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Following a very philosophical first day, Fool colleague Joe Magyer and I returned to the Value Investing Congress eager to hear more macro views and general investment approaches. While the burgers at the nearby Shake Shack looked mighty appealing, we certainly hungered for more stock picks. We didn't walk away disappointed on either front.
Do you take doom with your coffee?
The Congressional Budget Office's projected deficit inputs? "Utopian." Assumptions by Moody's (NYSE: MCO ) and other ratings agencies regarding heavily indebted nations' future interest rates? "More than laughable." These were the conclusions of Kyle Bass, who doesn't mince words when it comes to the post-credit crisis sovereign debt flood that's sweeping the globe.
Bass arguably outdid the previous day's bear, Michael Lewitt, in terms of both gloomy warnings -- Japan can't self-finance over the next few years and will have to default on its debt -- and supporting material, which included a deluge of charts that are unfortunately not being posted to the Web.
Prepare for takeoff
Tackling a completely different subject was Mohnish Pabrai, who gave us a great interview two years ago in the midst of the credit crisis. Pabrai has taken a cue from Dr. Atul Gawande, who has written extensively on the improvements in health-care outcomes achieved with the review of a simple checklist. The same procedure employed so effectively by pilots and nurses can be employed by investors, too, as Pabrai is discovering firsthand.
At present, Pabrai's investment checklist (i.e. risks to consider before initiating a position) stretches to some 97 items that span the major categories of leverage, management/ownership, moats, and valuation. That might sound like an unwieldy tool, but Pabrai says it generally takes no more than 10 to 15 minutes to run a new stock through the checklist. He notes that no stock zips through with zero issues, but a preponderance of red flags makes the decision to pass on an otherwise interesting investment much easier.
Pabrai noted that while future investing mistakes are inevitable, his error rate since using the checklist system is 0%. While this system has made him more conservative, he pointed out that the math of avoiding losses works wonderfully.
The long and short of it
The next presenters were two of the most impressive and convincing speakers of the entire Congress.
First, Michael Kao presented General Motors. Kao is an expert in convertible securities, which are weird debt/equity hybrids that are frequently mispriced, inviting arbitrage opportunities. Naturally, Kao has gravitated toward the GM convertibles -- and I'm not talking about the 2011 Camaro.
Rather than making a pure bet on GM outperforming, Kao's trade is paired with a short on Ford Motor (NYSE: F ) shares, whose valuation he views as relatively rich. Specifically, Ford's enterprise value exceeds GM's by some $20 billion, despite the fact that GM is the larger company by sales, is emerging from bankruptcy with a much-improved cost structure, and has a "crown jewel" in its international business.
David Einhorn has made some high-profile short cases in the past, and even wrote a fantastic book about one of them. He did not disappoint with his presentation on The St. Joe Company (NYSE: JOE ) . The slide deck (which you can find on the Web) was a tour de force, weighing in at 139 slides. Somehow Einhorn got through it all before lunchtime and had many in the audience laughing at the absurdity of it all, while others scrambled to issue sell instructions to their traders back at the office.
This is not the first time Einhorn has aired his views on St. Joe. At the Ira Sohn conference in May 2007, he argued that the shares, then trading around $60, were worth perhaps $15. Now he says management could get perhaps $7 to $10 per share if they sold the company today. Because the shares trade far above that level, Einhorn contends that the most likely path is for the company -- whose real estate developments have not generated positive returns for itself -- to continue burning cash and selling off low-value rural land in the northern Florida panhandle. In his view, that would make the company worth zero in 10 to 15 years.
Fortress firms and Steller's sea cow
Alexander Roepers scratched our stock pitch itch with a trio of long ideas including ITT (NYSE: ITT ) and Owens-Illinois (NYSE: OI ) . The former is a conglomerate trading at a big discount to its sum-of-the-parts value ($60 or more, according to Roepers), while the latter is a glass container manufacturer with an "impenetrable" competitive position -- given the local monopoly/duopoly nature of the industry -- combined with Owens' global network and long-term relationships.
Carlo Cannell followed with a presentation on companies bound for extinction, which is all of them, when measured on an evolutionary time scale. This was easily the most off-the-cuff and funniest presentation of the Congress. As far as companies whose days are numbered, Cannell mentioned postage meter company Pitney Bowes (NYSE: PBI ) and high-cost, uncompetitive European solar stocks. He views the entire green-energy field as ripe for shorting, and I don't disagree.
The conference wouldn't be complete without a word from T2 Partners, the folks who put this event together every year. A T2 presentation, in turn, wouldn't be complete without an update on the housing market. Using stats from Amherst Securities, Whitney Tilson suggested that 20% of single-family mortgages are either in or at risk of default. He thinks that "foreclosure-gate" could actually be a good thing for the country, in that we could see more genuine modifications and short sales, rather than an avalanche of foreclosures, which are the worst possible outcome in a distressed housing market.
As for stock ideas, the T2 guys threw out two: oil spill whipping boy BP (NYSE: BP ) and a complex merger situation involving blank-check company Liberty Acquisition Holdings, and a highly indebted European media company. The guys were certainly right-on in their BP call earlier this year, and it remains about a 10% position in their fund, reflecting high conviction in the company closing the massive valuation gap between itself and peers like ConocoPhillips.