Category Archives: Search Strategies

Down and Dirty on CRR (Process of Search and Quick “Valuation”)

Debt_Lava

Prior post on Carbo Ceramics (CRR)

CRR 10Q Sept 30 2014

My process is to weed out companies to look at based on their financial characteristics. In an ideal world, you would not be able to tell what the market price of the shares are trading at when you scan the Value-Line for the company’s financial history.

It is irrelevant where the price has been–either vastly higher or lower–just what your sense of the value is based on the FINANCIAL characteristics of the business.  I am not implying that my way should be YOUR way. Find what works for you in your search/valuation process.

My “Down and Dirty” on CRR Down and Dirty on CRR on November 14

Summary

An OK business with a clean balance sheet and incentivized management (14.5% ownership) and no dilution in a highly cyclical business. Not a franchise but an asset based business which means no value for growth.

I have rock bottom tangible book value of $32—a probable ugly case scenario if oil keeps falling to ?? Who knows.

Then I have reproduction value of about $43 per share which coincides with the lowest 1.3 times book value the stock has traded over the past 15 years. $45.

Industry multiples of EV/EBITDA (8.6 xs) place the value at $60 to $65

Median to high price-to-book value is $80 to $170.   Throw out the past high price. So……………..

Hard rock is $32 TBV;  Replacement or reproduction value $43-45;  Industry multiples $60 to $65; Cash flow multiple 12 to 13 times = $55 to $65.

Median price to book value past 15 years is $82, round down to $80   

$32 on the extreme low side to $80.   

So before looking at annual report or competitors to refine my numbers, I have an idea that this business might be worth buying at or under replacement value of $45. A plan for me based on my psychology and obtaining a price under replacement value might be to allocate a percentage of capital to buy this company starting at $45 down to $30. Perhaps three scaled buy orders on descending price?  Will I have the guts to keep buying to my allocation when and if oil goes to $60 and the S&P is down 600 points in a day? Yes, place GTC orders after final work is done.

Head in sand

Worth going through the proxy and 10-K for any problems.

Time: 15 minutes.

Next…………………………………

CARBO CERAMICS INC: A short thesis back when CRR traded above $150.

HAVE A GREAT WEEKEND

So What is it worth? Carbo Ceramics (CRR)

paul-singer

 The consensus (bull case): The power of psychology is overwhelming, and investor sentiment indicates that asset prices are being driven higher by QE and Zirp, that the Fed can be trusted, and that we should not worry too much about the unintended consequences, because the Fed will be able to follow a path to normalization and a soft landing. In any event, America is now a safe haven and always will be a safe haven. Moreover, goes the case, we may be at the sweet spot of the economic cycle. It has taken a long time to get here, but finally we are getting sustainable growth, and we can expect more of the same, Interest rates are completely under control, in fact, long-term rates are in a secular decline, which is not nearly at its bottom. Inflation is virtually impossible, and we really ought to be worrying about deflation instead. If we focus on getting inflation higher, then growth will follow. The currency is also under control, goes this line of thinking, In fact, what could the dollar fall against? The competition is in much worse shape. Banks are in far better financial condition than in 2008 and will gradually bleed off any remaining toxic assets that they own. If anything starts to go wrong, the government will step in to fix it. Pushing investors out on the risk curve in search of yield is a good idea and a clever way to encourage them to do what they should be doing on their own (i.e., taking risks to help the ecobnomy grow).  We should not worry, because things will be okay. We can even trust the representative branches of government, because elected officials will not have to do much that is unplatable or challending–the central bankers have it all covered. Above all, trust the Fed.  –Paul Singer

Do the Lessons of History Apply?

So what’s it worth?

Carbo VL

Carbo 2013

Carbo Presentation Sept 2014

Please do a “down and dirty” valuation giving your assumptions within twenty minutes.  I will post mine tomorrow!

ATCE-2014-post2

 

PRIZE: A Date with my EX! for best valuation!

Buy Hatred and Fear: Kinross (Russian assets for practically free)

CEF_041114

Gold Sentiment (CEF)

The above shows the extreme negativity in the gold market. You can buy the Canadian Closed-End Fund (CEF) at a 10% to 11% discount to gold (60% of assets) and silver (40%) approximately.  Gold and silver have no counter-party risk. Such is the world of closed-end funds.  Note the 20% premiums during bull runs!

KINROSS

The absurdity of gold stock valuations is illustrated by Kinross. Consistently improving operations with $5.30 book value and with no value attributed to their Russian mine. Net-debt-to-EBITDA of 1.28 with their debt covenants being 3.5xs to 1. Cash of $879 million. 1.14 billion outstanding shares. 27 cents of operating cash flow this quarter share, up 22%. A 2.6 to 2.7 million gold equivalent oz. producer. $698 cash costs and $919 All-in Sustaining Cash Cost.  They can survive at $1,000. Below $1,000 operations would be reduced.  Of course, Kinross represents a trifecta of hatred: poor past acquisitions (declining stock price), the gold market, and some Russian assets.

Basically, the market is heavily discounting their assets because the market is assuming sub-$1,000 gold. No value given to their Russian mine.

KINROSS RESULTS 3Q 2014

110514 kinross reports 2014 third quarter results

kinross141106

You should listen to the  Kinross conference call

Mining is a crappy business

Miners at or near ALL-TIME (past 90 years) low of stock price to gold price. Part of the reason for the decoupling is the time to find new deposits and place them into production has gone from five to six years out to ten years. Mining costs hve not been kept in check until recently. Past mining managements made poor capital allocation decisions. A mine is a depleting asset! But the market has had four years to replace managements and adjust.

sa71

Current sentiment in the gold miners ZERO (0). The recommended allocation is Zero. Contrarians take note but you better have a strong stomach in the near-term.

bpgdm7year021114

But what you need to focus on is not so much the nominal price but the REAL price of gold.  15% or more of the costs of a mine are energy based.

gold to oil

That said, do your own thinking and use this as a case study of where to look for negative sentiment.   The question is…..are you being paid enough for the risks?

Can gold go to $800? Sure and Kinross and other miners will be closing down many of their operations or even going bankrupt. But consider what $800 gold would mean in a world choking on debt! Perhaps stocks might not hold up in a deflationary bust!  It is not just the gold price but the real gold price that matters to miners.  However, nominal gold prices in US dollars matter to miners that have debt denominated in US dollars.

Just never buy one miner because of the risks to any one company. Use the EXTREME price volatility to your advantage. Don’t buy the stock all at once. If you need to diversify and have limited capital, then SGDM might be a choice–IF you think owning miners is the lowest cost way to participate in either a deflationary bust or inflationary response by the Fed.  Otherwise, CEF (above) might be a cheap form of insurance to monetary mayhem.

Miners in a capitulation phase–crashing on huge volume–after four year price decline. Folks have had enough. Money managers in forced liquidation?

GDX

Some history

Just remember that you are trying to buy assets at extremely low prices since this is not a franchise. A mine is a DEPLETING asset.   How much money goes into a mine versus what is sold discounted by your cost of capital.

Obviously, with a cyclical asset you will find losses and the widest spread between price and financial operating metrics because a trough occurs in a bear market of declining product prices.  The reverse occurs at the top of a cycle–huge revenues and profits during the boom. So you MUST sell–this is a “burning” match not a franchise. Burn this into your brain.

What could go wrong with financial assets?

Paul Singer grits his teeth while holding gold during a monetary delusion

Paul Singer on “illogical” market trends: http://www.valuewalk.com/2014/11/paul-singer-q3-2014-letter/

I disagree with Mr. Singer because the bubble in confidence in central planning by the Fed means extreme trends.   For example, massive printing of money will cause LOWER gold prices because the market sees perpetual support of financial assets. Why own gold when equities will NEVER drop more than 10% in our lifetimes.  Thus, massive monetary intervention is bearish for gold. Of course, house prices could NEVER fall nation-wide and the Internet Bubble ushered in a new normal.  Timing is impossible. 

THIS IS WHAT IT FEELS LIKE TO OWN MINERS THIS PAST MONTH–Please no women or children to click on this link! http://youtu.be/82RTzi5Vt7w?t=1m52s

Gold, Inflation Expectations and Economic Confidence

Wednesday November 05, 2014 11:29

Below is an excerpt from a commentary originally posted at www.speculative-investor.com on 2nd November 2014. Excerpts from our newsletters and other comments on the markets can be read at our blog: http://tsi-blog.com/ 

As a result of what happened during just one of the past twenty decades (the 1970s), most people now believe that a large rise in “price inflation” or inflation expectations is needed to bring about a major rally in the gold price. This impression of gold is so ingrained that it has persisted even though the US$ gold price managed to rise by 560% during 2001-2011 in parallel with only small increases in “price inflation” (based on the CPI) and inflation expectations. The reality is that gold tends to perform very well during periods of declining confidence in the financial system, the economy and/or the official money, regardless of whether the decline in confidence is based on expectations of higher “inflation” or something else entirely.

Inflation expectations are certainly part of the gold story, but only to the extent that they affect the real interest rate. For example, a 2% rise in inflation expectations would only result in a more bullish backdrop for gold if it were accompanied by a rise of less than 2% in the nominal interest rate. For another example, a 1% decline in inflation expectations would not result in a more bearish backdrop for gold if it were accompanied by a decline of more than 1% in the nominal interest rate.

Other parts of the gold story include indicators of economic confidence and financial-market liquidity, such as credit spreads and the yield curve.

That large rises in the gold price are NOT primarily driven by increasing fear of “inflation” is evidenced by the fact that the large multi-year gold rallies of 2001-2006 and 2008-2011 began amidst FALLING inflation expectations. These rallies were set in motion by substantial stock market declines and plummeting confidence in central banks, commercial banks and the economy’s prospects. Even during the 1970s, the period when the gold price famously rocketed upward in parallel with increasing fear of “inflation”, the gold rally was mostly about declining real interest rates and declining confidence in both monetary and fiscal governance. After all, if the official plan to address a “price inflation” problem involves fixing prices and distributing “Whip Inflation Now” buttons, and at the same time the central bank and the government are experimenting with Keynesian demand-boosting strategies, then there’s only one way for economic confidence to go, and that’s down.

Since mid-2013 there have been a few multi-month periods when it appeared as if economic confidence was turning down, but on each occasion the downturn wasn’t sustained. This is due in no small part to the seemingly unstoppable advance in the stock market. In the minds of many people the stock market and the economy are linked, with a rising stock market supposedly being a sign of future economic strength. This line of thinking is misguided, but regardless of whether it is right or wrong the perception is having a substantial effect on the gold market.

For now, the economic confidence engendered to a large extent by the rising stock market is putting irresistible downward pressure on the gold price.

Steve Saville
http://www.speculative-investor.com/new/index.html

Deep Value

 

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Interview-with-benzingas-deep-value-letter-author-tim-melvin-about-my-new-book-deep-value/

Micro-cap Investing

 

12126110-magnifying-glass-on-a-dollar-background

Search for the tiny, obscure, and neglected

  1. value-guide
  2. 090810_Hummingbird_Investment_Strategy
  3. vii_sonkin_v2

The above links will show you the methods of a micro-cap investor.  You typically won’t find many franchise-type companies in the sub-$300 million market cap area, but you might find a few strong niche companies like MLR (Miller Industries, Inc. – Tow Trucks).  Financials are usually easier to follow.   You need to be aware of the stock price volatility especially in bear markets (remember those?) to use Mr. Market to your advantage.   One of the best investments is to know the value of a company and take advantage of repeated volatility.

Update: Case Study in a Value Death Trap (PRXI). 

PRXI

 

Small PRXI

 Mark Sellers discusses the keys to investing (Interview)

 

 

Mark Sellers Capital

Sellers_Speech

Value Traps_PRXI Premier Exhibits

Sellers Piling into MCF (Contango Oil & Gas)

http://www.gurufocus.com/news/107859/mark-sellers-contango-investment–intelligent-investing-or-the-act-of-a-relatively-inexperienced-investor-

What can you learn from his saga?

Searching For Special Situations; The Petro-Dollar

nq140620

 The market, like the Lord helps those who help themselves. Unlike the Lord, the market does not forgive those who know not what they do. –Warren Buffett

A business that must deal with fast-moving technology is not going to lend itself to reliable evaluation if its long-term economics. Did we foresee thirty years ago what would transpire in the television-manufacturing or computer industries? Of course not. Why, then, should Charlie (Munger) and I now think we can predict the future of other rapidly-evolving businesses? We will stick instead with the easy cases. Why search for a needle buried in a haystack when one is sitting in plain sight.

SPECIAL SITUATION WORKSHOP PRESENTATION

Zack-Buckley-The-Road-Less-Traveled-Presentation Motivated students can download the financials of the companies mentioned and check the authors assumptions/work.

Creating Value Through Corporate Restructuring Course-1

 

The Current Situation with Our Petrodollar

http://usawatchdog.com/iraq-about-us-dollar-hyperinflation-trouble-in-2015-gordon-long/

 

In Gold We Trust; A Reader’s Question

Gold   In-Gold-we-Trust-2014-Incrementum

The above 100-page report on gold will provide a good financial history lesson.

A Reader’s Question

I was thinking about how many people think that the sell-side is just wrong about everything and completely untrustworthy.  From what I can tell, they are pretty good with the facts and a really valuable source when you want to learn about a new industry via a primers or initiation reports.  This led me to think that most of the sell-side critics think that they have an analytical edge over the sell-siders.  Maybe even an informational edge (which I think is very unlikely since these analysts cover one industry full-time.) But certainly an edge in judgment or behavior.  This I think is possible if you have a longer-time horizon and no man-with-a-hammer syndrome.

What sort of edge do you think is most achievable over the markets in general for an investor that is dedicated?  I’m thinking about full-time investors.

It seems to me that analytic edges are often overstated.  What are some cases that the sell-side or entire markets are just completely off on their analysis?  Maybe the optimistic analysts during the bubble years?  Is this just misaligned incentives?

I would guess that the market usually mis-weighs the probabilities of what may happen in the future, but that would be more of a misjudgment in my opinion.  (Maybe this is just semantics.)
I’d love to hear your thoughts.

My reply: I agree that analysts can provide great overviews of companies and industries in their initiation reports.  I will read them as a supplement to my own reading of original source documents.  I would not read them for valuation or investment recommendations.  The idea that analysts can predict next quarter’s earnings is absurd. Finding a reasonable range of normalized earnings three years to five years out is what matters, not the next six months of earnings.

Another reason I might try to read analysts reports is not for new ideas, but to see the extent to which the market is already discounting my own views.  Note the universal calls from analysts at Goldman and UBS for gold to trade to $900 or $800 See www.acting-man.com:

“Goldman Sachs lowers gold price target to $1,050” (Bloomberg, Reuters, etc. sometime in January and repeated ad nauseam ever since)

“Moody’s lowers gold price target to $900”  (January)

“Morgan Stanley: Gold price won’t see $1,300 again” (April)

Also, analysts may overlook key values in a company because they fixate on the next six months. For example, the most common way of valuing an exploration and production company is an appraisal of net asset value, based on sum-of-the parts approach. But most appraisals tend to ignore exploration assets which are not going to be drilled within some arbitrary time period, say the next 6 to 12 months. For some companies, much of the value is in assets which are not going to be drilled in the next year.

I think most of an investor’s edge is behavioral. (See http://www.amazon.com/Inefficient-Markets-Introduction-Behavioral-Clarendon/)

Take Coach’s (COH) recent plunge.

Coach

Coh Comments June 2014  and June 23 VL 2014 The company has to increase its investment to rebuild its brand. Wall Street analysts then act like this:

Over the Cliff

Therein lies opportunity or maybe not.   But if the markets didn’t act that way, then markets would not overreact. Markets tend to over-discount a known risk or uncertainty and under-discount an unknown uncertainty.

TREASURE CHEST!

Hashtag

INFLATION

http://www.acting-man.com/?p=31075  Note the ZIRP-induced distortion in the production structure.

production-capital-and-consumer-goods-ann

Fed and Stocks

BB

bPKW

PKW is a buy-back ETF which only chooses companies that will buy back at least 5% of their shares per year.

Treasure Chest 

Lecture Links  Thanks to a generous contribution! Let me know what you learn.

Snowball Author Discusses Buffett; Pierre Lassonde on Royalty Companies

U.S.CivilWar_1

Tim Du ToitFounder & CEO of Eurosharelab.com

Alice Schroeder, author of The Snowball: Warren Buffett and the Business of Life. Looking forward to your questions. (self.investing)

http://www.reddit.com/r/investing/comments/2550vq/hi_im_alice_schroeder_author_of_the_snowball

Royalty Companies: Pierre Lassonde, Chairman of Franco-Nevada. Not cheap but you pay a fair price now for quality.

If you ever wanted the cheapest way to own precious metals and/or copper, then focus on micro-cap companies with good assets and that are NOT producing–got that?

Now if you don’t want to wade through tmx.com then I suggest GLDX.

GLDX May 22

Counter intuitively, this may be a safer investment than GDX or GDXJ.  WHY? Aren’t explorers and pre-production companies risky? Yes, of course, you must diversify, but if gold declines these companies can hibernate by cutting costs sharply–faster than Newmont. And if gold turns, this can double or triple. A 50% loss for a double or triple is what I am assuming.  I could be wrong. Remember you are not buying quality but cheap, cheap assets.   This is NOT a recommendation but an idea for YOU to investigate or forget about.  This is about cheap OPTION value.  Do not do anything before going to school. 

Go to the mining investment university:

http://www.sprottglobal.com/natural-resource-investing/investment-university/mining-investment-college-video-1/

www.goldsilverdata.com then click on mining 101

www.oreninc.com

HAVE A GREAT WEEKEND and MEMORIAL DAY in the U.S.A.

TA vs. FA for Investors; Longleaf; The Outsiders

James-Turk-speech-Zurich

James Turk, a Goldbug, giving a speech last month to a mostly empty auditorium in Zurich last month.

Technical analysis versus value in gold By Alasdair Macleod Posted 16 May 2014

At the outset I should declare an interest. In the 1980s I was a member of the UK’s Society of Technical Analysis and for a while I was the society’s examiner and lecturer on Elliott Wave Theory. My proudest moment as a technician was calling the 1987 crash the night before it happened and a new bull market two months later in early December. Before anyone assumes I have a gift for technical analysis, I hasten to add I have also made many wrong calls using it, so to be so spectacularly right on that occasion was almost certainly down to a large element of luck. I should also mention that the most successful investors I have observed over 40 years are those who recognize value and disdain charts altogether.

Technical analysts assume past prices are a valid basis for predicting what investors will pay tomorrow. The Warren Buffetts of this world act differently: they care not what others think and use their own judgment of value. This means that value investors often buy when the trend is down and sell when the trend is up, the opposite of technically-driven decisions. A bear market ends when value investors overcome the trend.

Technical analysts go with the crowd and give any trend an added spin. This explains the preoccupation with moving averages, bands, oscillators and momentum. Speculators, who used to be independent thinkers, now depend heavily on technical analysis. This is not to deny that many technicians make a reasonable living: the key is to know when the trend ends, and the difficulty in that decision perhaps explains why technical analysts are not on anyone’s rich list.

Value investors like Buffett rely on an assessment of the income that an investment can generate, and the opportunity-cost of owning it. This may explain his well-known views on gold which for all but a small coterie of central and bullion banks does not generate any income. So where does gold, a sterile asset in Buffett’s eyes stand in all this?

Value investors in gold who buy on falling prices are predominately Asian. For Asians the value in gold comes from the continual debasement of national currencies, a factor rarely considered by western investors who measure investment returns in their home currency with no allowance for changes in purchasing power.

The financial system discourages a more realistic approach, not even according physical gold an investment status. Using technical analysis with the false comfort of stop-losses leads to more profits for market-makers. Furthermore, gold’s replacement as money by unstable national currencies makes economic and investment calculation for anything other than the shortest of timescales unreliable or even impossible. But then this point goes over the heads of the trend-followers as well as the fundamental question of value.

Technical analysis is a tool for idle investors unwilling or unable to understand true value. It dominates price formation in western markets and distorts investor behaviour by exaggerating any natural bias towards trends. It is this band-wagon effect that is the root of trend-following’s success, but also its ultimate weakness. A better strategy is to make the effort to value gold properly and then act accordingly.

http://www.goldmoney.com/research/analysis/technical-analysis-versus-value-in-gold

Longleaf Partners Presentation

http://longleafpartners.com/   (click on video link on the right side)

A great book on good capital allocating CEOs, The Outsiders: http://www.amazon.com/The-Outsiders-Unconventional-Radically-Blueprint/