Value Investing: Distilled

If Warren Buffett, Charlie Munger, and the Berkshire Hathaway (NYSE: BRK-B  ) annual meeting are the main dish in Omaha, the Value Investing Congress is that delightfully indulgent dessert -- with a foodie twist. Investors from far and wide flock to Omaha to hear the sage's words of wisdom, his thoughts on life, and Munger's sometimes cynical, often thoughtful musings on what's wrong with the world. The hardcore among them stick around for the Value Investing Congress, where this generation's elite value managers share their thoughts on how the value sausage is packed.

This year's cast is jammed full of some of the value investing community's best and brightest: David Nierenberg of D3 Family Funds; Keith Trauner and Larry Pitkowsky of GoodHaven Capital (formerly of Fairholme Capital); Tom Russo of Gardner Russo & Gardner; and Bruce Zessar and Matthew Swaim of Advisory Research.

What follows are the ideas, personalities, and witticisms that I found compelling.

  • Gassed out?: David Nierenberg's D3 Family Funds is so named for its approach: "David's Dirty Dogs." I've written before that natural gas is cheap beyond sustainable measure, and David's investment idea riffs on the same the me: He and partner Cara Jacobsen picked Superior Energy Services (NYSE: SPN  ) , whose shares have been taking a lashing as natural gas inventories have ballooned and rigs have exited gas-focused shale plays. In the process, pricing has taken a huge hit.

    David, for his part, sees a company that's unlikely to be affected so dramatically. Superior has relocated much of its pressure-pumping capacity, which makes up 18% of its revenues, to liquids-rich shales. It further stands to benefit from several secular trends, including increased deepwater and international exploration, higher service intensity per well, and the need for water management services in shales.

    I'm not altogether sure pricing won't suffer, or that earnings won't get hit. Services companies face a learning curve in new shales, and according to oil service biggies Schlumberger and Halliburton, capacity is building and pricing pressure is mounting in liquids-rich basins. But at 7.3 times analysts' estimated 2012 earnings, Superior's shares already have more than a little pain priced in, and the company's long-term prospects are anything but dull.

  • Seek stress, find money: Keith Trauner and Larry Pitkowsky espouse an investment philosophy close to my heart: They seek stress. They look for companies whose long-term cash-generating ability is obscured by some near-term ugly -- and ways that might remedy itself. Trauner captured it best: "You have to really be kind of a masochist to like this business." The two perfected their craft in 10 years of working at Fairholme Capital alongside Bruce Berkowitz.

    Their ugly of choice nowadays is the insurance business. I can understand why: The industry's endured seven years' worth of pricing weakness, low interest rates have killed investment returns, and many catastrophes have weighed on results. I'll add one more to the mix: RMS 11, a new catastrophe model that predicts higher incidence and severity of natural disaster -- and would require insurers to reserve at higher rates.

    Taking a longer view, these conditions are unsustainable without some improvement in the underwriting market's seemingly dour state. Trauner and Pitkowsky like Alleghany (NYSE: Y  ) and White Mountains (NYSE: WTM  ) for their conservative underwriting cultures, proven investment acumen, and compelling valuations -- both sell near book value. I'll throw two more into the mix: W.R. Berkley and Aon. And with pricing recently turning up, they appear primed to outperform.

  • Of snowfall, dividends, and repurchases: Bruce Zessar and Matthew Swaim don't mean to play games. They're managing partners at Advisory Research, a $9 billion shop focused on two things: investing in good businesses cheap, and effective capital allocation. They don't hesitate to get activist on management if conditions warrant. Their methods are rooted in a simple, empirically sound belief -- when money's smartly allocated, shareholders win. They advocate that managers should balance investment in the business with a hearty dose of dividends, and when shares get cheap, repurchases.

    And right now, they see a change of weather at Vail Resorts (NYSE: MTN  ) , citing the company's renewed focus on shareholder repurchases, dividends, and the most economically minded capital expenditures. As operator of seven of the world's most revered properties -- including Vail, Breckenridge, and Tahoe -- the company's a veritable cash cow with irreplaceable assets. I've long followed and appreciated Vail's casino-like qualities: Once patrons are in, they spend a lot on ancillary services. And after a historically warm winter, the shares trade at just 14 times my estimate of free cash flow (after netting growth-related expenditures). For a business of its quality, I'm intrigued.

We'll be back with the details of Day 2 tomorrow, but if you're finding yourself jealous, hankering for value, or otherwise preoccupied, know that you too can be a part of the fun. The Value Investing Congress comes to New York City in October, and interested Fools can get in for half-price. Get the details here, and be sure to enter discount code NY12FOOL.

Mike Olsen owns shares of Aon. The Motley Fool owns shares of W.R. Berkley, Berkshire Hathaway, White Mountains Insurance Group, and Aon. Motley Fool newsletter services have recommended buying shares of Aon, Alleghany, and Berkshire Hathaway. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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