by Eugene Robin | Research Analyst, Cove Street Capital
I’d like to share with you a great book on the basic mathematics of the stock market written by John Allen Paulos that has a section on the efficient market. Briefly, if investors believe in the Efficient Market Hypothesis (EMT) then they believe that the market efficiently incorporates all old and new pieces of information and thus the quest to beat the market is a losing proposition and thus everyone should just buy index funds. But, if enough people believe that the market is efficient then no one will engage in active management, thereby decreasing the overall efficacy of the now not-so-efficient market by slowing the diffusion of information into market prices. Therefore, if enough people actually believe that the market is efficient then that belief actually ensures the falsity of the theory itself, ergo, a paradox forms.
Why am I mentioning this? After recently watching a PBS documentary where Vanguard’s John Bogle espoused the glories of the ETF revolution, I began to think about the actual effects of ETFs on active managers. It’s hard to argue that Bogle is entirely wrong in his assault against the traditional active management industry. read more…
This past weekend’s trek to Omaha for the Berkshire Hathaway annual meeting represented the fifth consecutive time I have ventured to see the Oracle of Omaha and the man they call Charlie share their wisdom. Sorry folks, I didn’t take notes from the meeting this year. I have decided to pass that torch along to the next generation of note takers. However, the upshot of not taking notes is that I was able to absorb more of what was said in real time. I am sure that a comprehensive set of notes will show up on the internet in no time but in the meantime I wanted to share a few of my takeaways:
- While the idea of having a short seller ask questions was certainly compelling, the execution was lackluster. Unfortunately, it felt as though Doug Kass was far more concerned with promoting his own firm than asking tough questions. At one point Munger even joked that he could make a certain short point better than Kass was. Accordingly, my personal preference for subsequent years would be to have someone who knew the company really well and who owned the stock play the devil’s advocate. read more…
Our premise is simple: we bought Tessera because the stock was cheap and we received nearly free optionality on either the development of a new technology or improvement in the managing of the core business.
In a very short period of time, the management team members proved themselves to be some combination of incompetent, careless or clueless. We have been BLESSED with the entrance of what appears to be a competent group of investors—Starboard Value—who have experience in real activism and have in short order produced the departure of the CEO and most of the Board, a nearly complete makeover of the Board (proposed) and the announcement of a restructuring plan that should radically cut costs and shift capital allocation to enhance profitability and returns. read more…
Under normal circumstances, the prospect of leaving sunny Southern California to travel to a place where the day-time temperature encourages the wearing of fur is not particularly appealing. But I decided this year to make the slog to attend Fairfax Financial’s annual meeting in Toronto. Prem Watsa, the Chairman and CEO of Fairfax, has the reputation of being the Warren Buffett of Canada as he has modeled Fairfax to be similar to Buffett’s Berkshire Hathaway in terms of structure and investment approach. Like Buffett, Watsa measures success by comparing the yearly percentage increase in book value to the return of the S&P 500. Like Berkshire Hathaway, Fairfax has a decentralized structure whereby the insurance company presidents and the leaders of the non-insurance operating businesses have a lot of autonomy. This approach has helped Watsa and Fairfax generate substantial wealth for its long-term shareholders, as book value per share has increased from less than $2 twenty-seven years ago to close to $400 today.
CLICK HERE to download Cove Street Capital’s March 2013 Strategy Letter, Number 11, “Call Him Ishmael”
We own Tessera at a cost of approximately $16 per share. Our thought process was simple: a conservative analysis of their IP portfolio’s current cash stream plus cash on the balance sheet suggested a valuation of $15 per share, leaving $1 of implied value for the venture portfolio of their Digital Optics (DOC) business, in addition to any potential unseen value trapped in the IP portfolio. Subsequent events, legal settlements, and client renewals have added an additional $4-$5 in value. The initial analysis of the DOC business indicated that by the end of 2015, the segment could have been a real stand-alone business with $200 million in revenues operating with a 10-12% margin and worth another $7-$10 per share. Downside boredom—upside large.
A few weeks ago, Cove Street was asked to present a small cap stock idea for the 2013 Small-Cap Investing Summit. Our analyst Ben Claremon chose to discuss the investment thesis for Ruby Tuesday (RT) and created the attached presentation. Despite the fact that Ben was unfortunately not allotted the standard Bill Ackman 3 hour time window, these slides provide an in-depth analysis of why we think RT is undervalued. CLICK HERE to download the slides.
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.
The proposed management buyout of Dell is an abomination of corporate governance and decency on an extraordinarily large scale. While we have been too busy losing money in Hewlett-Packard to own Dell shares, I will take the liberty of being incensed for its shareholders. To wit:
- ANY management-led buyout of a public company is a complete violation of the most elemental sense of corporate governance, if not de facto insider trading. There is only ONE reason why management teams offer to buy out public shareholders—they think the stock is worth more than the price they are paying. While it is inaccurate to always infer greed as opposed to a distinct possibility of mere idiocy or incompetence (Tribune buyout?), in the case of a management-led buyout, I think we can default to the former. read more…
CLICK HERE to download Cove Street Capital’s January 2013 Strategy Letter, Number 10, “The Lost Decade…Found?”
Central Garden and Pet (CENTA) has been in and out of the portfolio several times over the last eleven years with results varying from stunning (a 6-bagger from the 2002 lows) to a lot less than that (repurchased the stock at $11 and bought it all the way down to $3 in 2008/09).
Business/Value/People: Central has a perfectly understandable set of businesses that should be operating at industry peer levels. The valuation “always” seems very cheap relative to this normalized set of margins. That leaves “people” and in the words of the great investor George W. Bush, “There’s an old saying in Tennessee—I know it’s in Texas, probably in Tennessee—that says, fool me once, shame on—shame on you. Fool me—you can’t get fooled again.”