Basket Cases - SVU, RSH, etc

[Guest hellsten]

A very large number of stocks that Mr. Market seems to view as basket cases have fallen a lot in one year.

 

A few examples:

- Supervalu -80% - many value investors seem to have owned/bought SVU all the way down

- RadioShack -83% - net-net stock

- Alcatel Lucent -80% - ValueLine likes this one

- Diamond Foods -78% - potential delisting, but how much would that hurt the stock?

- Green Mountain Coffee -80% - David Einhorn shorting, patents expiring.

- Arch Coal -82% - Cheap natural gas, China slowing?

- First Solar -88%

- Targacept -80% - Seth Klarman...

- Netflix -77%

- RIMM -74%

- HP -50%

- Sony -58%

- Terex -42% - Mohnish Pabrai seems to trade in and out of this one

- Portugal Telecom/Telefonica -56%

 

I'm not for diversification, but it seems that selling safe stocks (JNJ, BRK, KO, etc) and buying a basket of stocks (e.g. 5-10, not necessarily the ones above) would perform very well in 3-5 years. However, this would go against Warren's and Charlie's "it makes more sense to buy a wonderful business at a fair price.".

 

Personally I would consider selling BRK, JNJ, etc to buy e.g. Portugal Telecom, Terex or Arch Coal when they fall to multi-year or multi-decade lows. I just don't think were there just yet.

 

Any thoughts on this?

[tooskinneejs]

Also:

 

Pitney Bowes (PBI) - down 40%, has a 10% dividend yield (payout ratio of 45%)

HHGregg (HGG) - down 50%

All of the education stocks, such as Career Education which is down 80% and selling for less than cash (with no debt)

Deckers (DECK) - down 55%, makers of Uggs and Teva shoes

 

[Viking]

You can add HPQ (-50%), BBY (-40%), FTR (-50%), RRD (-39%)...

 

I do find these opportunities interesting (especially the basket approach). The challenge is valuing the business, management and future earnings. My big challenge is I give management the benefit of the doubt too much...

 

I have had the most success staying away from turnarounds and sticking with well managed companies with improving earnings (and what management says will happen usually does happen). The one exception would be buying US banks; I have bought and sold them a couple of times over the past year (taking advantage of the volatility).

[NormR]

- Diamond Foods -78% - potential delisting, but how much would that hurt the stock?

 

Has anyone ever seen a dislisting that didn't depress the stock price - at least in the short term?

[BargainValueHunter]

Not to mention:

 

NOK -95% (royalty stream and giant patent portfolio)

 

ATPG -96% (assets - but also a *bit* of debt  :P )

 

[Guest hellsten]

- Diamond Foods -78% - potential delisting, but how much would that hurt the stock?

 

Has anyone ever seen a dislisting that didn't depress the stock price - at least in the short term?

 

The only similar case I can remember is Olympus. I read a bit about how a delisting affects shareholders during the Olympus scandal:

http://en.wikipedia.org/wiki/Olympus_scandal

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/ocpnf-pk-olympus-corp/20/

 

Longleaf was (and is?) a long-time investor in Olympus. In the Diamond Food's scandal, it's Oaktree Capital that sees some value:

http://www.bizjournals.com/sanfrancisco/blog/2012/05/diamond-foods-oaktree-capital-kellogg.html?page=all

 

Diamond Foods' pricey deal to accept $225 million from Oaktree Capital

 

Terms of the deal that recapitalizes the company include paying interest to Oaktree at 12 percent, plus $10 warrants that would give the private equity firm a 16 percent in Diamond, if exercised

 

I hear that Diamond received inquires from 30 investor groups, with presentations made to about a dozen firms. That's not surprising given the interest in fast-growing snacks, or fast-growing anything in the grocery aisles.

 

I guess this means Diamond Foods won't go bankrupt.

 

More about the Oakmark Capital deal:

http://www.thestreet.com/story/11550815/1/diamond-foods-white-knight-could-be-a-stalking-horse.html:

"The investment of new capital by Oaktree, in conjunction with the amended bank credit facility, will provide Diamond with sufficient liquidity to meet its anticipated near-term and long-term funding need," said Diamond Foods in a release.

 

When the transaction closes, which is expected by the end of May, Oaktree managing director Matthew Wilson and advisor Dean Hollis will join Diamond Foods board.

 

Michael Larson was/is also interested in Diamond Foods:

http://seekingalpha.com/article/640581-michael-larson-investment-manager-to-bill-gates

 

At these prices I might consider putting DMND in my basket, but further analysis is needed before I'm comfortable with the idea.

[rogermunibond]

Baupost exited Targacept after their second failed P3 trial.

[PlanMaestro]

Baupost exited Targacept after their second failed P3 trial.

 

With all due respect and just trying to understand more ... Is Seth Klarman a good stock picker?

 

Targacept, Novagold, RHI Entertainment, on the top of my mind. I also read his 90s letters and did not improve my impression of his picks. He has an outstanding reputation in distressed debt, and his strong cash position getting into 2008 was fantastic. But every time I check one of his stock picks I have doubts, especially about quality and potential upside.

 

Really, I am trying to learn. Any opinions on this?

 

 

NovaGold plummets after Barrick raises doubts about gold deposit

 

NovaGold (NG) is retreating after Barrick Gold (ABX) indicated that it may not invest significant amounts of money in a gold deposit in which the two companies each have a 50% ownership stake. Barrick said that the Alaska-based Donlin gold deposit doesn't currently meet its investment criteria, primarily because of the large initial capital investment required to launch it. However, Barrick did add that Donlin represents a "valuable long-term opportunity," partly due to its long life mineral resources. Moreover, Barrick added that it would advance permitting activities at the site at reasonable costs, giving it the option to undertake construction there in the future. In early trading, however, NovaGold tumbled $1.67, or 31.04%, to $3.71. Barrick, meanwhile, sank $2.47, or 7.31%, to $31.32. :theflyonthewall.com

 

[oddballstocks]

Plan,

 

I've had similar thoughts, of course who am I a mere thousandaire compared to a billionaire, but still.  I've looked at some of his deep value picks such as SCMR and walked away less than impressed.  I would never buy the stocks, but he's the rich guy with the track record and I am not, so I'm not sure it matters much.

 

My sense is his investment style has changed over time, just the size of his fund alone limits the types of things he can do.  He wrote about mutual conversion investing in his book yet if he tried to buy any of the recent mutuals he'd end up owning the bank, and it wouldn't even be a blip for his fund.

[claphands22]

Klarman is probably no longer involved with day-to-day analysis, but managing the team or managing the guy who manages the team. He wrote a great book and has a great track record but I don't see him as a guy with lots of fire anymore. Nothing wrong with that. Once you got the money, you've built a successful firm and are spending more time with philanthropy -- proving yourself as a great analyst probably isn't very high on Maslow's hierarchy of needs.

 

The people I find with really great ideas haven't written any books. They don't manage in the billions, and their idea of talking to the team is looking in the mirror in the morning. They tend to put their ego in their ideas and are eager to discuss their ideas with anyone hoping to sharpen their skills and gain some recognition.

 

 

[Olmsted]

Baupost exited Targacept after their second failed P3 trial.

 

With all due respect and just trying to understand more ... Is Seth Klarman a good stock picker?

 

Targacept, Novagold, RHI Entertainment, on the top of my mind. I also read his 90s letters and did not improve my impression of his picks. He has an outstanding reputation in distressed debt, and his strong cash position getting into 2008 was fantastic. But every time I check one of his stock picks I have doubts, especially about quality and potential upside.

 

Really, I am trying to learn. Any opinions on this?

 

 

NovaGold plummets after Barrick raises doubts about gold deposit

 

NovaGold (NG) is retreating after Barrick Gold (ABX) indicated that it may not invest significant amounts of money in a gold deposit in which the two companies each have a 50% ownership stake. Barrick said that the Alaska-based Donlin gold deposit doesn't currently meet its investment criteria, primarily because of the large initial capital investment required to launch it. However, Barrick did add that Donlin represents a "valuable long-term opportunity," partly due to its long life mineral resources. Moreover, Barrick added that it would advance permitting activities at the site at reasonable costs, giving it the option to undertake construction there in the future. In early trading, however, NovaGold tumbled $1.67, or 31.04%, to $3.71. Barrick, meanwhile, sank $2.47, or 7.31%, to $31.32. :theflyonthewall.com

 

I've always had a sneaking suspicion that a lot of Klarman's reported longs are really offsetting unreported shorts or put positions (to add liquidity, lock in a borrow, etc.).  Since he never explains his rationale for positions, one has no way to know what is going on at his fund or in his head.

 

Because yes, there are a lot of questionable longs reported at Baupost.  And what's with all the biotech names?

[Rabbitisrich]

Klarman sometimes talks about his longs. He thought that NWS was cheap on a sum of parts analysis. MSFT  BBEP and PDLI had hedges and royalties, respectively, worth more than the market cap. His larger positions typically generate large amounts of cash relative to market cap. I think that he acknowledged RHI as a mistake, but these small positions are best viewed as a basket.

 

[Guest hellsten]

Just for fun, here's an update on where the basket cases are today about six months later:

 

RSH -6.8%

SVU 64.8%

ALU 41.88%

DMND -21.89%

FSLR 100.93%

NFLX 117.71%

ACI -7.55%

TEX 119.87%

BBRY 136.93%

GMCR 154.56%

PT 25.10%

TRGT 4.74%

SNE 32.59%

 

Average return was ~58% in 6 months.

 

Some other names mentioned in this thread:

BBY -19%

NOK 142%

FTR 17%

RRD -29%

DECK -6%

HGG 37%

 

Here's a chart comparing high beta to low beta (source http://brooklyninvestor.blogspot.com):

 

http://3.bp.blogspot.com/-OmhnISCastk/UGYhypO4siI/AAAAAAAABTI/DCpbB4RLMZk/s640/aaapzn+2.JPG

 

The valuation gap between low beta and high beta stocks is as high as ever.  This sort of value differential is a great opportunity for deep value investors.  Stock investors seem to be rushing to safety; low beta, high yield stocks, consumer staples etc.  while running from the cyclical, high beta names.  Of course this includes financials (and we all know financials are cheap).

 

It is a pretty stunning chart.  If there is any valuation normalization going forward (this may take time), this would be pretty exciting for deep value investors.

 

Here's another related article:

Beta was an investor’s best friend in 2009 – so much so that outperformance more or less required having significant exposure to high Beta stocks in any portfolio.

…

Notice that in general, high Beta stocks have not tended to outperform their less volatile siblings. However, when they do, the return differential is very dramatic. The other interesting thing from this chart is that following those dramatic “Beta Effect” years in 1999 and 2004, the Beta effect tended to reverse itself significantly.

http://seekingalpha.com/article/182899-our-december-2009-stock-market-review

 

http://static.seekingalpha.com/uploads/2010/1/17/saupload_dec_mmr_img_2_thumb1.jpg

 

Sorry for mentioning beta on a value investing forum  ;D

[eclecticvalue]

Man I wish I got into svu and rimm.

[Palantir]

I don't know much detail about Klarman's picks, so not qualified to comment, but Buffet notes him as the only "younger" value investor he respects and reads.

 

 

"When I asked if he followed any hedge fund managers, he struggled to name any, before saying that he liked Seth Klarman, a low-key value investor who runs the Baupost Group, based in Boston."

http://dealbook.nytimes.com/2012/12/03/for-buffett-the-long-run-still-trumps-the-quick-return/

 

 

Now, whether David Einhorn is a good stockpicker or not, that I'm beginning to wonder.  ::)

[longtermdave]

A very large number of stocks that Mr. Market seems to view as basket cases have fallen a lot in one year.

 

A few examples:

- Supervalu -80% - many value investors seem to have owned/bought SVU all the way down

- RadioShack -83% - net-net stock

- Alcatel Lucent -80% - ValueLine likes this one

- Diamond Foods -78% - potential delisting, but how much would that hurt the stock?

- Green Mountain Coffee -80% - David Einhorn shorting, patents expiring.

- Arch Coal -82% - Cheap natural gas, China slowing?

- First Solar -88%

- Targacept -80% - Seth Klarman...

- Netflix -77%

- RIMM -74%

- HP -50%

- Sony -58%

- Terex -42% - Mohnish Pabrai seems to trade in and out of this one

- Portugal Telecom/Telefonica -56%

 

I'm not for diversification, but it seems that selling safe stocks (JNJ, BRK, KO, etc) and buying a basket of stocks (e.g. 5-10, not necessarily the ones above) would perform very well in 3-5 years. However, this would go against Warren's and Charlie's "it makes more sense to buy a wonderful business at a fair price.".

 

Personally I would consider selling BRK, JNJ, etc to buy e.g. Portugal Telecom, Terex or Arch Coal when they fall to multi-year or multi-decade lows. I just don't think were there just yet.

 

Any thoughts on this?

 

This is a reply to a post from 2012....It's kind of amazing how well you would have done if you'd bought this list in equal amounts on the day he posted and held until today. I looked at this in a very quick and dirty way in 15 minutes, so I didn't count dividends, and counted anything where I couldn't quickly find the ticker in Yahoo as a zero. I still get about 30% annualized returns (XIRR in Excel). In my calculation, almost everything is driven by the huge run-up in Netflix. I was just wondering how a basket approach would do over the long term as opposed to a quick buy and then sell on the run-up, where you might retreat to the "safe" names after taking gains.

[nkp007]

Amazing!

 

Thanks for following up. Must have been a harrowing ride though. What would have happened if you sold at the end of each year? 2013. 2014. 2015. 2016.