Valuable Ideas from the West Coast Value Investing Conference

I recently attended a remarkable gathering here in Southern Cal, the "Value Investing Congress -- West Coast." The organizers billed the event as a place for like-minded individuals to learn from one another. (Indeed, participants shared, learned, discussed and debated!)

I won't have time to cover all of the presenters. So let me focus on the few whose "cheap" stock ideas caused me to think and rethink my own thoughts on "value."

Jeff Bronchick, chief investment officer at Reed, Conner and Birdwell, explained that his company seeks reasonable companies at great prices. To that end, he consistently pressed forward with the question, "What could you buy today that would make you proud in 3 years?"

The answer for Bronchick had a "financial services" flavor. Bronchick reiterated his long case for White Mountain Insurance (WTM). He also pined for Alleghany Insurance Corp (Y), expressing that it trades near book value. He also likes Annaly (NLY), the mortgage real estate investment trust whose earnings nearly doubled in the prior-year quarter.

Yet Bronchick spent the bulk of his presentation "talking up" American International Group (AIG). He maintained that the global insurance giant derives over 1/2 of its profits from overseas operations and that AIG has never been cheaper in the 40 years since it went public.

While everyone else discusses emerging markets from a resource-commodity standpoint, Bronchick pointed out that AIG has one of the most established emerging-market distribution networks for its multifaceted insurance products. One of the world's largest companies is not only capable of weathering its current troubles, Bronchick argues, but also figures to be a powerhouse in emerging markets for decades to come.

For those who like AIG, but wish to diversify a bit, the Dow Jones Insurance Index Fund (IAK) has a 17% weighting in American International Group. (You can read about other ETF ideas in financial services right here.)

Yet not everyone is smitten with "financials." Atticus Lowe and Lance Helfert from West Coast Asset Management made several comments that amounted to describing the sector as a "value trap."

So where did Mr. Lowe and Mr. Helfert see opportunity? They posited that the next great revolution would come from the "Green Revolution."

Their best play, one in which they own 10% of the shares outstanding, is a natural gas company Canadian Superior Energy (SNG). Lowe and Helfert maintain that natural gas prices between $7 and $12, a near certainty in their estimations, serve as a level of support for the company's exploration activity.

(Note than the company literally leaped from $3 to 3.6, a 20% pop, on the very day that Lowe and Helfert were speaking about Canadian Superior. Coincidence? Yes, but intriguing nonetheless.)

Lowe and Helfert speak about the company being a potential "3-to-5 bagger" based on drilling a series of high-impact wells off the shores of Trinidad. The speakers believe that the recent discoveries on 80,000 acres in Trinidad could put the company up in the $11-$15 range.

There are other potential investments in the ETF world that would benefit from a "green revolution." You can review my recent feature, "Green ETFs: Super Volatile or Supercharged."

One of the more intriguing presentations came from author and portfolio manager, Vitaly Katsenelson. His book, Active Value Investing, makes the case that a long trading range market is essentially in the works.

Katsenelson likes a high-end mens clothing retailer Jos A. Bank (JOSB). Wall Street hates it because its management doesn't communicate well with analysts, stoking fears of what the retailer may be hiding. More notably, Jos A. has watched its inventory double in recent years.

Yet the exceptional high short interest (contrarian indicator), substantial price pullback, record returns on capital and superior net margins make the $25 price attractive to Katsenelson. And he argues that men who need to buy quality suits are going to buy them regardless of the economic downturn.

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.

Comments

[fxtrader07]

seems like Bronchick totally blew it here - in an absolute complete manner. for instance, he speaks of $13 billion in excess capital. Yet, the company yesterday announced that it will have to raise almost the same amount after huge losses and deteriorating corporate performance.
Then, this Bronchick guy further said: "Potential write-offs are very small given the company’s large asset base" Yeah, right. almost 8 Billion of fresh writedowns are pocket change, i guess.
he couldn't know that, of course, but it should tell everyone out there that AIG needs a new mgmt and a new approach. Obviously, crooks and fools are running it right now.
Corporate performace has been deteriorating sharply - especially overseas, so this emerging market exposure doesn't cut any ice with me here. they obviously cannot extract much value from it.

beware of value traps. I like good insurers but aig certainly isn't one of them. it has a terrible track record , their integrity is one of worst in industry and I simply do not trust their prudence. I will alway prefer a markel or a berkshire hataway to them.

[fxtrader07]

just to add: seeking "reasonable companies at great prices" leads exactly to investments in potential catastrophies like aig. good companies at fair prices make a lot more sense than "reasonable" ones at great. after all - how can you really know how great a price is in relation to the shortfalls of the company. it's like trying to get second class quality at third class prices - you pay less, but still things can get kaputt very fast