Case Study: Stub Stocks or Sum of the Parts Analysis of Loews (L)

If you go to work tomorrow wearing a green shirt and say, “I’m going to win a million dollars today because everyone knows when you wear a green shirt on Tuesdays, you win a million dollars,” your colleagues will grab a giant butterfly net. You’re predicting an outcome that 1.) has no historical precedent and 2.) lacks any rooting in reality. You see that clearly.

Yet every time I (Ken Fisher) talk about history’s role as a powerful tool in capital markets forecasting, inevitably some say, “Past performance is no indication of the future!” Well, that is not why you should look at history. Use history as a laboratory–to understand the range of reasonable expectations. For example, when event X happens, the outcomes are usually B,C or D, but can be anywhere from A to F.  So I know that anything could happen, but odds are greater something like A through F happens, with odds still higher on B, C, and D. And the odds of something outside that range happening is very, very low, so it would take exceptional extra knowledge to bet on something like that happening.  (Source Markets Never Forget, But People Do, Fisher)

Case Study in Valuing a Stub–Loews, Corp (L)

These opportunities can offer (mostly) non correlated returns to the general market. Calculating the price of a stub is relatively straight-forward with publicly traded subsidiaries. These are typically non-franchise companies. Our goal in this case is to find the value of the stub (residual value) versus the market price of the conglomerate and its various subsidiaries. Is there opportunity here? What else would you need to consider?  In a day or two I will post the analysis. To help you, I have posted several readings below this case.

Link to Loews Annual Report and 10-K (2011):

Readings on Sum of the Parts Analysis and Stub Stocks

Sum of the Parts Conglomerates

Pratte on Liquidation and Creation of Stub Stocks

Stubs Maurece Schiller 1966  Prof. Greenblatt referenced and suggested this book as an example of how long special situation opportunities have existed. Interesting historical examples. Chapter on Stubs.

Leveraged Recaps and Exchange Offers_NYU

One response to “Case Study: Stub Stocks or Sum of the Parts Analysis of Loews (L)

  1. I love stubs. They are intellectually simple, but even then the “market” generally does a poor job of valuing them accurately. Best investment like this I ever made was Liberty Media Capital(now part of LMCA) – owned 40% of SIRI, a bunch of other common stock positions, the Atlanta Braves, and some random private companies. When I bought I figured it was at a 65% discount to these holdings (market value for public companies, comparables for private ones). MIL is another interesting asset/parent stub play right now.

    Re: L, no time to re-do the analysis, but I’ve seen a stub value of ~$3.5bn discussed, compared to a current market-implied stub value of ~$600m. This seems about right. Problem with L is, though, that it has had this discount for as long as I can remember. Their mgmt does not seem to have the capital allocation/dealmaking skills of, say, John Malone (of Liberty Media) – so the discount is not enough to entice me.

    Great reading on this blog!

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