Street Capitalist: Event Driven Value Investments

Wisdom on such diverse topics as: spin-offs, merger arbitrage, post-bankruptcy equities, global macro commentary and short ideas.

Street Capitalist: Event Driven Value Investments

Jeremy Grantham on CNBC

CNBC has a great interview with Jeremy Grantham:

Grantham gives his thoughts on a wide range of topics from the Fed’s policies, US equities, emerging markets, commodities, and even farmland/timber.

Michael Burry invests in Gold, Farmland, and Asian Tech

Many of you might remember my post Learning from Michael Burry where I looked at how he started out to get some insights on his investing process. Now, Bloomberg has a new article that talks a bit about where he is finding opportunities:

“I believe that agriculture land — productive agricultural land with water on site — will be very valuable in the future,” Burry, 39, said in a Bloomberg Television interview scheduled for broadcast this morning in New York. “I’ve put a good amount of money into that.”

Burry of `The Big Short’ Bets on Farmland, Gold After Profits on Subprime (Bloomberg)

Agricultural land is one area I’ve thought a bit about. With populations set to increase globally, there will be more demand for food. The thing I have not figured out is a way to play these trend as a value investor. In recent years we’ve seen short bubbles take hold of certain ag. commodities like wheat. Farmland, which is a bit less direct might actually make more sense. If you think about it, when commodities like wheat rise in price there is a real demand for increased production. Governments will try to do whatever they can to keep prices down, so that their people don’t riot. The value of farmland should increase in the long term even as commodities fluctuate, as long as we continue to see a rise in our population.

Another area Burry is looking at is small Asian technology companies:

“I’m interested in finding investments that aren’t just simply going to float up and down with the market,” he said. “The incredible correlation that we’re experiencing — we’ve been experiencing for a number of years — is problematic.”

Still, it’s possible to find opportunities among small companies because large investors and government officials focus on bigger ones, he said. He is particularly interested in small technology firms.

“Smaller companies in Asia, I think, are neglected,” he said. “There are some very cheap companies there.”

I am curious about whether he is looking at China. In some ways, the general disinterest in Chinese equities reminds me of the behavior he saw after the dot com bubble burst. At that time, the general investor community shunned technology firms, despite the fact that many had cash rich balance sheets with virtually no debt. Many of these companies eventually became net-nets or negative enterprise value companies. These were great investments for the value investors that were willing to ignore the words technology and internet, instead choosing to focus on their balance sheets.

If we look at Chinese microcaps today, many trade at incredibly low valuations. There is a good reason for that. The general investor community is worried about the potential frauds that are lurking beneath the surface. I don’t really know how to pick out Chinese frauds well enough to invest in Chinese microcaps. To some extent, I think it is almost a numbers game. Where if you diversify enough you can expect a certain percentage of your portfolio will go to 0 because of fraudulent activities but that a greater percentage will maintain or increase their value.

I wont invest in these Chinese microcaps, but I can imagine that whoever manages to pick the legitimate companies from the frauds will do extremely well.

Finally, Burry is looking at gold:

Gold is also a favored investment as central banks issue debt and devalue their currencies, he said. Governments haven’t adequately addressed the causes of the financial crisis and may be sowing the seeds for future problems by borrowing, he said. In the U.S., lawmakers showed they didn’t understand how to prevent another crisis when they gave the Federal Reserve and Chairman Ben S. Bernanke additional authority, he said.

“The Federal Reserve, in my view, hadn’t seen this coming and in some ways, possibly contributed to the crisis,” he said. “Now, Bernanke is the most powerful Fed chairman in history. I’m not sure that’s the right response. The result tends to tell me they’re not getting it right.”

To me, gold is really a trade where you are trying to profit from the fears/anxieties of the rest of the market. Some traders are very skilled at gauging that kind of sentiment and figuring out when it will shift so that they can then get out of gold and into other assets. I don’t know enough to be able to do that so I’ll stick with analyzing global businesses that have pricing power.

Bloomberg has a video up where you can hear from Michael Burry himself:

Michael Burry
(Click to play)

Transportation Roundup

A while back, Warren Buffett mentioned that he often looks at rail freight traffic to get an idea of the wellbeing of the economy. With transportation, you can figure out how goods are moving through the country in response to consumer demand, allowing you extrapolate how those sales will affect the broader economy.

Today there are a number of news releases that are pointing to a rebound:

Freight companies’ shares rose early Thursday after strong results from several companies in the sector showed a pickup in demand, which bodes well as an early sign of recovery for the economy as a whole.

The companies had been seeing a slow recovery as the economy started to improve. Pricing pressures and slumping freight demand hurt the companies in the last year and a half. But results from several of the companies, including United Parcel Service Inc. (UPS), in the last two days have offered new optimism for the freight-transport sector and sent shares soaring. Several companies posted gains in some of their metrics, such as revenue or volumes, that hadn’t been seen in nearly two years.

UPS is often viewed as a key barometer for global trading activity, and the freight sector as a whole offers a glimpse into how the economy is doing because it moves manufactured goods before they are sold.

“Seeing transport volumes pick up is a sign the economy isn’t far behind,” FBR Capital Markets analyst Christian Wetherbee said. A pickup in freight volumes points to improvement in manufacturing activity, along with coming improvement in retail sales, he said, which will eventually translate into gross domestic product.

Freight Companies’ Shares Rise As Results Show Demand Returning (WSJ)

Here is a closer look at UPS (NYSE:UPS):

United Parcel Service Inc. said its first-quarter earnings jumped a better-than-expected 33%, in another sign of improvement in shipping, a bellwether of the broader economy.

Disclosing its results two weeks early, UPS said on Wednesday that growth was powered by a “significant acceleration” in international shipping with daily volumes up 18% in the quarter compared with a year ago. U.S. daily shipping volumes rose less than 1%, but that is the first increase in U.S. volume reported by the company in two years.

UPS said international sales jumped and the U.S. had its first year-over-year gain in two years. Above, workers load packages in Louisville, Ky.

“We expected the first quarter to be the most challenging of 2010 as the economic recovery gathered steam through the year,” Kurt Kuehn, UPS’s chief financial officer, said in a statement. “As it turned out, revenue was stronger than we expected due to international volume gains, increased yields in the U.S. and growth in forwarding and logistics.”

Kevin Sterling, a transportation analyst with BB & T Capital Markets, said: “What I find encouraging is that the growth is top-line driven; it’s revenue driven. Really, I think it speaks to the economy gaining steam,” he said.

Mr. Sterling said that overall, international freight shipments are up 35% compared to a year ago, and up between 6% and 8% over 2008.

UPS Posts Strong Results (WSJ)

Railroad company CSX (NYSE:CSX) also reported strong results:

Railroad operator CSX posted double-digit increases in sales and income on gains in productivity and volumes. Above, a CSX locomotive at the Barr Rail Yard in Riverdale, Ill., in January.

CSX Corp., the first major U.S. railroad to report first-quarter results, cited the economy’s “gradual and steady” gain for a 24% profit rise that topped Wall Street expectations.

The Jacksonville, Fla., railroad operator said its freight volume rose 5% overall and climbed in most categories, compared with the depressed year-earlier period, with big increases in shipments of metals, fertilizers, autos and auto parts.

A 27% increase in metals shipments was driven by “rebounding steel consumption consistent with the ongoing economic recovery,” the company said in a statement. But its big coal-transportation business remained weak as volume shrank 13% in the quarter due to high coal stockpiles at U.S. utilities. Last month, CSX said it expects its coal shipments this year to rise a bit despite weak first-quarter trends.

The transport sector is poised for a rebound this year, with freight traffic on U.S. railroads up 2.2% in the quarter, according to figures complied by the Association of American Railroads. Still, traffic remains well off 2008 levels, indicating a slow turnaround is underway.

CSX Profit Jumped 24% On Revenue Gains (WSJ)

The railroad traffic specifically can give us an idea of how construction and new builds are progressing in the US via their activity in steel transportation. However, it is worth noting that coal demand and overall traffic still remains lower than before. So while we are gaining momentum in the recovery, we aren’t quite there yet.

If you think about it, Berkshire Hathaway (NYSE:BRK.B) must give Buffett a number of indicators for how the consumer economy is working. Besides Burlington Northern’s railroad traffic data, his various operations give him data on t-shirt sales, jewelry, furniture, fast food, energy consumption, and more. I’d argue that some of this data is probably more helpful than the kind the Federal Reserve gathers.

For us mere mortals without billion dollar conglomerates, we can rely more on transportation data for an approximate take on the economy since many businesses rely on trucks and rail freights to move goods from one point to the other in the supply chain.

Tom Winmill: A Checklist for Investing in Gold Miners

Gold Mining

Investing in commodities is usually a hotly debated area among value investors. In theory, being able to obtain commodities at a deep discount is just what value investing is. But, there is a tendency for investors to circle around this corner of the market only when commodity prices really heat up. It is easy to accidentally invest into a bubble and watch your margin of safety disappear. Still, I believe it is insightful to study how great commodity investors work, and MaryAnn Busso’s awesome Bloomberg article about Tom Winmill provides us with a glimpse of his approach:

Gold had a good year in 2009. Tom Winmill’s Midas Fund had an even better one.

The $125 million fund, which invests in companies that mine or process metals or other commodities, was up 83 percent last year. That return beat 95 percent of the fund’s peers, according to data compiled by Bloomberg.

Winmill, 50, says his training as a lawyer helps him sift through engineering reports on mining deposits, Bloomberg Markets reports in its March 2010 issue. “That’s much more important than putting on your hiking boots and walking around the mine,” he says.

Among the items high on Winmill’s checklist when picking stocks: a miner’s ability to start production on time and on budget and to preserve the value of its shares. “I like to see a mining company that pays a dividend, occasionally does a stock buyback — instead of constant stock issuance — and doesn’t make dilutive acquisitions in order to extend their empire,” Winmill says. Those three things, combined with a good project, are key, he says.

As of January, Winmill had the majority of the fund’s assets in stocks of gold-mining companies. Returns on miners’ shares tend to amplify the returns on gold because of the companies’ operating leverage, Winmill says. That gave the fund a boost from a bullish market as investors sought to protect the value of their holdings. “The devaluation of the dollar and the bursting of the bond bubble are going to hurt a lot of investors,” Winmill says. “And inflation is going to hurt a lot of savers.”

Midas Fund’s Winmill Turns Gold Rise Into 83% Return on Miners (Bloomberg)

Some of the key takeaways here are that an investor should spend a lot of time getting acquainted with understanding the engineering reports issued by these miners, to properly gauge the situation. Note that he does not find actually visiting the mines to be useful. There is probably good reason for that, someone who is untrained at gauging physical mining operations may inaccurately perceive activity. Engineering reports are a way to more objectively determine the mine’s prospects.

After looking at gold through his four filters of U.S. fiscal policy, U.S. monetary policy, market supply and demand, and geopolitical events, Winmill analyzes individual gold miners, hoping to take advantage of the operating leverage they provide. I thought Winmill’s checklist for mining companies was worth noting:

1. The ability to start production on time and on budget
2. Pays a dividend
3. Pursues share buybacks
4. Does not pursue dilutive acquisitions

A company with all of these characteristics would be one that is run by a sound capital allocator. After the commodities bubble burst in 2008, Rio Tinto was one miner that was hit particularly hard. The company engaged in a ruinous acquisition plan, financed by mountains of debt. The company was like a homeowner who purchased homes that they could not afford, with the hope that its price would rise, and that they would be able to refinance their mortgages. Eventually, the music stopped playing and Rio Tinto scrambled to find ways to infuse its balance sheet with capital and pay down debt.

I can’t say I have a lot of knowledge of good managers of miners and other commodity companies, but I do know that many investors like Ken Peak, who runs Contango Oil and Gas (AMEX:MCF). In the Bloomberg article, Winmill goes on to mention a few companies that he likes:

Among the miners that meet Winmill’s investment test is Northern Dynasty Minerals Ltd. (AMEX:NAK) The Vancouver-based company is developing Alaska’s Pebble gold and copper project in partnership with Anglo American Plc. Shares of Northern Dynasty, which is 20 percent owned by Rio Tinto Group, rose 124 percent in 2009. This year, the stock rose 3 percent to trade at $8.52 on Feb. 10. “They’ve got experienced, well-capitalized partners who really know how to get the ore out of the ground,” Winmill says.

Midas also owns shares of Jaguar Mining Inc.(NYSE:JAG) The Concord, New Hampshire-based company is bringing older gold mines in Brazil back into production. Winmill says Jaguar’s output might reach 600,000 ounces in about five years, up from 115,000 ounces in 2008. He says the company is likely to be acquired. Jaguar’s shares jumped 114 percent in 2009. This year, they fell 14 percent to trade at $9.60 on Feb. 10…

Midas’s holdings also include Silvercorp Metals Inc. and Fresnillo Plc. Shares of Vancouver-based Silvercorp, which has been buying high-grade mines in China, rose 210 percent last year. Stock of Mexico City-based Fresnillo, which operates silver mines in Mexico, was up 244 percent in 2009.

Midas Fund’s Winmill Turns Gold Rise Into 83% Return on Miners (Bloomberg)

Be sure to read all of the article, it’s a great look at how one investor operates. Warren Buffett has invested in commodities in the past, specifically silver, so it is worth taking some time to study. It’s always good to expand your circle of competence and a good value investor should be willing to travel through asset classes in search of value.

About Me

My name is Tariq Ali, I run Street Capitalist. I recently graduated from the University of Texas at Austin. There, I stumbled onto value investing via the school library. I read everything I could and now I'm here, writing out my thoughts and investment ideas.

I have a lot of heroes when it comes to investing, it seems like every investor has some kind of niche. Some, whose books and writings have had the biggest impact on me are: Warren Buffett, Benjamin Graham, Joel Greenblatt, Seth Klarman, and George Soros.

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