Posts By: Geoff Gannon

Kenneth Cole: Iconix Wants to Buy – Brother Runs Company

Bloomberg reports Iconix (ICON) wants to buy Kenneth Cole (KCP):

Designer Kenneth Cole is in talks to sell the shoe and clothing company he founded to Iconix Brand Group Inc., the licensing company run by his brother Neil Cole, according to two people with knowledge of the matter.

Kenneth Cole and Iconix are both asset light companies. Would Benjamin Graham buy Kenneth Cole? Probably not. Benjamin Graham liked his earning power backed up by assets. Kenneth Cole is asset light and earning power heavy.

Kenneth Cole’s 10-year average real free cash flow per share (adjusted for the current share count) is $1.18. Slap a Shiller P/E of 15 on that $1.18 and you get $17.70. Kenneth Cole has a clean balance sheet. It has $4.67 a share in cash and investments. Current assets are $2.52 a share more than total liabilities. That means at least $2.52 per share of those cash and investments is surplus. Add the company’s $17.70 a share in earning power value to its extra cash of $2.52 and you get an intrinsic value of $20.22. A buyout price of $20 sounds fair. The stock trades at $16.75. That’s a 20% return if Kenneth Cole is sold for $20.

The downside? It’s hard to come up with an intrinsic value estimate under $15 unless you think 2008-2009 sales are the new normal. Fashion is fickle. It’s not my thing. But 10-15 years of solid cash earnings, the buyout report, and the family connection make Kenneth Cole interesting.…

ou Can Be a Stock Market Genius: Best Investment Book Ever

I love Benjamin Graham. But if I had to hand you one book to tell you how I pick stocks, it wouldn’t be The Intelligent Investor. It would be You Can Be a Stock Market Genius.

Why? Because Joel Greenblatt doesn’t talk personal finance. He doesn’t talk bonds. He doesn’t talk portfolios. He just says diversification is overrated and starts picking stocks.

The next 250 pages are case studies. Greenblatt tells you how he found a stock, the situation it was in, why he bought it, and how much money he made.

Benjamin Graham is value investing’s Old Testament. Warren Buffett is its New Testament. And You Can Be a Stock Market Genius is our Gospel of Mark. It doesn’t repeat sayings or rehash dogma. It just tells stories. The case studies read like the present tense. You feel like you and Greenblatt are analyzing the stocks together.

It’s a cheap book. Amazon sells the paperback for $10. The publisher is Simon and Schuster’s Fireside. It’s sitting in my bookcase right now, shelved with a $50 hardcover from Wiley. It looks like it belongs one shelf down squashed between Raymond Chandler and Ross MacDonald.

The pulp pages, urine yellow cover, and Ron Popeil title turn off a lot of investors. I was one of them. I wouldn’t touch it in a bookstore. I needed to read Amazon reviews and hear from value guys. Tariq Ali of Street Capitalist loves it too.

He should. It’s the best investment book ever written.…

Barnes & Noble: Glass Lewis, Egan-Jones Endorse Riggio and Poison Pill

Proxy advisors Glass Lewis and Egan-Jones endorsed the Riggio party and its poison pill in the Barnes & Noble (BKS) board election.

Of modern Wall Street’s sins, the one Benjamin Graham would never forgive is listening to a proxy advisor.

“Glass Lewis’s analysis concludes that Mr. Burkle and his nominees have not offered a compelling plan or strategy to build value at Barnes & Noble and that his proposed amendment to the company’s shareholder rights plan could enable Burkle to team with Aletheia to acquire control of the company without providing shareholders a control premium.”

Glass Lewis is wrong on the people and the pill.

Without the pill: neither Burkle nor Riggio could take control without paying a premium, because each party blocks the other and too much stock is sold short. The poison pill doesn’t block a creeping takeover. It blocks a Northern Pacific mad dash to 50%.

Ron Burkle is one of America’s best investors. In You Can Be a Stock Market Genius, Joel Greenblatt calls Stephen Bollenbach a “financial whiz” and a big reason why he bought stock in Host Marriott. None of the Riggio party other than Len is impressive. If the proxy advisors endorsed on merit alone it would be: Burkle, Bollenbach, and Riggio.

Instead they break with common sense and endorse a barely independent board (Judge Strine’s words), an ineffective compensation committee (Glass Lewis’s words), and a poison pill at a company with a staggered board.

The Barnes & Noble polls close September 28th.…

Charlie Munger: 2 Hour Interview – Opportunity and the Black Death

Becky Quick interviewed Warren Buffett’s partner, Charlie Munger, for two hours at the University of Michigan. Tariq Ali of Street Capitalist has the link.

Warren Buffett is gun scope focused on making money. Charlie Munger, like Benjamin Graham, scans a wider field of vision. Also like Benjamin Graham, Charlie Munger talks a lot about professional ethics. He blames accountants for Enron and says Arthur Andersen got what it deserved.  He talks about how his dad almost lied on a hunting license to save five dollars. Why? Because he was with friends who were lying on theirs. The moral of the story: avoid temptation. And learn psychology. A good place to start is Poor Charlie’s Almanack.

On opportunities, Charlie quotes his great-grandfather, a pioneer and banker who fought in the Black Hawk War:

“When you find one, my dear grandchildren, and you can clearly recognize it, seize it boldly and don’t do it small.”

Seizing opportunities is Charlie’s best advice.  What’s his best quote?

“The Black Death was good for the survivors.”

The Black Death was a 1300s plague that killed 30% to 50% of all Europeans. It cut the ropes of the rigid labor market that tied down Europe’s economy.

I know what you’re thinking. With unemployment at 9.6%, we could use a plague. It’s nature’s own stimulus package.

Like wars, plagues always kill but seldom stimulate. The Roman plague of the 160s killed millions and did nothing for the economy.

Besides, quantitative easing is more sanitary.…

arnes & Noble: CEO Campaigns for Riggio – Bookstore Darwinism

William Lynch, CEO of Barnes & Noble (BKS), sent a letter to shareholders as part of the Riggio party’s campaign for the September 28th board election against Ron Burkle.

The letter’s chewy center is bookstore Darwinism:

a. Fewer bookstore competitors – It’s clear there will be fewer bookstores in this country and as we continue to maintain the best real estate portfolio of locations and best run retail bookstore model, our stores will be the beneficiary of this consolidation…

b. Fewer stores selling books – approximately 50% of the $21 billion U.S. book business is transacted in non-book retail outlets such as mass merchants, as well as drug and mass discounters. As the physical book market contracts over the next four years, from approximately $21 billion to $19 billion, we see many of these non-book retailers de-emphasizing the book category with greatly reduced shelf space and in some cases eliminating it all together. This will provide an opportunity for us.

Evidence of this shake-out already exists as our share gains from our largest physical bookstore competitors have accelerated in the last year. Today, the Company owns approximately 18% of the U.S book market, and we expect that figure to grow to 20-25% over the next three years.

I was just chatting about this with Sivaram of Can Turles Fly?. My expectation: The offline book market will shrivel while Barnes & Noble takes a bigger piece of that shriveled pie.

See: Would Benjamin Graham Buy Barnes & Noble at $15 a share?…

Barnes & Noble: On the Proxy Campaign Trail

A Barnes & Noble (BKS) shareholder wrote this at GuruFocus:

I’ve gotten no less than 5 (maybe more) phone calls trying to influence how I vote my tiny stake of 1,900 shares. Mostly I don’t answer them, but in (one) case where I did, and had a little debate, the caller seemed fairly well informed on the issues. Of course he was following a script but even so…(he was) fairly good at responding to my questions…It must cost a lot to staff up, train, call up every small shareholder, and be ready to answer questions. 

It does cost a lot. And the parties don’t staff up themselves. They hire expert proxy campaigners. That’s what Benjamin Graham did in his 1927 proxy campaign against the Bushnell brothers at Northern Pipeline. And that’s what Ron Burkle is doing in his 2010 proxy campaign against the Riggio brothers.

Ron Burkle hired Mackenzie Partners. This is what Mackenzie does:

…initial tasks…include analyzing the shareholder base and developing voting projections based on our knowledge of the…constituents’ past and…future voting practices…From there, we develop a…communications strategy based on the issues involved and launch a comprehensive campaign. The solicitation…includes a full-scale telephone campaign to retail holders, (and) in-person visits and conference calls with management of the largest institutions…

Sounds like James Carville for corporations.

You can read about Benjamin Graham’s proxy campaign at Northern Pipeline in Chapter 11 of Benjamin Graham: The Memoirs of the Dean of Wall Street.

The Barnes & Noble polls close September 28th.…

Interactive Investor: One of my Favorite Blogs

Richard Beddard writes about stocks Benjamin Graham would buy. Beddard focuses on U.K. stocks. If you use a discount broker who doesn’t let you place orders overseas, you probably think you’re saving money. You’re not. Cheap brokers cost Graham and Dodders money. Lost Benjamin Graham bargains cost more than commissions. My advice: switch brokers and read Beddard.

If Benjamin Graham was alive, he’d be in foreign micro caps. It’s easy to find cheap micros overseas. It’s hard in the U.S. Lots of American investors focus on cheap micros. You need to go where the competition ain’t.

Beddard writes well. There’s more muscle than fat on his prose.

He sticks to Orwell’s rules:

1. Never use a metaphor, simile, or other figure of speech which you are used to seeing in print.
2. Never use a long word where a short one will do.
3. If it is possible to cut a word out, always cut it out.
4. Never use the passive where you can use the active. 
5. Never use a foreign phrase, a scientific word, or a jargon word if you can think of an everyday English equivalent.

I would add another: Never use a pun.

Beddard does. And he does it well (Dart: in for the long haul). You can tell Beddard reads Krugman. Krugman also does puns well (Brother, Can You Paradigm?).

If you’re looking for the best Benjamin Graham bargains in Britain, check out the Interactive Investor blog.…

What are the 4 Most Important Numbers to Know About a Stock?

A lot of investors think they have to be scientists. They have to be rational. They have to be objective. And they have to weigh all the facts equally.

Some of those are good ideas. Others aren’t. Yes – You need to be rational when judging a stock. But I’m not sure you need to be objective. Let’s talk a bit about that.

I’ve said before that if you want to become a better investor, you should think less about stocks and think more about thinking.

Thinking about how you think is not objective. But it is rational.

Being objective means focusing on the stock instead of the investor. Scientists write papers from an objective view. They describe their experiments in a way others can copy. They don’t make science personal.

So why should you make investing personal?

Because it’s safer that way.

There’s a great book called

The Checklist Manifesto: How to Get Things Right

. It talks about how checklists can be used to break complex tasks into simple steps that prevent mistakes. Not just for amateurs. But for professionals. For experts.

People like doctors, pilots, – and yes – even investors make fewer mistakes when they use checklists.

I’ve talked about checklists in the past. In “Investor Questions Podcast #11: Why Does Evergreen Energy’s Stock Always Go Down?”, I said you should focus on stocks with Z-Scores of 3 or more, F-Scores of 3 or more, and 10 straight years of positive free cash flow.

I still think that’s a good idea. Investors who stick to those rules will make fewer mistakes than investors who don’t.

But that checklist isn’t good enough. There are other mistakes you can make. The checklist I gave you in podcast #11 won’t protect you against all of them. The most important rule I left off was price. Investors who don’t add a price rule to their checklist can still lose a lot of money.

I’ll give you a fuller checklist later. For now let’s talk about why you need a checklist in the first place.

I want you to take off your lab coat and put on a fedora. Stop thinking of yourself as a scientist and start thinking of yourself as a detective.

You walk into a hotel room. There’s a dead man in a business suit lying face down on the carpet.

The hotel room is full of clues. Dozens of them. But how do you know what’s a clue? How do you make sense of the data?

There are two ways to tackle this problem. One way is to start in gatherer mode. You walk around the room looking at stuff, taking pictures, and writing things down.

The other way is to start in hunter mode. Instead of starting with the data you start with a theory. Or a question. Or a hunch. You follow that thread as far as it takes you.

Which way is best?

I don’t like either of them. The gatherer mode …

Suggested Link: Charlie Munger Op-Ed

Warren Buffett’s business partner, Charlie Munger, writes an op-ed in the today’s Washington Post.

Read “How We Can Restore Confidence” by Charlie Munger.…

On the President’s Address

President Obama spoke about the economy last night. I am not a political commentator, so I may not be able to correctly score the politics of the fight.

The President began by painting gloomy word pictures of a Depression – without actually using the “D” word:

“…They can’t pay their bills and they’ve stopped spending money. And because they’ve stopped spending money, more businesses have been forced to lay off more workers. Local TV stations have started running public service announcements that tell people where to find food banks, even as the food banks don’t have enough to meet the demand… As we speak, similar scenes are playing out in cities and towns across the country. Last Monday, more than 1,000 men and women stood in line for 35 firefighter jobs in Miami.”

Theory

Although the President said – correctly I think – that most economists agree a stimulus is necessary, agreeing a stimulus is necessary and agreeing it is sufficient are two different things. Economists don’t agree a stimulus is sufficient. Nor did most of them think very highly of a New Deal redux like this one until more proven measures – like monetary stimulus – were already depleted.

What economists do agree on is that the economy is very bad and that the number of tools that have been tried before and not yet tried this time around is very low. In technical terms, they are advocating a kitchen sink approach.

Seventy years of social science have given government a whole new toolbox with which to approach the same problems (of 1929) and despite the change in process the outcome has remained the same.

Eventually, this will make for an interesting case study. The idea that the Great Depression was a unique and unrepeatable event will be challenged. The idea that lessons learned in retrospect can be applied in the future has been seriously compromised. It is not clear that in an ever-changing system like an economy, theory could keep pace with reality. Prescriptive economics may not work. But prescriptions have to be made nonetheless.

Politics

The President made some errors last night. He gave in to partisan temptations and reminded Republicans of their previously profligate ways.

An excellent point – if he was aiming for honesty – but honesty is rarely the best policy. Utility is.

He needs to pass bills – not win elections – and maybe his little reminders helped Democratic chances at the ballot box, but he hurt the country’s chances of getting the bills it needs passed. It was an understandable but idiotic mistake. It wasn’t just partisan politics, it was poor tactics.

The President is a lot weaker than he appears. Constitutionally, his legislative powers are – well – non-existent. A President is not a Prime Minister.

The man himself is popular. His policies are not. His party’s majorities are large, but not large enough to pass bills in the Senate – even without any Democratic defections. And there will be defections. …