Luke Elliott January 17, 2020 Idea Exchange

AdvanSource Biomaterials Corp. (OTC: ASNB) – An Attractive Microcap Arbitrage Opportunity With Limited Risk

17 Jan 2020 Quote: $0.18/share     AdvanSource Biomaterials designs and manufacturers materials used in medical applications. They primarily make polyurethane materials that are used in long and short-term implants and disposable products (plastics).  The business has been around for 20 years but neither the history of the business nor what they do make much difference to the investment case. On November 25, 2019, AdvanSource announced that they had entered into an agreement to sell all of their assets to a subsidiary of Mitsubishi Chemical Corporation for...

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Andrew Kuhn January 13, 2020 Andrew Kuhn 0 Comments

9 States in 5 days

9 states, 5 days, 2,092 miles, 32 hours of driving, 3 different companies, a ton of fast-food, 1 tornado scare, and a helllllllllllllllllluva lot coffee later, Geoff and I have finally finished our research trip and are back in good ole’ Dallas, Texas. It was a productive trip, and I thought I’d spend this week’s post talking a bit about the trip without revealing the companies we visited, for obvious reasons. (I know, I know – super annoying).

First, and most importantly – my biggest takeaway is that I think as investors WE ALL often forget that every stock we analyze and form extreme opinions on from public filings 100+ miles away are, in fact, real businesses. Everyone says they know this, but then you read or listen to their thoughts and it conveys the opposite. Real businesses are run by real managers. Real businesses have real employees. Real businesses have real assets. Real businesses have real customers. These real businesses are most likely very important in their real communities. And, the real people of these real businesses most likely have good intentions and are just trying to do the best that they can.

I truly think every serious investor should implement company visits and in-person scuttlebutt in their routine as much as possible. I think doing this helps take stock-price-gyrations out of the real business, and should help keep the big picture in mind – which is finding great companies that can compound their net worth for years to come.

One thing I often talk about on the podcast is being the customer in the companies you’re analyzing — experience what the real customers experience. If you’re thinking of investing in Disney, watch some content on Disney+. Plan a trip at Disney World. Eat at the park. If you have children, observe their reactions and mood. Basically, try to connect with why individuals use the product/business from an experience perspective. Have a journalistic mindset. This is all stuff that you can’t learn from a 10K.

Investing has a level playing field. Other people can read the same information that you can. I think putting in the additional work to go the extra mile (or 2,092 miles) in your research is what can separate the good from the great. Warren Buffett, in his early days, did this all the time – and it’s something that I think investors overlook due to information overload via the internet. Someone once asked Warren about Phil Fisher’s Scuttlebutt method at an annual meeting. Below was his response.

 

WARREN BUFFETT: Area 5?

AUDIENCE MEMBER: My name is Travis Heath (PH). I’m from Dallas, Texas. And my question regards what Phil Fisher referred to as “scuttlebutt.” When you’ve identified a business that you consider to warrant further investigation — more intense investigation — how much time do you spend commonly, both in terms of total hours and in terms of the span in weeks or months that you perform that investigation over?

WARREN …

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Andrew Kuhn January 5, 2020 Andrew Kuhn, Free Articles 0 Comments

One of My Goals For 2020 – Blog More! 

To Focused Compounding Members,

 

I hope everyone had a great holiday! Let me start by saying I am not one for New Year’s resolutions. I genuinely believe you should start today instead of tomorrow – and that an arbitrary date should not dictate when you should work to become the better version of yourself.

 

That said, one of the things I wanted Geoff and myself to do before the new year was to write down 5 goals that we would be proud of if we accomplish by this time next year. We had professional and personal goals. I decided on 5 because this was right out of Warren Buffett’s 5/25 strategy for focus. You can learn about that below from James Clear’s blog post below. (Hopefully James won’t mind me stealing his story if I link to his great book, Atomic Habits: https://www.amazon.com/Atomic-Habits-Proven-Build-Break/dp/0735211299/ref=tmm_hrd_swatch_0?_encoding=UTF8&qid=1578004386&sr=8-1

 

/

 

https://jamesclear.com/buffett-focus

 

“The Story of Mike Flint

 

Mike Flint was Buffett’s personal airplane pilot for 10 years. (Flint has also flown four US Presidents, so I think we can safely say he is good at his job.) According to Flint, he was talking about his career priorities with Buffett when his boss asked the pilot to go through a 3-step exercise.

 

Here’s how it works…

 

STEP 1: Buffett started by asking Flint to write down his top 25 career goals. So, Flint took some time and wrote them down. (Note: you could also complete this exercise with goals for a shorter timeline. For example, write down the top 25 things you want to accomplish this week.)

 

STEP 2: Then, Buffett asked Flint to review his list and circle his top 5 goals. Again, Flint took some time, made his way through the list, and eventually decided on his 5 most important goals.

 

Note: If you’re following along at home, pause right now and do these first two steps before moving on to Step 3.

 

STEP 3: At this point, Flint had two lists. The 5 items he had circled were List A and the 20 items he had not circled were List B.

Flint confirmed that he would start working on his top 5 goals right away. And that’s when Buffett asked him about the second list, “And what about the ones you didn’t circle?”

 

Flint replied, “Well, the top 5 are my primary focus, but the other 20 come in a close second. They are still important so I’ll work on those intermittently as I see fit. They are not as urgent, but I still plan to give them a dedicated effort.”

 

To which Buffett replied, “No. You’ve got it wrong, Mike. Everything you didn’t circle just became your Avoid-At-All-Cost list. No matter what, these things get no attention from you until you’ve succeeded with your top 5.”

 

 

/

 

One of my goals for 2020 is to write a lot more. To quantify this, I’m committing to one post a …

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Geoff Gannon January 2, 2020 Gannon on Investing, Stock Ideas

Geoff’s Thoughts on Cheesecake Factory (CAKE)

Someone asked me my thoughts on Cheesecake Factory. It’s a stock we’ve looked at before. But, I have written about it recently. The stock hasn’t done well lately. It looks fairly cheap. Here was my answer: “I haven’t followed it lately. I know the stock hasn’t done that well. I did a very quick check of the stock price just now looking at the long-term average operating margin, today’s sales, today’s tax rates, etc. It seems that on an earnings basis (normalized for a normal...

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Andrew Kuhn December 30, 2019 Idea Exchange

Familiarity Breeds Success: Why Members of Congress Do Best When Buying Local Stocks

From 12/21/2010 Here’s an interesting article from BusinessWeek about how members of Congress do best when picking stocks from their own districts. While cynics will jump to the conclusion these representatives must be trading on inside knowledge gleaned from lobbyists, or just outright favoring local companies, I have to say I have a better record investing in New Jersey companies. I was born and raised in New Jersey. I still live and work here. I know the place. And I do best when investing in New Jersey...

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Andrew Kuhn December 19, 2019 Gannon on Investing 2 Comments

Finding Enough Investment Ideas

SEPTEMBER 30, 2013

by Geoff Gannon

Upon seeing that The Avid Hog is a monthly newsletter, someone asked this question:

…how do you expect to find suitable candidates every month? Is the supply of good companies that large?

The supply of good companies is enormous. If you don’t have any restrictions on market cap or country, there are always good companies out there. Supply is never the problem. Knowing that supply well enough is.

Although I consider myself a value investor, I don’t get ideas the way most value investors do. You can see a good example of how a value investor looks for ideas in this video of Michael Price’s presentation at the London Value Investing Conference. Another good example is this quote from Nate’s latest post at Oddball Stocks:

I value banks like I value companies.  I find a bank that’s clearly undervalued, then I work to either confirm or deny the valuation.  This is the opposite of someone who might research and value a company and once the valuation is done look at the market value.  I start with the market value, I’m not looking for franchise companies, I’m looking for companies that appear cheap, and I want to confirm they actually are cheap, if so I invest.  This means I don’t have a Watchlist of banks or companies I’d like to buy if the price were right.  Rather I continually trawl low P/B stocks and pick up what’s on sale that week or month

Let’s contrast that with the ideal I strive for. In a perfect world, my approach looks more like how Warren Buffett described his analysis of PetroChina to Fox Business. He told Fox Business the important parts of his approach are that:

  1. He tries to look at the business first, without knowing the price
  2. He decides what he would pay for the entire company
  3. He compares the price he would pay to what the entire company is trading for in the market
  4. If the price he would pay is a lot higher than what the whole company trades for in the market, he buys it.

That’s the ideal approach for me. I’ve found personally that it’s the one that works best. If I appraise the entire business with fairly little preconception of where the stock should trade, has traded, etc. and then I compare my appraisal to the market price I’m on the firmest footing in terms of knowing I have a bargain.

The hypothetical I often pose when talking to Quan about a stock is:

Imagine you are running a family holding company. The assets of all your family members are tied up in this company’s stock. You can put 25% of the value of your holding company into buying this business in its entirety. Would you do it?

In other words, is this a business you want to be in forever? Is the price good? And would you be willing to put 25% of the money of the people …

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Andrew Kuhn December 17, 2019 Gannon on Investing 0 Comments

Stock Price Guidelines

by Geoff Gannon

It’s amazing how so many of the deals cluster around the 10x pretax earnings ratio despite these businesses being in different industries with different capital expenditure needs and things like that. Even the BNI acquisition, which many thought was overpriced (crazy / insane deal! Buffett has lost his marbles!) looks normal by this measure; a price that Buffett has always been paying. And yes, right now I’m the guy swinging around a hammer (seeing only nails), but I notice a pattern and think it’s really interesting.

(The Brooklyn Investor)

I’m often asked what’s a fair price to pay for a good business? This is a tough question, because people seem to mean different things when they say “fair price” and different things when they say “good business”.

I will suggest one awfully automatic approach to deciding what stocks are acceptable candidates for long-term investment. The simplest approach I can suggest requires 2 criteria be met. To qualify as a “good business” the stock must:

  1. Have no operating losses in the last 10 years
  2. Be in an industry to the left of “Transportation” in this graph of CFROI Persistence by Industry

In other words, we are defining a good business as a stock in a “defensive” industry with at least 10 straight years of profits.

If those two business quality criteria are met, what is a fair price to pay for the stock? I suggest three yardsticks:

  1. Market Cap to Free Cash Flow: 15x
  2. Enterprise Value to Owner Earnings: 10x
  3. Enterprise Value to EBITDA: 8x

These are “fair” prices. A value investor likes to pay an unfair price. So, these are upper limits. They are prohibitions on ever paying more than 15 times free cash flow, 10 times owner earnings, or 8 times EBITDA.

At Berkshire, Buffett is willing to pay a fair price – 10 times pre-tax earnings – for 2 reasons:

  1. Berkshire amplifies its returns with leverage (“float”)
  2. Buffett has learned to find a margin of safety in places other than price

For example, Buffett talks about Coca-Cola (KO) as if the margin of safety was the profitable future growth of the company. He was paying a fair absolute price (it was a high price relative to other stocks at the time), because he knew it was a good price relative to earnings a few years out.

Let’s take a look at the 5 guidelines I laid out:

  1. Have no operating losses in the last 10 years
  2. Be in an industry to the left of “Transportation” in this graph of CFROI Persistence by Industry
  3. Market Cap to Free Cash Flow: 15x
  4. Enterprise Value to Pre-Tax Owner Earnings: 10x
  5. Enterprise Value to EBITDA: 8x

Implementation of this – or any – checklist approach requires one additional thing: common sense.

Common sense often finds itself at odds with two other types of sense:

  1. Theoretical Sense
  2. Technical Sense

Technical sense is when you notice that Carnival (CCL) trades at more than 8x EBITDA and

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Warwickb December 17, 2019 Idea Exchange

Suria Capital Holdings Bhd (KLSE:Suria): A Cheap, Conservatively FInanced Port Concession Operator

Writeup by Warwick Bagnall www.oceaniavalue.com Suria has some sell-side analyst coverage so I wouldn’t say it is a totally overlooked stock.  But it has several features which make it a quick pass for many investors: top line revenue is up and down by >50% in many years (the company reluctantly books some capex as revenue), it is small (~116 MM USD market cap) and it is illiquid (~4% annual share turnover).  You can’t buy more than a few thousand USD per day of stock without...

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Geoff Gannon December 14, 2019 Stock Ideas

Truxton (TRUX): A Small, Fast Growing Private Bank with Extremely Low Net Non-Interest Expense

by PHILIP HUTCHINSON Overview Truxton is a small, fast growing private bank with extremely low net non interest expenses due to its wealth management business and very high level of deposits per branch Truxton Trust is a one-branch private bank and wealth management firm in Nashville, Tennessee. It was founded in 2003 by a group of founders (some – though not all – of whom are also executives at the company) who appear to be a mix of very well-connected members of the Nashville business...

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Geoff Gannon December 14, 2019 Gannon on Investing, Stock Ideas

Canterbury Park (CPHC): A Stock Selling for Less than the Sum of Two Parts – A Card Casino and 127-Acres of Land (Plus You Get a Horse Track for Free)

Canterbury Park (CPHC) is a sum of the parts stock. After our experiences – and when I say “our”, I mean my decisions to buy – Maui Land & Pineapple, Keweenaw Land Association, and Nekkar – Andrew has a sticky note on his desk that says: “When thinking about SOTP, think STOP”. Canterbury Park (CPHC) is a sum of the parts (SOTP) stock. Since we’re thinking “SOTP” should we also be thinking “STOP”? Yes, Canterbury Park is a sum of the parts stock. But… That...

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