The Long Case for AmEx, Hunter Douglas, and Hemisphere GPS

These are notes from the Day 2 sessions at the 3rd Annual Value Investing Congress West, held May 6-7, written by Jonathan M. Heller.

Ken Shubin Stein, of Spencer Capital, laid out his philosophy, which includes:
• Looking for asymmetric payoffs (limited downside, with much upside)
• Bottom-up fundamental analysis
• A “scientific” research process
• Belief that volatility is the key to successful long term investing

Shubin Stein made an extremely interesting, and often forgotten observation that value investors need the emotional stability to invest and take on more risk during a crisis.

He laid out a very detailed case for his favorite idea, American Express (AXP):

• Trading at 14X earnings
• Best credit quality of anyone in the business, with premium customers
• Have successfully shed unrelated business to focus credit card ops
• High ROE (37% in 2007)
• Superior management
• Competitive advantage and long-term growth prospects
• Best service, and reward programs
• #1 in customer satisfaction
• Wide acceptance in US, and internationally
• Should be relatively unscathed by credit crisis
• Should trade at 18-21 times earnings
• Earnings target of $4.50 share in 2011 implies an $89 target price.

One of the very pleasant surprises this year was newcomer Aaron Edelheit, of Sabre Value Management, whose passion for value investing was very apparent in his presentation. Edelheit pointed out the outstanding returns from the small cap value area of the market since 1970 (16.2%), but noted the disinterest here from many investors. He cited the following reasons for this situation:
• Small Cap Value can be very boring to investors
• There may be long periods with no news
• Illiquidity associated with SCV companies scares investors
• Too much volatility
• Little or no analyst coverage.
One of Edelheit’s favorite ideas is Hemisphere GPS (HEMEF.PK), formerly CSI Wireless. This misunderstood company is his largest holding.
• Hemisphere operates in the agricultural GPS arena, offering “auto steering” technology to farmers, which allows for more efficient use of tractors and thus their acreage, seed and fertilizer
• Pricing of HEM’s products are very favorable
• He forecasts rapid sales and earnings growth on the horizon.

The Value Investing Congress would not be complete without the interesting perspective and style of Carlo Cannell, of Cannell Capital LLC. Cannell presented the relatively unknown (at least in the US) company Hunter Douglas NA (HDUGF.PK), distributor of high-end shades and blinds:

• Main business throws off a great deal of cash, which feeds a $1billion portfolio of securities
• Business itself is worth close to market cap, essentially buyers get the investment portfolio for free
• Portfolio experiences little to no taxation
• Meanwhile, company pays a 5% dividend.

Cannell also broached another interesting topic, that being the proliferation of Chinese companies listing on US exchanges, through reverse mergers. In Cannell’s view, there may be shorting opportunities in some of these names due to corruption, fraud, accounting issues, and weak corporate governance.