Berk Sure Has A Way

Last week I attended the Value Investing Congress in New York.  The speakers were top notch and the presentations were very engaging.

I enjoyed hearing the speakers’ discuss their investment processes.  Lloyd Khaner’s talk on turnarounds was very well done.  Also, various presentations on the continued weak state of the housing market were very informative.  Overall, the tone was pretty bearish on the economy and the markets.  Many of the presenters professed concern about overvaluation but projected a sense of “the show must go on… so here are my stock picks.”

I agree that the markets feel stretched based on the woeful state of the consumer but some of the picks are worth watching.  Some longs do go up when markets go down.  Even better is to pick up great stocks on sale if the market does turn down again.  My favorites of the conference were:

Small Cap Long Ideas – Risky companies

IRDM – Whitney Tilson and Glenn Tongue presented an interesting pitch for Iridium (yes, the formerly bankrupt satellite phone company that used to be a punchline!).  According to Whitney and Glenn, Iridium has an unrivaled set of assets (satellites and services).  Iridium reaches 90+% of the globe has no cell towers (e.g. ocean, dessert, mountains).  The company was purchased by a SPAC a year ago on favorable terms.  Non-voice data services are growing dramatically and the voice business is growing nicely.   The bear case on IRDM is that they plan launch a new constellation of satellites starting in 2014.  Whitney and Glenn believe that IRDM might be about to launch it without borrowing funds.

CORE – Kian Ghazi provided a detailed bull case for Core Mark, a convenience store distribution player.  CORE is the number two operator behind Mclane (a Berkshire company).  Kian claims that while distribution may not be a sexy business, it can be a defensible one if the following conditions are met:  high route density for drop-offs, highly fragmented, high switching costs and small drops with lots of stops.  In his opinion, CORE
benefits from all of these.  His bullish case for them rests on an emerging part of their business:  fresh food (prepared fruit cups, sandwiches, etc).  This high margin, high growth business should more than offset the secular decline in low margin cigarette business which is a big part of CORE existing revenue.

Mid / Large Caps Long Ideas – Safer, less risk of massive downside

CXW – Bill Ackman sparked a rally in Corrections Corp when he revealed he owned a 9+% stake (which hadn’t been publicly disclosed yet).  His pitch was funny and well thought out:  CXW is largely an inexpensive, safe real estate play with extremely creditworthy tenants, secular growth and room for market share gains.  He claimed that private prisons operate more effectively than public ones on many levels and that the trend will be towards privatization (especially for new prisons).   The stock probably won’t double but he thinks it has upside to $40-50+.

LH – Zeke Ashton laid out the case for Labcorp, the number two provider of laboratory testing behind Quest Diagnostics.  The growth rate of the company is high, the industry pretty defensible.  The only issue is a biggie though – healthcare reform.  The lab testing business has been bandied about as a rich target for cost cutting, but Zeke thinks that the concerns here are overblown.  There may even be a scenario in which LH and Quest benefit from expanded coverage and testing.

Shorts – Proceed with caution

ITB – Whitney Tilson presented the housing stock ETF as a short based on an updated version of his voluminous housing “head fake” presentation.  It lays out a compelling story that housing has not yet bottomed because of shadow inventory (7 million homes in various stages of delinquency and foreclosure), option-ARM exposure peaking in 2011, a stretched consumer, removal of stimulus and the eventual rise in interest rates.  His take was that there are more than enough homes for those that can afford to buy them and that the housing companies should basically build nothing for years.

O – Bill Ackman spoke briefly about shorting Realty Income – the “monthly dividend company”.  This is a company he has previous criticized for having risky tenants who have done sale-leaseback transactions with Realty Income.  He expects that the company will have a radical valuation readjustment once the market realizes that the dividend is not safe.   The company does a lot of shareholder marketing focusing on the dividend and if (when, according to Ackman) O sustains credit losses in its weak portfolio they will need to cut the dividend.

Overall, the conference was very interesting.  The slides from all the presentations were available after the conference as well.

Disclosure:  I do not
have positions in any of the stocks mentioned in this article.