Value Investing Congress Blog

Bill Ackman, Pershing Square, LP

Hedge Fund legend Ackman laid out an interesting case for Wachovia. While many investors may believe that this company is dead money, Ackman suggested that there’s a lot more to Wachovia than meets the eye.

Ackman’s analysis broke Wachovia into several parts, and put a valuation range on each part. Ackman’s analysis was thought provoking, and well constructed. When all was said and done, Ackman came up with a total value for Wachovia shares of between $7 and $19 per share.

Ackman’s sum of the parts valuation was intriguing. Of course, Wachovia’s fate is still up in the air between Citi’s initial bid and Wells Fargo’s subsequent offer, but Ackman, for one has purchased a lot of Wachovia shares—180 million in recent weeks, and currently owns about 8%.

Atticus Lowe and Lance Helfert , West Coast Asset Management

Lowe and Helfert run very concentrated portfolios, and look for: Margin of safety, catalyst, management quality and strong cashflow.

Lowe and Helfert also espoused the following

• Prioritize the margin of safety—i.e., what’s the worst that can happen?
• Base investment decisions on what you see, not on what you hear
• Good ideas are hard to come by, so bet big when the odds are in your favor

One of Lowe and Helfert’s ideas was energy company ATP Oil and Gas (ATP)

• $475 million mkt cap
• Enterprise Value: $1.8 billion
• Selling off $600 million in assets
• Estimated 2009 CF: $700 million
• Oil: 200 million barrels
• Currently trading at $12.50, could be worth $75-$88

Jonathan Heller, CFA

Disclaimer: I have no positions in any of the companies mentioned

Vitaly Katsenelson- portfolio manager with Investment Management Associates and author of Active Value Investing, laid out his rationale for suggesting that markets are currently range-bound, and will continue to be so for the foreseeable future:

• Range Bound Markets are caused by valuation
• Interest rates are secondary
• Profit margins are near all time highs, and will revert
• As margins decline, the “E” in P/E will also drop, P/Es will rise
• Profit margins in most sectors will decrease
• Stocks are not currently cheap
• In range bound markets, careful stock selection is paramount

Katsenelson’s favorite idea is clothing retailer Jos A. Bank (JOSB)

• $420 million mkt cap, no debt, $80 million in cash
• Great service, quality at a reasonable price
• Wall Street hates the stock because of low inventory turnover, and the fact that management communicates terribly
• Despite pulling back considerably, returns on capital, and net margins are still rising to historic levels
• Currently trading around $25.50, Katsenelson believes the stock could be worth $41-$53

Next up were Atticus Lowe and Lance Helfert from West Coast Asset Management who run very concentrated portfolios, and look for the following: Margin of safety, catalyst, management quality and strong cashflow. They caution against the classic value trap, and getting sucked into ideas that appear cheap, but are actually facing obsolescence. They suggest that value investors take it upon themselves to:
• Observe like-minded investors- see what the managers you respect are buying
• Attend special events for ideas and information (trade shows, Value Investing Congress, etc)
• Observe businesses first hand—speak to suppliers, employees, management
• Use stock screens

Lowe and Helfert’s best idea is gas company Canadian Superior Energy (SNG)

• $500 million mkt cap
• Western Canada and Trinidad operations worth $500 million alone
• Catalyst is recent discovery in Trinidad—80,000 acres, offshore natural gas field, which, if successful may put the company value from $10-$15/share (currently $3.50).
• British Gas experience and involvement will help
• Value not dependent on soaring natural gas prices

Jonathan M. Heller, CFA

Noven Pharmaceuticals (Nasdaq: NOVN) recently made significant changes to its board of directors and senior management. The company hired a new CFO, accepted the resignation of its long time Chairman and CEO Robert C. Strauss, and appointed Wayne P. Yetter as its new Chairman. We applaud these actions and believe a tremendous amount of value will come from the changes.

The Chairman and CEO roles are now separated, and Mr. Yetter has an outstanding reputation and track record. He is the former CEO of Novartis Pharmaceuticals and Astra Merck, and also served as the COO of IMS Health, all large and successful companies. Interestingly, Mr. Yetter was the CEO of Novartis at the time it established the Novogyne joint venture with Noven. For a company with an enterprise value of only $250 million, Noven has an impressive leader at the helm.

Noven has appointed Jeffrey F. Eisenberg, Senior VP of Strategic Alliances, as Interim CEO and expects to announce a new CEO shortly. We believe that a well recognized industry leader with a proven track record will be appointed. Noven presents an outstanding opportunity for a top notch executive to take charge of a profitable company with a very flexible balance sheet, at a time when its stock is extremely depressed and its opportunities are abundant. In our opinion, prior management did not aggressively exploit Noven’s drug delivery platform or utilize its overcapitalized balance sheet.

The company has best-in-class drug delivery technology and a deep pipeline of products – both proprietary and with market leading partners – in various stages of development. In addition, Noven’s strengths play into the key challenges faced by Big Pharma today. Its patented Dot-Matrix technology differentiates products and extends patent life, while requiring a short timeframe for regulatory approval and a relatively small amount of development capital. In addition, Noven has outstanding proof of concept via its Vivelle-Dot patch for Estrogen Therapy and its Daytrana patch for ADHD. Both are market leading products with no close competitors.

We see tremendous value in Noven, which should become apparent to the market as new products are approved and a new management direction takes hold. We believe Noven’s 49% ownership of its Novogyne joint venture alone is worth 40% more than its current enterprise value, and that does not attribute any value to its four additional approved products or its robust product development pipeline. At present, we believe Noven’s stock is selling for $0.38 on the dollar. A significant share repurchase would be extremely accretive, and the pursuit of strategic alternatives would likely catapult the stock. Regardless of the means, we are confident that the gap between Noven’s share price and its intrinsic value will be closed over the long term.

Atticus Lowe & Lance Helfert at the 3rd Annual New York Value Investing Congress reported by Marcelo Lima.

Atticus Lowe & Lance Helfert of West Coast Asset Management began their talk with a list of 10 signs of a strong company:

1. A simple business model – Dell vs. Wrigley
• Understandable, focused
2. A wide-moat competitive advantage – Cisco Systems vs. Microsoft
• Barriers to entry, pricing & buying power, sustainability
3. Recurring revenue – ADP vs. Toll Brothers
• Long-term contracts, repeat clients (razor blades)
4. Low inventory risk – Starbucks vs. Circuit City
• Don’t get stuck with inventory – quick turnover
5. Alignment of interest – National Home Health Care vs. ATP Oil & Gas
• Ownership, motivations, per share value, compensation
6. A healthy culture – General Electric vs. Johnson & Johnson
• Ruthless vs. selfless, ethical, lead by example
7. A flat organizational structure – Kodak vs. Contango Oil
• Fewer layers better, lean environment, close to customer
8. Low reinvention risk – Apple vs. Tootsie Roll
• Product life cycle, predictable, hit or miss, uncertainty
9. Low capital requirements – General Motors vs. Google
• Flexibility, resilience, generate cash vs. consume
10. Favorable demographics – Tribune vs. Angiotech
• Population characteristics – digital, baby boomers

They presented Noven Pharmaceuticals, of which they own 14%. Noven has a patented drug patch – a proven concept – which is much smaller than previous patches, and can administer a huge variety of drugs in a less intrusive way.

The company’s enterprise value is $270m, which is particularly attractive given that aside from their product portfolio and pipeline, there’s a JV with Novartis which alone is valued by WCAM at approximately $350m.

Overall, they believe a base case for the stock is $21.60 per share with potential to reach $30.80.

Marcelo Lima is a securities analyst for the Flexor Fund, at Miami-based Horn Eichenwald Investments. He focuses on running a concentrated value-oriented portfolio.