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London Value Investor Conference, 22nd May – features Mason Hawkins and Don Yacktman

The London Value Investor Conference, which is Moderated by Richard Oldfield and David Shapiro, will take place on Thursday 22nd May at the Queen Elizabeth II Conference Centre in Westminster, London. The Conference will feature well known investors such as Mason Hawkins, Don Yacktman, Mason Morfit and Jon Moulton. As an introduction this conference, please find a video of Michael Price’s 42 minute presentation from May 2013 below:

 

At the 2014 Conference, the following speakers will provide valuable insights in to their methods and approaches as well as giving specific investment ideas: 

  • Mason Hawkins – Chairman and CEO of Southeastern Asset Management with $34bn AUM
  • Don Yacktman – President and Co-CIO of Yacktman Asset Management with $28bn AUM
  • Mason Morfit – President of ValueAct Capital, recently appointed Directors of Microsoft
  • Jon Moulton – Founder of Better Capital; previously founded Venture Capital firm Alchemy
  • David Samra – Founding Partner of Artisan Partners, recently named Morningstar International Stock-Fund Manager of the Year 2013
  • Aled Smith – Manager of the M&G Global Leaders Fund and the M&G American Fund
  • Richard Rooney – President and CIO of Burgundy Asset Management
  • Tim Hartch, Fund Manager at Brown Brothers Harriman
  • Charles Heenan, Investment Director at Kennox Asset Management
  • Andrew Hollingworth, Founder of Holland Advisors
  • Jonathan Mills, Founder of Metropolis Capital
  • Philip Best and Marc Saint John Webb, co-Fund Managers at Argos Investment Managers

A key feature of the conference is the 10-15 minutes dedicated to audience Q&A which is led by Richard Oldfield of Oldfield Partners and David Shapiro from Towers Watson. 

There are only 8 weeks to go until this conference and for a short time you can get a discount by using “GREENBACKD-22MAY” when booking (expires 17th April 2014)

This will also be a unique networking opportunity as this conference is the largest gathering of value investors in Europe, we expect there will be 400 paying delegates present this year. 

 

Disclosure: I receive a small fee for the sale of tickets to the London Value Investor Conference.

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Institutional Investor has a great piece from Clifford Asness and John Liew called The Great Divide over Market Efficiency on the efficient markets debate. Most interesting for me was their discussion on the launch of AQR and the “value” strategies it employs:

Starting in the mid-1980s, researchers began investigating simple value strategies. That’s not to say value investing was invented at that time. We fear the ghosts of Benjamin Graham and David Dodd too much to ever imply that. This was when researchers began formal, modern academic studies of these ideas. What they found was that Graham and Dodd had been on to something. Stocks with lower price multiples tended to produce higher average returns than stocks with higher price multiples. As a result, the simplest diversified value strategies seemed to work. Importantly, they worked after accounting for the effects of CAPM (that is, for the same beta, cheaper stocks still seemed to have higher expected returns than more expensive stocks). The statistical evidence was strong and clearly rejected the joint hypothesis of market efficiency and CAPM.

We started our careers in the early 1990s, when as a young team in the asset management group at Goldman, Sachs & Co. we were asked to develop a set of quantitative trading models. Why they let a small group of 20-somethings trade these things we’ll never know, but we’re thankful that they did. Being newly minted University of Chicago Ph.D.s and students of Gene Fama and Ken French, the natural thing for us to do was develop models in which one of the key inputs was value. …

Asness Long Short Value v2

Above is a graph of the cumulative returns to something called HML (a creation of Fama and French’s). HML stands for “high minus low.” It’s a trading strategy that goes long a diversified portfolio of cheap U.S. stocks (as measured by their high book-to-price ratios) and goes short a portfolio of expensive U.S. stocks (measured by their low book-to-price ratios). The work of Fama and French shows that cheap stocks tend to outperform expensive stocks and therefore that HML produces positive returns over time (again, completely unexplained by the venerable CAPM). The graph above shows this over about 85 years.

If you notice the circled part, that’s when we started our careers. Standing at that time (before the big dip you see rather prominently), we found both the intuition and the 65 years of data behind this strategy pretty convincing. Obviously, it wasn’t perfect, but if you were a long-term investor, here was a simple strategy that produced positive average returns that weren’t correlated to the stock market. Who wouldn’t want some of this in their portfolio?

Fortunately for us, the first few years of our live experience with HML’s performance were decent, and that helped us establish a nice track record managing both Goldman’s proprietary capital, which we began with, and the capital of some of our early outside investors. This start also laid the groundwork for us to team up with a fellow Goldman colleague, David Kabiller, and set up our firm, AQR Capital Management.

As fate would have it, we launched our first AQR fund in August 1998. You may remember that as an uneventful little month containing the Russian debt crisis, a huge stock market drop and the beginning of the rapid end of hedge fund firm Long-Term Capital Management. It turned out that those really weren’t problems for us (that month we did fine; we truly were fully hedged long-short, which saved our bacon), but when this scary episode was over, the tech bubble began to inflate.

We were long cheap stocks and short expensive stocks, right in front of the worst period for value strategies since the Great Depression. Imagine a brand-new business getting that kind of result right from the get-go. Not long cheap stocks alone, which simply languished, but long cheap and short expensive! We remember a lot of long-only value managers whining at the time that they weren’t making money while all the crazy stocks soared. They didn’t know how easy they had it. At the nadir of our performance, a typical comment from our clients after hearing our case was something along the lines of “I hear what you guys are saying, and I agree: These prices seem crazy. But you guys have to understand, I report to a board, and if this keeps going on, it doesn’t matter what I think, I’m going to have to fire you.” Fortunately for us, value strategies turned around, but few know the limits of arbitrage like we do (there are some who are probably tied with us).

On the question of market efficiency, years as practitioners have put Asness and Liew somewhere between Fama and Shiller:

We usually end up thinking the market is more efficient than do Shiller and most practitioners — especially, active stock pickers, whose livelihoods depend on a strong belief in inefficiency. As novelist Upton Sinclair, presumably not a fan of efficient markets, said, “It is difficult to get a man to understand something, when his salary depends upon his not understanding it!” However, we also likely think the market is less efficient than does Fama.

After backtesting countless “value” and fundamental strategies for our book Quantitative Value I found myself in the same boat. There exist some strategies that, over the long term, lead to a consistent, small margin over market, but fewer work than most believe, and our own efforts to cherry pick the model inevitably lead to underperformance.

Click here to read The Great Divide over Market Efficiency and here if you’d like to read more on Quantitative Value, or connect with me on LinkedIn.

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From the FTAlphaville’s “This is Nuts. When’s the crash?” series:

We argue Tesla cannot be valued on near-term multiple metrics like traditional auto companies given that we expect Tesla to multiply revenues by more than 10x from 2013 to 2016 by nearly 30x by 2020 and around 60x by 2028. We have thus chosen a 15-year time horizon for our DCF which captures the full maturation of the Model S, Model X (and top-hat derivatives) and also the ramp up of its mass market electric vehicle (the Gen 3). We have applied a 11% WACC with a range of 9% to 13%. The terminal value, calculated on a midpoint of 10x EV/EBITDA accounts for roughly 50% of the total DCF value across the range of methodologies we have applied to arrive at our PT.

New base case: a $320 share price, implying an almost $40bn market capitalisation.

New Bull case, $500/share or more than a $60bn valuation.

Tesla sales over the last four quarters: $1.7bn.

Tesla share price over the same period:

Revs 10x in three years. 11% WACC. 10x EBITDA/EV multiple at terminal value. Bull. Market. Insanity.

Click here if you’d like to read more on Quantitative Value, or connect with me on LinkedIn.

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In 7-Footers In A Sea Of Pygmies: Why Concentrating On Just The Averages Obscures True Market Insights, Lonnie and Jacob from Farnam Street Investments have a great post on the current lack of dispersion in stock valuations. The corollary to last week’s post on the extremely tight distribution of P/E multiples for stocks in the S&P 500 (the tightest in 25 years) is that there are now fewer stocks with low P/Es than at any time in the last 25 years.

While the stock market peak in 2000 was higher than the current market (measured on the basis of the Shiller P/E ratio) the wider distribution of P/Es meant that there were many bargains available in 2000. Jacob and Lonnie write:

When there’s a wide range of cheap and expensive, the thoughtful investor can still find deals, even if the averages are generally high.

This is exactly what we saw in 2000 to 2001. Because of the disruptive arrival of the Internet, many stocks were priced to the moon, while some were being practically given away. The prevailing narrative was that new-economy internet stocks were the wave of the future and old-economy stocks were soon-to-be-extinct dinosaurs. This created a two-tiered market with a record high average price (the Shiller P/E was 44.2 in December 1999!), but a plethora of deals are available at the bottom. The chart below shows that time frame having a record high dispersion; it was a tribe with an incredibly wide range of heights to choose from.

What type of market do we find ourselves in today?

Looking back at our dispersion chart above, we’re currently at a 25-year low, meaning the cheapest 10% of the market looks an awful lot like the other 90%. And if you normalize earnings at all, the current P/E is extremely high with the Shiller CAPE at 25x. Prices are expensive and tightly packed around the average, meaning we shouldn’t expect very good returns from here. In fact by some statistical thresholds that we’ve already crossed, it’s one of the top five most dangerous markets of all time. It will be extremely difficult to be a stock picking hero in this environment. Even though the 2000 market average was higher than today, the 2000 time frame delivered a much better hunting ground.

Jacob and Lonnie conclude:

Value investors are known for ignoring “macro” developments and relying solely on their skills as bottom-up stock pickers. Their depth of research is usually unparalleled, but there’s a general hesitancy in considering broader market valuations in their analysis. We’re value investors through and through, but we think it’s a mistake not to pay attention to what the current investment opportunity set looks like compared to different points in history.

Read Farnam Street Investments’  7-Footers In A Sea Of Pygmies: Why Concentrating On Just The Averages Obscures True Market Insights.

Order Quantitative Value from Wiley FinanceAmazon, or Barnes and Noble.

Click here if you’d like to read more on Quantitative Value, or connect with me on LinkedIn.

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Great piece from Tocqueville Funds’ François Sicart called Contrarian Investing in a Liquidity-Driven Environment. Tocqueville is a “bottom-up” value investor:

Individual stock selection prevails over macro opinions, be they about the economy or the markets.

This approach generally has been vindicated in the past, as value investors tended to outperform a majority of money managers over full market cycles; and this outperformance has been achieved principally during bear markets, by losing less than most.  The reason, I believe, is so obvious as to sound simplistic:  When a stock is selling close to the “intrinsic” value of its underlying company’s shares, it does not have to travel down very much to find a floor.

Good logic, but it didn’t protect Tocqueville of anyone else in 2007 to 2009:

In spite of this “unquestionable” logic, the great majority of portfolios (including those of some iconic value investors) were engulfed in the panicky downward spiral that followed the Lehman Bros. failure, between the summer of 2008 and the final bottom, in early 2009.

That part of the overall 53-percent decline from the 2007 top to the 2009 bottom was generally indiscriminate – more so than I can remember throughout my career, with the possible exception of the one-day crash of 1987; but that violent but brief market episode did not trigger a global financial crisis or recession.

“But it’s a market of stocks”:

At this stage of a discussion, a broker would typically tell you, “This is not a stock market, but a market of stocks,” implying that there are always attractive investments somewhere, even when the overall market seems overpriced.  And although this is a typical sales pitch, they usually are correct.  This time, however, we may have to work harder to find those attractive investments.

David Kostin, Goldman Sachs’ chief U.S. equity strategist, explained that investor demand for “value” has been so pervasive that low-valuation stocks had outperformed higher valuation peers by 12 percent in 2013.  As a result, the distribution of S&P 500 P/E multiples was now its tightest in at least 25 years, implying less differentiation of companies based on valuation.

“With valuation clustered together, we believe there are attractive relative value opportunities where companies with different fundamentals are trading at very similar valuation levels.”

If you’re having trouble finding undervalued stocks, this is some indication that it’s not just you. The current valuation spread is narrower than it was in 2007, and stands in stark contrast to the early 2000s when it was wider than usual.

Read Tocqueville Funds’ Contrarian Investing in a Liquidity-Driven Environment.

h/t Farnam Street Investments.

Order Quantitative Value from Wiley FinanceAmazon, or Barnes and Noble.

Click here if you’d like to read more on Quantitative Value, or connect with me on LinkedIn.

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MoI Cover

John Mihaljevic’s The Manual of Ideas: The Proven Framework For Finding The Best Value Investments builds on his and his brother Oliver’s wonderful work with the Manual of Ideas newsletter.

The book is a  comprehensive assay of value investment theories, accompanying methods for identifying undervalued stocks, and practical considerations in the application of each strategy. John covers the following value investment methods:

  • Benjamin Graham’s “cigar butt” rule;
  • the sum-of-the-parts analysis;
  • Joel Greenblatt’s “Magic Formula”;
  • small cap stocks;
  • special situations;
  • equity stubs; and
  • international stocks.

John also suggests following great managers, and using the portfolios of “superinvestors” as a source of ideas.

The book is set out in logical, easy-to-follow format, and it is a worthwhile addition to any value investor’s library. It will be most useful to intermediate-level value investors who have developed an appreciation for the art, but not yet settled on a style. For my part, I am an advocate for “deep value,” which John limits to Grahamite net nets and subliquidation stocks, but which I define more broadly. (My definition covers most of the methods John highlights excluding Greenblatt’s “Magic Formula” for the reasons I have discussed in several posts including How to beat The Little Book That Beats The Market: An analysis of the Magic Formula and How to beat The Little Book That Beats The Market: Redux.) I highly recommend it.

Buy John Mihaljevic’s The Manual of Ideas: The Proven Framework For Finding The Best Value Investments.

Disclosure: I was provided with a free copy of the book for review, and I am quoted in it. I receive a small commission for books purchased on Amazon through this site.

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A year ago I wrote a post on the returns to negative enterprise value stocks.

Zero Hedge screened Russell 2000 companies finding 10 companies with negative enterprise value, and then further subdivided the screen into companies with negative, and positive free cash flow (defined here as EBITDA – Cap Ex). Here’s the list (click to enlarge):

Including short-term investments yields a bigger list (click to enlarge):

Like Graham net nets, negative EV stocks are ugly balance sheet plays. They lose money; they burn cash; the business, if they actually have one, usually needs to be taken to the woodshed (so does management, for that matter). Frankly, that’s why they’re cheap.

Just for fun, I made four throw-away predictions:

  1. All portfolios beat the market
  2. Portfolio 1 outperforms Portfolio 2 (i.e. all negative EV stocks outperform those with positive FCF only)
  3. Portfolio 3 outperforms Portfolio 4 for the same reason that 1 outperforms 2.
  4. Portfolios 1 and 2 outperform Portfolios 3 and 4 (pure negative EV stocks outperform negative EV including short-term investments)

Here are the results:

1. Negative Enterprise Value Portfolio

2. Negative Enterprise Value Portfolio (Positive FCF Only)

3. Negative Enterprise Value (Inc. Short-Term Investments) Portfolio

4. Negative Enterprise Value (Inc. Short-Term Investments) Portfolio (Positive FCF Only)

I’m scoring the predictions as follows:

  1. All portfolios beat the market (Right)
  2. Portfolio 1 outperforms Portfolio 2 (i.e. all negative EV stocks outperform those with positive FCF only) (Wrong)
  3. Portfolio 3 outperforms Portfolio 4 for the same reason that 1 outperforms 2. (Wrong)
  4. Portfolios 1 and 2 outperform Portfolios 3 and 4 (pure negative EV stocks outperform negative EV including short-term investments). (Right)

Here are the links to the four virtual portfolios at Tickerspy that track the performance:

  1. Zero Hedge Negative Enterprise Value Portfolio
  2. Zero Hedge Negative Enterprise Value Portfolio (Positive FCF Only)
  3. Zero Hedge Negative Enterprise Value (Inc. Short-Term Investments) Portfolio
  4. Zero Hedge Negative Enterprise Value (Inc. Short-Term Investments) Portfolio (Positive FCF Only)

See my earlier post on the Returns to Negative Enterprise Value Stocks

Order Quantitative Value from Wiley FinanceAmazon, or Barnes and Noble.

Click here if you’d like to read more on Quantitative Value, or connect with me on LinkedIn.

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Low bond yields have in the past been bad, not good, for equity returns.

See my earlier post on the Fed model “How predictive is the Fed model?

Order Quantitative Value from Wiley FinanceAmazon, or Barnes and Noble.

Click here if you’d like to read more on Quantitative Value, or connect with me on LinkedIn.

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The Hong Kong University of Science and Technology Value Partners Center for Investing has examined the performance of value stocks in the Japanese stock market over the period January 1975 to December 2011. They have also broken out the performance of value stocks during Japan’s long-term bear market over the 1990 to 2011 period, when the stock market dropped 62.21 percent.

The white paper Performance of Value Investing Strategies in Japan’s Stock Market examines the performance of equal-weight and market capitalization weighted quintile portfolios of five price ratios–price-to-book value, dividend yield, earning-to-price, cash flow-to-price, and leverage-to-priceexcluding the smallest 33 percent of stocks by market capitalization.

The portfolios were rebalanced monthly over the full 37 years.

The authors find the value quintile of equal-weighted portfolios book-to-market, dividend yield, earning-to-price, cash flow-to-price, and leverage-to-price generated monthly returns of 1.48 percent (19.3 percent per year), 1.34 percent (17.3 percent per year), 1.78 percent (23.6 percent per year), 1.66 percent (21.8 percent per year) and 0.78 (9.8 percent per year) percent in the 1975–2011 period.

The returns diminished over the 1990 to 2011 period. The value quintile of equal-weighted portfolios book-to-market, dividend yield, earning-to-price, cash flow-to-price, and leverage-to-price generated monthly returns of  0.84 percent (10.6 percent per year), 0.78 percent (9.8 percent per year), 1.31 percent (16.9 percent per year), 1.13 percent (14.4 percent per year) and 0.0 percent (0.0 percent per year) in the 1990–2011 period, respectively. In contrast, the Japanese stock market lost 62.21 percent.

They find similar results for market capitalization-weighted portfolios sorted by these measures, as well as for three-, six-, nine-, and twelve-month holding periods (excluding the leverage-to-price ratio).

They also investigated the cumulative payoff in dollar terms of investing $1 in the portfolios having the highest values of our value measures with monthly portfolio rebalancing in the 1980–2011 period. Value investing strategies based on stock’s book-to-market, dividend yield, earning-to-price , cash flow-to-price , and leverage-to-price grew $1 into $115.98, $81.88, $433.86, $281.49, and $6.62 respectively, while the aggregate stock market turned $1 into a mere $2.76, in the 1980–2011 period. This implies that these value investing strategies rewarded investors 42.0, 29.6, 157, 102 and 2.40 times what the Japanese stock market did. The effective monthly compound returns of the various investing strategies are 1.25 percent, 1.16 percent, 1.60 percent, 1.48 percent and 0.49 percent, while the aggregate stock market only delivered 0.27 percent in this period.

Japan Value

Four out of five value investing strategies actually rewarded investors with positive returns in the bear market that spanned two decades from 1990 to 2011, turning $1 into $4.77, $4.25, $17.17, and $10.91, implying profits of 377 percent, 325 percent, 1617 percent, and 991 percent respectively, while the stock market plunged 62.21 percent after reaching its peak in January 1990. In addition, every one of these value investing strategies continued to generate positive returns between the pre-global financial crisis peak in 2007 and December 2011.

Order Quantitative Value from Wiley FinanceAmazon, or Barnes and Noble.

Click here if you’d like to read more on Quantitative Value, or connect with me on LinkedIn.

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The CFAInstitute blog Inside Investing has a great post on the returns to negative enterprise value stocks. Alon Bochman, CFA has investigated the performance of all negative enterprise value (“EV”) stocks trading in the United States between March 30, 1972 and September 28, 2012. He used balance sheet data from Standard & Poor’s Compustat database and merged these data with price data from the database maintained by the Center for Research in Security Prices (CRSP). He then calculated historical EVs for every company every month, as well as matching forward 12-month returns. Says Alon:

I found 2,613 stocks that at one point or another traded at a negative enterprise value between 1972 and 2012 (Microsoft, unfortunately, was not among them). The list has one entry per stock-month. That is, a stock that has traded at a negative enterprise value three months in a row will appear on the list three times. Each time is a different investment opportunity with its own forward 12-month return. The average stock spent 10.17 months (not necessarily consecutive) in negative EV territory. Thus, the list shows a total of 26,569 opportunities to invest in negative EV stocks.

The average return across all 26,569 opportunities was 50.4%. That is, if you had diligently watched the market over the last 40 years and invested $1,000 into each negative EV stock each month, your average investment would be worth $1,504 after holding that investment for one year, not including trading costs, taxes, and so on. Not bad!

Most of the opportunities are in micro caps with limited liquidity:

Returns by Market Cap -- Negative EV Investing

Alon notes that these opportunities have come up with some regularity and have usually provided attractive returns but have on occasion lost a great deal as well:

Average 12M Returns on Negative EV Stocks by Entry Year

Read Returns on Negative Enterprise Value Stocks: Money For N0thing?

Order Quantitative Value from Wiley FinanceAmazon, or Barnes and Noble.

Click here if you’d like to read more on Quantitative Value, or connect with me on LinkedIn.

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