Lisa Rapuano at the 3rd Annual New York Value Investing Congress reported by Marcelo Lima.
Lisa Rapuano at the 3rd Annual New York Value Investing Congress reported by Marcelo Lima.
Lisa Rapuano of Lane Five Capital Management (formerly a colleague of Bill Miller at the Legg Mason Value Trust) gave a very interesting talk on how growth is underappreciated. The vast majority of the value in an investment lies in the future, so being able to look ahead and forecast is incredibly important.
Lisa doesn’t like to use multiples for her valuation work. Instead, she likes to use a scenario-based probabilistic approach, which essentially involves constructing a number of discounted cash flows using various assumptions – the most likely, which is the base case, and a few optimistic and pessimistic scenarios. You then apply probabilities to these scenarios and get a weighted average estimate of intrinsic value.
Lisa prefaced the ideas she pitched by saying that last year she recommended two stocks: BearingPoint and Blue Nile. The former was thought by many to be good value, and it tanked by over 50%. The second – one comment I heard in the audience was “Lisa got lost on her way to the Growth Investing Congress!” – was a double. “So,” she said, “keep that in mind as you think about the next two ideas I’ll pitch here.”
The first long idea was Renault, and short the proportional shares of Nissan that Renault owns. Lisa believes the core Renault business is extremely cheap because Carlos Ghosn, the wunderkind automotive turnaround CEO, has a plethora of pockets of opportunity to hit his 6% operating profit target by 2009. As a result, core Renault currently trades at about €27.00 per share and Lisa believes intrinsic value is close to €85.00.
The second long idea is the extremely controversial Overstock.com (OSTK), which is losing money. According to Lisa, the “new guy” in charge of the company has done all the right things. Her DCF goes all the way to 2017 (!) and assumes a variety of market growth cases and operating margins. Her conclusion is that this is a high risk, high payoff situation that fits in the context of her portfolio.
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.