Sandridge Delisted

[Luckyone77]

And I remember the beating I took on this stock when I was selling it at about 5 and 6 bucks a share. Lost my butt but now I feel lucky that I dodged an even bigger bullet. It's all relative I guess.

 

I know I'm beating a dead horse here but still struggling to understand the investment in this complete dog of a stock. Another stock pick by this team that had to "try" to reinvent itself because the original thesis was a turd. Do we still own this?

 

http://finance.yahoo.com/news/sandridge-delisted-nyse-low-price-205008881.html

[Parsad]

If oil was above $70 barrel, and it was well above at one point, it would not have been a dog of a stock.  Everything is relative to the economic circumstances around it.

 

Lou Simpson owns quite a large chunk of Chesapeake...which is nearly as big as a dog.  Doesn't mean Lou Simpson was completely wrong on the thesis, but the environment changed dramatically and the viability of the company changed.

 

You pick ten stocks...as long as you are right on six of them you are golden.  Two will fail and two will tread sideways.  But you still do perfectly fine over the long-run if you get those six of ten right.  Cheers!

[petec]

I agree with all that you say Parsad - but it is a bit odd to invest in something that needs a high oil price, when you are on public record as saying that commodities will fall.

[giofranchi]

I agree with all that you say Parsad

 

+1!

 

but it is a bit odd to invest in something that needs a high oil price, when you are on public record as saying that commodities will fall.

 

+1!

 

Cheers,

 

Gio

[Parsad]

I agree with all that you say Parsad - but it is a bit odd to invest in something that needs a high oil price, when you are on public record as saying that commodities will fall.

 

I agree!  If anyone should have avoided SD, it would have been the guys who expected the commodities blow-up and deflation. 

 

But you have several primary managers at Hamblin-Watsa, as well as analysts, who all manage some money.  They are allowed to allocate a significant portion as they see fit.

 

SD was probably not a consensus investment, but one allocated by a couple of managers with the capital at their discretion.  How many value investors on here have varying views of the same security?  Cheers!

[ERICOPOLY]

How many value investors on here have varying views of the same security?  Cheers!

 

With commodities it goes like this:

 

First you speculate on the future price of the commodity.  Then based on that speculation, you state how much margin of safety there is in the stock.

 

Therefore, tons of varying views among value investors.  And the views are based on speculations.

 

I think this is why Buffett wants to avoid "price taker" businesses.

[goldfinger]

How many value investors on here have varying views of the same security?  Cheers!

 

With commodities it goes like this:

 

First you speculate on the future price of the commodity.  Then based on that speculation, you state how much margin of safety there is in the stock.

 

Therefore, tons of varying views among value investors.  And the views are based on speculations.

 

I think this is why Buffett wants to avoid "price taker" businesses.

 

Commodities seem cyclical though. What if you assume low prices (close to marginal cost of production)?

[ERICOPOLY]

How many value investors on here have varying views of the same security?  Cheers!

 

With commodities it goes like this:

 

First you speculate on the future price of the commodity.  Then based on that speculation, you state how much margin of safety there is in the stock.

 

Therefore, tons of varying views among value investors.  And the views are based on speculations.

 

I think this is why Buffett wants to avoid "price taker" businesses.

 

Commodities seem cyclical though. What if you assume low prices (close to marginal cost of production)?

 

There is a degree of gravity that affects prices, no doubt. 

 

But the price of Coca Cola at the grocery store doesn't swing as much.  I think Buffett has a point.

 

If you truly want to be a value investing "monk", you would do best if you could seek out a company that was an absolute price setter, with a massive moat, trading at a discount to IV.  No argument there.  Commodities undergo long periods of "price taking", and these fragile leveraged commodities companies are toast -- so they aren't "value investor" fare.

[twacowfca]

If oil was above $70 barrel, and it was well above at one point, it would not have been a dog of a stock.  Everything is relative to the economic circumstances around it.

 

Lou Simpson owns quite a large chunk of Chesapeake...which is nearly as big as a dog.  Doesn't mean Lou Simpson was completely wrong on the thesis, but the environment changed dramatically and the viability of the company changed.

 

You pick ten stocks...as long as you are right on six of them you are golden.  Two will fail and two will tread sideways.  But you still do perfectly fine over the long-run if you get those six of ten right.  Cheers!

 

This is where the back of the envelope calculation helps: math so simple all it takes is the back of the envelope to explain it, even if the figures are approximate.

 

I remember reading an 80+ page presentation on Sandridge right after Ward spoke at the FFH AGM a few years ago. After reading it, I was farther away from a thesis using simple math that supported buying the stock than before reading their presentation. Nowhere in those 80 pages  was there simple quantification showing what their edge was or how much that edge was worth. 

 

Later, a little digging revealed that Chesapeake with acreage not too far away was pumping twice as much oil per well drilled than Sandridge was.  A decisive analysis didn't even require the space of the back of an envelope. That one astonishing fact was sufficient to falsify all the BS in their self serving, 80 page report.

[Luckyone77]

If oil was above $70 barrel, and it was well above at one point, it would not have been a dog of a stock.  Everything is relative to the economic circumstances around it.

 

Lou Simpson owns quite a large chunk of Chesapeake...which is nearly as big as a dog.  Doesn't mean Lou Simpson was completely wrong on the thesis, but the environment changed dramatically and the viability of the company changed.

 

You pick ten stocks...as long as you are right on six of them you are golden.  Two will fail and two will tread sideways.  But you still do perfectly fine over the long-run if you get those six of ten right.  Cheers!

 

If memory serves, they went into this company because of its natural gas and not it's oil. That was the original thesis. Then they had to reinvent themselves by doing a 180 and try to get into oil since gas was a loser. They took on massive debt acquiring land at higher prices all the while building a huge building in downtown OKC and things had to go perfect for it to work. Red flags everywhere!! That's when I finally bit the bullet and took the loss.

 

Blackberry is a similar situation. They went in thinking with better leadership that they could regain market share in the phone business. Another thesis down the toilet. Now after another new CEO, we're left hoping they can too can reinvent themselves and just be a successful software company. Possible? I guess. But shouldn't they start buying better companies at a fair price instead of so many long shots at a discount? Your losers shouldn't go to zero. SD is basically there.

 

Spin it however you want but that was a very stupid investment that these guys should have seen coming.

[Uccmal]

If oil was above $70 barrel, and it was well above at one point, it would not have been a dog of a stock.  Everything is relative to the economic circumstances around it.

 

Lou Simpson owns quite a large chunk of Chesapeake...which is nearly as big as a dog.  Doesn't mean Lou Simpson was completely wrong on the thesis, but the environment changed dramatically and the viability of the company changed.

 

You pick ten stocks...as long as you are right on six of them you are golden.  Two will fail and two will tread sideways.  But you still do perfectly fine over the long-run if you get those six of ten right.  Cheers!

 

This is where the back of the envelope calculation helps: math so simple all it takes is the back of the envelope to explain it, even if the figures are approximate.

 

I remember reading an 80+ page presentation on Sandridge right after Ward spoke at the FFH AGM a few years ago. After reading it, I was farther away from a thesis using simple math that supported buying the stock than before reading their presentation. Nowhere in those 80 pages  was there simple quantification showing what their edge was or how much that edge was worth. 

 

Later, a little digging revealed that Chesapeake with acreage not too far away was pumping twice as much oil per well drilled than Sandridge was.  A decisive analysis didn't even require the space of the back of an envelope. That one astonishing fact was sufficient to falsify all the BS in their self serving, 80 page report.

 

When Tom Ward spoke at that meeting, all my antennae went up, and I got that greasy feeling.  I never even bothered to look into Sandridge after that.  Ward made out like a bandit. 

 

I got the same feeling about the CEO of Resolute.  Never bothered to look at it either. 

 

Before the flames come out, I am not saying I am any better - we have all been had a few times by a good story.  As time goes on I see more and more the wisdom of the "ham sandwich" businesses principle, even if its not entirely realistic in our fast changing world. 

 

I wrote this years ago, and will reiterate it.  There is a reason that Buffett went into stable cash generating businesses as he got into the multimillions.    Graham style businesses aren't meant for concentration and there aren't enough good ones around to invest billions in. 

 

As always I admire the business that Prem and company built. 

 

 

[Luckyone77]

If oil was above $70 barrel, and it was well above at one point, it would not have been a dog of a stock.  Everything is relative to the economic circumstances around it.

 

Lou Simpson owns quite a large chunk of Chesapeake...which is nearly as big as a dog.  Doesn't mean Lou Simpson was completely wrong on the thesis, but the environment changed dramatically and the viability of the company changed.

 

You pick ten stocks...as long as you are right on six of them you are golden.  Two will fail and two will tread sideways.  But you still do perfectly fine over the long-run if you get those six of ten right.  Cheers!

 

This is where the back of the envelope calculation helps: math so simple all it takes is the back of the envelope to explain it, even if the figures are approximate.

 

I remember reading an 80+ page presentation on Sandridge right after Ward spoke at the FFH AGM a few years ago. After reading it, I was farther away from a thesis using simple math that supported buying the stock than before reading their presentation. Nowhere in those 80 pages  was there simple quantification showing what their edge was or how much that edge was worth. 

 

Later, a little digging revealed that Chesapeake with acreage not too far away was pumping twice as much oil per well drilled than Sandridge was.  A decisive analysis didn't even require the space of the back of an envelope. That one astonishing fact was sufficient to falsify all the BS in their self serving, 80 page report.

 

When Tom Ward spoke at that meeting, all my antennae went up, and I got that greasy feeling.  I never even bothered to look into Sandridge after that.  Ward made out like a bandit. 

 

I got the same feeling about the CEO of Resolute.  Never bothered to look at it either. 

 

Before the flames come out, I am not saying I am any better - we have all been had a few times by a good story.  As time goes on I see more and more the wisdom of the "ham sandwich" businesses principle, even if its not entirely realistic in our fast changing world. 

 

I wrote this years ago, and will reiterate it.  There is a reason that Buffett went into stable cash generating businesses as he got into the multimillions.    Graham style businesses aren't meant for concentration and there aren't enough good ones around to invest billions in. 

 

As always I admire the business that Prem and company built.

 

But doesn't it seem they've lost their way when it comes to investing? Some of this stuff is garbage and has a very amateur feel to it. They've sold good dependable companies to buy long shots. The kind of stuff you do when you're learning not when you've acquired wisdom. It appears they've forgotten Rule #1: Don't lose money.

[original mungerville]

Something seems off here - I agree with Uccmal despite my respect for them.

 

If I could communicate one thing to those guys, it would be something Jeremy Grantham said/wrote during the financial crisis. He said value outperforms growth stocks. This is what analyses show over many decades. The caveat, however, was the Depression because traditional value stocks (low price-to-book, etc) tend to be lower quality companies, and lower quality companies failed during the depression. I thought that was very very interesting.

 

So you had a lot of traditional value stocks (like the stocks Watsa seems to be buying) going to zero in depression conditions and Greece, Ireland, and the oil patch seem to have been or are in depression-like environments. Brazil is now in one as well, and other countries may soon enter. I think you need to factor what Grantham said here.

 

It speaks to buying higher quality, or it speaks to moving from 40 cent dollars to a larger margin of safety like 20 or 30 cent dollars (ie if you have 10 stocks, 2 go to zero, 2 stay stable and the remaining 6 go to $16 total over 5 years for about 10% compounded annually on the overall portfolio, those 6 need to be about 40 cent dollars - not exactly easy and all that for a 10% return on the whole portfolio), or (God forbid) it speaks to drastically lowering your portfolio return expectations. If you have depression-like conditions in some of the markets you invest in, maybe buying traditional value you need to expect 3 zeros rather than 2 zeros out of 10 stocks. And with 3 zeros you need 5 stocks going to $16 to make that rough 10% return over 5 years - they need to be 30 cent dollars.

 

If you are in a global depression impacting all markets you invest in, maybe you need to expect 5 or 6 zeros - I don't know. The point is that you should factor this in here. The other implicit point is that as you grow in portfolio dollar size, its hard to find 40 cent dollars, let alone 20 or 30 cent dollars.

 

[petec]

Something seems off here - I agree with Uccmal despite my respect for them.

 

If I could communicate one thing to those guys, it would be something Jeremy Grantham said/wrote during the financial crisis. He said value outperforms growth stocks. This is what analyses show over many decades. The caveat, however, was the Depression because traditional value stocks (low price-to-book, etc) tend to be lower quality companies, and lower quality companies failed during the depression. I thought that was very very interesting.

 

So you had a lot of traditional value stocks (like the stocks Watsa seems to be buying) going to zero in depression conditions and Greece, Ireland, and the oil patch seem to have been or are in depression-like environments. Brazil is now in one as well, and other countries may soon enter. I think you need to factor what Grantham said here.

 

 

I think this is a very smart commentary and I would add that it's not just about P&L quality but balance sheet quality.  I'm sure you can do very well with value investing in a depression scenario so long as you focus on companies whose assets have value even if the company goes bust.  For me the crime with something like Sandridge is that the asset value can go to zero if oil prices fall far enough, so balance sheet value gets wiped out at the same time that P&L value does.  If you expect a GD scenario, you simply shouldn't go there.

[Luckyone77]

Something seems off here - I agree with Uccmal despite my respect for them.

 

If I could communicate one thing to those guys, it would be something Jeremy Grantham said/wrote during the financial crisis. He said value outperforms growth stocks. This is what analyses show over many decades. The caveat, however, was the Depression because traditional value stocks (low price-to-book, etc) tend to be lower quality companies, and lower quality companies failed during the depression. I thought that was very very interesting.

 

So you had a lot of traditional value stocks (like the stocks Watsa seems to be buying) going to zero in depression conditions and Greece, Ireland, and the oil patch seem to have been or are in depression-like environments. Brazil is now in one as well, and other countries may soon enter. I think you need to factor what Grantham said here.

 

 

I think this is a very smart commentary and I would add that it's not just about P&L quality but balance sheet quality.  I'm sure you can do very well with value investing in a depression scenario so long as you focus on companies whose assets have value even if the company goes bust.  For me the crime with something like Sandridge is that the asset value can go to zero if oil prices fall far enough, so balance sheet value gets wiped out at the same time that P&L value does.  If you expect a GD scenario, you simply shouldn't go there.

 

Great points, guys. Castles made of sand...or, in the case of Sandridge, built on overpriced land and too much debt. It should have been seen by somebody at Fairfax long before it happened. Inexplicable, really, and concerning.

[Luckyone77]

Not sure what this means to Fairfax.

 

http://www.bizjournals.com/houston/news/2016/01/27/exclusive-houston-energy-private-equity-firm-eyes.html?ana=yahoo