My career in asset management started with Federated Investors' municipal bond group. As an analyst, I reported to the Sr. Analysts and Portfolio Managers. The talented team at Federated has a deep expertise in municipal credit.
Therefore, Lee Cunningham is the best person I know to answer the question "Is Chicago the next Detroit?" As Sr. Portfolio Manager, he runs Michigan focused and High Yield municipal bond funds for Federated Investors.
If you want to learn more about muni bonds, I recommend this book (link).
Also, if you are on twitter, I recommend followingCate Long (@cate_long) for all muni bond news.
I hope you enjoy Klarman's presentation as much as I did. It's is a bit long but worth the time.
Like Greenwald says in the beginning, the founder of Baupost Group needs no introduction. Klarman's remarks begin around the five minute mark. If you aren't familiar, he also wrote this book (link).
As usual, my notes are below. You may find Baupost Group 13F here, but it represents only a fraction of total firm AUM.
Ethan Berg is a management consultant turned investment partnership manager. He worked for six years at Michael Porter's Monitor Group. Of course, Porter is best known for his Five Forces analysis. As a management consultant Berg brings a unique perspective, a certainly a different methodology to value investing.
If you've ever worked with a management consultant, you know they have buzzwords and terminology that can be foreign to an investment manager. This interview is no different. "Assets and Activities", and "Activity Webs" are discussed at length. However, don't be deterred by this seeming foreign language, these are simply tools to gain a deeper understanding of Economic Moats. Listen below, and check out my notes further down the page.
This interview comes to us from the must-listen Value Investing Podcast by John Mihaljevic, CFA, author of The Manual of Ideas. More about Berg from The Manual of Ideas:
Ethan Berg is the founder and chief investment officer of G4 Partnership, an investment partnership dedicated to the implementation of the investment discipline of Ben Graham, Warren Buffett and Seth Klarman. Prior to founding G4 Partnership in 2000, Ethan was a management consultant at Monitor Group for six years, including two years of working directly for Michael Porter.
The common perception of activist investing is personified by Carl Icahn. Activists are known for using PR campaigns to exert pressure and affect change at target companies.
However Jeffrey Ubben of ValueAct is among the world most successful activist investors, and rarely goes public. In fact, he says public campaigns are less effective in unlocking value than his collaborative approach.
Ubben recently made waves in pharma/biotech when he sold part of his long time Valeant ($VRX) stake.
Enjoy the 25 minute interview below, in two parts. It is courtesy of the amazing OpalesqueTV YouTube channel.
I recently published a report over at Chimera Research Group titled 13F Analysis of Best Performing Healthcare Hedge Funds (Q1 2015).
As free preview to the Chimera article, below is a list of the best performing healthcare specialists, judged by replicating the holdings disclosed in their 13F filings. For details on how these portfolios were constructed, see the geek notes below.
As implied by the article title, I identify the best performing healthcare focused hedge funds from the list of 35+ 13F filers I track. From this list I created a "best ideas" portfolio by looking for stocks that multiple managers own. The intuition is this: if two biotech specialists with great track records, who are presumably competitors, are both in the same stock, its worth a look. The entire article, including stock picks, is available over at Chimera Research Group.
To be perfectly clear: These are the not returns of the funds listed, rather they are the returns of buying the stocks listed on the fund's 13F filing.
Portfolio Construction Notes:
Motley Fool has an interesting conversation on American Express's split with Costco. In their view it's indicative of disciplined management from AXP.
As I previously discussed, American Express may be undervalued here.
The market is buzzing about Biogen Idec ph1b BIIB-037 data for Alzheimer's disease tomorrow. The press release is coming out at 5:35 am EDT. BIIB represents a 9.72% holding for most common benchmark in biotech, the Nasdaq Biotechnology index, the ETF that tracks this index is IBB. Other ETF's with large exposure include BBH, and PBE.
The data are widely expected to be positive. Either way, it will move the sector. Best of luck.
Data above is from morningstar and etfdb.com
A must read book for any value investor is The Warren Buffett Way by Robert Hagstrom. Now in it's 3rd edition, the book profiles Buffett, his process, and deconstructs his most well known investments. It provides a valuation framework and quantifies Buffett's famous Margin of Safety.
Unlike many of Buffett the books out there, this one is by and for investment practitioners. Robert Hagstrom is Chief Investment Strategist and Managing Director of Legg Mason Investment Counsel. The forward to the first, second, third editions are by Peter Lynch, Bill Miller, and Howard Marks, respectively. While it is not endorsed by Buffett himself , Hagstrom reports he was granted permission to quote extensively from Buffet's letters, after he had reviewed the book.
American Express is one of Buffett's best known investments, and it is well examined in the book. This is the first in a series wherein I'll review a valuation from the book, and then perform an updated valuation of the company with the same approach as the author.
AXP has under performed the market over the past year, among the reasons are the Costco deal, and the anti-trust case.
EDIT 3/16/15: Talking with some investors brought up other risks:
Are these problems actually a buying opportunity? Buffett recently opined on these issues on CNBC.
Buffett has actually gone several rounds with American Express, first with The Buffett partnership during the Salad Oil Scandal in the 1960's and then again with Berkshire in the 1990's when he infused AXP with capital via preferred shares during a cash crunch (sound familiar?).
Buffett converted his preferred to common in 1994, after AXP management sold off under performing divisions and began buying back shares. He bought more in 1995, owning almost 10% of AXP.
In The Warren Buffett Way, the Hagstrom uses a two-stage "dividend" discount model, however in lieu of dividends he substitutes "owners earnings" defined as:
In the 1990's American Express situation , it was approapriate to use net income, as non-cash charges roughly equal capex.
The author uses the following conservative assumptions:
Based on these assumptions, he concludes that Buffett determined AXP had an intrinsic value of $43.4B while its market cap was only $13B. A whopping 70% margin of safety!
There are a host of qualitative factors to consider. The author goes into AXP's consistent operating history, and management rationality. You'll have to read the book if you want a discussion of those.
Of course, since 1994 AXP has performed very well.
To assess the current valuation we are going to carry forward the authors assumptions about owners earning's being equal to net income. Over the past few years, depreciation, depletion, and amortization has roughly equaled capital expenditures at AXP, so we are going to keep that simplifying assumption.
As for owners earning growth rate, AXP management is still targeting 12% to 15% long term growth, same as 1994. Now that is consistency!
We have been able to drive strong EPS growth within our 12% to 15% long-term target range. - Jeffrey Campbell, Chief Financial Officer- Q3 2014 earnings call, Oct. 16, 2014
To be conservative we are going to keep our model's growth of 10% for 10 years, and a terminal growth rate of 5% after 10 years.
As for discount rates, long term treasury rates are much lower today than 1994. However, I love building conservative assumptions into my models. This way, if your valuation work points to a screaming buy, you know its not because of your optimistic assumptions. For these reasons we are going to stick with a 10% discount rate.
One interesting take-away from the book is Buffett doesn't adjust his discount rate up or down to account for perceived risk. Rather, he demands a larger margin of safety. This is just another example of value iinvesting contradicting the approach taught in business school.
After re-running the two-stage "dividend" discount valuation model with 2014 earnings and the assumptions outlined above, the model concludes AXP is worth $179 a share. This figure is much higher than any sell side analyst price targets. This is an intrinsic value estimate, not a price target. It also implies a 56% margin of safety at the current market price of $79. Please note, this is the book's sheet, not mine. You can get a copy of the model from the books companion website.
It's worth noting a few take away's from this intrinsic value estimate:
The biotech space is hot with merger activity right now. Last night, Pharmacyclics (PCYC) agreed to be acquired by Abbvie (ABBV), and a few days ago the Salix / Valeant (VRX) deal was announced. Merger arbitrage, or speculating on mergers & acquisition activity, can be a high risk game. However a lower risk variation of merger arbitrage has been practiced by Warren Buffett, and of course it fits nicely in the value investor's framework.
Note: if you just want the merger arb tracking sheet, scroll to the bottom. If you want to learn about how Buffett does it, read on.
Not much has been written about Buffett's approach to merger arbitrage. However, I have found two books:
Warren Buffett and the Art of Stock Arbitrage cites this study and a Forbes article that state Buffett has produced annualized returns of 80% to 90% on his merger arb investments, or "work outs" as he likes to call them.
Buffett practices long-only merger arbitrage, taking long positions in the company to be acquired. This contrasts with traditional merger arbitrage, in which one goes long the acquired and shorts the buyer. This approach hedges out market risk and some other factors. However some criticize it as twice the risk for half the return.
Here is Warren Buffett in his 1988 letter writing about arbitrage:
Below is a summary of the investment criteria in Warren Buffett and the Art of Stock Arbitrage and Trade Like Warren Buffett.
With these factors in mind, Warren Buffett and the Art of Stock Arbitrage describes a model that incorporates these factors. One of my pet peeves is investment calculations in paragraph form. So I built the model below for you, and loaded it with my best estimates for PCYC and SLXP.
The entire sheet doesn't fit into this web page well, so you may just want to look at it here. I should mention this model is only good for all cash deals. If there is interest, I may build one for a mix of cash and stocks. My take away at time of publication: there is some opportunity in PCYC, but not much in SLXP.
This is the personal blog of Emory Redd.
This blog is not investment advice. This is not a solicitation to invest. Don't take candy from strangers.
BEST OF HEDGEROLL
ACHILLION AND RA CAPITAL: MY FAVORITE TRADE
SALIX INVESTORS LOOKING FOR A BUYOUT SHOULD BE CAUTIOUS; MORE ACCOUNTING PROBLEMS AHEAD
BIOTECH AS BUFFETT'S WONDERFUL BUSINESS