On “Three Ideas and an Award”

Today, I’m going to try something a little different. Many longtime readers have told me how much they enjoy discussions of specific stocks and how rarely I discuss specific stocks these days.

Other bloggers often look back on the past performance of stocks mentioned on their blog. That’s difficult for me to do, because my conclusions regarding individual stocks tend to be pretty varied. I’ve written about many businesses I liked that weren’t selling at prices I liked. I don’t want to give up writing about interesting businesses merely because they’re overpriced today. The name of the blog, “Gannon On Investing” sums up what this site is all about – it isn’t a personal trading blog; it’s just me writing about investing.

I decided a short monthly post that focuses on a very small number of stocks and eliminates all the nuances of longer posts is the best way for me to give you some of my best ideas – at the moment – while also providing a record I can dissect at a later date. This way, I can still write about the stocks that are the most interesting stocks to write about – and yet keep them separate from the stocks that look most appealing as investments.

I’ll try to have a little fun with this monthly post. I’m calling it “Three Ideas and an Award”. I’ll always start by listing my three best ideas. Then, I’ll make up some award to present to a fourth stock that doesn’t make my top three ideas list – but is worth looking into.

The prices presented will simply be a recent price included for future reference. If a stock is one of my “three best ideas” it’s safe to say I believe there’s a wide margin of safety; so, I’m not worried about small price differences – I just want the post to be archived with relatively current prices.

Finally, unless otherwise indicated, you should assume I and people connected to me both professionally and personally own the stocks mentioned. If these are my best ideas, why wouldn’t I own them? Still, I’ll try to include a generic disclosure with each post.

I’d appreciate hearing what you think about this idea. Feel free to give your opinion about this new idea, or anything else you do or don’t like about my blog, by commenting to this post or sending me an email.…

Three Ideas and an Award – April 2007

Ideas

Bancinsurance (BCIS): $6.05

Rex Stores (RSC): $16.55

Strattec (STRT): $43.00

Note: Despite the fact that I plan to update this post at the beginning of each month – these are not short-term stock picks. In fact, this particular group of stocks is likely to do little or nothing for long periods of time. Value investing is about buying an asset for less than it’s worth; the shares of these businesses are now selling for less than the businesses are worth. That’s why they are my three best ideas for the month of April. Expected short-term price movements have nothing to do with the selection.

Regarding BCIS – it trades very infrequently. If you decide to buy it (and you manage to find some shares) you’ll do best if you forget it’s a public company, ignore the daily market quote – and judge your investment by the quarterly updates on underwriting results and per share book value. Do not buy this company if you need a quote to sleep at night – fluctuations in market price are meaningless for such a small, thinly traded security.

Award

Best DIY LBO Candidate – Timberland (TBL): $26.05

Description: The Best DIY LBO Candidate Award is presented to the company I believe is in the best position to benefit (continuing shareholders) by taking on debt and repurchasing its own shares through a large tender offer.

A good do-it-yourself leveraged buyout candidate requires both an unduly low public market value (market cap/enterprise value) and the ability to consistently cover large interest payments from free cash flow – Timberland meets both requirements.

Disclosure: I and people connected to me both professionally and personally own some or all of the stocks mentioned in this post.

I’d appreciate hearing what you think about my plan to do a “Three Ideas and an Award” post at the start of each month. Feel free to give your opinion by commenting to this post or sending me an email.…

20 Questions for Clyde Milton of Cheap Stocks

Clyde Milton became enamored with deep value, off the beaten path investment ideas through years of fundamental research, and ultimately, as a writer/editor for a now defunct personal finance magazine.

He strives to research stocks that few others will, using valuation techniques based on Ben Graham’s ideas (such as stocks trading below their net current asset value) as well as some ideas he has developed himself.

Milton freely admits that his site is written under a pseudonym; Clyde and Milton being the first names of his beloved grandfathers, to whom the site is dedicated. While Cheap Stocks was originally launched primarily to keep Milton’s research and writing skills sharp (and not as a public site) it has developed a following.

Visit Cheap Stocks

1. Are you a value investor?

There’s no doubt about that. I am a dyed in the wool, card carrying, unapologetic value investor. That’s generally how I’m wired. I don’t understand how to value growth companies for the most part, perhaps I’m just not smart enough.

2. What is value investing?

Value investing is the ultimate pursuit, the ultimate treasure hunt, the extremely rewarding (financially and otherwise) quest to buy a buck’s worth of assets for much less than a buck – be those assets land, cash, marketable securities, pieces of other companies, water rights, or what have you. It’s the attempt to find that situation where true value is not reflected in the current price (market cap or enterprise value) of a given company. There’s a huge dependency here: that the markets ultimately discover what your analysis has revealed, and that your analysis was accurate. It doesn’t always work that way in practice, and patience is paramount.

3. What is your approach to investing?

It’s “off the beaten path” for lack of a better description. I try and turn over the rocks that few others do (maybe they are way smarter than I am, and know not to waste their time). For example, I will buy illiquid securities such as profitable companies that have “gone private”, and no longer file with the SEC, and are not required to comply with Sarbanes Oxley, but still trade on the Pink Sheets. Sometimes, liquidity is over-rated….if you can afford to be patient.

4. How do you evaluate a stock?

I start by identifying a potentially interesting situation. It may be that I discover a little-known thinly traded company that has some “hidden” or undervalued assets on its balance sheet. It might be a down and out company with a relatively large amount of cash relative to market cap, that is on the verge of profitability. It could be a situation where inventories are carried at lower of cost or market, and these inventories, in our estimation, are worth several times carrying value—this situation is rare. Could be land holdings that are undervalued. Most of these situations require some digging.

5. Why do you buy a stock?

When I’m convinced that there’s a real opportunity that the market is ignoring. …

On Buffett, Berkshire, and You

At the end of my post “On Billionaires, Their Buys, and Buffett“, I said “I will follow up with another post on this topic tomorrow. Hopefully, I can give you some idea of what you should and shouldn’t do based on news of Berkshire’s activities in specific stocks.”

This is that post. Unfortunately, before sitting down to write this post, a piece by James Altucher (author of “Trade Like Warren Buffett“) was brought to my attention. I’ll link through Value Investing News, because you should be visiting that site regularly – here’s Altucher’s article.

It’s good. However, there are still some things left for me to cover.

Altucher is right in stressing that Berkshire holds many positions that aren’t presently of interest, because the business has changed (or more usually) the stock price has changed. A rare example of the former is the Washington Post Company (WPO). If you want some idea of what the Washington Post (the stock and the business) looked like back when Buffett bought it, see Max Olson’s excellent article “Warren Buffett and the Washington Post“.

Buffett Holds

The Washington Post is a rare example of a Berkshire position that is no longer attractive because of changes in the business. In most cases, it’s a change in the stock price that disqualifies a Berkshire position from inclusion in your own portfolio. Several years ago, it was painfully obvious that Coca-Cola (KO) was one such stock.

During the Millennium Bubble, shares of Coke were priced for pluperfection. Buffett didn’t sell because he intends Coke to be a permanent holding for Berkshire. If he had been running his partnership, he would have sold. He has a different attitude at Berkshire – one he has made clear to shareholders countless times. As a result, he sometimes sacrifices better returns for Berkshire by sticking with a permanent position he knows is overpriced. Coke is probably the biggest and best known example of Buffett holding a stock he knew Berkshire would be better off selling.

But He Sells Too

However, Berkshire has many lesser known positions that it’s held for a long time. That sometimes leads people to believe that Berkshire never sells. Not true. Berkshire does sell; in fact, it has even gone as far as completely eliminating some large positions.

One recent example of such selling is H&R; Block (HRB). The company, which Berkshire once owned more than 8% of, became badly distracted with operations outside of its core tax preparation franchise. It seems clear Berkshire has eliminated its stake in H&R; Block. The company’s single minded pursuit of diversification and cross-selling is probably what turned Buffett off the stock – since Buffett bought in 2001, management has done a remarkable job of shrinking the company’s moat and scattering its eggs across many different, less secure baskets.

So, how can you avoid having a bad experience in a Berkshire stock? Don’t overpay. Even in some situations where Berkshire has …

Book Review: Supermoney

Gannon On Investing’s contributing writer, Steven Rosales, reviews Adam Smith’s Supermoney.

Read Review…

Book Review: Trade Like Warren Buffett

Gannon On Investing’s contributing writer, Steven Rosales, reviews James Altucher’s Trade Like Warren Buffett.

Read Book Review…

On Barron’s Top 30 CEOs – Bob Simpson, XTO Energy

The latest issue of Barron’s includes a list of the world’s 30 best CEOs. The names are organized alphabetically (i.e., there’s no #1, #17, or #30). Of the 30 CEOs on this year’s list, 21 were also on last year’s list. One of those “returnees” is Bob Simpson.

It’s hard to argue against including the head of XTO Energy (XTO). The company’s long-term performance has been spectacular. Furthermore, XTO employs a strategy that relies heavily on excellent decision making at the top. In fact, very few companies have a clearer history of being shaped by the major capital allocation decisions of top management.

One of the criteria for making Barron’s list was the expectation that the CEO would be missed by investors if he unexpectedly departed. I don’t know if Bob Simpson’s departure would send XTO shares spiraling; but, I do know that XTO’s strategy requires remarkable management at the top.

The company was founded in 1986 by Steve Palko, Jon Brumley, and Bob Simpson. Brumley left in 1996; Palko left in 2005. This is how Simpson described his company’s founding in a 1999 interview with The Wall Street Transcript:

“We brought to the company the best of the philosophy we learned at Southland, which is to buy quality production and make it better. We started with six folks and no reserves, and we’ve used that strategy to build the company to what it is today a buyer of long-lived, quality properties in areas we understand. We then make the properties better.”

(Interview)

The Barron’s article mentions that XTO’s share price has increased nearly fifty fold since the company went public in 1993.

Such share price performance isn’t surprising when you consider XTO’s business performance. Over both the last five and ten years, XTO’s revenues, earnings, and cash flow per share have grown by double digits – and none of the first digits is a one!

While the entire energy sector has performed well over the last few years, the gap in growth and value creation between XTO and its competitors is real. The longer the period of comparison, the better XTO looks.

Improving acquired properties has been the key to XTO’s business growth and share price growth.

Later in the same TWST interview, Simpson explained why it has been possible for XTO to improve the properties it purchases from major oil companies.

“Of course, they are intelligent organizations doing what is logical for their strategy focusing their best people on their main assets. Ironically, this is what we do on a step-down basis. What was considered a small project with junior talent at a major will be a major project with major-league talent at (XTO).”

(Interview)

Unlike most energy companies, XTO’s future is explicitly dependent upon acquisitions. The company has grown through acquiring and improving properties. While XTO can plow a lot of its free cash flow back into the business through investments in already owned properties, it won’t be able …

On Billionaires, Their Buys, and Buffett

I recently read a post by Barry Ritholtz over at “The Big Picture“. It’s called “Investing Advice: If you are NOT a billionaire“. Ritholtz starts with a good premise: don’t try to “tag along” on stock market investments made by billionaires simply because they’re billionaires.

Unfortunately, his argument goes off the tracks pretty quickly. He singles out three billionaires: Kirk Kerkorian, Michael Dell, and Warren Buffett. Ritholtz has a point with Michael Dell, but the same point is applicable to an awful lot of insider buying at large, public companies.

As for Kerkorian and Buffett, I’m afraid I can’t find anything to agree with in those arguments. Regarding Kerkorian he writes:

He has a long and storied history as a corporate raider, greenmailer, etc. When one gets closer to the long dirt nap, one thinks of their legacy. For all we know, this GM bid was an attempt to improve his reputation.

I have to admit smiling when I read this, because about a year ago I wrote a post on some notable billionaires (from the Forbes list) that included a fairly long digression on comments made by bloggers about Kerkorian’s advanced age:

There’s been more than enough written about General Motors (GM) over the past year; so, I won’t add anything here. I will, however, mention that one point made by some blogs (and even some “mainstream” media sources) is nonsensical. It’s been written (presumably with a straight face) that Kerkorian can’t possibly be making a long-term investment in GM, because (at 89) he simply doesn’t have enough time left to see such an investment through.

The strongest argument against this line of reasoning is that making investment decisions based on your anticipation of imminent death is akin to making life choices based on the belief that you don’t have free will and all future events are predestined. In both cases, if your assumption is correct, you gain little or nothing. If your assumption is incorrect, you lose a lot.

Besides, all of this assumes you have no interest in leaving greater wealth behind (whether to charity or your family), which seems rather absurd. Kerkorian isn’t exactly forgoing his own enjoyment; he already has far more money than he could ever spend on himself (that would be true even if he were 29 instead of 89).

Also, it’s worth noting that Phil Carret lived to be 101. I don’t mean to suggest Kerkorian may live just as long; rather, I mean to suggest even at 89, you could be hanging up your cleats twelve years too early. To put that in perspective, if the average American male expected to die twelve years before he actually did, he would be planning to die around the time he would start collecting Social Security.

As a rule, investors who are as passionate as Kerkorian usually die long before they retire.

I don’t have anything more to say about Kerkorian. I do, however, have quite a lot to say …

Column: Tweeter Home Entertainment

Guest Columnist Max Olson’s latest article is entitled “Tweeter Home Entertainment“. In this article, Max discusses Tweeter (TWTR) and its recently announced plans to close many of its stores.

Read “Tweeter Home Entertainment”…

Value Investing News: Top Stories – Week of Monday, March 19th

1. Sherwin Williams: No Lead Threat
2. Use Sites Like Yahoo! Finance With Caution
3. Tweeter Home Entertainment
4. Value Delusions and Strategic Thinking
5. On the Risk of Settling
6. On Rex Stores, Real Estate, and Ethanol
7. Chou 2006 Annual Report
8. Festival of Stocks #28
9. Profit With Split-Offs
10. Marty Whitman: Letter to Shareholders

Visit Value Investing News…