Give 'em Some Water

After a certain point, which comes from reading the business magazines, newspapers, listening to conference calls, and watching Bloomberg or CNBC you start to hear some of the same phrases.

For example, you will never get through a conference call without some analyst asking the company management, "So just to put some meat on the skeleton/bones what were the numbers for so and so?" This is probably the most used way of asking a question because so and so analyst has to put a number in his model to smooth out his price projection.

This week, I was watching Bloomberg and another one of the most widely used phrases was used. Gold on Thursday/Friday touched $900 and ounce and one of the commentators came on and said, " Investors were exhausted at the 900 level and couldn't move it past." Let's get a few things straight: First, "they" are not investors, they are short term traders. Second, these people that we are made to believe are exhausted have jobs that are white-collared jobs, they work from 9:30 AM to 4:00 PM, they have a cappuccino machine within walking distance and their work area is air conditioned. Teachers can be exhausted, construction workers are exhausted, I think you get the idea. So give 'em some water and tell 'em to shut up.

I promised some interesting businesses that I am looking at for this weekend, so let's get to it:

PFE- Interesting yield, very non-cyclical, they say that they will revive their product flow. P/E at depressed levels and if you live in Canada, it makes even more sense because of the currency situation.

PETS- I think this is one of the more interesting businesses out there. Certainly a niche market, ROE above 30%, P/E reasonable relative to growth. They are buying back shares from their 20 million dollar charter. I can't stress how much I like this business, people are married to their spouse and pets. This will never become a 50 billion dollar market cap business, but they have somewhat of a monopoly. No debt, 50 million in cash and will continue to add to it. Definitely has a moat.

KMX- Don't really know as much as I should about this company, it is priced at or near the same price as when Berkshire made their investment. I have some friends that work in this industry, but I'm not sure they have a moat and I'm probably wrong about that, but let me ask this question: 10 years ago, could the car salesman foresee Ebay taking business away from them?

CMCSA- I understand how it is relatively undervalued, but I'm not sure about it being undervalued on an absolute basis because there are better options out there for your hard earned money. Mr. Eveillard believe it is a great buy so it is worth looking at. In my city, San Antonio, Time Warner has a 95% market share of the market, I presume Comcast has the same level or near market share in some of their respective markets. There is definitely some moat here and I think once I look at it more closely, I can probably guesstimate the margin of safety.

LM- I like the business, love their open access to their conferences because of the interesting people they bring in. Bill Miller deserves all the respect he receives, Michael Mauboussin is really a brilliant guy because of the time and effort he puts towards his writing. Chip Masons seems like a good guy. I don't know if there is a moat here, probably not, as investors are very short-term based and Bill Miller is witnessing that. Asset Under Management ("AUM") is the most widely used metric for this business, but I think there are some flaws to that because if AUM is decreasing, then well the intrinsic value has to have an AUM discount factor, I would think. Most valuations of these business involve the AUM increasing in future year, I think thats a flaw.

WPL- See LM, they are value investors and is at the lower AUM ratio, but again I'm not sure. More research necessary. On a side note, there have been many Value Investors that have caught the mortgage falling knife, I don't think we should easily discredit their respected abilities and that is what makes investing in WPL and LM so challenging. Again, I'm probably wrong unless I prove otherwise, that's usually how I approach most investments.

LUV- They are great at hedging their jet fuel cost, but is that a moat? Definitely not, even though they have proven they are best in class.

TM- Very consumer friendly, great product, and outstanding management. It was very ballsy of them to build their Tundra headquarters in the heard of Texas (San Antonio) knowing that Texas is a truck state. Still, I don't see as many of their trucks on the road as I thought I would.

USG- What can be said that hasn't been said already? We know who holds it, we might not know the value of the business and put a price on it, but we do know there is value. Very cyclical translates into lumpy earnings which is perfect for Sir Buffett. I know Marty Whitman has a stake here as well. I held a position in the mid-40's, and I sold at the same price shortly after because I wasn't comfortable with the valuation. However, I do know there is a replacement cost much higher than the current price quoted by Mr. Market. I guess time will tell. Definitely some sort of Moat just based on the market share they have.

HBI- Love their products, only two participants in this market, Fruit of the Loom is the other. Users are continuous buyers of their product, commercials are a little flamboyant, not sure about having two guys always giving high-fives and hugs all the time. Those type of commercials work for Victoria's Secret, but that's just cause I'm a guy. It is at the lower end of it's 52-week rang, which is usually where I look for ideas. Definitely a moat and I understand their business: socks, shirts, underwear. Also, Hanes benefits from putting on as many commercials as possible because it is very much a mind-share business.

Coal- no specific ideas here, but I know Mr. Watsa of Fairfax holds ICO and so does Wilbur Ross. You are in good company with those guys. It is commodity based, so moat is dependent on the cost structure and mineral rights. Coal prices have increased by about 25% since mid-august. Viewed negatively by media because of it's pollution. Still, I prefer Nuclear Energy and Uranium, but again I could be wrong.

SHLD- What can I say about one of the greatest capital allocators of my time: Eddie Lampert. Actually, I'm working on this project right now, I figure it will take me about 2 months and plan on having an ambitious 10-post writing on this. Everyone has heard the saying, "Your only as good as you want to be," and I think the same is true for the moat of SHLD, "It's only as wide/good as Eddie wants it to be." I have a lot of faith in Mr. Lampert and think he will prove all the doubters wrong.

FSR- When a person with the last name of Byrne is running the show of any company, it deserves a look. Jack did wonders in his day and now he has two sons running their own show. One at Overstock and the other here at FSR. This is an insurance business, something I am more comfortable investing in and understanding more so because of my job. We know that premium rates are under pressure and how it is a soft market, but did you know FSR trades at book value. Did you also know that Mr. Byrne is a Byrne? Sometimes the fruit doesn't fall far from the tree and sometimes it does, I think it's closer to the tree here.

OSTK- See FSR, except all the insurance business. Not sure if there is a moat here and Mark is as eccentric as it gets, very passionate about his business. The fact that he pursued a career other than insurance makes him the fruit that fell further from the tree, but that's not a bad thing. He is very business savvy and if you invest with him or his business you are guaranteed at least 1 of the more entertaining conference calls each year. Although, Lord of SLM maybe challenging him from here on out.

SNS- A company that I was about to leave out because it is one that I am closer to making a purchase in. I am an investor in WSZL and know Sardar is a better capital allocator than I. Management has taken notes from GM I assume because they are absolutely oblivious to all the disaster they have caused. Either way, something is bound to happen here, what I just said doesn't mean you should sell puts and buy calls. No moat here.

GLRE- This is more of a investment in David Einhorn and his abilities to invest the float a la Berkshire. Although, I think his track record is too short to pass judgment and not comfortable at all with his New Century relations. Still, I think it deserves a look.

PZN- see LM and WPL. Value investor Pzena is regarded by Greenblat as very smart. But, like I said earlier, I'm not sure I understand the AUM type company.

So this concludes a sample list of business that I am monitoring and getting to know better on a daily basis. There are others and I will talk about them maybe next week. Please tell me what you are looking at and please comment on the one's I did. Have a great week and take care.


S.K.


For disclosure purposes, I don't hold any position in any of the named businesses with the exception of WSZL, which I did classify as a position. I reserve the right to purchase any of the businesses mentioned at any time.