Street Capitalist: Event Driven Value Investments

Times are pretty crazy. With the volatility of last week a lot of panic ensued. I hope all of your investments are doing well, I’m a little nervous about some companies that appear cheap. A few value investing bloggers are jumping into monoline insurers like Ambac (ABK) and I think that perhaps these types of investments are not prudent. I don’t think you need to strap on your helment and start shooting. Try to take some time to really study investments in financials, don’t just assume because their names are big that they will be around forever. A lot of their long-term success may depend on capital infusions which could dilute your shares. And really, do you want to invest in a company with the hopes of some SWF swooping in and proping your company up? Or do you really want to invest hoping for a government bailout? Do you want to compete against Berkshire Hathaway’s new insurer? I think that borders too much on the risky side of things, and would prefer to stay on the sidelines.

I started this blog in September and created a portfolio specifically for it, that way I can document how my investments have been doing along the way. So far, things are looking good.

Before I begin:

New Position - Steak ‘N Shake

I postponed on mentioning this, because I kept debating whether or not I should purchase more. After listening to the conference call, I decided to keep my position at its original average cost - $11 per share. This means that I’m down roughly -33% so far on Steak N Shake (SNS) and it has only been about a month. The reason I decided not to dollar-cost average down was that I still wanted to maintain my concentrated by lagging position in Odyssey Re - and I was not thrilled with anything mentioned in the conference call.It seems like Steak N Shake will be a special situation with good potential upside, but for now I see few catalysts on the horizon to make the company appreciate value immediately. SNS represents 10.7% of the Street Capitalist Portfolio.

Other investments:

1. Fairfax Financial Holdings

I’ve been most thrilled with how Fairfax Financial has performed over the course of the blog. My average purchase price was $215 a share, in early September. Today, Fairfax Financial Holdings hit $326.41. FFH had been on my watch list for quite sometime, but I felt uncertain about a catalyst to really make it appreciate its value, especially confronted with the massive short campaigns of various hedge funds.What peaked my interest was their CDS portfolio.In early September, I spent a good deal of time analyzing some macro issues and comparing them to possible value investments. I believe that this is a good strategy, and Julian Robertson’s success is really evident of that.

Since February of last year I actually started following what had been going on with sub-prime mortgage lenders and decided their business wasn’t very viable. I was a little astonished when after March, some investors began plunging into sub-prime lenders with hopes of picking up a nice 5-bagger. Then, when I read a paper from the Jackson Hole Summit, my conviction to figure out a way to get exposure to the short side of sub-prime. The paper, detailed how in most cases, countries with easier access to credit typically have consumers who heavily leverage or at least employ leverage to augment their consumer spending.

Since I believe that consumer spending has a major impact on the way our economy moves, I became pretty bearish and decided to take a position.While I don’t have access to credit default swaps, and I wasn’t confident in directly shorting a Delta Financial or Countrywide, FFH seemed like a good bet. Prem Watsa is a great investor who I feel has considerable foresight, the stock didn’t seem to be followed very well / seemed to be hated quite a bit by big money — resulting in a company that from a P/B perspective looked quite attractive, with a great CDS portfolio to add some extra oomph.My position in FFH has achieved a 51.82% return in a little less than 5 months. I wasn’t the first to the Fairfax party, but I feel like I came in at a pretty opportune time. While price targets for the company range from the $320 - $360 range, I’m quite sure that I’ll be in it for the long haul.

Fairfax Financial Holdings (FFH) makes up 44% of the Street Capitalist Portfolio.

2. Odyssey Re Holdings Corp.

A lot of the same factors that influenced my FFH investment influenced my ORH position. At about 25% of the Street Capitalist portfolio, Odyssey Re (ORH) is a pretty considerable position. Trading at about 1x book, not followed well, and holding a good CDS position still makes it very attractive to me. Since I bought FFH and ORH at the same time, Odyssey Re has lagged behind, it’s only up 6.76% for the same period, versus Fairfax’s 51.82% return.Ultimately though, I don’t feel the need to sell ORH and believe it will become valued over time, albeit a little longer than FFH.

3. Esmark Inc. Esmark (ESMK) is 19% of the Street Capitalist portfolio and its worst performer. So far I’ve lost -50% on this position, which hurts my overall performance. Basically this was another special situation idea that I feel still has a lot of promise. As long as Esmark can pull off the Sparrows Point acquisition, they should be able to do relatively well. It seems as if union support by both groups will certainly help with this, they may just need to find better partners. I’m not really worried and will hold on to the company.

4. Steak N Shake

There’s not too much else that I can mention here, I was pretty disappointed with management’s lack of receptiveness during the conference call and their general ambiguity. I believe that Sardar Biglari’s ability to win board seats certainly looks probable.I’ve included a number of links related to Steak N Shake below:

A Special Situation at Steak N Shake (Motley fool)

Steak N Shake (Gurufocus)

Overall:

As a whole, the Street Capitalist portfolio is up 12.82% over the course of less than 5 months. During the same period, the S&P 500 is down -6.46%. I’m quite satisfied with this type of out performance of my benchmark. In the future I’d like to make a few more changes. Holding just four companies is incredibly concentrated, and while I don’t entirely object to this, I do believe it would be a good idea to hold more just to safeguard against any unintended stupidity on my part. I was pretty inspired by Mohnish Pabrai’s performance considering DFC’s bankruptcy while ABXA and CCRT nose dived. Overall, Pabrai was able to maintain a positive return year to date Thanks Anonymous for catching an error - I misread PF2’s year return as positive 1.2%, when it was really -1.2%. Still though, not a bad drawdown considering there was one bankruptcy and multiple positions which lost greater than 30%.

My current watch list:

WellCare (WCG), Sears Holdings Corp (SHLD), Marvel Entertainment (MVL), Wyndham Worldwide Corp. (WYN)

I’ve posted briefly about Marty Whitman before, but I don’t think I’ve ever mentioned Jean-Marie Eveillard of First Eagle Funds. Eveillard is another excellent value investor, and in the Morningstar interview I’m linking below we get to see some good commentary from both Eveillard and Whitman.

Conversation: Jean-Marie Eveillard and Marty Whitman (Morningstar)

MW: I think buy-and-hold makes much more sense than people give it credit for. Because one, value is not static. It is very dynamic. If you’re in a reasonably good company on a long-term basis, the business continues to create value. And I’ve had a long career in learning my lesson. I’d own a stock for three years; it would double; and I’d sell it to somebody for whom it would triple in the next six months. We should also talk about shortcomings. I think your discipline and my discipline works an awful lot better on the buy side than the sell side. Therefore, unless you have compelling reasons, why sell?

JME: That’s right. Too much money is often left by value investors on the table because the stock is sold too soon. Truly, as value investors and as long-term investors, we should not worry too much about the fact that after the price of the stock has moved up, maybe it will no longer go up, or maybe come down a bit over the next year or two.

One of my favorite trading books is Inside the House of Money by Steven Droby. What I really enjoyed was that through the interviews, we were able to get a good idea of the kinds of mindsets some global macro traders had.

The book featured an interview with James Leitner of Falcon Management Corp which I especially enjoyed. In his interview, he described how he uses magazines like The Economist as a way of sourcing ideas.

Now, in a recent issue of The Deal magazine, Leitner shows us another way to source investment ideas. This time by using development indices created by groups such as the United Nations, the Heritage Foundation, and World Bank.

Leitner says:

Through our research at Falcon Management Corp., we have uncovered linkages between good governance, economic freedom, human development and stock market returns.

Essentially, Leitner’s group of researchers found that the year after these indices are published, the top ten nations of each ranking will dramatically outperform market benchmarks.

In theory, a lot of this makes sense. Stability is essential for strong capital inflows in many developing nations. Increased development and investment should help the economies and companies of these nations grow creating positive changes in their respective markets. Instability on the other hand creates increased risk and higher costs of borrowing (just see the move in Pakistani CDSs after the Bhutto assassination)

The types of returns detailed in the chart are certainly strong and I believe it’s something worth studying further. So far already, the data has helped Leitner find attractive securities in areas once thought of as being too dangerous to invest in. For example, he’s picked up shares of one bank in Ghana after visiting and witnessing the changes occuring within the nation.

Links:
UN Human Development Reports
The Heritage Foundation’s Economic Freedom Index
The World Bank’s Ease of Doing Business Rankings
The Leinter Center at Fordham Law School