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Geoff Gannon October 23, 2006

Book Review: Pit Bull

Gannon On Investing’s contributing writer, Steven Rosales, reviews Martin Schwartz’s Pit Bull.

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Geoff Gannon October 22, 2006

Value Investing News: Top Ten Stories

Here are this week’s top ten stories from Value Investing News:

1. Proof that losing money really is scary
2. What’s Berkshire Hathaway Worth, Anyway?
3. Berkshire Press Release: Equitas Reinsure & Run-Off Deal
4. The Cost of Anchoring
5. (Geoff Gannon) On the Round Table Discussion
6. Jeff Matthews Is Not Making This Up: Baby Boomers Remembering When
7. Free Advice from All-Star Managers
8. The Worst Has Yet to Come for Regional Airlines
9. ValueBlogReview: Morningstar’s Classroom
10. Buffett in Lloyd’s deal

Please be sure to vote either up or down on these stories as you read them. You will earn points each time you vote that will go towards winning the monthly prize, which is the The Little Book of Value Investing this month. All you have to do is register and log in to be able to vote and submit your own favorite value investing articles.

Voting also helps generate a customized list of recommended articles tailored to your preferences.

As I’ve said before, I’m a huge fan of Value Investing News. When you use the site, you’ll notice that a user named “Geoff” has submitted a lot of stories to the site. So, if you want to know what I’m reading, just browse Value Investing News.

The more people use the site, the better it will become.…

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Geoff Gannon October 20, 2006

On the Round Table Discussion

On Wednesday, the value investing site Modern Graham hosted a round table discussion involving three participants: Rick Konrad of Value Discipline, Doug McIntyre of 24/7 Wall St., and (me) Geoff Gannon of Gannon On Investing.

You can read the entire discussion here.

Since this is my blog, I will pull a few of my own answers from the discussion to share with you. I’ll let Rick and Doug talk about their answers on their own blogs.

How do you value a particular stock, and further what valuation techniques do you utilize in doing so?

Well, I would say I tend to value businesses rather than stocks, by which I mean I look first to a “capitalization independent” measure like EV/EBIT. I think the inverse (EBIT/EV) is a good measure for comparing the yields on various stocks and bonds. So, that would be the standard measure of how cheap or expensive a stock is for me.

However, there are many situations (and here is usually where you find some bargains) where the EV/EBIT measure is not the most useful. When I can predict a high free cash flow margin with confidence, I use a very long-term discounted cash flows calculation. For instance, this is what I would do with Hanes Brands (HBI), which was recently spun-off from Sara Lee (SLE). On an EV/EBIT basis, it may not look cheap. But, looking truly long-term, I’m convinced the intrinsic value of each share is much closer to the $45 – $65 range than the roughly $23.00 a share at which it now trades. But, that’s a special case – Hanes is a special business.

In other situations, where I don’t think the company can do more than the industry average long-term, I’ll use book value. So, that would be banks and insurance companies obviously as well as some industrials on occasion.

What are your views of the current market and the direction we are headed?

Since my approach is completely bottom up rather than top down, I really do see it as a market of stocks rather than a stock market. So, I can’t comment on the level of the general market, but I can comment on the presence of bargains – they’re scarce.

That isn’t to say most stocks are terribly expensive. But, it has become increasingly difficult to find bargains – at least the kind of bargains I’m looking for.

This isn’t a time of the Nifty Fifty or the dot com bubble – you don’t have wide price disparities that are clearly unjustified. What you do have is a pretty flat and (in my view) barren investing landscape.

I mentioned Hanes. That’s a notable exception, but it’s also a spin-off. I think that’s telling. I don’t have very many good ideas these days – honestly, I’m at the lowest point since 2000 in terms of good ideas. For me, this is definitely the toughest environment in more than half a decade.

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Geoff Gannon October 18, 2006

Traffic at Surges 440%

Traffic at recently jumped more than 440%. The website is operated by Universal Tube & Rollform Equipment Corporation, a company that “specializes in buying and selling used tube mills, used pipe mills and used rollforming machines”.

On its homepage, the company proudly proclaims:

“Our machines are stored in our 125,000 Sq. Ft, Perrysburg Ohio Warehouse. We have the ability to rebuild, retrofit or recondition each piece of equipment in our inventory. We are committed to being the number one supplier of used Tube & Pipe equipment in the world!”

Unfortunately, the company recently encountered a major setback in its noble effort to become the world’s number one supplier of used tube and pipe equipment. Last week, the company’s website was paralyzed by the actions of a large (allegedly “not evil”) American corporation.

On Saturday, October 14th, Universal Tube put out this press release:


“We apologize to those who have tried to view our webpage during the last few weeks and were unable. The website is now up and running strong after being paralyzed this week by the announcement of Google purchasing the popular video website for $1.65 billion. Millions of people inadvertently typed the URL coming to our site instead of the they were actually trying to reach. The heavy traffic flow shut down our website again and again. We have moved our website 4 times during the last week to servers with additional bandwith capable of handling our own customers and reps along with the influx of video searchers.”


Others in the financial media have already reported on this story. However, I had to address the topic myself, as they’ve clearly missed the point. They tended to focus on the Google (GOOG) angle, writing about the fact that millions of people typed in an incorrect web address after seeing television and newspaper accounts of Google’s acquisition of

After visiting, I am now convinced the real story is Universal Tube. Any company that puts an exclamation mark after a statement like “we are committed to being the number one supplier of used tube and pipe equipment in the world” and puts out press releases on Saturdays is clearly worthy of an investor’s attention.

Sadly, Universal Tube appears to be a privately held concern.

On a related note, I suspect Universal Tube & Rollform Equipment Corporation’s accountants will be pleased to know their job will be a lot easier this year. I’m guessing their periodic review of the domain name will find that the asset’s fair value is at least equal to its carrying value.

However, the company’s lawyers may find they have more work rather than less. May I be the first to suggest they press Google to change the newly acquired web property’s slogan to: You Tube, Broadcast Yourself – not affiliated with Universal Tube and Rollform Equipment Company.

It rolls right off the tongue.


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Geoff Gannon October 17, 2006

Book Review: The Neatest Little Guide to Stock Market Investing

Gannon On Investing’s contributing writer, Steven Rosales, reviews Jason Kelly’s The Neatest Little Guide to Stock Market Investing.

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Geoff Gannon October 15, 2006

Announcement: Modern Graham Round Table Discussion

The value investing site Modern Graham will be hosting a round table discussion on Wednesday, October 18th. I will be one of the participants.

Below, I’m reprinting Modern Graham’s description of the round table discussion. You can either send your questions to me or send them directly to Modern Graham.

At this point, I have no idea what the discussion will be like. It’s really up to you.

How this works:

Readers may submit questions via comments left on this post or the contributor’s blogs, or by email to Jon and I will compile the questions and moderate the discussion. Please submit as many questions as you can think of. This discussion can only be as interesting as the questions are.

The actual discussion will be held in this thread of our forum. The thread will be open to the public to read, but only the participants will be allowed to post.

We are excited to have the following people contribute to the discussion:

Rick – Value Discipline

Rick has been a portfolio manager of institutional portfolios for over 25 years. He is currently working with individuals rather than institutions and finds this much more satisfying and rewarding. His greatest joy outside of his family is training young people to become better research analysts.

Geoff Gannon – Gannon On Investing

Geoff leads Gannon On Investing, a value investing blog and value investing podcast influenced by Benjamin Graham, Joel Greenblatt, and Warren Buffett’s value investing model. Built upon the value investor insights of intrinsic value, margin of safety, competitive advantage, and protection of principal.

Doug McIntyre – 24/7 Wall St.

Douglas A. McIntyre is the former Editor-in-Chief and Publisher of Financial World Magazine. He is also the former president of, which was the 10th most visited site in the world at the time, according to MediaMetrix. He has been chief executive of FutureSource LLC and On2 Technologies, Inc. and has served on the boards of and Edgar Online. He does not own securities in companies he writes about.

Visit Modern Graham

Visit Value Discipline

Visit 24/7 Wall St.

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Geoff Gannon October 14, 2006

Value Investing News: Top Stories

In an effort to promote Value Investing News, a new community driven value investing news site, I’m listing the top five stories of the week. George already did this on his site. But, I thought the list was worth reprinting here, as it might encourage some people to give Value Investing News a try.

As you can probably tell, I love Value Investing News. If you register at Value Investing News, you can see evidence of my devotion to the site by checking out the “Highest Users” list. Some user named “Geoff” seems to be at the top. So, if you want to know what I’m reading online, just go to Value Investing News.

This Week’s Top Five Stories

1. Are Homebuilders Worth More Than Book Value?
2. Three Ways We Can Beat Mr. Market
3. Why Study the Fundamentals?
4. Don’t Ever Be Around for the Dividend Cut
5. Highest-Yielding Magic Formula Stocks

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Visit Fat Pitch Financials

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Geoff Gannon October 13, 2006

Gold Kist Rejects $20 a Share Offer From Pilgrim’s Pride

Yesterday, the board of poultry producer Gold Kist (GKIS) rejected a $20 a share offer from rival Pilgrim’s Pride (PPC):

“(The) Board of Directors has rejected as inadequate Pilgrim’s Pride Corporation’s unsolicited tender offer to acquire all outstanding shares of common stock of Gold Kist at a price of $20.00 per share, and strongly recommends that its stockholders not tender their shares.”

Gold Kist’s President and CEO John Bekkers explained the decision:

“Our Board unanimously determined that the offer is inadequate and does not fully reflect the value of Gold Kist, including the Company’s strong market position and future growth prospects… We have successfully positioned ourselves to take advantage of attractive growth opportunities in key markets and are confident in our prospects.”

The board claims it is continuing to explore strategic alternatives. The reasons outlined in support of the board’s decision are fairly standard. However, one point does ring true: “(the offer) was made at a time when Gold Kist’s stock price was temporarily depressed following a recent cyclical downturn in the industry.”

Some of you may remember I wrote about the offer when it was first made public (which was quite some time after Pilgrim presented the offer to Gold Kist’s board).

My post didn’t go over well, because I was misunderstood – no doubt because my writing was sloppy and unclear (as can often happen when employing a medium that allows for such a quick transmission of ideas). In my original post, I did not intend to say that individual investors who own shares of Gold Kist would be better off taking stock rather than cash. As they could trade their cash for stock anyway (i.e., they could buy shares of Pilgrim’s Pride for themselves), individual investors are obviously better off receiving that most liquid of assets – cash.

What I meant to say was that Gold Kist’s board should have requested a show of good faith from Pilgrim’s Pride before sitting down to discuss possible terms for a friendly deal. The sign they should have demanded was an all-stock offer of comparable value (based on current market prices) to the $20 a share all-cash offer.

Why? Because an all-cash offer allows Pilgrim’s Pride to exploit any general (and temporary) undervaluation of poultry producers in the stock market. Pilgrim’s Pride made an offer that was more than 50% above the quoted price for shares of Gold Kist. However, if all poultry producers are currently undervalued, that premium may not even make up for the market’s irrational pessimism towards the poultry companies.

Conversely, an all-stock offer would have the effect of eliminating any general (i.e., non-company specific) market pessimism. If Pilgrim’s Pride made such an offer, it would prove that they were not attempting to profit from avian flu fears; but, rather saw Gold Kist itself as a bargain – either because of alleged synergies, or because the company was simply undervalued relative to the other poultry producers.

In essence, an all-stock offer would represent a …

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Geoff Gannon October 12, 2006

20 Questions for George of Fat Pitch Financials

George has been active individual investor for 15 years, but only “saw the light” of value investing five years ago. He is the author of Fat Pitch Financials, a value investing blog inspired by the writings of Warren Buffett. One of the most popular features at Fat Pitch Financials is an exclusive detailed list of current going private transactions that is made available to members of the site.

1. Are you a value investor?

Yes, I’m a value investor. My investment philosophy is closely aligned to Warren Buffett’s. I look for wide moat companies selling at a price that provides a margin of safety. While I wait for those opportunities, I also invest in risk arbitrage and special situation opportunities.

2. What is value investing?

Value investing in my book is investing with a particular emphasis on intrinsic value. I view the intrinsic value of a company as the amount of money a rational person should be willing to pay for a company if it is viewed solely as a money printing machine. Value investing is then just the process of finding money printing machines that are selling for less than the present value of the future money that they will print. The key is buying the opportunities at a discount sufficient to provide a margin of safety.

3. What is your approach to investing?

My approach to investing involves breaking the process down into different components. I do a ton of reading to identify potential opportunities, especially those that appear to be giving a company a sustainable competitive advantage. I also run some fundamental stock screens to identify potential investment candidates. Then I usually run a preliminary analysis using my Fat Pitch Finder spreadsheet. If the numbers look acceptable, I then dig into the various SEC regulatory filings for that company. I look for corporate governance issues, competitive weaknesses, and hidden liabilities. Finally, I create a more refined intrinsic value analysis and determine my margin of safety for that stock. If the price of the stock is trading below my margin of safety, I buy it.

I also have created an elaborate system for scanning SEC filings for special situation opportunities. I then track them using Fat Pitch Financials Contributor’s Corner. These opportunities are assigned phases or stages and I also calculate their potential percent gain. I then determine the “expected” payout adjusted for risk of each opportunity and select the best options.

4. How do you evaluate a stock?

I avoid just evaluating a stock, but instead I try to focus on the business and its management. I determine the competitive position of the business, the reliability of management, and finally I estimate the intrinsic value of the business.

5. Why do you buy a stock?

I buy a stock when it is selling for a price that provides for a significant margin of safety and its business has a wide moat.

6. Why do you sell a stock?

I sell a stock when it becomes …

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Geoff Gannon October 12, 2006

Book Review: Reminiscences of a Stock Operator

Gannon On Investing’s contributing writer, Steven Rosales, reviews Edwin Lefèvre’s Reminiscences of a Stock Operator.

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