GuruFocus has various tools and screeners available to make the quest for your next great investment a little bit more efficient.
A tool of which I am fond is the Double Buy screen. By employing it you can easily screen a list of stocks that have been double tapped by both gurus and insiders. Both types of events tend to trigger my interest, but when they occur simultaneously it is time to pay close attention. I regularly review the list, and these are currently the top three stocks that come up on the screen:
Barnes & Noble Education
Seth Klarman (Trades, Portfolio)'s protegé David Abrams (Trades, Portfolio) is still vigilantly adding to his already huge stake in Barnes & Noble Education (NYSE:BNED). Abrams is a real value investor, managing several billions of dollars and known to make concentrated bets. He is quite secretive but also very patient and is especially keen on companies where insiders' incentives are well aligned with his own interests.
Barnes & Noble Education is a spinoff from Barnes & Noble Inc. (NYSE:BKS); the company operates the bookstores located on the campuses of many colleges and universities around the U.S.
I have previously written an article about this company on GuruFocus, which is worth reading if you are interested in the company. At that time I attempted to do a rough valuation to explore why Abrams was interested, but a reader presented me with a superior method which I thought was quite interesting:
Better off analyzing college segment EBIT from the previous years' 10Ks. Average of between $60 million and $70 million over the last four years. Take low range, $60 million x (1-t), t = 35%, gets $39 million. Add back net capx of $25 million, ignoring change in working cap as book inventory should offset by change in trade A/P. FCFs of, say, $64 million, and as you've pointed out, asset light, audience captivity type business with an imbedded presence at U.S. universities. This isn't factoring in possible growth from digital, which they've been investing heavily in.
Note that a FCF of $64 million is incredibly attractive considering the company’s enterprise value just north of $300 million.
However, interestingly Murray Stahl (Trades, Portfolio) is bearish on Barnes & Noble Education, and I am always careful to read his commentary (emphasis mine):
The college bookstores, however, even though they earn about $100 million EBITDA a year, are in the process of radical change. That is because university education materials are in the process of shifting to digital delivery. That is a huge challenge for college bookstores. For instance, at MIT.edu, students can obtain – for free – lecture notes, past exams, lecture videos. It is the policy of the university to publish and make available all course material online worldwide to anyone for free, and MIT is not the only university to do so. In principle, I could take thousands of courses, including single variable calculus, electronics, multivariable calculus, differential geometry, marine hydrodynamics and many, many more. I could have all the course materials at my disposal and if a textbook were needed, I could purchase it online in used condition from a multiplicity of vendors, none of which are college bookstores. This trend reflects the response of universities to online education and the financial pressures students face. It also poses a huge threat to the college bookstore. A brand new textbook could cost $140. For a student taking four or five courses, with two or three books per course, that adds up to quite a lot of money. So the universities are responding, especially since the universities do not publish the textbooks. This is a radical change, and it appears that Barnes & Noble is reacting to that change. Once the college bookstores are in a separate company, they will have to find another way to make money, which they might do, but that business appears to be under some degree of pressure.
Stahl is really worried this could be a value trap as the company's revenues are in a secular decline. Only time will tell whether shareholders can profit, anyway.
Cheniere Energy
Cheniere Energy Inc. (LNG, Financial) owns and operates the Sabine Pass LNG terminal in Louisiana. It has access to a deep water shipping channel near the Gulf coast. In addition the company is developing another natural gas liquefaction and export terminal near Corpus Christi, Texas.
The Sabine Pass LNG terminal has its entire 4.0 Bcf/d of regasification capacity fully contracted. This doesn’t surprise me because there is a wide spread between U.S. gas prices and continental and/or Asian gas prices. This dynamic has attracted the attention of such notable gurus as Klarman, Andreas Halvorsen (Trades, Portfolio) and Carl Icahn (Trades, Portfolio).
The company received some criticism for overpaying its founder and previous CEO Charif Souki. The CEO was ousted by the board, most likely because he has an entrepreneurial and expansionary mindset. Souki called ousting him the right call by the board.
The company is incredibly expensive by any kind of traditional value metric like P/E, Price to Cash Flow, Price to Sales or Price to Book while it has a ton of long-term debt (about $15 billion worth), but that’s because its cash flows have yet to materialize while these are already contractually agreed to. Icahn and Klarman are clearly banking on them. Icahn went so far as to call them gold. Buyers in the last three months include: Steve Mandel (Trades, Portfolio), John Griffin (Trades, Portfolio) and Stahl. Below $50 insider buying started after lots of selling previously:
Walmart
I won’t insult you by explaining what Walmart (WMT, Financial) is. I have to admit I was surprised to see it at No. 3 on this list. Ken Fisher (Trades, Portfolio), Arnold Van Den Berg and T Rowe Price Equity Income Fund have been recent buyers along with insiders.
The firm is a little bit out of favor with investors because it is viewed as an underdog to Amazon (AMZN, Financial) in some segments and competition from dollar stores is perceived as another threat. Walmart is in the process of setting up many smaller stores to enable people to shop at a Walmart much more often, not just for the weekly groceries but because of the company’s enormous scale and level of sales it can leverage to get good terms from suppliers. It does, and it doesn’t always get good press.
People continue to shop there though so it only goes to show how much of a competitive advantage the company has. Its operating cash flow is almost $30 billion; the company trades at roughly 16x forward P/E, and its debt load is sizeable at $53 billion but should be easily managed because of the reliability of the company’s earnings. At the end of the day, people will need to eat.
Disclosure: Long BNED.
