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Jul 29 14

Quarterly Earnings: Our Sentiments Exactly!

by Cove Street Capital

by Ben Claremon | Research Analyst

As long term-focused investors, we have a certain disdain for the quarterly earnings rigmarole and the associated maniacal focus on “beating” what are somewhat irrelevant earnings per share estimates. The truth of the matter is that, more often than not, what happens during an arbitrary 90 day period has very little bearing on the long-term opportunity for a company or on its intrinsic value. As such, the huge price moves—both up and down—that occur as a result of singular quarterly earnings reports are always somewhat amazing (and sometimes amusing if we don’t own the stock) to us. The most unfortunate outcome of this focus on the short run performance is that certain management teams succumb to the pressure they receive from certain members of the investment community. In doing so, they risk managing the business to achieve near term results and thus not thinking enough about what  they want the company to look like in five years. In a perverse way, the desire to meet probability expectations on a quarterly basis and avoid a potential drop in the stock price actually can impair the value of the franchise if the management team is too focused on this month’s margins as opposed to investing for the future.

Given all of that, it was very refreshing to read Jamie Dimon’s comments on JP Morgan’s Q2 earnings call. After being barraged with questions from the sell side community regarding millions of details that likely had no bearing on the value of the company, Dimon responded with the following (emphasis added):

No. No, look, I can’t overemphasize this. We do not run the company for quarterly profits. We make long-term decisions on people, systems, technology, products, services, stuff like that. And a lot of things drive short-term profits, but the profit you have at any one quarter relates to the decisions you made for the last 5 years, and so we feel great about these companies. The big weak spot, which we all acknowledge, is mortgage, and we’re going to put the — we’ve got great people there. We’re going to put elbow to the metal there. We’re going to invest some more money in their systems. We’ve got some catch-up to do. We got caught in the middle of, as you know, WaMu, Bear Sterns, origination platforms. But usually, if you look at these businesses, they’re all doing fine, and we’re looking at how we can grow them over the next 5 to 10 years. And that’s what we’re going to do, and I honestly mean it. I don’t care whether FICC is up 10% or 15% or down 10% or 15% in the next quarter. I think — I actually think that this is a complete waste of time.

Channeling our inner Charlie Munger: we have nothing to add.

 

Jul 14 14

CSC Strategy Letter | Number 17 | Hockey is Nothing Like Investing

by Cove Street Capital

CLICK HERE to download Cove Street Capital’s July 2014 Strategy Letter Number 17, “Hockey is Nothing Like Investing”

Jul 7 14

Very Scary

by Cove Street Capital

Our takeaway on this speech is three-fold:

  1. We paraphrase: “Wise regulation, which is mostly now in place globally, will ensure that future financial crises will not billow out of control.” Wow, I didn’t realize that until 2010 the world didn’t have any regulators—no wonder why we have had periodic problems.
  2. Mrs. Yellen seems oblivious to enormous distortive effects of her institution’s suppression of interest rates below “market.”
  3. A lot of people are counting on the Federal Reserve. We wouldn’t.

CLICK HERE to download Janet Yellen’s July 2, 2014 speech

Jun 11 14

More Corporate Governance Weirdness

by Cove Street Capital

The “Entertainment Business” is well known for having a callous disregard for other people’s money. The origins of Live Nation (LYV) and some of the Board principals involved—current and former—include some of the more egregious examples we’ve seen in our career.

Liberty Media, represented on the Board by Greg Maffei and Mark Carleton, has clearly been an adult influence on what was truly a cacophonic beginning for LYV. While Greg Maffei gets some very mixed reactions in some circles, we are 100% on the Liberty bandwagon of shareholder value creation, and thus we are truly stumped by the recent shareholder vote for the election of directors (results below). We nearly tripled our money in Live Nation—and still missed the last 30%. So we are UTTERLY stumped that the logical conclusion is that Liberty gets the biggest no vote.

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The opinions expressed herein are those of Cove Street Capital, LLC and are subject to change without notice. Past performance is not a guarantee or indicator of future results. Consider the investment objectives, risks and expenses before investing. The information in this presentation should not be considered as a recommendation to buy or sell any particular security and should not be considered as investment advice of any kind. You should not assume that the security discussed in this report is or will be profitable, or that recommendations we make in the future will be profitable or equal the performance of the security discussed in this presentation. The report is based on data obtained from sources believed to be reliable but is not guaranteed as being accurate and does not purport to be a complete summary of the available data.Recommendations for the past twelve months are available upon request. In addition to clients, partners and employees or their family members may have a position in security mentioned herein. Cove Street Capital, LLC is a registered investment advisor. More information about us is located in our ADV Part 2, which is available upon request.

 

 

May 29 14

If Invited, I Shall Serve — A Rock and Roll Update

by Cove Street Capital

by Jeff Bronchick | Chief Investment Officer

Fender tried to go public in 2012. It failed and here is why.

In how the world should work, the prevailing private equity investors bit the bullet and raised new capital at levels well below what was being offered to the public. “New” CEO Larry Thomas retired. Private equity buyer TPG Growth is the new sheriff in town. “New” models are being introduced and most interestingly, Fender is tentatively experimenting with the Direct-to-Consumer scene. Oh, and Board meetings have suddenly gotten a lot more interesting with the addition of two U2 band members.

I don’t think a single thing has changed since my initial piece…but there is a price for what will inevitably be another chance to take our money.

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The opinions expressed herein are those of Cove Street Capital, LLC and are subject to change without notice. Past performance is not a guarantee or indicator of future results. Consider the investment objectives, risks and expenses before investing. The information in this presentation should not be considered as a recommendation to buy or sell any particular security and should not be considered as investment advice of any kind. You should not assume that the security discussed in this report is or will be profitable, or that recommendations we make in the future will be profitable or equal the performance of the security discussed in this presentation. The report is based on data obtained from sources believed to be reliable but is not guaranteed as being accurate and does not purport to be a complete summary of the available data. Recommendations for the past twelve months are available upon request. In addition to clients, partners and employees or their family members may have a position in security mentioned herein. Cove Street Capital, LLC is a registered investment advisor. More information about us is located in our ADV Part 2, which is available upon request.

 

May 29 14

Social Media Lets Us Pretend to Know Something About Everything

by Cove Street Capital

by Jeffrey Bronchick | Chief Investment Officer

Read this article from the New York Times and replace many of the nouns with “investor,” “stock,” and “investment industry.”

Long before social media, Wall Street and its predecessors had a wildly viral network of passing rumors around that may or may not have any basis in reality. Historical readings back a few hundred years show that little progress has been made to date.

“The analyst said…”

“I read somewhere in the Wall Street Journal…”

“Do you see that x smart guy bought y security?”

“I went to an idea dinner and they were really pushing xyz.

“Did you see Barron’s this weekend?”

While it is possible to find real information to rely on, I never cease to be amazed when I push a little through the veneer and see how little work was done by the current announcer of said idea.

Reading primary material is slow and painstaking, and obviously that is why few actually do it. Legal and SEC mandates that have created 600-page 10k’s have not made our lives any easier. Internet access has made some things easier but it also raises idle chatter to a deafening level. And then there are those kittens.

May 29 14

Reading List – The Classics

by Jeffrey Bronchick, CFA

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Recently added:

Conservative Investors Sleep Well – Philip A. Fisher

Good Strategy Bad Strategy: The Difference and Why It Matters – Richard Rumelt

Organizational Intelligence: Knowledge and Policy in Government and Industry – Harold L. Wilensky

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read more…

May 9 14

Buffett vs. Icahn on Coca Cola? Slam dunk for Icahn.

by Cove Street Capital

by Jeff Bronchick and Ben Claremon

We have been thinking about this issue for a few weeks, tempering our urge to dash out some heated thoughts of the moment. We have gotten over it.

Ignoring for a moment the details of Coca Cola’s magnificent excessiveness in its executive compensation plan, the issue here is Buffett’s decision-as Coke’s largest shareholder and long-term confidante of the management team-to express his viewpoint that the pay package is indeed excessive by abstaining from a shareholder vote on the pay package instead of voting against it.

Using a different strategy, Mr. Icahn took it upon himself to draft a Dear Warren editorial in the Wall Street Journal suggesting that Buffett’s behavior highlights exactly what is wrong with US corporate governance. Specifically, very few people are willing to actually address the issues regarding pay for performance and the ongoing transfer of outrageous sums to executives—at the expense of shareholders—due to fear of “rocking the boat.” Buffett responded that maybe Carl is used to dealing with a slightly different type of management team and Board, rather than the hoi polloi that flies around on Berkshire’s Net Jets and hobnobs with Warren. read more…

May 9 14

A Word From Our Trader

by Cove Street Capital

by Matt Weber |  Director of Trading + Operations

There is more to life than increasing its speed.

-Mahatma Gandhi

Even though we are “investors,” we are very aware of the High Frequency Trading (HFT) issues that emerge on our playing field. While the portfolio management team at CSC might profess not to care about a penny here and a penny there when they are looking for 50% and 100% moves over time (and that IS the correct big picture), it’s my job to pick up the pennies for our clients, or at least defend our wallets from the unrelenting pressure of HFT.

Having been a student of market structure ever since the creation of many market venues, algorithms, dark pools, and HFT, I believe that the majority of HFT is benign with regard to our day to day trading and in many cases the liquidity provided can be beneficial to our clients. There are predatory HFT firms and strategies that exist, but it is important to remember that “financial predators” have existed since investors met under a tree at Wall and Broad. So it’s not just the Lehman and Goldman block trading desks looking to scalp our clients, it is a new breed. read more…

Apr 21 14

Why We Continue to Think the ISS Approach Toward Corporate Governance and Executive Pay is Moronic

by Cove Street Capital

CLICK HERE

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The opinions expressed herein are those of Cove Street Capital and are subject to change without notice. Past performance is not a guarantee or indicator of future results. Consider the investment objectives, risks, and expenses before investing. You should not consider the information in this blog a recommendation to buy or sell any particular security and this should not be considered as investment advice of any kind. You should not assume that any of the securities discussed in this report are or will be profitable, or that recommendations we make in the future will be profitable or equal the performance of the securities listed in this report. Recommendations made for the past year are available upon request. These securities may not be in an account’s portfolio by the time this report has been received, or may have been repurchased for an account’s portfolio. These securities do not represent an entire account’s portfolio and may represent only a small percentage of the account’s portfolio. Partners, employees or their family members may have a position in securities mentioned herein. CSC was established in 2011 and is registered under the Investment Advisors Act of 1940. Additional information about CSC can be found in our Form ADV Part 2a.