Value Investing Congress Blog

Lee Cooperman at the 3rd Annual New York Value Investing Congress reported by Marcelo Lima

Lee Cooperman of Omega Advisors gave a great talk on Henry Singleton, the CEO of Teledyne Corporation.

According to John Train’s The Money Masters, as quoted by Lee, “Buffett considers that Henry Singleton of Teledyne has the best operating and capital deployment record in American Business. […] The failure of business schools to study men like Singleton is a crime, he says. Instead, they insist on holding up as models executives cut from a McKinsey & Company cookie cutter.”For a long time, while Teledyne’s stock was inflated, Singleton used it to acquire other companies – about 130 of them. When value caught up with price he changed course and pioneered stock repurchases, shrinking his capital from 40m shares to 12m. Singleton also pioneered the spinoff as a value-enhancing exercise for shareholders. The result is a tremendous track record of increase in intrinsic value per share, one that must be studied by all who want to learn about efficient capital allocation.For those interested in learning more, Lee recommended the book Distant Force by George Roberts (the word Teledyne is an amalgam of “distance” and “force” in Greek).

Lee mentioned that Jim and Larry Tisch of Loews have a great record of doing stock repurchases.

Towards the end of his talk, Lee recited a litany of statistics to drive home the point that America is on sale.In March of 2000 the S&P was 1527. It’s 1430 today. So it’s declined 6% in 7 years. Yet in these 7 years, the long term bond rate dropped 31% from 6.2% to 4%, gold is up 175%, silver is up 181%, copper is up 276%, wheat is up 280%, crude oil is up 250%, the median home price of 7 years ago is up 40%, the Case-Schiller home price index is up 93%, the Euro is up 50% against dollar and the British Pound is up 29% against dollar – you’re going to see a lot of strategic activity coming to the west.

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.