I am looking high and low for good value investment ideas, but the 25+% run-up in the market over the last year has left me high and dry.
The best I can do is the pair of toy-makers (MAT and HAS) that had ben left for dead a year ago, presumably because kids play video games now, real physical toys are not a growth industry anymore. Like railroads or newspapers, you know, the stuff Buffett likes to buy. But both of them have climbed and are still climbing up, getting closer to fair value. I do believe they have a ways to go up. Still, not as attractive / safe based on margin of safety as they were a year ago.
Same with industrials, I like EMR, UTX and colleagues, but also not cheap. They were being given away last September.
Maybe I will try my luck with K, GIS, CPB (maybe ADM) etc. No growth and the draught will kill their earnings by raising the supply prices. Temporary earnings dip = panicked Wall Street guys dumping good companies = opportunity to buy.
Let me know if you see Value lurking out there somewhere else.
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Value is contained in the places people don’t care to look or have no interest in. Social media, commodities and financials seem to take up most of the spotlight now, leaving other industries largely ignored. However, there are only a limited amount of industries to invest in. I’m particularly a huge fan of buying stocks that get beat up because of bad earnings for a quarter or who have received negative publicity.
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I think consumer staples are overvalued right now.
Some value stocks I own are:
PH
L
GOOG
DJCO
Cities teem with evil and decay, let’s give it a good shake and see what falls out!!
You are looking at some of the largest and most well recognized compaines in the country in a market that is up considerably. How can you expect to find value there?
“I lost my wife to a margin call. Wives get mad when you come home and say, ‘Sweetheart, I lost the house today.’” - Dennis Gartman on trading mistakes
i like occ and scor
Damn AF ate my reply! I clicked on DBS’s name and that was that! A well-composed 20 line reply vanished for the lack of a control-C. Ah well.
@Palantir: L is interesting. Like BRK but more junky operational businesses. Impossible to value so I only feel comfortable with a small stake.
@bromion - value can lurk in widely followed large caps, you cannot overestimate Wall Street stupidity and the need to follow the herd. After the 2008/2009 crisis, these geniuses were offering T and HNZ at a discount, both are up 50%-ish now. Forget cyclicals like HD (almost 100% gain) or F (1100%). Look at what Buffett buys - IBM, BNSF (before he bought all of it), WFC.
@DBS: OCC is too small-cap but SCOR looks interesting despite the negative EPS. Thanks for the tips!
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One Rec Ho
Oh and DJCO - Munger’s private project. Was a good value at 72, better at 60, who knows at 91?
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One Rec Ho
Palantir, didn’ tknow you were long on GOOG as well…..good to be partners….
L is not impossible to value its actually quite easy if you understand hotels, offshore, insurance and holding company versus underlying…..its actually much easier than BRK.B…..
Yes you can find value anywhere…..ppl that say you can’t find value in big market cap stocks are just plain wrong…..the biggest holdings of some top managers is AAPL….not value? perhaps but it sure as hell did good for them and beat out 90% of “value” cigar butts out there….
When you don’t see opportunities, sometimes the most important thing is not to deploy in unfavorable conditions. It’s amazingly challenging on the psyche. It seems to me that this may be another one of those times.
Of course, if you aren’t finding stuff because you’re not looking, that’s another story.
You want a quote? Haven’t I written enough already???
FrankArabia, I don’t really understand insurance and off-shore investing so please explain how you value “L.” I’m curious to learn.
Also, going forward, it would be a lot more informative if people on this thread (and others) explain the rationale for their investment ideas rather than just throwing a bunch of tickers out there.
bpdulog – just a couple names to throw out there that may fit your investment philosophy – HPQ and DELL. Curious to hear where you stand on these, if you have an opinion. Specifically, with your investment preferences, I wonder how you systematically separate value traps from stocks that are unfairly beat up due to bad publicity and are generating below-normalized earnings, but are ultimately primed for an uptick in performance.
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Keep in mind DJCO has a 100M portfolio and they’re earning about 8M/yr in FCF, so you’re paying 25M for 8M FCF…..(I bought it at MCap of 115 though). I think it is still a good value….but being a micro it can fluctuate so you should look for a better price.
This stock piled up cash for years, and starting in 2009ish they really started investing it. If you look at BVPS growth, it really took off after 2009, which reflects that.
Cities teem with evil and decay, let’s give it a good shake and see what falls out!!
numi, you’re undermining the “confidence culture” by demanding an investment rationale. We’re supposed to be practicing saying things “I’m confident that FB is going to exceed expectations in the short term; it’s a substantially undervalued: strong buy. Anyone who says otherwise just isn’t informed.”
Because, in the end, confidence is all that matters.
(jk)
You want a quote? Haven’t I written enough already???
Yeah…the way I see it is that Google really does have a substantial economic moat in search, that has been very difficult to crack. It’s not to say that they will always have that moat, but it does look pretty strong to me.
Cities teem with evil and decay, let’s give it a good shake and see what falls out!!
You can’t quote the 2008 / 2009 period and suggest that large cap stocks offer good value in even semi-normalized conditions. I also saw someone buy HTZ below $2.00 and watched it go to the high teens, that hardly makes it a regular occurence though. I can name multiple stocks that were up between 10x and 20x during that period, but I haven’t seen much of anything move that much since, nor do I expect to.
Buffett has a longer-term time horizon than most people here. Again, it’s not a value for the average stock market participant if you have to hold it forever to see realization of that value, or if you buy the whole thing and plan to never divest it.
Btw, 100% gain is the minimum target outside of large caps. Most professional value investors I know are looking for 3 baggers on a 2-3 year basis.
“I lost my wife to a margin call. Wives get mad when you come home and say, ‘Sweetheart, I lost the house today.’” - Dennis Gartman on trading mistakes
numi……….you can buy based on 1) historical discount to nav 2) underlying growth in value of assets 3) capital allcoation efficiency….i won’t get into valuing insurance and offshore drilling (not entirely confident in offshore here either)….
one easy way to buy on L is to basically buy on discount to nav…its disclosed in the annual report (the discount and the calc)…essentially the sum of the parts is greater than the whole but this is a phenomenon has gone on indefinitely so ppl would buy when the discount is wider than its historical average….
yeah palantir….goog my holding and fave stock now….moat in search is the fundamental and you not paying too much for it even if other endeavors fail (glass,android, etc)…..
Uh….what’s so great about HPQ….massive value trap. (Unless proven otherwise)
Cities teem with evil and decay, let’s give it a good shake and see what falls out!!
who are these professional value guys you’re referring to? you might aim for that but you won’ get that on a consistent basis…..anything above the index is good and from an absolute standpoint 15%+ consistently is amazing (over a 10 year period).. aiming for 2-3 baggers is unrealistic for me at least…..to get one of those you will get a lot of losers…..value guys have outperformed generally but not by the margins you’re suggesting big or small caps…..
You target a 3x return, obviously many do not work out. You will have some losers in that group, but hopefully you pre-emptively dump the ones that are struggling once the outlook changes. I have seen many stocks go up 3x over a 2-3 year period and there is a kind of science to finding them. There are others where you can say pretty confidently that the stock will likely be up 5x over a 3-7 year period and you have an opportunity to buy in to a name that is pretty illiquid (event driven selling). A lot of funds can’t do that because they have a quarterly mandate from their institutional LPs, so they have to accept lower returns. I wouldn’t call 15% amazing though unless you’re talking large dollar sums north of a billion in assets. If it’s a small nimble firm, I would say 25%+ is solid, 35%+ is amazing. Some have done 40-50% returns over a decade or longer but that can’t be done with a large capital base focusing on small caps internationally. Maybe I’m biased and 15% is amazing, but I’ve been lucky enough to work at a firm that has returned way more than that annually over the last 15 years with only one down year (2008 – down 5% in absolute terms).
“I lost my wife to a margin call. Wives get mad when you come home and say, ‘Sweetheart, I lost the house today.’” - Dennis Gartman on trading mistakes
what was your one year performance ending july 31?
i got 9%.
About flat with the S&P. I’m not sure if you’re implying this, but having great annualized returns doesn’t require consistently linear performance each year. The fund was up 150% in 2009, for example, had a big 2010, and was about flat last year. It has been difficult to make money on a short-term basis over the last 18 months in the US. But that doesn’t mean there won’t be more triple digit years to come (the firm has had 3 over the last 15 years). Right now it’s mostly about wait and see and not losing money, but that said, there are some pretty good long-term value picks in the market right now IMO in small caps for buy and hold investors.
It is a HUGE advantage to be able to hold things indefinitely because you have a permanent capital base and don’t have to worry about quarterly numbers. That alone should offer the opportunity to beat the market over long time periods assuming a reasonable amount of investment analysis skill. The market is a discounting mechanism for the next 6-12 months. In probably 80% of public names, the market is blind or close to blind beyond that point.
“I lost my wife to a margin call. Wives get mad when you come home and say, ‘Sweetheart, I lost the house today.’” - Dennis Gartman on trading mistakes
Is it a special situations fund or more of a traditional ” long term franchise-style” investor? If so, I think that’s the reason you and Frank are disagreeing.
If you guys are a SS fund, did you by any chance invest in Huntington Ingalls? I stared at it for ages but somehow didn’t pull the trigger when it was trading at 1B….
Cities teem with evil and decay, let’s give it a good shake and see what falls out!!
i used 1 year cause that is the time i got a full portfolio to manage……
triple digit years are hard to come by from what i see…even when funds were small at Baupost, Fairfax, Chou Funds, Buffet partnership, Munger partnership etc i didn’t notice them having outsized returns in any given year like that (100%+) but i could be wrong…and i think they’re the floyd mayweathers of the investing game….
the guys who did do those numbers rode a huge wave (i.e. commodities n the recent decade) but subsequently had double digit losses….
just looking to step my game up….but i actually never invested in anything i thought would go up 3x in the intermediate term so maybe thats my problem…but when i look at stocks that tripled in value they were not stocks i would ever invests due to weak balance sheets or whatever……
what are your thoughts on? TEVA, JPM, GOOG, INTC…i don’t see them doing double in the 3 year horizon but i dont’ think they’ll lose money either….
I agree. I’m not sure what style of fund Frank has in mind. I’m referring to small cap long / short (or actually even into multi-strategy focusing on select distressed debt and other debt instruments). Capital base is $500 million or less. If by franchise-style you mean private market analysis then yes – it is sort of a cross between Gabelli and Greenblatt, private market with a catalyst & magic formula. I know several people who have spun out of this fund and done 30%+ over 5-10 year periods. The founder has done better than that over 15 years. The founder’s father has done better than that over a decade plus before he retired. It’s possible if you have a small capital base and are very opportunistic. It would not work at Greenlight, SAC, etc. Those firms are too big.
“I lost my wife to a margin call. Wives get mad when you come home and say, ‘Sweetheart, I lost the house today.’” - Dennis Gartman on trading mistakes
i’m not sure that even matters…money is money…hedge fund performance overall has been weak from what i read…i believe that group encompassess all types of strategy…..Private Equity may be diffferent due to active involvement and lots of leverage but running a private equity operation is not something even an average portfolio manager can do
I have no thoughts on those Frank. I rarely look at anything over a billion in market cap and certainly not over five billion. If those are the kinds of stocks you look at then what we’re talking about is not comparable. I’m talking about names like AEPI that go from 22 to 48 in 10 months (likely on its way to 60+). That stock is probably too small for you.
“I lost my wife to a margin call. Wives get mad when you come home and say, ‘Sweetheart, I lost the house today.’” - Dennis Gartman on trading mistakes
I don’t think that is the case, in special situations, due to the huge embedded leverage built into these securities, you can see some spectacular returns, but those are not consistently found year to year. You’ve read the Greenblatt book right? I assume bromion’s firm is more like that.
If you’re primarily looking for firms that have growing annuity stream of cash flow with a MoS (what I call “franchise style”), I don’t think you’ll see epic 30+% returns, but they will still be very good, and more in line with what you’re saying, 20% return there would be excellent.
Cities teem with evil and decay, let’s give it a good shake and see what falls out!!
Yes, I think we are most similar to Gotham and maybe 2 or 3 other firms that I know of. I wouldn’t call it special situations per se, but there is definitely some exposure to distressed equity and other “leveraged” opportunities (although we don’t use leverage per se). A distressed equity name can go up 20x but it can also go to zero. I know that for a while Gotham was returning 50% a year compounded, although I think it is has declined somewhat as they have gotten larger.
A lot of the returns in these sort of funds come from getting involved in things that others can’t – here’s a stock under $5 that is a great deal. Here’s a spin out. Here’s some diamonds in the rough on Russell week. Here’s an orphaned IPO post-Lehman. Here’s a block trade that looks like a screamer over 3 years. Here’s a misunderstood small cap. The list goes on. But the point is, you are not blocking and tackling on blue chip names that have 30 analysts following them. If you want to call that special situations then so be it, although I am not really sure what special situations means. Is activism special situations? Is using derivatives? Is it a special situation if you own 20% of the stock? I don’t know.
I agree that 20% is excellent for other styles or larger firms. Clearly Frank and I are looking at two different things.
“I lost my wife to a margin call. Wives get mad when you come home and say, ‘Sweetheart, I lost the house today.’” - Dennis Gartman on trading mistakes
i manage funds the size of a traders lunch tab so its not size….i follow buffets rule in sticking to things understandable and possibility of losing money at close to nil….
if i may dig more, what makes you think AEPI will go to 60? what am i missing here (not saying you’re wrong, just want to see your thought process).
According to 2011 10k, the stock looks to be in a low margin industry with significant capex to cash flow generation with interest coverage of less than 3x (oper income adjsuted for amor/depreciation/stock expense).
Valuation looks to be high at 250m with relatively lumpy earnings (8x p/e on the best of last 5 years earnings and over 20x based on 2011) and book value of roughly 50m implies 5x book value……
Also, half of assets for this asset heavy industry is goodwill…..i would consider this company to be debt heavy….
defintely not an expert or knowledgeable in this sector but things don’t jump out at me….please fill in…
I would have to dig through my notes to get the specific numbers, but this is the gist:
The company recently refi’d its debt, has a history of aggressively buying stock, and is run by two value guys with decades in the business who combined own a large chunk (it might be 20-30% off the top of my head but don’t quote me).
The business itself isn’t a stunner at first glance, but it has structurally embedded market share gains coming for the next 5 years. The industry is very fragmented with high fixed asset requirements, and many mom & pop one shop players are no longer earning their cost of capital post-Lehman (especially after getting whipsawed on resin prices due to the fluctuating price of oil). AEPI is the low cost producer. Because this is plastic films, it is never going away (every consumer product uses this stuff) and cannot be outsourced due to weight (shipping beyond 500 miles or something like that is prohibitive). The company has a national or near national foot print and is the second largest in the industry. They soak up share just by showing up to work every day, providing future operating leverage. The share gain opportunity is happening and will continue to happen for some time. It is not a “story.”
If you look at normalized gross profit per pound of $0.20+ and model in market share gains (500 million pounds, conservatively), it punches out in a spreadsheet to somewhere around 50-70 million of normalized FCF with a buy back. There are no aggressive assumptions in the model. It was a lay up at $22. It is leveraged, that’s true and they have suffered from margin compression just like everyone else, but they are in the cat bird seat (#2 of 350 with scale). The #1 player has a worse balance sheet (was an LBO) and cannot generate significant additional pricing pressure. Current pricing pressure is bound to alleviate at some point after the smaller players bleed out and die.
I went out to meet this company in New Jersey and management is true blue. The opportunity exists because they hate Wall Street – if you read the calls, there is obvious disdain for the analyst community, which is hyper-focused on what resin will do in the next 10 minutes. So management never bothered to outline the full extent of the share gain potential. I did some basic industry research and it was pretty clear cut. Anyway, my math said about $60, but it could go higher over time if they gain even more share. It happened faster than I expected.
I agree that the business is not sexy and without the market share back drop would not be a very attractive long. It’s a mistake to think that low margin businesses cannot be attractive investments though. In terms of debt heavy, I would have avoided except that they just got a refi and were aggressively buying stock with high insider ownership – if that is not a very positive sign, I don’t know what is.
By the way, the fund I work for bought some and I personally bought some at $22, so this is not theoretical.
“I lost my wife to a margin call. Wives get mad when you come home and say, ‘Sweetheart, I lost the house today.’” - Dennis Gartman on trading mistakes
good write up Bromion……..
Yeah, I would just add one thing – the stocks I try to find are low multiple sleepy stocks that become multiple expanding growth stocks. Three ways to get “paid” as an investor – dividends, earnings growth with constant multiples, and expanding multiples. If you can find something with sustainably growing earnings at a low multiple, that’s probably going to be a big win over time. Stuff like “Tech IPO 2.0” with high earnings growth automatically gets a high multiple applied to it, and that is actually quite risky if the growth decelerates. So I try to go in reverse – what is this thing that has done okay or subpar over time but with decent structurally embedded characteristics, and is it going to improve?
They are hard to find. You have to turn over a lot of rocks. I’ve heard it said that in a normalized stock market, maybe 9 / 10 stocks are fairly priced within a decent range. If that’s true, then maybe 1,000 of the 10,000 stocks are actionable, split between longs and shorts. I personally am not good enough to find 1 in 10, and it seems to be more like 1 in 20 (and that’s assuming I’m right all the time, which is a stretch). So I try to go through things pretty quickly (days or less, not weeks).
Okay, seriously, I need to do some work today.
“I lost my wife to a margin call. Wives get mad when you come home and say, ‘Sweetheart, I lost the house today.’” - Dennis Gartman on trading mistakes
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