txlaw
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Posts posted by txlaw
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Love: Twitter
Hate: Facebook
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And not just a regular IPO. An LBO IPO exit.
A Twitter finance community member just made the point that Carlyle has more than tripled their money with this IPO. And that speaks poorly for Dupont management.
I wonder if this company is a potential acquisition candidate for Berkshire? Seems like it would be very beneficial to vertically integrate with all of the planes, trains, and automobile activity going on with Berkshire. Valspar apparently generates 15% EBIT margins on its coatings business, with what looks like a pretty high return on assets. If you folded Axalta into Lubrizol, could you get a best of breed transportation coatings companies that generates very high returns on investment? (Just back of the envelope musings, right now.)
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WEB and the Van Tuyl CEO did a long interview with Becky Quick today where they took questions on their plans for the auto group, among other things. There are too many videos for me to post the links to, so you'll just have to check the CNBC videos page until someone compiles all the links or posts a transcript.
Also, it's definitely worth reading Glenview's take on auto dealerships to get a sense of why WEB bought into this dealer group:
https://www.scribd.com/fullscreen/259928537
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Here's Dr. Lustig's latest mini medical school talk:
It's long, but it's worth watching.
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W/R/T the compensation/agency problem, the only solution I see is an active owner who lets the agent know his role. We could do with a whole lot more of that if you ask me.
I have no problem with active owners. I doubt WEB does either.
But there's a difference between being an owner that keeps the principal-agent problem in check and being an activist who's focused on forcing corporate action to get Mr. Market to recognize value to the detriment of the actual intrinsic value of the company. For example, Jeff Ubben, an activist that I highly respect, was absolutely right to point out that Dan Loeb's push to sell off part of the Alibaba stake may have been a bad decision that primarily benefited Loeb and not the long term owners of YHOO.
The question is, what type of active ownership does WEB not like? Clearly, he's cool with the 3G variety. Not so much with the buy 'em and flip 'em mentality that's all about earning that fee.
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Hell, to me the big problem with WEB and KO is not his non-vote on the comp scheme. Instead, the problem is what Ackman brought up the other day. KO sells a lot of product that is terrible for most people's health. Yet WEB is in complete denial about this, IMO. I'm a big fan of WEB, but I can't help but turn up my nose at his public endorsements of sugar water and junk food as the food of the gods (and, yes, I'm purposefully being a bit hyperbolic).
That argument doesn't work. Who should decide what is good or not for my body? You? The government? Bill Ackman?
This is a major problem today. Most people believe they are responsible for the decisions of other adults. When someone tries to take away another persons ability to choose they are treading on dangerous grounds for me. Personal responsibility is a huge problem in the west. If you don't want to hold individual responsible for their health why are you holding Coke responsible? You can't have it both ways. I would say a lot of harm is done to individuals when the government tells them they are not responsible either.
Let me be clear. KO doesn't hold a gun to anybody's head and force them to drink their products, yet you want to hold a gun to KO's head... and claim the moral high ground in doing so.
WEB is free to make whatever endorsements he wants. Do you want to hold the proverbial gun to his head too? Ultimately who should decide?
It is very freeing when you believe that everyone is free to make their own decision and that they are also free to face the consequences of those decision. The government is in the business of removing consequences, for bankers to Coke. Great discussion... Thanks.
Argument for what? You seem to have come to the knee-jerk conclusion that I am advocating for some "gun to Coke's head" policy.
I did no such thing. However, since you brought it up, there probably are many government policies that I probably would advocate for that you might be opposed to. For example, banning soda machines from schools would be totally fine to me. Same with banning them in public sector workplaces. Beyond that, I haven't really thought that much about this issue and government policy.
Taking the government out of the picture, I am all for better information being disseminated regarding the harms of ingesting too much of KO's product. WEB's "calories in, calories out" incantation is misguided and denies a lot of scientific controversy surrounding the detrimental effect of sucrose on public health. I'm not holding a gun to WEB's head. He can think whatever he wants to, but I'm "free" to criticize him on his views.
As to the moral high ground, I most certainly can turn my nose up at WEB and his denial/advocacy. Same as how I can hold with disdain the denial of climate change by some people who should know better. Or the tobacco companies' previous campaign against the science demonstrating that smoking causes incredibly deleterious effects to health.
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On the KO issue though Winters clearly bumbled his approach, created new enemies, etc. but if you look at him as just the messenger of a possible point of real fact, if you look at the issue he is raising and not his personality, investment performance, math ability, ethnic background, skin colour or whatever, people have to decide if the actual issue he is raising is legitimate or not. For investors to be easily distracted by such diversionary tactics is disheartening (both in my respect for Buffett and my expectations of other investors with skin in the game). I don't own KO except through BRK so it's more of an academic issue to me but like the vast sums of money that have enriched executives via seemingly "innocuous" options grants, is the ability of a board to issue unlimited numbers of shares to executives (as Winters claims) a valid threat to existing shareholders?
I think it's fair to say, well, let's forget about Winters' incompetence and/or cynicism, and let's take a look at the actual facts regarding KO's comp. But you also have to acknowledge the ugly truth that Winters has distorted the facts in a way that undercuts his own arguments regarding the comp package. He has been pretty hyperbolic, no?
Still, I agree that the comp package was excessive. But I'm one of those few people who thinks that pretty much all of the C-Suites in corporate America are overpaid. However, I don't know how to fix that problem. It seems like a one-way ratchet to me.
As to diversionary tactics, WEB himself said that the comp package was excessive -- and he said so publicly. WEB just hammered Winters on CNBC for grandstanding and using WEB's name for the real world equivalent of "click bait."
Hell, to me the big problem with WEB and KO is not his non-vote on the comp scheme. Instead, the problem is what Ackman brought up the other day. KO sells a lot of product that is terrible for most people's health. Yet WEB is in complete denial about this, IMO. I'm a big fan of WEB, but I can't help but turn up my nose at his public endorsements of sugar water and junk food as the food of the gods (and, yes, I'm purposefully being a bit hyperbolic).
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Well all that junk about activists and PE shops is just marketing to me (or more accurately to managements and potential sellers of businesses). Seabury Stanton learned about how passive Mr. B can be and all he did was chisel him a little on the greenmail. Carl got AAPL to do what WEB advised what....a decade ago? Just saying, I doubt he has a problem with that.
Winters, however, deserved to get nuked.
Well, I would agree that there is a marketing component to WEB's spiel. He definitely gets to play the good guy owner for prospective sellers.
Still, I don't think selling people on the "BRK as perfect home" story is incompatible with actually believing that some of this increased activism is harmful because it is: (1) short term-oriented in nature, and/or (2) is unfairly brought in order to market one's investment management services as value-add. And I don't think WEB's fight with Seabury Stanton can necessarily be use to show that WEB is being a hypocrite. That fight was a long time ago, and WEB seems to have changed over the years, as many people do. (Even Uncle Carl is not the same person he was in the 80s.)
Of course, given your screen name, I'm guessing you're not quite so perturbed by the "corporate raider" mentality as I am, haha :D
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I think another thing to consider with regards to WEB's proxy vote (or lack thereof) and his b---- slap of David Winters is that he is engaging in a bit of politics to discourage potential activist investors from unfairly targeting his investee companies, and to remind folks that he could be a "white knight" in these types of situations.
As Munger said in his letter, we are in the "age of activism." There are really no size constraints anymore for activists. Nelson Peltz goes after PEP. Ackman goes after PG. Carl Icahn goes after AAPL. BRK is one of the few big dogs who could build up blocking positions in these types of large companies and vote in a way that sways the passive investors.
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And while Winters is far from a genius, he is a very very long way from the the bottom of the pile.
I dunno.
The underperformance slam may be a bit unfair. But didn't Winters go on record as saying that the KO comp deal (using his inaccurate numbers) was the biggest scandal since Enron? And then didn't he release some odd press release last month about KO issuing double secret probation bonus shares?
I hate to say it, but Winters seems like he's either gone off the deep end, or is very cynically (and incompetently) playing the "activist" card in order to increase his profile and AUM. That should probably be worrisome to potential and existing investors.
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I'm kind of shocked by the general sentiment. JPM's grown tangible book value per share from $23 to $45 from 07-14 while paying fairly sizable dividends over that period. I can't see how you would say Jamie hasn't navigated the company through the storm beautifully. And when you judge each of the company's two main segments (it is a retail and investment bank) independently relative to its peers, its performance has been best in class.
+1
I own both JPM and BAC. Those JPM warrants were damn cheap too.
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The Alleghany annual is out:
http://www.alleghany.com/files/doc_financials/2014/Q4/2014-Annual-Letter_v002_m1ed53.pdf
Their discussion of the global P&C market is a must read for anyone invested in insurance companies.
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Early in my career as a security analyst following the property and casualty industry, an insurance executive at the time explained the business to me as follows: “The property and casualty business is a simple business: prices follow loss costs with a lag, usually about two to three years.” Over the past two years, the property and casualty industry has experienced low levels of natural catastrophe losses and casualty claims have generally emerged at lower-than-expected levels. The result has been that reserves established in prior periods have proven to be more than what is needed, resulting in “favorable reserve development” in the current period.
We do not know – and never know with any degree of certainty – what the future trend in claims will be. Accordingly, at Alleghany we try to use conservative assumptions, trending past loss emergence even if the “loss curve” is flattening.
At the writing of this letter, we are focused on the potential significant issues surrounding “deflategate.” Deflategate, of course, is our “term of art” which describes the deflationary pressures that seem to be the dominant force on a macro-level right now. If you had to pick a business that will hold its value in a deflationary environment, a property and casualty company would be high on the list. On the left side of the balance sheet you have, for the most part, high quality bonds. As interest rates fall, the value of these bonds increases. At the same time, if economic conditions are deflationary, the ultimate liabilities of a property and casualty business should shrink. The net effect of the two is a leveraged increase in equity. And although prices ultimately fall, they tend to lag the actual trend in loss costs. In a deflationary environment, property and casualty companies should hold their value.
It should be no surprise that insurance and reinsurance prices, after increasing for the past several years, have stopped increasing and in some cases – large property exposures in particular – have begun to decrease. Among our insurance and reinsurance subsidiaries, price decreases are most pronounced in the global property catastrophe reinsurance business, and to a lesser extent, the U.S. primary property business. Casualty rates as of this writing are more or less stable, with the exception of California workers’ compensation and some specialty casualty lines, where rates continue to increase -- primarily because they have been deficient in the aggregate relative to loss costs.
While mild deflation is positive for the net asset value of the property and casualty industry, it is negative for prospective returns. Our industry is being challenged by the extremely low nominal interest rate environment, both in terms of direct and indirect effects. Because a large portion of the industry’s economic return comes from investment returns generated on capital and float, lower nominal interest rates result in lower industry returns. With hindsight, one might even conclude that the industry for many years enjoyed “excess returns” because embedded portfolio returns were significantly above a declining rate of inflation. These are the direct effects. Indirect effects include increased and new competition from so-called “alternative capital” providers, including pension funds, hedge funds, and the like. According to Guy Carpenter, approximately 18% of global reinsurance catastrophe limits are now provided by alternative capital. Following six years of an appreciating stock market, the industry itself is flush with capital, resulting in excess industry capacity.
Faced with these environmental challenges, the industry is consolidating. In order to generate reasonable returns, companies must be as efficient as possible, avoid underwriting mistakes, and add value where possible through the investment function. A company that is successful on all three of these items will still likely generate lower nominal returns, but real returns can remain attractive.
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from transcript
"We have partners who in the past have been – have suggested that they would like to be partners with us and – in these
insurance operations, and we may consider that, if it's a partner that we're really comfortable with. And all of that just
to say, in terms of our common stock, we think our common stock with a book value of $400 a share and a stock price
– with a market stock price to book value of about 1.3 times, we think is inexpensive. We're selling – we had a very
good year last year. Our earnings are well protected. Our underwriting is – and our insurance operations are very good.
Our investment portfolios are very conservative, as you know. We went through it last week. Our equities are hedged.
We got 25% cash, low corporate bond. We've got deflation swaps. So we just think that we have many ways of
financing this, and one of the last alternatives will be a stock issue."
This makes more sense. Once you had adjusted for the fair value of their associates, the stock only traded at 1.1x book from what I could calculate back of the envelope. Hardly an expensive price for a company that seems like it will do moderately well no matter what environment.
Yeah, makes a lot more sense.
Looks like a very nice acquisition to me.
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From the call: "And all of that just to say, in terms of our common stock, we think our common stock with a book value of $400 a share and a stock price – with a market stock price to book value of about 1.3 times, we think it's expensive."
Er...did he actually just say that?! ;)
Actually it's 1.6x BV and 2x TBV now so I rather hope they do issue equity to buy Brit...
Wait. So PW just said that the stock is expensive? What question prompted that?
Any other interesting tidbits from the CC? Noticed that FFH is up over 7% at the moment.
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Ackman should introduce Lampert to his friend who tells him "stay away from retail" every time they see each other :D
Haha. :)
I guess to be fair to ESL, though, he has had a tremendous amount of success in the retail space in the past. AN and AZO were grand slam home run investments. GPS was a great buy, and he also almost stole Restoration Hardware during the financial crisis.
But that doesn't mean he can successfully become Bezos with SYW.
True, good point.
But I wonder, if Sears doesn't ultimately work out, will Lampert lose almost everything he made in AN and AZO?
Doubtful that he will lose everything if you believe in the MOS story with regards to the real estate, which I do.
Also, his cost basis in SHLD is very low because it is the latest iteration of his Kmart BK investment (which was another retail investment success for him). So I think it might be difficult for him to actually lose money on the investment.
Having said the above, the real question is what his opportunity cost was with SHLD. Imagine if he had used all the cash that he spent buying back stock and building up SYW for building up a position in AMZN. Now that would have been an awesome way to continue investing in retail.
But c'est la vie.
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Ackman should introduce Lampert to his friend who tells him "stay away from retail" every time they see each other :D
Haha. :)
I guess to be fair to ESL, though, he has had a tremendous amount of success in the retail space in the past. AN and AZO were grand slam home run investments. GPS was a great buy, and he also almost stole Restoration Hardware during the financial crisis.
But that doesn't mean he can successfully become Bezos with SYW.
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ShopYourWay may become "LostYourWay." That was a great line. ;D
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Bumping to see if I can get any more responses.
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5- Whenever a thesis is brought to you by an "expert" be skeptical.
I don't care if it is Watsa, Ackman, Buffett or whomever. These guys rarely make money with the idea that you have retained and it is often the one that will make you lose money.
You really have to make an idea for yourself about an investment and remove from your head target prices, buyout possibility or whatever rosy scenario someone may have mentioned. It includes things that are said on this board and that stick in your mind. It is something very hard to do, but you have to purge from your mind anything positive or that is not a cold hard fact.
For example, Sanjeev had mentioned that TPG-Axon would try to sell Sandridge. Sanjeev is successful and right much more often that he is wrong, but that thing stuck in my mind and seemed to make a lot of sense. This was reinforced by Cooperman's $10 target. Fairfax also held a very large position and Watsa mentioned publicly that SD was worth $20. The CEO mentioned not that long ago $15. Unfortunately, TPG-Axon was likely greedy and did not do the sale. Maybe they could not either. The reasonable target now if things don't change rapidly, is much less than $5.
It was not that hard for me to realize that this investment was much worse than all my Canadian oil & gas names: higher debt, tougher reservoir with lower oil content. What kept me in was hope of a take-out.
This one hits close to home. I would say that SD is probably the worst mistake I've made since becoming a full-fledged "value investor."
I've invested in a few O&G-related companies, and for the most part, my theses were all my own and focused on my views with respect to US natural gas (and not oil). However, with SD, I got pulled into an oil company with the "special situation" lure. I was expecting SD to be sold at $7 to $8, and in short order as well.
Why? Because I attended the FFH shareholder meeting/dinner and heard the following:
-SD is sitting on good rock. (This is not necessarily inaccurate, but it perhaps reflects too much faith that SD themselves can survive long enough to lower costs and increase their hit rate to make IRRs attractive. It would certainly be good rock for DVN to own.)
-Continued support for Tom Ward from HWIC and the view that TPG was just going to flip the company as soon as they got on the board
This screamed "special situation" to me, and I got pulled in, despite not being that interested in oil at the time. I also think my natural skepticism of O&G promotion was tempered a bit too much because of the support from HWIC and the very skeptical yet optimistic valuations set forth by TPG and Leon Cooperman.
Well, I paid for it with my results last year. So I feel your pain.
I was at the same meeting when Tom Ward took questions at Joe Badali's. I have never gone near Sandridge after that. The guy just oozed unbridled greed. BTW, not saying that I am any better than you txlaw. People assessment is something I am good at, partly from innate suspicion, and partly from experience of 13 yrs in pseudo law enforcement. I have other weaknesses.
Unfortunately, I never made it to Joe Badali's. I think it would have been very helpful to have seen the guy in person, as I probably would have had the same feelings.
In any case, the problem was not relying on Tom Ward -- I put him in the same camp as Aubrey, i.e., not to be trusted except to promote like a typical O&G CEO. Hearing PW talk about "good rock" and Paul Rivett discuss the "flip" by TPG is what really kept me in SD because I thought the company was very likely to be sold. If TPG Axon hadn't gotten involved, I wouldn't have been in SD. (I still think that the assets themselves are likely to be fantastic over time as operators figure it out, but I have very little confidence that SD can get the job done.)
I think I even told ourkid at that meeting that I had no desire to be in SD as an owner (I think he was a bit surprised that I said that, haha), and I was just there to participate in the sale of the company to someone like DVN. And then I would reallocate back to CHK.
That never happened.
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5- Whenever a thesis is brought to you by an "expert" be skeptical.
I don't care if it is Watsa, Ackman, Buffett or whomever. These guys rarely make money with the idea that you have retained and it is often the one that will make you lose money.
You really have to make an idea for yourself about an investment and remove from your head target prices, buyout possibility or whatever rosy scenario someone may have mentioned. It includes things that are said on this board and that stick in your mind. It is something very hard to do, but you have to purge from your mind anything positive or that is not a cold hard fact.
For example, Sanjeev had mentioned that TPG-Axon would try to sell Sandridge. Sanjeev is successful and right much more often that he is wrong, but that thing stuck in my mind and seemed to make a lot of sense. This was reinforced by Cooperman's $10 target. Fairfax also held a very large position and Watsa mentioned publicly that SD was worth $20. The CEO mentioned not that long ago $15. Unfortunately, TPG-Axon was likely greedy and did not do the sale. Maybe they could not either. The reasonable target now if things don't change rapidly, is much less than $5.
It was not that hard for me to realize that this investment was much worse than all my Canadian oil & gas names: higher debt, tougher reservoir with lower oil content. What kept me in was hope of a take-out.
This one hits close to home. I would say that SD is probably the worst mistake I've made since becoming a full-fledged "value investor."
I've invested in a few O&G-related companies, and for the most part, my theses were all my own and focused on my views with respect to US natural gas (and not oil). However, with SD, I got pulled into an oil company with the "special situation" lure. I was expecting SD to be sold at $7 to $8, and in short order as well.
Why? Because I attended the FFH shareholder meeting/dinner and heard the following:
-SD is sitting on good rock. (This is not necessarily inaccurate, but it perhaps reflects too much faith that SD themselves can survive long enough to lower costs and increase their hit rate to make IRRs attractive. It would certainly be good rock for DVN to own.)
-Continued support for Tom Ward from HWIC and the view that TPG was just going to flip the company as soon as they got on the board
This screamed "special situation" to me, and I got pulled in, despite not being that interested in oil at the time. I also think my natural skepticism of O&G promotion was tempered a bit too much because of the support from HWIC and the very skeptical yet optimistic valuations set forth by TPG and Leon Cooperman.
Well, I paid for it with my results last year. So I feel your pain.
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Hi folks,
I am posting to see if I can recruit any CoBF board members to beta test this web-based software I’ve been working on that is at minimum viable product (MVP) stage. I’m looking for 15 to 20 testers — preferably analysts at small, value-oriented investment shops (hedge fund or PE) or individual value investors who invest full-time.
For those of you in the industry, many of you will be familiar with the process of using “tearsheets” to track investments (current or prospective) for the purposes of analysis/monitoring, presentation to PMs/Investment Committees, and compliance/litigation. These “tearsheets" are often just Excel files that have all sorts of information cut and pasted into them, and that have to be supplemented with documents stored on network drives (or who knows where) and whatever is in the analyst’s head. The software I’ve developed is essentially intended to be a modern instantiation of the “tearsheet” concept that should optimize the analyst’s workflow and lower compliance costs (e.g., by making tape backups unnecessary).
For those of you who don’t work in the industry, you can basically envision the software as a dashboard for your investments that integrates with various productivity tools (e.g., Evernote and Box), automates data pulls from various sources based on user input, and has journaling/note-taking/media saving as a core functionality. The plan is to also make it very easy to granularly set access/sharing controls for the information collected and generated.
Short list of features in the MVP:
-WYSIWYG editor that can be used for the creation of company overviews and notes (auto-population also possible for publicly traded companies)
-Journaling functionality that allows for the creation of a collection of time-stamped notes (using the WYSIWYG HTML editor)
-For publicly traded companies (US only for now), the pulling in and visualization of fundamentals data over 10 years
-Automated pulling of SEC filings and financials (for US traded companies, of course)
-News, alerts, and other data pulls from certain content providers based on user suggested queries
-Rich media saving (e.g., relevant videos from YouTube, CNBC, Bloomberg, etc.)
-Evernote integration (for those who use the service for notes and web clipping)
-Box integration (for file storage)
-Modularity allows for the possible integration with other productivity tools like Office/OneNote and Google Apps (if such integrations would be useful)
Archiving, snapshots, and sharing are features I’d implement if I find enough people who actually see this software as being useful. And for credit-oriented investors who might be pulling info from data rooms such as Syndtrak or Intralinks, the plan would be to integrate with those data rooms to automate the pulling of credit agreements, amendments, notices, issuer financials, etc.
Again, I view this software as an MVP, and I’m at the point where I want to get some real feedback to see if it is at all interesting to target users. If so, further development might be worth pursuing. If not, well then that’s that.
If you’d be willing to participate as a beta tester, please PM me.
Thanks.
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Pretty interesting presentation from Director of North Dakota Department of Mineral Resources.
https://www.dmr.nd.gov/oilgas/presentations/FullHouseAppropriations010815.pdf
Basically projects that production in the Bakken stays flat at around $55 per barrel.
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Good post, txlaw, thanks for sharing your thoughts.
Thanks, Liberty. :)
One of my New Year's resolutions is to go back to putting more of my investment thoughts to paper, as I think it helps to keep the mind sharp. Finance Twitter is very fun and valuable, but it's obviously very difficult to lay out nuanced arguments there. And the snarkiness is fun but not necessarily helpful when trying to get the truth of a situation in order to profit.
Also, re: my post, I mention POSCO as the closest analog to O&G. But, duh, WEB is invested in XOM, so . . .
Fairfax letters
in Fairfax Financial
Posted
Joel, I for one think you're actually kind of an ass---- ...