Thursday, January 25, 2007

Klarman is not afraid of spin offs

Klarman is not afraid to buy spin offs. In fact, he views such situations favorable for value investors who often look out for ignored and unloved assets.He purchased the shares of two subsidiaries of Tenneco Inc. One was Pactiv Corp which made branded food storage bags and trash bags. Also, the company was the market leader in a range of plastic packaging products. Due to market forces pushing the stock price down, the stock price dropped to about 10 times after tax earnings. The conditions to buy the stock were appealing. Management was loading up stock while earnings growth indicators were solid. There were plans to cut down costs and redeploy assets while price of raw materials was expected to drop. Here was a premium brand selling at a heavily discounted price.

Another spinoff of Tenneco was an automotive company which manufactured branded shock absorbers abd mufflers. Like Pactiv, it was a market leader in its respective product categories.Due to its small market cap, there was a heavy sell off by shareholders who felt that such small caps were ill-suited to their portfolios.This heavy sell off depressed the stock price, making it an attractive target for Klarman.

Saturday, January 20, 2007

Seth Klarman case study 3

Seth Klarman Case study 3
- Columbia gas systems went into a contract that overpaid for gas
- Gas was selling at 1.20 per gallon while they paid for $5 per gallon through contractual arrangements
- Unnecessary and excessive liabilities
- All assets on the book could pay off liabilities

Seth Klarman Case Study on Federated Stores!

Seth Klarman case study 2
- Federated stores were going to miss payments and bonds sold off to a huge discount
- Face value of bonds was 2.4 billion
- 2.4 billion dollars of bonds could be bought with 1 billion dollars in the open market(40 cents on the dollar)
- Company had 500 million dollars in cash
- Positive cashflow and were still in the black
- Restructured debt would involve 75 cents in debt and 20 cents in equity given per senior bond held-->95 cents -->50% margin of safety

Wednesday, January 17, 2007

Why does Seth Klarman like Blank Check Companies?

Here enclosed is a link discussing Seth Klarman's reasons for choosing such companies

Written by Manpreet

Seth Klarman case study: Harcourt Brace Jovanovich

Dear friends,
here is a case study i did on the ever popular manager and head of Baupost Group, Seth Klarman. For those who have not heard of him, you just have to google him and find that he has been a wildly successful manger of funds and his portfolio includes both debt and equity. First up lets take a look at some of his guidelines for investing in distressed debt before we look at a company he invested in.

Seth Klarman guidelines
1) Sees opportunity mostly in junk bonds that are trading between 20cents and 40cents
2) Looks at tangible assets and ignores intangible assets

Seth Klarman case study 1
Company: Harcourt Brace Jovanovich
- Has 2 businesses, publishing and insurance
-Total market capitalization of debt and equity was 4.6 billion
- Theme park was sold for 1.1 billions dollars and proceeds were used to pay down bank debt
- This should have reduced debt by 1.1 billions and the market capitalization of debt would have been 3.5 billion
- But because of panic selling in junk bonds, market capitalization of debt and equity sold at 1 billion
- What was the true worth of the company? à company’s operations spurned off 180 million pretax earnings and at a multiple of 12 times, after tax valuation of the company was around 1.4 billion ignoring debt àequity was worth 1.4 billionà Company was at a discount to what it was worth

- Catalyst according to Klarman: ‘The pressure to pay off the debt tends to put a firecracker under management. Either the company will tender for the bonds at something less than par but above their unceremoniously low prices, or, if they cannot, bankruptcy will lead to the underlying values being realized through a court-ordered reorganization or liquidation.’

Written by:

Lucas Lim

Monday, January 15, 2007

Studying the insiders!

I know for a fact that many articles have been written about insider trading. Tons of them available on the internet. Even Tweedy Browne looks for value through the confirmation of insider trades. My personal take is that insider trades are not enough. What one needs to look for is a 'significant pattern of insider trades' according to Tweedy Browne. What that means is that one should look for a certain consensus among the insiders. What i look for is for the heavy weights. I want to make sure that the heavy weights of the company have loaded up on shares within the company and who are the heavyweights? The heavyweights are namely the Chief executive officer, the chief financial officer and the chairman. If these 3 fellows are scooping up shares in the open market, one can be to a large extent sure on one thing: The insiders think that their shares are worth a lot more. Why? These fellows are the ones who know their industry best, and the earnings estimates for the future or whether their recent marketing programs work. These fellows know it all baby! And what they are pretty sure of is that all these will eventually translate into positive news announcements in the near future and the bottom line.

As a practitioner, i would go one step further by considering one more point. From a psychological standpoint, a behavioural standpoint, all humans have 2 vital elements that causes market prices to fluctuate and that is 'fear' and 'greed'. What i want to know is that these fellows are acting out of greed. One is most greedy when one is most certain about the positive outlook for his company. So just to illustrate a real life example of my various info digging sessions, i was looking at one company on the Singapore stock exchange. It was a poor company by buffet's standards, No moats, no high ROEs etc but what happened was that the insiders were loading shares like crazy! And it so happened that one of the C level officers bought about a million dollars worth of the company's shares. I called its investor relations department up and as rude as they may have sounded, they revealed that this C-level officer earned about 1.2 million dollars in remuneration. That, to me was "greed"! He used up a huge portion of his salary to buy shares in the open market.

Although i did not buy its shares as i felt that it went against my own philosophy, my parents scooped it up in the open market. 3 months later, its shares doubled in price.

Of course, i am not advocating this approach in its entirety but i feel that one should combine it with fundamental analysis to buy a truely valuable company.

When it comes to investing there are only 2 rules: (forgive me for being a ripoff but i could not have said it better than buffet)
Rule No 1 : Dont lose money!
Rule No 2: Dont forget rule number 1!

Written by:

Scouring Ben Graham Stocks in Singapore!

Scouring for Ben Graham stocks is a hard thing to do these days. It not only is rare but some feel it is ever to a certain exten extinct already. Now, what is a Ben Graham stock. If you would like to know, during the time when Behjamin Graham was spectecularly successful, Ben Grahan bought into stocks that were trading very much below book value. He would buy a stock if it was trading at 2 thirds the net current asset value. The net current asset value can be calculated by taking the total current assets of the company and subtracting the total liabilities of the company. This figure is finally divided into the number of shares outstanding for the company and you get the Net Current Asset Value per share. This also means that the company's very liquid assets could pay off all its liabilities if the figure is positive. He then compares it to the per share price of the company and if it trading below 2 thirds of the NCAV per share, he would have bought it.

The problem with using this approach is that the method has been so popularised in the US that stocks of such nature are extinct. Any company trading near book value would have been spotted by value and vulture investors eyeing its debt, equity and assets and not allowed to trade below book value. Theoretically, a company that trades below book value could be bought over and liquidated and a decent profit would be realised. For example, if a company was trading at half of book value, a vulture realising that it is worth double could buy over the company and liquidate its assets, leaving a decent return for him. Furthermore, plant property and equiptment may only be reflected at cost and not market values. Upon liquidations, the true book values may be worth far more.

That being said, where can one find Ben Graham stocks? I did a detailed study of the Singapore Stock market, an emerging market and found several. The most notable of which is Matex International, a company selling dyestuffs, a rather 'Unsexy' company largely ignored by the ignorant investors.

Check this out. The company is selling at 12 cents per share and has 178000000 shares outstanding. It has a current asset value of 63.36 million and total liabilities of 27.73 million. The NCAV per share equates to 20 cents a share. Buying it at 12 cents a share would imply a discount of 40% to the NCAV, trading well below 2 thirds of the NCAV.

Just to add to the confirmation that the company is undervalued, i called the company and spoke to management and they claimed that the stock is fairly undervalued and they have no idea why. Insiders confirm that the company is even expanding in China by adding more plants and the tone of the conversation seemed positive.

So there you go.... An extinct stock by Graham's standards found in the tiny Island of Singapore. Bottom line: If you look hard enough, you will find it! And one place to start looking is : Singapore and many other emerging markets if and only if youwere confident of accounting and governance standards.

Written by: Lucas Lim

Saturday, January 13, 2007


Lets take a look at the some of Buffett's previous investments and ponder over them..perhaps some of his wisdom can enlighten us.

USG.In 2001, Berkshire Hathaway bought USG stock for about $15 a share .A few months later, much to dismay,USG filed for bankruptcy.One underlying reason for this was the huge asbestos ligation that it faced. USG "faced more than 250,000 claims",which battered the stock and drove it to an all time low of $2.80. The CEO felt that bankruptcy would be the only alternative left as it would protect the business from claimants while it worked on settling the asbestos ligation.Such a strategy would keep the company from being forceably liquidated by claimants while giving it time to work out an arrangment with the claimants.

Buffet was sure that the stock would bounce back and even loaned USG stock to short sellers at an interest,knowing that the fundamentals of the company were strong and it was just a matter of time.

After its bankruptucy in 2001, the housing boom in the US meant strong growth for the company in the coming years and helped boost the company's revenues.Now, the stock current trades abt $54 and Buffett's stake is worth at abt 700 million,which is roughly abt 5 times his intial investment.

Here a key lesson is learnt.Ignore the pessimism surrounding the company and dig into its fundamentals to uncover its true potential.

Written by Manpreet

Thursday, January 11, 2007

Tweedy Browne's principles to value investing

For those in the investing community, they might know who Tweedy Browne is. Tweedy Browner used to be a brokerage executing trades for Ben Graham, the father of value investing. And since then, Tweedy has been raking returns of around 15 - 20% for the past 20 years or so. Impressive isnt it? And so here it is, certain principles of Tweedy Browne that we can all apply:

1. Low price in relation to assets

2. Low PE

3.Insider Purchases

4.Significant decline in stock price

5.Small market Capitalization