Archive for June, 2016

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Huge Margins At Capacity

A stock that can trace its roots to Sidney Jacobson’s Sid Tool Company founded in 1941 in Manhattan. To diversify its sales, in 1961 Jacobson started a catalog business offering discounted prices on imported cutting tools. Since it was a catalog instead of a store, the book was able to offer a wide range of products. By 1964, it had over 150 pages. Today, its catalog–known as the “Big Book”–has over 4,000 pages, with customers in all 50 states, through a network of five customer fulfillment centers (four in the United States and one in the United Kingdom) and 106 branch offices (104 in the United States, one is located in the United Kingdom and one in Mexico).
Over the next 5 years, the company can increase sales, and margins, and pay out free cash flow without additional investment in infrastructure. It is cheap today compared to what it will be earning in 2021.

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The Acquirer’s Multiple® is the value ratio “acquirers”—buyout firms, activists, deep value investors—use to find undervalued stocks.

As Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations shows undervalued companies trading on a low acquirer’s multiple tend to be good targets for investment.

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If you are as perplexed by the Kardashians as I am, you will love this analysis from The Private Investment Brief:

[T]he Kardashians are at or near the top of a very large heap. And they climbed there from quite a low base not nine years ago, without any conventional celebrity merit to speak of beyond a cable TV reality show of modest ratings success. Information about these things is notoriously unreliable, but it’s not crazy to speculate that the family collectively takes in something approaching $100 million per year in gross income. A typical industrial company might have to gross over $1 billion to earn that much in operating income, and a typical hedge fund might need more than $2 billion in assets under management. If like me you like to study business success, then perhaps you should study and even admire the Kardashians, despite the fact that—or is it because?—their pre-eminence is in a much different field than your own.

…Whether we like it or not, in other words, we’re all Kardashians now, so perhaps we shouldn’t be so dismissive. Back in old Europe, young women from good families would sometimes pay discreet visits to their counterparts in the demimonde, seeking some insight into the duties of a new wife. So too should we acknowledge that true expertise doesn’t always with status and credentials. Kim Kardashian may well be a better marketing professor than the ones you find at Kellogg.

…When people my age get on the subway in the morning and find themselves surrounded by 50 millenial heads buried silently in 50 iPhones, they tend to think the world is ending. But the basic business model of the modern mobile celebrity is no different than Milton Berle’s nearly 70 years ago: the celebrity commands the attention of the public, and then that attention is transformed into money via some type of advertising or endorsement….

While conceptually the modern mobile celebrity is the same as the celebrity of yesteryear, there is a huge difference in the execution. In the 1940s, a movie star would have to appear in public maybe twice a year to promote a new movie, and that was considered an annoying but necessary burden of fame. Today, the mobile celebrity entertainer must appear in virtual public twice a day at a minimum, or else risk falling to the bottom of a smartphone user’s feed. That is to say, in the new world of mobile entertainment the required velocity of fame is much higher than it used to be. And with the need for more velocity comes the need for more ephemerality: Each appearance by the celebrity on the smartphone screen must manage to be both instantly attention-grabbing and instantly forgettable, so as not to overtax the brain of the viewer while at the same time building up the “mental availability that is crucial to selling brands, especially in highly fragmented, mass-market product categories like fragrances, mobile apps, and clothing where the Kardashians do especially well. The goal is not to get 40 million people to love you, it’s to get 40 million people to at least think of you when they are buying perfume.

I doubt she’s ever used this term explicitly, but what Kris was describing is the concept of risk bearing economies of scale, one of the oldest and simplest strategic competitive advantages a company can enjoy—and the third success secret of the Kardashians. Risk bearing economies of scale are the reason movie studios and record labels and insurance underwriters like to be big, because they diversify the risk of individually risky investments and decisions. And they’re crucial in the world of mobile entertainment, where the name of the game is to generate tweets and photographs and stories that become “hits” for that day or hour….

Read more: Success Secrets of the Kardashians | The Private Investment Brief

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JK Take me back to 1976. How did the whole KKR experiment begin?

HK We started with $120,000. George and I each put up $10,000—that was all we had—and Jerry put up $100,000, because he was 20 years older. And then we went out to raise our first fund, a $25 million private equity fund. There was no such thing then, but the first people we talked with—mostly insurance companies we’d worked with at Bear—all liked what they heard. But the catch was they wanted to be the investment committee. Well, we’d just done that and had left Bear for a reason: to make our own mistakes and our own right decisions.

JK So no $25 million fund. What did you do?

HK George and I went to Joe and Rose Restaurant—there’s a picture of it right over there—and said, “Why don’t we go to eight individuals and ask them to put up $50,000 each for 5 years?” That would give us $400,000 a year. Then, if you’ve given us $50,000, in return you get the ability to come into any of our deals. But if you do invest, we want 20 percent of the profits.

JK How did you come up with 20 percent, which became the industry standard?

HK George’s father and my father were in the oil-and-gas business, and in those days there was something called “a third for a quarter.” If I had a lease and wanted to drill a well, I would go to the money person and say, “I’ll put up 25 percent of the cost, you put up 75 percent, and you’re going to get a two-thirds interest and I’m going to get a one-third interest for my 25 percent.” We thought 20 is close enough to 25. I’m often asked, “Why didn’t you pick 25 percent because that would have stuck and carried interest?” We were just trying to get started, so that was literally what we started from.

Read more: Q&A With Henry Kravis on 40 Years of Creating and Re-Creating KKR

Check out the best deep value buyout targets in the largest 1000 names for free on The Acquirer’s Multiple.


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This was fun. Two photos from the launch of Concentrated Investing.


The great Emanuel Derman, author of My Life As A Quant and Models.Behaving.Badly., and Professor at Columbia University.


Charles Brandes, legendary founder of Brandes Investment Partners.

Click here if you’d like to read more on Concentrated Investing.

Buy my books Concentrated Investing: Strategies of the World’s Greatest Concentrated Value Investors (Wiley Finance, 2016) or  Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations (hardcover or Kindle, 240 pages, Wiley Finance) from Wiley Finance, Amazon, or Barnes and Noble.

Here’s your book for the fall if you’re on global Wall Street. Tobias Carlisle has hit a home run deep over left field. It’s an incredibly smart, dense, 213 pages on how to not lose money in the market. It’s your Autumn smart read. –Tom Keene, Bloomberg’s Editor-At-Large, Bloomberg Surveillance, September 9, 2014.

Click here if you’d like to read more on Concentrated Investing or Deep Value, or connect with me on Twitter, LinkedIn or Facebook. Check out the best deep value stocks in the largest 1000 names for free on The Acquirer’s Multiple.

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A Regional Bank That Can Trace Its Roots To The Year The American Civil War Ended

A family-run and owned regional bank that can trace its roots to the year the American Civil War ended. Run by one family for at least the last 113 years, the current president and chief operating officer succeeded his father in 2013 to create an unbroken line of sons running about 110 years and five generations.

It is not a growth stock. But, it’s a good value stock. The combined level of growth in deposits per share – this number is boosted by the annual stock buybacks – and the dividend yield is high enough to outperform the S&P 500.

It’s a safe and boring bank. When it’s priced to outperform the S&P 500, it should be bought.

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