Value Investing Congress Blog

Last Month at the 3rd Annual Value Investing Congress West in Pasadena,  Atticus Lowe and Lance Helfert from West Coast Asset Management presented a compelling case for relatively underfollowed natural gas company Canadian Superior Energy.  They suggested that the company’s recent discovery of an offshore gas field near Trinidad was the potential catalyst to drive SNG shares much higher.

Since their presentation, Canadian Superior shares are up nearly 35% to $4.22 (June 6, 2008).  On May 20^th, the company announced a collaborative effort with Global LNG Inc on the Liberty Natural Gas Transmission Project, a $550 million effort to transport liquid natural gas from the Trinidad fields through a deepwater pipeline that will end 15 miles off the New Jersey coast. Canadian Superior expects this project to deliver up to 2.4 billion cubic feet of natural gas by 2011.

Canadian Superior Energy also recently reported first quarter earnings. Revenues from petroleum and natural gas sales were up 27% from the same quarter last year; earnings were ($.01) per share vs. breakeven last year.

With the price of natural gas up nearly 50% so far in 2008, to $12.47 per million BTU’s (July Futures price), and great prospects in Trinidad, this is a company to watch.  However, as Lowe and Helfert pointed out, SNG’s success is not dependent on soaring natural gas prices.  With a market cap just north of $625 million, the company is currently covered by just one analyst according to Bloomberg.  More positive news from the Trinidad fields will likely change that.

 Jonathan M. Heller, CFA

*The author has a position in Canadian Superior Energy

The 3rd annual Value Investing Congress West kicked off today with an introduction from co-founder John L. Schwartz, MD. Each presenter discussed their investment philosophy, addressed current market issues, and then highlighted specific investment ideas.

First up were Mark Sellers and Victor Fasciani from Sellers Capital LLC, whose Sellers Capital Fund has booked an impressive 36% annualized (net of fess) since inception. Seller’s runs a highly concentrated portfolio of companies with what they believe to be “wide moats”.

Sellers and Fasciani presented the case for Vulcan Materials (VMC, $66):
• Demand for aggregate materials (asphalt related) will grow as US infrastructure (bridges, roads, etc) are in need of repair.
• The aggregate industry suffers from the “Not in my back yard” syndrome, so new mines are not being opened quickly enough. Plus, it takes five years, an onerous amount of permits, and $100 million to open a new mine.
• With growing demand for aggregate material, and desperate needs for infrastructure improvements in the US, Vulcan is well positioned to be a beneficiary.
• Sellers and Fasciani believe the stock is worth at least $90.

Next up was Jeff Bronchick from Reed Conner & Birdwell, LLC. Bronchick seems never afraid to speak his mind, which makes him a very entertaining speaker. Among other things, Bronchick brought forth the notion that value investing is far from an exact science, and while it is successful over time, it does not work in every time period. On the subject of the credit crisis, Bronchick suggested that the situation may not be as dire as it appears, and took aim at industry execs that still have their jobs despite terrible mismanagement.

Bronchick’s main focus was AIG:
• Company is unfairly tarnished, and has been punished by headline risk
• Has never been cheaper at 8 times “depressed” earnings
• Has $13 billion in excess capital
• Potential write-offs are very small given the company’s large asset base
• Company has plenty of staying power

Bronchick also addressed GE, suggesting that management needs to, among other things, drop quarterly guidance, stop selling businesses at book value, then paying dearly for other businesses, and buy back stock and/ or increase the dividend.

Jonathan M. Heller, CFA
*Author does not own any securities mentioned

I’m back in Southern California for my second Value Investing Congress West (May 6th and & 7th), and this year I’m also attending the Pre-Congress Workshop, An Advanced Seminar on Value Investing, taught by T2 Partners’ Whitney Tilson and Glen Tongue.

As a CFA Charterholder with an MBA, a small financial advisory practice, and 20 years in the business, I’ve been in my share of classrooms over the years.

Tilson and Tongue’s detailed, fast moving, but equally understandable instruction style make this pre-Value Investing Congress session well worth attending.

Morning Highlights McDonald’s
An excellent case study on the fate of McDonald’s (MCD) following the company’s 2003 bottom opened today’s session. Tongue recounted a previous analysis of the company which argues against viewing McDonald’s as merely a quick service restaurant company, preferring to characterize it as a Brand business (including real estate and franchises) and a restaurant company with more than 8000 company owned stores. This is the way that we, as value investors, are trained to think. A little reinforcement here is never a bad thing.

The restaurant business is much more complicated than one might think, and Tongue and Tilson’s insights on the industry as whole, and a few of the players, were extremely valuable.

Berkshire Hathaway
Tilson and Tongue are still unapologetic Berkshire proponents, and put the current intrinsic value of the A shares at nearly $180,000 per share, a 40% premium to the current price. (Interestingly enough, the audience at today’s session was polled, and at least half were at last week’s Berkshire annual meeting!)

The Mortgage Crisis
For his part, Tilson believes that we have not yet seen the worst of the mortgage crisis. His extremely detailed presentation (“An Overview of the Mortgage Crisis and the Structure of CDO’s”) paints a very bleak picture, suggesting that all things housing and mortgage related will get much worse before improving. Tongue and Tilson put their money where their mouth is with short positions in monoline insurers AMBAC and MBIA, and a long position in Fairfax Holdings (which has gained and may gain further in the mortgage crisis due to its credit default swap holdings).

Jonathan M. Heller, CFA