Day 2 at the VIC: Stock Ideas Galore

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.

Wrapping up
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.

ITT and Moody's are Motley Fool Inside Value selections. Ford and Moody's are Motley Fool Stock Advisor picks. Motley Fool Options has recommended writing covered calls on Moody's. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Toby Shute doesn't have a position in any company mentioned. Check out his CAPS profile or follow his articles using Twitter or RSS. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.


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  • Report this Comment On October 14, 2010, at 2:47 PM, gakushi wrote:

    After reading Einhorn’s presentation, I have a couple of points to make.

    A) What Einhorn is implicitly telling us how much JOE is worth?

    The presentation is focused on total acreage of 6,950 (= 4170 (RiverTown) + 762 (SummerCamp) + 2020 (WindMark) see P106). On P122, the total what-we-can-see value is 38.7M. If we take 38.7M and divided it by the total acreage of 6952 we get $5566 per acreage.

    BTW, Einhorn only included WindMark II on P122. This is because he used the number from P112. BTW WindMark II is only about half of the total WindMark, see P104. And the the source of P40,67,71, & 89 are from 10-K not from 10-Q.

    According to P30, that JOE has 536,000 of Timberland or Rural Land. However, it happens to be that most of them are within 15miles from the beach. If you take a look at P6 of the latest investor Presentation http://files.shareholder.com/downloads/JOE/1037019379x0x3569... you will also see miles of beaches and water front land are still in JOEs holding. Want to know how much a piece of beachfront can be sold at? See P73 of Einhorn’s presentation.

    Let’s say we use the $5566 per acreage (derived from Einhorn’s total what-we-can-see number on P122) times it by 536,000, we get 2.98Billion. Divide 2.98Billion by 92Million shares, we get $32.3 per share.

    In conclusion, Even using Einhorn’s worse numbers we get a per share price of JOE at $32.3

    B) About Impairment.

    Let’s say I agree with Einhorn that we should write down say $242Million (= 280M – 38M) according to P122. In this case, shouldn’t we also update the value of the rest of the land holdings on JOE’s book?

    Let’s say we again use the $5566 per acreage (derived from Einhorn’s total what-we-can-see number on P122) times it by 536,000, we get 2.98Billion which is more than three times higher then the current book value.

    In addition, impairment is just an accounting technique which does not affect JOE cash flow wise.

    C) Burning through cash?

    JOE is not burning through cash. In fact, JOE’s free cash flows for TTM, 09, 08 are $18M, $48M, $46M respectively. As Bruce Berkowitz put it: “You can only spend the cash.”

    In fact, according to Morningstar, “St. Joe reduced its employee base by nearly 90% since real estate's peak in late 2005, exiting noncore businesses in hospitality services, homebuilding, construction, and development. The firm has also shrunk its regional footprint, closing or selling operations in ancillary downstate areas like Tampa and Orlando. St. Joe now boasts a lean staff of just 140 and an intense singular focus on developing its major regional land holdings, a major positive development compared to its prior, more diverse endeavors.”

    C) Conclusion

    Over all I don’t think Einhorn did a complete job on evaluating the company. After - as he claimed - looking into the matter for the pass six years, one would expect he came up with a detailed, complete section by section evaluation of JOE’s holding. In stead he just focused on 1.2% (= (4170 (RiverTown) + 762 (SummerCamp) + 2020 (WindMark) )/ 577,000 ) of JOE’s land. I am wondering if Einhorn is not as intelligent as we think he is or Einhorn intended for something else.

    Good lucking in investing!

    gigakushi@yahoo.com

  • Report this Comment On October 14, 2010, at 9:04 PM, gakushi wrote:

    After reading Einhorn’s presentation, I have a couple of points to make.

    A) What Einhorn is implicitly telling us how much JOE is worth?

    Einhorn’s presentation is focused on total acreage of 6,950 (= 4170 (RiverTown) + 762 (SummerCamp) + 2020 (WindMark) see P106) which BTW, is only 1.2% (= (4170 (RiverTown) + 762 (SummerCamp) + 2020 (WindMark) )/ 577,000 ) of JOE’s total land holding. On P122, the total what-we-can-see value is 38.7M. If we take 38.7M and divided it by the total acreage of 6952 we get $5566 per acreage. Please keep this number $5566 in mind as I will refer to it later in my analysis. Also remember that $5566 is derived from Einhorn’s presentation. I did not invent it.

    BTW, Einhorn only included WindMark II on P122. This is because he used the number from P112. BTW WindMark II is only about half of the total WindMark, see P104. And the the source of P40,67,71, & 89 are from 10-K not from 10-Q.

    According to P30, that JOE has 536,000 of Timberland or Rural Land. However, it happens to be that most of them are within 15miles from the beach. If you take a look at P6 of the latest investor Presentation http://files.shareholder.com/downloads/JOE/1037019379x0x3569... you will also see miles of beaches and water front land are still in JOEs holding. Want to know how much a piece of beachfront can be sold at? See P73 of Einhorn’s presentation.

    Let’s say we use the $5566 per acreage (derived from Einhorn’s total what-we-can-see number on P122) times it by 536,000, we get 2.98Billion. Divide 2.98Billion by 92Million shares, we get $32.3 per share.

    In conclusion, Even using Einhorn’s worse numbers we get a per share price of JOE at $32.3

    B) About Impairment.

    Let’s say I agree with Einhorn that we should write down say $242Million (= 280M – 38M) according to P122. In this case, shouldn’t we also update the value of the rest of the land holdings on JOE’s book?

    Let’s say we again use the $5566 per acreage (derived from Einhorn’s total what-we-can-see number on P122) times it by 536,000, we get 2.98Billion which is more than three times higher then the current book value.

    In addition, impairment is just an accounting technique which does not affect JOE cash flow wise.

    C) Burning through cash?

    JOE is not burning through cash. In fact, JOE’s free cash flows for TTM, 09, 08 are $18M, $48M, $46M respectively. As Bruce Berkowitz puts it: “You can only spent cash.”

    In fact, according to Morningstar, “St. Joe reduced its employee base by nearly 90% since real estate's peak in late 2005, exiting noncore businesses in hospitality services, homebuilding, construction, and development. The firm has also shrunk its regional footprint, closing or selling operations in ancillary downstate areas like Tampa and Orlando. St. Joe now boasts a lean staff of just 140 and an intense singular focus on developing its major regional land holdings, a major positive development compared to its prior, more diverse endeavors.”

    D) About the history of JOE’s land sales

    The land JOE sold during 2000-2009 was not strategic to JOE’s long term objectives. We should not simply use the price on P28 to calculate the rest of JOE’s land holding.

    Einhorn spent very little of his presentation on 98.8% of JOE’s land holding. He simply assumes the price to be $1818 per acre according to P28.

    On the other hand, he went to great detail to talk about 1.2% of the JOE’s land holding. Yet he evaluated them at a much higher price of $5566 per acre. Once again as I stated above $5566 is Einhorn’s price. I did not invent it (see A) above).

    I just use it to make a point. I use Einhorn’s $5566 to time 536,000, to get 2.98Billion. So, you see Einhorn is contradicting himself.

    If you really believe that the JOE sold all its best land at $1818, you can go to the map on P6 in http://files.shareholder.com/downloads/JOE/1037019379x0x3569... to see for yourself and estimate the miles of beachfront land for yourself. In fact, what left is JOE’s prime real estate.

    If you really believe that the land on the map is just Timberland and Rural Land, you can go to the map on P11 in http://files.shareholder.com/downloads/JOE/1037273919x0x3146.... Ask yourself why people are building roads in the midst of every piece of JOE’s land.

    E) Conclusion

    Over all I don’t think Einhorn did a complete job on evaluating the company. After - as he claimed - looking into the matter for the pass six years, one would expect he came up with a detailed, complete section by section evaluation of JOE’s holding. In stead he just focused on 1.2% (= (4170 (RiverTown) + 762 (SummerCamp) + 2020 (WindMark) )/ 577,000 ) of JOE’s land. I am wondering if Einhorn is not as intelligent as we think he is or Einhorn intended for something else.

    Good lucking in investing!

    gigakushi@yahoo.com

  • Report this Comment On October 15, 2010, at 12:05 PM, prime99 wrote:

    September’s CPI figures show reasonable price stability, which is good news for consumers. These figures along with September Retail sales data reflect that consumers are taking advantage of the current situation. As long as CPI is maintained through October and Retail Sales continue, stocks like PG and V should do well.

    PG vs. CPI- http://www.hiddenlevers.com/hl/u?EEDED

    PG vs. Retail Sales- http://www.hiddenlevers.com/hl/u?EEDED

    Use the HiddenLevers screener to discover other stocks to play on the Retail Sales and CPI trend. - http://www.hiddenlevers.com/hl/screener

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