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Steven Wood was one of three finalists in the first Value Investing Challenge in 2012, which had more than 110 submissions that were judged by a panel of top money managers. Here's an update on his thesis on Fiat.

IN THIS ISSUE

Introducing a New Challenge for Value Investor
By Value Investing Challenge
The Unknown Asset Manager You Need to Know
By Alex Rubalcava, Rubalcava Capital Management
The Joy of Fishing Where Others Are Not – Tw
By Tim Eriksen, Eriksen Capital Management
Book Excerpt: The Investment Checklist
By Michael Shearn
Book Excerpt: The Little Book of Hedge Fund
By Anthony Scaramucci
These Five Stocks Could Be Value Opportunities
By Scott Rubin, Benzinga Staff Writer

FINANCIAL AND BUSINESS VIDEOS

THIS MONTH'S ISSUE

The Joy of Fishing Where Others Are Not – Two Small Cap Bargains
By Tim Eriksen, Eriksen Capital Management

The goal of every enterprising investor is to achieve attractive absolute returns and to outperform a passive index approach over time. The best way to achieve that is to focus on the least efficient segments of the stock universe. As Seth Klarman wrote in Margin of Safety, “ample investment opportunities may exist in the securities that are excluded from consideration by most institutional investors. Picking through the crumbs left by the investment elephants can be rewarding.” In other words, we should fish where others are not.

That is the basis of how we manage money. We spend our time looking at the most ignored segments of the market - companies with market capitalizations of less than $200 million, spin offs, misunderstood mid and large caps, stocks trading under $5 per share, and unlisted companies. Two attractively priced unlisted companies that we have been adding to recently are Carter Bank & Trust (CARE – OTC BB) and Pardee Resources (PDER – OTC).

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Showing comments 1 to 10 of 18 | Next | Last
Comment
Tue July 31, 2012, 07:36:59
Thanks for your reply.
Regardless of a 'sum of the parts' or 'fcf to ev' perspective, this stock seems to be an outstanding LT investment.

I have received 3 years of annual reports from the company and noted that in 2009, 2010 and 2011 the company has been buying 14 188 (70% of total volume, avg price 175.68), 3741 (18.75% of total volume, avg price 173.48) and 4518 (14.3% of total volume, avg price 264.66) respectively. Do you have an indication of how much stock they have been buying the last decade and as to what their stock-buy back policy is? Is it simply to offset any diluting effect from the issuance of stock to employees? Or was the big buy-back in 2009 merely to prevent the stock from falling and does the management counter-act markets to minimise volatility (and the inconvenience that causes for its employees who together are a major shareholder of the company)?

Should you have a link to your comparison on Keweenaw vs Pardee, I would be very happy to receive it.

Good luck with your investments.
teriksen
Comment
Sat July 21, 2012, 13:55:59
I understand. I actually wrote a comparison article of Keweenaw and Pardee for Walker's Manual Newsletter back in 2005. Pardee has better timber assets and is better managed in my opinion. If KEWL didn't do the appraisals I think it would sell at a fraction of its current price based on earnings. It trades at 130x times versus 7x for PDER. That is hugely important in that PDER compounds much faster. Anyways, I am sure you can try and find comps to calculate what you are trying to do. Good luck.
Comment
Sat July 21, 2012, 06:04:16
That is my point exactly; the 100m valuation cannot be derived from an income approach by discounting the 3-4m cash flows. The market price for this land however, might still be 100m+, regardless of the cash flows associated with it.

Another company which hold a lot of land (and timber), Keewenaw has had a third-party appraisal of all its land and timber assets, and concluded that the value of its land assets using comparable transactions (market approach) resulted in a higher value than when using a discounted cash flow model (income approach).

If all land assets would be held for an infinite period of time, it does of course not make sense to use the market approach.
I am however interested in how much the ACTUAL real value of the land assets are, only to evaluate whether it would be more shareholder friendly to sell these assets and return funds to shareholders. The only approach that would make sense for this, would be the market value approach.


* 2010 annual report, http://www.keweenaw.com/pdffiles/2010-annual.pdf
They value their land & timber at 128.85m and report to have 153k acres of productive timberland. (=$842 per acre, timber included)
Comment
Sat July 21, 2012, 04:03:08
Thanks for your reply.

I understand that earnings, and more specifically FCFs, are in the end, all that matter if you try to value to company from an owners perspective.

However, within that same perspective, a 3-4m gross profit would result in too low of a yield if the true value of its timber land were to be 100m+ (and that's still only $512/acre), and it would be more shareholder-friendly to sell these assets and give these funds back to shareholders.

Knowing the real book value would also change the risk profile of this investment, and would help to assess the possibility of a catalyst in the form of a take-over.

Do you have any idea as to how high this book value growth over the last ten years would have been if gains related to the disposal of asset are being excluded?
teriksen
Comment
Fri July 20, 2012, 17:19:23
That is my point. People who, for example, place a theoretical $100 million value on timberland based on a per acre valuation when it only generates $3-4 million in gross proceeds are IMO incorrect in their thinking. Sure some endowment could see timber as a good investment at 3% per year plus inflation protection, but that is the extreme high end valuation. Most analysts fail to think through that the timber cannot and never will be harvested all in one year. The trees may increase in size 3% per year but you have to discount the yearly cash proceeds such that the valuation should be reasonable based on the cash flow stream.

The land does not just relate to timber. It is part of access to coal which is on the land, and natural gas (in some areas). As West Virginia develops, they will sell small parcels. They do have a Real Estate division (Timber & Surface). I also would not factor into the analysis any possibility of a takeover or sale. Multiple families have owned the stock for generations. I would be surprised if that changes.

What gains related to the disposal of assets?
Comment
Fri July 20, 2012, 15:49:30
Thanks for your reply.

I understand that earnings, and more specifically FCFs, are in the end, all that matter if you try to value to company from an owners perspective.

However, within that same perspective, a 3-4m gross profit would result in too low of a yield if the true value of its timber land were to be 100m+ (and that's still only $512/acre), and it would be more shareholder-friendly to sell these assets and give these funds back to shareholders.

Knowing the real book value would also change the risk profile of this investment, and would help to assess the possibility of a catalyst in the form of a take-over.

Do you have any idea as to how high this book value growth over the last ten years would have been if gains related to the disposal of asset are being excluded?
teriksen
Comment
Fri July 20, 2012, 14:28:58
I think I understand your question, I just don't analyze it that way. The reason is that I think it is better to use the earnings power of the assets rather than a theoretical value of the assets based on value per acre times number of acres. The per acre method is subject to ridiculously high results, similar to what people have come up with regarding St. Joe's. So I have never spent the time to try and calculate it.

I take your comment at the end to infer that the low cost for the land is why they can present such a high ROE without leverage. If I look at ten years ago, in 2001 they had a cost basis for Property & Equipment of $31 million and net book value of $22.5 million. Today those figures are $130.2 million and $90.9 million. Meaning they have grown through acquisition as well. They have a very impressive track record in that regard. So their high ROE, while benefiting from purchases years ago, it is mostly based on wise capital decisions in the last ten years.
Comment
Thu July 19, 2012, 11:23:52
Sorry for the confusion, my question below was indeed about the book value of PDR. What I meant to ask was; how much do you think its asset value should be adjusted upward to reflect the true market value of its assets?
I see that they have about 195k acres of land, and the total value of its land is being stated at cost at 27.24m, which equals to about $140 per acre. Obviously, this is below fair market value, but I can't find how much exactly. (As this would be the price of an acre of land without the value of the timber on it, as that is already being recorded in the net asset value of the timber (about 10m)).
This would also explain why they can present such a high ROE, without any financial leverage.
teriksen
Comment
Wed July 18, 2012, 14:37:34
The internet somewhat impacted the viability of the printed manual format. Ultimately it was the owners decision. He has toyed with an internet based model in the past. It sure would be nice.

Two thoughts on price movement. If the company is creating value, the share price will usually not lag that too far. If by chance it does lag, it creates a great long-term opportunity. While you wait, both pay decent dividends (3-4%). While the price could be flat five years from now, both will have grown book value by 30 to 40%, making them an even bigger bargain.
Second, I don't place much weight on past price movement. MSFT is a better deal now after ten years of flat to declining stock price than it was a decade or so ago. Valuation matters. Low price plus growing earnings will give a good result over time.
With unlisted stocks I demand a greater discount to intrinsic value in part because I have to be more patient about the timing of that realization.
Comment
Wed July 18, 2012, 13:36:11
Tim, thank you again for the detailed response. One last thing....how much do the share prices in these stocks move? Looking back over the past 4 years, for CARE for example, the performance has been relatively lackluster. I suppose what I'm trying to say is, won't it take a really long time for the catalyst (if one exists) in these OTC stocks to be realized? Especially with such low liquidity and being so off the radar, there's a good chance the share prices can remain dominant for very long periods of time, no?

Thanks for the tip about the Walker's Manual. I had heard about it, and the last version I can find on Amazon is 2000. Maybe I'll try searching somewhere else. Any idea why the firm stopped publishing the list?
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