Ask Packer - No Seriously, Ask Him Anything (AHA)!

[jobyts]

Packer,

 

I'm thinking of a cloning of some of the CoBF members as a strategy. An advantage of cloning CoBF members is that we know exactly why they bought and sold, compared to the Wall street gurus. Would you mind sharing your ticker symbols in your portfolio, preferably with the percentage allocation. May be the top 5? Ignore this request if you think I'm asking too much. I started looking at your posts to extract the information, but it is spread across 170 pages  ???

[CorpRaider]

Yo Pack,

 

Saw that Van Eck launched and international version of the MOAT etf.  Thought you might want to monitor it as I know you like(d) the MOAT etf at one time.  Ticker is MOTI.

 

Thx.

[cmakam]

Hi Packer,

You have indicated a typical position size for you is 5-7 percent and you dollar cost up to 10-12 percent of portfolio.

1) Do you buy the initial 5-7 percent in one shot? Any reason you choose a particular approach?

2) When you Dollar cost average after the initial purchase, how do you phase in the balance of the 7-12 percent?

3) At what point do you stop investing in a position (assuming you still believe the original thesis), if at all?

4) Typically at what percentage of the initial purchase price do you max in the investment (i.e. the 10-12 percent)

-cmakam

 

 

[Packer16]

Currently the top 10 includes: Dhando Holdings, Genl Comm, Ntelos, Alliance Healthcare, Broadstone Net Lease, Intralot, GP Investments, Lotte Chilsung pfd, KIH pfd & Shun Ho Resources.  Be aware that I sometimes sell and buy lower priced names so this group will change.

 

As to purchase and sale, it usually takes me a few times to get to 5 - 7 percent.  The increases in positions is due to buying cheaper stocks after sales of stocks with half the potential upside.  I stop buying when it becomes a large portion of my portfolio relative to other positions.  Max percentage is based upon relative upside but is typically 10 to 15%.

 

Packer

 

[cmakam]

Thanks Packer, a few follow ups:

1) Do you basically keep a position weighting in the portfolio constant at 5-7% while investing  up to 10-12 % (at cost) as the stock price declines ?

2) If sufficient upside opportunity exists, do you take a 5-7% position to the 10-12% weighting even without the position decreasing in price?

3) If I understand the adding and decreasing logic (from half upside to full upside position) correct, does it mean your position sizing could fluctuate quite a bit for a relatively high beta stock between position initiation and final exit?

4) Am thinking the logic behind adding/decreasing a position is to ensure a value bias. Is this done primarily as a risk control measure or to leverage volatility (or both)?

5)It is probably hard to measure but off the top of your head, if you did not use the value bias adding/trimming strategy but held the position constant, how much impact might that have had on portfolio returns?

6) Do you factor in absolute downside risk in portfolio sizing?

-cmakam

[Homestead31]

 

As to purchase and sale, it usually takes me a few times to get to 5 - 7 percent.  The increases in positions is due to buying cheaper stocks after sales of stocks with half the potential upside. 

 

Packer

 

Hi Packer - would you mind expanding upon this a bit?

 

in other words, you say "half the potential upside" but i'm curious how you define upside - ie over what time period?

 

for example, if you own something b/c of a discount to NAV and you think it should trade at NAV you could define the upside right now.  however, if you own a compounder, it is a bit trickier.  would you look at a compounder and say, "i think it can grow 15% a year for X years and deserve a Y multiple at the X year mark, and I will PV that value at a Z% discount rate, and then define the upside as the current discount to the PV?

 

any thoughts on how you think about current value vs future value when considering a sale are appreciated!

[Packer16]

In response to questions (list):

 

1) Yes

2) Yes, but this depends upon whether other holdings have reduced margins of safety (via increase in price or reduction in IV)

3) Yes, but in practice I only make switched when there has been large changes in relative fair values

4) It is done in part for risk control as I am increasing my average margin of safety with each switch, however, this does not decrease volatility in general.

5) I do not track but I have sold one 10 bagger so I am looking to hold a portion of these types of stocks in the future if I can identify them as such upfront.

6) Yes for volatile industries (like mining services today) I will limit to 3%.

 

Thanks I will look at the new Moat holding.  Funning thing with the moat index is that it is now lagging the S&P 500 so I am wondering if its popularity may have reduced its effectiveness.

 

Broadstone is a value oriented NNN private REIT with competitive fees (cheaper (%of AUM) than all REITs for its size and less than many large NNN REITs).  Fees are important for REITs because every % point that goes to management is one less % point that goes to investors combined with the fact that a large part of the return will come from dividends (most likely over 50%).  They have a website which can provide more details than I can provide here.

 

Potential upside is based upon valuation today not future valuation.  At this point I have not included future appreciation in my buy/sell framework other than I may hold onto a compounder longer than a non-compounder.  I am thinking through this now and will include at some point in my approach as I have made some mistakes in selling compounders too early.

 

Packer

[cmakam]

Thanks Packer....

-cmakam

 

[Homestead31]

 

Potential upside is based upon valuation today not future valuation.  At this point I have not included future appreciation in my buy/sell framework other than I may hold onto a compounder longer than a non-compounder.  I am thinking through this now and will include at some point in my approach as I have made some mistakes in selling compounders too early.

 

Packer

 

Thanks for your response - just to flesh it out a bit - as i understand it, when you say valuation today do you mean the P/E or P/FCF or EV/EBITDA etc based on T12M E / FCF / EBITDA?  Meaning that you don't think to yourself, "todays E/FCF/EBITDA is a bit depressed at the moment, but margins will expand over the next ~2 years as X,Y,Z happens so I will base my value on "normalized" E/FCF/EBITDA

 

Or do you mean something along the lines of "there are 5 companies in this industry - 4 of them trade at 15x FCF, but 1 of them trades at 11x FCF because [insert condition such as temporary problem, limited float, no research coverage etc].  I think all 5 should trade at 15x, so i'm going to put a 15x on the current FCF and that is what i consider IV even if there is a temporary problem"

 

thanks again - i realize this is more art than science, but any further thoughts are appreciated

[stahleyp]

keith, are you out of alsk now?

[Packer16]

I think it is a combination of the two situations.  The only exception is in cyclical industries where I estimate a normalized cash flow or earnings level.  Yes, I still have ALSK.  It is cheap as a growing RLEC with only one competitor.

 

Packer

[simplefocus]

Hi Packer,

 

It looks like you still own AIQ.  AIQ has been dropping signicantly in the last few weeks. What's your thought on the drop?  What's your valuation of AIQ?  If you have some dry powder, will you add to your current position?

 

Thanks.

[Packer16]

I have no idea what is causing the drop.  One key item in my mind is the growth of the pain management business as this could tip the scale to cash flow growth.  My valuation is in the mid to high $30s @ 7x EBITDA.  As to adding it depends upon what other opportunities you have.  At this point this is becoming one of my higher upside ideas.

 

Packer

[plato1976]

Hi, Packer:

 

Using 7x EBITDA early this year indicated a near 50 valuation. Just wondering what changed from that point to now

 

Thanks!

 

I have no idea what is causing the drop.  One key item in my mind is the growth of the pain management business as this could tip the scale to cash flow growth.  My valuation is in the mid to high $30s @ 7x EBITDA.  As to adding it depends upon what other opportunities you have.  At this point this is becoming one of my higher upside ideas.

 

Packer

[Packer16]

I think the difference is primarily due to using the mid-point of guidance and a $52m minority interest treated like debt.  It was also an approximation.  Using 7x from my spreadsheet using these assumptions is about $40.

 

Packer

[Homestead31]

  I also have a competition of stocks in the portfolio versus new prospects every few weeks, to see if a switch makes sense.

 

 

Packer

 

going way back to the beginning here....

 

Packer - i'm just curious - when you say you have a competition every few weeks, does that mean that you don't look at prices in between?

 

thanks

[Homestead31]

Took a quick Look at Chrous.  It is interesting that they are building out a fiber network in NZ.  The overall EV/EBITDA is about 4x.  However, the EBITDA is expected to continue to decline in FY2014.  When the trend turns up I will be more interested. 

 

Packer

 

Hi - thanks again for all your time.  Could you talk about how you view momentum, both in terms of business momentum and stock price momentum?

 

from the above it seems you are clearly focused on positive business momentum, but the flip side of that is that when biz starts to turn, prices will go up, so you will "miss" the cheapest stock.

 

how do you think about that?

 

thanks

[Packer16]

As to periodic review, I update relative value spreadsheet every week and will take occasional action on this.  As to momentum, I exclude companies with declining revenues unless I think it is cyclical and we are nearlng the bottom of the cycle.  I like growth as it increases the value of the firm while I am holding it.  As to TIER,  this is an odd-lot sale.  I do not invest in this area so I have no opinion.  There are others on this board who are better qualified to answer your question.

 

Packer

[Homestead31]

As to periodic review, I update relative value spreadsheet every week

 

Packer

 

thanks for your response. 

 

How many names are on your relative value spreadsheet?  Is this basically like your "watch list" of companies you would like to own at the right price?  and are you basically always trying to add companies to this list, but then only owning the best/cheapest 15 or so?

[Packer16]

I have a few hundred but only a small number are interesting at any one time.  I do increase the size as I research new adjacent market segments.

 

Packer

[HJ]

Packer,

    Would love to hear your thoughts on the local broadcasters.  Are you still involved?  What's your thoughts about the consolidation that has gone on in the last couple of years with the industry, implications to profitability, spectrum auction, cord cutter impact, how does OTT thin bundle impact them, etc., etc.  The stocks have all run up since you started talking about them on the board.  I finally decided to take a leap in the middle of the media selloff last couple of days.  Any insights appreciated.  Which is your favored names at this point?

[Packer16]

I have started to look at some of the media names.  In terms of valuation, I like the way Malone looks at recurring revenue businesses, namely, buy at 5x EBITDA, buy-back shares at 7x EBITDA and sell at 10x EBITDA or higher.  When I started looking at these name the where alot under 5x EBITDA and I sold once they were above 10x EBITDA.  Now you have some names around 7x (like Viacom) so I am starting to do research.  If anything approaches 5x I would be a buyer. 

 

The growing recurring telcos are cheaper now with NTLS at 5.2x, Alaska Telco at 4.9x and General Telco at 6.5x.  The broadcast firms are closer to 10x to 13x 2015/2016 EBITDA.  I use 2015/2106 average EBITDA due to the election cycle in the US. 

 

At his point there are some nice leveraged FCF buys (like Viacom @ 7.5x FCF) but no unleveraged EBITDA screaming buys and the growing telcos are cheaper on a unleveraged basis.  Given how these things play out, there may be more bargains in the future, time will tell.

 

The consolidation has been good and generated nice cost savings.  The auctions will provide some nice revenue also.  As to OTT, I think the content providers will be fine but the syndicators with little or no original content will feel the brunt of the loss due to OTT.  Similar to radio where the syndicators have suffered but the specialty or local stations, like Salem or Saga, will continue to do fine.

 

Packer

[HJ]

Packer,

    Tanks as usual for your reply. 

    I guess I got quite optimistic on the Incentive Auctions coming up next year.  The name I got myself bulled up on is Sinclair.  They just got very big from acquisition, and don't have much loyalty to a lot of the stations, especially the ones that don't rank high in the local markets.  Even though the CEO sounded tough, and in fact tried to sue FCC to slow down the auction, I somehow got it in my head that it's all for show.  Their CFO on the earnings call said that using the government's medium value, they can get $2 billion from the auction while having very small impact to their runway ebitda.  This is against an enterprise value of $6 billion, and not a particularly high ev/ebitda starting point.  Putting this together with a growing affiliation fee and moderate political ad assumption, you kind of get to a 5-6x valuation some point next year.

    I'm relatively new to media/telecom investing, and didn't know Malone's valuation algorithm, but it's certainly a fascinating industry with all the changes that has been and will be going on.

[cmakam]

Hi Packer,

 

A portfolio management detail question :

 

1)You have explained a  typical position is 6-12% at cost.

2)You have also said you don't like to a position to get too big as a percentage of portfolio.

 

My question is as follows :

Lets say you initiate a position at 6% of portfolio,then based on sufficient undervaluation take it to 12% at cost.

 

For our discussion let us assume this portfolio position stands at 9% at current valuations (12% at cost).

 

a)How high do you let it go as a percentage on a valuation basis (20-30%?)before you begin to trim it down?

b)Do you begin to trim as early as 12% at valuation (due to moving from higher price /value positions to low price/ value positions)?

c)Do you have an absolute max you allow a position to get to at valuation?

d)Any insights on how you arrived at max investment at cost per position,max percentage of a holding at market value?

 

-cmakam

 

 

[Packer16]

As to the auctions when they happen some of these firms will be interesting.  By my calcs, Sinclair will be priced at 6.5x EBIDTA of projected 2015/2016 EBITDA if they can net $2 billion.  However, at this point the final rules and auction are TBD. My estimated upside is about 66%.

 

As to sizing questions:

 

1. I sell as the prices rise relative other stocks I am looking at.  At this point I have always had other stocks in wings to sell as position rises to over 15%. 

2.  Yes but it depends upon relative pricing

3&4.  My top % is based upon the Kelly formula described up thread.  This % declines as the upside declines so it has a built in sell signal.

 

Packer