Guy Gottfried's Presentation on Glentel & Supremex: Value Investing Congress

We're posting up notes from the 2013 Value Investing Congress in New York.  Next up is Guy Gottfried of Rational Investment Group.  He gave a presentation called "Needles in a Haystack: More Small Cap Values" that focused on Glentel and Supremex.

Guy Gottfried's Value Investing Congress Presentation

His picks at this event on average are up 60% & he pitched 2 Canadian stocks:

Glentel (GLN)

3.4% yield. Wireless retailer. Canada, US, Australia. Second largest Verizon retailer in US.  Carriers pay them a bounty/commission.  Profits from commissions, not phone hardware.

7.5x FCF, Management aligned with shareholders. Good capital allocation record.  Dividend while you wait. 

 

Why cheap?  Made a big acquisition. Wireless Zone. Confusing accounting. Some divisions making no money.  Lots of non-recurring items.  Arcane accounting; put obligation recorded on balance sheets, marked to market.  To make it look cheap, you have to do a lot of adjustments.

Family owns 46% of company.  Good record of acquisitions.  Deals with Costco, kiosks inside.  Some divisions with no cash flow but still valuable.  So many adjustments to income to get the valuation.

He gets $1.66 per share FCF, 7.5x when he adjusts share price for the amt segment. Lots of accounting tricks needed to make it look cheap.

Supremex (SXP)

Illiquid stock.  Canada's largest envelope maker. Declining industry.  60% market share. FCF up due to cost cutting.

3.1x FCF. 7.5% dividend yield, 23% payout ratio.  Cheap because no coverage, conference calls. Cut dividend by 90% a few years ago.

 Activist owns 45%.  Cut debt with FCF by 69%. 1.5x debt.

Catalysts: Likely big dividend hike. Insiders won't waste cash on bad acquisitions.  Could double it to 15% and still be paying less than 50% of FCF.  In the past, this would lead to 30-50% stock move.

Even in FCF decline of double digits, can sustain 15% yield for 5 years. Still cuts debt.

Q&A: How do you know it doesn't decline faster than you expect? A: Believes his double digit decline assumptions are realistic. 


Embedded below is Gottfried's PDF slideshow presentation on Supremex & Glentel:

Be sure to check out the other presentations from the New York VIC here.

Baupost Group Shows Position in Gabriel Resources (TSE:GBU)

Seth Klarman's hedge fund Baupost Group has disclosed an 11.37% ownership stake in Gabriel Resources (TSE:GBU) with 39,625,822 shares. This makes them the fourth largest shareholder.

This is an older disclosure as it was revealed on April 8th in a Canadian regulatory filing. Given how investors love to track Klarman, we figured we'd share since we hadn't seen it discussed before.

This position is interesting mainly because it's has exposure to gold mining. This is the second equity investment in a gold miner we've seen from Klarman's fund. As noted in the latest issue of our Hedge Fund Wisdom newsletter, Baupost started a new position in Allied Nevada Gold (ANV) back in the first quarter.

Gold Miners A Play on Inflation?

We'll have to see if building equity stakes in miners becomes a trend for Baupost. The firm could potentially be using these miners as a hedge. After all, we covered how Klarman is worried about inflation.

It's been well documented that John Paulson's gold fund invests in gold miners as a bet against the US dollar (inflation) as well. Paulson & Co also owns 17.62% of Gabriel Resources with 61,420,000 shares. They disclosed this position size in May 2008 and it was later amended to reflect their purchase of securities in a private placement in June 2009. So, two legendary investors own sizable chunks of GBU.

Gold Vs. Gold Miners

In the past, hedge fund managers have pondered whether gold or gold miners is a better way to play the precious metal, inflation, and uncertainty. So while many invest in gold miners for protection, we assume that Baupost is pursuing the same thesis (but again that's merely speculation on our part).

In other recent activity from the prominent hedge fund, Baupost trimmed its position in Audiovox (VOXX).

Per Google Finance, Gabriel Resources is " is engaged in the exploration and development of mineral properties in Romania. It is developing its 80.46% owned Rosia Montana gold project (the Project). Minvest S.A. (Minvest), a Romanian state-owned mining company, and one other private Romanian company, hold a 19.54% interest in Rosia Montana Gold Corporation (RMGC)."

For more from Klarman, see an excerpt from Baupost's 2010 letter.