Homestead31

Excerpt from Khrom Capital's letter available here: http://www.gurufocus.com/news/355992/khrom-capital-june-30-letter-to-investors any guesses what this position could be? We recently made a new investment based on taking this lifetime view of a business. This company is disrupting a large industry; it has only a 0.3% share of a growing market, a clear and increasing competitive advantage, an astute and well incentivized board of directors, and is run by an extraordinarily intelligent CEO who has a clear strategic vision and has created an outstanding corporate culture. However, if our investment strategy focused on trying to estimate what the stock price could be in a year – or even five years – from now, we might have passed on this investment. There are many reasons that the stock price could decline in the near term. Competition will likely increase since the opportunity that this company is pursuing is large and lucrative. The company’s current profitability is depressed, and its CEO will likely continue to suppress it further in pursuit of significant advantages of scale. The U.S. economy may enter another recession, and since this business hasn’t previously proven itself through an economic contraction, there may be panicked sellers of the stock. These and other factors may make for a “messy” stock price over the next few years. However, by encouraging ourselves (and structuring our partnership to allow us) to think as permanent owners of the business, we focused our attention not on the share price this company could trade for in a few years, but on the profits this business is likely to produce over the next few decades. Ironically, the farther out we look, the easier it becomes for us to approximately predict things. Focus on long-term profitability For example, take the risk of competition. We think that this company has obvious and growing competitive advantages that should help solidify it as the dominant player in its space. (Think how the number of search engine startups dried up once Google Inc. (NASDAQ:GOOG) solidified its dominant position.) We think it is ideal that this management is willing to reduce short-term profitability to invest in growing the company’s competitive advantage, increasing the quality of its long-term profitability. (Think how Amazon.com, Inc. [NASDAQ:AMZN] has barely shown any profits for over a decade, but the value of its business has grown significantly every year.) We think that a recession could benefit this company, since their cash-rich balance sheet, economies of scale and prudent management team would enable them to grow stronger as weaker competitors die off. (Think how Wells Fargo & Co. [NYSE:WFC] is earning more money today than before the Great Recession.) In short, since we do not need to concern ourselves with where the stock price will be in the next few years (since you have allowed us to follow an investment strategy that focuses on the fundamentals of a business), we are able to look beyond all the short-term noise. That is how we attempt to generate our excess returns. By taking the profits that people cannot take (and hopefully avoiding the losses that they incur) because they want to rent a stock.

that is my point... when i go to verify, it rarely if ever lines up. but what do people assume (knowing full well that they will go double check themselves)

i have a question for the group... when you are reading an interview with a well known investor etc and they talk about XYZ spitting of $ABC in free cash flow, do you assume that they are talking about operating cash flow - all cap ex? or do you assume that they are talking about operating cash flow - maintenance cap ex? obviously every case is different, but i have noticed that very rarely does what an investor say line up with what the financials actually say if you go by a strict definition of FCF... so what do you assume?

it is also worth checking Ackman's last Sohn conference presentation. the latter half of the presentation focuses on VRX, but the first half focuses on "platform companies" and is a useful mental model

Check out the Fundoo Professor blog if you haven't already. he is based in India and ~20% per year for years w/ a Ben Graham and arbitrage style... a year or 2 ago he switched to a "moat" strategy of 10 or 12 stocks and had 100% returns last year. this presentation in particular is very good: https://dl.dropboxusercontent.com/u/28494399/Blog%20Links/October_Quest_2013.pdf it demonstrates the trouble the market seems to have w/ discounting very good businesses. also google "fundoo professor, floats and moats" for a 3 part series on what he looks for..

thanks for all the responses!

gurufocus changed their format so you can no longer get 10 years of financials easy and free.... does anyone have an alternate source? i realize the gurufocus stuff is just quick and dirty, but i liked to be able to use it for a quick glance to get a basic feel for trends, margins, returns on capital etc... if you know of another quick and easy source of data, please share!

thanks for the responses... as for the "read read read" comments, that is already what i do - i'm just seeking to do it more efficiently b/c sometimes (alot of times) i wind up down a rabbit hole. that is fine, b/c as others commented, you never know where your next idea is going to come from - but there are certain areas that tend to be more fruitful than others, like insider buying, new lows etc as i mentioned. as for packers comment, that is definitely something i should be better about - ie expanding the circle of competence. one other issue i have is that i often find myself reading too much "investment porn." it is all helpful, but at some point time is better spent on reading new 10-ks than reading old interviews with super-investors etc. this is more of a self-discipline issue i guess - its just more fun to read about past successes than to do the hard work on new potential successes for me. more opinions welcome!

I'd be curious to hear about your process for idea generation. I am in the midst of trying to refine my own, and the collective wisdom here can surely be a great help. I know most value investors say, "i just read and find ideas where i find them" and that is great, but I often find myself getting off track and not using my time in the most efficient way possible. I am currently thinking of something along the lines of spending 1 day a week reviewing new lows, 1 day a week reviewing recent insider buys, 1 day a week reviewing valueinvestorsclub.com/cornerofberkshire, and 2 days a week for spill over from the other 3 days. is anyone doing something simlilar? or BETTER? please share your technique for finding ideas

anyone have any advice here? i know there are classes from providers like Wall Street Prep and Training The Street that cost a few thousand bucks... i'm more interested in a good book or something from coursera. my accounting skills are CFA level, so good w/ the basics, but not great overall. i usually just make quick and dirty operating models, but i'd like to develop the skills to make 3 statement models more effectively and efficiently. any suggestions appreciated.

some amazing quotes in the speech by Druckenmiller.... i wish he would have gone into more detail on what he did / felt when he was wrong with some of these huge bets, like top ticking tech stocks etc.

Chef's Warehouse. several easily identifiable milestones on the horizon, commodity costs that will mean revert, an industry that will want a second fiddle to a post merger sysco, a long runway for growth through acquisition

thanks all! i was also able to find the SP data w/ dividends reinvested on Y charts for free

Does anyone no where i can find monthly returns for the S&P 500 and R2000 for the last few years with dividends reinvested? i'd like to pop it into excel along w/ my own monthly performance and chart cumulative returns. thanks!

I concur. Its all a waste of time. Things never unfold as they are supposed to. I think the trick is finding things where you have a different take on the "obvious." Howard Marks calls this second level thinking. The Brooklyn Investor blog had a great post on this awhile back on DaVita (DVA) http://brooklyninvestor.blogspot.com/2013/11/davita-healthcare-partners-dva.html I think HLS is another name that is going to obviously benefit from demographics but it still cheap. They operate free standing Inpatient Rehab Facilities (IRFs) which treat post-acute patients for things like strokes and other brain injuries. The sell side sheepishly sticks to price targets close to today's trading price and talks about the risk of cuts to gov't reimbursements without realizing that HLS is by far the best player in the industry (~20% EBIT margins vs ~0-1% for most players). When (not if) the gov't cuts reimbursement rates, the industry will be wiped out and HLS will pick up the pieces. this is already happening as other IRF operators have been approaching HLS and asking them to JV and run their IRFs. As Buffett has said, no matter the industry, the low cost provider always wins through a cycle. It can just be difficult to look past the obvious (the reimbursement cuts) and look to the second level (that HLS will come out of the downturn stonger then ever.)

In my days as a sell side trader I had easy access to bloomberg and its very powerful screening tools, but those days are over. does anyone know of a free screener that has the capability to screen for performance? For example, this time of year when screening for "january effect" candidates its nice to be able to include something like "down 40% year to date," or "down 20% over the last month" or "price < (52 week high * .70) etc etc. is there anything out there for free that has performance tracking? or anything that is reasonably cheap? thanks

i know there are a bunch of websites that track form 4s and insider buying, but does anyone know of one that has a market cap screener attached to it? i'd like to be able to see insider buying in small caps in an easy manner. thanks

i typically spend some time at the end of the year looking at stocks that have gotten smoked over the last year and have a share holder base where a bunch of the top holders are relatively new to the name and thus incentivized to take the tax hit at the short term rate. i haven't come up with much all that interesting yet, although i think RYAM might fit the bill. recent spin and basically everyone who has bought it all year is underwater... more importantly i'm sure alot of those people did it without doing much work b/c the headline spin dynamics were so attractive (spun out of a reit so reit dedicated guys have to sell, CEO went with the spin-co etc etc). i'm aware that people have started to question the company's staying power in the face of increased competition and capacity etc etc. i really don't have a great handle on that, but i imagine that the very smart folks at Fairfax and Abrams Capital do have a great handle on that. seems like this is a stock that will get killed into year end b/c just about everyone that owns it is incentivized to sell for non-economic reasons, but stocks like this can pop quite a bit in the early part of the new year. any other names on your radar that are worth looking at b/c of non-economic tax motivated selling?

nate as i'm sure you are aware there are all sorts of studies that reveal how poorly people can predict the future, how bad analyst's track records are, and the fact that so called "experts" actually perform worse than layman b/c their high level of confidence in their abilities blinds them to their flaws. 10 years is just insane in my mind. it is difficult to predict a 2 variable scenario out into the future. a business has about a million different variables. i'd also be curious to see how these people think about recessions because in any ten year period there is a real good chance that cash flows are going to be seriously impaired at some point. personally i try to think about cash flows 2-3 years out which is kinda crazy in and of itself, which is why i need to be able to drive a truck through a valuation gap caused by some obvious factor (non-economic selling, easily identifiable temporary problem, etc etc). even when i can identify some obvious factor i still figure i'm probably at least half wrong about something. i'm obviously talking about margin of safety here. what is amazing to me is the amount of people that say, "buy XYZ, i think it is 25% under valued!" even on well respected sights like valueinvestorsclub.com. 25% might be acceptable for a truly great company, but in my mind it is no where near a big enough discount for an average company because 25% can vanish in a heart beat when you find out you were wrong about something (and you are definitely wrong about something). part of this of course has to do with portfolio construction as well. if you want to own 100 names youre gonna have to settle for some 25% off names. if you want to own 10-15 names, they better all be potential doubles in 2-3 years in my opinion.

i think there is some confusion between the forest and the trees here. think of it this way: Buffett has said that the best business is one that can re-invest its capital in itself at high rates of return for long periods of time. Similarly, everyone on this board would agree with Buffetts statements on the advantages of permanent capital. Montier is saying that the culture of shareholder value makes it more difficult for companies to reinvest in themselves because investors want immediate results (ie not willing to take a short term hit to GAAP earnings in order to maximize future earnings potential), which is akin to CEOs not having access to permanent capital. Now, as with anything else, there is a continuum here. On one end of the spectrum, companies that are unable to re-invest in themselves at obviously acceptable rates of return should clearly return capital to shareholders. On the other hand, companies that are able to re-invest in themselves at obviously acceptable rates of return should quite obviously re-invest in themselves. However, where it gets tricky is in the middle. there is a lot of gray area here between what is a wise re-investment and what is not. it depends on your assumptions and hurdle rates etc. As investors we should of course demand a margin of safety and expect management to require one when making investment decisions, and thus err on the side of caution. The problem however lies in the fact that as we all know (and as Montier has written about extensively) human beings have a hard time placing the future in context. Is it worth it to pursue a project that has a negative impact on EPS for 5 years before turning into a massive success? Mathematically answering that question is a simple IRR calculation. But what Montier is saying is that in the real world, its not simple math. The math is clouded by human elements such as a CEO who is likely to have a short tenure and thus must drive profits and earnings now. This CEO is thus incentivized to violate a decision that may make sense economically in the long term in order to focus on the short term. for more on this google Tom Russo, Capacity to suffer... he gave a speech in Omaha in 2013 i think about the best companies over time having the capacity to suffer, meaning invest for the future at the expense of short term profits. it is one of the reasons that owner operator companies perform better over time... they're not afraid to take the short term pain for the long term benefit. Modern CEOs don't have that luxury.

and read the class notes from Greenblatt's special situations class at Columbia University. You can find them online. If you're look for more info on Denali, they were featured in Graham and Doddsville a few issues back.

another thing to think about - what are management's incentives? when looking at acquisitive companies and/or roll ups i always want to see a management team that owns a bunch of stock. that way you know they are worried about share price, not just empire/ego building. growth is great, but only if it is profitable growth.

according to the media "small caps are still expensive" but this recent sell off has created some incredible value in select names in my opinion. CHEF, MSO, EZPW are all names that I think can double in the next 2-3 years with solid downside protection. some of the special situation names have gotten destroyed as well as they are over owned by hedge funds, and hedge funds are the first guys to cut their losses and run in a sell off. BKS is a good example. happy to discuss any of the above.