Value Investing Congress Blog

Whitney Tilson and Glenn Tongue move on from their presentation on the housing bubble and credit crisis to their current stock picks. They present on EchoStar (SATS), Fairfax Financial (FFH), and Berkshire Hathaway (BRKa).

EchoStar

EchoStar Corp. is a spinoff of EchoStar Communications (DISH). They make set-top boxes, but also includes Slingbox. Also has satelites/broadcast business.

Sum of the parts analysis

Cash: 1.1 billion
Satellites/Broadcast: 1.2
$2.3 billion

Set-top box: 1.6-2.4
Technology (slingbox) 0.4
Investments 0.3-0.5
Total $2.3-3.3 billion (25.60-36.60/share)

EchoStar not buying back stock because they are seeing better deals for their stock.

Fairfax Financial

T2 use to be short Fairfax Financial when they were so weak one hurricane could take them out. Now Tilson is long as the company has strengthened. Fairfax Financial CDS portfolio has paid off nicely.

Should trade 1.3 to 1.5 book. Right now trading at around 1.25 book, but they have added 574.5 in realized cash proceeds from selling CDS in the third quarter so adjusted P/B is more like 1.16.

You are getting a great CDS portfolio but there is a high short interest ratio. The company is buying back stock and their behavior does not indicate they are likely to be crooks.

Berkshire Hathaway

T2 estimate of Berkshire Hathaway’s intrinsic value is $157,000/share and forward value of $178,000/share. Berkshire Hathaway is apparently down 5% today.

Questions

Tilson doesn’t believe the Community Reinvestment Act and Fair Housing Act was a major contributor to this problem. Fannie Mae and Freddie Mac were some of the only lenders to maintain standers. Their problem was that they got sucked into increasing leverage too much.

What’s your outlook for consumer exposure? They regret being early. They were long retailers, but short real estate broad index and retail real estate REITs. Therefore, they are not down as bad. They want the best companies in the worse out of favor sectors. They are looking at buybacks being made by retailers. Sears is buying back lots of stock with their cash.

Tongue discusses Target (TGT) thinks they will be a relatively strong company as they survive this crisis. They will loose a year of cash flow but it won’t materially impact the DCF for Target.

Will there be a great bust in municipal bonds? A big question and Tilson doesn’t invest much in bonds. Tongue responses to the analogy of the Great Depression and doesn’t think with the appropriate action we will end up in that position. Will they need a bailout? They will likely get one if they need it. The example here is the California general revenue bond. Tilson expects default rate for municipalities will increase, but not be widespread like a Great Depression.

George
www.fatpitchfinancials.com

Whitney Tilson and Glenn Tongue, co-portfolio managers of T2 Partners, presented on November 29, 2007 at the 3rd Annual New York Value Investing Congress to a standing- room-only crowd at Rose Hall in the Time Warner Center. This link will take you to their presentation, which also argues that Berkshire Hathaway is somewhat undervalued but offers an immense margin of safety. To learn more, click on http://www.valueinvestingcongress.com/download/T2_VIC07.pdf.

On Seeking Professional Help

By Dan Ferris

There’s much documentation to show that most investors – individual and professional alike – fail to adequately appreciate how difficult, and therefore rare, is the production of outsized investment returns.   I don’t want to suggest that you’re crazy to pursue such a goal, but I think most of us – again, individual and professional alike – ought to have no qualms about seeking, as it were, “professional help.”    

Seeking professional help means that, when the public equity markets offer you easy access to a great capital allocator, you should exploit the opportunity.   The names I’m talking about include the folks in Omaha, Loews, Sears Holdings, Leucadia National, Markel, Fairfax Financial Holdings and the one I own, for which I shall advocate forthwith, Alleghany Corporation (NYSE: Y).    

Aside from its well-covered large, successful bets on Burlington Northern and perhaps a dozen big cap energy stocks, Alleghany most recently found a sweet spot in its principal operating business, property and casualty insurance.   Unlike the rest of the property/casualty market right now, pricing in the California workers comp insurance is firming up.  Premiums soared earlier in the decade.   Employers screamed bloody murder.  The state passed sweeping reforms, and premiums fell 60% from 2003 – 2007.    

Today, it’s hard to get a rate cut without a stellar claims record.  One employer that saw a 46% reduction on its 2006 renewal, reports a 9% increase in 2007.   The California Workers’ Compensation Insurance Rating Bureau, a non-profit that tracks claims data, which recommended a double-digit cut last year, recommends a 4.2% increase in workers comp premiums this year.   

Right on cue, in July, Alleghany bought Employers Direct Corporation, one of the top 20 workers comp insurers in California, for $192.5 million.   Capital allocation certainly isn’t about calling insurance market bottoms.  Then again, happy accidents tend to happen to good professional helpers.    

Alleghany can be had today by paying $1 for each $1 of net assets, and 35 cents for all the future earnings and investment gains of chairman John Burns, CEO Weston Hicks, and their future successors.   The price doesn’t discount much certainty that Alleghany will find conservative enough investments that will achieve high enough returns over the long term.   I’m betting it will find them.  It is arguably the cheapest, and not likely the riskiest, of the professional helpers: 

Professional help on sale (multiples of book value)
 

Alleghany’s $4.7 billion of investments (and $3.2 billion market cap) doesn’t have the “bigness” problem they have in Omaha.   And Alleghany will certainly approach its larger pool of choices with its time-honored conservative, risk-averse posture.  The odds are squarely against similar treatment of our capital by most fund managers, whose results look like quackery next to those of our professional helper list.  

Yet, too many people persist in the conviction that they’ll make big returns (which is necessarily born of something other than experience).   This is expensive lunacy, however common a form.  I contend that easy access to good professional help tends to be undervalued at any given moment.  Consider the trillions in mutual and hedge funds doomed never to outperform.  If those investors ever got even a little bit wise, the above list, at a total market cap of $269 billion, is such a tiny drop in the bucket that the list could find itself trading at lofty multiples as lousy returns persist, which they will for the vast majority of market participants.  

 I suspect many stock market participants who felt sane last year feel crazy right now.   Next year and beyond, then, quality professional help might well command a premium price. 

 -Dan Ferris

Ferris Capital Management, LLC is an Oregon registered investment adviser www.ferriscapital.com

FULL DISCLOSURE:  I own or have trading authority over shares of Alleghany.   This should not be construed as an offer to buy or sell securities.