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Feb 18 15

50 Shades of Grey, the G-rated Version

by Cove Street Capital

From time to time I have embarrassing moments, like admitting I have read L.J. Rittenhouse’s book, “Investing Between the Lines: How to Make Smarter Decisions by Decoding CEO Communications.” This was a fairly simplistic read on a 2 hour flight that essentially says: a CEO should write like Carol Loomis (or Warren Buffett)—be clear, be honest, and admit when you have made a mistake.

This press release could be its polar opposite. When viewed in the context of a CEO that made an absolutely miserably timed and expensive acquisition, you quickly realize you are being cheated. There is no owning up to the mistake, the writing is complete PR feel-good gobbledygook, and the “fact” does not make its appearance until the last paragraph.

There is no wonder why OM group is an activist’s dream. We own it lower as our work suggests that prior bad news and capital allocation issues have been priced in.


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.



Feb 10 15


by Cove Street Capital

CLICK HERE to download a press release from Forestar Group Inc.

Feb 9 15

Are You Better at Currency or Oil Price Forecasting?

by Cove Street Capital

by Dean Pagonis | Research Analyst

We think you might have noticed the dollar has been appreciating versus most currencies. (Have you heard the one about the Canadian Peso?)

Source: New York Times, 2015

So yes, there is a negative translation effect for large multi-national companies and yes, a product gets more expensive vis-à-vis foreign competitors and yes, there will be problems for some foreign companies whose dollar denominated debt is getting larger by the moment. The overall effect is equity investors don’t like a strong dollar, but the correlation is mixed depending upon the environment.

Source: Wisdom Tree, 2014

But not all is lost…particularly for small cap managers. While 34% of S&P 500 companies’ revenues are from foreign sales, it’s only 19% for the Russell 2000®. Small cap firms are therefore less exposed than their large cap peers to decreases in earnings from a strengthening dollar. After a relatively tough 2014, we will take it.

Source: Bank of New York Mellon, 2012

But the largest risk we see on the horizon for multinationals is not a strong dollar, but rather the fact that the majority of the world’s international markets are in recession or trending towards it. Although we are mindful of the effects currency produces, there is not a single company in which currency exposure ranks as the first or even second crucial variable in the determination of a company’s value.

Feb 9 15

Coherent and Consistent

by Cove Street Capital

This report remains the single most coherent and consistently negative argument against…a lot of things we do.

Feb 9 15

Well Said.

by Cove Street Capital

Mr. Gideon King’s parting notes on his decision to close down his hedge fund business:

“Controlling capital and engaging intellectually is good work if one can get it. The business, on the other hand, has changed dramatically. As the endless quest for becoming institutional continues on, the soul of investing might get lost, as the unmitigated compliance processes become cumbersome and interfere with the purity of speculative contemplation.”

Feb 9 15

The Blame Game

by Cove Street Capital

From time to time we must look in the investment mirror and conclude that we are stinking and we have no one to blame but ourselves. This is an interesting piece that academically exposes a lot of the other times.

Jan 29 15

CSC Strategy Letter | Number 19 | The Great Complacency…Continued

by Cove Street Capital

CLICK HERE to download Cove Street Capital’s January 2015 Strategy Letter Number 19, “The Great Complacency…Continued”

Jan 8 15

The Reluctant Warriors

by Cove Street Capital

A friend of ours who works for a well-known activist firm summed it up perfectly when he said, “We are living in the era of the activist halo.” From 300-page PowerPoint presentations to incredible revelations about the amount of salt that should be included in pasta water to investors who own 20,000 shares asking for Board seats, there has been a proliferation of “activist” activity.

Some of this is good, some of this is bad as Wall Street is just like Hollywood – take a fundamentally good idea and ruin it with ten successively dismal iterations. As a “guideline,” it’s not for us. Successful investment is all about the “investment.” Activism is about the time horizon. We always welcome being right sooner than later, but the beauty about investing for a living is the ability to be left alone and think, pick good combinations of business model, valuation and people, and then let compounding work for you without the “need” to be public and hire lawyers. It’s solid indoor work with no heavy lifting.

But the fun thing about investment life is that it is usually better to live by guidelines—an indication or outline of policy or conduct—rather than hard rules, given that the only “rule” outside of unimpeachable ethics and integrity, is that the future remains uncertain. read more…

Dec 18 14

Reading Disorder

by Cove Street Capital

A senior member of our investment team read this transcript and couldn’t help but replace the words “investment management” in lieu of the subject being discussed. Worth reading and thinking about.

Dec 2 14

What a Phony, Part II

by Cove Street Capital

Click here for Part IThe Worst Piece of Corporate BS, 2/11/2013

A recent article in the Wall Street Journal penned by Michael Dell is so full of self-serving garbage it is difficult to know where to start. (Click here to go to the op-ed at WSJ.) What is clear in most companies is that the fish rots from the head and Dell’s decade of miscues—led by Michael Dell and his hand-chosen successors— brought it to a position of miserable valuation, investor apathy, and then finally investor activism…not the other way around as Mr. Dell implies.

If a company clearly delineates a course of strategic investment, provides clear accounting into how results of this investment are measured, and most importantly, provides accountability if money is wasted, then it will attract an intelligent group of long-term shareholders who will properly discount the detraction from short-term earnings. That might explain the “sage” ability of investors to value the hundreds of billions of dollars invested in life science research which are almost by definition difficult to handicap, not to mention the hundreds of billions of dollars of market value accorded to any variety of seemingly overvalued (by our standards) technology companies. While there is “bad” activism, there is equally disastrous capital allocation by entrenched management teams. The two extremes deserve each other and somehow life manages to go on. read more…