Posts In: Gannon on Investing

Geoff Gannon February 22, 2020 Gannon on Investing 0 Comments

Ask Yourself: In What Year Would You Have Hopped Off the Warren Buffett Compounding Train?

Warren Buffett’s annual letter to Berkshire Hathaway shareholders was released today. It starts – as always – with the table comparing the annual percentage change in Berkshire Hathaway with the annual percentage change in the S&P 500 with dividends included. Long time readers of the Buffett letter will remember when the change in book value of Berkshire Hathaway was included. That’s been removed. We are left with the change in per-share market value of Berkshire Hathaway.

Today, I’m just going to focus on this table. Over the next few days, I’ll talk about a few different parts of Buffett’s letter I found interesting. But, one of the most interesting pages in the letter is the very first one. The one with the table showing Berkshire’s performance vs. the S&P 500.

What’s notable about this table? One, Berkshire has outperformed the S&P 500 by about 10% a year over more than 50 years (1965-2019). Berkshire has compounded its market value at about 20% a year while the S&P 500 has done 10% a year. What’s also notable is the many very big years for Berkshire as a stock. On my print out of the letter, I circled some years that stood out to me. Basically, I just assumed that it’s incredibly rare for the S&P 500 to ever have a return of around 50% a year. Generally, an amazing year for the S&P 50 would be one like what we saw last year (up something over 30%). If you are completely in the S&P 500 index, your portfolio is not going to have up years of 40%, 60%, or 120%. Berkshire’s stock price sometimes does go up that much. Or, rather – it sometimes did. It hasn’t lately.

Berkshire had amazing up years – as a stock, these don’t necessarily match up with business results – two times in the 1960s, three times in the 1970s, three times in the 1980s, twice in the 1990s and then never again since the late 1990s. Berkshire’s stock has gone over 20 years with no what I’d call amazing up years. Any good year Berkshire has had as a stock in the last 20 years has been the kind of up year an index like the S&P 500 is also capable of. This obviously tamps down on Berkshire’s long-term performance potential. Most stocks that have amazing long-term compounding records will achieve those records with a bunch of short-term upward spurts in their stock price like Berkshire had in the 1970s, 1980s, and 1990s. In the last 20 years, Berkshire has had several years where returns were in the 22-33% range. Those are great years. But, they are years the S&P 500 is also capable of having (it was up 32% last year). The disappearance of these very big up years – the “lumpy” outperformance – in Berkshire as a stock explains a lot of why the stock performed so well versus the S&P 500 for its first 30 years under Buffett and so much …

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Geoff Gannon February 20, 2020 Gannon on Investing, Stock Ideas

Gainsco (GANS): A Dark Nonstandard Auto Insurer That’s Cheap Based on Recent Underwriting Results

Gainsco (GANS) is a dark stock. It does not file with the SEC. However, it does provide both statutory (Gainsco is an insurer) and GAAP financial reports on its website. These reports go back to 2012 (so, covering the period from 2011 on). Not long before 2011, Gainsco had been an SEC reporting company. Full 10-Ks are available on the SEC’s EDGAR site. Anything I’ll be talking about with you here today about Gainsco’s historical financial performance has been cobbled together through a combination of...

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Andrew Kuhn February 5, 2020 Gannon on Investing 1 Comment

Keywords Studios: A good business with a leading niche in a terrific industry – but perhaps too expensive to buy (for now)

Written by: Vetle Forsland



The video game industry is a large and rapidly growing market with revenues projected to reach nearly $200 billion this year, a consistent growth rate in the high single-digits, and over 2.3 billion gamers across the globe. As video games have developed in graphics, gameplay and story, while moving most of the gaming experience online, it has silently become the largest entertainment industry on the planet. According to IDG Consulting, by 2020, the video games industry will bring in more revenue globally than the music business, movie ticket sales and home entertainment combined, after an impressive 26 percent revenue jump from just two years ago. This write-up is centered around Keywords Studios (LSE:KWS), a niche leader set to benefit from all the major developments within this rapidly growing industry.

The Video Game Industry

Major video game releases put Hollywood to shame. While Avengers: Infinity War brought in $640 million globally during its opening weekend, Red Dead Redemption 2, released the same year, generated over $725 million in worldwide sales during its first three days.

How did this happen?

The industry has gone through a big change over the past decade plus. First and foremost, the rise of online gaming, streaming and Esports turned video games from a relatively isolated experience into mass entertainment for everyone to enjoy.

For instance, the 2019 League of Legends World Championship drew 200 million viewers in 2019, more than twice that of the Super Bowl. Major players like Amazon (through its Twitch acquisition), Facebook (Oculus), Snap and Nike are entering the industry. Further, the casual mobile gaming market practically didn’t exist in the 2000s, but generated $38 billion in revenues in 2016, versus $6 billion for the console market, bringing gaming to everyone’s parents and even grandparents. Additionally, in its early history, video games were mostly a single-player activity – but the consoles of the early 2010s made online gaming the main form of gameplay, and together with streaming, turned the industry into something undeniably social.

In the years ahead, the video game market is expected to grow at a strong, consistent CAGR of 9 percent from 2019-2023. This increase is driven by the continued development of higher definition- and complexity games, next-gen consoles coming out in late 2020, and new ways of playing video games – like AR, VR, video game streaming, subscription models – as well as more sophisticated mobile games. It is in this market that Keywords Studios operates, without direct exposure to the successes or failures of individual game titles.

Keywords operates in a niche within the video game market that has grown, and will continue to grow, even faster than the overall industry – specifically the outsourced video game services “industry”, a niche set to continue to expand.


First of all, the video game industry is trending more and more towards outsourcing important tasks to third-parties, as video game developers experience increased complexity, volume and speed of content generation within competing …

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Geoff Gannon February 5, 2020 Gannon on Investing, Stock Ideas

Transcat (TRNS): A Business Shifting from Distribution to Services and a Stock Shifting from Unknown and Unloved to Known and Loved

Transcat is an interesting stock for me to write-up, because I probably have a bias here. Quan and I considered this stock – and researched it quite a bit – several years back. We were going to write it up for a monthly newsletter I did called Singular Diligence. All the old issues of this newsletter are in the stocks “A-Z” section of Focused Compounding. And – you’ll notice, if you go to that stocks A-Z section of Focused Compounding – that there’s no write...

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Geoff Gannon January 26, 2020 Gannon on Investing, Stock Ideas

Hilton Food (HFG): A Super Predictable Meat Packer with Long-Term “Cost Plus” Contracts and Extreme Customer Concentration at an Expensive – But Actually Not Quite Too Expensive – Price

Hilton Food Group (HFG) trades on the London Stock Exchange. It qualifies as an “overlooked stock” because it has low share turnover (17% per year) and a low beta (0.28) despite having a pretty high market cap (greater than $1 billion in USD terms). On a purely statistical basis, Hilton Food is one of the most predictable – in fact, in one respect, literally THE most predictable – companies I’m aware of. There’s a reason for this I’ll get into in a second. But, first...

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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 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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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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Geoff Gannon December 7, 2019 Gannon on Investing, Stock Ideas

Stella-Jones: Long-Term Contracts Selling Utility Poles and Railroad Ties Add Up to A Predictable, Consistent Compounder that Unfortunately Has to Use Debt to Beat the Market

Stella-Jones mainly provides large customers with pressure treated wood under contractually decided terms. The customers are mainly: U.S. and Canadian railroads, U.S. and Canadian electric companies, U.S. and Canadian phone companies, and U.S. and Canadian big box retailers. Stella-Jones has some other sources of revenue – like selling untreated lumber and logs – that provide revenue but no value for shareholders. The company also has some more niche customers – probably buyers for using wood in things like bridges, piers, etc. – that probably do...

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