Value Investing Congress Blog

The afternoon session was chock full of practical value investment techniques, applicable to real situations. Here are just a few of the highlights:

Washington Mutual
Having already stated their belief that the mortgage crisis is not over yet, Whitney Tilson and Glenn Tongue presented a negative view of WAMU (they have a short position):
• The concern centered on HELOC exposure (home equity lines of credit), junior liens, and option Arms. In the case of option ARMs, 62% of exposure came from two of the most challenged markets: California (49%) and Florida (13%).
• Tongue expected the company to lose $5 per share this year
• Significant shareholder dilution occurred when the company issued $7 billion in stock in April
• Tongue stressed the importance of doing your homework -and having a working model to assess true exposures -when taking a position (either long or short) in a company such as WAMU.

Retailers:
Tilson suggested that although now is not the appropriate time to be long a basket of retailers given the current economic situation, there are some bargains out there. He presented a bullish (and compelling) case for Target (TGT):
• buying back stock ($10 billion buyback program)
• selling credit card ops—(interestingly enough, the news of the sale of 47% of this business to JP Morgan for $3.6 billion broke during the conference)
• Owns a large percentage of its land and buildings—real estate alone may be worth 70-80% of current market cap
• Potential $5.00/share eps 3 years out (stock currently $53)

Tongue presented the bullish case for Sears Holdings (SHLD):
• Repurchased 33 million shares the past 3 years
• Sum of the parts potentially worth a great deal more than current market cap ($13 billion)
• Real estate alone- 250 million square feet- currently being valued at less than $10/sq ft assuming conservative $11 billion valuation of business units
• Trading at significant discount to current $100 price

Other Highlights:
• Bearish on Allied Capital (ALD -short position)—company surrounded by controversy, and may be a house of cards ready to fall.
• Bearish on Crocs (CROX- short position)—which may be a textbook version of a fad stock—explosive growth, unsustainable margins, and no competitive advantage, all of which is a road to nowhere.

Tilson and Tongue put on a great seminar—well worth the price of admission, and highly recommended to anyone who wants to learn practical applications of value investing taught by successful professionals who practice the art each and every day.