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Stepan Lavrouk
Stepan Lavrouk
Articles (625) 

Mohnish Pabrai on How He Stumbled Into Owning a 60-Bagger Stock, Part 3

The guru's mental models for finding great opportunities

September 24, 2020 | About:

Mohnish Pabrai (Trades, Portfolio)'s curiosity was piqued when he discovered a forgotten Indian stock certificate that had appreciated 60 times in the 21 years since he purchased it. Stumbling into a sixty-bagger is one thing, but is it possible to identify the businesses that have the potential to be truly great opportunities? Pabrai thinks so.

In the first two parts of this series, we looked at some of the mental models that he uses when looking for great opportunities, which he talked about in a 2016 lecture at Peking University. In part three, we will look at the last two categories of great opportunities identified by Pabrai.

Category 4: Bankruptcies and other special situations

Companies undergoing bankruptcy might not be the best businesses in the world, but at the right price and under the right circumstances, they can be great investment opportunities. There are a lot of other special situations that can offer a good opportunity, like reorganizations and public leveraged buyouts. Pabrai described a special situation in which he did very well. Real estate investor Sam Zell had bought a bankrupt business with $630 million in net operating losses for $30 million.

Why would anyone want to buy a business with nothing but losses, you might ask? Tax efficiency. The idea was to take the bankrupt business, merge it with a highly profitable company and save hundreds of millions of dollars in taxes by using the losses of the bankrupt business to shield the earnings of the profitable one. After some initial challenges, they found an energy company that generated electricity by burning waste. By the time Pabrai had found out about Zell's scheme, the stock had risen from $1 per share to $9 per share. After he invested at $9, the stock doubled over the next 13 months and eventually quadrupled.

Category 5: Upside without downside

During the dotcom bubble, Pabrai was looking for a way to invest in internet companies. Like many investors, he felt the internet was going to be a huge factor in business, but wisely understood that he couldn't predict which specific companies would do well. To make matters worse, most internet companies were selling at high price-earnings ratios. So his solution was to buy stock in a bank called Silicon Valley Bank, which had received a lot of warrants from dotcom companies during the bubble.

Nobody knew exactly how much these warrants were worth, so there was some uncertainty inherent in the investment, but Pabrai figured out that there was a lot of potential upside with little downside:

"If those warrants turn out to be worthless, we don't lose any money. We still have the bank. And if they do turn out to be worth something, then we have a huge, huge run. We made about two and a half times our money in two and a half years on the stock."

Silicon Valley Bank, which is a subsidiary of SVB Financial Group (NASDAQ:SIVB),would eventually go up 5 times from where Pabrai invested as a result of the monetization of the warrants by the bank.

Disclosure: The author owns no stocks mentioned.

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About the author:

Stepan Lavrouk
Stepan Lavrouk is a financial writer with a background in equity research and macro trading. Specific investing interests include energy, fundamental geoeconomic analysis and biotechnology. He holds a bachelor of science degree from Trinity College Dublin.

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poolgmac
Poolgmac premium member - 1 week ago
Value Thesis on Request RE Novation Companies, Inc OTC NOVC (ex MREIT, $730M NOLs, Rights to most $3B Collateral Assets in RMBS, NQM Portfolio with WAC 600 Bpts. All the attributes that existed at Newcastle Inv Corp NCT now called Drive Shack DS.

What’s Ocwen Fin'l OCN/New Residential Inv Corp NRZ/Dynex Cap DX & Novation co NOVC have in common? Fortress (ex DX investor via CMO)/EJF Capital - Sr Debt Holders SDH via CDOs they paid almost nothing to hold & 31.3M NOVC common, Mass Mutual Barings 19M common & others including Chuck Gillman, Jeff Eberwein, Barry Igdaloff/Thomas Akin ex DX Board members own at least 87M or 75% of Novation Companies Inc. OTC NOVC – Offer to help turn $100k into $83M by split NOVC into 2 public co JUST like Fortress' Wesley Edens did at Newcastle NCT/Drive Shack DS (Edens was CEO Fortress & COB of NCT now DS which kept $160M NOLs after spinning off from NCT 3 tax exempt MREITs; SNR, NRZ and NEWM). Fortress is OCN Ocwen the Servicer of NOVC 3B portfolio of RMBS, NQM, Fortress/EJF Capital own 31.3M NOVC Shares and all Sr Debt (deemed basically worthless by Boulay Group, NOVC CPA firm Outside Auditor relied upon by all NOVC Shareholders). Boulay Group NOVC Outside Auditor CPA firm certified NOVC Sr Debt as basically worthless. Mr. Market can be confident these investors will present a plan to monetize 86M common they hold in NOVC and retire the SDH at discount which they have little cash invested. These close investors are not in NOVC for Sr Debt that has FMV of only 17M per last Q.

NOVC can spin off Novastar Financial Inc. their 100% owned ex MREIT and leverage collateral assets 10:1 from Cleanup Call Rights CCR (READ sec 5.04 of Service Rights Transfer Agreement SRTA attached to the back of NOVC Q3 2007. CCR provide the right to call back rich, seasoned collateral assets to most of $3 Billion RMBS, NQM portfolio with WAC 600 Bpts.

Wesley R. Edens, Peter Briger Co-CEOs of Fortress plus partners in NOVC Sr Debt, Manny Emanuel J. Friedman, Neal Wilson Co-CEO at EJF Capital, Thomas Akin ex CoB of DX, Akin also owns 13.4% of IMH and Barry Igdaloff (resigned from Dynex Capital NYSE DX Board and days later accepted Chairman of the Board position at NOVC). NOVC can position remaining www.healthcare-staffing.com as a Blank Check Corp or SPAC but with $730M NOLs. Chuck Gillman, Jeff Eberwein introduced to Barry Igdaloff via Whitney Tilson (Trades, Portfolio) were on the Board of NOVC - Jeff Eberwein was CEO and COB & were allowed to appointee 3 to NOVC Board including David Pointer, Lee Keddie & Tim Eriksen who have given themselves 6.7M RSU over last few years. Mass Mutual Barings has $48M invested in NOVC and the rest of these investors have no more then a bit over a million or so.

One estimate shows if NOVC duplicates their restructuring from DX and NCT these investors stand to make billions yet have less than a few million invested. Again they do not care about Sr Debt valued by Boulay Group at only 17M FMV. Their reward is all common shares 114M CSOS Dilute. The MREIT Novastar Financial Inc could generate $100Ms in annual dividends depending on the NIMs & leverage used at MREIT Novastar Financial Inc. I can say without reservation these investors are all connected and most are experts in NRZ, DX, IMH, MREITs. Manny Friedman and Wesley Edens, Thomas Akin ex COB of DX, Barry Igdaloff sat on DX Board with Thomas Akin and both served DX together. Fortress bought for almost nothing CDO Service Rights that control NOVC Sr Debt (Taberna I & II), ditto for Manny Friedman at EJF Capital (Kodiak CDO I).

See below Wesley R. Edens own presentation made to shareholders of Newcastle Inv now called Drive Shack Dec 2016. IMHO these investors lead by Fortress, EJF Capital will do it again at Novation Companies, Inc. Given NOVC $730M NOLs start to expire 2025 and NOVC SEC reports have said $730M NOLs are extremely valuable the new Chairman of the Board at Novation Companies, Inc. NOVC Barry Igdaloff (Expert in MREIT) maybe making his move soon (Barry Igdaloff resigned days before from Dynex Capital NYSE Board which he served since 2010, the only DX announcement of Barry Igdaloff’s departure from DX Board was buried in DX 9/3/20 8K. Image serving that long and having your resignation for personal reason be buried in 8K. Igdaloff gave up estimated $126,000 in DX Board Fees before accepting the Chairman of the Board post at NOVC days later).

[url="]http%3A%2F%2Fir.driveshack.com%2FCache%2FIRCache%2Fa1b2ee64-5797-45c5-953a-7aed241fbd80.PDF%3FO%3DPDF%26amp%3BT%3D%26amp%3BY%3D%26amp%3BD%3D%26amp%3BFID%3Da1b2ee64-5797-45c5-953a-7aed241fbd80%26amp%3Biid%3D4040318[/url]

Ping for investment thesis.

Drive Shack DS will benefit Covid Solutions. Fortress CEO Wesley Edens spun 3 MREITs out of Newcastle NCT aka DS. DS is comp to success event at TopGolf acquired by ELY. Edens per Form 4 at DS bought 1.7M+ DS shr 3/20 giving Fortress & Edens 18% of DS. Edens and their co investors own 86M 75% of NOVC & all Debt + CCR + $730M NOL. NOVC holds same attributes as NCT including rights to $3B RMBS, NQM collateral.

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