By Carla Fried
If you weren't investing in the 1980s through the mid 1990s the name Michael Price might not ring any bells. That's a shame. Price ran one of the most consistently successful retail value fund shops -- Mutual Series -- before cashing out in a $600 million sale to Franklin Resources in 1996. The activist ways of Dan Loeb and David Einhorn are downright dainty compared to Price's aggressive attacks when he smelled blood (a too-low stock price) in the street.
The guy was tagged "the scariest S.O.B. on Wall Street" on a Fortune magazine cover.
Scary successful too. In the twenty years through 1995 Price's Mutual Shares fund had an annualized return of 20%, compared to 15.6% for the S&P 500. Price now runs what is a family office to manage his private fortune. If you've got a value bent, following the 13-F portfolio filings for MFP Investors is time well spent. As is watching a 40-minute talk he recently gave that is a pretty sweet master class in his investment approach, which we noted on valuewalk.com.
As a deep value guy Price casts a skeptical eye at some of the investing memes of the day. Price says the notion that cash is trash given negative real returns misses the point. "I couldn't care less about getting zero on my cash. That's ammunition." Price says he typically keeps a cash cushion of up to 5% or so.
And he's no fan of relativity discussions. "A 12 PE in a market at 15 has nothing to do with intrinsic value." Price's shorthand definition of intrinsic value during his chat at the London Value Investors conference: What a company is worth if it is sold. His goal is to identify companies selling at ½ to 2/3 of intrinsic value.
That tends to come from scouring the lists of companies hitting new lows, not high. "We wait for bad news," Price explained. "Corporate change is very important; look for change." That can be in the form of leadership change, proxy battles, and operational setbacks that send a stock reeling.
He offered up Hospira (NYSE:HSP) as an example of what floats his boat. The leading global manufacturer of generic injectable drugs was flying high in 2010 when it was hit with the first of a string of FDA warnings about problematic quality standards at some of the firm's manufacturing plants. From the middle of 2011 through the end of the year the slow drip of bad news took its toll, sending the stock from $54 to $28 a share at the end of the year, as seen in a stock chart.
HSP data by YCharts
That's when Price got interested. Watching the market cap of the stock sink by $3.5 billion he stepped back and surmised fixing the problems would cost less than that $3.5 billion haircut. He bought some of the stock in the fourth quarter of 2011.
Then this past February, when Hospira was hit with another round of FDA warnings -- this time following inspection of a plant in India -- the stock took another dive, from $35 to $29. Price used that as an opportunity to boost his stake by more than 60%. As he explained to the London crowd, a value investor has "a natural propensity to add to stocks as they get cheaper." Based on the company's guidance that it is on pace to clean up the operational messes, Price thinks the stock can make it back to $45 a share within a year.
As this earnings per share chart shows, the clean up cost has indeed taken a pound of flesh from earnings. But if you're with Price that the cost is transitory not permanent, you look at the fact that revenues continue to grow. Get past the temporary hit to earnings and there's room for profit growth to resume.
HSP EPS Diluted TTM data by YCharts
As you'd expect from one of the most successful corporate agitators, Price also made a pitch for the transformative power of proxy fights. "A proxy fight illuminates the beginning of change," Price explained. Sometimes that means an immediate nod to the demands/wishes of the agitator. Other times it sets in motion a slower tectonic internal shift that has the same impact value managers want: change.
When Hess (NYSE:HES) recently found itself in the crosshairs of a proxy fight, Price loaded up on the stock, taking a 5% position in the first quarter of the year. That's the upper bound of what he typically devotes to the top 5-10 high-conviction ideas in his portfolio. Price described the Hess challenge as a "call to stop spending money in foolish ways." At the time of the London talk Hess had yet to announce its response, but Price said he expected the company would accede to the pressure and revamp its board. (It did.) Price said if management follows through on the change, "the stock gets to $80-$85."
HES data by YCharts
To be clear, he's not suggesting the pop -- if it comes -- will materialize in a quarter or two. He'll be just fine waiting for a slow climb back to where the growth guys start getting interested. As Price simply put it, his approach is to buy what the growth-focused are selling and then eventually sell it back to them once it climbs back closer to its intrinsic value.
Another high-conviction Price holding worth watching is Intel (NASDAQ:INTC). Price dove into the stock in late 2011 and the first quarter of 2012 when the chip-maker was getting creamed for missing the mobility sea-change. He continued to build up the position to 5% through the third quarter of 2012. Since then he's only modestly added to the positions. The stock continued to slide throughout the second half of 2012, year, at one point falling from $27 a share to below $20.
But so far this year, Intel's 20%-plus price gain outpaces the 14% rise for the S&P 500, perhaps signaling Intel is on the verge of a pivot.
If so, new investors can essentially get in at a price today that is no higher than when Price began building his position in late 2011, based on his investment analysis. The dividend yield is a nice kicker. Given aggressive dividend hikes without commensurate price growth, Intel's current 3.6% yield is nearly 1.5 percentage points better than a 10-year Treasury.