Thursday, June 28, 2007

Visiting Greenwald

There are those who make the pilgrimage to Omaha once a year to soak in the wisdom of Warren and Charlie. Then there are those who make the yearly pilgrimage to Columbia University’s Business School for the Value Investing Seminar taught by Bruce Greenwald. I registered for the course a year ago and finally got to attend the seminar last week. It was well worth the wait.

There were 85 students from all over the world and Greenwald did not disappoint. I have written about Greenwald before when I reviewed his book. It turns out he is working on a revised edition due out some time next year. The new version will delve deeper into valuing growth as a value investor. It will no doubt be a must read.

Greenwald overloaded us with information over the course of two days and not all of it has sunk in yet. The valuation cases on Liz Claiborne (NYSE: LIZ), Apple (Nasdaq: AAPL), Amazon (Nasdaq: AMZN), American Express (NYSE: AXP) and Wal-Mart (NYSE: WMT) were outstanding. Plus, it was great to be in the company of other hard core individual and professional investors who are just as passionate about investing as you are.

Greenwald’s valuation methodology is powerful. It combines the search for unglamorous stocks with a valuation methodology based on asset values and current earnings while being patient and disciplined. The seminar underscored the fact that there is no easy way out of thorough analysis and a complete understanding of what you are investing in. Once you have calculated an intrinsic value and determined that a company has a moat, the heavy lifting begins. Are your valuation assumptions sound? Is that moat defensible? Does the company have a sustainable competitive advantage? How much should you pay for growth?

An important concept is that if nothing is popping up as an opportunity, you better have a default strategy. Cash is fine but probably not optimal. At least buy the index against which you are being measured until you find investments worth pursuing.

By the way, in case you are wondering, he doesn’t recommend Amazon at current prices. AmEx on the other hand is a buy.

Wednesday, June 13, 2007

Lampert and The Prince

We first profiled Eddie Lampert late in 2005. Since then, Sears Holdings (NYSE: SHLD) has returned approximately 35%. Our thesis on this company and Mr. Lampert has not changed. Meanwhile, others are jumping on the bandwagon. Most recently on June 1st, Morningstar (Nasdaq: MORN), which by the way is a holding in the Model Portfolio, raised its fair value estimate from $150 to $240. Not as exciting was an increase in price target from $195 to $200 by Goldman Sachs earlier today - we can thank strong cash flow generation and valuation updates for that generosity. We highly encourage you to read Mr. Lampert's Chairman Messages to get a sense of his approach to operating a business and to making investments. You are in good hands. Here is what he did with some of the cash Sears generaed in 2006:
  • $816 million used for share repurchases (we repurchased over 6 million shares in the year at an average price of about $133 per share);
  • $474 million used for capital expenditure reinvestments in our businesses;
  • $318 million contributed to fund our legacy pension obligations;
  • $282 million used to purchase an additional interest in Sears Canada. Our ownership level is now 70%, up from 54% last year; and
  • $250 million used for net debt reductions as our domestic debt balance declined to $3.0 billion (or $2.3 billion excluding capital lease obligations).
Mr. Lampert generated some other headlines worth mentioning. In May, SEC filings revealed that his hedge fund vehicle, ESL Investments, had amassed an $800 million stake in Chuck Prince's Citigroup (NYSE: C). It appears he built his stake through last September and bought more during the first three months of 2007. Overall, we estimate his average cost at close to $50. We have spoken positively about Citi in the past. My brother and I have been longtime shareholders. With Lampert on-board and a 4% yield, we are happy to continue to hold.