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

Why does Seth Klarman like Blank Check Companies?

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

http://www.stockpickr.com/problog/11/


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

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:
Lucas