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One Person’s Trash Is Another’s Treasure
Posted by: David Chulak (IP Logged)
Date: June 21, 2013 10:16AM

I find myself taken aback when those providing a bullish case for a possible purchase of an equity fail to provide the reader, not just a potential bearish possibility, but fail to either attempt to “kill the stock” in Bruce Berkowitz style or even provide what could be considered a “short case” for actually shorting the stock. Berkowitz endeavors to discover or test whether the business is truly growing and has some sort of competitive advantage over its competitors or is somehow vulnerable. He attempts to determine what it would take to kill the stock, looking for the fatal flaw or anything that may be terminal in the stocks future. Short-sellers, on the other hand, short stocks for different reasons. I often find some of the reasons less than convincing. It’s a different form of killing it in the sense that it may fully recover at some point… or it may not.

Short-sellers may be just as wrong as buyers. Those that try to “kill the stock” or even short it, and consider themselves successful in their study may continue to find themselves on the wrong side of the price of the stock which may continue to rise. It’s with this background that value investors need to either heed the advice or consider the advice of those that are on the other side…..the dark side, so to speak.

I recently found myself on the opposite side of a few investors that I admire considerably, most notably Ray Dalio Jeremy Grantham and Howard Marks. They were and are on the long side of Vale S.A. (VALE), the world’s largest producer of iron ore located in Brazil and I had decided to go short. While I enjoyed the company of David Einhorn and Jim Chanos, it was my own research that provided me with the impetus to make that final decision.

One of my distastes for short-sellers is that too often they attempt to bully the stock down to meet their expectations or to somehow drive it down into submission. I have no such luxury other than to somehow hope that a Chanos or Einhorn may help my cause in the process. I certainly do not depend on them and don’t particularly approve of some of the tactics used. In fact, I would have shorted without their support, believing my decision the correct one. Note that there is nothing wrong in make a “short” case if one clearly exists in your opinion.

I often hear short-sellers talk about fads and how they come and go. They often choose to short these equities believing that they can somehow “time” this endeavor. Let me state clearly that timing rarely belongs in a value investor’s vocabulary and that short-selling a stock due to a “fad” is probably one of the worst reasons I can think of. Holding an equity that continues to grow as a fad may not be smart and will at some point take the path it should, but we all understand that Mr. Market has its own timing.

I continue to be amazed at Ulta Salon Cosmetics & Fragrances Inc. (ULTA). Incredibly overvalued, it continues to go up and put up impressive numbers. With that said, I would not short it… at least not now. I can only imagine someone waiting for the “Barbie” fad to finally take hold and short Mattel (MAT).

What’s clear is that one person’s valuable stock or treasure may be considered to be relegated to the trash pile (short) of another investor’s portfolio and you had best reflect on why they may have taken the path they’ve chosen.

Vale S.A. (VALE) is currently being held by the following investment gurus. The list alone would almost suffice for some investors as to a high recommendation for purchasing the equity:

Ray Dalio
Jeremy Grantham
Jim Simons
Ken Fisher
Louis Moore Bacon
Howard Marks


It boasts a reasonable PE of 11.3, PB of 1.2, PS of 1.5, PCF of 3.7 and a 2.8% dividend yield. There are certainly things to like about it, but there is much to dislike. Without going into every reason for the short, consider the following:

While both China and India have largely driven the price of commodities, both are slowing down while supplies are stockpiling. Billions have been spent in the industry to expand the supply which is no longer being required.

The industry is heavily dependent on the economy which is worsening in many countries.

Chanos indicates that the company (Vale S.A.) is highly dependent upon China which is slowing down and currently building their own iron ore plants. In fact, Chanos has gone so far as to call the stock a “value trap”.

Government regulation for Vale S.A. (VALE) is particularly worrisome. The government still has a lot of control over business decisions.

While they produce other commodities such as coal, nickel and copper, they are not as nearly diversified as some of their competitors.

Highly dependent on China for purchases, the high cost of transportation makes it a costly venture compared to similar companies situated in nearby countries such as Australia. China has been using nearly 65% of the world’s iron ore, a reason for them pursuing their own plants.

High acquisition cost of companies such as INCO that have not substantially benefited the company’s bottom line.

Even Rio Tinto (RIO)'s chief economist for one of Vale S.A.’s largest competitor has issued a stark warning of the future price of iron ore.


I can offer no better advice than Bruce Berkowitz’s advice to try and “kill the stock” prior to buying. Whether you agree or disagree with the analysis, including those of both Jim Chanos and David Einhorn, it is incumbent upon you to consider the bearish or potential short reasons for a stock prior to purchase.

Fortunate on this stock (less fortunate on others), we must each remember that I and many others are voting with our own money for the stock to go down while you desperately cling to your analysis that it is an undervalued stock and should go up. Your treasure may be doomed for someone’s trash pile, so caution to all and analyze fully.

Disclosure: Short of Vale S.A. (VALE)



Guru Discussed: Bruce Berkowitz: Current Portfolio, Stock Picks
Jeremy Grantham: Current Portfolio, Stock Picks
Stocks Discussed: VALE, BHP, ULTA, MAT,
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Re One Person s Trash Is Another s Treasure
Posted by: agaglio (IP Logged)
Date: June 21, 2013 12:35PM

It seems that, in the case of a short seller, one ought to provide the bull argument in an attempt to 'kill' the short thesis. What is the bull argument here? Surely if Marks, Dalio, and Grantham are on the long side it's not trivial!



Guru Discussed: Bruce Berkowitz: Current Portfolio, Stock Picks
Jeremy Grantham: Current Portfolio, Stock Picks
Stocks Discussed: VALE, BHP, ULTA, MAT,
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Re One Person s Trash Is Another s Treasure
Posted by: batbeer2 (IP Logged)
Date: June 21, 2013 02:10PM

Thanks for sharing your thoughts.

A tip:

"I" is the sixth most used word in this article. It's a tie along with "it", "is" and "for".
"VALE" or "company" don't make the top 30.

[www.wordcounter.com]




Guru Discussed: Bruce Berkowitz: Current Portfolio, Stock Picks
Jeremy Grantham: Current Portfolio, Stock Picks
Stocks Discussed: VALE, BHP, ULTA, MAT,
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Re One Person s Trash Is Another s Treasure
Posted by: vivekjain57 (IP Logged)
Date: June 21, 2013 06:25PM

I think you realy need to consider the time horizon.....it may work to short vale for a quick trade with the reasons you cited and Chanos and Einhorn are more traders than long term investors. Chanos even shorted Hpq and it initialy fell down a cliff but later recovered. Long term it should come back. At the current price and valuation I am definetely long Vale.



Guru Discussed: Bruce Berkowitz: Current Portfolio, Stock Picks
Jeremy Grantham: Current Portfolio, Stock Picks
Stocks Discussed: VALE, BHP, ULTA, MAT,
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Re One Person s Trash Is Another s Treasure
Posted by: davidchulak (IP Logged)
Date: June 21, 2013 07:00PM

Agaglio,

My intent...which may have not come across, was only to demonstrate that investors should look at both sides....long and short to get a better understanding of the stock. Could I have provided a long or bull argument? Yes, and perhaps I should have, though I wouldn't even try to speak for the likes of Grantham, Marks and Dalio. Sorry that I disappointed on that. I'll keep that in mind on future articles. Thanks for the comment.

Batbeer,

I just used "I" several more times in my reponse to Agaglio. Actually, thanks for that. Anything that helps me to become a better writer is always useful. I love your comments and wish I would see you write more. Thanks for the tip.....I did it again!!!

Vivekjain,

Excellent comment. Chanos believes that Vale is a value trap, but I can't go that far. I (darn you Batbeer!!) saw an opportunity due to several factors and took advantage in this short term situation. Not my normal style of investment, but after becoming convinced, had to take advantage of the opportunity. These are extraordinary times of investing. Mostly, I am a pretty boring investor...long KO, PFE, INTC and several others.

Thanks for the input to all.



Guru Discussed: Bruce Berkowitz: Current Portfolio, Stock Picks
Jeremy Grantham: Current Portfolio, Stock Picks
Stocks Discussed: VALE, BHP, ULTA, MAT,
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Re One Person s Trash Is Another s Treasure
Posted by: w1omega (IP Logged)
Date: June 21, 2013 07:16PM

Interesting. Prem Watsa also sorta hinted a collapse in commodity is coming, though his reasoning was vague....he thinks commodity is being horded by speculators, which makes it difficult to analyze.

I'm curious. You said India and China's "_supplies are stockpiling." To what were you referring to?

Enjoyed reading about Glenn Greenberg.



Guru Discussed: Bruce Berkowitz: Current Portfolio, Stock Picks
Jeremy Grantham: Current Portfolio, Stock Picks
Stocks Discussed: VALE, BHP, ULTA, MAT,
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Re One Person s Trash Is Another s Treasure
Posted by: davidchulak (IP Logged)
Date: June 21, 2013 08:00PM

W1omega,

I was referring to a combination of reporting by various sources.

Einhorn stated in his short thesis that commodities had basically run their nearly 10 year course or bull market (my words) and that supply was now exceeding demand. In fact, he goes on to explain how the mining company's have spent billions to attain more supply, while the demand was already slowing down.

Chanos makes the argument that the entire industry is overvalued and in particular, Vale is extremely dependent on China which is 1) slowing down and 2) creating their own plants.

Vale has also had many write downs that have not turned out the best, especially under the old CEO. This is still creating a drag on the company.

http://businesstoday.intoday.in/story/slowing-demand-to-keep-iron-ore-prices-under-pressure/1/194380.html

We believe domestic iron ore prices will remain weak and may decline by 5-7% by the end of 2013. Also, small players will continue to remain shut.

TARANG BHANUSHALI

Associate Vice President, Research, India Infoline

Actually many sources are available, but let me know if you want more. And thanks for reading!!




Guru Discussed: Bruce Berkowitz: Current Portfolio, Stock Picks
Jeremy Grantham: Current Portfolio, Stock Picks
Stocks Discussed: VALE, BHP, ULTA, MAT,
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