Ideas with Catalysts

[BG2008]

Just want to create an ideas list of potentially undervalued companies with activist and/or management looking to affect changes.  Some of these are actionable and some of them have already appreciated significantly

 

1.  Digirad - Cash balance is over 50% of MC, activist group 1 was accumulating shares via 10b5 programs. Recently announced plan to buy back shares.  Activist Group 2 is now wagering proxy battle against activist group 1.  Bought and sold in the $1.90/$2.25 range. Was never too comfortable with the underlining business and thought that group 1 was going to sell the company for a 2x of what it trades at.  M&A didn't materialize and I took the profit and left.

 

2. EPAX - High cash balance, owned real estate, business running at 10 year lows, may have room to trim fat, Lane Five is the activist.  Lots of operating leverage in business

 

3. Commonwealth REIT - several hedge funds wants to oust the externally managed structure.  There is even an offer to buy out company at a 10% premium to current price. 

 

4. Sandridge Energy - see thread

 

5. Integrated refiners that either have or will list their refining assets in MLPs and spin off gas stations - Northern Tier, Alon USA, Tesoro, HollyFrontier etc

 

6. PropCo and OpCo splits - Penn National Gaming, most of the gains have been realized

 

7. Xyratex - Baker Street Capital bought over 20% position in Net Net hard disk driver manufacturer.  Shares have appreciated from $7 to $11 and a special $2 dividend paid in late 2012

 

More to come

 

 

[LC]

I was looking at Ambassador's Group (EPAX) today as well. Do you think their business is in terminal decline? That was the question I could not get past. If that is the case, the company appears fairly priced.

 

I don't know what can turn around sales. Management is already alluding that 2013 revenue is expected to be lower than 2012.

[GrizzlyRock]

InfuSystems (only works for small funds or PA)

[BG2008]

I don't think their business is in terminal decline in the way of video rentals or yellow pages.  I think there is certain value add of going on oversea trips where the student get to meet politicians and/or important figures.  They are certainly in the premium niche of the market.  With the current economics, $5,000-$7,000 discretionary trips for high school students are tough to sell.

[Phaceliacapital]

A short 3 bullet point premise for Infusystems?

[Eric50]

Novus Energy is cheap and looking for a buyer.

[GrizzlyRock]

A short 3 bullet point premise for Infusystems?

 

 

- Market leader in oncology drug infusion pumps and pump servicing. Equipment overly specific & expensive for most hospitals & med service providers to economically own & service.

- Medicare only 1/3rd of the business with private payer contracts negotiated independently

- New CEO.  Chairman capable capital allocator with reasonable incentive to sell.

- Trading at 0.9x price to book while accounting regs specific faster amort of med equipment than economic life.

- Trading at half of intrinsic value: 4.9x EV to EBITDA, 9.8x PE, 15% FCF yield

 

I'll take any other conversation offline.

[jay21]

Every one of my ideas has a catalyst and most ideas on the board do.  Catalysts can be intelligent growth (BRK), industry tailwinds (autos, rails, banks), workouts (post re-orgs, spin offs), recaps (buybacks, reduction of debt), etc.

 

The poorest investments are ones where a small discount exists between price and IV and the risk of IV falling is high.  The best ideas are where there is a large discount between price and IV and IV is growing.

 

To give examples:

 

Recap - DTV

Industry tailwinds and workout - GM

[Kraven]

Every one of my ideas has a catalyst and most ideas on the board do.  Catalysts can be intelligent growth (BRK), industry tailwinds (autos, rails, banks), workouts (post re-orgs, spin offs), recaps (buybacks, reduction of debt), etc.

 

The poorest investments are ones where a small discount exists between price and IV and the risk of IV falling is high.  The best ideas are where there is a large discount between price and IV and IV is growing.

 

To give examples:

 

Recap - DTV

Industry tailwinds and workout - GM

 

What about value being it's own catalyst?  And who would make what you label the "poorest investments"? 

[jay21]

Every one of my ideas has a catalyst and most ideas on the board do.  Catalysts can be intelligent growth (BRK), industry tailwinds (autos, rails, banks), workouts (post re-orgs, spin offs), recaps (buybacks, reduction of debt), etc.

 

The poorest investments are ones where a small discount exists between price and IV and the risk of IV falling is high.  The best ideas are where there is a large discount between price and IV and IV is growing.

 

To give examples:

 

Recap - DTV

Industry tailwinds and workout - GM

 

What about value being it's own catalyst?  And who would make what you label the "poorest investments"?

 

I only do extensive work on companies I feel are growing in value.  From what I do know, I would consider the poorest investments to be some tech companies like DELL, RIMM, and HPQ, where I don't really see how they are growing value.  The discount to IV could be large with their low PEs but the risk of IV halving or more seems real to me.  I am also talking about the universe of investments that people on this board look at.  Obviously buying a company above IV and the probability of IV decreasing is high is worse than if there is a discount to IV.

 

I am not sure if value can be it's own catalyst.  I much prefer the adage, if it is cheap a catalyst will emerge to narrow the gap.  But you could probably frame it so that the value is the catalyst that causes the catalyst? 

[Kraven]

Every one of my ideas has a catalyst and most ideas on the board do.  Catalysts can be intelligent growth (BRK), industry tailwinds (autos, rails, banks), workouts (post re-orgs, spin offs), recaps (buybacks, reduction of debt), etc.

 

The poorest investments are ones where a small discount exists between price and IV and the risk of IV falling is high.  The best ideas are where there is a large discount between price and IV and IV is growing.

 

To give examples:

 

Recap - DTV

Industry tailwinds and workout - GM

 

What about value being it's own catalyst?  And who would make what you label the "poorest investments"?

 

I only do extensive work on companies I feel are growing in value.  From what I do know, I would consider the poorest investments to be some tech companies like DELL, RIMM, and HPQ, where I don't really see how they are growing value.  The discount to IV could be large with their low PEs but the risk of IV halving or more seems real to me.  I am also talking about the universe of investments that people on this board look at.  Obviously buying a company above IV and the probability of IV decreasing is high is worse than if there is a discount to IV.

 

I am not sure if value can be it's own catalyst.  I much prefer the adage, if it is cheap a catalyst will emerge to narrow the gap.  But you could probably frame it so that the value is the catalyst that causes the catalyst?

 

I am not sure even where to start.  I think I know what you're trying to say, but it's all over the place.  I don't know how a low p/e could provide you a large discount to IV, but then the IV could be halved?  That's 2 concepts that are mixed up.  A low p/e might provide an attractive price point (or might not), but doesn't have anything to do with what IV is.  Remember, price is what you pay, value is what you get.  2 different things.

 

I would take issue too about the investments "people on this board" look at.  In this post and your prior post there is an implication that the board is a homogeneous group looking at the same or a very similar pool of investments.  While there is certainly overlap, I don't think there is the homogeneity you may believe exists.

 

Finally, I would disagree that value can't be it's own catalyst and that at best cheapness needs to cause an external or additional catalyst to emerge.  There are simply too many examples.

[LC]

I don't think their business is in terminal decline in the way of video rentals or yellow pages.  I think there is certain value add of going on oversea trips where the student get to meet politicians and/or important figures.  They are certainly in the premium niche of the market.  With the current economics, $5,000-$7,000 discretionary trips for high school students are tough to sell.

 

I agree, there is value-added. I also agree that it is a large discretionary expense for this economic environment (hence the sagging sales).

 

I don't feel the company is undervalued, though, despite the operating leverage. Nor do I see a catalyst, other than a general economic turnaround...which I don't really think is a catalyst specific to this business. I'd love to be convinced otherwise, though!  ;D

[jay21]

I am not sure even where to start.  I think I know what you're trying to say, but it's all over the place.  I don't know how a low p/e could provide you a large discount to IV, but then the IV could be halved?  That's 2 concepts that are mixed up.  A low p/e might provide an attractive price point (or might not), but doesn't have anything to do with what IV is.  Remember, price is what you pay, value is what you get.  2 different things.

 

Sorry, I tend to be too brief on message boards. 

 

For those tech investments, the price is low based upon TTM P/Es.  The market is pricing in some decline in the earnings of the company.  I feel those companies are susceptible to disruption and the earnings decline can be more severe and unpredictable than the market is pricing.  Plan made some good comments on what I am trying to describe here: http://variantperceptions.wordpress.com/2009/10/12/turnaround-lessons-when-the-tough-gets-going/

 

"A good financial position, like Dell’s or Yahoo’s,  can give them time to experiment and look for alternatives. But from the point of view of an investor even if the plan is successful the company will probably be a follower in the new industry, product, segment, business model: a shadow of its former self.

 

So the downside is not that well protected, the probabilities of success are not that good, and the upside will probably be limited: does not look like the recipe for successful investing. This is an area where I think value investors have to be careful."

 

Let me try to re-phrase what I was trying to say.  I would rather invest in companies with improving fundamentals than in companies with deteriorating fundamentals.  (That is probably what I should have typed instead of discussing price and value).

[Palantir]

How do you know that value will be its own catalyst? A stock can stay undervalued for ages. Especially if you're like me, and prefer to run a concentrated portfolio, then you're just screwing yourself.

[Palantir]

 

 

I only do extensive work on companies I feel are growing in value.  From what I do know, I would consider the poorest investments to be some tech companies like DELL, RIMM, and HPQ, where I don't really see how they are growing value.  The discount to IV could be large with their low PEs but the risk of IV halving or more seems real to me.  I am also talking about the universe of investments that people on this board look at.  Obviously buying a company above IV and the probability of IV decreasing is high is worse than if there is a discount to IV.

 

I am not sure if value can be it's own catalyst.  I much prefer the adage, if it is cheap a catalyst will emerge to narrow the gap.  But you could probably frame it so that the value is the catalyst that causes the catalyst?

 

In technology, some of these companies (HPQ, YHOO, BBRY, AOL) are experts at destroying value. Bridge tolerates 2.5 tons, you're at 2 tons (#marginofsafety), but as you get on...it starts crumbling.

[oddballstocks]

How do you know that value will be its own catalyst? A stock can stay undervalued for ages. Especially if you're like me, and prefer to run a concentrated portfolio, then you're just screwing yourself.

 

How can it not be?  We're talking true value, not a 10% undervaluation.  Imagine if Apple were selling for half of their net cash, deep value for sure and their business was the exact same as it is today.  Wouldn't that cheap valuation be the catalyst to get people involved?  Private equity firms would be falling all over themselves to bid for the company.

 

At some point a company gets so cheap it's almost silly, that's where value becomes a catalyst.  At those extreme valuations people tend to pay attention and will act because there is almost no downside risk and a lot of upside.

 

Sometimes the action is taken by the company, executives realize how cheap it is and go private.  Other times it might be a hedge fund taking a position or the appearance of an activist. 

 

When something is cheap enough things will happen, always has and always will.

[Hielko]

It wouldn't surprise me if investments without an obvious catalyst outperform in the long run because everybody wants to own something with a catalyst these days.

[premfan]

How do you know that value will be its own catalyst? A stock can stay undervalued for ages. Especially if you're like me, and prefer to run a concentrated portfolio, then you're just screwing yourself.

 

How can it not be?  We're talking true value, not a 10% undervaluation.  Imagine if Apple were selling for half of their net cash, deep value for sure and their business was the exact same as it is today.  Wouldn't that cheap valuation be the catalyst to get people involved?  Private equity firms would be falling all over themselves to bid for the company.

 

At some point a company gets so cheap it's almost silly, that's where value becomes a catalyst.  At those extreme valuations people tend to pay attention and will act because there is almost no downside risk and a lot of upside.

 

Sometimes the action is taken by the company, executives realize how cheap it is and go private.  Other times it might be a hedge fund taking a position or the appearance of an activist. 

 

When something is cheap enough things will happen, always has and always will.

 

Yes value itself is a catalyst. There are many ways to value and usually 1-3 main metrics to determine if the prices get to the silly range. The problem i faced as a young investor was i tried to value companies all the same way. Doing discount to cash method doesnt work for high growth companies. Knowing how to value certain companies in different industries is critical in not fooling yourself.  Also having a mental model of how the numbers "really" work.  Like if X happens then y will happen.  Also having a checklist of 7 main items is really helpful. If all the items line up its in the " no brainer " camp. Above all sentiment is number 1. Then followed by a catalyst. I would always look for bad sentiment and make a bet against wall street when the downside is clearly covered. Binary situations are awesome if you have a major buyer on your side ( like prem with rim).  The catalyst itself will be time. Merely surviving is the catalyst. Wall street tries to model everything. In the real world business cant be modeled exactly. I like stuff that wall street cant model or doesnt care to model.

[luck]

good points jay21. 

 

i'm also long both dtv and gm.  5% positions in both.  gm and fiaty clearly cheap on a ev/ebitda basis versus comps, auto tailwinds, etc.  to arrive at fair value for dtv, one should probably factor in buyback rate into intrinsic value calculation as this company generally acts on their buyback announcements in an intelligent way.

[mevsemt]

I like what premfan said, here's an old blog post of mine along those lines for those interested: http://mevsemt.blogspot.com/2010/09/uu-investing.html

 

-MEvsEMT

[oddballstocks]

How do you know that value will be its own catalyst? A stock can stay undervalued for ages. Especially if you're like me, and prefer to run a concentrated portfolio, then you're just screwing yourself.

 

How can it not be?  We're talking true value, not a 10% undervaluation.  Imagine if Apple were selling for half of their net cash, deep value for sure and their business was the exact same as it is today.  Wouldn't that cheap valuation be the catalyst to get people involved?  Private equity firms would be falling all over themselves to bid for the company.

 

At some point a company gets so cheap it's almost silly, that's where value becomes a catalyst.  At those extreme valuations people tend to pay attention and will act because there is almost no downside risk and a lot of upside.

 

Sometimes the action is taken by the company, executives realize how cheap it is and go private.  Other times it might be a hedge fund taking a position or the appearance of an activist. 

 

When something is cheap enough things will happen, always has and always will.

 

Yes value itself is a catalyst. There are many ways to value and usually 1-3 main metrics to determine if the prices get to the silly range. The problem i faced as a young investor was i tried to value companies all the same way. Doing discount to cash method doesnt work for high growth companies. Knowing how to value certain companies in different industries is critical in not fooling yourself.  Also having a mental model of how the numbers "really" work.  Like if X happens then y will happen.  Also having a checklist of 7 main items is really helpful. If all the items line up its in the " no brainer " camp. Above all sentiment is number 1. Then followed by a catalyst. I would always look for bad sentiment and make a bet against wall street when the downside is clearly covered. Binary situations are awesome if you have a major buyer on your side ( like prem with rim).  The catalyst itself will be time. Merely surviving is the catalyst. Wall street tries to model everything. In the real world business cant be modeled exactly. I like stuff that wall street cant model or doesnt care to model.

 

I agree with you that different things need to be valued differently, I was trying to use an obvious example.  Companies that have high growth are valued much differently, industries valued differently etc.  I don't remember where but I saw something maybe a blog post or an article that said investors would be doing a great deal of help for themselves if they learned the key metric per industry.  For example in railroads operating ratio is the key metric, it's what everyone compares themselves on.  Banks you're looking at NIM and ROE etc.

 

You're right that the best stuff can't be modeled.  I also like finding situations where management clearly knows the business is worth more, but they don't look at things through a Wall Street view.

 

Asset based valuation is clearly the bottom rung of the latter, and anything can be valued on an asset basis.  Sure I will miss the Apples the Cokes etc, but once you get to the bottom level the playing field is pretty even.  If I had the time and resources to do this stuff full time I'd probably expand my reach, but I currently have a circle of competence that's sound that I'm very comfortable in.  It has been working for me so far, probably not for many others, but it works for me.  Know thyself..

[Kraven]

How do you know that value will be its own catalyst? A stock can stay undervalued for ages. Especially if you're like me, and prefer to run a concentrated portfolio, then you're just screwing yourself.

 

80 years of history tells me that it's true.  Years of personal experience tells me it's true. 

[rukawa]

Finally, I would disagree that value can't be it's own catalyst and that at best cheapness needs to cause an external or additional catalyst to emerge.  There are simply too many examples.

 

This is an interesting question. Is value its own catalyst? Or better yet, what prevents value from being a catalyst? This came up at Norm's dinner when I was talking with Packer16 about Japanese net nets. The argument was that value would have a difficult time being realized if the stock had very limited marketability, a majority of shares were closely held by a family and there was limited interest on the part of owners in providing value for shareholders or growing the business.

[Kraven]

Finally, I would disagree that value can't be it's own catalyst and that at best cheapness needs to cause an external or additional catalyst to emerge.  There are simply too many examples.

 

This is an interesting question. Is value its own catalyst? Or better yet, what prevents value from being a catalyst? This came up at Norm's dinner when I was talking with Packer16 about Japanese net nets. The argument was that value would have a difficult time being realized if the stock had very limited marketability, a majority of shares were closely held by a family and there was limited interest on the part of owners in providing value for shareholders or growing the business.

 

It's a good topic.  Note that in the "value is it's own catalyst" discussion there is nothing that talks about how long it will take for that value to be realized.  So in your example, illiquidity, majority shareholders, etc. could certainly impede the progress for many years.  Hell, maybe forever.  But experience shows that at some point, whenever that is something will occur to unlock that value.  So maybe the family who holds the majority of the shares gets down to the 3rd generation who hates each other and they decide to sell out.  Maybe they get tired of being stock rich and cash poor and pay themselves a large dividend.  Maybe after the founding generation they decide they need new blood in the company and hire themselves a hotshot "moat" guy who can quote Buffett and Munger chapter and verse and the company becomes the next Teledyne or something.  But at some point, in most cases, something will occur.

[Palantir]

 

How can it not be?  We're talking true value, not a 10% undervaluation.  Imagine if Apple were selling for half of their net cash, deep value for sure and their business was the exact same as it is today.  Wouldn't that cheap valuation be the catalyst to get people involved?  Private equity firms would be falling all over themselves to bid for the company.

 

At some point a company gets so cheap it's almost silly, that's where value becomes a catalyst.  At those extreme valuations people tend to pay attention and will act because there is almost no downside risk and a lot of upside.

 

 

Sure, something might eventually happen, but how long are you going to wait? As I have stated, a stock can remain undervalued, misunderstood, and unloved for years on end. One day, it can suddenly triple, but you don't know when that will happen, and the longer you wait, the more opportunities you miss out on, and if it's a significant portion of your portfolio, you will hurt. And that's assuming that it will work out in the end, the firm can still get sold for a poor price, management can still try to take it private at a lowball valuation (Dell) etc.