Tag Archives: Pzena

Case Study on Dell

Least Resisitance

Dell Case Study

Stop the presses! Before reading Longleaf’s valuation of Dell (linked below), go to the 2009 and 2013 Value-lines and value Dell with a back of the envelope calculation using a post-tax free cash flow yield as one signpost.

What do you think Dell is worth—about?  What do you think of the valuations mentioned in this article? Does growth have value? Why or why not?

Do you have any criticisms?  What in Michael Dell’s prior history makes you (perhaps) not surprised by his current actions? Would you have factored that into your pre-announcement valuation?  How?  Should Dell offer to do a Tender Offer for the shareholders?  If the price callapsed to $9 or $10 based on the deal being pulled what would you do?

Case Study Materials: Dell_VL_2009     Dell_VL_2013   Dell_Valuation_and_Tender_Offer_Case Study

Longleaf Protests: Dell-Board-Letter_by_Longleaf

DELL_Morn: Background on Dell

I will put in my two cents next week in the comments section.  Email prizes awarded.

Update Feb. 11, 2013: Corporate BS: http://covestreetcapital.com/Blog/?p=828


Common Sense Words about America (not political)

 See what independent thinking, love of history and knowledge plus GUTS can do…..

The Actual Speech:

Readings and Batten Down the Hatches

Pzena   Commentary 3Q12 (1)

Regime Uncertainty: http://mises.org/daily/6245/Malinvestment-and-Regime-Uncertainty coupled with money growth http://scottgrannis.blogspot.com/2012/10/money-demand-continues-to-rise.html

Update from Stu Ostro, Senior Meteorologist, The Weather Channel

– With Sandy having already brought severe impacts to the Caribbean Islands and a portion of the Bahamas, and severe erosion to some beaches on the east coast of Florida, it is now poised to strike the northeast United States with a combination of track, size, structure and strength that is unprecedented in the known historical record there.

– Already, there are ominous signs: trees down in eastern North Carolina on Saturday, the first of countless that will be blown over or uprooted along the storm’s path; and coastal flooding in Florida, North Carolina and Virginia Saturday and Sunday, these impacts occurring despite the center of circulation being so far offshore, an indication of Sandy’s exceptional size and potency. Sustained tropical storm force winds were already measured at a buoy just offshore of New York City Sunday evening, 24 hours before the closest approach of the center.
– A meteorologically mind-boggling combination of ingredients is coming together: one of the largest expanses of tropical storm (gale) force winds on record with a tropical or subtropical cyclone in the Atlantic or for that matter anywhere else in the world; a track of the center making a sharp left turn in direction of movement toward New Jersey in a way that is unprecedented in the historical database, as it gets blocked from moving out to sea by a pattern that includes an exceptionally strong ridge of high pressure aloft near Greenland; a “warm-core” tropical cyclone embedded within a larger, nor’easter-like circulation; and moisture from the tropics and cold air from the Arctic combining to produce very heavy snow in interior high elevations. This is an extraordinary situation, and I am not prone to hyperbole.

– That gigantic size is a crucially important aspect of this storm. The massive breadth of its strong winds will produce a much wider scope of impacts than if it were a tiny system, and some of them will extend very far inland. A cyclone with the same maximum sustained velocities (borderline tropical storm / hurricane) but with a very small diameter of tropical storm / gale force winds would not present nearly the same level of threat or expected effects. Unfortunately, that’s not the case. This one’s size, threat, and expected impacts are immense.
– Those continue to be: very powerful, gusty winds with widespread tree damage and an extreme amount and duration of power outages; major coastal flooding from storm surge along with large battering waves on top of that and severe beach erosion; flooding from heavy rainfall; and heavy snow accumulations in the central Appalachians where a blizzard warning has been issued for some locations due to the combination of snow and wind. With strong winds blowing across the Great Lakes and pushing the water onshore, there are even lakeshore flood warnings in effect as far west as Chicago.

– Sandy is so large that there is even a tropical storm warning in effect in Bermuda, and the Bermuda Weather Service is forecasting wave heights outside the reef as high as 25′.

– There is a serious danger to mariners from a humongous area of high seas which in some areas will include waves of colossal height. Wave forecast models are predicting significant wave heights up to 50+ feet, and that is the average of the top 1/3, meaning that there will be individual waves that are even higher. A buoy between North Carolina and Bermuda measured significant wave heights of ~40′ Sunday evening. The Perfect Storm, originally known as the Halloween Storm because of the time of year when it occurred, peaking in 1991 on the same dates (October 28-30) as Sandy, became a part of popular culture because of the tragedy at sea. This one has some of the same meteorological characteristics and ingredients coming together, but in an even more extreme way, and slamming more directly onshore and then much farther inland and thus having a far greater scope and variety of impact.

Goodwill Hunting: Being in the Storm


Why I don’t work for the Government



Fairholme: Keep Calm and Carry on; Pzena: Value Abounds in Large-Caps

The news speaks to both bull and bear market–but in a counterintuitive way. Here is a definition from Harold Ehrlich, who was with Shearson at the time and later became president and then chairman of Bernstein-Macaulay: “A bull market is when stocks don’t go down on bad news. A bear market is when stocks don’t go up on good news.”

Long cycle bottoms can be particularly hard to fathom. One famous story is that in the year 1938, when the stock market was still recovering from the crash of 1929 and had lurched along for years and years and years, essentially doing nothing, only three members of the graduating class of Harvard Business School went to work on Wall Street.

To bring this into a contemporary context (2012), my friend Dean LeBaron has said publicly, referring to the more than 100,000 members of the Financial Analysts Federation: “That’s too many analysts; by the time this is structural bar market is over, there will be only 50,000.” History thus suggest that by the time this structural bear market is all over, it may not be socially acceptable to be seeking a career on Wall Street. (Deemer on Technical Analysis by Walter Deemer)

Second Quarter (June 2012) Letters from Investors

Fairholme Stays the Course July 2012

Pzena’s 2nd Qtr. 2012 Letter:Pzena 2Q 2012

Editor: In my opinion, the edge you can gain in large-caps is in the behavioral area based on what embedded expectations are in the current market price rather than expecting an informati0nal edge. What gain can you have in understanding Coke’s operations in 150 different countries and several divisions rather than determining if you believe the market is too pessimistic or optimistic based on current prices? 

Note the differences in expectations between the price of Coke in 1998 vs. 2009 or 2012. KO_VL.

Muddy Waters Releases a New Short Recommendation

A thorough discussion of the risks in Chinese stocks (investing outside your circle of competence):MW_EDU_071812_Sell Short

More videos/Readings of interest

Use your gifts: Video http://www.foxbusiness.com/personal-finance/2012/07/18/all-have-gifts-but-question-is-are-using-them/?link=mktw

A research firm for assessing your aptitudes (natural gifts) is http://www.jocrf.org/

Herd mentality video: http://www.youtube.com/watch?v=xU0cq3UvLaM

Barton Biggs (R.I.P.): http://www.thestreet.com/story/11618931/1/kass-rest-in-peace-barton-biggs.html

Chart Book: http://blog.haysadvisory.com/ (click on JP Morgan link for charts)


Melvin: The Art of Being Cheap

By Tim Melvin07/14/12 – 06:00 AM EDT  Real Money

Last week, a reader chided me for having an overly simplistic approach to investing. He pointed out, quite correctly, that the old Wall Street mantra of buying and holding quality stocks has not worked for investors for nearly a decade. Those who took it on faith have taken dramatic hits to their net worth.

My approach is not buy-and-hold as traditionally defined. I do not blindly buy or sell anything. I really do try to exercise the discipline to buy what is cheap and sell what is dear. I focus on valuation first — always. I use tangible book value as my chief measure of value but I also calculate intrinsic value and liquidation value for certain situations. I also do comps on takeover and merger situations by industry group to keep a constant measure of what rationale buyers are paying for companies similar to those I own. When a stock I own trades at a significant premium to its underlying value, I sell it regardless of market conditions. If the fundamentals change materially for the worse, I sell the stock. My approach is to buy what is cheap and sell what is expensive.

While it is a very simplistic strategy, that does not mean it is easy. Buying truly cheap stocks generally means you will be underinvested until the market undergoes a serious decline. You will be shopping in segments of the market that everyone hates and that attract negative commentary in the media. Your ideas will not be popular and will often be met with stunned disbelief. During those annual 10% declines and the meltdowns that occur every three years or so, your list of cheap stocks will be long and opportunities will be plentiful.

When everyone loves a stock and your nephew with the 600 SAT scores is racking up triple-digit returns by day trading, your stocks will be overvalued and there will no new opportunities. You will be selling stocks and holding a lot of cash. Even the most disciplined of us will start questioning our process when the hot stocks are jumping several points a day. I have seen the same cycle many times over my career. It always ends the same way: After a significant inventory creation event, stocks become cheap enough that I am a busy buyer once again, and the nephew goes back to waiting tables.

So, you will find yourself completely out of step with conventional wisdom. Buying a stock such as Kelly Services (KELYA) right now when the economic outlook is somewhat dire takes backbone and discipline. You have to ignore the market and focus on the fact that it is cheap. Being underinvested when the talking heads are screaming “Buy!” is not always easy. Neither is reading piles of 10-Qs and 10-Ks to find quality cheap stocks with the potential to recover. Running endless credit tests on companies that appear cheap is not exactly fun for most of us.

Buying the few stocks that are “too cheap not to own” until the stock market stages a sharp decline to create inventory requires discipline and patience. Holding stocks that are cheap when all the news appears negative requires mental toughness and belief in your approach — try being long natural gas stocks and small banks over the past year. The news flow could have you questioning your sanity if you did hold to your belief in asset-based investing.

During my lifetime, owning “too cheap not to own” stocks and waiting for inventory creation events has been exceptionally profitable for those few investors who practice the art of being an owner of assets purchased on the cheap.

At the time of publication, Melvin was long KELYA, although positions may change at any time.Tim Melvin is a writer from Stevensville, Maryland, who spent 20 years a stockbroker, the last 15 as a Vice President of Investments with a regional firm in the Mid Atlantic area.

Why Smart Money Gets it Wrong in Financial Stocks (Pzena)

“If it weren’t for bad luck, I’d have no luck at all.” –Stevie Ray Vaughan

Ok, so my mother never loved me. I reveled in schadenfreude as I watched the big money go down in flames buying financial fiascos during 2008/09.  My twisted ego might be comforted but what can we learn for the future? Try to think through what makes financial stocks difficult to value and especially risky in a credit crisis.  We will discuss under the heading, lesson, near the end of this post.

Richard Pzena, called one of the smartest men on Wall Street, nearly sank his money management firm (PZN) by buying FRE, FNM and Citigroup (“C”) in early 2008. See prior post: http://csinvesting.org/2011/11/15/pzena-pzn-disappointment-despair-and-tax-loss-selling/

Below is an inteview in early 2008 with Richard Pzena. Mr. Pzena gives his reasons for owning Freddie Mac (FRE), Fannie Mae (FNM) and Citigroup (C)


A Citi revival?

Earlier this week, I talked with Richard Pzena, one of the deans of the value camp. His company, Pzena Investment Management (PZN, news, msgs),
which I mentioned last week as a buy on big dips, runs $25.5 billion in value
money for clients worldwide, including that once-sterling John Hancock fund
that’s now in the tank. He was defiant, contending that he expects to double
his money on such road kill as Citigroup, Fannie Mae, and Freddie Mac over the next three years. I think he’s dreaming, but he does manage $25.49 billion more than I do, so perhaps you should lend him an ear.

Pzena’s main point is that though losses in subprime mortgages have generated the most headlines in the sector, few banks actually have much exposure to them. He sees Citigroup, for instance, as a global consumer-credit business that generates most of its money by issuing plastic overseas. The way he sees it, virtually every adult has a credit card while few have subprime loans, so what’s the problem?

To be sure, Citigroup has had monumental write-downs on its mortgage portfolios and gotten stuck with illiquid structured investment vehicles on its books, and credit card defaults will lead to more losses. But before too much longer new management will have taken out the garbage, and the remainder of the company will have a chance to shine again.

“We view it as a great global franchise that’s inefficiently priced,” Pzena says. “We don’t think the real value of the firm has come down at all, even though it’s
lost over $125 billion in market cap.”

Pzena says he doesn’t know how long he will have to wait to be right — and if he did know, the stock wouldn’t be cheap. His analyst team has torn the company’s financials apart, stress-tested them to the most outrageous negative cases and sees its business getting back on track in every scenario.  (Editor: I doubt even Citigroup’s CFO knew what financial risks the bank’s derviatives traders were taking much less the traders.)

The US dollar could turn out to be the big comeback surprise of the year. One reason: As foreign investors put big money into US companies, those foreign countries are less likely to dump the dollar, MSN Money’s Jim Jubak says.

“The reason it’s so depressed is that no one really knows how bad it will be, but we think that sometime in 2008 there will be clarity and we’ll start to see buyers come back,” he says. “They might have to cut their dividend — which would
not be so terrible — to shore up their capital base, but they’re not going out
of business. They will weather this storm.”

The manager says his analysts have put their money where their spreadsheets are — buying more Fannie, Freddie and Citi for their personal accounts than at any time in the past five years. “They believe they have properly analyzed these franchises and should buy even though they don’t know when the turn is
coming,” Pzena says. “There’s no dissension about this position within the firm. Buying low is a strategy that has never failed to work.”

No competition left for Fannie and Freddie

Catching falling knives is a strategy that has never failed to leave your hand in shreds, either. But Pzena insists he has history on his side. Financial stocks got
extremely cheap in the year before the past five recessions, he says, then
began to outperform the market about three months after the recessions’
official start dates, as determined later by the National Bureau of Economic

If the current recession began in the fourth quarter, as many independent experts believe, then it could be time for Citi, Fannie and Freddie to start bucking up. The idea is that when people fear the unknown, they sell. But in the reverso-world logic of Wall Street, once a recession becomes evident, investors begin anticipating a recovery.

Editor of Csinvesting: I hope you caught the flaw in Pzena’s thinking. Buying “low” is a false premise.  A plunging price does not equal value though it may be a place to look for it.

Another famous investor, Jim Rogers, saw Pzena’s picks as over-leveraged death traps. http://articles.moneycentral.msn.com/Investing/SuperModels/StockMarketWinterIsMovingIn.aspx?page=1

Rogers, who is equally negative on stocks, was one of the earliest proponents of investing in China and in metals, long before their surge of the past few years. He achieved notoriety three years ago by warning that shares of Fannie Mae  would get crushed once the market realized that it was “unbelievably over-leveraged” and would sink under the weight of its out-of-control derivatives positions. At the time, the government-sponsored mortgage-lending titan was on top of its game, and his warning drew derision. But no one’s mocking him now that Fannie shares have lost 60% of their value.

“There was clearly outright fraud, as they were reporting earnings for years when they really had no idea whether they were making money — they were just making stuff up,” he says. “People are still in denial about Fannie Mae’s value. They took every phony mortgage loan ever made by banks, losing billions, and now the government wants them to take on even more bad loans to bail people out? They should just let it go bankrupt!”

Rogers, who is short Fannie Mae shares, is also short Citigroup (C, news, msgs)
and highly negative on its prospects, too.

“Technically, it’s bankrupt, with gigantic off-balance-sheet derivatives positions whose value it cannot possibly know,” he says. Though he believes some large
banks can and will go under in the next year or two under the weight of
billions of dollars worth of bad loans and blown-up derivatives positions, he
doubts the government will allow Citi or Fannie to fail. “They’ll nationalize them in some way. It’s wrong, but they can’t let the two largest lenders in the nation go down.”

The fund manager, who has traveled extensively in emerging markets and lives part of the year in Asia, says sovereign wealth funds in Abu Dhabi and Singapore that recently made large investments in Citigroup and UBS AG are likely to lose a lot of money on their ploys. “They’re making a big mistake; these banks have many more problems still ahead. They should wait until these companies are really on the ropes a few years from now . . . and trading at $5 a share.”

But aren’t they supposed to be the smart money? Maybe not. “I know these people, and they have never given me the impression that they’re smarter than anyone else,” Rogers says. “They have gigantic amounts of money, but they’ve made a bad judgment in these cases.”

US economic problems contagious

As for the rest of the market, well, Rogers doesn’t see equities to buy right now, as he forecasts that a U.S. recession — already in progress, in his view — will choke off earnings growth at companies worldwide. He calls the emerging markets “overexploited” and likes only a few commodities, such as farm goods
and energy.

“The number of acres devoted to wheat farming is at a 30-year low while inventories of food worldwide are at their lowest since 1972,” Rogers says. “With so much corn going into our tanks as ethanol, a growing middle class worldwide eating more corn-fed meat and wearing more cotton than ever, agriculture has a great future, if you ask me, and that’s why I’m buying.”

Editor: Jim Rogers has an understanding of Austrian Business Cycle Theory. http://jimrogersblog.com/


An economic model will characterize a company, any company, except financial groups, with three endogenous and two exogenous variables: an amount of invested capital, a real growth rate and a real cash return associated with this capital, complemented by the cost of capital and a market price.  Linking these endogenous variables with the two exogenous ones is what we call ‘investment analysis’.

Now you see the problem with analyzing financial companies. What IS their invested capital? How do you define economic capital for banks, insurance companies and mutual fund companies? Financial groups carry large amounts of what we could call ‘third party capital’–in other words, capital that does not belong to shareholders, and is not provided by lenders.  These are the assets deposited by the clients of these companies; bank deposits, for instance. Due to the complexity of these groups, accurately desegregating only  the capital financing the company’s own assets is nearly impossible, especially since most of these assets are ‘marked to market’, or revalued every day at their market value.

A large international bank like Citigroup may have thousands of derivatives contracts making the true economic picture of its balance sheet impossible to determine.  Furthermore, there is an analytical issue. Segregating capital and identifying cash flow for financial groups is difficult because, fundamentally, these businesses do not produce profits in the same way as non-financial groups. The latter simply add some value, via a proprietary process, to a certain amount of operating costs, and sell units (goods and services) of the total cost to its clients.

The former capture capital flows, often thanks to financial leverage partly from debt, partly from ‘third-party capital’, transform them and clip a remuneration for this process. Even if it were possible to identify cash flows and economic capital for financial groups, the difference in balance sheet leverage would demand the calculation of an expected return (cost of capital) specific to them.

Financial firms are inherently more difficult to value and certainly subject to financing risk.  Perhaps avoiding financial firms might be one strategy for improving returns. Please be aware of the unique investment risks financial firms contain and allow for them in your valuations and portfolio management. Richard Pzena’s clients suffered permanent loss of capital as shown by the two charts above.


Pzena (PZN) Disappointment, Despair and Tax Loss Selling

A reader has asked about search strategies and I plan to do a more indepth post on search strategies including screening techniques.

Some people think of what Thanksgiving may bring while I look for tax loss selling in small, obscure, and deeply disappointing stocks.

Here is one company that might fit the bill:

To understand the depth of the disappointment we might compare PZN to other small caps:

I have had enough

When I go to www.pzena.com and look at their recent press release I see $13.7 million in managed assets so a low-end valuation of assets under management (AUM) might be 2% or (2% of 13.7 billion or $274 million divided by 65 million shares (both A & B) or $4.23. Enterprise value is about $200 million after subtracting $38 million in cash and EBITDA is around $45 million (there isn’t much capex with human capital). If assets stabilize, then perhaps asset values are above enterprise value–I might have a margin of safety.

Mr. Pzena almost blew up his firm with investments in Citigroup (“C”) during the 2008/2009 crisis. His firm’s equity performance since then has been good but he has to maintain good performance to turn his three and five-year performance record to top quintile performance. Go here: www.pzena.com

Ok, so that is a reason I would then go to the 10-K and dig deeper; there is enough here to make it worth my time to spend another hour or two. Please, this is NOT an investment recommendation since there may not be enough of a cushion to have a comfortable margin of safety. Also, there may be more attractive alternative investments than this one.

The main point is to look for disappointment. Now I have no proof that there is tax loss selling but with the company underperforming the Russell 2000 for several years and the recent decline during this tax loss window (Oct. – Dec.), I am making a supposition that some investors are making a tax decision rather than an investment decision.

Let’s revisit this in 6 months to see whether my thesis has more substance.