Wally Weitz Interview: Columbia Business School's Graham & Doddsville

Columbia Business School is out with the Fall 2014 edition of their investment newsletter: Graham & Doddsville.  In it, they interview Wally Weitz of Weitz Investment Management, Guy Gottfried of Rational Investment Group, as well as the gentlemen from Development Capital Partners.

Additionally, the newsletter features student pitches on short B&M European Value Retail and long Countrywide Plc.

As always, this is definitely a worthwhile read.

Embedded below is the Fall 2014 issue of Graham & Doddsville:


You can download a .pdf copy here.

For more great stuff from past issues of this newsletter, be sure to check out Lee Ainslie's interview as well.

Guy Gottfried's Presentation on Tree Island Steel & TerraVest: Capitalize For Kids Sohn Canada

We're posting up notes from the Capitalize For Kids Sohn Canada conference that just took place.  Next up is Guy Gottfried of Rational Investment Group who pitched longs of Tree Island Steel and TeraVest Capital.


Guy Gottfried's Sohn Canada Presentation

Pitched LONG Tree Island Steel. They are the largest steel wire product manufacturer (think nails). Small company and a recent sell off has made it even cheaper. Currently trades at 3.5x normalized FCF (using 2006 EBITDA and adjusting for capex, interest & tax). Believes the company is well run and has considerable insider ownership, however is still cheap and unrecognized by the general market due to being a microcap, illiquid and no conference calls until second quarter this year.  Believes they have been “under earning” for last few years. However, insiders remain confident and have bought 7% of shares in the open market within the last year and higher prices than today.  In 2006, EBITDA was $25m and he believes they can get back to these levels.

Next, he pitched TerraVest Capital. It is a former conglomerate with six divisions. It has divested 4 of the divisions, simplifying their capital structure and using cash for special dividends and share buybacks. Currently trades ~6.5x FCF based on current run rate. This exists because the market is not understanding the recent acquisition of Jerico (only been in financials for 2 quarters). It has dramatic growth potential (especially with lots of dry powder waiting to be allocated). Considerable insider ownership and recent buying. Insiders have bought 8% of openly traded stock since February and at much higher prices than today. 

Be sure to check out the rest of the presentations from Capitalize For Kids Sohn Canada here.

Guy Gottfried's Value Investing Congress Presentation on Holloway Lodging & Perpetual Energy

We're posting up notes from the 2014 Value Investing Congress in New York. Next up is Guy Gottfried of Rational Investment Group who presented 2 long ideas: Holloway Lodging Corp (HLC) and Perpetual Energy (PMT).


Guy Gottfried's Value Investing Congress Presentation

Long: Holloway Lodging Corp (HLC) – all references in CAD  

• $5/share, $100mm mkt cap, 3% yield. Gottfried suggested this at VIC in Omaha 
• Stock collapsed following a dividend suspension and dilutive debt recap. Gottfried thinks investors   are still feeling burned by the name. It’s also small, holds no conference calls and is only covered by   one sell-side firm 
• Substantial insider ownership and widespread buying (9.5% of shares since May) 
• Holloway is cheap on a standalone basis (8.4x P/FCF) but has since undergone a transformational   acquisition by acquiring Royal Host and doubling its size in the process. Thinks it’s priced at 5x FCF   without assuming any cost synergies 
• Hidden assets / low-hanging fruit: under-earning hotels, renovations, redevelopments, franchise   rights


Long: Perpetual Energy (PMT)

• Oil and gas company with $300mm mkt cap, $664mm EV 
• Extremely cheap, management has substantial ownership and record of good capital allocation, and   upcoming catalysts will highlight valuation discount and eliminate doubts about balance sheet 
• Opportunity exists because it is smaller than peers, is mistakenly perceived as being overleveraged   and has hidden assets in non-producing wells 
• Controlled by Riddell family. Gottfried has followed this family into several deals 
• For many E&Ps, equity offerings come as second nature. These tend to be done at non-accretive   prices. Gottfried likes that PMT didn’t issue equity when the stock tanked during natural gas   downturn. Instead they sold assets to pay down debt


Be sure to check out the rest of the Value Investing Congress presentations here.

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.

Notes From Value Investing Congress Las Vegas 2013: Day 2

Yesterday we posted up some quick notes from day 1 of the 2013 Value Investing Congress in Las Vegas and today we'll highlight key takeaways from day 2 below:


Whitney Tilson, Kase Capital: AIG, Hertz (HTZ)

He talked about how American International Group (AIG) is still a position he likes as it's still cheap and the company has been streamlined to something much easier to understand and there's been a lot of advancement since the financial crisis and even since last year.  It's around 14% of his portfolio and was his largest position as of last month.  Tilson also likes his long of Berkshire Hathaway (BRK.A / BRK.B) and recently adjusted his intrinsic value figure to just north of $193,000.  Additionally, he mentioned he's started a new position in Hertz (HTZ) and you can read the pitch on Hertz in this newsletter that convinced him.


Guy Gottfried, Rational Investment Group: WPX Energy (WPX)

His pitch was on WPX Energy, a spin-off from Williams Companies last year.  He says it trades at 8x free cashflow and .66x book value.  Gottfried feels it's a very cheap stock for a play on natural gas that doesn't require gas prices to head higher.


Mark Boyar, Boyar Value Group: Weight Watchers (WTW), Dole Foods (DOLE), Western Union (WU)

He thinks we might be in the midst of multiple expansion.  Boyar likes Weight Watchers (WTW) as a play on the weight management industry and notes it's down 50% over the past 12 months.  He also pitched Dole Foods (DOLE) as the company reduced its debt load by selling the packaged foods business.  His third and final pick was Western Union (WU).


Vitaliy Katsenelson, Investment Management Associates: Whistler Blackcomb (WB.TO)

He said that profit growth is slowing down and that the market is actually getting expensive on a P/E basis.  Katsenelson argued that there's no secular bull market, at least not yet.  In the mean time, he likes stocks with solid dividends and says that the vast majority of returns in sideways markets are derived from dividends.  He's the author of The Little Book of Sideways Markets, by the way.  His pick was a high dividend payer (over 7%) in Whistler Blackcomb, the owner of the popular ski resort.  He likes their lower costs due to no property development etc.


Zeke Ashton, Centaur Capital Partners: Fidelity National (FNF), First American (FAF)

He emphasized the importance of learning from mistakes.  While you will encounter your own mistakes as an investor, it's also easy to learn from others' mistakes too.  Ashton argued that emotional mistakes are much more prevalent than analytical ones and so obviously behavioral finance is an important part of investing.  As far as current opportunities in the market go, he's having a hard time finding good ones as so many shares have been bid up.  He's not a big fan of homebuilders but if you want a play on housing, he said to look at the title insurers as a proxy with lower risk.  His picks were Fidelity National (FNF) and First American (FAF).


Joe Altman & Chris Kyriopoulos, COMPOUND Capital: TARP Warrants, Nathan's (NATH)

They launched their fund at a hell of a time: during the financial crisis when Lehman Brothers failed.  These two mentioned that they like TARP warrants, which we'd note has been a hedge fund favorite (especially AIG and BAC warrants, though Compound prefers AIG and COF ones).  They note these are liquid plays that are often underfollowed.  However, their pitch today was Nathan's (NATH), the popular hot dog proprietor.


David Hurwitz, SC Fundamental: Long KISCO, Short Salesforce.com (CRM)

He pitched one long: KISCO in Korea (001940.KRX) and one short: Salesforce.com (CRM).  He says KISCO is much cheaper than CRM.


Chris Mittleman, Mittleman Brothers:  Revlon (REV)

He pitched this as a turnaround story, praising management for a good effort.  Ron Perelman owns a ton of the company and that's partially the reason it's so cheap.  Mittleman likes that it's essentially a recession resistant business.  A solid portion of their revenues come from Walmart.  He also mentioned Carmike Cinemas (CKEC).


Ori Eyal, Emerging Value Capital: Hilan Tech

Eyal talked about the opportunities to invest in Israel, somewhere he specializes in (launching the Emerging Value Israel Fund).  He says the country is stable and pro-business and has a growing economy.  He pitched Hilan Tech, which he dubbed the 'ADP of Israel.'  He says Israeli stocks on the whole are cheap as they've largely traded sideways the past few years.


Harris Kupperman, Mongolia Growth Group: Real Estate

He touched on how there's too many investors out there all doing the exact same thing (i.e. herding).  One place that there certainly aren't many investors involved is Mongolia.  He says the country's GDP will explode 10x over the next decade or so, creating a big opportunity and he recommended real estate there.


For more from this event, head to notes from day 1 of the Value Investing Congress.

Guy Gottfried Presentation on ClubLink Enterprises & Canam Group: Value Investing Congress

Continuing coverage, we're posting up notes from the Value Investing Congress.  Below are notes from the presentation of Guy Gottfried of Rational Investment Group.  His talk was entitled 'Underfollowed and Undervalued: More Small Cap Bargains.

Over the last 3 meetings, his 4 ideas on average have been up 55% in the 8 months after the conference (we've posted up Gottfried's presentation from the last conference as well).

His Checklist:
1.  Do I understand the business?
2.  Is the balance sheet sound?
3. Am I partnering with the right people?
4. Am I getting a great deal?

Two Small Cap Ideas

ClubLink Enterprises (TSE:CLK) - Gottfried pitched a company that operates 51 golf clubs in Canada and the US (in addition to a tourism business in Alaska with port and docks for tour ships). Owns white pass and Yukon route tourist excursion railway in Alaska.

$7.55, 26.7M shares, $201M market cap, 0.30 dividend, 4% yield.

Illiquid.  Financials in Canadian dollars.  Trades at 5.5x FCF.

Each segment, golf and tourism, worth more than stock price.  No sell-side coverage, illiquid, no need to raise capital. High insider ownership.   Gottfried says EBIT has been stable even through the recession.

CEO Rai Sahi is a control investor, outstanding capital allocator, aggressive buyer of stock.  Has issued options only once in 8 years, owns a majority of outstanding shares.  Company has bought back 19% of shares in past 12 years.

Since 2010, has acquired 11 clubs at fraction of replacement costs.  Spent $25M on gulf clubs with replacement value of $100M. Debt: ave maturity 2022, most of it is fully amortizing mortgages.

Valuation: FCF $26.5M, $0.99/share, 7.6x Catalysts: FL results get better, and incremental acquisitions in FL. Tourism grows at the port, expected to grow 10% next year.  Continued stock repurchases.



Canam Group (TSE:CAM) - His second idea was a maker of steel joints and decks, structural steel, steel bridges that he argues is undervalued and very well-run.

$5.05/share, 42.1M shares, 213M market cap, 476M EV. (lots of debt)

Largest producer in Canada, 75% market share, #3 in US with 15% share (top 3 control 90%)  20 plants in Canada and US. Trading at 3.8x normalized FCF, 2.7x FCF excluding non-core assets being actively monetized.

Trades at 69% of understated book value. Why cheap? 1.  US operations (2/3 of revenue) mired in severe cyclical downturn 2. Recent acquisitions during industry slump haven't paid off yet. 3.  Multiple non-core investments Run and 16% owned by Dutil family.

From 2008 to 2011, made $200M of acquisitions. 2 US steel fabs.  $263M in debt, only 27% subject to covenants, has $527M of net WC, land and buildings at cost.  Owns all of its plants and real estate, 2097000 sq ft, average year acquired 1989.   Valuation: average EBITDA last cycle $63M, adjusts to get to $56M FF, $1.32/share, or 3.8x P/FCF.  (He admits that the numbers he used as "normalized" were during the boom years, but says it's justified because they've bought more fabs since then.)

Catalysts:  Rebound in US operations, continued monetization of non-core assets, debt repayment, eventual resumption of dividends.


Embedded below is Gottfried's slideshow presentation from the Value Investing Congress:





Be sure to check out the rest of the hedge fund presentations from the Value Investing Congress.

Guy Gottfried's Presentation on Holloway Lodging & Trans World Entertainment: Value Investing Congress

At the Value Investing Congress this past May, Guy Gottfried of Rational Investment Group pitched two stocks.  We wanted to post up his presentation (we've also posted up notes & presentations from all other VIC speakers as well).

Gottfried presented the investment case on Holloway Lodging (TSX:HLR.un) and Trans World Entertainment (TWMC) in early May.  Since then, shares are up 30% and 47% respectively.  Gottfried will also be presenting investment ideas at the upcoming Value Investing Congress in New York City in October and MarketFolly readers can receive a discount here with code: N12MF7.


Thinking Small: Scouring for Bargains in a Hot Market

- Common traits: misunderstood businesses (changed but market hasn't yet caught on), demonstrably undervalued, insiders have a lot of skin in the game, catalysts.

First idea - Holloway Lodging (TSX:HLR.un)

-  Canadian hotel REIT based predominantly in Western Canada.  Was at $2.80 at the time of the presentation ($53mm market cap, $165mm EV).  12.5% cap rate and 5.5x FCF and NOI/FCF on the rise

- Multiple catalysts.  Forced to undergo debt recap to address upcoming debt maturity - recap completed in January, diluted equity by over 90%.  Despite dilution, recap greatly enhanced margin of safety: LTV fell from 79% to 56%, implied cap rate actually increased.

- Dilution mitigated by huge decline in stock price - fell 65% to 70% on news of recap, traded under $3.00 vs $150 (split-adjusted) before recession.

- Historically mismanaged but prior management forced out along with recap.  Massive insider buying: two industry insiders bought nearly 50% of stock on the open market immediately following recap as former bondholders dumped their shares.  Industry insiders: Geosam - successful activist/control investor in Canadian small caps.  Temple - fellow Canadian hotel REIT

- Serious takeover candidate, Temple most likely buyer given geographic fit in their portfolios.  Catalysts other than takeover - share buyback, dividend resumption (suspended dividends in 2009, could yield 5% at 43% payout ratio).



Second idea - Trans World Entertainment (TWMC)

- Retailer of music, video and related entertainment products.  At time of presentation, closed at $2.25, $74mm market cap, $34mm EV.  Profitable net-net: traded at just 53% of net-net working capital yet actually makes money.  1.7x EV/FCF.

- Average net cash in past 4 quarters equal to half the stock price, at most recent quarter-end cash actually exceeded stock price.

- CEO Higgins founded firm in 1972, owns 51%, has been big buyer of stock, tried to take it private in 2008 (couldn't after credit markets froze)

- Business in structural decline but Higgins has run it admirably - closed 60% of stores in past 5 years, returned company to profitability after string of losses.  Excellent fallback strategy: 80% of leases expire by 2013 and 97% by 2015;  if company fails to sustain profitability, can shut down nearly entire store base and monetize tremendous amount of working capital

- Hidden asset: owns Walgreens in South Beach, conservatively worth 61c per share (27% of stock price).  Significant NOLs: $175mm federal, $310mm state

- Main catalyst: company either becomes consistently profitable (which will be a major surprise to market) or continues aggressively closing down stores, freeing up a boatload of cash; either way shareholders win


Embedded below is Guy Gottfried's presentation from the Value Investing Congress:




His picks are up 30% and 47% respectively over the past 3 months.  To hear Gottfried's next investment ideas at the Value Investing Congress in New York City in October, you can take advantage of Market Folly's discount to the event by clicking here and using code: N12MF7.

Value Investing Congress Notes: Day 1

Today we're posting notes from the Value Investing Congress in New York where tons of prominent hedge fund managers are giving their latest investment ideas.

This post serves as an index and you can click each individual manager's name below for notes on their presentation.


David Einhorn (Greenlight Capital): short Green Mountain Coffee Roasters (GMCR)

Ricky Sandler (Eminence Capital): long CME Group (CME)

Joel Greenblatt Gotham Capital: The big secret for value investors

Guy Gottfried (Rational Investment Group): long Canadian company The Brick (TSE:BRK)

Jim Chanos (Kynikos Associates): Beware the global value-trap

Vladimir Jelisavcic (Longacre Fund): DryShips (DRYS) Convertible Bonds

Timothy Hartch (Brown Brothers Harriman): Dentsply (XRAY) & Energy Solutions (ES)

Alexander Roepers (Atlantic Investment Management): Anticipating more M&A



***UPDATE***: We just posted our Day 2 notes from the Value Investing Congress which features presentations from Bill Ackman, Leon Cooperman and many more hedgies.


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Guy Gottfried's Long The Brick Presentation from Value Investing Congress

At the Value Investing Congress today, Guy Gottfried of Rational Investment Group talked about his long position in The Brick (TSE:BRK) in a presentation entitled "Prospecting for Value in the Great White North".

Be sure to check out all of our notes from the Value Investing Congress.


Guy Gottfried (Rational Investment Group): Long The Brick (TSE:BRK)

Embedded below is his full slideshow presentation:



Gottfried started by talking about Canada's general economic situation: 11 years of budget surpluses price to recession, lowest debt-to-GDP and fastest growth in G7, world’s strongest banking system for 4 straight years, no bank required bailout during financial crisis. Less sophisticated stock market than US, value investing not practiced, investors obsessed with resource stocks, yet miners are actually only 1/3 of the stocks on the TSX.

His long idea was The Brick (TSE:BRK) and Brick Warrants (BRK.WT). It's a specialty retailer of furniture, appliances, mattresses, etc. $2.45 price, 140m shares. It has 3 segments: corporate retail. 177 stores in Canada, financial services: extended warranties sold at stores, credit insurance on proprietary credit card, $22m FCF franchising: 58 stores, franchise fee and ongoing royalty of 2.5% of sales, $4m FCF (smallest, but fastest growing segment).

It trades at 6.2x FCF, market valuing core retail chain at below zero. Strong balance sheet, good business, insiders buying shares on open market. Mismanagement and financial distress in the past, paid too much of cash flow in dividends, and was in distress when recapitalized in 2009. Issued 12% debentures, and 100M warrants, now has $100M in cash, has turnaround specialist CEO. Operations have recovered, but stock has not.

Why so cheap? Investors burned by near-death experience, illiquid due to heavy insider ownership, no institutional following.

Very recognized brand in Canada, economies of scale in furniture and appliances. Financial services is durable business, even in 2009 sales held up. Good lead shareholder- Prem Watsa of Fairfax, the “Warren Buffett of Canada”. Bill Gregson CEO has a history of successful retail turnarounds- focus on costs, not growth. Cut its shares outstanding by 20% through “cashless exercise offer” for warrants. 13 senior execs and directors have bought shares on open market. Company now has $100M in cash, will end year with no net debt; overcapitalized, could buy back 20% of its shares, even with $50M still in the bank, boosts FCF by 27%. Valuation: 6.2x P/FCF. With operational improvements and repurchases, you get company at 4.2x P/FCF.


Q&A Session:

1. Why is it a good business? He says they've improved logistics

2. Aren't Toronto and Vancouver housing markets still very strong? Answer is even if business slows down, you're getting the retail business for free anyways.

3. T2 Partners' Whitney Tilson pressed him on the housing bubble in Canada - Gottfried admitted that real estate is overvalued, but it doesn't pose the same risk as the US did, due to less crazy mortgages.


About Guy Gottfried: He founded Rational Investment Group and focuses on a risk-averse, research-intensive strategy. He is a value manager and prior to founding his firm was an analyst at Bruce Berkowitz's Fairholme Capital.


You can view our notes from the Value Investing Congress for the rest of the hedge fund manager presentations.