Value Investing Congress West 2008 IV
Ken Shubin Stein, of Spencer Capital, laid out his philosophy, which includes:
• Looking for asymmetric payoffs (limited downside, with much upside)
• Bottom-up fundamental analysis
• A “scientific” research process
• Belief that volatility is the key to successful long term investing
Shubin Stein made an extremely interesting, and often forgotten observation that value investors need the emotional stability to invest and take on more risk during a crisis.
He laid out a very detailed case for his favorite idea, American Express (AXP, $50.96):
• Trading at 14X earnings
• Best credit quality of anyone in the business, with premium customers
• Have successfully shed unrelated business to focus credit card ops
• High ROE (37% in 2007)
• Superior management
• Competitive advantage and long-term growth prospects
• Best service, and reward programs
• #1 in customer satisfaction
• Wide acceptance in US, and internationally
• Should be relatively unscathed by credit crisis
• Should trade at 18-21 times earnings
• Earnings target of $4.50 share in 2011 implies an $89 target price
Robert Hagstrom, portfolio manager of Legg Mason Growth Trust laid out his case that worst of the credit crisis is probably over, and that the markets are functioning much better since the Fed, (and other leaders) acknowledged the seriousness of the credit crunch, and became engaged in trying to address it. (Two rate cuts in 8 days in January, the first of which was between Fed meetings, first time that’s happened since 2001).
Hagstrom labeled the current environment as “Large Cap Growth Heaven”, with declining interest rates, slowing growth, and attractive valuations.
When it came to his favorite idea, Hagstrom was very self effacing: Last year’s best idea was Amazon, and he hit a home run with that pick. This year, it was Yahoo; whose acquisition by Microsoft fell apart in recent days. Hagstrom made light of the misfortune of his timing, but proceeded with his case for Yahoo (YHOO, $25.72):
• YHOO is still growing faster than many believe
• Company now emphasizing innovation over marketing, which bodes well
• Contrary to conventional wisdom, Microsoft needs Yahoo, more than Yahoo needs Microsoft
• Ultimately, this deal will get done
The Value Investing Congress would not be complete without the interesting perspective and style of Carlo Cannell, of Cannell Capital LLC. Cannell presented the relatively unknown (at least in the US) company Hunter Douglas NA (HDG.AS), distributor of high-end shades and blinds:
• Main business throws off a great deal of cash, which feeds a $1billion portfolio of securities
• Business itself is worth close to market cap, essentially buyers get the investment portfolio for free
• Portfolio experiences little to no taxation
• Meanwhile, company pays a 5% dividend
Cannell also broached another interesting topic, that being the proliferation of Chinese companies listing on US exchanges, through reverse mergers. In Cannell’s view, there may be shorting opportunities in some of these names due to corruption, fraud, accounting issues, weak corporate governance.
Jonathan Heller, CFA
*The author does not have positions in any of the securities mentioned.