New book out now! The Acquirer’s Multiple: How the Billionaire Contrarians of Deep Value Beat the Market

Tobias CarlisleAmazon, Tobias Carlisle1 Comment

From Amazon

The Acquirer’s Multiple is an easy-to-read account of deep value investing. The book shows how investors Warren Buffett, Carl Icahn, David Einhorn and Dan Loeb got started and how they do it. It combines engaging stories with research and data to show how you can do it too. Written by an active value investor, The Acquirer’s Multiple provides an insider’s view on deep value investing.

The Acquirer’s Multiple covers:

  • How the billionaire contrarians invest
  • How Warren Buffett got started
  • The history of activist hedge funds
  • How to Beat the Little Book That Beats the Market
  • A simple way to value stocks: The Acquirer’s Multiple
  • The secret to beating the market
  • How Carl Icahn got started
  • How David Einhorn and Dan Loeb got started
  • The 8 rules of deep value

The Acquirer’s Multiple: How the Billionaire Contrarians of Deep Value Beat the Market provides a simple summary of the way deep value investors find stocks that beat the market.

Excerpt

Media

(If you’d like to schedule an interview, please shoot me an email at tobias@acquirersmultiple.com)

Buy The Acquirer’s Multiple: How the Billionaire Contrarians of Deep Value Beat the Market is out now on Kindle, paperback, and Audible.

Other Books

Review: Brian Portnoy’s The Geometry of Wealth: How To Shape A Life Of Money And Meaning

Tobias CarlisleStock ScreenerLeave a Comment

Brian Portnoy’s The Geometry of Wealth: How To Shape A Life Of Money And Meaning is a strategic, rather than tactical, guide to wealth. It is strategic in the sense that it asks the reader to consider the purpose of wealth–the ability to afford a meaningful life–as opposed to tactical questions about income, budgets, saving and investing.

Wealth is an important part of a good life. But the getting of it is a confusing, emotional subject. And we are behaviorally ill-adapted dealing with such matters.

Portnoy’s thesis is that, at each stage in life, a well-defined purpose allows us to simplify the big money issues. If we understand our purpose, we can prioritize the right things at the right time. And that makes the practical decisions easier.

Broadly, our purpose is a life well-lived. In this way, Portnoy distinguishes getting wealthy from getting rich. Getting rich is about getting more. It assumes, as neoclassical economists do, that we are utility maximizers–we make rational decisions about the highest and best use of our last dollar. Instead, getting wealth is about achieving funded contentment.

Portnoy defines funded contentment as the “ability to underwrite a meaningful life.” It is necessarily an individual consideration. It is striking the right balance between money and happiness, where money “alleviates sadness more than it inspires joy.” More is only a useful consideration to a point, beyond which the marginal dollar earned is less useful than the time lost to earn it. As such, it is a repudiation of the idea that we are utility maximizers, and an acknowledgment that we are imperfect, and idiosyncratic, the foundation of behavioral economics.

Using the lenses of modern neuroscience and ancient philosophy, Portnoy asks the age-old question, “Does money buy happiness?” This chart contains one of my favorite answers:

Drawn from Juliet Schor’s The Overspent American the chart shows answers to the specific question, “To live in reasonable comfort around here, how much income per year do you think a family of four needs today?” The median answers are set beside the median income of respondents. It shows that from the 1970s to the 1990s, we have consistently believed that we need just a little more to be happy.

To me, the book reads as if it’s aimed at mid-to-late-career, middle-class professionals. Those who have seniority at work, with older kids at home. In other words, those without much time for philosophical questions about the meaning of life. But those who may have reached many of their professional and personal goals, and must now decide whether to “float with the tide, or to swim for a goal,” as Portnoy quotes Hunter S. Thompson. A difficult decision, given the drive to achieve goals is a powerful one, particularly in those who have achieved many goals. Portnoy seeks to guide those folks through a philosophical discussion to the nitty, gritty of the tactics, where the rubber hits the road.

I recommend Portnoy’s Geometry to those who have achieved some success in their professional and personal lives and now ask, “What’s next?” It is a lively consideration of the relationship between money and happiness. Portnoy effectively demonstrates that, for those in the middle-class professional cohort, the quest for more money is an “unsatisfying treadmill.”

Portnoy offers a wonderful conclusion to his book, distilling the book down to a “Tweet,” “Cocktail party” discussion, “Graphic summary,” and individual chapter summaries. The Tweet:

True wealth is funded contentment. Anyone with the right mindset and the right plan can afford a meaningful life.

Disclaimer: I received an ebook of The Geometry of Wealth gratis, and will earn a small affiliate commission from Amazon for any books purchased through the links on this page.

Philip Carret: “If The Figures Look Right And The Management Knows What It Is Doing, Why Does One Need A 40-Page Report?”

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One of our favorite investors here at The Acquirer’s Multiple is Philip Carret. Carret wrote one of the best books on investing called – A Money Mind at Ninety. There’s a great passage in the book, taken from his 1990 speech at Contrary Opinion Forum, in which he provides two valuable insights for investors. The first relates to borrowing money to buy stocks, and the second relates to how much emphasis investors should place on a company’s annual report.

Here’s an excerpt from the book:

What should a contrarian whose policy is to invest in attractive securities, regardless of his own or anyone else’s forecast of future market behavior, do now? The answer, in my judgment, is simple. The job of a security analyst, or a money manager, is to determine relative values. If security X appears to be relatively cheaper, by a wide margin, than security Y, the holder of Y should sell it and buy X.

This is far more difficult than it may at first appear. The suggested wide margin is insurance against the errors of judgment of which all of us are guilty. There is also another alternative-do nothing. More fortunes are made by sitting on good securities for years at a time than by active trading.

I well remember a luncheon with a friend who was a limited partner in a stock exchange firm. The third member of the luncheon party was an active partner of the firm. They had just been to the funeral of a friend whom they regarded highly. He had been a floor trader for his own account, had made and lost several fortunes.

When he felt confused about the market it was his practice to board the Queen Mary, stay on the ship when it reached England and return to New York. The sea breezes having blown cobwebs out of his brain, he would resume active trading. What was his fortune when he died, I inquired? “Oh, he was broke,” I was told. Personally, I have never thought it would be sensible to lose even one fortune. There is a simple way of avoiding such a catastrophe – ­ never borrow money, at least for speculation.

One of the most astute investors I have ever known was a remarkable exemplar of long-term investing. He owned several hundred different securities, accumulated in small increments over many years. He liked to talk about his successes. One, in particular, was fascinating. In his twenties he invested $1,400 in a relatively obscure company. Over the ensuing 60 years the stock was split repeatedly, for a net result of 360 shares for each original share. At that point the $1,400 had become $2 million.

Fred at one time checked the company by talking to the management. “They seemed to know what they were doing,” he told me. That is security analysis in a nutshell. If the figures look right and the management knows what it is doing, why does one need a 40-page report?

Sponsored Post: Value Invest New York $350 discount until August 31

Tobias CarlisleStock ScreenerLeave a Comment

 Value Invest New York will take place on December 4

$350 discount until August 31

The line-up for Value Invest New York was announced last week and it will feature speakers including Joel Greenblatt, Howard Marks, Robert Hagstrom, Dave Iben and others.

If you want to attend you can get $350 off the ticket price until the end of August using the code: AQUIRERS_MULTIPLE_AUGUST18

The speakers will talk about current themes affecting Value Investors, outline their approach and give investment ideas from the United States and around the world: You can see the full speaker line-up here.

An overview video of the event and performance of the investment ideas presented at the organizers other conference in London is below. The conference in New York will have a similar number of investment ideas presented at it each year (skip to 47 seconds for the investment ideas):

Warren Buffett (Age 21): The Security I Like Best (1951)

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Here’s a great article written by the 21-year-old Warren Buffett for The Commercial and Financial Chronicle dated Thursday, December 6, 1951. The article is a great illustration of how a young Buffett analysed GEICO for potential investment saying:

“At the present price of about eight times the earnings of 1950, a poor year for the industry, it appears that no price is being paid for the tremendous growth potential of the company.”

Here’s an excerpt from that article:

 

 

Government Employees Insurance Co.

Full employment, boomtime profits and record dividend payments do not set the stage for depressed security prices. Most industries have been riding this wave of prosperity during the past five years with few ripples to disturb the tide.

The auto insurance business has not shared in the boom. After the staggering losses of the immediate postwar period, the situation began to right itself in 1949. In 1950, stock casualty companies again took it on the chin with underwriting experience the second worst in 15 years. The recent earnings reports of casualty companies, particularly those with the bulk of writings in auto lines, have diverted bull market enthusiasm from their stocks. On the basis of normal earning power and asset factors, many of these stocks appear undervalued. The nature of the industry is such as to ease cyclical bumps.

Auto insurance is regarded as a necessity by the majority of purchasers. Contracts must be renewed yearly at rates based upon experience. The lag of rates behind costs, although detrimental in a period of rising prices as has characterized the 1945-1951 period, should prove beneficial if deflationary forces should be set in action.

Other industry advantages include lack of inventory, collection, labor and raw material problems. The hazard of product obsolescence and related equipment obsolescence is also absent.

Government Employees Insurance Corporation was organized in the mid-30’s to provide complete auto insurance on a nation wide basis to an eligible class including: (1) Federal, State and municipal government employees; (2) active and reserve commissioned officers and the first three pay grades of non-commissioned officers of the Armed Forces; (3) veterans who were eligible when on active duty; (4) former policyholders; (5) faculty members of universities, colleges and schools; (6) government contractor employees engaged in defense work exclusively, and (7) stockholders.

The company has no agents or branch offices. As a result, policyholders receive standard auto insurance policies at premium discounts running as high as 30% off manual rates. Claims are handled promptly through approximately 500 representatives throughout the country.

The term “growth company” has been applied with abandon during the past few years to companies whose sales increases represented little more than inflation of prices and general easing of business competition. GEICO qualifies as a legitimate growth company based upon the following record:

Of course the investor of today does not profit from yesterday’s growth. In GEICO’s case, there is reason to believe the major portion of growth lies ahead. Prior to 1950, the company was only licensed in 15 of 50 jurisdictions including D. C. and Hawaii. At the beginning of the year there were less than 3,000 policyholders In New York State. Yet 25% saved on an insurance bill of $125 in New York should look bigger to the prospect than the 25% saved on the $50 rate in more sparsely settled regions.

As cost competition increases in importance during times of recession, GEICO’s rate attraction should become even more effective in diverting business from the brother-in-law. With insurance rates moving higher due to inflation, the 25% spread in rates becomes wider in terms of dollars and cents.

There is no pressure from agents to accept questionable applicants or renew poor risks. In States where the rate structure is inadequate, new promotion may be halted.

Probably the biggest attraction of GEICO is the profit margin advantage it enjoys. The ratio of underwriting profit to premiums earned in 1949 was 27.5% for GEICO as compared to 6.7% for the 135 stock casualty and surety companies summarized by Best’s. As experience turned for the worse in 1950, Best’s aggregate’s profit margin dropped to 3.0% and GEICO’s dropped to 18.0%. GEICO does not write all casualty lines; however, bodily Injury and property damage, both important lines for GEICO, were among the least profitable lines.

GEICO also does a large amount of collision writing, which was a profitable line In 1950. During the first half of 1951, practically all insurers operated in the red on casualty lines with bodily injury and property damage among the most unprofitable.

Whereas GEICO’s profit margin was cut to slightly above 9%, Massachusett’s Bonding & Insurance showed a 16% loss, New Amsterdam Casualty an 8% loss, Standard Accident Insurance a 9% loss, etc.

Because of the rapid growth of GEICO, cash dividends have had to remain low. Stock dividends and a 25-for-1 split increased the outstanding shares from 3,000 on June 1, 1948, to 250,000 on Nov. 10, 1951. Valuable rights to sub scribe to stock of affiliated companies have also been Issued.

Benjamin Graham has been Chairman of the Board since his investment trust acquired and distributed a large block of the stock in 1948. Leo Goodwin, who has guided GEICO’s growth since inception, is the able President.

At the end of 1950. the 10 members of the Board of Directors owned approximately one – third of the outstanding stock.

Earnings in 1950 amounted to $3.92 as contrasted to $4.71 on the smaller amount of business in 1949. These figures include no allowance for the increase in the unearned premium reserve which was substantial in both years.

Earnings in 1951 will be lower than 1950, but the wave of rate increases during the past summer should evidence themselves in 1952 earnings. Investment income quadrupled between 1947 and 1950, reflecting the growth of the company’s assets.

At the present price of about eight times the earnings of 1950, a poor year for the industry, it appears that no price is being paid for the tremendous growth potential of the company.

You can find the original article here.

Walter Schloss: All Superinvestors Make Mistakes Of Omission

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The Annual Ben Graham Conference was held earlier this year and the topic was – investing mistakes. The panel members were Edwin Schloss, son of Walter Schloss, Paul Lountzis – President Lountzis Management, and Michael Lipper – President Lipper Advisory Services.

Edwin Schloss shared a couple of great anecdotes on how he and his father made two very big mistakes of ommission by not getting in early on Apple stock in 2009/2010, then called Apple Computers when it was $11, and Xerox in the 1950’s, which was then called The Haloid Photographic Company.

Here’s an except from that conference which you can watch in the video below [23:00]:

Edwin Schloss: This is so embarrassing. In 2009/2010 my dad and I looked at Apple. It was called Apple Computer in those days. It was selling below its cash levels. The stock was around $11. My dad and I never really did technology. Every time we bought technology we always seemed to do poorly because we were always buying the also-ran. We never seemed to be buying the one that everybody was… We’re not exactly momentum players. Put it that way. We didn’t buy Apple and I see what it is now. I didn’t realise how incredible an investment it would have been.

But, I have to tell you that my dad had a very interesting experience when he worked for Benjamin Graham in the fifties. Ben had come back from lunch one day and said, “Walter what are you working on now. I’d like to see a new idea for me”. So Walter said, “Well, I have a very interesting idea here. I’m working on a company called Haloid.” Ben said, “What is it exactly”. Walter said, “This is a company that was founded in 1906, a Rochester company, and it looks very interesting. Has to do with reproduction, photo reproduction”. Ben said, “This is not an area we usually invest in. It’s not a rail, it’s not a utility, it seems to me this is a new area, this technology thing. I don’t really know if we should do it”. And of course Haloid turned into Xerox. The reason I recall that anecdote is that it’s apropos that I think for value people its very difficult to invest in technology effectively.

Here’s the video of the Annual Ben Graham Conference 2018:

Seth Klarman: 32 Books That Every Investor Should Read

Johnny HopkinsInvesting Books, Seth Klarman2 Comments

Last week we compiled our Top 50 investing Books Of All Time. Over coming weeks we’ll provide recommended reading lists from some of the superinvestors. Back in 2010 Jason Zweig interviewed Seth Klarman at the CFA Institute Annual Conference. During the interview Klarman was asked for his book recommendations. He provided a number of specific books and authors that investors should consider reading including:

  1. Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor
  2. Security Analysis
  3. The Intelligent Investor
  4. You Can Be A Stock Market Genius
  5. The Aggressive Conservative Investor
  6. The Forgotten Depression: 1921: The Crash That Cured Itself
  7. Mr. Market Miscalculates: The Bubble Years and Beyond
  8. The Trouble With Prosperity: A Contrarian’s Tale of Boom, Bust, and Speculation
  9. Money of the Mind: Borrowing and Lending in America from the Civil War to Michael Milken
  10. John Adams: Party of One
  11. Minding Mr. Market: Ten Years on Wall Street With Grant’s Interest Rate Observer
  12. Bernard M. Baruch: The Adventures of a Wall Street Legend
  13. Mr. Speaker!: The Life and Times of Thomas B. Reed The Man Who Broke the Filibuster
  14. When Genius Failed: The Rise and Fall of Long-Term Capital Management
  15. Buffett: The Making of an American Capitalist
  16. America’s Bank: The Epic Struggle to Create the Federal Reserve
  17. The End of Wall Street
  18. Origins of the Crash: The Great Bubble and Its Undoing
  19. While America Aged: How Pension Debts Ruined General Motors, Stopped the NYC Subways, Bankrupted San Diego, and Loom as the Next Financial Crisis
  20. Moneyball: The Art of Winning an Unfair Game
  21. The Fifth Risk
  22. Liar’s Poker
  23. The Money Culture
  24. The Undoing Project: A Friendship That Changed Our Minds
  25. The Big Short: Inside the Doomsday Machine
  26. Flash Boys: A Wall Street Revolt
  27. Boomerang: Travels in the New Third World
  28. The Blind Side: Evolution of a Game
  29. Panic: The Story of Modern Financial Insanity
  30. Losers
  31. The Real Price of Everything: Rediscovering the Six Classics of Economics
  32. Too Big to Fail: Inside the Battle to Save Wall Street

You can find notes from Jason Zweig’s interview with Seth Klarman at the CFA Institute Annual Conference 2010 here:

How Different Are Value Investors From Other Investors?

Johnny HopkinsValue InvestingLeave a Comment

Heres a great article by George Athanassakos at The Globe and Mail which discusses the personality traits of successful value investors and how value investors are different to other types of investors.

Here’s an excerpt from that article:

While the technical aspects of value investing – screening for and valuing low price-to-earnings ratio (P/E) or price-to-book ratio (P/B) stocks – are well understood and documented, there has been no attempt to understand the role that an investor’s individual character plays in investing success even though anecdotal evidence does point to the importance of character and temperament.

For example, James Montier, an investing strategist and member of the asset allocation team at investment firm GMO, believes that successful value investors are contrarian, patient, disciplined, unconstrained and skeptical. And famed value investor Warren Buffett has frequently indicated that his successor must have the right temperament and a keen understanding of human psychology and institutional biases.

But do not all successful investors share similar traits? And if so, then how do value investors really differ from other investors who follow different investing styles?

I wanted to develop a less anecdotal and more formal and systematic understanding of what character strengths and virtues value investors embody.

A few years ago, I conducted in-depth interviews with 19 successful value investors in Canada and the United States and found overwhelming support for the importance of character in value investing. One of the questions asked was “How different are value investors from other investors?”

Interviewees felt that value investors tend to be low-key, not necessarily anti-social, but certainly asocial; they are contrarian, patient and disciplined and willing to do things out of the ordinary. Humility, integrity and independence are also important to value investors. Also interviewees felt that genetics play a big role, as well as family upbringing.

But they also felt that character has to be honed in the right environment. It is difficult to teach the behaviour, as it is not an attribute of your IQ. It is more a frame of mind in making decisions. If one has the right frame of mind, everything falls into place. And so interviewees felt that value investing is closer to being a profession whereas running a money-management firm is a business.

In a more recent research project, I wanted to go further, particularly on the question of the differences between value investors and others. And I wanted to directly compare value investors against others as opposed to just talking to value investors and assuming what they are telling me is different from what others may have told me.

I examined two groups of investors. One consisted of the attendees at the Ben Graham Centre’s 2017 value-investing conference. Attendees at the conference paid a good amount of money to attend and listen to outstanding professional value investors talk about their philosophy and how they put it into practice. One has to assume that this group of people was mostly value investors. The other group I approached was through a company that runs surveys for a fee. I asked them to survey people who work in the financial sector and who own personal trading accounts. As value investors tend to be a small percentage of the population, according to Mr. Buffett, I assumed that this group of surveyed professionals was mostly non-value investors.

To keep the survey short, I used an abbreviated questionnaire of personality which focuses on the belief that (a) there are five basic dimensions of personality, often referred to as the “Big 5” personality traits, and (b) that personality characteristics that are important in peoples’ lives will eventually become a part of their narrative. The five broad personality traits described by the “Big 5” theory are: (a) extraversion (for example, outgoing/energetic versus solitary/reserved), (b) agreeableness (friendly/compassionate versus challenging/detached), (c) openness to experience (inventive/curious versus consistent/cautious), (d) conscientiousness (efficient/organized versus easy-going/careless), and (e) neuroticism (sensitive/nervous versus secure/confident).

What I found was that in general and, on average, the responses from the two groups were similar in the sense that there were no statistical differences in the average answers to most of the questions. One area with some difference was that value investors tended to be more conscientious than others.

However, in my opinion, the most interesting finding was the magnitude of dispersion in the answers. Value-investor answers were grouped within a very narrow range, whereas those of the other group spread out more. That is, value investors tended to have a greater similarity of beliefs than the other group. And this is consistent with what Mr. Buffett says in the sense that either you get value investing right away or not, and if not, there is nothing one can tell you to get it. This is also consistent with what I found when I interviewed professional value investors in that value investing is closer to being a profession, whereas running a money-management firm is a business.

Research is continuing. Stay tuned.

You can read the original article at The Globe and Mail here.

This Week’s Best Investing Reads 08/10/2018

Johnny HopkinsValue Investing NewsLeave a Comment

Here is a list of this week’s best investing reads:

The Longest Bull Market of All-Time? (The Irrelevant Investor)

What People Will Pay For (The Reformed Broker)

Strategy vs. Tactics: What’s the Difference and Why Does it Matter? (Farnam Street)

If It Sounds Too Good to Be True… (A Wealth of Common Sense)

Value Investors Struggle–What Happened? (csinvesting)

The Dangers of Persistence (Safal Niveshak)

The Heroic Assumptions Behind Today’s Unprecedented Equity Valuations (The Felder Report)

The Privatization of Tesla: Stray Tweet or Game Changing News (Aswath Damodaran)

The Double Edged Sword of Avoiding Value Traps (Valedia)

Rare Charlie Munger and Li Lu Interview – Part I (GuruFocus)

Investing in an Age of Disruption (Intrinsic Investing)

Hidden Costs (Of Dollars and Data)

Why the Most Important Idea in Behavioral Decision-Making Is a Fallacy (Scientific American)

Natural Maniacs (Collaborative Fund)

China Thoughts and the Circle of Competence (Base Hit Investing)

The Oversold Gold Market Creates An Asymmetric Opportunity With This Strategy (Palisade Research)

David Steinberg on Approaches to Deep Value Investing (MOI Global)

“Nobody Ever Got Fired for Buying Vanguard…” Well, Maybe They Should Be? (Meb Faber)

Many Americans Still Feel the Sting of Lost Wealth (Bloomberg)

Rebalance or Rush Hour? (Advisor Perspectives)

A Bearish Market Warning From The Tech Bubble Is Back (CNBC)

Jamie Dimon cautions the 10-year Treasury yield could hit 5%: ‘It’s a higher probability than most people think’ (CNBC)

Lessons from Michael Batnick (Big Mistakes) (25iq)

I think Buffett is going to scoop up a number of shares of Apple over the next few years (David Rolfe)

Open Letter to Cigna Stockholders (Carl Icahn)

Growth vs. Value: Waiting for GODOT (CFA Institute)

Musk’s Money Mystery Intrigues SEC (Bloomberg)

New Details About Wilbur Ross’ Business Point To Pattern Of Grifting (Forbes)


Q2 2018 Shareholder Letters

Bill Ackman’s Q2 2018 Shareholder Letter (Pershing Square)

Ariel Investments Q2 2018 Shareholder Letter (Ariel Investments)

Brookfield Q2 2018 Shareholder Letter (Brookfield)


This week’s best investing research reads:

The Shrinking Universe of Public Firms (Bureau Economic Research)

Warning: Stock and Bond Correlation Assumptions are Regime Dependent! (Alpha Architect)

Mean Reversion and Bond ETF Returns (Flirting With Models)

Why It’s So Hard To Predict The Next Bear Market (Vanguard Blog)

Momentum Variations (Factor Research)


This week’s best investing podcasts:

Animal Spirits Episode 41: Despite All Logic (Michael Batnick & Ben Carlson)

Face The Factors (Cliff Asness)

Thinking in Algorithms: My Conversation with Ali Almossawi (Shane Parrish)

Just Survive – Meb Faber (Corey Hoffstein)

Episode #116: Sarah Ketterer, “Without a Quant Risk Model, I’d Argue an Investment Manager Is Completely Blind” (Meb Faber)

Ryan Selkis – The Crypto Barbell and Token Curated Registries (Patrick O’Shaughnessy)

TIP202: Renewable Energy Investing w/ Bryan Birsic (Preston Pysh & Stig Brodersen)

TAM Stock Screener – Stocks Appearing in Greenblatt, Simons, Griffin Portfolios

Johnny HopkinsStock ScreenerLeave a Comment

One of the new weekly additions here at The Acquirer’s Multiple features some of the top picks from our Stock Screeners and some top investors who are holding these same picks in their portfolios. Investors such as Warren Buffett, Joel Greenblatt, Carl Icahn, Jim Simons, Prem Watsa, Jeremy Grantham, Seth Klarman, Ray Dalio, and Howard Marks.

The top investor data is provided from the latest 13F’s over at WhaleWisdom (dated 2018-3-31). This week we’ll take a look at one of the picks from our Large Cap 1000 Stock Screener:

L Brands Inc (NYSE: LB)

A quick look at the price chart below for L Brands shows us that the stock is down 25% in the past twelve months. We currently have the stock trading on an Acquirer’s Multiple of 8.17 which means that it remains undervalued.

(SOURCE: GOOGLE FINANCE)

Superinvestors who currently hold positions in L Brands include:

T Rowe Price – 4,390,074 total shares

Jim Simons – 2,014,733 total shares

Ken Griffin – 474,309 total shares

Joel Greenblatt – 395,823 total shares

Charles Brandes – 15,476 total shares

Murray Stahl – 12,552 total shares

The Large Cap 1000 Stock Screener (19.3%)

From January 2, 1999 to November 29, 2017, the Large Cap Stock Screener generated a total return of 2,797 percent, or a compound growth rate (CAGR) of 19.3 percent per year. This compared favorably with the Russell 1000 Total Return, which returned a cumulative total of 320 percent, or 6.3 percent compound.

TAM Stock Screener – Undervalued Lam Research Corporation (NASDAQ: LRCX)

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One of the cheapest stocks in our Large Cap 1000 Stock Screener is Lam Research Corporation (NASDAQ: LRCX).

Lam Research (Lam) manufactures equipment used to fabricate semiconductors. The firm is focused on the etch, deposition, and clean markets, which are key steps in the semiconductor manufacturing process. Lam’s flagship Kiyo, Vector, and Sabre products are sold in all major geographies to key customers such as Samsung Electronics and Taiwan Semiconductor Manufacturing.

A quick look at Lam’s share price history below over the past twelve months shows that the price is up 19%, but here’s why the company remains undervalued.


(SOURCE: GOOGLE FINANCE)

The following data is from the company’s latest financial statements, dated June 2018.

The company’s latest balance sheet shows that Lam has $4.950 Billion in total cash and cash equivalents. Further down the balance sheet we can see that the company has $610 Million in short-term debt and $1.885 Billion in long-term debt. Therefore, Lam has a net cash position of $2.455 Billion (cash minus total debt).

Financial strength indicators show that the company has a Piotroski F-Score of 8, an Altman Z-Score of 5.24, and a Beneish M-Score of -2.24 All of which illustrate that the company remains financial strong.

If we consider that Lam currently has a market cap of $29.168 Billion, when we subtract the net cash totaling $2.455 Billion that equates to an Enterprise Value of $26.713 Billion.

If we move over to the company’s latest income statements we can see that Lam has $3.218 Billion* in trailing twelve month operating earnings which means that the company is currently trading on an Acquirer’s Multiple of 8.30, or 8.30 times operating earnings. That places Lam squarely in undervalued territory.

The Acquirer’s Multiple is defined as:

Enterprise Value/Operating Earnings*

*We make adjustments to operating earnings by constructing an operating earnings figure from the top of the income statement down, where EBIT and EBITDA are constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–income that a company does not expect to recur in future years–ensures that these earnings are related only to operations.

It’s also important to note that if we take a look at the company’s latest cash flow statements we can see that Lam generated trailing twelve month operating cash flow of $2.656 Billion and had $273 Million in Capex. That equates to $2.383 Billion in trailing twelve month free cash flow, or a FCF/EV Yield of 9%.

In terms of Lam’s annualized Return on Equity (ROE) for the quarter ending June 2018. A quick calculation shows that the company had $6.803 Billion in equity for the quarter ending March 2018 and $6.502 Billion for the quarter ending June 2018. If we divide the combined total of both numbers by two we get $6.652 Billion. If we consider that the company has $2.381 Billion in net income (ttm), that equates to an annualized Return on Equity (ROE) for the quarter ending June 2018 of 36%.

Other considerations regarding Lam include the company’s trailing twelve month revenue of $11.077 Billion, which is higher than any one of the full-year revenues posted in the past five years. The company’s net income of $2.381 Billion (ttm) is the highest in the past five years and 40% higher than the FY2017 net income of $1.698 Billion. Lastly, Lam’s free-cash-flow of $2.383 Billion (ttm) is 27% higher than the $1.872 Billion recorded for FY2017, and a record high in the past five years.

Summary

In summary, Lam is trading on a P/E of 14, compared to its 5Y average of 23.97**, and an Acquirer’s Multiple of 8.30, or 8.30 times operating earnings. The company has a strong balance sheet with a net cash position of $2.455 Billion and a cash-debt ratio of 1.98.  Financial strength indicators show that Lam is financially sound with a Piotroski F-Score of 8, an Altman Z-Score of 5.24, and a Beneish M-Score of -2.24. The company also generates a FCF/EV Yield of 9% (ttm) and has an annualized return on equity of 36% for the quarter ending June 2018. Lam’s revenue of $11.077 Billion (ttm), net income of $2.381 Billion (ttm), and free-cash-flow of $2.383 Billion (ttm) are all record highs in the past five years.

(** Source Morningstar)

Superinvestors Currently Holding Positions In Lam include:

There are a number of superinvestors currently holding positions in Lam including David Tepper, Steven Cohen, George Soros, Joel Greenblatt, Jeremy Grantham, Cliff Asness, Ken Griffin, and Lee Ainslie.

More About The Large Cap 1000 Stock Screener (19.3%)

From January 2, 1999 to November 29, 2017, the Large Cap 1000 Stock Screener generated a total return of 2,797 percent, or a compound growth rate (CAGR) of 19.3 percent per year. This compared favorably with the Russell 1000 Total Return, which returned a cumulative total of 320 percent, or 6.3 percent compound.

Jim Rogers: “Anytime That You Think You’ve Become A Financial Genius—It Is Time To Sit Back And Do Nothing For A While”

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One of our favorite investing books here at The Acquirer’s Multiple is – A Gift to My Children: A Father’s Lessons for Life and Investing, by Jim Rogers. Rogers co-founded the successful Quantum Fund with George Soros back in 1973. There’s a great passage in the book in which Rogers provides a great lesson for investors that are enjoying success.

Here’s an excerpt from that book:

Never act upon wishful thinking. Act without checking the facts, and chances are that you will be swept away along with the mob. Whenever you see people acting in the same way, it is time to investigate supply and demand objectively.

Let me give you an example: In 1980 everybody wanted to own gold. The price had skyrocketed to over $850 per troy ounce. But one could see that gold was being overproduced; after all, a supplier is bound to increase production for anything that rises in price. A lot of people bought gold at this inflated price, insisting that it was somehow different from other commodities. Boy, were they wrong.

More gold started to be mined, and, at the same time, the demand for the precious metal scaled back. In fact, many folks who owned gold jewelry sold it to refiners for melting, which further increased the supply. By the year 2000, the price of gold had sunk to about $250 an ounce. History shows that most bubbles take years for recovery, so there is rarely any reason to rush in after a period of mania. The exact same change in supply and demand happened with silver, which tumbled from $50 in 1980 during its mania to under $4 a couple of decades later.

When you see so many people being unrealistic, stop and make an objective assessment of the supply-and-demand equation. Bearing in mind this basic principle will bring you that much closer to success.

Anytime that you think you’ve become a financial genius— when, in fact, you simply have had the good luck to turn a profit—it is time to sit back and do nothing for a while. If you stumble upon success in a bull market and decide that you are gifted, stop right there. Investing at that point is dangerous, because you are starting to think like everybody else. Wait until the mob psychology that is influencing you subsides.

Warren Buffett: How to Minimize Investment Returns

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In their Berkshire Hathaway 2005 shareholder letter Warren Buffett provided a great illustration of how shareholders continually sabotage their investment returns saying:

“Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, “I can calculate the movement of the stars, but not the madness of men.” If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.”

Here’s an excerpt from that letter:

It’s been an easy matter for Berkshire and other owners of American equities to prosper over the years. Between December 31, 1899 and December 31, 1999, to give a really long-term example, the Dow rose from 66 to 11,497. (Guess what annual growth rate is required to produce this result; the surprising answer is at the end of this section.) This huge rise came about for a simple reason: Over the century American businesses did extraordinarily well and investors rode the wave of their prosperity. Businesses continue to do well. But now shareholders, through a series of self-inflicted wounds, are in a major way cutting the returns they will realize from their investments.

The explanation of how this is happening begins with a fundamental truth: With unimportant exceptions, such as bankruptcies in which some of a company’s losses are borne by creditors, the most that owners in aggregate can earn between now and Judgment Day is what their businesses in aggregate earn.

True, by buying and selling that is clever or lucky, investor A may take more than his share of the pie at the expense of investor B. And, yes, all investors feel richer when stocks soar. But an owner can exit only by having someone take his place. If one investor sells high, another must buy high. For owners as a whole, there is simply no magic – no shower of money from outer space – that will enable them to extract wealth from their companies beyond that created by the companies themselves.

Indeed, owners must earn less than their businesses earn because of “frictional” costs. And that’s my point: These costs are now being incurred in amounts that will cause shareholders to earn far less than they historically have.

To understand how this toll has ballooned, imagine for a moment that all American corporations are, and always will be, owned by a single family. We’ll call them the Gotrocks. After paying taxes on dividends, this family – generation after generation – becomes richer by the aggregate amount earned by its companies. Today that amount is about $700 billion annually. Naturally, the family spends some of these dollars. But the portion it saves steadily compounds for its benefit. In the Gotrocks household everyone grows wealthier at the same pace, and all is harmonious.

But let’s now assume that a few fast-talking Helpers approach the family and persuade each of its members to try to outsmart his relatives by buying certain of their holdings and selling them certain others.

The Helpers – for a fee, of course – obligingly agree to handle these transactions. The Gotrocks still own all of corporate America; the trades just rearrange who owns what. So the family’s annual gain in wealth diminishes, equaling the earnings of American business minus commissions paid. The more that family members trade, the smaller their share of the pie and the larger the slice received by the Helpers. This fact is not lost upon these broker-Helpers: Activity is their friend and, in a wide variety of ways, they urge it on.

After a while, most of the family members realize that they are not doing so well at this new “beatmy-brother” game. Enter another set of Helpers. These newcomers explain to each member of the Gotrocks clan that by himself he’ll never outsmart the rest of the family. The suggested cure: “Hire a manager – yes, us – and get the job done professionally.” These manager-Helpers continue to use the broker-Helpers to execute trades; the managers may even increase their activity so as to permit the brokers to prosper still more. Overall, a bigger slice of the pie now goes to the two classes of Helpers.

The family’s disappointment grows. Each of its members is now employing professionals. Yet overall, the group’s finances have taken a turn for the worse. The solution? More help, of course.

It arrives in the form of financial planners and institutional consultants, who weigh in to advise the Gotrocks on selecting manager-Helpers. The befuddled family welcomes this assistance. By now its members know they can pick neither the right stocks nor the right stock-pickers. Why, one might ask, should they expect success in picking the right consultant? But this question does not occur to the Gotrocks, and the consultant-Helpers certainly don’t suggest it to them.

The Gotrocks, now supporting three classes of expensive Helpers, find that their results get worse, and they sink into despair. But just as hope seems lost, a fourth group – we’ll call them the hyper-Helpers – appears. These friendly folk explain to the Gotrocks that their unsatisfactory results are occurring because the existing Helpers – brokers, managers, consultants – are not sufficiently motivated and are simply going through the motions. “What,” the new Helpers ask, “can you expect from such a bunch of zombies?”

The new arrivals offer a breathtakingly simple solution: Pay more money. Brimming with selfconfidence, the hyper-Helpers assert that huge contingent payments – in addition to stiff fixed fees – are what each family member must fork over in order to really outmaneuver his relatives.

The more observant members of the family see that some of the hyper-Helpers are really just manager-Helpers wearing new uniforms, bearing sewn-on sexy names like HEDGE FUND or PRIVATE EQUITY. The new Helpers, however, assure the Gotrocks that this change of clothing is all-important, bestowing on its wearers magical powers similar to those acquired by mild-mannered Clark Kent when he changed into his Superman costume. Calmed by this explanation, the family decides to pay up.

And that’s where we are today: A record portion of the earnings that would go in their entirety to owners – if they all just stayed in their rocking chairs – is now going to a swelling army of Helpers.

Particularly expensive is the recent pandemic of profit arrangements under which Helpers receive large portions of the winnings when they are smart or lucky, and leave family members with all of the losses – and large fixed fees to boot – when the Helpers are dumb or unlucky (or occasionally crooked).

A sufficient number of arrangements like this – heads, the Helper takes much of the winnings; tails, the Gotrocks lose and pay dearly for the privilege of doing so – may make it more accurate to call the family the Hadrocks. Today, in fact, the family’s frictional costs of all sorts may well amount to 20% of the earnings of American business. In other words, the burden of paying Helpers may cause American equity investors, overall, to earn only 80% or so of what they would earn if they just sat still and listened to no one.

Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, “I can calculate the movement of the stars, but not the madness of men.” If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.

Here’s the answer to the question posed at the beginning of this section: To get very specific, the Dow increased from 65.73 to 11,497.12 in the 20th century, and that amounts to a gain of 5.3% compounded annually. (Investors would also have received dividends, of course.) To achieve an equal rate of gain in the 21st century, the Dow will have to rise by December 31, 2099 to – brace yourself – precisely 2,011,011.23. But I’m willing to settle for 2,000,000; six years into this century, the Dow has gained not at all.

You can read the 2005 Berkshire Hathaway shareholder letter here.

Whitney Tilson: Analysis of Berkshire Hathaway’s Blowout Earnings

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Over the weekend Whitney Tilson tweeted on Berkshire Hathaway’s blowout earnings saying:

Here’s the analysis on Berkshire’s Hathaway’s Q2 2018:

Berkshire reported blowout earnings this morning (see earnings report here: www.berkshirehathaway.com/news/aug0418.pdf and 10Q here: www.berkshirehathaway.com/qtrly/2ndqtr18.pdf).

Here’s Glenn’s take (as always, our slide presentation is posted at: www.tilsonfunds.com/BRK.pdf):

Berkshire Hathaway reported Q2 2018 earnings this morning. The headline numbers for the quarter were startling, with net earnings per share almost tripling from $4.3 billion to $12.0 billion.

These headline numbers were impacted by a number of items, the most important of which was a new accounting rule that requires changes in the value of equity holdings, both realized and unrealized, to be shown in the income statement (previously the income statement only reflected realized gains). In addition, Berkshire is a major beneficiary of the lower corporate tax rate for U.S. corporations.

But even excluding these two items, Berkshire’s pretax operating earnings soared 67% (!) from $4.1 billion to $6.9 billion. The standout was the insurance group, led by GEICO, where pretax income jumped more than 5x from $119 million to $673 million. Overall, insurance underwriting profits were $1.2 billion vs. -$24 million in Q2 ’17.

Investment income was up almost 8%, increasing to a run-rate of over $5 billion annually, and the pretax profit of all other operating businesses, the largest of which are manufacturing and BNSF, grew 9%.

Other items of note:
• Float grew by $2 billion year to date to $116 billion.
• Book value per share grew to $217,677 per share, up 3% year to date.
• With the stock today at $304,671, it’s trading at 1.4x book value.
• No shares were bought back under the repurchase program.
• Cash and investments per share were virtually unchanged from the end of 2017.

In summary, it was an exceptionally strong quarter. However, since the majority of the change in earnings came from insurance underwriting, our estimate of intrinsic value didn’t change as much as one might expect (we only include an estimate of normalized insurance underwriting pretax profit of $1 billion annually in our valuation methodology – an overly conservative assumption in all likelihood, in light of the $1.7 billion underwriting profit in only the first half of this year).

Net net, our estimate of intrinsic value, using cash and investments plus an 11x multiple on normalized pretax earnings, is now $348,000 for the A shares and $232 for the B shares, meaning that Berkshire today is trading at a 12% discount to intrinsic value.

Value Stocks Come Roaring Back From the Dead – Bloomberg

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Here’s a great article at Bloomberg which discusses the possible shift back to value stocks as cracks start to emerge in momentum stocks thanks to earnings disappointments from companies such as Facebook Inc. and Netflix Inc saying:

Cheap equities are in vogue at long last — lending a helping hand to stock markets hit by the recent trials and tribulations of tech companies.

If economic growth and strong earnings redress its undervaluation, the investing style may rebound in earnest — signaling there’s more juice left in the aging bull market.

But there’s a problem. Few can agree whether last week’s outperformance in the U.S. and Europe was a head fake or a sign of things to come.

In the bullish corner are the likes of JPMorgan Chase & Co.’s Marko Kolanovic and Dennis DeBusschere at Evercore ISI. They argue value has the potential to pick up the slack, as cracks emerge in momentum equities thanks to earnings disappointments from companies such as Facebook Inc. and Netflix Inc.

“Despite ebbing trade tensions, the economic backdrop remained positive last week supporting the continued outperformance of value,” DeBusschere, head of portfolio strategy, wrote in a Monday note. The sharp shift suggests a “meaningful rotation” out of momentum and into value is on the way, he said.

A market-neutral version of U.S. value outperformed momentum by 0.5 percentage points last week, the most in four months, data compiled by Bloomberg show. Meanwhile, momentum in Europe has declined 1 percent compared to a 0.1 percent value gain over the past week.

Still, one week of gains a trend does not make, particularly when you consider financials have the largest weighting in U.S. value. The recent bounce coincided with a steepening of the Treasury yield curve, which tends to boost net interest margins for banks. But that’s a situation few see enduring.

“We see a stronger macro case for the yield curve to continue its flattening trend which is likely to be a headwind for further value out performance if this relationship holds,” Mayank Seksaria, chief macro strategist at Macro Risk Advisors, wrote in a note.

Morgan Stanley, for its part, sees room for cheap shares to power ahead, even as it warns the risks for a broad S&P correction have risen.

Over the past 15 years, the price-to-earnings gap between value and growth stocks has only been higher four percent of the time, according to data compiled by the bank.

Depressed valuations boost the appeal of value — and the high price of growth leaves the group acutely vulnerable. Since the latter prices-in strong future earnings, signs the business cycle might be turning is decidedly problematic for the allocation strategy.

“Rising valuation dispersion suggests a better backdrop for value investing,” strategists headed by Matthew Garman wrote in a note.

You can read the original article at Bloomberg here.

50 Of The Best Investing Books Of All Time

Johnny HopkinsInvesting Books2 Comments

Last week we put together our list of 150 of the best investing blogs on the planet for 2018. This week we’ve compiled a list of what we consider to be 50 of the best investing books of all time. This list is in no way complete or in any particular order. If you would like a add a book to the list, please add it to the comments section below:

  1. Poor Charlie’s Almanack: The Wit and Wisdom of Charles T Munger (Peter Kaufman)
  2. Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor (Seth Klarman)
  3. The Intelligent Investor: The Definitive Book on Value Investing. A Book of Practical Counsel (Benjamin Graham)
  4. The Most Important Thing: Uncommon Sense for the Thoughtful Investor (Howard Marks)
  5. Value Investing: From Graham to Buffett and Beyond (Bruce Greenwald)
  6. Security Analysis: Sixth Edition, Foreword by Warren Buffett (Benjamin Graham)
  7. Fooling Some of the People All of the Time, A Long Short (and Now Complete) Story (David Einhorn)
  8. You Can Be a Stock Market Genius: Uncover the Secret Hiding Places of Stock Market Profits (Joel Greenblatt)
  9. Common Stocks and Uncommon Profits and Other Writings (Philip Fisher)
  10. What Works on Wall Street, Fourth Edition: The Classic Guide to the Best-Performing Investment Strategies of All Time (James O’Shaughnessy)
  11. The Essays of Warren Buffett: Lessons for Corporate America (Warren Buffett, Lawrence Cunningham)
  12. The Dhandho Investor: The Low-Risk Value Method to High Returns (Mohnish Pabrai)
  13. Charlie Munger: The Complete Investor (Tren Griffin)
  14. The Little Book of Value Investing (Christopher Browne)
  15. The Little Book That Beats the Market (Joel Greenblatt)
  16. The Little Book That Builds Wealth: The Knockout Formula for Finding Great Investments (Pat Dorsey)
  17. The Warren Buffett Way (Robert Hagstrom)
  18. Damn Right!: Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger (Janet Lowe)
  19. Snowball: Warren Buffett and the Business of Life (Alice Schroeder)
  20. Berkshire Hathaway Letters to Shareholders, 1965-2017 (Warren Buffett)
  21. Value Investing: Tools and Techniques for Intelligent Investment (James Montier)
  22. Mosaic: Perspectives on Investing (Mohnish Pabrai)
  23. Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations (Tobias Carlisle)
  24. The Manual of Ideas: The Proven Framework for Finding the Best Value Investments (John Mihaljevic)
  25. The Art of Value Investing: How the World’s Best Investors Beat the Market (John Heins, Whitney Tilson)
  26. Buffettology: Warren Buffett’s Investing Techniques (Mary Buffett, David Clark)
  27. The Acquirer’s Multiple: How the Billionaire Contrarians of Deep Value Beat the Market (Tobias Carlisle)
  28. One Up On Wall Street: How To Use What You Already Know To Make Money In The Market (Peter Lynch)
  29. Buffett: The Making Of An American Capitalist (Roger Lowenstein)
  30. The Money Game (Adam Smith)
  31. Education of a Value Investor (Guy Spier)
  32. The Little Book That Still Beats the Market (Joel Greenblatt)
  33. Beating the Street (Peter Lynch)
  34. Irrational Exuberance: Revised and Expanded Third Edition (Robert Shiller)
  35. A Random Walk down Wall Street: The Time-tested Strategy for Successful Investing (Burton Malkiel)
  36. Applied Value Investing: The Practical Application of Benjamin Graham and Warren Buffett’s Valuation Principles to Acquisitions, Catastrophe Pricing Execution (McGraw-Hill Finance & Investing) (Joseph Calandro Jr.)
  37. The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success (William Thorndike)
  38. The Alchemy of Finance (George Soros)
  39. Competition Demystified: A Radically Simplified Approach to Business Strategy (Bruce Greenwald)
  40. Thinking, Fast And Slow (Daniel Kahneman)
  41. The Little Book of Behavioral Investing: How not to be your own worst enemy (James Montier)
  42. Manias, Panics, and Crashes: A History of Financial Crises (Charles Kindleberger, Robert Aliber)
  43. The Black Swan: Second Edition: The Impact of the Highly Improbable (Nassim Taleb)
  44. The Rediscovered Benjamin Graham: Selected Writings of the Wall Street Legend (Benjamin Graham, Janet Lowe)
  45. The Warren Buffett Portfolio: Mastering the Power of the Focus Investment Strategy (Robert Hagstrom)
  46. The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns (John Bogle)
  47. Investment Valuation: Tools and Techniques for Determining the Value of Any Asset (Aswath Damodaran)
  48. Stocks for the Long Run 5/E: The Definitive Guide to Financial Market Returns & Long-Term Investment Strategies (Jeremy Siegel)
  49. When Genius Failed: The Rise and Fall of Long-Term Capital Management (Roger Lowenstein)
  50. Against the Gods: The Remarkable Story of Risk (Peter Bernstein)
  51. Market Wizards: Interviews With Top Traders (Jack Schwager)

This Week’s Best Investing Reads 08/3/2018

Johnny HopkinsValue Investing NewsLeave a Comment

Here is a list of this week’s best investing reads:

The Spectrum of Financial Dependence and Independence (Collaborative Fund)

The 3 Levels of Wealth (A Wealth of Common Sense)

No, No, No (The Irrelevant Investor)

Once in a lifetime, if you’re lucky (The Reformed Broker)

The Untapped Market That’s Ripe For Activists (Institutional Investor)

It’s More Than Just FANG Stocks Investors Should Be Worried About (The Felder Report)

4 Lessons From the Richest Woman In Wall Street History (Of Dollars and Data)

Interview With Rob Arnott – Research Affiliates (The Big Picture)

Gold: Come On – Admit It – You Want To Own It (The Macro Tourist)

Be Water, My Friend (Safal Niveshak)

Eyeing returns in tennis and investment (Schroders – Value Perspective)

Value Still Waiting for a Catalyst (Advisor Perspectives)

Inside Google’s Venture Capital “Machine” (Axios)

Not So Predictable (Humble Dollar)

The Skeptic’s Checklist (Behavioral Value Investor)

Questions I’d Be Asking If I Owned Tesla Stock (Vitaliy Katsenelson)

The Real (Cautionary) Take Of David Einhorn (LT3000 Blog)

Goldman Sachs 2018 Mid-Year Report (Goldman Sachs)

If You Take Risk, Get Compensated For It (Valedia)

Langone and Druckenmiller Speech 2018 Alexander Hamilton Awards (Manhattan Institute)

Lessons from Elad Gil and High Growth Handbook (25iq)

A Look At Apple’s Trillion-Dollar World (Bloomberg)

Be Wary of Mutual Funds Run by Hedge-Fund Managers (Barron’s)

The (Other) Problem with Active Management (Behavioural Investment)

Measuring Process Diversification in Trend Following (Flirting With Models)

Home Is For Your Heart, Not Your Portfolio (Global Investment Strategy)

An Inverted Yield Curve May Not Portend Doom (WSJ)


This week’s best investing research reads:

Finance Journals Rarely Publish Articles with low T-stats (Alpha Architect)

What Are Leading Indicators Showing For 2H 2018? (Upfina)

What Can Fintech Accelerators Teach Financial Advisers? (CFA Institute)

If there are no trends, there will be no gains (mrzepczynski)

Tug of War in The Bond Market (Dr Ed’s Blog)

Factors: Shorting Stocks vs The Index (Factor Research)

Cyclically Non-Adjusted Earnings (Adsolute Return Investing)

Major Asset Classes | July 2018 | Performance Review (The Capital Spectator)

Ranking the Worst-Ever One-Day Stock Market Cap Crashes (Political Calculations)


This week’s best investing podcasts:

Steve Glickman, Opportunity Zones: “Ultimately, If You Hold for…10 Years or More…You Don’t Pay Any New Capital Gains – Ever” (Meb Faber)

What Worked on Wall Street (Ben Carlson & Michael Batnick)

Cathie Wood – Investing in Innovation (Patrick O’Shaughnessy)

TIP201: Big Mistakes That Great Investors Make w/ Michael Batnick (Preston Pysh & Stig Brodersen)


Q2 2018 Commentaries

Weitz Value Fund Q2 2018 Commentary (Weitz Investment Management)

Tweedy Browne Q2 2018 Commentary (Tweedy Browne Fund Inc)

Fairholme 2018 Semi Annual (Fairholme Funds)

TAM Stock Screener – Undervalued RMR Group Inc (NASDAQ: RMR)

Johnny HopkinsStock Screener2 Comments

One of the cheapest stocks in our All Investable Stock Screener is RMR Group Inc (NASDAQ: RMR).

The RMR Group Inc (RMR) is a holding company which conducts its business through its subsidiary RMR Group LLC. The RMR Group LLC is an alternative asset management company which invests in real estate and manage real estate related businesses. The company’s business primarily consists of providing management services to publicly owned real estate investment trusts, or REITs, and real estate related operating companies. It also provides management services to real estate securities mutual fund and commercial real estate finance company. The company operates through single segment being RMR LLC. The RMR Group derives its revenue from providing business and property management services as well as advisory and other services.

A quick look at RMR’s share price history below over the past twelve months shows that the price is up 77%, but here’s why the company remains undervalued.


(SOURCE: GOOGLE FINANCE)

The following data is from the company’s latest financial statements, dated March 2018.

The company’s latest balance sheet shows that RMR has $276 Million in total cash and cash equivalents. Further down the balance sheet we can see that the company has zero debt. Therefore, RMR has a net cash position of $276 Million (cash minus total debt).

Financial strength indicators show that the company has a Piotroski F-Score of 8, an Altman Z-Score of 21.02, and a Beneish M-Score of -3.72 All of which illustrate that the company remains financial strong.

If we consider that RMR currently has a market cap of $1.398 Billion, when we subtract the net cash totaling $276 Million and add back the minority interests of $209 Million, that equates to an Enterprise Value of $1.331 Billion.

If we move over to the company’s latest income statements we can see that RMR has $252 Million* in trailing twelve month operating earnings which means that the company is currently trading on an Acquirer’s Multiple of 5.28, or 5.28 times operating earnings. That places RMR squarely in undervalued territory.

The Acquirer’s Multiple is defined as:

Enterprise Value/Operating Earnings*

*We make adjustments to operating earnings by constructing an operating earnings figure from the top of the income statement down, where EBIT and EBITDA are constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–income that a company does not expect to recur in future years–ensures that these earnings are related only to operations.

It’s also important to note that if we take a look at the company’s latest cash flow statements we can see that RMR generated trailing twelve month operating cash flow of $231 Million and had $1 Million in Capex. That equates to $230 Million in trailing twelve month free cash flow, or a FCF/EV Yield of 17%.

In terms of RMR’s annualized Return on Equity (ROE) for the quarter ending March 2018. A quick calculation shows that the company had $217 Million in equity for the quarter ending December 2018 and $223 Million for the quarter ending March 2018. If we divide the combined total of both numbers by two we get $220 Million. If we consider that the company has $91 Million in net income (ttm), that equates to an annualized Return on Equity (ROE) for the quarter ending March 2018 of 41%.

Other considerations regarding RMR include the company’s trailing twelve month revenue of $390 Million, which is higher than any one of the full-year revenues posted in the past five years. The company’s net income of $91 Million (ttm) is the highest in the past five years and 116% higher than the FY2017 net income of $42 Million. Lastly, RMR’s free-cash-flow of $230 Million (ttm) is 84% higher than the $125 Million recorded for FY2017, and a record high in the past five years.

Summary

In summary, RMR is trading on a P/E of 15.3 and an Acquirer’s Multiple of 5.28, or 5.28 times operating earnings. The company has a strong balance sheet with a net cash position of $276 Million and zero debt.  Financial strength indicators show that RMR is financially sound with a Piotroski F-Score of 8, an Altman Z-Score of 21.02, and a Beneish M-Score of -3.72. The company also generates a FCF/EV Yield of 17% (ttm) and has an annualized return on equity of 41% for the quarter ending March 2018. RMR’s revenue of $390 Million (ttm), net income of $91 Million (ttm), and free-cash-flow of $230 Million (ttm) are all record highs in the past five years.

Superinvestors Currently Holding Positions In RMR include:

There are a number of superinvestors currently holding positions in RMR including Cliff Asness, T. Rowe Price, Jim Simons, Chuck Royce, James O’Shaughnessy, and Paul Tudor Jones.

More About The All Investable Stock Screener (CAGR 25%)

From January 2, 1999 to November 29, 2017, the All Investable Stock Screener generated a total return of 6,765 percent, or a compound growth rate (CAGR) of 25.0 percent per year. This compared favorably with the Russell 3000 TR, which returned a cumulative total of 321 percent, or 6.4 percent compound.

TAM Stock Screener – Stocks Appearing in Greenblatt, Gabelli, Grantham Portfolios

Johnny HopkinsStock ScreenerLeave a Comment

One of the new weekly additions here at The Acquirer’s Multiple features some of the top picks from our Stock Screeners and some top investors who are holding these same picks in their portfolios. Investors such as Warren Buffett, Joel Greenblatt, Carl Icahn, Jim Simons, Prem Watsa, Jeremy Grantham, Seth Klarman, Ray Dalio, and Howard Marks.

The top investor data is provided from the latest 13F’s over at WhaleWisdom (dated 2018-3-31). This week we’ll take a look at one of the picks from our All Investable Stock Screener:

Tenneco Inc (NYSE: TEN)

A quick look at the price chart below for Tenneco shows us that the stock is down 17% in the past twelve months. We currently have the stock trading on an Acquirer’s Multiple of 5.61 which means that it remains undervalued.

(SOURCE: GOOGLE FINANCE)

Superinvestors who currently hold positions in Tenneco include:

LSV Asset Management – 998,853 total shares

Mario Gabelli -739,874 total shares

Steven Romick – 370,626 total shares

Joel Greenblatt – 147,906 total shares

Aexander Roepers – 90,717 total shares

Jeremy Grantham – 75,500 total shares

Cliff Asness – 64,394 total shares

Scott Black – 35,950 total shares

Ken Griffin – 21,020 total shares

Paul Tudor Jones – 9,534 total shares

The All Investable Stock Screener (CAGR 25%)

From January 2, 1999 to November 29, 2017, the All Investable Stock Screener generated a total return of 6,765 percent, or a compound growth rate (CAGR) of 25.0 percent per year. This compared favorably with the Russell 3000 TR, which returned a cumulative total of 321 percent, or 6.4 percent compound.

Alexander Roepers: Why Disciplined Investing Trumps Big Headlines

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One of the activist investors we follow closely here at The Acquirer’s Multiple is Alexander Roepers. Earlier this year Roepers did a great interview with Forbes in which he discussed his investment strategy. He highlighted the importance of thinking like a private equity owner, and staying within your circle of competence, in order to achieve investment success saying:

“It’s a time-tested approach of investing in predictable, reliable, cash flow generators with a very much business owner mentality. We do a ton of homework and we think as if we’re going to own the whole company. It’s really employing a private equity owner mentality in evaluating publicly traded equities that are within our universe. We only want to go for transparent companies that we can analyze and understand.”

Here’s an excerpt from that article:

Since the crisis, hedge fund activists have made big headlines by challenging companies as large as General Electric, Procter & Gamble, ADP, Pepsico and Xerox to perform better, change management, or even break apart. For Alexander Roepers, a Dutch-born hedge fund activist based in New York, deploying a quieter and more focused approach drives returns at his top performing fund, Atlantic Investment Management.

Roepers is an activist investor, but instead of running public fights with company boards and management teams, he takes a softer approach, back-channeling with targets and working constructively to improve performance. Part of this playbook hinges on specialization: Instead of canvassing every corner of the stock market for ideas, Roepers invests in industrial, aviation and engineering companies where he’s emerged as a weighty and consistent investor over the span of three decades. When Atlantic builds positions in companies Roepers and his team deem are undervalued or underperforming, it generally leads to an open a dialogue. Change is accomplished without the juicy headlines of a public proxy battle.

This approach is all part of Roepers’ repeatable process. Atlantic doesn’t stray into what it doesn’t know and the $1.3 billion in assets firm has strong returns to show for it. Since inception in October 1992, Atlantic’s Cambrian fund has returned 16.1% annualized net of fees and it gained 9.7% in 2017. It’s opened this year up solidly. A newer Cambrian Global Fund has gained 12% annualized since inception in January 2012 and it gained 16.4% in 2017, according to documents obtained by Forbes.

Roepers got a taste of industrial companies in the 1980s when days after graduating Harvard Business School he joined the corporate finance department of Dover, one of the blue chips in the sector. Just on the job, Roepers was sent on the road by Dover to hunt for acquisitions. Within months, he’d bagged his first big deal, buying a California-based company called Pathway Bellows.

Through the 1980s, he worked on numerous acquisitions and the experience opened his eyes to the opportunity of disciplined investing in the sector. In 1988, Roepers decided to become an investor, specializing in what one might call “old economy” stocks. Atlantic normally invests in companies with a market value of between $1 billion and $20 billion and concentrates its portfolio to about two dozen holdings. The firm also runs a long / short strategy, where Roepers will make carefully-sized short trades. Currently, Atlantic is short Elon Musk’s Tesla. (more on that later)

In February, Forbes sat down with Roepers at Atlantic’s headquarters in 666 Fifth Avenue to learn about his strategy. Below is a lightly edited and excepted Q&A where Roepers explains his process and a few recent investments.

Antoine Gara: Can you briefly explain you investment process?

Alex Roepers: I started Atlantic in 1988 and the idea was to be only in public equities, using a highly concentrated value investing approach to a very defined universe of mid-cap, industrial and consumer companies.

It’s a time-tested approach of investing in predictable, reliable, cash flow generators with a very much business owner mentality. We do a ton of homework and we think as if we’re going to own the whole company. It’s really employing a private equity owner mentality in evaluating publicly traded equities that are within our universe. We only want to go for transparent companies that we can analyze and understand.

As a result, we avoid entire sectors, such as those with risk of technological obsolescence like biotech and high tech. In these sectors, there’s substantial risk that things can change dramatically more than anticipated through new inventions. Also, we avoid sectors that lack transparency such as banks, brokerage firms and insurance companies.

We much prefer an elevator company over a furniture maker, where the elevator company has an installed base of customers, whereas furniture maker is highly cyclical. We also don’t go with the companies where the commodity pricing drives value, for instance iron ore and coal miners, or a pure oil exploration company. We avoid those areas.

We avoid areas where idiosyncratic risk is very difficult to understand. We look for solid balance sheets, where the interest expense is less than a quarter of EBITDA and we’re looking for companies that remain profitable in all market cycles. This is important because we take a business owner mentality and also because we’re highly concentrated. In order to outperform markets over time, you need to be highly concentrated in your best ideas.

AG: You’re an activist investor, but I don’t see you on TV criticizing CEOs. How do you operate?

AR: There’s another thing that differentiates Atlantic. We’re a global research firm. We have analysts from Asia, we have analysts from Europe. We do hundreds of visits a year outside of the United States. I believe last year we did 500 company visits across the U.S., Europe and Japan.

So we have this added value to offer the companies we’re talking to. We’ve met with their competitors and peers all over the world. Once we get to the point where we know the company well, we go meet the CEO to understand why the company is undervalued. And we try to craft a road map with them, or try to understand how they could craft a roadmap that’s credible and returns them to stronger earnings or a higher valuation.

It starts with letters written to the management to be discussed at the board level. Sometimes our analysis involves operational restructuring, McKinsey-like work where we study the best-in-class peers and identify what they’ve done well in terms of working capital management, operating margins and gross profit margins. Then we plot a roadmap of blocking and tackling to get to those numbers.

Other times it involves capital allocation like buybacks and dividends. And then there’s the deployment of free cash flow; are there opportunities to enter new markets, or new products? Finally, there’s M&A. This is all self-help, things a company can do to help themselves get things right. We’re there to help them identify what they are, and to push on the things that we think are priorities.

At all times, we want to stay liquid. There’s a key differentiation. Illiquid activism, which includes board seats and proxy battles, makes very little sense to us because you can’t trade on it. We employ rigorous sell discipline on our investments, so we’re doing everything we can to stay liquid and very constructively engaged. We also want to be respectful.

AG: Give us some examples of how Atlantic’s style looks in practice.

AR: Take GKN. It’s an English conglomerate in the automotive and aerospace sectors. They build parts for drive trains and chassis and they have high market shares in their businesses. But the management believed it was too dependent on automotive so it bought Volvo Aerospace and Fokker Aerospace, in addition to a whole bunch of companies in Europe. Put together, half the business is now aerospace-related.

But they got to the point where they underperformed across the board and were vulnerable. They needed to take corporate actions to improve both businesses. They could split the company in two pieces and garner a high value, even for the underperforming aerospace business. If they didn’t do that, they’d get taken over.

We got involved in early 2016 at GBP250 and we knew the company pretty well and started to get active in speaking with management, trying to tell them how to get things on track. Things went reasonably well. It’s very important for us to be able to sell, so when the stock moved from GBP250 to GBP350, we reduced because the risk and reward was less. Then in the last quarter of 2017 (with shares floundering around GBP310), we were extremely active and rebuilt a large position. The company was about to split the business and appoint the CEO of the aerospace business as the head of the whole company. Then they realized there was a problem in his aerospace business and they fired him.

It was pretty unusual situation but it had everything. A botched succession, in addition to the actions the company could take to improve things, such as split into two. We were there proposing ideas that made sense and, frankly, if they didn’t move fast enough they were going to get taken over. Within six weeks of taking the position, they got a takeover offer from Melrose Industries (pushing shares well above GBP400) and we exited.

Right now Owens-Illinois is our largest holding. I mentioned we actively trade stocks. Today, we own nearly seven million Owens Illinois shares, but over the last eight years, we’ve bought 36 million shares and we’ve sold 30 million shares. I’ve known this company since 1984 when I came out of business school and I’ve seen it become the largest glass bottle maker in the world. Twenty-five percent of all glass bottles in the world are made by Owens Illinois, 70% of that is international. A key point, glass bottles don’t travel very well so plants are within a 300 mile radius to their market. These don’t scale and are prohibitively expensive for new entrants; so OI is a monopoly or duopoly in the 21 countries it operates in.

We’ve been trading it and been involved with it since 2009 when we bought the first in the mid-teens. It doubled and we trimmed. We’ve increased and reduced the position a number of times. Recently, it backed off to $22 a share. Right now, Owens Illinois is cheaper than almost any time ever; it’s the cheapest stock in our universe. There are a number of catalysts like corporate actions and activism that are already going on. And then there’s the prospect of a takeover. Asbestos liabilities, which have kept the private equity guys away, are now a finite issue.

AG: You also take shorts, explain why. And why are you short Tesla?

AR: The short ideas are a byproduct of what we do on the long side. As you look for great, undervalued companies you come across incredibly mismanaged companies that have done dumb acquisitions, or have grandstanding CEOs, or accounting issues and too much debt. With our shorts we take a very controlled position, normally a 1%-to-2% weight with strict stop losses.

Valeant was a controversial one to say the least because there were a lot of smart people on the long side and a lot of people were on the short side. I took an opinion initially quite early, that there was a purchase price accounting game going on with leverage, plus we looked at their drug pricing polices and decided to short the stock.

Another name that we published on, which is very controversial is Tesla. It a has tremendous following on the long side. It has a lot of detractors on the other side. We’re on the detractor side and that is rooted in my experience in the automotive industry. It is ridiculously misunderstood. The whole debate has to be removed from everything that Elon Musk is saying and everything that’s going on with electrification. The only thing that matters is the production facility in Fremont, California. That’s all you need to know. If you look at promises being made in terms of Model 3 cars sold, orders taken, Elon cannot physically, even under the best of circumstances, removing every bottleneck there is, make anywhere near the numbers of cars he’s promising. It is a money losing operation and will continue to be that way for as long as we can see.

While we’re still waiting for Atlantic’s Q2 2018 shareholder letter you can read his January 2018 Annual Letter here.