1. finance
2. investing

April 2, 2015
February 3, 2015
In Search of Mispricings
Inside this Issue
FEATURES
Joseph Koster and Mathew Miller prove that an intense focus on the smallcap space can yield extraordinary values that are hiding in plain site.
Investor Confidential: Boyles Asset
Executing a value based investment approach with investments in EGI Financial,
Zicom Group, and Cambria Automobiles.
n
PAGE 2 >>
Investor Confidential: Saj Karsan
Searching for value in unknown or unwanted
businesses, and finding it in Alloy Steel, Data
Group Ltd, and IWG Technologies.
D
PAGE 1 2>>
Inside The Investor’s Mind:
Breakdown and insight of a recent white paper by Joseph Calandro on Value Investing
Principles.
PAGE 16 >>
Joe Koster and Matt Miller founded Boyle’s Asset Management in May 2013 based on the
inspiration and principles of the Buffett Partnerships during the 1950s and 1960s. Which
means they believe in pay for performance; and
structured the fund in such a way that ensures
incentive fees are entirely dependent on strong
performance for their investors.
Their value investing philosophy is complemented by their patience, long-term mindset and
investment process. And although they have a
broad mandate for investment, they pay particular attention to the small and micro-cap space
(U.S. and select International territories)
Currently, they are finding value in businesses
in the small/micro cap marketplace. They are
finding value in such industries as insurance,
equipment manufacturing, and automobiles.
See page 2
Value Revealed: Alliance One
Shining light on a possible asymmetric risk/
reward scenario in a leading tobacco lead
merchant.
PAGE 19>>
Editors’ Letter:
Complex?
.
A
PAGE 20 >>
INVESTMENTS FEATURED
INVESTMENT IDEAS
Alliance One International
Alloy Steel
Cambria Automobiles
Data Group Ltd
EGI Financial
IWG Technologies
Zicom Group
PAGE
19
13
10
14
7
15
8
Boyles Asset Management
BoylesAsset.com
Philosophy: Focused on acquiring
equity stakes in companies at significant
discounts to rationally determined
assessments of intrinsic worth.
Stick To The Basics!
Saj Karsan believes that it is much easier psychologically to focus on companies with good/rational management teams.
Saj launched Karsan Value Funds (KVF) in
July 2009, a long-term oriented, value investment fund. The fund takes equity positions in
public companies which trade at discounts to
their intrinsic values and where downside risk
is low compared to upside potential.
The investment horizon of the fund is longterm nature, as it can take many years for
such companies to return to trading at their
intrinsic values. His value investing process
continues to prove itself year after year. In
2013, his fund returned 38% (after taxes).
And his fund outperformed the broad index in
2014 with a gain of 16% for the year.
Today, Saj is finding value in in the smallKarsan Value Funds
micro cap space. He’s finding value in such
Philosophy: Establishes equity stakes
in public companies trading at discounts to industries as document and marketing solutheir intrinsic values and where downside
tions, aircraft water systems, and Arcoplate
risk is low compared to the upside.
manufacturing.
See page 12
INVESTOR CONFIDENTIAL
Are Complex Adaptive Systems, Really That
INVESTOR CONFIDENTIAL
INVESTOR CONFIDENTIAL: Boyles
Asset Management
February
3, 2015
Investor Confidential: Boyle’s Asset Management
Boyles Asset Management explains why they focus more on identifying the moat of a business now, how they use continuous learning to keep their edge, how they were influenced by
Munger, Buffett, Franklin as individuals, as well as investors, and why they see upside in EGI
Financial, Zicom Holdings, and Cambria Automobiles.
How did you get started in value vesting has evolved, I’m reminded of
an answer Peter Bernstein gave to
investing?
Jason Zweig in a 2004 interview: “I
Joe Koster: Matt and I first really make no excuses or apologies for
learned about value investing at changing my mind. The world around
Coastal Carolina University from a me changes, for one thing, but also I
professor we both had, Dr. Gerald am continuously learning. I have
Boyles. As you might be able to tell never finished my education and
from the name of our firm, he had a probably never will.” My view of the
huge impact on the course of our world continues to evolve and I’m
lives and careers. He taught both an constantly changing how I look at
investments class and a stock mar- things, and I think that will always be
ket challenge class where he intro- so.
duced value investing and Warren
But when I first started, I probably
Buffett to students, and even used focused too much on only looking for
the book The Essential Buffett as the low P/E stocks or stocks with good
textbook for one of the classes.
returns on capital. Now, I’m probably
While in college, Dr. Boyles also a little more skeptical overall, and
was also the reason that Matt got in realize that low P/E stocks might be
touch with Mike Pruitt. Mike was that way for a reason, and returns on
looking for his next project and end- capital often mean revert. And stocks
ed up hiring Matt and me right out of with higher P/Es and lower returns
school to serve as analysts for the on capital on the surface can somenew company he was forming called times be the best investments if they
Chanticleer Holdings. We were lucky are that way because management
once when we crossed paths with teams are making the right investDr. Boyles, and got lucky again work- ment to increase long-term value at
ing for Mike, who made sure to give the expense of short-term earnings.
us all the resources he could for us In light of all of that, I’ve realized the
to continue our education. After a importance of really focusing on
year-and-a-half on the job, we one’s downside protection, either in
launched a tiny fund with money the form of a moat, balance sheet
from friends and family to start man- values, or some unique insight into
aging public investments more for- the sustainability of earnings, bemally. And then in 2013, with the cause things aren’t always what they
help of a sophisticated firm in Char- seem, and the future is sure to surlotte that we had gotten to know well, prise me at some point, no matter
we formed Boyles Asset Manage- how deeply I think I’ve read and rement in order to focus our full atten- searched something.
tion on the fund management business.
What does your typical day look
like from beginning to end?
Has your view of investing
evolved over the years?
JK: On this topic, I’ve recently begun to read the book Daily Rituals:
JK: As far as how my view of in- How Artists Work, and have really
April 2, 2015
www.ValueInvestorConfidential.com
Boyles Asset Management
On Giving Back
Joe Koster gets inspired all the time
simply seeing people performing acts
of generosity to the world or even being
useful to others. It’s no wonder his heroes include Charlie Munger, Warren
Buffett, and Benjamin Franklin. “I think
they have been three of the greatest
example
of
continuous
learning
throughout the history of the world, and
I admire how much they’ve been willing
to share their knowledge and improve
the world around them,” he says,
Joe and Matt even went as far as
naming their new fund after the person
who first introduced them to value investing, Dr. Gerald Boyles. “He had a
profound impact on our professional
lives. We were so pleased to honor that
impact by naming the firm after him! He
still lives in the Myrtle Beach area, and
spending time with him when we make
trips down there is always one of the
best highlights of our year.”
While they honor Dr. Boyles and his
early influence, their view of investing has
evolved over time. “I’ve realized the importance of really focusing on one’s
downside protection, either in the form
of a moat, balance sheet values, or
some unique insight into the sustainability of earnings…” says Joe.
Value Investor Confidential
INVESTOR CONFIDENTIAL: Boyles
Asset Management
February
3, 2015
seen how people who have accomplished great things don’t really have a
whole lot in common in their daily routines, at least not anything that can be
seen as a universal type of rule. Their
schedules and daily habits are personalized to their individual preferences
and circumstances.
As for me, I’m usually more of a
morning person, and the routine isn’t
the same every day. But on a typical
day, I get up, grab a cup of coffee and
start the day going through my
memory palace for about 15-30
minutes (which I described in a blog
posted titled “Memortation, or One
Way to Put What You Learn to Practical Use”). I then read through a few
things—books and/or some reminders
and quotes I’ve compiled—that I consider the fundamentals of my investing
philosophy. This usually takes anywhere from 15 minutes to an hour. I do
this to make sure I stay on a disciplined path, as it’s all too easy for psychology and a good narrative to lead
me, and probably most investors,
astray at times. I then go through all
my daily news and site feeds. As I’m
going through them, I’ll email the
things I find especially interesting to
myself and link to them on my blog
when I’m finished going through that
process.
I then go through my daily, automated stock screens that get sent to me
(more on that below) to try and see if
any ideas pop up that look especially
interesting. The goal here is really not
just to try and find new ideas, but to
compare what shows up with the stock
ideas I’m currently working on to see if
there’s something worth working on
instead. In effect, it’s part of the constant process of trying to increase the
opportunity cost of how I spend my
time. The time for news-related things
and screens can be a bit unpredictable
depending on how many interesting
articles and companies show up in
those processes, but after I’m finished
with those, I turn my attention to whatever portfolio idea task is at hand,
whether it’s researching what I think
are the most attractive new ideas or
keeping up with current portfolio holdings. I usually leave the office in time
to have dinner with my wife about every night, and then usually have an hour
or two before bed for something additional, which usually involves catching
up on the Charlie Rose show, “60
Minutes”, or something else I’ve recorded, and then either reading, watching a video or lecture, or catching up
on some podcasts.
April 2, 2015
www.ValueInvestorConfidential.com
ON CONTINUOUS LEARNING:
My view of the world continues to evolve and I’m
constantly changing how I
look at things, and I think
that will always be so.
You mentioned that your heroes
include Charlie Munger, Warren Buffett, and Benjamin Franklin. What
did you learn from them?
JK: Besides the quality they all
share of a lifelong commitment to continuous learning and improvement,
they were—and continue to be in the
cases of Buffett and Munger—all committed to giving back to society and
leaving the world in a better place than
when they entered it. They were all
also quite skilled at figuring out what to
avoid in life, or to put it as Munger often says it, “All I want to know is where
I’m going to die so that I’ll never go
there.”
What are the top 3 books people
don’t talk about, but that you would
recommend to an investor?
JK: I think Charlie Munger’s concept
of developing worldly wisdom is hugely
important, and besides the compilation
of his thoughts and talks in Poor Charlie’s Almanack, I believe Peter Bevelin’s Seeking Wisdom: From Darwin to
Munger is about the best place one
can go to get an overview of the big
ideas from the big disciplines. Two other books that I’ve made it a plan to reread every year are Nassim Taleb’s
Fooled by Randomness and Howard
Marks’ The Most Important Thing,
which I also think are brilliant.
What is your philosophy and process to investing?
JK: I guess the best way to describe
our philosophy is “global value investors.” We define value investing the
way Munger has in the past, which is
simply acquiring more than you are
paying for. We will look anywhere, but
our main focus is on the developed,
English-speaking countries of the
world, primarily the U.S., Canada, Australia, and the U.K. We can invest in
companies of any size, but we’ve primarily focused on small and micro-cap
companies given the greater number
of chances to find mispricings for a
fund of our size.
We do utilize a large number of
screens using Capital I.Q. as our research platform. We both have dozens
of screens set up that run each week
automatically, and in which we receive
notifications when companies are either added to or removed from results.
The screens are also pretty wide ranging. We have some for valuation or
return on capital metrics, some for keyword searches in company filings,
some for insider purchases, and so on.
Other than screening, we basically try
and get ideas by reading widely and
building our network of people that we
are close with and who share similar
investment philosophies. Before investing in an idea, we usually spend at
least a several weeks digging into it.
Are there aspects to your research
process that you would consider
unique?
JK: I’m not sure our process is all
that unique compared to others like us,
but I think in-depth research in general
Value Investor Confidential
INVESTOR CONFIDENTIAL: Boyles
Asset Management
February
3, 2015
is unique compared to the way most of
the population invests. The one possibly unique thing we do is that normally
one of us talks to management, while
the other does not. This fits our own
personalities better, but it also acts to
balance the added understanding you
can get from talking to management
with the potential risk of having an enthusiastic CEO sell his company’s story well. It can become easy to get detached from the current numbers and
potential risks that one should dispassionately consider before investing
when in the presence of a charismatic
executive, and that is a risk we take
seriously.
How important is it for you to have
investors in the fund that share your
focus on the long-term?
JK: Having a long-term client base is
certainly one of the most important
advantages a fund like ours can have.
There aren’t too many advantages one
can gain over most in the market, but
the ones we think are achievable and
that we aim to have in place are:
1. Process - An almost obsessive focus on process over outcome, or in the
lingo of Scott Adams, on systems over
goals. It's okay to set big picture goals
and you need to observe outcomes in
order to assess and/or improve your
process, but that is a small part of the
day-to-day activity of focusing on your
process and the things that within your
control.
and analyzing businesses. There is a
lot of noise out there, and being able to
clearly focus on making long-term decisions isn't always easy. After psychological mistakes, the inability to be patient and look past the short-term is
likely the next major cause of investment mistakes, maybe even the biggest cause.
4. Structural - This is where having the
right client base comes in. Having investors that understand our long-term
focus and that understand our philosophy is a big advantage to achieving
ON IN-DEPTH ANALYSIS:
I think in-depth research
in general is unique compared to the way most of
the population invests.
success over time. Investing is the
type of business where one can and
will underperform for significant
stretches of time, so having an investor
base that will stick with us through the
ups and downs is very important.
Do you have interest or expertise in
a particular industry that you would
call your “circle of competence”?
Or are you more of a generalist in
search of value or market inefficiencies?
3. Long-Term Thinking - Keep a longterm outlook when it comes investing
JK: For the most part, we are generalist. We will look at anything that is
simple enough that we feel we can
gain an advantage over most people
looking at it if we put in enough effort.
To paraphrase Warren Buffett, we
want to be able to narrow down what is
important and what is knowable in
each investment. We have to have
some idea about what we need to
know, and what we don’t need to
know, while realizing that what we
need to know can change as the price
of an asset changes. And while we’d
consider ourselves generalists, we
April 2, 2015
www.ValueInvestorConfidential.com
2. Ego Elimination - Keeping your ego
out of the investing process. If you
don't keep your ego out of the process,
you are much more likely to fall for the
psychological biases that are likely the
biggest cause of investment mistakes.
You can't worry about looking good.
You need to worry about finding out
what is true and what is not.
have had some decent success in the
past investing in insurance companies,
largely thanks to the expertise that
Matt has developed in that space over
the years.
Describe your value discipline once
you have arrived at an understanding of the Intrinsic Value of the business?
JK: We tend to focus on the downside first. We want to invest in things
where we think we have good downside protection, and where fairly conservative assumptions lead us to believe the stock will be worth at least
double what we are paying for it in 3-5
years (or sooner), based on the earnings or book value we expect for the
business over that time and the range
of multiples we think are reasonable
for the quality of the business, based
on our own assessment as well as current private market multiples, if there
are good comparables. Because the
future is full of surprises, we try hard to
understand the downside as well as
the reasons the opportunity is presenting itself, instead of just focusing on
the potential upside.
Selling is usually more difficult. In
general, we have a range of intrinsic
value, but that range can be quite
large. So we’ll usually tend to start selling some as it approaches the lowerend of our value estimate, and then
sell out fully as it gets into the mid and
upper end of our range. We’ll also sell
earlier if we either have a better use for
the cash, or if we realize we’ve made a
mistake.
How do you think about managing
risk (for each investment and portfolio as a whole)?
JK: We describe risk as both the
probability and amount of potential loss
on an investment. Trying to figure out
the amount of potential loss is essentially what I was describing earlier
when discussing our focus on
Value Investor Confidential
INVESTOR CONFIDENTIAL: Boyles
Asset Management
February
3, 2015
downside risk. Trying to handicap
probabilities is harder, because you
can’t get the precise odds of being
right when it comes to investing. But
there are traits to an investment that
we try to focus on to improve our odds
of success, even if we can’t quantify
exactly how much those traits tilt the
odds in our favor. These traits include
things such as competitive advantages
(moats), management teams with “skin
in the game”, conservative balance
sheets, downside protection in the
form of tangible assets in the absence
of moats, or buying from distressed or
uninformed sellers, to name a few.
If you did know the precise odds and
payouts of a given investment, then
you could use the Kelly Formula to
determine optimal position sizes. And
while that kind of precision isn’t possible investing in a focused portfolio of
equities, we do believe using the Kelly
framework is a good way to philosophically think about position sizing even in
the absence of precision.
For example, if you can consistently
find ideas where you make 50% more
when you are right than you lose when
you are wrong, then even if you are
right only 50% of the time, the Kelly
Formula would say that the optimal
position size on those investments
should be 16.67%, or a total, fullyinvested portfolio of 6 positions. We
are looking for traits that hopefully give
us better than 50/50 odds, and are
usually looking for about a 3-to-1 upside-to-downside ratio, which should
hopefully provide us a little extra protection from being wrong.
But even being conservative beyond
that and assuming a ½ Kelly position
size instead of a full Kelly position size
would still yield a fully-invested portfolio of only 12 positions. So we think
that range of 6-12 core positions is
about correct for investors who are
willing to put in significant amounts of
work and only invest in their highest
conviction ideas. We normally lean
towards the higher end of having 10-12
core positions if fully invested to ac-
count for some correlation among securities, and could consider having
more than one stock make up a given
position if the attractiveness of those
stocks is about the same and the correlations between them are high.
Of course, the odds and payouts
change as prices change, and certain
things may be being bought or sold
over time, which can lead us to having
a few additional positions. But in general, if we were fully invested, we’d
expect to have 10-12 core positions,
possibly less under the right circumstances. And if we can’t find things that
April 2, 2015
www.ValueInvestorConfidential.com
ON SELLING
...we have a range of intrinsic
values...So we’ll usually tend to
start selling some as it approaches the lower-end of our
value estimate, and then sell
out fully as it gets into the mid
and upper end of our range.
meet our standards of being high conviction ideas, then we hold cash and
just keep on searching. The discipline
to hold cash in the absence of the right
opportunities is also a key aspect in
how we manage risk.
How do you handle currency risk, if
at all?
JK: We’ve thought about this quite a
bit given that we do invest internationally. As of now, rightly or wrongly, we
don’t hedge our currency risk. The
studies we’ve seen show that it tends
to move closer to evening out over the
long run—more than five years—
though there certainly can be some
significant effects in the short run, as
we experienced in our fund during
2014. Hedging adds another layer of
complexity and layer of decisions to
make and as of now, we are really focused on trying to find things where
the undervaluation is so great that over
time, even if the currency moves
against us somewhat, we’ll still earn a
good return if we are right in our analysis on the opportunity.
But given that we also want to make
sure that our ability to identify undervalued stocks shows up in our results,
we are looking hard at implementing a
hedging program if the cost to do so
isn’t too great. As of now, we do think
about how much exposure we have to
a given currency and would consider
pulling back from a country should we
get closer to having an exposure of
about 25% of our portfolio in a given
foreign currency, and that percentage
would likely be quite a bit lower if we
were investing in lesser-developed
countries.
Are there potential areas of opportunity that investors should be
aware of over the next 6-12 month
and beyond?
JK: Our timeframe is usually based
by looking out 3 to 5 years at the businesses we are looking at, and we
claim to know very little about anything
that will happen in the next 6-12
months. But in general, we are still
finding a lot more opportunity in international markets. Our work is based
more on working from the bottom-up,
but I think if you look at the cyclically
adjusted price-to-earnings ratios from
around the world, it confirms the general view that the U.S. is one of the
more expensive markets out there right
now.
When it comes to oil, and anything
macro-related, I’m reminded of the
Howard Marks quote: “It’s one thing to
have an opinion of the macro but
something very different to act as if it’s
correct.” The big drop in the price of oil
has certainly increased the number of
energy-related ideas that are popping
up on our screens. And while we tend
to think there is a decent probability
that the long-term price of oil will be
much higher than the $50 or so it is at
today, we don’t want any investment
we make to have its downside protection depend on that, and so we’ve
Value Investor Confidential
INVESTOR CONFIDENTIAL: Boyles
Asset Management
February
3, 2015
a pretty careful and measured approach to looking at companies in that
space so far. We’d love to take advantage of the volatility, but we want to
make sure we have downside protection before putting capital to work, just
in case energy prices stay subdued for
an extended period of time.
JK: As Warren Buffett has said, “ We
don’t have to be smarter than the rest.
We have to be more disciplined than
the rest.” Discipline for us is sticking to
our process, and continually trying to
improve upon that process. And most
of all, never forgetting what Ben Graham considered the three most important words in investing: margin of
safety.
Patience to us is simply giving an
idea time to work out, and not letting
emotions get in the way of selling too
early when the facts are still in our favor. Patience is also being willing to
hold cash in the absence of extremely
compelling ideas. Right now for instance, our portfolio is weighted to approximately 50% cash. As you might
imagine, that has hurt our relative performance significantly with US markets
having advanced as they have over
the past 18 months, but our process is
to only act when we feel we have significant upside potential compared to
our downside risk, and that process
has driven us to hold a lot of cash in
the current environment.
Judgment is what happens when it is
time to make the buy and sell decisions. It is something that I think will
constantly be evolving over time. But
constantly searching out additional
information to make informed decisions, as well as analyzing past decisions—especially the bad ones—is an
important part of what will hopefully be
an evolution towards making better,
and easier, judgment calls.
What is the #1 mistake that inves- TMA also works with and negotiates
tors make as it relates to investing directly with insurance carriers on behalf of the agents it represents and
in general?
benefits from some network effects
JK: While I hinted at this a bit earli- because as each new agent is added
er, I think the biggest mistakes inves- to the network, and as each agent
tors make fall largely into the catego- grows its business, TMA improves its
ries of: 1) Psychological; 2) Lack of bargaining position with the carriers.
Patience; 3) Underestimating CompetiBecause there is a limited fixed intive Forces; and 4) Extrapolating the vestment to maintain the network, the
Recent Past into the Future.
company was earning very high reAt the top of that list for me are the turns on capital. We began buying
psychological mistakes. There are so shares in July of 2007 at a price that
many biases that can work against was just a slight premium to tangible
investors that I think everyone is bound book value, in which cash made up a
to make a psychological mistake at very large percentage of that book valsome point. Being aware of those bias- ue. TMA was also paying north of a
es is something that I think is essential 5% dividend yield and had no debt.
The company was extremely small
ON DISCIPLINE
back then and the type of valuation in
Discipline for us is sticking to which we acquired shares is rarely
our process, and continually try- possible outside the realm of the micro
ing to improve upon that pro- -cap arena, and even then those types
cess. And most of all, never for- of opportunities don’t come around
getting what Ben Graham con- often. On top of the valuation, we were
sidered the three most im- and continue to be extremely impressed with the CEO, Tim Klusas.
portant words in investing: marWe realized we were looking at a 1gin of safety.
foot hurdle with very little downside
risk, so we put approximately 20% of
to being successful over a long period our much smaller pool of capital into
of time, because it is very easy to fool TMA’s stock at the time. The company
yourself into doing something you basically just continued steadily grow
shouldn’t do. As Richard Feynman its business, serve its customers, and
said: “The first principle is that you return a decent amount of capital back
must not fool yourself, and you are the to shareholders over the ensuing
easiest person to fool.”
years. Its core businesses remained
pretty robust and profitable during the
What was the best investment years following the crisis, and our total
return, especially given our large alloyou’ve ever made?
cation at the time, proved very rewardJK and MM: The Marketing Alliance, ing.
Inc. (TMA) is probably the best investment we’ve made to date. The compa- I see you have a position in EGI Finy’s core business, and its only busi- nancial. Can you describe your
ness at the time of our investment, is broader investment thesis?
that it’s an aggregator for a network of
small, individually owned and operated MM: We began buying EGI Financial
insurance agents. TMA provides mar- at our prior firm, Chanticleer Advisors,
keting support and back-office support in mid-2011 when the shares were
that is crucial to the underwriting pro- trading between 60 and 70 percent of
cess. The back-office support includes tangible book value. Our basic thesis
technology and application processing. at the time was that the market was
April 2, 2015
www.ValueInvestorConfidential.com
How do you define the traits of Discipline, Patience, and Judgment as
it relates to investing at Boyle’s Asset Management?
Value Investor Confidential
INVESTOR CONFIDENTIAL: Boyles
Asset Management
February
3, 2015
heavily penalizing the company for
recent poor performance in the compa- INVESTMENT SPOTLIGHT
ny’s core non-standard auto business
EGI Financial
Price
$15.80
in Canada and for efforts to diversify
(TSE:EFH)
52-Week
Range
$11.80
— 17.00
into the US. Our belief was that the
Description:
Engaged
in
property
and
Dividend
Yield
2.78%
underwriting cycle was beginning to
casualty insurance in Canada and Europe.
Market Cap
$185.26M
improve in their core Canadian nonstandard business as regulatory presBasic Valuation:
Largest Owners:
% Owned
sures began to recede and that the US
P/OCF:
11.71
I.A. Michael Inv
19.36%
exposure was a manageable effort.
We believed there to be little downside
P/TBV:
1.04
Co-operators Gen Ins
17.45%
given the valuation even if things conTrailing P/E:
10.07
EdgePoint Inv
8.54%
tinued to be difficult. Since that time,
EFH STOCK PRICE HISTORY
the company has been able to drive
the core non-standard business, exited
the nascent US effort, expanded into
Europe, grew book value and repurchased some shares. We again bought
heavily in 2013 when we launched
Boyles at just over 75 percent of tangible book value. Our belief was that the
company continued to be overly penalized by recent issues in the company’s
niche Canadian business in Canada
and the European efforts where premiums were growing quickly. Again we
INVESTMENT SUMMARY
judged the downside to be minimal
Matt Miller believes, based on returns on equity, comparable valuations and
under a variety of scenarios.
transaction multiples, that a valuation in the range of 1.2x - 1.4x tangible book
In terms of position sizing, prior to
value is a reasonable expectation. That would value the shares at a bit over $20
the most recent move in 2015, the poand we think that value is likely growing at 8-12% per year depending on how
sition was 9.4% of capital at December
efforts in Europe continue to play out.
31, 2014. That tends to correspond
with typical position sizing where we
Sources: Company reports (10Ks, 10Qs), other public information
judge there to be minimal downside
and attractive upside.
transaction multiples that a valuation in next few years in our minds are really
the range of 1.2x - 1.4x tangible book two-fold from here: continued progress
How are you looking at valuation at value is a reasonable expectation. in Europe and a potential acquisition of
current levels? And how cheap do That would value the shares at a bit the business. The small insurance
you consider shares at today’s over $20 and we think that value is space is a generally consolidating
likely growing at 8-12% per year de- business and we suspect EGI could
share price?
pending on how efforts in Europe con- prove to be an attractive target, espeMM: Certainly with the recent moves tinue to play out. We have a tendency cially given the market position of their
the shares are not as undervalued as to begin trimming positions in a small non-standard auto business. We think
they’ve been over the last several way at around 90% of intrinsic value, further underwriting profitability and
years. At about $16 per share, the though that is also clearly dependent proper reserving on the growing intershares trade at a modest premium of 4 on other opportunities that might be national business could also be a cata-5% on current tangible book value. In available.
lyst. Results thus far have been admitour minds, the shares remain sometedly mixed, but the earnings potential
what cheap on an absolute and rela- What catalysts do you see at these is quite substantial.
tive basis. Importantly, we continue to levels for the next 1-3 years? If
judge that there is minimal downside. any?
What kinds of moats do you see in a
We would expect, based on returns on
company like EGI?
equity, comparable valuations and MM: The primary catalysts over the
April 2, 2015
www.ValueInvestorConfidential.com
Value Investor Confidential
INVESTOR CONFIDENTIAL: Boyles
Asset Management
February
3, 2015
MM: As an insurance company
there is really little to point to at EGI in
terms of a moat. The company has a
strong position in the Canadian nonstandard market, where it has a rich
history that can provide some advantage but we would be fooling ourselves if we thought there was a strong
moat. When it comes to management,
that is certainly an important consideration when examining any business,
let alone an insurance business. As is
the history of underwriting. I think it is
fair to say that the company has been
better in some areas than other, but it
does have a strong history of properly
reserving. While we don’t expect a
management change, if it was to happen, we’d naturally want to examine
the incoming team before passing
judgment. I will say it has been pleasant to see some insider purchases by
the current team over the last couple
years.
Tell us about your position in Zicom
Group?
INVESTMENT SPOTLIGHT
Zicom Group
(ASX: ZGL)
Description: Equipment manufacturer and engineering service provider.
Basic Valuation:
P/TBV:
P/OCF:
Trailing P/E:
Price
52-Week Range
Dividend Yield
Market Cap
$0.22
$0.18 — 0.26
3.64%
$47.4M
.70
4.4
14.40
ZGL PRICE HISTORY
INVESTMENT SUMMARY
At current prices, Joe Koster believes that normalized earnings lie in the $7-10 million dollar range, which puts shares trading at only 6-7x earnings. On top of that,
they are getting between a 3% and 4% dividend yield and it’s also trading at just
under 70% of tangible book value.
JK: Zicom is an industrial holding
company based in Singapore and traded in Australia. It is composed of four
main segments: 1) Offshore Marine,
Oil & Gas Machinery; 2) Construction
Equipment; 3) Precision Engineering &
Automation; and 4) Industrial & Mobile
Hydraulics (a small and immaterial
segment).
The Offshore segment provides
equipment for offshore vessels as well
some infrastructure projects and has
been the big driver of profits as of late.
The Construction Equipment segment
manufactures concrete mixers and
foundation equipment largely in Australia and Southeast Asia, and has
been quite volatile lately given varying
levels of constructions in those regions. The Precision Engineering segment is an outsourced manufacturing
segment which also includes the company’s investments in medical technologies. These investments were made
in the company’s quest to own instead
of just manufacture products, and were
made in businesses that the company
believes will be disruptive to their respective industries.
Our broad thesis is that we are partnering with a proven owner-operator at
both a good multiple of normalized
earnings, which are being masked by
the medical technology investments,
and at a price that gives us good
downside protection at about 70% of
tangible book value. The start-up investments in the medtech companies
give us a lot of potential upside should
one or more of them work successfully,
but having them work is not something
we think is required in order for us to
earn a good return buying shares
around this price. Currently, Zicom is
April 2, 2015
www.ValueInvestorConfidential.com
Sources: Company reports (10Ks, 10Qs), other public information
roughly a 7.5% to 8% position in the
fund.
With shares trading around .23 per
share, how cheap do you consider
shares at today’s share price?
JK: Before the medtech investments
really started to ramp up, Zicom was a
business that was consistently earning
double-digit returns on capital and
earning about $7-10 million after-tax.
The current market cap is about S$5055 million, and the current trailing earnings are just north of $5 million. So we
think we are paying at most 10 times
earnings for what we think is a decent
business that is slightly under-earning,
and probably more like 6-7...
Value Investor Confidential
INVESTOR CONFIDENTIAL: Boyles
Asset Management
February
3, 2015
times earnings what we think their core
businesses are earning. This assigns
no value to any earnings that could
come from their medtech investments,
which while they sound promising, are
too hard for us to handicap whether or
not they will eventually achieve commercial success. But given the multiples similar types of companies have
been trading at recently, we like that
we get that upside potential without
having to pay for it.
On top of that, we are getting between a 3% and 4% dividend yield,
which is paid out of conduit foreign
income and so is not subject to Australian withholding tax. We are also
paying just under 70% of tangible book
value as mentioned, which gives us
comfort in our downside protection
buying at this price.
on Friday 31 October [2014] at $0.21
therefore does not reflect the intrinsic
value of the Group. In pursuit of this
objective your Board has commenced
to seek opportunities to unlock value in
some of its investments concurrently
undertaking relevant corporate initiatives primarily to re-align the Group’s
new directions so as to maximize value
for shareholders.”
ON WHATS KNOWABLE
To quote Charlie Munger yet
again: “We're emphasizing
the knowable by predicting
how certain people and companies will swim against the
current. We're not predicting
the fluctuation in the current.”
What catalysts do you see over the
next 1-3 years? If any?
What kinds of moats do you see in a
company like Zicom as investors
JK: There is a bit of a lag between continue to shun it? If any?
the equipment they manufacture for
marine vessels, so a pickup in offshore JK: There really isn’t a sustainable,
activity would be one catalyst, but give wide moat with Zicom. But there are
the recent decline in the price of oil, some competitive advantages that
this is more likely to be a headwind have built up from doing reliable work
that a tailwind over that timeframe. and establishing good relationships
Growth in construction activity in Aus- over time. As an example of these retralia or Southeast Asia could be a lationships, Zicom has been picked
more possible catalyst, and the com- among a very select group of compapany has continued to see strong de- nies to receive a government grant to
mand from Singapore and Malaysia as expand investments in the medical
of late.
technology space on very favorable
But a more likely catalyst is a lower terms, where Zicom will have the oplevel of expenditure filtering into the tion to buy out the government agency
medtech investments, either as they should any of the investments it makes
reach a stage of self-sustainability, prove commercially viable.
they reach a point where progress is
stopped, or where the company finds a Does the global drop in oil prices
way to capitalize on the valuations be- disrupt your investment thesis on
ing given to promising medtech com- Zicom?
panies. The owner-operator CEO, Giok
Lak Sim, could also be working to JK: While the current drop in the
speed up a catalyst as he seems to be price of oil could affect Zicom and its
getting a little tired of the stock’s un- profitability over the short-term after it
dervaluation, as is evidenced by the works through its large order book over
comment in his annual meeting ad- the next 12-18 months, we believe we
dress: “The last transacted share price are being well compensated for it at
April 2, 2015
www.ValueInvestorConfidential.com
this valuation, and we think the company and management team are more
than set up to handle its effects. To
quote Charlie Munger yet again:
“We're emphasizing the knowable by
predicting how certain people and
companies will swim against the current. We're not predicting the fluctuation in the current.” We feel that Zicom
is a group that will swim well and adapt
to whatever oil prices hold in store over
the next several years.
Is Giok Lak Sim aligned properly to
produce shareholder value?
JK: Giok Lak Sim is well aligned
with shareholders. He owns over 30%
of the stock and his salary is just a
fraction of the value of those shares.
The price matters to his wealth a lot
more than his compensation. He also
added to his position late in 2014,
which was just the latest episode in
open market purchases, buying shares
at prices above where the stock trades
today. He has also made a concerted
effort to surround himself with people
he trusts to run different parts of the
business, including Kok Hwee Sim, his
eldest son whom Matt had the opportunity to meet in person last year while
he was on a trip to New York.
At today’s price, what upside do
you see?
JK: This is an investment with a particularly wide valuation range. We think
the company is worth a decent premium to tangible book value which, at
current exchange rates, would be
about $0.33. We like the position size
where it is right now at current prices
and would consider adding if, in the
absence of any news, it fell meaningfully below its current weighting.
While we expect there will be news
to reassess before we’ll need to consider a sale, we’d likely need a decent
premium to tangible book value before
we’d really consider taking a lot of
chips off the of the proverbial table. If
Value Investor Confidential
INVESTOR CONFIDENTIAL: Boyles
Asset Management
February
3, 2015
they can get back to earning doubledigit returns on capital over the next
couple of years as well as make some
progress on the medtech investments,
we think the upside is somewhere
around 2x tangible book value, or
about $0.60-0.65. Though we’ll continually reassess the valuation as new
information comes in, which we think is
especially important with a business
like Zicom.
Cambria looks like a very interesting business model. What’s your
broad investment thesis here?
MM: Cambria is a recent addition to
the portfolio. Our basic investment thesis is that Cambria represents an opportunity to invest along-side an owner
operator undertaking an attractive buy,
turn and build, and eventual exit strategy. We have quite a high opinion of the
management caliber and track record.
We believe investors get to participate
at an attractive valuation supported by
significant real estate as a time when
there is clear momentum behind the
business. The company’s strong balance sheet with additional capacity for
further acquisitions supports further
non-dilutive growth opportunities. Additionally, the growing 0 to 3 year old
car park provides a potential tailwind
for service growth and currently modest margins provide significant room
for continued margin expansion. All of
this, in our minds, bodes well for equity
holders over a multi-year period. The
position at the end of 2014 was just
under 7%, though we’ve since purchased additional shares.
With shares trading around .54 per
share, how are you looking at valuation?
MM: This is definitely an earnings
power investment. We believed when
we bought the shares that the company was trading at under 10x trailing
earnings, adjusted for an acquisition
made toward the end of last year. Fur-
April 2, 2015
INVESTMENT SPOTLIGHT
Cambria Automobiles
(LSE:CAMB)
Description: UK based retailer of new and
used cars, commercial vehicle and motorbikes.
Basic Valuation:
P/OCF:
N/A
P/FCF:
N/A
Trailing P/E:
N/A
Price
52-Week Range
Dividend Yield
Market Cap
Largest Owners:
AQR Capital
Davidson Kempner
Polar Securities
0.54
0.46 — 0.57
1.11%
106.2M
% Owned
15.04%
6.47%
5.55%
CAMB PRICE HISTORY
INVESTMENT SUMMARY
Matt Miller believes intrinsic value is significantly in excess of the current share
price. Our range begins at above 70p and rises a fair bit beyond that depending on
the assumptions. We think in a flat to slightly growing new car market that, depending on the pace of acquisitions and the ultimate margin improvement, the
company can grow its intrinsic value in the low teens for a considerable period of
time. This ultimately results in a potential IRR for an extended period that exceeds
20%.
Sources: Company reports (10Ks, 10Qs), other public information
ther, given the continuing growth in UK
monthly auto sales we believed we
were paying perhaps a bit over 8x FY
‘15 earnings for the company. We considered that to be quite a bargain considering: 1) the quality of management,
2) the historical returns on equity, 3)
the comparable valuations and transactions and 4) the prospects for a continued, well-executed M&A strategy.
Our belief was and is that the market
fails to recognize the power of the recent acquisition, the momentum with
some of the company’s brands and the
quality of management.
MM: The catalyst over the next few
years in many ways centers around
the continued successful M&A strategy. The track record here is really quite
spectacular. The group has been entirely built by acquisitions and prior to
the Barnet acquisition, the company
had not acquired one business that
was making money and had not paid
any goodwill to speak about. They are
disciplined and great at turning around
poor performing dealerships. We believe collectively acquired losses of
several million have been turned into a
group that generated over four million
in profits in FY ‘14. We think that over
What catalysts do you see in the the next two years that the market will
come to realize the potential even benext 1-3 years? If any?
yond year one for the Barnet
www.ValueInvestorConfidential.com
Value Investor Confidential
INVESTOR CONFIDENTIAL: Boyles
Asset Management
February
3, 2015
acquisition to drive significant earnings
growth. Ultimately, we expect a mix of
Barnet style and turnaround transactions to continue and for these to be
done without dilution.
Additionally, the company has great
momentum with some of the bigger
brands in its portfolio, particularly Jaguar, Volvo and Mazda. I’ll just note
quickly Jaguar which represents perhaps 15% of the company’s new car
sales. That is now a part of Jaguar
Land Rover and that company is rolling
-out several new and exciting brands
that it expects to materially increase
new car sales over the next three
years. This starts with the launch of the
XE which is now taking pre-orders.
Levered as the company is to Jaguar
and the margins such dealerships provide, we think this could become a material tailwind for the company. One
only need to look at the renaissance
that occurred at Land Rover and the
premium multiples those dealerships
demand to get particularly intrigued by
this potential tailwind.
I would further note that as the 0-3
year old car park continues to grow
given the surge in new car sales over
the last 3 years following the GFC, this
bodes well for the service segment of
the business which tends to retain
much of this service work over the first
few years of a car’s ownership and
importantly drives much better margins.
And lastly, there is a significant opportunity for margin expansion at Cambria. Part of this is driven by improvement in the service segment as mentioned and further growth in the luxury
market as mentioned with Jaguar, but
there remains margin potential by continuing to improve operations at the
dealerships acquired.
April 2, 2015
www.ValueInvestorConfidential.com
share price. Our range begins at above
70p and rises a fair bit beyond that
depending on the assumptions. We
think in a flat to slightly growing new
car market that, depending on the
pace of acquisitions and the ultimate
margin improvement, the company can
grow its intrinsic value in the low teens
for a considerable period of time. This
ultimately results in a potential IRR for
an extended period that exceeds 20%.
What are The 3 Things an investor
should focus on the most to produce out-sized investment returns
What kinds of moats do you see in over the long-term?
Cambria? How have they positioned
themselves to compete over the 1. Develop a process that you stick to
long-term against their competi- and continually improve over time.
tors? If, at all?
2. Remember that no matter how much
MM: I wouldn’t necessarily say work you do and how much you think
there is a moat around the Cambria you know, the future will always be full
business, but I would again note the of things that you never see coming.
strong management team we are partnering with as a significant advantage. 3. Remember that you just need to find
a few intelligent things to do, or as
From today’s price, what upside do Charlie Munger put it: “Our job is to
find a few intelligent things to do, not to
you see?
keep up with every damn thing in the
MM: We believe intrinsic value is world.”
significantly in excess of the current
Value Investor Confidential
INVESTOR CONFIDENTIAL:
Karsan3,Value
February
2015 Fund
Investor Confidential: Karsan Value Fund
Saj Karsan explains his focus on the quality and management of the business, his buying
and selling discipline, his biggest investing mistakes, and why he see upside in Alloy Steel,
Data Group Ltd, and EWG Technologies .
How did you get started in the What are the top 3 books people
world of investing?
don’t talk about, but that you
would recommend to an investor?
Saj Karsan: Once I started earning
real money (to me, anyway) during Three books that I don't think get
an internship in university, I wanted enough credit are Competition Deto know how to grow my savings. So mystified by Professor Bruce GreenI started buying mutual funds, but as wald (Columbia University), The Halo
I read further I recognized that the Effect by Phil Rosenzweig, and The
funds were just marketing machines, Goal by Eliyahu M. Goldratt.
not focused on returns. I started
reading from Buffett and Graham What is your philosophy as it reand it totally changed my outlook.
lates to investing?
I used to just look for cheap companies, but over time I've migrated SK: We are a long-term oriented,
towards companies with good/ value investment fund. The fund
rational managements. It's so much takes equity positions in public comeasier psychologically to be partners panies which trade at discounts to
rather than adversaries with the their intrinsic values and where
stewards of my capital.
downside risk is low compared to
upside potential. Because it can take
What does your typical day look many years for such companies to
return to their intrinsic values, our
like from beginning to end?
investment horizon is long-term by
SK: I try to start right away in the nature. Also, I do some screening,
morning with analyzing companies and I try to steal ideas from anyone
on my to-do list. This is when I'm the talking their book for high quality infreshest and probably thinking the vesting ideas. I have a checklist apmost clearly. In the afternoon/ proach, where I'm looking for a good
evening, I'll deal with the things that price, good management, sustainadon't require as much clear thinking ble earnings, downside protection
like e-mail, reading from other inves- etc.
tors, reading articles I've tagged,
writing a post if I have something to Describe your value discipline
say etc.
once you have arrived at an understanding of the Intrinsic Value of
Who are the people that inspire (or the business?
inspired) you the most?
SK: I try to buy at around a >40%
SK: Warren Buffett. He got me into discount to my estimate of Intrinsic
the whole value investing program Value. I sell if I would rather invest
with his folksy yet educational share- the money in something else, or I
holder letters, and he's been a role scale out as the price rises towards
model ever since. A few years ago IV. This is a good psychological
when he graciously agreed to host hedge for me, because if it rises a
students from my business school.
lot, at least I still own some at the
April 2, 2015
www.ValueInvestorConfidential.com
BarelKarsan.com
Investor & Blogger...
Saj had the distinct pleasure of meeting Mr. Buffett personally while studying under Professor George Athanassakos (Richard Ivey School of
Business). During his studies, he and
his classmates would visit Berkshires
offices in Omaha and even dine with
Buffett on occasion.
It’s no surprise that he models himself after Buffett. “Basically, I am a
long-term investor who consider buying stock as if I’m buying a part of a
business. And most of all, I only buy if
I believe there is a large margin of
safety, says Saj.” His advice to other
investors is realize the world is an uncertain place. Only buying when there
is a large margin of safety is the best
way to increase an investor’s probability of success.
Saj is not just a great investor. His
blog, BarelKarsan.com, has been a
very popular site for value investors
over the years. At the site he interacts
with readers, provides analysis on
companies he is investing, and gives
summaries and reviews of timeless
investing books. It’s a highly recommended site any type of investor
(professional or amateur).
Value Investor Confidential
INVESTOR CONFIDENTIAL:
Karsan3,Value
February
2015 Fund
price, whereas if it does a round trip, at company.
least I did sell some!
I see you have a position in Alloy
Does management play a big role in Steel. Can you describe your broadyour investing?
er investment thesis?
SK: For me meeting management is
not important at all. Not only can I not
afford it with the small amount of capital I run, but I don't consider myself a
good judge of character or anything, so
I could totally get duped by a management team better at marketing themselves than actually executing. Nevertheless, management does play a big
role in my investing, because I'm looking for rational managements that allocate capital effectively and make good
decisions with respect to its business.
Are there any investing themes that
investors should be aware of over
the next 6-12 month and beyond?
SK: I try to avoid making macro
calls on investing themes. I stick to the
micro. That said, if a macro event has
already occurred, that can help guide
investors to sectors where some cheap
companies may be uncovered! For
example, I've been looking in the oil
sector for babies thrown out with the
bathwater. I've also recently invested
in a Canadian exporter to the US. As
the Canadian currency has taken a big
hit, such companies experience a tailwind that has not yet shown up in the
financials.
ture highly uncertain.
Okay now for the good news. The
company has grown its book value by
46% per year since 2008, and yet you
can buy the company at 80% of book!
There is no debt, and ex-cash, the
SK: I can understand why it would company trades of a P/E of about 4!
turn off a lot of investors, but that may
be why it's so ridiculously cheap. Alloy Can you elaborate more on your
management is not very communica- position in Data Group Ltd?
tive, and the stock trades on the OTC
market. It's headquartered in Australia SK: A year and a half ago, I wrote
and counts the mining industry (is any- about Data Group's debentures as a
one not scared of a China bubble potential value opportunity. At that
bursting that takes down this industry?) time, they traded for 58 cents on the
as one of the major customers of its dollar with maturity in less than four
service, which is the application of a years, for a yield to maturity of 20%.
proprietary substance to protect steel Today, those same debentures trade
equipment from abrasion. The compa- at 71 cents; but as maturity is now just
ny's founder just died, making the fu- over 2 years away, the yield to maturity
INVESTMENT SPOTLIGHT
Alloy Steel
(OTC:AYSI)
Description: Manufacturer of Arcoplate
located in Perth, Western Australia.
Basic Valuation:
P/TBV:
P/FCF:
Trailing P/E:
Price
52-Week Range
Dividend Yield
Market Cap
$1.09
$0.75-$1.83
N/A
$18.6M
.80
18
2.6
AYSI PRICE HISTORY
What was the worst investment
you’ve ever made? What happened,
and how did you learn from it?
SK: There are too many " worst" investments to count! I got taken by
some Chinese frauds, for example. I
learnt the importance of sticking to
countries where the rule of law is
strong, and where corporate governance is valued. I also plan to stay diversified until I have truly convinced
myself that I know how to separate a
great company from a good/lucky/fake
April 2, 2015
INVESTMENT SUMMARY
Saj explains that the company has grown its book value by 46% per year since
2008, and yet you can buy the company at 80% of book! There is no debt, and excash, the company trades of a P/E of about 4.
Sources: Company reports (10Ks, 10Qs), other public information
www.ValueInvestorConfidential.com
Value Investor Confidential
INVESTOR CONFIDENTIAL:
Karsan3,Value
February
2015 Fund
is even higher, closer to 25%! This is
despite the fact that business conditions for the company have improved
markedly. Previously, revenue was
declining and management expected
revenue to continue to decline annually
at a rate of 3-4%. More recently, revenue for the last half of 2014 was higher
than in the last half of 2013, and management projects revenue will continue
to grow in 2015.
But the main improvement relates to
the company's cost structure. In the
most recent quarter, G&A costs were
down 8%, leading to an operating profit
of $3.8 million. This covers interest
payments by more than 2.5x.
Management is not yet done with the
cost reductions, either. They have
identified other savings (including consolidating four manufacturing facilities
into one, which is expected to be completed at the end of this month) adding
up to another $10 million per year.
Adding these savings (but excluding
restructuring charges) to the company's 2014 results yields a potential operating profit on the order of $25 million on an annual basis. This would
cover interest payments 4x.
The company's total debt is now $90
million, $6 million lower than a year
ago. Bank debt, which ranks ahead of
the debentures, represents $47 million
of this amount. The debentures represent the remaining $43 million. Because of the large discount on the debentures, the company has been buying them back. Data Group showed a
gain of $43 thousand in the most recent quarter as a result of the buybacks.
The bank debt is due in 2016 and the
debentures are due in 2017. Despite
Data Group's improved finances, the
chances that they can actually pay this
debt back through operating cash flow
are low. Instead, a refinancing of some
form will be required. But if management continues to execute as it has
over the last year and a half, interest
coverage will improve and the company should able to secure a loan at
favorable rates that can be used to pay
off its existing obligations.
Data Group's debentures offer plenty
of upside without a lot of downside
risk, in this author's opinion. The company is profitable, covers its interest
payments comfortably, and should see
revenues and profits grow in 2015. As
such its debt should be trading much
closer to par, and may do so as investors get to know the story.
April 2, 2015
www.ValueInvestorConfidential.com
Tell us a little more about your position in IWG Technologies?
SK: IWG Technologies is a producer
of aircraft water systems. The company is the "world’s leading provider of
flight-certified potable water treatment
units, on-demand water heaters, aircraft water pumps, a compact water
module, and innovative potable water
components", with more than 3,000 of
its units installed on airplanes
INVESTMENT SPOTLIGHT
Data Group Ltd. (via Debentures)
(OTC:DGPIF)
Description: Provides document management and marketing solutions.
Basic Valuation:
P/TBV:
P/OFCF:
Trailing P/E:
Price
52-Week Range
Dividend Yield
Market Cap
$0.61
$0.37—$0.90
N/A
$14.40M
1
1
3.74
DGPIF PRICE HISTORY
INVESTMENT SUMMARY
The company's total debt is now $90 million, $6 million lower than a year ago.
Bank debt, which ranks ahead of the debentures, represents $47 million of this
amount. The debentures represent the remaining $43 million. Because of the large
discount on the debentures, the company has been buying them back. Data Group
showed a gain of $43 thousand in the most recent quarter as a result of the buybacks. The company is profitable, covers its interest payments comfortably, and
should see revenues and profits grow in 2015. As such its debt should be trading
much closer to par, and may do so as investors get to know the story.
Sources: Company reports (10Ks, 10Qs), other public information
Value Investor Confidential
INVESTOR CONFIDENTIAL:
Karsan3,Value
February
2015 Fund
worldwide. But the company does not
trade like a leader. It has a P/E (ttm) of
just 10 despite a net cash position and
expectations for growth. While sales
increased 12% last year, income fell as
the company had to spend more in
anticipation of increased deliveries in
2015. IWG recently launched some
new products which it expects will help
achieve the company's sales growth
rate of 10-15%.
The nature of the company's products is such that there appear to be
barriers to entry in this field. Companies with existing contracts with aircraft
manufacturers get to spread their fixed
costs (design, manufacturing etc.)
across more units. Furthermore, customers likely don't want to risk dealing
with new companies in such a small
but important component of the aircraft. As such, IWG competes with few
competitors with many of its products.
Another tailwind in IWG's favor is
currency-related. Most of the company's costs (along with its financials and
share price) are in Canadian dollars,
but 4/5ths of its revenues are exports
in US dollars. Thanks to some massive
US dollar appreciation of late, the company should see some benefit to the
bottom line as a result. Note, however,
that the company does hedge a portion
of its US sales, and so the benefits of
the currency moves may not be as pronounced as quickly as one might otherwise expect.
INVESTMENT SPOTLIGHT
IWG Technologies
(TSXV: IWG)
Description: Engaged in developing, manufacturing, and selling of aircraft water
treatment equipment.
Basic Valuation:
P/TBV:
1.7
P/FCF:
17.58
Trailing P/E:
10.7
Price
52-Week Range
Dividend Yield
Market Cap
Largest Owners:
Penderfund Capital
$0.25
$0.15—0.26
N/A
$9.6M
% Owned
14.02%
IWG PRICE HISTORY
INVESTMENT SUMMARY
It has a P/E of just 10 despite a net cash position and expectations for growth.
While sales increased 12% last year, income fell as the company had to spend
more in anticipation of increased deliveries in 2015. The nature of the company's
products is such that there appear to be barriers to entry in this field, which should
allow the business to continue profitability and growth.
Sources: Company reports (10Ks, 10Qs), other public information
April 2, 2015
www.ValueInvestorConfidential.com
Value Investor Confidential
INSIDE THE INVESTOR’S MIND: Value Investing
General
Principles
February
3, 2015
How Biases Effect Investor Behavior
In this recent white paper, Joseph Calandro, Jr. profiles six core
value investing principles.
it is worded can lead pretty much anyone to think they are a “contrarian,”
which of course they are not for as
James Grant has insightfully observed,
“What money can’t buy—what brains
frequently don’t contribute—is a precious, non-consensus view of the future.” Professional value investors are
very much "contrarians" because they
understand, as the school’s founder
Benjamin Graham did, that "You may
take it as an axiom that you cannot
profit in Wall Street by continuously
doing the obvious or popular thing." As
value investor Howard Marks has obIntroduction
Like many people I admire Thomas served: "Accepting the broad concept
Edison and, also like many people, I of contrarianism is one thing; putting it
have visited his New Jersey factory, into practice is another."
which is now a museum. On my first
visit there I noticed a sign that quoted
ON BEING CONTRARIAN:
Sir Joshua Reynolds, which Mr. Edison
prominently displayed above the facto- Professional value investors are
ry time clock immediately in front of the very much "contrarians" because
building’s entrance. It reads as follows: they understand, as the school’s
"There is no expedient to which a man founder Benjamin Graham did,
will not go to avoid the labor of think- that "You may take it as an axiom
ing." What an odd quote, I thought at that you cannot profit in Wall
the time, for your employees to see as Street by continuously doing the
obvious or popular thing."
they check in for work.
Editor’s Note: If you try to explain
value investing to someone, you’ll likely agree that it either sticks right away
and it stays with them a lifetime, or it
doesn’t and it never becomes part of
their investing philosophy. Joe does an
excellent job of laying out the very principles that should be engrained in the
very fabric of every value investor. Below, used with permission, are excerpts from the latest white paper by
Joseph Calandro, Jr. titled, “Value Investing Principles”
6 General Principles
Principle 1: When I was trading,
many people said they put a premium
on being a "contrarian." One of the
classic books on this subject is The Art
of Contrary Thinking by Humphrey
Neill, which begins with this definition:
“The art of contrary thinking may be
stated simply: Thrust your thoughts out
of the rut. In a word, be a nonconformist when using your mind….Let me
give you an easily remembered epigram to sum up this thought: When
everyone thinks alike, everyone is likely to be wrong” (emphasis original).
This is a classic definition, but the way
April 2, 2015
is as most people have credit cards,
car payments and/or mortgages and
these are all forms of credit. But examples are not definitions. Fundamentally, credit--as James Grant insightfully
observed--is "money of the mind" or a
subjective estimate of a person's or
institution's ability and willingness to
pay their debts. While I would generally not expect non-financial professionals to understand the economic implications of this, I do expect financial
professionals to understand the implications, especially the higher-order
implications, and yet following the recent financial crisis we heard numerous financial professionals justifying
abysmal credit positions with arguments like "It was triple-A rated so
how can I be blamed for not foreseeing
crisis-level distress?" A value investing
-based reply to such statements could
be framed like this: "While rating agencies thought those investments were
creditworthy, what did you do to validate the credits?" Questions like this
help to show how the principle of value
subjectivity can be operationalized;
stated another way, because value is
an opinion the assumptions behind a
valuation should be thoroughly underPrinciple 2: A fundamental driver of stood and validated.
“herding behavior” such as this is the
subjective nature of value. Value sub- Principle 3: Rigorous bottom-up
jectivity simply means that value is an analyses is a key characteristic of all
opinion , which is significant because professional value investors, which is
while everyone has an opinion most significant for as value investor Martin
people tend to be more confident with J. Whitman has observed, “To the ustheir opinions when others agree with er, the ultimate value of a value investthem. Nevertheless, the fact remains ing approach compared with the value
that before a trade can take place valu- of academic finance depends on how
ations must diverge. The value of eve- realistic and useful the various asrything is subjective, which may seem sumptions are.” The first step of botsimple but like many seemingly simple tom-up fundamental analysis is, sensithings its implications are profound. bly enough, to read all of the docuTake, for example, credit. Just about ments associated with the asset (or
everyone thinks they know what credit liability) to be valued. This may sound
www.ValueInvestorConfidential.com
Value Investor Confidential
INSIDE THE INVESTOR’S MIND: Value Investing
General
Principles
February
3, 2015
like a given, but the sad and highly
irrational fact is that most people who
invest do not read financial documents.
Some examples to illustrate this point:
● One of the most incredible quotes to
come out of the recent financial crisis
is this one that is attributed to value
investor Bill Ackman: "'And usually, by
the way, most people don't read the
stuff [meaning, financial statements]
anyway,' Ackman added. 'So you've
got a huge edge just by reading, right?
And then if you really dig into something, you can really know more than
the market.'"
● Sadly, this phenomenon is not new.
For example, the failure of investors to
read financial information is an underlying theme of James Grant's aforementioned bestselling book, Money of
the Mind (NY: Farrar Straus Giroux,
1992).
● Of course, failing to read financial
information is not limited to investors.
Before the recent financial crisis many
financial services executives did not do
much financial reading either, as Michael Lewis observed in bestselling
book, The Big Short. For example, Mr.
Lewis profiled an experience of investor Steve Eisman as follows, "He'd go
to meetings with Wall Street CEOs and
ask them the most basic questions
about their balance sheets. 'They didn't
know,' he said. 'They didn't know their
own balance sheets.'"
Bottom-up fundamental assumptions
are line-by-line estimates of certain
financial parameters that are formed
on a case-by-case basis. Whether an
assumption is correct or not depends
on an analyst’s knowledge of the item
being estimated (following exhaustive
reading and investigation), the process
used to derive the assumption and the
valuation approach to which the assumption is being applied. In short,
assumptions are opinions and like any
opinion they can be formed correctly or
incorrectly.
rigorous and conservative approach to
the estimation of all assumptions. A
dictionary defines conservative as
"cautiously moderate or purposefully
low: a conservative estimate." Accordingly to Benjamin Graham, "It is a
basic rule of prudent investment that
all estimates, when they differ from
past performance, must err at least
slightly on the side of understatement."
The principle of conservatism is closely
related to the earlier principle of contrarianism in that most people tend to
approach valuation optimistically (and
hence aggressively) when prices are
going up, and pessimistically (and
hence despondently) when prices are
going down. In contrast, value inves-
ON MEAN REVERSION:
Fluctuations can vary
from mere oscillations to
wave-like swings, but irrespective of the size of the
fluctuations pricing will,
over time, frequently revert to some central tendency.
tors attempt to strike a conservative
balance across market conditions,
which is a great deal harder to do than
it may appear because, simply put, it
goes against human nature.
Applied with discipline over time the
application of the above four principles
will result in a circle of competence,
which is value investing nomenclature
for a knowledge or informational advantage in a given area or set of areas.
Principle 5: Our next principle is
based on the statistical concept of
mean reversion, which is a simple but
profound concept that holds the following: Given value subjectivity, market
perceptions of value will fluctuate
around some longer-term mean or expected value. Such fluctuations can
Principle 4: Value investing takes a vary from mere oscillations to wave-
April 2, 2015
www.ValueInvestorConfidential.com
like swings, but irrespective of the
size of the fluctuations pricing will, over
time, frequently revert to some central
tendency. The regularity with which
this occurs has caused confusion to
some, even to Benjamin Graham
himself.
For example, on March 11, 1955, Mr.
Graham testified before the Committee
on Banking and Currency in the United
States Senate that resulted in this exchange:
The Chairman: When you find a special situation and you decide, just for
illustration, that you can buy for $10
and it is worth $20, and you take a position, and then you cannot realize it
until a lot of other people decide it is
worth $30, how is that process brought
about--by advertising, or what happens?
Mr. Graham: That is one of the great
mysteries of our business, and it is a
mystery to me as well as to everybody
else. We know from experience that
eventually the market catches up with
value. It is realized in one way or another.
The Chairman: But do you do anything
to help that? Do you advertise, or what
do you do?
Mr. Graham: On the contrary, we try,
as a matter of fact, to keep our operations as confidential as we can.
The Chairman: Even after you buy?
Mr. Graham: Even after we have acquired our shares.
The Chairman: Why?
Mr. Graham: Basically for the reason
that we are just not interested in other
people knowing about our business,
and we have no interest in endeavoring to persuade people to buy stocks in
which we have an ownership. We have
never done it and we never will do it.
The Chairman: That is rather unusual.
Since you make your capital gains, a
lot of people have got to decide it is
worth $30.
Mr. Graham: We have been very fortunate in our experience by finding that
people decide that stock that you mention is worth $30 without the
Value Investor Confidential
INSIDE THE INVESTOR’S MIND: Value Investing
General
Principles
February
3, 2015
necessity of our doing anything about it
on the advertising side. We might conceivably at times intervene in a managerial policy. We might suggest some
change in the procedure, but that of
course is merely because we are substantial stockholders.
We now know that a fundamental
driver of mean reversion is the fact that
higher returns tend to decline over time
due to increased competition, etc.,
while lower returns tend to rise over
time due to performance improvement
initiatives, etc., as indeed Mr. Graham
himself earlier in career has observed;
for example, in the opening to his seminal Security Analysis he quotes from
Horace's Ars Poetica as follows: "Many
shall be restored that are now fallen
and many shall fall that now are in
honor."
Principle 6: The general principles
we have discussed thus far are cumulative, which means that they build on
each other leading up to the final and
most important principle, the margin of
safety, the utility of which Martin J.
Whitman and Fernando Diz cogently
describe as follows: “The lower the
price, the less the risk of loss and the
greater the prospect for gain.” Conceptually, this principle like all of the others
is very easy to understand; however,
the simplicity of exposition does not
extend to simplicity of execution, which
is highly significant because every successful value investor attributes their
success to this principle. For example,
in 1991 Seth Klarman named the title
of his seminal book, Margin of Safety,
and in 1992, Warren Buffett stated:
"We insist on a margin of safety in our
purchase price. If we calculate the value of a common stock to be only slightly higher than its price, we're not interested in buying. We believe this margin-of-safety principle, so strongly emphasized by Ben Graham, to be the
cornerstone of investment success."
Significantly, because the general
principles that I have outlined are cumulative you effectively cannot invest
April 2, 2015
at a margin of safety unless you:
● Approach the market as a contrarian
(Principle 1) because if you think like
everyone else you are going to value
things like everyone else and thus you
will pay what everyone else pays;
● Understand the risks and opportunities associated with value subjectivity
(Principle 2);
● Approach valuation rigorously from
the bottom up (Principle 3);
● Formulate conservative valuation
assumptions (Principle 4); and
● Understand how to put mean reversion to work for an investment instead
of having it work against one (Principle
5).
Conclusion
The fact that so few people have been
able to consistently implement these
general principles over time attests to
how incredibly difficult professional
value investing is. However, when the
principles are successfully applied they
have resulted in extraordinary levels of
insight. So extraordinary, in fact, that
one of the questions I am frequently
asked when I lecture at either the undergraduate or graduate levels is, "Are
successful value investors simply born
or are they made?"
My reply to this question goes something like this: "Before answering, I'm
curious, how many of you play chess?"
As chess is a popular game most of
the hands in the classroom tend to rise
so I ask: "How many of you play chess
well?" Typically, three-quarters or so of
the hands in the room go up. "How
many of you are ranked Masters or
Grandmasters in chess?" No hands
typically go up; rather, a complaint is
typically raised: "That's not really fair;
you said 'well,' not 'expert.'" "To me,
'well' means significantly better than
average and in chess that is Master
and Grandmaster. You may think this
standard is high but it really is not:
most of us are average chess players,
broadly defined. In fact, most of us are
average in a broad array of activities,
including investing and business,
whether we like to admit it or not."
www.ValueInvestorConfidential.com
Silence. "So, to continue with the example a bit longer, the question now
becomes why do you think Grandmasters and Masters play chess so well?"
Answers tend to vary, but by now the
students know where I am going:
"They practice a lot," "They study and
memorize the games of famous
Grandmaster in the past," etc., and
then, inevitably, more silence when
they run out of answers.
"In my opinion, the answer is in the
way they 'see the board.' They see it
differently than average players do."
Now, value investing is infinitely harder
than chess is, and it is obviously not a
game as the money investors manage
will ultimately be spent on retirement,
education, medical expenses, etc. But
the point of this example is to show by
analogy how successful value investors "see value" differently than just
about all other people do. Howard
Marks refers to this ability as "secondlevel thinking." Such thinking is enabled by years and years of experience
applying the above general principles,
which over time results in consistent
identification of investments selling at
appreciable margins of safety.
The importance of consistently applying sound general principles to investment and corporate management
success cannot be underestimated.42
As Benjamin Graham himself stated,
“The main point is to have the right
general principles and the character to
stick to them.” For a corporate management example, consider the late
Larry Tisch, who was the cofounder,
Chairman and CEO of Loews Corporation. As Christopher Winans reflects in
his biography of Mr. Tisch, “What
worked for Tisch wasn’t having a plan
but having a clear set of principles for
determining when to buy an asset and
when to sell, whether it was a business, a commodity, or a security.”
Words to run a company by!
>GET FULL WHITE PAPER HERE<
Value Investor Confidential
VALUE REVEALED:
February Alliance
3, 2015 One
Is This Company Smoked…?
This hated tobacco manufacturer could be righting its ship. The continued neglect of
this hated stock and sector could provide opportunity to investors.
Despite the world’s hatred for tobacco
and tobacco businesses. Individuals
around the world continue to smoke
tobacco. Especially in emerging countries. It is a habit forming consumption
pattern that has been around for thousands of years. Alliance One plays an
integral role in the supply chain to cigarette manufacturers. The industry is
dominated by two companies: Alliance
One and Universal Corp. Together
they share about 70% of the market
and act as a duopoly on the market.
Market share has stayed constant the
last 10 years. There are three things
that help to provide competitive advantages to Alliance One which have
not show up on the bottom line yet.
One, it is a low cost producer of tobacco. Two, it has vast industry experience. Three, it operates in an industry
that only has two main players. One is
very
stable
with
low
debt
(Universal)...the other is highly cyclical
with loads of debt (Alliance). Time will
tell if Alliance will be able to match its
peer.
This an active value situation that
has the potential for big returns if Peter
Sikkel is able to engineer a turnaround
in operations. If Sikkel is able to execute a fraction of what their main competitor, Universal Corp has been able
to do. This stock has the potential for
more than a 4x return at current levels
based on our calculation of normalized
earnings. The main catalyst will be the
turnaround. And Management is heavily incentivized to execute the turnaround plan of this company. In fact,
Alliance One is trading a little more
than 2x the hard EPS minimum of
$1.10 it must earn before management
receives any long-term incentive pay.
Earnings were $1.49 in 2009. I expect
Sikkel to continue to invest in emerging
markets while cutting costs.
If Alliance One is able to achieve
1/10th of the operating efficiency of
Universal...Alliance should prove to be
a lucrative investment over the long
term. The probably of an executable
turnaround in business operations are
April 2, 2015
www.ValueInvestorConfidential.com
INVESTMENT SPOTLIGHT
Alliance One International
(NYSE: AOI)
Description: Leading independent
tobacco leaf merchant.
Price
52-Week Range
Dividend Yield
Market Cap
Basic Valuation:
P/TBV:
P/FCF:
Trailing P/E:
Largest Owners:
Aegis Financial
Donald Smith & Co.
Baupost Group LLC
.50
N/A
N/A
$1.10
$0.83 — 3.01
N/A
$97.38M
% Owned
9.46%
9.19%
6.62%
AOI PRICE HISTORY
INVESTMENT SUMMARY
Despite the aggressive selling in shares of Alliance One, the argument for investment remains strong in AOI. The recent downdraft in share prices is likely
a result of technical selling after being ejected from the S&P 600 Index of
small cap stocks. AOI could generate $0.50 per share of earnings on a normalized basis in the coming years. At 10x that’s almost 400% from current levels.
Forced selling in conjunction with extreme undervaluation and improving
fundamentals, makes AOI an interesting risk-reward candidate.
Sources: Company reports (10Ks, 10Qs, etc..), other public information
small and we have factored it into our
analysis. The real margin of safety in
Alliance One is that it is trading below
its tangible book value. Which we believe to be a low line estimation of its
real liquidation value.
This may not be an amazing company, however it's available at an incredible price.
Value Investor Confidential
INVESTOR CONFIDENTIAL:
FebruaryEditor’s
3, 2015Letter
How Complex Could A Complex Adaptive System Be…?
In one word —- Complex!
Essentially it means that cause and
effect are not statically linked. And by
Learning how to invest is likely one of that I mean, just because something
the most multifaceted lessons an indi- happened in the past, it doesn’t mean
vidual will learn in his or her lifetime. you should expect it in the future.
This is because the stock market is a
highly complex system of interconnect“In the complex adaptive
ing shares, companies, investors, and system that is the stock market
other networks that rely and feed off of
… there will be dominant
each other for both success and failnarratives that most everyone
ure. The stock market is a complex
agrees with and that seem to
system that mankind has been trying
provide past explanations for
to fully understand since its inception.
In fact, being able to accurately predict what has happened and predict
what’s likely to happen.…we
the constant ebb and flow of these
don’t make forecasts and
rarely precise transitions within the
conform portfolios to
massive backdrop that is the market, is
the dream of investors across the
those forecasts.”
globe.
Bill Miller
Unfortunately, it's a dream that very
few will accomplish due to the volatile
Just because the economy is at the
and unpredictable nature of business same debt-to-GDP level as it was in
and money. This shows that the mar- 1929, doesn’t necessarily mean we are
ketplace functions because of the dy- going to encounter another Great Denamic network and collective behav- pression and market crash of 80%.
iors within the system. Each entity
within the macro-structure mutates and With that said….
adapts so as to increase the possibility
of survival as a whole.
Observing past behaviors during cerIn its simplest form, a complex adap- tain events is certainly an interesting
tive system can be broken down into and fun endeavor. Seeing how behavheterogeneous agents. These agents, ior develops and forms into feedback
or investors and speculators, interact loops to increase or decrease the efwith each other, and the market, simi- fects can help yield understanding.
larly to a colony of ants. This is called The complexities of so many different
“emergence” because the patterns and interlocking pieces, living and invented,
regular processes become recogniza- adapting within themselves to build
ble in the much larger entity of the
stock market from the interaction with
smaller entities, like traders, brokers,
and shares. This system can't be reduced to a pile of information through
reduction or deduction, but must be
calculated through a complex method
of all interactions occurring, and the
understanding of how they cause
change in one another.
and break down such a large scale
system, make the stock market seem
like a sentient organism.
It also makes it one of the most unpredictable systems in the world. Its
intricacies and wildly unstable behavior, such as the dot.com boom (and
bust) and the big market crash during
1987, make it understandable that individuals leave the stock market and
investing, never to return again. As
Mark Twain famously said, “History
doesn’t repeat itself, but it does
rhyme.”
So what do we do about it?
Nothing really.
You should expect boom and bust periods. Expect the unexpected. Never
lean too far to one side of the market’s
bearish or bullish perception. Trying to
guess what will happen in the stock
market is a fool’s errand. An investor
will be better served to focus on the
most important factors and components to investing success.
Lukas Neely
Co-Editor-In-Chief
So what does all of that mean?
April 2, 2015
www.ValueInvestorConfidential.com
Value Investor Confidential
February 3, 2015
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