This is the part I of notes taken by Anastasios Dimopoulos during the 4 th Annual Value Investing Seminar in Italy. It includes the talks given by Whitney Tilson and Mohnish Pabrai.
4 th Annual Value Investing Seminar in Italy – Day 1
The annual value investing seminar is organized by Cattolica Partecipazioni S.p.A. and takes place in Puglia , Italy . Our host was Ciccio Azzollini, the founder of Cattolica Partecipazioni S.p.A, and I want to thank him publicly for this great event and his generosity. This year I had for the first time the pleasure to attend the seminar and listen to the presentations of some well-known value investors. In this first report I will give you the highlights of the presentations that the first four speakers gave on the first day. Other reports will follow for the rest presentations of the first and second day and also one concerning my thoughts on various kinds of information about value investing in general that I picked up during the four days I was in Italy .
1 st day’s speakers: Ciccio Azzollini, Whitney Tilson – Glenn Tongue, Mohnish Pabrai
Ciccio Azzollini
Ciccio Azzollini made a very short introduction and talked about the two sides of value investing. The first side is that of Benjamin Graham which is buying really cheap businesses as measured by low multiples like P/E, P/B, EV/Sales, EV/EBITDA, while being fairly diversificated. The other side was made very popular lately by Joel Greenblatt and is to buy good companies at good prices.
He also talked about the investment he has presented last year and why he will never do such an investment again. Last year’s recommendation was Telecom Italia which had very low downside. The price of the stock has remained flat during the year and he said he will try to find situations that even if the downside is very low there is a lot more upside.
Whitney Tilson – Glenn Tongue
Whitney Tilson and Glenn Tongue presented one of their favorite stock ideas which is Berkshire Hathaway. They used several ways to arrive at Berkshire ’s intrinsic value which they estimated at about $144000/share. Then they analyzed an investment they have made by having custom call options written. This is a LEAP investment strategy that until now is doing quite well since Berkshire ’s stock price is going up the last years following its growing intrinsic value.
One of the attendees asked about what might happen to Berkshire ’s stock price if Warren Buffett isn’t there to manage it. In Tilson’s and Tongue’s opinion there is not much Buffett premium in the stock price today since the board is strong and there is also a succession plan in place.
The second idea was about Target which is the largest position ever in their fund. The thesis is that value could be unlocked by a possible spin-off of the credit card business and a sale of the owned real estate. The real estate is considered to be worth about $30-$40 billions to an LBO firm partnering with a real estate firm to do the deal. They see a very limited downside and the upside to be a matter of time. An equivalent situation was heard about KKR and Macy’s. The catalyst for Target according to Tilson and Tongue is activist investor Bill Ackman who has recently announced a sizeable stake. The thing that impressed me was that they believe Wal-Mart is in the same situation as to how it could be valued but it is too large to be acquired. Some of the seminar participants expressed their opinion that this kind of deal will be just financial engineering since if Target sells the real estate will have to lease the stores. There was agreement on that side of the situation but this doesn’t mean that a lot of value can't be unlocked momentarily.
Mohnish Pabrai talked a little about his low risk-high uncertainty investing strategy and specifically for “Abhimanyu’s Dilemma” from his new book “The Dhandho Investor”. “Abhimanyu’s Dilemma” has to do with the decision about when to sell a stock. Pabrai’s strict rule is “Do not sell if the intrinsic value is above the market price no matter what happens.” He gave an example which had to do about one of his investments that is mostly sold by now. The company is Universal Stainless & Alloy Products, Inc and the situation unfolded in the following order.
1. Bought stock at $14- 15 in 2002 seeing a forward p/e of 4-7 with no downside and a huge upside.
2. One year later the stock was trading at $5 but he couldn’t see anything wrong with his assessment of intrinsic value. He just waited.
3. One year later the stock was trading at $10-11 and the intrinsic value was estimated at easily over that price. Wait again.
4. In 2005 the stock was trading again at $15 but he didn’t sell at break-even because the intrinsic value was estimated by him at $30, so he bought more and waited.
5. In 2006 the company starts running at full capacity and is very profitable. The thesis is being confirmed and he starts selling at over 90% of intrinsic value.
In the second part of his presentation Pabrai talked about a current pick which meets the nine criteria of his framework as described in his book. The company is Delta Financial Corporation which Pabrai thinks is traded at a “throwaway price” of around $11 (At the time of this writing the stock was trading at $3.85). Pabrai estimates the company’s intrinsic value at over $30/share for several reasons. One good sign for him is that the insiders own over 30% of the company and they are according to him very conservative. He also told the audience that whenever he buys a stock it goes down and that is what happened with Delta Financial Corporation since he bought at the beginning of the year just before the subprime meltdown.
"Anastasios Dimopoulos studies Accounting and Finance at the the American College of Greece. He will graduate on December 2007 and is planning to work as an analyst in a value oriented investment firm. You can contact him at anadimop@gmail.com"
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Anastasios Dimopoulos studies Accounting and Finance at the the American College of Greece. He will graduate on December 2007 and is planning to work as an analyst in a value oriented investment firm. You can contact him at anadimop@gmail.com
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I don't understand how companies like MCD and TGT can be viewed as real estate plays, when they are already running businesses on their owned real estate that pretty much maximize the value of the underlying land.
This doesn't make any sense to me.
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I think the main deal on these real estate plays is that the land is held at book value which can be quite understated. If they can sell the land and lease it back they will gain a truckload of cash that they can use to expand or distribute.
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One MCD exec in the past joked at a Q&A at some university. He asked a student what business MCD is in. The student said restaurants. The exec giggled and said, no real estate.
Now think about the last MCD you saw. Pretty damned good location isn't it.
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I agree for a company with underperforming businesses like SHLD.
But assume TGT does a sell and lease back. They get cash, but pay a lot of taxes on the gain. Then, pay taxes on the interest on the cash, unless they do something with it right away.
Let's say they buy back stock with the cash. Ok, so now the remaining shareholders have higher lease obligations and a more leveraged company. I guess this can be interesting, but it is not a straight value adder.
Truly "unlocking" real estate value means replacing whatever is on the land with a more valuable development. I argue this would be unlikely for TGT in general. MCD locations would of course vary, but MCD runs pretty good businesses on these sites already.
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I agree that this is mostly financial engineering. When Ackman presented his MCD version at the first VI Congress, I went to the breakout and asked him if it wasn't just that. He didn't have a good retort - his main focus is that he believes it will raise the stock price, not necessarily increase intrinsic value IMO. It is true that if the RE is WAY understated on the books that turning it into cash might wake WS up to the fact, but you would think this would be priced in anyway.
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Well it is somewhat like a homeowner cashing out equity to make other investments.
You had better make sure you are making good investments, because having the equity is a nice cushion.
The same is true with any company that cashes out assets to do something "smarter" with the money.
Target is doing pretty well on its own without resorting to any balance sheet gimmickry, but I guess activist shareholders are entitled to their own opinions.
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So Pabrai still thinks Delta Financial is worth $30 a share even as of August 23rd?
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Ackman has said that he wants to sell a part of the company, unlock the value of another, and one part is misunderstood. I suppose he wants to sell the credit card business. I guess the grocery business is misunderstood(not sure)? The thing about the real estate is that they don't have to sell the entire portfolio, they don't even have to sell a lot of it. They just have to sell a piece so that Wall Street has some metrics to value it.
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I bought a small amount of DFC yesterday at $4.50, after thinking it over and reading their 10K and 10Q. Only 0.6% of my portfolio. After sleeping on it, I decided to buy more today at up to $5/share, only to see that the price at $5.25. While it is nice to make 12% overnight, I really would rather the price had dropped.
If Pabrai is right and Delta is worth $34, it is a buy even with a 70% chance of going bankrupt! I don't think the chances are that bad, but I plugged it into the Kelly formula and came up with [http://www.cisiova.com/betsizing.asp]:
"Your Kelly Percentage is: 16%
You can achieve on average 5.5% growth
by investing 16% of your bankroll in this opportunity."
FYI, the 5.5% is the return on your WHOLE bankroll, not just the fraction you wager.
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However based upon current write offs, layoffs, environment etc his $34/share value has changed?
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Yes, good point. It might only be worth 15. Given the high risk and the difficulty of pinning down a fair value, I'm not going to pay up very high. But under 5, what a deal!
GULP not GARP. Good companies at an Unreasonably Low Price.
Some Pabrai thoughts, presented prior to the big layoff and closure of offices:
- Severely distressed industry
- DFC stock is at a throwaway price despite being different
- Half of loans originated at retail centers with ultra-low costs
- 78% average loan-to-value and 92% of loans are fixed rate
- Conservative accounting
+ revenue recognized over life of loan but expenses are recognized immediately
+ Mostly a re-fi lender. Not affected much by housing starts. Low California exposure.
- 1/3 owned by insiders. Solid, conservative, owner-oriented management.
- Securitized fair value is over $8 per share, excess book is another $4, and the mortgage banking earnings engine generates $1.50 per share
- Less competition now so earnings will grow. DFC has been hiring and growing recently.
- Earnings could be much higher than $1.50 in 2 to 3 years. With a 15X multiple the intrinsic value is about $35
- more if earnings grow. Once the cloud passes over the industry the stock price should rise.
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Wise move buffetter. You bet an amount which is negligble if it was to go sour to your portfolio but your upside is great at your entry price and well worth to risk reward ratio.. Making a large bet in this industry during this time of uneasy in the credit markets after the "bubble" we have had would be quite risky but DFC at the price you bought in for the amount you bought in at is "perfect".wise move .peace
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