Value Investor Conference London

April 2016

Welcome to the 25th edition of Value Investor Digest

In this edition we feature a complimentary research report from Boyar Value Group, some early Scion Capital letters written by Michael Burry whose character featured in the recent hit movieThe Big Short, conference speaker David Iben’s recent thought-piece on The Big Long, a Jean-Marie Eveillard article on “Benchmark Tyranny”, an article from Nick Kirrage of the Schroders Global Value team on why income-seekers must now take a view on commodities and financial stocks; plus a WSJ article from Jason Zweig on why it is time for investors to rediscover the lost art of reading. Concluding this edition is an article from Business Insider which looks at historical corporate profit margins, which Jeremy Grantham has referred to as “the most mean-reverting series in finance.”

Complimentary Research Report from Boyar Value Group 
Since Mark Boyar began publishing equity research in 1975, he has seen his share of market dislocations. Whether it was the 1987 stock market crash, the failure of Long-Term Capital or the dotcom bust, The Boyar Value Group has always been able to help clients uncover intrinsically undervalued equities during times of distress. Boyar’s philosophy is that while stock market corrections are never an enjoyable experience, they are an integral part of the investment process. Without them it would be impossible to capture future outsized gains. During the early part of 2016, when stocks experienced their latest round of turmoil, a number of the companies followed by Boyar Research suffered a significant price decline without a corresponding deterioration in their private market value. The Boyar Value Group viewed this situation as an attractive buying opportunity and published a note to clients identifying nine companies that they believed were currently on the bargain basement table.

To view the note The Boyar Value Group published (which includes updates on Bed Bath & Beyond, Devon Energy, Eastman Kodak, Interval Leisure Group, Kohl’s, MSG Networks, Oaktree Capital Group, PayPal Holdings, Time Warner) and to receive a complimentary research report, please click here.

Michael Burry early Scion Capital Letters
Many readers will have seen the film The Big Short in which Christian Bale’s character Michael Burry is one of the main characters. These letters are from Michael Burry’s early days at his hedge fund Scion Capital, whose original backers included Joel Greenblatt. Burry is portrayed as a very poor verbal communicator in both Michael Lewis’s book and the film adaptation of it – however the quality of his written communications, as judged by these letters, is excellent. Even though the letters are dated they are worthwhile reading for the clarity with which he communicates his investment approach, the way he runs his funds and also his approach to valuation – the latter includes his explanation that he “strives to buy stock at prices per share that no acquirer could ever pay for the whole company – not because the prices are too high, but because the prices are so low that a potetial acquirer proposing them would be laughed out of the boardroom.”

David Iben – The Big Long
David is going to speak at the upcoming conference on 26th May. His new thought-piece,  The Big Long draws some interesting parallels between events unfolding today and the Fed-induced malinvestment that a group of eccentric, contrarian-minded investors successfully exploited during the 2007 housing bubble in in Michael Lewis’ well-written book and Academy Award nominated film, The Big Short. David believes that the real world is scripting a sequel as we once again live in an era of central bank induced extremes which has irrationally extended prices in many US stocks, high-end real estate, art, tuition, healthcare, entertainment, etc. while masking a deep and prolonged bear market in many non-US stocks, gold, oil, gas, coal, uranium, hydro-electricity, etc.

Jean-Marie Eveillard – on Benchmark Tyranny
This article was written by conference speaker Jean-Marie Eveillard back in the early 2000’s on the subject of “benchmark tyranny”. He writes about how both closet indexing and shooting for the stars are exposing financial planners’ clients to undue risk: “In a recent issue of Barron’s, a money manager was quite critical of a particular stock, but said he owned it, although he was “underweighted”. Which leads to the question: what’s the point of holding a stock at all if one deems it unattractive? A portfolio that includes many stocks just because they have a big weight in the index (a result of their having gone up a lot) may go down sharply and still carry risk – no cushion there to begin with…An investor who buys a building or an entire corporation gives a great deal of attention to the price to be paid for the asset. So does the buyer of a car or even a bathing suit. They all seek value. What’s so different with equities?”

Think Big – Why Income-Seekers Must Now Take a View on Commodities and Financial Stocks
Nick Kirrage of the Schroders Global Value Team, who will be presenting at the LVIC next month, identifies in this article that a small number of UK’s very largest companies are forecasting high dividend yields: “17% of the UK by market capitalisation yields above 8%, 28% yields above 7% and 40% yields above 6%”; the implication is therefore that the forecast average yield of 4% in the UK market at present is highly dependent on a handful of corporate behemoths and their 8%+ yields – which normally means that the market is a lot less convinced than the analysts that these businesses will pay up. Investors therefore need to take a view on some of these predominantly commodity and financial sector stocks in determining whether the forecast yield is likely to be achieved (Royal Dutch Shell, Rio Tinto, BHP Billiton, HSBC, BP and Lloyds). As a guide to how likely the current expectation is, they have also provided an interesting graph which compares forecast and realized dividend yields in the UK market going back to 1995.

It’s Time for Investors to Re-Learn the Lost Art of Reading
This Jason Zweig WSJ article reveals that only 29 people a day download the average annual report when it comes out. “Even General Electric’s annual report was downloaded from GE’s website only 800 times in 2013, according to the company.” By contrast, every day for the past seven weeks a young New York based fund manager has read an average of 39 letters that CEOs write to shareholders in their companies’ annual reports. His goal is to peruse the annual report from each of the 3,000 largest companies in the United States. There may be some merit in this approach: Warren Buffett is also known for spending a lot of time reading – and spent much of the early 1950s reading every single entry in the thousands of pages of Moody’s manuals, the corporate encyclopedia of that era.

Mean Reversion of Record-High Corporate Profit Margins
Jeremy Grantham referred to corporate profit margins as “the most mean-reverting series in finance”; and Warren Buffett has also commented on the reasons why he thinks “you have to be wildly optimistic to believe that corporate profits as a percent of GDP can, for any sustained period, hold much above 6%.” This Business Insider article looks at some of the drivers of corporate profit margins since 1950 and the author explains why he thinks the challenges to today’s historically high corporate profit margins will not let up any time soon.

Another recent article in the Economist titled Too Much of a Good Thing argued that profit levels of US businesses may remain at current high levels unless regulators take a more aggressive approach, as in many areas they are the result of increased consolidation and less competition.

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