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« October 2006 | Main | December 2006 »

November 30, 2006

3i Launches "Activist Investment" Team

James Quinn writes in the Daily Telegraph:

British private equity house 3i has hired Bruce Carnegie-Brown to lead its new push into activist investing in large quoted companies.

Mr Carnegie-Brown is to head a new team which will focus on taking stakes in companies where it is not appropriate to launch a full-cash offer.

His appointment is something of a coup for 3i chief executive Philip Yea, as this is the first role Mr Carnegie-Brown has taken since standing down as the chief executive of insurance broker Marsh earlier in the year.

3i's initial push will be in consumer and industrial firms with market caps of more than US$1 billion. And Yea says 3i is seeking "private equity-style" returns:

"There are some opportunities where the all-cash offer may not be delivering for other people, where a different approach might work," Mr Yea said. "We see this as a medium-term value creation journey, it's not a trading position."

Financing for the team will initially come from 3i's own balance sheet, although it is thought possible that a specific activist fund could be raised in the medium term dependent on the team's success.

Brandes and Value

This piece on visiting with the Brandes firm in California is authored by Bob Thompson, an investment advisor and strategist with Canaccord Capital in British Columbia. It's more about value investing than Brandes, but seems like an interesting article anyway.

One thing I like is that Thompson's piece reminds us that investing is as much art as science. I've read where Peter Cundill has said the same thing. And ties into Walter Schloss saying you never really know a stock until you own it.

Anyway, back to Thompson's article on value investing:

There are two keys to doing it well. First, an intrinsic value has to be determined for the company, based on the attributes of the business, independent of the stock price.

Once this is determined, this value can be compared against the stock price to see if there is a Margin of Safety (MOS). In other words, can the stock be purchased for 30 per cent, 40 per cent, or 50 per cent below its true value?

It is more difficult than it seems because first it takes a lot of skill to come up with an intrinsic value for the stock, especially when it may be different from the view others come up with.

Second, and the reason that value investing works, is that investor emotions get in the way of people making logical investment decisions. As Ed Blodgett of Brandes said “People are inherently wired up improperly to make money in the market.”

He referred to the fact that people have a fight or flight response that allows us to run when faced with danger. In other words, when we see a bear in the woods, we run or try to get away.

November 29, 2006

Rising Demand, Fewer Assets

You've read me say it seems like stock market bargains are anything but plentiful. I'm still mostly invested and hardly sitting in cash. But I'd like to buy a few more things and haven't found anything to pounce on.

I've got a list of candidates. Yet they've almost all had price increases by the time I learn of them.

David Rosenberg is prominently mentioned in this Globe and Mail piece. His comments focus more broadly than just stocks:

David Rosenberg, chief North American economist at Merrill Lynch & Co. Inc. in New York, argues that supplies of "financial assets" -- stocks, bonds and other securities -- have been shrinking, while demand for them has been growing. This tightness helps explain why stocks and bonds have maintained historically high prices despite the fact that "real assets" -- primarily real estate and commodities, which typically move inversely to financial assets -- have also hit unprecedented peaks.

"Whether it be REITs, corporate bonds, high-yield emerging markets -- everything is hitting either new cycle highs or multiyear highs in terms of price," Mr. Rosenberg wrote in a report. "What we know from our Economics 101 is that the price of everything is determined by the interaction of two curves: supply and demand. In the case of financial assets, the demand may well be fuelled by rampant global liquidity. . . . At the same time, the supply growth of financial assets . . . has either been stagnating or declining outright."

Further down the article:

"If you're a classic value investor, you're just standing on the sidelines scratching your head," he said in an interview yesterday. "There's nothing out there that's undervalued.

"You just have a lot of money chasing slowing growth in assets."

I wonder if Meryl Witmer's remarks during the Barron's conference in October will prove true. Recall she said that her firm, Eagle Capital Partners, was 50% cash, which is about the most they ever carry. She also said whenever their cash level has gotten that high in the past, something happened to bring the market down in the following six months to a year.

Witmer looks at things from the bottom-up perspective, while Rosenberg may be taking a more top-down view. I'm not a big picture guy myself. Others do it wonderfully well. It's just not my area of competence.

It is safe to say that stocks aren't dirt cheap.

November 28, 2006

Schloss Archives for Value Investing

By way of Value Investing News, I see that the Walter Schloss archives are housed at the Heilbrunn Center for Graham & Dodd Investing at Columbia Business School.

Some of the archives aren't available to the general public, but plenty of good stuff is available online for anyone for free. I particularly enjoyed an interview with Walter Schloss and his son (and managing partner) Edwin from April 2003, when they were winding up the Schloss partnership.

I've been a huge admirer of Walter Schloss ever since I first read Warren Buffett's "Superinvestors of Graham-and-Doddsville" in the mid-1980s. But the man has never been what you'd call a publicity hound, and articles on him don't appear frequently, to put it mildly. (Even though I posted about him earlier this month.) I'm sure that will be even more the case since he's closed shop on his partnership.

November 24, 2006

ArmorGroup in Nigeria's Oil Delta

You know I think portfolio holding ArmorGroup International (ARG/LN or AMGPF/OTC) may turn out to be a good way of playing any long-term commodities boom.

That's because much of the exploration for these much-needed products takes place in dangerous parts of the globe. Places that need security services such as those provided by firms like ArmorGroup.

Such as Nigeria, as you'll see in this Associated Press report via Forbes:

The drama of foreign oil workers kidnapped for ransom in restive southern Nigeria plays out so often that it seems the hostage takers, the oil giants and the army follow a script - one that usually ends peacefully with the captives released unharmed.

But not always, and the death Wednesday of a British oil worker during a hostage rescue attempt in the Niger Delta made clear that doing business in Africa's oil leviathan is deadly serious. Analysts said Thursday the risks are set to increase as the West African nation prepares for an OPEC conference next month and nationwide elections in April.

Then this quote from ArmorGroup's manager in the country:

"There has been a big increase in the number of hostage-related incidents this year ... and a buildup of tension ahead of the elections. No doubt we'll see that continue," said Peter Sharwood-Smith, the country operations manager for ArmorGroup, a private security consultancy with many clients in the oil industry. "Various different movements that are present in the delta will want to get their point across before the elections and influence the result."

It's a tough business. And the stock is definitely unloved by investors right now. But ArmorGroup's shares remain undeniably cheap for those who understand the risks of owning the company. And they yield 5%, for those willing to be patient.

With GM a Cost-Cutting Story, Will Kerkorian Cut and Run?

Bill Smith of SAM Advisors says something I agree with in this Wall Street Journal report:

Mr. Kerkorian in the past has sold GM shares only to turn around and repurchase the same amount. He made such a move last January, when he bought back 12 million shares he sold in December. Less than two weeks after disclosing that move, Mr. York was awarded a seat on GM's board.

However, Bill Smith, president of SAM Advisors in New York, said it's more likely now that Mr. Kerkorian plans to continue selling. GM's turnaround "is still a cost-cutting story, and [Mr. Kerkorian] doesn't want it to be," said Mr. Smith, who owns GM shares.

My hunch is that Kerkorian is in the process of unloading his General Motors (GM/NYSE) position. It's just that -- a hunch -- and nothing more. But I'm thinking he probably hasn't been able to get the company's other major shareholders to join his crusade.

Remember, the top five or six GM shareholders controlled the majority of the stock as of a few months ago.

So even if he couldn't sway the Board of Directors, he could still wreck havoc on GM management during any proxy fight. IF he had the votes. It's looking like he doesn't.

But my investment in GM isn't based on Kerkorian being bullish or bearish on the company. Long time Controlled Greed.com readers know I bought the stock BEFORE Kerkorian came on the scene. And I'm prepared to continue holding should he leave it.

One thing in the linked WSJ report that popped out at me is this:

Tracinda disclosed the GM share sale in a filing with the Securities and Exchange Commission. The firm said it agreed on Monday to sell 14 million shares in a private transaction for $33 a share, and that the purchase will be settled today. It was unclear who bought the shares.

I wouldn't mind knowing who bought that block of stock.

November 21, 2006

Happy Thanksgiving

Here's wishing all of you in the US a Happy Thanksgiving on Thursday. I'm staying in town as usual. To all of you traveling, stay safe and hopefully the roads and airports won't be too hectic. It's a great time to be with friends and family. So take your time and make sure you get to where you're going -- and back home again.

To our friends in Canada, I extend my belated good wishes for a Happy Thanksgiving, which you celebrated in October. And for readers everywhere, stay tuned and lets continue the hunt for value after I have the chance to recover from eating way too much turkey and stuffing and mashed potatoes and Yorkshire pudding and, well, you get the idea. ;-)

Google Topping $500

When I came across this Ticker Sense post on Google topping $500 a share, I thought about a couple of things.

First, my memory is that everyone was going ga-ga over Google about the time I launched Controlled Greed.com in April 2005. My first stock pick on this blog was General Motors (GM/NYSE). And, let me tell you, if you wanted to start a blog at that time with hopes of building a large readership fast, you couldn't kill your chances any quicker than by recommending the Detroit dinosaur that many forecasted was headed for extinction.

Especially when Google's stock price was growing by leaps and bounds by the day, if not by the hour.

Now, I'm not saying my investment in GM has or hasn't performed better than Google. I don't know. And I don't really care.

The fact is, I'm constitutionally incapable of buying the Googles of the world. Even when traders I'm familiar with say "it's like shooting fish in a barrel." God bless 'em and I hope they make a mint. It's just not my game.

But GM was and is. Yes, it could still be a loser. Heck, it could still go bankrupt -- if the UAW decideds to commit suicide. I don't think that's going to happen. And I'm content to maintain my position because I think this baby still has room on the upside.

The second thing that came to mind reading about Google topping $500 was this. You see, the Ticker Sense post listed all the companies with a smaller market cap than Google. Look and you'll see some impressive names.

So I remembered reading an interview with the guys at Tweedy Browne. Gosh, it must have been about 1991. At the time, Wal-Mart was all the rage on Wall Street. And the Tweedy Browne folks played a game in their office called something like, "What can I buy for my Wal-Mart?"

They took Wal-Mart's market cap and listed all the world-class companies you could buy for that amount. I wish I'd clipped the article, because it'd be fun to look at again.

Today, many view Wal-Mart as a value stock. I wonder if investors will say the same about Google in 15 years time?

Michael Decter: "Homespun Value Investor"

Andrew Allentuck of the Globe and Mail profiles Michael Decter, manager of several Canadian mutual funds:

His Redwood Diversified Income Fund posted a 21.3-per-cent return for the 12 months ended Oct. 31, about double the 11.2-per-cent average of Canadian income balanced funds. His Redwood Diversified Equity Fund did a bit better with a 23.6-per-cent return, more than double the 10.1-per-cent average return of Canadian balanced funds.

Mr. Decter tends to hold 80 per cent in equities and 20 per cent in fixed income in his balanced funds. He not only holds long positions in anticipation of share price increases, but also does a modest amount of short selling when he thinks selected stocks are due for a fall. The combination of short sales and a higher stock-to-bond ratio than the 60/40 mix usually held by balanced funds explains part of the superior performance of the funds.

November 20, 2006

By George! The Festival of Stocks is being hosted by Fat Pitch Financials

George over at Fat Pitch is hosting this week's Festival of Stocks. My contribution is my post from a week ago discussing the amount of cash being held by several value investors.

You'll also find lots of good stuff by a wide variety of blogs, so be sure to stop by Fat Pitch Financials and check out the action.

Value Deep in the Woods?

Some value investors are finding investment ideas in Canada's beaten-up lumber sector, reports Derek DeCloet in his Globe and Mail column:

Jimmy Pattison is running though his itinerary. It is a late Friday afternoon on the West Coast, close to quitting time for most people, day six of the usual seven-day workweek for the man who is among Canada's wealthiest people, not to mention one of its most frequent fliers.

A bit later:

But it's what he is doing close to home that has people on Bay Street and Howe Street talking — and wondering. This spring, Mr. Pattison, already a major shareholder in Vancouver's Canfor Corp., began buying more of the province's largest lumber producer — and buying, and buying. In a four-month period between May and September, he laid out more than $85-million on Canfor stock, bringing his stake in the company up to 25 per cent. And he did it at a time when things have rarely looked bleaker for the industry. The U.S. Commerce Department said this week that new home construction plunged 15 per cent in October, and Canfor's profits have begun collapsing along with it.


Some of the best value investors on the continent are thinking the same thing. Several have placed large bets that the red ink in the woods is bound to stop flowing, eventually, and that by investing now, they will reap huge gains in the recovery. Their theory, contrarian as it may seem, is that the industry's economics have been so bad for so long that it has no choice but to undergo massive change. Weak players will go bankrupt, scores of mills will close forever, and a wave of takeovers will knock out the smallest players.

Then DeCloet mentions several investors familiar to Controlled Greed.com readers:

Third Avenue Management, a Wall Street investment shop run by Marty Whitman, an expert in distressed companies, now owns a 38-per-cent stake in Catalyst, and has made other large investments elsewhere in the sector, including Abitibi Consolidated Inc., the worst-performing company in the TSX composite index over the past 20 years.

Brandes Investment Partners, the San Diego, Calif., firm headed by Charles Brandes, acquired stakes in several beaten-up Canadian forest stocks, including Catalyst, Domtar Inc., West Fraser and Tembec Inc. As of July, the firm's Canadian Equity Fund has more money in forestry than in any other sector.

An investment group whose chief investment officer is Peter Cundill — a man once dubbed “the best mutual fund manager of all time” — now owns about 20 per cent of SFK Pulp Fund. Fellow value investor Prem Watsa at Fairfax Financial Holdings Ltd. this week disclosed he had increased his SFK stake to 19 per cent.

I don't own anything in this sector. But it's definitely an area worth keeping an eye on. If I end up buying, you'll read about it here.

November 19, 2006

Controlled Greed Named to Stockpickr Top 100 Blog Index

The other day I saw on Fat Pitch Financials that Fat Pitch is listed on the Stockpickr Blog Index of the top 100 finance, investing and business blogs. When checking out the list, I saw that Controlled Greed also made the cut.

James Altucher is associated with Stockpickr. James covers blogs for RealMoney.com, pens a regular column for the Financial Times, and authored a fine book, Trade Like Warren Buffett.

I'm honored that Controlled Greed is included among such outstanding blog sites. And, coming on the heels of Controlled Greed being named a "must-read" blog by Kiplinger's Personal Finance Magazine, it's certainly gratifying to see this site gaining some degree of notoriety.

November 17, 2006

eBay a Value Stock?

I ask because Mason Hawkins and Staley Cates report establishing a position in eBay in the Longleaf Partners Fund. As of September 30, the holding accounted for just over 1% of the fund's assets. So they could own a lot more by now. Or not.

Regular readers know I admire Hawkins, Cates and the Southeastern Asset Management folks immensely. And if they build their eBay position -- on top of their firm's huge bet on Dell -- perhaps that's a sign bargains are to be found in technology.

Then again, the Longleaf Partners Fund currently has nearly $10 billion under management. And they like to spread their money over 20 holdings. So Hawkins and Cates pretty much have to stick with large cap situations.

That's not a criticism. Just a fact.

Even Hawkins has been quoted as saying he doesn't like companies with huge market caps, giving Wal-Mart and Pfizer as examples if memory serves.

With a market cap of more than $46 billion, eBay certainly is a big company. And it will be fun to watch and see if the company becomes more and more of a darling for value managers.

Plenty of people have ridiculed Longleaf's Dell investment -- which is down big since they first bought it. Yet the flagship Partners Fund is up 12.8% through September 30, and that includes Dell being its largest holding.

Several years ago, people ridiculed Longleaf for having roughly 15% of its Partners Fund in Waste Management. But Hawkins and his fund holders had the last laugh there.

For all we know, the same could be true with Dell -- and perhaps eBay. We just won't know for a few years in all probability. That's the way it is with long-term investors.

Value Hedge Fund Manager Starts Revolutionary Pay Structure

I agree with the notion that traditional mutual funds encourage mediocrity. There are exceptions, but the financial incentive is to have as many assets under management as possible and simply collect the management fee. Too many mutual fund companies are marketing operations. They grow their assets by attracting new fund accounts and not by growing the portfolio value organically.

That's why I've always preferred what this New York Times article calls the "2 and 20" compensation arrangement of most hedge funds. I'll add "investment partnerships" because a lot of partnerships are often referred to as hedge funds.

The difference? Well, I may be wrong, but I've always been under the impression that hedge funds often engage in short selling. While investment partnerships often don't. Walter Schloss didn't. I think "hedge fund" has become a hot term with journalists.

The "2 and 20" structure is that the manager receives 2% of the assets they manage as a management fee and keep 20% of the profits as incentive pay. I like this because the portfolio manager's interests are aligned with investors. The manager only makes money if investors make money.

Of course, the pressure to make some money annually can prove a temptation for some managers, which can hurt investors' potential gains.

So the linked Times article reports on one value manager who has a different approach:

Lisa Rapuano, a longtime value investor, grappled with these issues and came up with a compensation structure based on the radical notion of delayed gratification. In January, she will start a value-oriented hedge fund that pays her a hefty incentive fee, but only every three years.

Lane Five Capital Management charges a 1.5 percent management fee and takes 40 percent of any profits that exceed her hurdle rate (the Standard & Poor’s 1,500 index) every three years. If the fund has negative returns, she gets nothing — a fact her husband finds very perplexing, according to Ms. Rapuano’s presentation at the Value Investing Congress in New York last week.

Her reasoning, which she outlined at the conference, was straightforward. She likes the hedge fund model of compensation because it is incentive-based. It is better than the traditional asset management model, which encourages mediocrity. Traditional managers are paid based on the amount of money they manage, not their performance.

But she called the 12-month time horizon of hedge fund compensation “less than ideal” because it can cause people to “gun for performance and take undue risks at the end of the year,” she said.

I'm intrigued by Rapuano's idea, though not quite ready to say I'd go her route if I ran a private fund. On a side note, I wonder why her hurdle is the S&P 1,500 index and not the S&P 500.

It will be interesting to see if her compensation approach catches on.

November 16, 2006

Applying Bottom-Up Value Investing in Eastern Europe

I'm not familiar with Thomas Neuhold, but this Q&A with him in BusinessWeek makes for an interesting read:

When stocks roar ahead, as they have been in Eastern Europe lately, having a strict buy and sell discipline and holding cash can help ease the whiplash when they turn south. Thomas Neuhold navigates The World Funds—Eastern European Equity Fund in Vienna as a bottom-up value investor who examines the profitability and valuation levels of companies before he dips in. He has loaded up on stocks in banking, real estate, and telecom that will benefit from consumers' rising incomes in Eastern Europe. And he's avoiding the "overheated" commodities and energy stocks in Russia.

Neuhold currently keeps the fund 40% in cash. When asked what trends he's seeing in Eastern Europe, he replies:

We like the convergence story very much. In sectors like banking, insurance, and real estate, the countries in Eastern Europe will reach similar penetration levels of Western Europe and the U.S. In the banking sector, if you look at the ratios—loans to GDP, mortgages to GDP, credit cards per capita—a lot of countries in Eastern Europe are still very below the penetration levels that we see in Western Europe and the U.S.

We think with rising income levels—we see real income levels increasing between 2% and 4% in the more developed markets like Poland and the Czech Republic and up to 10% to 12% in the less-developed markets like Romania, Ukraine, and Russia—there's a good chance that these countries will show very attractive growth in products including loans, mortgages, insurance, and credit cards. This is an excellent long-term growth opportunity for banks and insurance companies.

Interesting stuff. Like I said, I'm not familiar with Neuhold.

But I find you can get better glimpses into how things really are in other parts of the world by reading the thoughts of investors putting money to work on the ground -- rather than listening to politicians, government bureaucrats, NGOs and UN types.

Just my opinion.

November 14, 2006

Dorfman Reviews His Stock Picks

Bloomberg columnist and professional money manager John Dorfman reviews his stock picks in his latest piece. One of the stocks reviewed is a holding of mine -- Deckers Outdoor Corporation (DECK/NASDAQ). Here's what Dorfman writes:

In December 2005 I selected seven small stocks that I liked for the coming year. They are up an average of 34 percent, compared to 11 percent for the S&P 500 and 13 percent for the Russell 2000, a small-stock index.

The biggest gainer was Decker's Outdoor, which sells Teva, Ugg and other footwear. Shares of the Goleta, California- based company gained 101 percent from Dec. 6, 2005 through Nov. 10, 2006.

Longtime readers of this blog know I bought Deckers in October 2005 at $20.92. You can read my original rationale and note that I've sold part of my original stake. Deckers closed Tuesday at $55.22 and remains a full portfolio position due to its significant price appreciation.

Analyst at Center of Fairfax Financial Case Arrested on Wire Fraud Charges

This is a weird development not directly related to portfolio holding Fairfax Financial (FFH/NYSE).

In fact, it might not even be indirectly related. Yet this report by Ian McDonald in The Wall Street Journal is undeniably noteworthy:

A free-lance stock analyst at the center of a high-profile civil court case against prominent U.S. hedge funds was arrested on seemingly unrelated criminal wire-fraud charges in New York Monday afternoon, according to a person familiar with the matter and court documents filed by the U.S. Attorney's office in federal court in New York Monday.

Spyro Contogouris, a stock analyst that Toronto-based insurer Fairfax Financial Holdings Ltd. has accused in civil court of spreading false rumors about the company and harassing executives in recent years to drive down the company's stock price, was taken into custody by the Department of Justice Monday afternoon, this person said.

Mr. Contogouris faces criminal wire-fraud charges. It isn't clear from the court filings what the charges related to. Mr. Contogouris isn't accused of wire fraud in the Fairfax complaint, but is involved in other, unrelated civil litigations.

You don't have to be a lawyer, or even a Court TV addict, to know that Spyro Contogouris is innocent until proven guilty. And I certainly have no idea whether these charges have merit, or even the validity of Fairfax's court action filed in July.

But plenty of people were skeptical of Prem Watsa's motivation in going to court last summer. Today's development, while not directly related, should give Watsa-haters pause.

And give Fairfax shareholders no reason to regret holding the stock.

Some Investors Carrying More Cash

In the For-What-It's-Worth department, I've currently got enough cash to buy a couple more full portfolio positions.

Is that a lot?

Well, maybe. Maybe not.

Longleaf Partners just released its latest quarterly report, and Mason Hawkins and Staley Cates report being nearly fully invested. They have been for at least the past few months.

Meryl Witmer stated at the recent Barron's conference that her firm, Eagle Capital Partners, was holding roughly 50% cash. She said that's about the most they ever carry. And whenever they hold that much something happens in the next 6 to 12 months in the market that creates opportunities.

And the amount of cash being carried by investors fluctuates, as you can see from this Bloomberg report:

Charles de Vaulx, who manages $11 billion at the First Eagle Overseas Fund in New York, has increased his proportion of cash to 25 percent from 18 percent since midyear because he can't find anything to buy.

"We haven't been able to identify enough cheap securities to replace the ones we've lost to takeovers and those we decided to sell,'' de Vaulx said.

Value investors such as de Vaulx are avoiding equities because stock prices have met their targets. Other investors are adding to cash holdings, exceeding their benchmarks, because they doubt the 13 percent increase in the Standard & Poor's 500 Index since mid-June will last.

This further down the piece:

The $9 billion Third Avenue Value Fund and the $3.5 billion Fairholme Fund also recently held 20 percent to 30 percent of their assets in cash, said Herbert of Morningstar. The managers weren't available for comment.

November 13, 2006

Festival of Stocks at Gannon on Investing

This week finds the 10th installment of the Festival of Stocks being hosted by Gannon on Investing. Geoff was kind enough to include my submission -- which is my post from last week about Walter Industries (WLT/NYSE) and Mueller Water Products (MWA/NYSE).

In all, this Festival installment is packed with some neat stuff. As Geoff writes:

Overall, I was very pleased with this week's submissions. What today's festival lacks in quantity it more than makes up for in quality. The festival includes six posts discussing specific stocks, three posts on topics in investing, and a poem. Yes, you read that right. This week's festival concludes with a poem. It's the proverbial cherry on top of this satisfying stock sundae.

Be sure to check it out.

November 12, 2006

Walter Schloss

One of the best pieces of advice on investing I ever read came from Walter Schloss: you never really know a stock until you own it.

I thought about that when I saw this article (by way of VInvesting) about the New York Society of Security Analysts paying tribute to Schloss in celebration of his 90th birthday:

During its 47-year lifetime, Walter J. Schloss Associates generated in excess of 20% gross annualized returns and netted to its partners more than 15% per year, while the S&P 500 gained slightly more than 10%. An investor with $100,000 in the S&P 500 from January 1, 1956, to December 31, 2002, would have made $9.3 million. That same $100,000 invested in the Schloss partnership would have generated over $78 million.

“I worked for Benjamin Graham for 9 1/2 years, and Ben said he was going to retire and move to California,” began Schloss. “I had to get another job, so one of the people who was a stockholder of Graham Newman came to me and said, ‘Walter, if you start a fund, I will put some money in it.’ We ended up with $100,000. The structure was that I would not get paid unless we realized gains. The kind of stocks I bought were not growth stocks. Graham was really value-oriented. In those days he would buy stocks that were selling below working capital. There were less of them, but they were still around.

This is a wonderful article and I encourage you to read it all. But let me highlight this from Schloss, because what he says can be used by individual investors:

“I’m not very good at judging people. So I found that it was much better to look at the figures rather than people. I didn’t go to many meetings unless they were relatively nearby. I like the idea of company-paid dividends, because I think it makes management a little more aware of stockholders, but we didn’t really talk about it, because we were small. I think if you were big, if you were a Fidelity, you wanted to go out and talk to management. They’d listen to you. I think it’s really easier to use numbers when you’re small."

November 10, 2006

3i Investing in Infrastructure Assets

3i Group (III/LN) announced plans to increase investments in infrastructure assets as it reported first-half net asset value that was at the upper end of analysts’ forecasts.

From the linked Times of London report:

Total return for the six months to September 30 was 9.3 per cent. Diluted net asset value, a key measure of the company’s worth, was 792p per share, at the upper end of the 770p to 793p per share predicted by analysts. Profits from the sale of assets during the six-month period were £216 million.

CEO Phil Yea stated that increasing exposure to infrastructure investments could account for 10% to 15% of the group’s balance-sheet. He added that the 3i was “some way off that at the moment." He went on to explain that the company would consider a separate fund for infrastructure assets.

If you're a regular reader of Controlled Greed.com, you've read me say that 3i Group has been increasing its Asian investments and has, over the past 18 months, opened offices in Bombay, Beijing and Shanghai. Asia is obviously a long-term growth opportunity. But management now sees global infrastructure as a growth area as well.

The only drag for 3i has been its venture capital activities. Still, overall the firm is doing really well, and I'm glad to maintain this portfolio position.

Some analysts think the shares are attractive here. They may be right, but it was a much cheaper buy when I bought the stock in May 2005.

November 07, 2006

Charles de Vaulx in Barron's Online

Charles de Vaulx took over the First Eagle funds when Jean-Marie Eveillard retired in 2004. Barron's Online has a short interview with him:

Barron's Online:  What do you project for the coming year in the U.S. equity market? 
de Vaulx: We have no clue. As value investors, we have a view as to how cheap or expensive either an entire market or some subsets are. But valuation alone has very little predictive power short term as to what a market or a sector will do. Which is why when sometimes people say, "Charles you have 35% of your U.S. Value Fund in cash. It's a form of market timing. You expect the market to go down." I say, "No, it's just a reflection that I find most stocks out there to be somewhat pricey." It says nothing about what the market may or may not do in the next six months.

Q:  What do you think about gold prices now?   
A: We want to have some exposure to gold, but we are aware that over the past two years, there has been a very close correlation between gold and crude oil and I'm not comfortable with these crude oil prices. My sense is that the marginal cost of finding and extracting oil around the world today is around $50.

Later, he mentions a couple of stocks I hold:

Q:  What are you interested in currently?
A: In sectors, it's hard. Last year it was easy; media was a big theme. In 2005, we bought Comcast and News Corp. We added this year to the [former] Liberty Media, which split in two. So we added to Liberty Media Interactive, which is a piece mostly comprised of QVC, a retailer.

Q:  So does the stock price reflect its parts?
A: A few months after the company split in two, the stock was trading between $16 and $18. We think QVC is by far the best in its business. They are much bigger, much more profitable than number-two competitor Home Shopping Network. Roughly a quarter of QVC sales are jewelry and jewelry carries very high margins. Jewelry is very cyclical, so we are mindful of where we are in the economic cycle. But if you add the other smaller pieces within Liberty Interactive, including Expedia, we come up with an intrinsic value north of $26 a share.

Bloomberg's Currier: Will Success Spoil Value Investing?

It's a "spoilsport" question to ask, writes Chet Currier in his latest Bloomberg column:

But someone has to ask it. With value stock mutual funds trouncing their growth-fund counterparts for a seventh straight year here in the waning weeks of 2006, the issue can't be avoided much longer: At what point do value stocks and value funds get so fat and happy they don't represent "value'' any more?

Currier points out that many value managers today are buying stocks no one would have ever tagged as "value" just a few years ago:

See Warren Buffett at Berkshire Hathaway Inc., the paragon of value investors, snapping up shares of drugmaker Johnson & Johnson. See value managers like Southeastern Asset Management Inc. in Memphis, Tennessee, and Harris Associates LP in Chicago loading up on the stock of computer-maker Dell Inc.

I don't own either. You've read me say before that I just can't get excited about stocks like Dell. Or Wal-Mart.

I COULD at a price, I suppose. So I may well bite on one or both in the future. Just not now.

Back to Currier:

Regression to the mean -- it's a favorite subject of many a value manager. In financial markets, nothing stays hot forever. And after seven strong years in a row, value investing would seem to be a prime candidate to feel some regressionary pressures.

So where does that leave us? Seems like I've argued both sides of the question -- that value investing is forever, but also may be due for a disappointing year or two soon.

Well, that's what happens in markets. Strong opposing forces, trends and ideas collide. Value investing stands every chance to prove its enduring worth in the years ahead. But probably not without a struggle.

Note that word "struggle." I feel like value investing is all about struggling -- buying stocks unheard of or universally disliked. Companies facing headwinds that are hampering their share prices. Firms going through workouts that will take months or even a couple of years or so to complete.

But you and I see Currier's point. Value investing will go through periods where it WON'T do well. I remember practicing the concept in the last half of the 1990s and, let me tell you, the value style didn't outperform during the tech boom.

So if you've come to the value approach in the last two or three years, understand that. Understand that you will go through periods -- short by historical standards, but agonizingly long at the time -- where your portfolio will under perform. But my unsolicited advice is to stick to it.

Besides, if even Warren Buffett goes through times where people think he's "lost it," what should you and I expect? ;-)

November 05, 2006

Mueller Water Products, Walter Industries Remain Strong Buys

Two portfolio holdings, Mueller Water Products (MWA/NYSE) and Walter Industries (WLT/NYSE), both sold off sharply late last week.

Why? Because they committed the sin of reporting strong quarterly results -- just not as strong as Wall Street expected.

So Mueller Water closed Friday at $14.23, down 10.5% for the day. And Walter ended the day at $41.18, down more than 9.5% itself for the session.

Both are bargains, in my opinion. The Mueller Water and Walter Industries' stories have been out there for several months. Anyone thinking about buying them -- and who hasn't -- should strongly consider adding them here. Some like Walter more than Mueller. You know I like having BOTH as full portfolio positions.

On a side note, The New York Times mentions Mueller in a story on corporate spinoffs:

Mueller Water Products, the dominant producer of hydrants, values and pipe fittings for municipalities, was carved out of Walter Industries,  another conglomerate, in May and its stock has languished ever since. Mr. Cornell said he liked its prospects, though, especially once Walter distributes its remaining shares as expected by the end of the year.

With America’s aging infrastructure in need of fixing, Mueller, a solid moneymaker, would appear to be well positioned to handle its business alone, without having to share profits with a parent. That would be good for Mueller’s shareholders, which is the whole point of a spinoff, after all.

To view my original rationales for owning Muller Water Products and Walter Industries, just click on the appropriate company name in the "Current Holdings" menu at the right.

ArmorGroup Among the "New Dotcoms"?

Matthew Lynn writes about private security companies in the latest Spectator. His headline is "Men with Guns are the New Dotcoms." One of the firms mentioned in his piece is portfolio holding ArmorGroup International (ARG/LN or AMGPF/OTC).

Lynn suggests the sector could take off:

Ask anyone in the City what the highest growth sector of this decade has been and they might mumble about online gambling or biofuels or ring tones. But, in reality, it is probably security contractors. There have always been ex-soldiers for hire, and if you paid them enough, there wasn’t much you couldn’t persuade them to do for you. Now, however, the private armies that used to operate on the shady edges of the military world have turned themselves into big, mainstream businesses and plan to get a lot bigger.

Some relevant bits referencing my holding:

"On the back of Iraq, this has blossomed into a sizable industry," said Dave Seaton, the chief executive of Armor Group. Indeed so: Seaton’s company has already listed itself on Aim with a market value of more than £30 million. It had a turnover of £124 million last year, operates in more than 50 countries and has Sir Malcolm Rifkind as its chairman.

And ArmorGroup and other security firms could be a way of playing any long-term commodities boom:

Dave Seaton suggests that in 2004 the industry globally was worth about $900 million. By 2005, driven by Iraq and Afghanistan, that figure had mushroomed to $2.5 billion. And the soaring oil price has helped too. Expensive oil has meant fresh fortunes sunk into exploration, and since by some strange geological accident oil is nearly always found in very dangerous places, security firms have had plenty of work keeping all those drills and rigs protected. "Oil companies have always been willing to spend money to protect themselves," says Seaton.

The article ends with this:

The bet that substantial military contractors can be built may yet be a good one. "I don’t believe the world is getting any safer," says Seaton. With that judgment, at least, it would be hard to disagree.

I bought ArmorGroup stock in September and it's basically done nothing. As you know, I'm expecting the British private security industry to go through a lot of change over the next few years. I'm not saying these firms will be the next dotcoms. But, hey, I'd love to see Matthew Lynn's statement prove valid.

Meanwhile, with ArmorGroup yielding 5%, I'm content to wait and see what happens.

November 04, 2006

Bloomberg Reviews Browne's The Little Book of Value Investing

Earlier this week I posted my positive thoughts regarding Christopher Browne's The Little Book of Value Investing.

Now you might enjoy reading this review from Bloomberg's James Pressley:

This is no glib, get-rich-quick book. Value investing involves drudgery. Browne's first job at Tweedy -- long before desktop computer search engines -- was "to look through the Standard & Poor's and Moody's manuals for stocks selling below their book value.''

If you're like I am, you'll enjoy Pressley relaying this story concerning his dad:

My father still employs this technique. One day during the 1990s stock bubble, Dad went down to the public library and plowed through the Moody's handbook. He found a company then known as Ennis Business Forms.

"Its capitalization was limited to common stock,'' Dad recalls. "It had no debt at all.''

Ennis Inc. of Texas makes business forms, tags and labels. It confers no bragging rights at cocktail parties. Dad paid about $10 a share. The price went down, so he bought more at $7. Ennis now trades at about $23. It has paid a dividend of 15.5 cents a share every quarter for years.

On the facing page in Moody's that day at the library was a high flier called Enron Corp. Dad turned the page.

As you read me say several days ago, The Little Book of Value Investing will be enjoyed by those new to the value approach -- and also by those of us practicing the concept for years. So click on the Blogad for the book that's currently running of this site.

You'll be making an excellent addition to your investment library. And I'll appreciate your support of a Controlled Greed.com advertiser. Thanks.

November 03, 2006

CBS Announces Stock Buyback

Les Moonves announced Thursday that CBS (CBS/NYSE) would spend up to $1.5 billion to repurchase stock. A lot of news reports stated that investors were disappointed.

I haven't had time to thoroughly read everything. But I don't know why investors would be down about the news.

Moonves has always been upfront about eventually buying back company stock -- as long as it didn't interfere with dividend payments.

Actually, I think I do know. They probably want CBS to pay out even more in dividends to shareholders. I'm one, and I wouldn't mind that, either. But I've been confident in Moonves' leadership thus far and I remain so.

This from the linked AP report from the Houston Chronicle:

Investors have been pressing CBS to say what its plans are for its growing cash stockpile, which is currently $3.2 billion, up from $1.7 billion a year ago. The cash has been coming from good operating results as well as the sale of its parks business and more than two dozen radio stations.    

CBS Chief Executive Leslie Moonves told analysts on a conference call that the company would continue to look for smaller acquisitions, contribute more to its pension plan and continue to increase its dividend in line with earnings growth. But he stressed that the company has "no plans" for major acquisitions.

Radio remains weak. I'm still looking for the publishing business to get sold. And, no, Katie Couric doesn't factor into this at all as far as I'm concerned. ;-)

November 02, 2006

Seeking Alpha's Towns on Takefuji: "Japan's Most Hated Value Stock"

Steven Towns of Seeking Alpha writes this lengthy -- and very, very fine -- article on Takefuji Corp. (8564/JP or TAKAF/OTC). Steve mentions me in his piece, as we've exchanged more than one email on Takefuji in particular, and Japanese consumer lenders in general.

As you know, I'm underwater with this holding. But I'm holding tight. And if that changes, you'll read about it here.

November 01, 2006

Another Cash-Rich Company

I don't own stock in Onex Corp. The Toronto-based company is described as a leveraged buyout firm in this Globe and Mail story, with the shares trading on the Toronto Stock Exchange. The top guy is Gerald Schwartz.

Onex already had $1.2 billion worth of Canadian dollars sitting idle on its balance sheet at the end of the last quarter. Now Onex announces it will sell as much as US$1.2 billion worth of its Spirit AeroSystems Holdings unit -- adding to its substantial cash hoard.

From the Globe and Mail:

Much of Onex's excess cash is parked in low-returning assets such as Treasury bills, which don't generate anything close to the double-digit returns that Onex investors want. Bringing in another pile of cash from Spirit increases the pressure on Mr. Schwartz to come up with another buyout opportunity fast, something that's not easy these days with dozens of flush private equity firms competing for acquisitions and driving up prices.

"It's not a nice problem to have," said Wade Burton, a portfolio manager at Vancouver's Cundill Investment Research, which runs funds that hold Onex shares. "Everything is way too expensive to make any money on it, but if anybody is going to do it, it's going to be him."

Sounds like Burton and the Cundill folks are making a bet on Onex's cash hoard -- and the executive managing it. Back to the article:

Mr. Schwartz acknowledged the dilemma at the company's annual meeting earlier this year, telling investors: "We have too much idle capital earning low returns."

Onex has created the situation with a run of winning investments, especially in the health care business.

For example, last year the company sold its stake in Magellan Health Services for $302-million (Canadian), 2.4 times the original investment.


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