Inside the Minds of the Value-Investing Elite

When people achieve uncommon greatness, there's a certain sense of curiosity and wonderment about them. We gravitate to them, their ideas, and their predictions like mosquitoes to zapping lamps. For value investors, there's no greater fascination than Omaha in May -- site of the Berkshire Hathaway annual shareholders meeting and the new-age equivalent, Value Investing Congress, where some of the best and brightest in today's value-investing community share their favorite investment ideas.

Joe Magyer -- my Foolish friend and an Inside Value advisor -- and I will join consummate students of the craft in Omaha. With such greats as Chuck Akre, David Nierenberg, Tom Russo, and Congress founder Whitney Tilson presenting, some variety of curmudgeonly value-investor camaraderie should prevail. I expect three themes to get serious air time at this year's VIC.

1. Gas fit to burst? There's a very palpable irony here. The U.S. has discovered a truly game-changing quantity of natural gas that can be extracted at very low cost. And yet, as natural-gas prices hover around $2, prices have declined to such a degree that no one wants to drill. Natural-gas rig counts are down 29% year over year, but between a warm winter and contributions from liquids-rich wells and recently completed dry-gas wells, storage tanks are full to bursting, and production has hardly budged. Bears among the lot are calling for $1 handles later this year.

To my eye, this is a categorically unsustainable condition. There's hardly a dry-gas well in the country that makes money at $2 natural gas. It's unclear when, but at some point natural-gas prices must converge toward the marginal cost of production (the cost of pulling the last bit from the ground), which I'd estimate at $5 to $6 per million cubic feet, in order that producers have proper economic incentive to drill. Fixed-income guru Jeff Gundlach seems to agree. At a recent conference, he quipped: "I know it's early, but if I were a crazy hedge fund, I'd go long natural gas, short Apple, and leverage 100 times."

The upshot is that some of the sector's best operators are trading near multi-year lows. A few names I'd expect to hear among potential value picks are Ultra Petroleum (NYSE: UPL  ) , Halliburton (NYSE: HAL  ) , and Apache (NYSE: APA  ) .

2. A new technology paradigm? Technology companies represent a funny riddle for traditionalist value-types. The best among them can reliably generate high returns on capital, recurring and large free cash flows, and world-beating returns, and many of the larger-cap tech names have been left in the dust as the market has sped skyward. Others appear cheap, despite great runs. But there's a caveat to that: Technology changes. Behemoths of yesteryear can end up lapped -- or worse, irrelevant -- on product cycles, cloud computing, or some heretofore unimaginable paradigm shift.

That tension can create an opportunity (or risk) for would-be investors -- but uncertainty is a friend of the value investor. Two that I like for their durable moats and relative recurrence of cash flows, despite the industry's sometimes unpredictable tides, are Oracle (Nasdaq: ORCL  ) and Google (Nasdaq: GOOG  ) .

3. The pain in Spain: You didn't think the eurozone troubles would leave us so quickly, did you? Yet again, the "confidence lacking" effect is wracking Spanish bond markets. Yields are creeping higher as market-watchers wrestle with some fundamental questions: Can Spain be saved from itself, and will its troubles precipitate a full-on eurozone credit crisis with disastrous consequences?

I expect this conversation to be at the forefront. Bears will cite "zombie banks," a housing bubble that would make Las Vegas circa 2005 look comparatively tame, a disastrously leveraged consumer, high unemployment, and the tightening vice of austerity measures. Expect the bulls -- er, relative bulls -- to claim that the European Central Bank has taken the appropriate measures to facilitate deleveraging at the consumer, bank, and sovereign levels, and that the government, though faced with a tough task, is striking the right chord on austerity.

All told, I expect one refrain to be unanimous: Amid this uncertain environment, quality companies rule. Those with battle-proven moats -- steady and recurring cash flows, durable franchises, need-to-have goods, and rock-solid balance sheets -- are best able to survive, prosper, and capitalize on opportunities before them in a shaky economy. Most importantly, they're the surest ways to safeguard your capital.

Keep your eyes on Fool.com from May 5 to 7, when we'll offer our favorite takeaways from the VIC, Berkshire, and whatever random conversations we end up in. And if you just can't fight the bug, you can join us at the VIC -- the promo code "S12FOOL" will earn you $400 off the cost of admission. And if that's not sufficient motivation, consider this: It will be a rare opportunity to see a Fool in a suit.

Michael Olsen owns shares of Ultra Petroleum. The Motley Fool owns shares of Ultra Petroleum, Oracle, Apple, Berkshire Hathaway, and Google. Motley Fool newsletter services have recommended buying shares of Apple, Halliburton, Berkshire Hathaway, Google, and Ultra Petroleum, as well as creating a bull call spread position in Apple. The Motley Fool has a disclosure policy.
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  • Report this Comment On April 24, 2012, at 5:18 PM, DJDynamicNC wrote:

    "Can Spain be saved from itself, and will its troubles precipitate a full-on eurozone credit crisis with disastrous consequences?"

    The question is actually "can Spain be saved from the austerity-mongers at the ECB?"

    The ECB refuses to loan unless Spain accepts crippling cuts that decimate its economy and destroy any shot at growth, all in the name of "restoring confidence." Then, once the economy has been tanked and the GDP shrinks yet again, people are surprised that investors don't want anything to do with the bonds and call for... more cuts! To "restore confidence." They don't need confidence. They need their own currency with which to enact stimulus, like the (now solvent and successful) Swedish government, or a central bank that acts like a central bank instead of an unsympathetic landlord.

    "Yes, doctor, clearly this patient has not recovered because you have not applied enough leeches."

  • Report this Comment On April 25, 2012, at 10:14 AM, TMFGuardian wrote:

    Great article, Mike.

    But you may want to tell Jeff Gundlach to reconsider going short Apple :)

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