Steve Romick's Presentation at London Value Investor Conference

We're posting up notes from the 2017 London Value Investor Conference.  Next up is Steve Romick of FPA Funds.


Steve Romick's Presentation at London Value Investor Conference

Since inception in June 1993, Steve Romick’s FPA Crescent Fund has returned 10.4% annualised Vs 7.0% for the MSCI World Index.

A few stocks drive the index at any one time. Contrary to popular belief you don’t need to hold the golden stocks of each era to win at investing. You can win by avoiding the losers. His fund typically underperforms in bull markets but outperforms by more in bear markets. Stocks are expensive today and he is finding it hard to find good investments. He outlined an example of how he has been putting some of the fund’s money to work outside of the equity market.

The fund has provided a loan to Sears Canada. The company is facing the same pressures as many other retailers and may go bankrupt at some point. Given their tenuous finances the loan has been secured against inventory, receivables, and real estate. He estimates that the liquidation value is about 1.7X the loan value. Romick expects the loan to produce an IRR of 11% no matter what happens to Sears.


Be sure to check out the rest of the presentations from the London Value Investor Conference.

Notes From 2013 Value Investing Congress Las Vegas: Day 1

Here's some brief notes from the 2013 Value Investing Congress taking place in Las Vegas.  This event has somewhat of a new format with a lot more speakers presenting rapid fire ideas.  As such, we'll highlight the takeaways from each pitch below from day 1.  Check back tomorrow as we'll have notes from day 2 as well.

*** 50% discount to next VIC: Also, there's currently a 50% off sale for the New York Value Investing Congress in September. This is the biggest discount to the event you'll see and the sale ends tonight!  Sign up here with discount code N13MF


Steven Romick, FPA Funds: Occidental Petroleum (OXY) & Oracle (ORCL)

Romick likes to focus on contrarian names that investors have seemingly forgotten about.  He mentioned old large cap tech names such as Oracle (ORCL), Microsoft (MSFT), and Cisco Systems (CSCO).  He likes ORCL because they offer a unique product and have recurring revenue streams.  His other idea was Occidental Petroleum (OXY), an oil producer that isn't really focused and can make a lot of adjustments to create value now that the chairman is gone.  Romick says OXY is a sum of the parts play.


Phil Goldstein, Bulldog Investors: Imperial Holdings (IFT)

The company was raided by the FBI and lawsuits post-raid and Bulldog started buying around $1.60.  They went activist and got seats on the board and he thinks there's value to be unlocked there.


John Hempton, Bronte Capital: Transglobe Energy (TGA)

He mentioned he's short an astonishing 120 companies.  His specialty is frauds and he looks for fake cash and fake assets (receivables, goodwill, etc).  He spoke negatively about Transglobe Energy, pointing out they don't collect on oil they've sold until 7 months later.  He's also skeptical since the company shows no inventory and he has other balance sheet questions.  Additionally, he flagged Jos A. Bank (JOSB) due to potential inventory issues and PureCircle (PURE.LN) for balance sheet issues.


David Nierenberg, D3 Funds: Rosetta Stone (RST)

His firm runs a concentrated portfolio of microcap stocks (typically busted growth names).  His pitch was on Rosetta Stone (RST), the popular language learning software company.  Nierenberg notes RST's solid brand in a fragmented industry.  He highlighted that the company has $7 per share in cash and no debt and has been cutting costs by closing some of their mall kiosks. He sees upside of 75% but notes that competition in the space could intensify and free offerings could emerge.


Tim Eriksen, Eriksen Capital Management: First Internet Bancorp (INBK)

He focuses on the section of the market where many companies are ignored (companies with market caps below $100 million) and he also runs a concentrated portfolio.  His pick was First Internet Bancorp (INBK):  $45m market cap, trading below TBV, with a potential catalyst of rising interest rates (loan growth).  Eriksen argued it's cheap because no one really knows about it, investors are still somewhat hesitant about financials and it's slightly illiquid.


Marcelo Lima, Heller House Capital: Hargreaves Services PLC (HSP.LN)

Lima pitched the out of favor coal industry via a UK play: Hargreaves Services PLC (HSP.LN), noting that the UK gets around 40% of its electricity from coal power.  He likes the acquisitions they've made at less than 7x earnings and highlights the benefits of their long-term contracts not being vulnerable to the ebbs and flows of commodity prices.  In the past, fraud at a Belgian subsidiary and issues at a mine weighed on shares but those problems are now gone.


Geoffrey Batt, Euphrates Advisors: Baghdad Soft Drinks (IBSD.IQ)

Batt runs the Euphrates Baghdad Fund and compared Iraq to Germany after World War II, South Korea in the 1960's and Russia in the 1990's. He sees countries that have undergone chaos as opportunities ripe for investing and Iraq fits the bill this time around.  But obviously, he points out, you still need to see stabilization in the economy and if things gradually become less worse, then equities there can head higher.  He says that the country has begun a private credit cycle and notes their oil production potential is huge.  However, he didn't pitch anything oil related.  Instead, he said he likes soda via Baghdad Soft Drinks, a Pepsi bottler.


Zack Buckley, Buckley Capital Partners: Bluecora (BCOR)

His expertise is technology stocks and he pitched Bluecora (BCOR), formerly Infospace.  He likes that they bought TaxACT and highlights Bluecora's $700 million in net operating losses (NOLs).  He said they'll probably look to do acquisitions within a year or so.


Isaac Schwartz, Robotti & Co: Halyk Bank of Kazakhstan (LON:HSBK)

He pitched Halyk National Savings Bank of Kazakhstan (Borat, anyone?) as he likes to play "ugly ducklings."  Schwartz notes the company trades around TBV and is the largest bank in the country (even though its market share is only around 20%) with the dividend now back at 4%.


Amitabh Singhi, Surefin Investments: Greenply (MTLM.IN)

He specializes in India and mentioned that Indians are fixated by gold.  Sighi likes the underappreciated, unfollowed small cap sector in India.  He's looking long-term and thinks agriculture could be a big winner.  Singhi notes that land prices have accelerated higher and while there's around 400 million acres of ag-land in the country, farms are usually only around 5 acres each.  His pick was Greenply (MTLM.IN), an Indian plywood maker.


Chan Lee & Albert Yong, Petra Capital: Sebang, Sebang Global Battery

These two harped on how South Korean equities are very cheap compared to other equity markets (they're based there).  In particular, they're focused on small & mid caps and note how these plays give you access to emerging markets exposure.  They like Sebang the holding company and subsidiary Sebang Global Battery.  They also mentioned Daechang Forging.


Jeff Pintar, Pintar Investment Company: Residential Real Estate

Pintar owns a ton of residential properties, over 2000 as the real estate bubble created immense opportunities.  He pointed out that demand for new homes is rising and supply can't keep up so more homes need to be built.  As to where the biggest demand will be in the future, he singled out Texas, Florida, California and the Carolina regions.  He thinks values can head as high as 50% in select areas.


Chris Mayer, Capital & Crisis Newsletter: First Citizens Bank (FCNCA), Atlas Financial (AFH)

He manages a newsletter with 28,000 subscribers and talked about the positives of investing in owner-operators and likes management to have skin in the game.  Mayer pitched First Citizens Bank as it's 33% family owned and also lauded Atlas Financial (AFH), Howard Hughes (HHC) and Covanta (CVA).


Be sure to check back tomorrow for notes from day 2 of the Value Investing Congress 2013 in Las Vegas.


*** Special discount for Market Folly readers:  The New York Value Investing Congress will take place in September and you can currently get a 50% discount to the event with code: N13MF.  This discount expires tonight (Tuesday) so take advantage while it lasts.  This is the biggest discount you will see for the VIC. ***

Steve Romick's FPA Crescent Fund Still Conservatively Positioned: Q4 Letter

Steve Romick's FPA Crescent Fund is out with its fourth quarter and 2012 year-end letter and commentary.  In it, he highlights how they've maintained conservative positioning due to concern over risk.

FPA Still Conservatively Positioned

Romick writes that,

"Artificial and unsustainably low cost of capital perverts capital allocation decisions. Fear of not having enoughincome pushes the elderly to own more equities or riskier bonds. Companies will find that they can invest capital that wouldn’t otherwise meet their return -on-capital hurdles (ROC). In general, investors are moreable/willing to assume greater risk, and they sometimes forsake liquidity in the process, even though they might have near- term needs for that capital. It’s easier to spend capital  when it’s sitting on your balance sheet, earning essentially nothing. And companies that should die are kept alive by an endless supply of cheap money  . We feel like we’ve fallen down the rabbit hole. Traditional investment decision -making processes have been hijacked by zero-interest-rate-policy (ZIRP)."

The scenario they illustrate of lack of return on cash positions driving investors to invest more fully has certainly come to fruition.  Earlier today, we highlighted how Grey Owl Capital has moved more cash into equities due to the negative real return on cash.  FPA, on the other hand, has stood steadfast and will invest only when they see opportunity by their definition.


Investment in Groupe Bruxelles Lambert

FPA notes they've taken a stake in Groupe Bruxelles Lambert (GBL), a Belgian holding company which many liken to Berkshire Hathaway as it's run by the 'Warren Buffett of Europe,' Albert Frere.  FPA liked shares due to the 25-30% discount to NAV and they term it a 'infinite duration bond.'  They also like the 4.5% dividend yield but note that they don't see a catalyst for the NAV gap to close.

They also include a write-up on their stake in Orkla, a stock they originally purchased in November 2011 but they continue to hold.


Embedded below is FPA Crescent Fund's Q4 letter to investors:




To see what FPA's invested in, we've covered Romick's pitch on Renault as well as some of Romick's investment picks.

Steve Romick's Pitch on Renault: Invest For Kids Chicago

Next up in our notes from Invest For Kids Chicago is Steve Romick of First Pacific Advisors.

•    “We are circumspect” and “invest across the capital structure”
•    Real GDP is declining and are now at a Keynesian endpoint
•    Romick anticipates tremendous 2nd order effects of QE-Eternity and is thus “investing in a nervous fashion"
•    Large cap stocks are relatively inexpensive with especially low values in Europe


Romick's Pitch on Renault

•    Renault: Operating cash conversion from EBITDA of 104%
•    Half of sales are from outside US where the cost of labor is 50 to 90% less
•    “Entry level cars are more profitable”
•    Carlos Ghosn CEO of both companies Nissan and Renault and sees synergistic opportunities
•    Renault has no net debt including off-balance sheet liabilities
•    Sum of Renault’s publicly traded assets are €54.4 with the Renault stub is worth $5 billion currently
•    Romick is short Nissan and Volvo against Renault
•    CarCo could pay a dividend
•    Debt could be upgraded

Romick also recently touched on his favorite stock picks in an interview.


For the rest of the hedge fund presentations from the event, head to notes from Invest For Kids Chicago.

Steve Romick's Latest Investment Picks (Interview)

FPA Crescent Fund's Steve Romick recently appeared on CNBC's Squawk Box to talk about his approach and his top two stock picks.  FPA has returned 19.7% over the past year and has seen 9% annual returns over the past decade.

Romick's Picks

The fund manager likes Renault (RNO), since it's out of favor in Europe at the time.  He cites the company's stakes in Nissan, Volvo, and Daimler as being worth more than the value of Renault.  They're long RNO and short Volvo & Nissan, saying that "the market is paying us to own Renault."

OmniCare (OCR) was his other pick as he argued the business will benefit from the aging of America and new management.  Sticking with the healthcare space, we've also posted up on potentially why Romick owns WellPoint (WLP) as well.

He also likes farmland is his thesis there is that it will benefit in an inflationary environment (and decline in the US dollar).  He likens it to gold, but unlike the metal, he says it has a positive return and no cost of carry.  They couldn't own as much of it as they want due to liquidity. 

We've detailed in the past how Michael Burry has advocated owning farmland in the past.  Burry, if you're not familiar, was one of the investors that profited from the subprime bubble.


FPA's Investment Approach

He mentioned that his goal is to "provide equity rates of return with less risk than the market."  They invest across asset classes.  While equities are the largest portion of their portfolio, they also do high yield bonds, mortgage home loans, farmland, etc.  They currently hold around 30% in cash as well.

Romick argues against owning bonds at the moment, save for some corporate bonds.  Past posts on this site have highlighted how Omega Advisors' Leon Cooperman has been outspoken against bonds.

Embedded below is the video of Romick's interview with CNBC:



Romick will be presenting new investment ideas at the Value Investing Congress in Las Vegas next May and our readers receive a discount to the event here.

Why Steve Romick Owns WellPoint (WLP): Stock of the Week

The stock of the week this time around is WellPoint (WLP) and the analysis below takes a look at some potential reasons as to why Steve Romick of FPA Crescent might like the company. Last week we featured: why David Einhorn owns Dell.


The following is written by Tsachy Mishal, portfolio manager of TAM Capital Management.

Hedge funds as a group have struggled performance-wise in recent years. However, there is one sector which has treated them very well: the HMO's. In 2010, at the height of uncertainty surrounding Obamacare, many hedge funds took positions in HMOs such as UnitedHealth (UNH), Cigna (CI) and WellPoint (WLP).

Since then, most of the stocks in the group are up by 50%, with some nearly doubling. Even after this large rise, many stocks in the the group are still cheap. Currently, Farallon Capital Management and Steve Romick of FPA Crescent hold positions in WellPoint.

WellPoint currently trades at $69.25 a share. They are expected to earn $7.70 in the current year and $8.50 next year. WellPoint is planning on repurchasing $2.5 billion worth of their own shares this year, which amounts to nearly 11% of the shares outstanding at the current price.

The most often cited reason for this bargain basement price is the continued uncertainty surrounding Obamacare. While Obamacare will lead to more customers, there is uncertainty regarding many of the new laws (specifically the mandate that requires them to accept customers at their quoted price, even if they are already sick).

The stock has underperformed its peers in the HMO sector recently as earnings disappointed last quarter. Wellpoint mispriced a large policy in California, which they have since terminated. As a result, Wellpoint trades at a discount to the group, even though it is the second largest HMO in a business where scale matters.


What I Like:

- The valuation of 8.15 times 2013 earnings estimates is extremely attractive assuming estimates are anywhere near accurate.

- Management has an excellent track record of returning cash to shareholders and have said they will return $2.5 billion this year via share repurchases. The share repurchase should put a floor under the stock as there will constantly be a large buyer in the market.

- There is little to no European risk in the business and economic sensitivity is minimal.

- Management recently reiterated their intent to repurchase $2.5 billion worth of shares this year, which likely means that this year is less than a disaster.


What I Don't Like:

- Low health care utilization has helped the earnings of HMOs in recent years. This trend is likely to end at some point.

- Obamacare is a wildcard as it can help or hurt earnings. While there will be more customers there will also be new regulations. This large change is a big uncertainty, which investors don't like.

- A decade ago, HMO industry profits plunged as companies fought for market share. Since then, the industry has consolidated and become more rational. However, there is still the risk that the industry is more cyclical than most believe.


There are numerous risks in WellPoint, such as Obamacare and the risk that margins for the industry contract. However, at a little over 8 times next year's earnings there is a large margin of safety in WLP's stock price. Even if estimates are off by 20% the stock is still cheap. The nice part of the business is that it is insulated from Europe and has little economic sensitivity. As a result, I am long WellPoint.


Be sure to scroll through all of our stock of the week posts for further equity analysis.

Value Investing Congress Summary: Marks, Romick, Tilson, Leonard & More

Below is a summary of yesterday's Value Investing Congress in California. Tomorrow we'll provide a summary of day two so if you haven't already, make sure to sign-up to receive our free updates via email.


Howard Marks (Oaktree Capital): Oaktree manages over $80 billion and we've covered Marks' insightful commentary numerous times. His presentation highlighted the "human side of investing" and the difference between theory and practice. The manager said he splits investors up into two categories: those who know and those who don't, pointing out that it's what investors *think* they know that gets them into trouble. Risk can be introduced when investors overestimate what they know about the future.

Marks says that the main difference between value and growth investors is that value investors focus on the present. He went onto say that, "(The) most important science for investors is psychology. Investors who have their psyches under control will do best." This of course beckons the age old concept of not letting your emotions get in the way of making rational decisions.

He also went on to focus on the importance and difficulty of being contrarian and that market tops typically occur during a time of rampant bullish euphoria. Marks noted that pro-cyclical behavior is a huge mistake.

Oaktree's funds currently have a lot of cash on hand as opportunities are not abundant; Oaktree seems to be doing more selling than buying these days. He also mentioned he thinks that most institutions over-diversify.

Marks said that the gist of his presentation is featured in his new book that we highlighted yesterday, The Most Important Thing: Uncommon Sense for the Thoughtful Investor.



Steve Romick (First Pacific Advisors): Romick noted that enticing opportunities today are scarce and compared it to trying to ski in the middle of summer. The one pocket of snow he does see potential in is large cap stocks as he believes small caps are overvalued.

Romick presented CVS Caremark (CVS) as a business with good tailwinds and a store footprint that's hard to replace. He says the company is undervalued, trading at a P/E of 12.2x net of the pharmacy benefit management (PBM) hedge. He also points out that management owns a lot of stock and that private label is an opportunity for them to grow as it's only 17% of revenue right now.

Interestingly enough, CVS also seems to be under pressure to split up from its previous merger (combining drugstore chain CVS with pharmacy benefit manager Caremark). Numerous analysts and investors believe the break-up value is much higher than CVS' current share price. Rival Walgreen's (WAG) recently sold-off its PBM segment.

Lastly, Romick also gave another investment idea in Hong Kong traded Goldlion (HK 533). It is an apparel and goods manufacturer in China that caters to the mid-high end consumer, akin to Coach or Polo.



Steve Leonard (Pacifica Capital Management): Pacifica focuses on picking good businesses, but more importantly places emphasis on not making mistakes since they run a highly concentrated book (typically with 10 or fewer holdings). Pacifica originally started out as real estate investors and currently does not see any opportunities in commercial real estate. After shifting their focus to equities, they've beaten the S&P 500 by 9.4% each year since inception.

They primarily invest in domestic companies but like plays with exposure to global growth. They started buying Fairfax Financial (FRFHF) 10 years ago and today it's their largest position. Their second largest holding is Berkshire Hathaway (BRK.A). They haven't really stepped too far out of the box as those are perennial value investing picks.



Whitney Tilson & Glenn Tongue (T2 Partners): Their ideas centered on land companies: one long and one short. They provided an update on St. Joe (JOE ~ their largest short position) and said that the company had incentive not to writedown its developments because around $1 billion of its market cap was attributed to them. As an example, T2 cited how Windmark is worth $12 million, but St. Joe is carrying it at an inflated value 92% higher (T2 said that JOE can do this because of accounting rules). For more on this rationale, head to David Einhorn's short thesis on JOE.

T2's is also long a land-oriented company in the form of General Growth Properties' spin-off, Howard Hughes Corp (HHC). They like HHC because it's undervalued and has a portfolio of high quality assets in desirable locations. The company is difficult to value due to various development properties and other assets, but T2 says that it's obviously worth much more than the $0 carrying value some pieces currently garner (like the air rights over Fashion Mall in Las Vegas). We posted up Tilson's presentation on JOE & HHC here.

Tilson also appeared on CNBC to talk about their stance on JOE and HHC (video embedded below):



On their recent conference call, T2 mentioned they were adding to their HHC position on the recent pullback. Bill Ackman is the Chairman of HHC and his hedge fund Pershing Square owns HHC too. For more from Tilson, head to T2's thoughts on contrarianism.



Rahul Saraogi (Atyant Capital India Fund): Given that Saraogi manages an Indian-focused fund, it should come as no surprise that his presentation focused on this country and the ability to find gems in a "minefield of value traps." Overall, he thinks India has nice tailwinds: depth of markets, domestic demand, and solid demographics. The main question he focused on was what prevents a stock from reaching its intrinsic value?

While there are 6,000 publicly traded companies in India due to the low cost of going public, the trick is identifying the real value. Saraogi thinks the country is a paradise for value investors who are willing to put in the work to separate the gems from the value traps. Liquidity is volatile and there's little analyst coverage outside of the top stocks, so there's some hairy situations investors can dig into. However, he also notes that corporate governance is still a problem there, citing examples of frequent equity dilution.



David Nierenberg (D3 Family Funds): Nierenberg works directly with companies in a constructive manner in order to unlock value. Back in 2008 he learned a valuable lesson that the macro picture matters as cheap got even cheaper. He offered two investment ideas: Multiplus (SAO: MPLU3), a Brazilian loyalty program administrator and MBAC (NEX: MBC), another Brazilian play that focuses on phosphate.



Guy Gottfried (Rational Investment Group): Gottfried, previously of Bruce Berkowitz's Fairholme Capital, turned to Canada for value investing opportunities. The inefficient market there has priced Morguard Corp (TSX: MRC) quite cheap at less than 5x cashflow while the company is very well-run. He argues that you essentially get their owned properties for free.



Ori Eyal (Emerging Value Capital Management): Eyal's presentation focused on a company's management and their (lack of) care about minority shareholders. Eyal's global focus means he has to research not only the company, but the country as well.

He presented two ideas: first, a share-class arbitrage of Grupo Prisa. He says to simply long the B shares (PRIS/b) and short the A shares (PRIS/a) as the risk/reward is skewed favorably with 50% potential upside and limited downside.

His second idea was Israel-traded Willi Foods, the leading kosher food distributor in Israel that is also looking to acquire a distributor in the United States. The company trades for around 5x this year's earnings net of cash (the $50 million cash stockpile represents half the market cap).



Kian Ghazi (Hawkshaw Capital Management): Hawkshaw runs a concentrated long/short fund and focuses on high quality companies. Ghazi presented Ingram Micro (IM) as a one-stop-shop and says that the threat from "the cloud" is overblown and that not all software is shifting there.

The company has 25% market share (leading its competitors) and Ghazi thinks it can still grow 3-4% as the industry has been focusing on ROIC. While Ingram Micro trades at .9 times tangible book value, the primary risk here is a global slowdown in IT spending.


Tomorrow we'll post a summary of day two so be sure to subscribe to our free updates via email or via RSS reader.