Three Stocks We're Long With High Conviction

Excerpted with permission from the monthly letter to investors in Mr. Tilson's T2 Partners Fund:

• • •

Fairfax (FFH)

In last month’s letter, we wrote:

We’re still in the money on our investment in Fairfax, but have given back most of our  initial gains as the stock has fallen from a peak of $330 as recently as April to today’s  level of $213.73.  We continue to scratch our heads over the recent decline, as the company is doing quite well, albeit in a weak pricing environment for insurance companies.

The catalysts for the dramatic rise in the past two weeks to $328.50 were the announcements that the company had realized cash proceeds of $574.5 million from its credit-default swaps, equal to $31/share (pre-tax), and planned to buy back a significant amount of stock.  We think the stock is worth $350-$400/share, about $25 more than we estimated last month due to the big gains in the CDS portfolio.

dELiA*s (DLIA)

We have been buying dELiA*s stock hand over fist yesterday and today and now own 7.9% of the company.  This is one of the safest, cheapest stocks we have seen in quite some time.

dELiA*s operates retail stores aimed at teenage girls and also owns and operates a very successful direct marketing business.  We started buying the stock at around $2.00 per share, equal to an enterprise value of about $55 million, based on our belief that its breakup value substantially exceeded $4 per share.  Our investment thesis began to play out yesterday when the company announced the sale of part of its direct marketing division for $102 million in cash, or $3.28/share (pre-tax).

With the stock at $2.50, we expected it to skyrocket immediately, but instead, two days later, it’s only at $2.89 due, we think, to some very motivated sellers.  Thus, we were able to substantially increase our position at a price that roughly approximates that cash proceeds from the recent sale, meaning that we were getting the core business for free!

In light of the current environment, one might ask whether a retailer (especially one selling clothing to teenage girls) is worth much, but dELiA*s is actually doing very well.  Excellent new management is in place, same store sales were up 5.2% last quarter, margins rose and the stores were comping in the double-digit range in the important back to school season.  We are very enthusiastic about the company’s future.

Berkshire Hathaway (BRK.A)

We’ve long felt that Berkshire Hathaway was beautifully positioned to take advantage of the distress in the financial markets, thanks to the combination of the world’s savviest investor and a Fort Knox balance sheet.  Buffett has invested approximately $40 billion so far this year and the deals keep getting better and better.

This month, he absolutely stole Constellation Energy, after the company encountered a liquidity crisis, for $26.50/share ($4.7 billion in total).  The stock had been above $60 only weeks earlier – and was likely cheap even at that price, so Buffett bought it for less than half of its intrinsic value.  He then followed that coup with another: investing $5 billion in perpetual preferred stock -2- in Goldman Sachs, with a 10% yield plus $5 billion in warrants struck at $115.  With the stock at $128 today, Berkshire is already $566 million in the money on the warrants, which are worth $2-3 billion.

We think Berkshire stock is 15-20% undervalued, before factoring in any gains from the equity portfolio (up roughly 7% in the third quarter vs. a decline of 8.3% for the S&P 500), recent investments or the possibility (likely, we think) of additional highly beneficial investments.

Disclosure: Author manages funds that are long FFH, DLIA and BRK.A
 

Comments

[Jerlad:]

Look at the 3-month charts of FFH and DLIA. AFTER he's finished buying and his positions are hugely up, NOW he's telling us to buy? A little late in the game, don't ya think? Just take your profits and leave us alone. These self-promoting, greedy posts make me sick.

And Warren Buffett in the news so much lately - I could puke. I guess 52 million isn't enough for him. Hey, let's all bid up GS and make him even richer !!!

2008 Oct 02 06:09 PM

[borisbear:]

Oh, my. I detect anger and Jealousy (.?).
It's not about how much Warren makes. It is about you being a wiser investor and make some money..Remember Sir John Templeton's famous observation that made him a Billionaire:" Buy at a point of maximum pessimism" If you've got time on your side to await the great stocks to make a rebound after the dust is all settled--bully for you
"There is nothing new under the sun" the book of Ecclesiastes says.
Ergo---the stocks that are seemingly down for the count, will get up!!!

2008 Oct 02 07:50 PM

[weiwentg:]

Tilson runs a hedge fund. He's not obligated to tell non-owners when he purchases stocks. You can buy into Tilson Focus, his mutual fund, if you like. In fact, it's doing relatively well this year, having only lost about 15%.

2008 Oct 02 07:52 PM

[Bespoke Bul...:]

"In fact, it's doing relatively well this year, having only lost about 15%"... Seriously? in what world? That's called losing money. A money manager doesn't get paid to lose less money. He/she gets paid to actually make money

2008 Oct 02 08:38 PM

[Mountain Fist:]

Irrational markets, how is your portfolio this year? Unless you've lost less than 15% on your investments this year you have absolutely nothing to say about someone who has lost only 15% in a brutal year! Preservation of capital is king right now. Personally I can't say I've lost only 15% this year (more like minus 35%). Over half of that has occurred in the last two weeks. And out of 25 years, the last 10 years I've been better than 90% of professional money managers, even through dot.com and housing crashes. I am personally impressed with anyone who has only lost 15% this year. I am a small time private value investor with long term horizons. Disclosure- most recent buys are AOB and KHD (today). Yes, I'm still buying, and yes I'm very open-minded and at least considering ideas from those who are outperforming me. You might try the same.

2008 Oct 02 09:33 PM

[Mountain Fist:]

I took a look at these. Can't say I agree on DLIA. I wouldn't touch it. I do have a lot of faith in Buffett and Berkshire, though it's out of my price range. However FFH is pretty impressive. PEG is 0.42, P/S is 0.78, EV/EBITDA is phenomenally low at 0.599, margins are excellent, ROE is excellent at 37.57%, per year revenue is nearly 2 Billion above market cap (revenue per share at 440.46 and EPS 78.43), debt/equity is 0.351, is generating nearly 10% free cash flow, trades at only 1.34 times book value, and as a small bonus has a little 1.5% dividend! What's not to like? This stock is significantly undervalued by many measures. Thanks for the article!

2008 Oct 02 09:51 PM

[Nikola:]

I really don't understand why MUST you buy. You can get 3% in the bank. You should have gotten out a few months ago when it was obvious the world was going to end, and held cash.

That's better than -15% or -35%.

2008 Oct 03 01:15 AM

[Moral Hazar...:]

What Jerland said! This article reads like a Yahoo pump 'n dump message.

My investment portfolio is up significantly for the year, so according to Mountain Fist I'm actually qualified to criticize this article. Let me start by saying that one crucial reason I’ve managed to stay ahead is by ignoring hype like this and selling into dangerous charts like these. Timing is everything.

Is it any wonder why the retail investor has thrown in the towel and given up?

2008 Oct 03 10:45 AM

[leh:]

What is with all the rude, irrational criticism here? Mr. Tilson posts what I consider a straightforward and informative summary of his recent investments as a professional investor and a couple idiots jump on him as if he's a penny stock operator operating out of a boiler room?!? If you actually took the time to read his post, you'd see Tilson sees much continued upside potential here. Not sure why you Yahoo types even come here, but your rudeness is astounding. Get lost.

2008 Oct 03 12:54 PM

[leh:]

P.S. Delia was an $11 stock less than two years ago, and traded today at $3.05, so you tell me if there's no upside left.

2008 Oct 03 12:57 PM

[Moral Hazar...:]

leh, I will not go away just because you think I’m being rude. Please read my message again because this advice is coming from an investor who has learned to successfully navigate the shark and piranha infested waters of stock trading. My message above contains the seeds of a couple of *very*important truths that the retail investor needs to know to stop losing so much money, and perhaps even start making money.

Yes, it’s certainly possible that Delia could go up to $11 or even $30 in the next 12 months, but you’ve got to learn to stop thinking like that if you’re going to be a long term successful trader. If I go to my favorite casino, the Bellagio, and put $5000 down at the roulette wheel’s number 12, it’s also possible that 30 seconds later I will have won $175,000. But is it a good investment decision?

Like, Jerland, I don’t necessarily share a great admiration for Warren Buffet. Haven’t you ever noticed that he divulges the companies he’s invested in *after* he’s accumulated shares? Now in this article we learn of the author’s significant position in Delia, again *after* he has quietly accumulated his shares. I wish him the best of luck and do appreciate that he's written some excellent articles, but maybe he’s trying to stack the odds in his favor here.

What I said was honest, spoken from the heart, trying to help people, and coming form someone who absolutely has no financial axe grind in any of the companies mentioned. I could be wrong but I would not be an investor in any of them at this point in time.

2008 Oct 03 03:33 PM

[Mountain Fist:]

I MUST buy because I'm an investor. 3% in the bank? Are you nuts? You must measure inflation by the same BS measures the Fed and US government use. If I 'm making 3% in the bank I'm losing money with inflation in this country/declining value of the dollar. I'm supposed to put money in the bank on a short term pop in the dollar while the treasury destroys it's value. Do you really think the dollar will continue to rise for 5 years...10 years? The US dollar is garbage backed by nothing.

Look at a historical stock market chart that goes back before the Great Depression. It goes in one direction. UP! If we have the worst chaos since the Depression, I am & will still be, buying stock in the companies that have the ability to survive and thrive through this.
The best deals are to be had when everyone else is selling. I am a long term investor, not a trader.

Bought PCU today though it may still have a little downside. Am looking at SSL and FCX, and any other high growth potential companies that pay and are raising dividends, are heavily undervalued, generate copious free cash. I have a chance to buy companies on my list at firesale prices. Sure I could have sold everything I owned a month or two ago, and locked in smaller losses. If the fundamental reasons for which I bought these companies are intact, I would be a fool to lock in losses when this too shall pass. If it is the end of the world, as some of you think, then it doesn't really matter does it?

I agree about the rudeness, though. I'm not trying to be rude, I just call it as I see it. It annoys me when someone takes the time to write an informative article like this one and I have to read these goofy comments from people like jerlad & irrational markets who have nothing to do but talk crap about the author's chosen positions. Nobody is forcing you to buy what he is buying, he's not pumping crap penny stocks here. I gave you many fundamental reasons why FFH has great potential and is undervalued.

To moral hazards amok, I would love to see a snapshot of your portfolio and or trades for the year. I would be willing to bet the only way you are up this year is if you are a trader. For those of us who have very little money or time to invest, trading is not an option. If I had a lot more money and was able to sit watching screens all day I'd certainly be trading this volatile market and I'd be willing to bet my portfolio would be up as well. However the amount of money I have to invest is in small bits at a time, and I work a brutal time-consuming job. I have to do what works best for me. Investing with a 5-10 year horizon on heavily undervalued (quality) stocks at times of maximum pessimism is that strategy (with many hours of late night research).

And I may look like a genius in 5-10 years. You don't have a lot of admiration for one of the greatest investors of this century? Appreciate your honesty on that. Not to be rude, but I don't need your approval to follow a strategy that meets my needs. Thanks again for this article!

2008 Oct 03 06:54 PM

[Mountain Fist:]

One more thing to moral hazards amok. I may have the skill to trade this volatility, if I had the time and money. You may have it. Most individual investors, however, do not. Most people who have the emotional makeup can, however, do the research and find undervalued companies. They can do well on them with a long term horizon, while they would probably lose their a*ses trying to trade this volatility. What's wrong with Tilson throwing out an idea or two for us to look at?

2008 Oct 03 07:19 PM

[Old Trader:]

Mountain Fist,

Only being down 10%, ytd, "qualifies" me too, I guess, LOL. You're not the first person I've heard scoffing at cash for precisely the same reason (ROR < than inflation). I don't think anyone is saying stay in cash "forever", but going overweight cash for 6/9/12 months might well allow one to have some "dry powder" available, when the time is right.

Just sayin'

2008 Oct 04 01:30 AM

[Mountain Fist:]

How did I set these qualifications? Geez! LOL Who am I? My point was that somebody losing 10-15% this year is probably beating 99.5% of investors today. Considering that my picks in the past have put me consistently in that top 1/2% (within up and down markets during two bubbles and subsequent crashes), and I'm losing my arse right now, I'm trying to give credit where it's due. And by the way, all that time I was in 100% long positions!

Yes, indeed I have considered going to cash. It would have been a much better choice for me had I done it a month ago. There are deep value plays that just keep getting cheaper, but to take advantage of them or to go to cash now requires me to lock in pretty big losses on what I already own.

When the markets are brutal and being manipulated to the extent they are now, it's a hard choice. A combination of in depth fundamental analysis, with reference to technicals served me well for many years. New money is going to dividend payers that are heavily undervalued, but as to the money already in play that is sitting down massively on the last couple of weeks activity...hmmm?

Contemplating rolling all my stock positions into a business idea. Businesses that stand to profit from economic and market chaos may be the best of all possible places for my money to be now. Many of these types of businesses may not be publicly traded. Any change in my strategy of buying and holding (for 1-10 years) great companies that are heavily undervalued requires me to lock in large losses.

The business plan I am drawing up is a winner in normal economic conditions due to fundamental macro changes that are inevitable over the next 25 years or so, and are accelerating. The real plus is that if they succeed in really screwing up the US economy any further, my business at the least should be just as profitable, but most likely even more profitable. Why? Because I'll be able to obtain my inventory at even better prices, while the product in the form that I'm selling it will benefit people hurting financially.

oldtrdr you may have helped me answer my own question. I just find it hard to lock in the last couple of weeks losses, when one of the things that has made me successful is having the balls to not micro manage and lock in losses when things look bleak. I guess we'll all be watching to see what happens Monday.

I'll be working very hard at this new business, while keeping an eye on the markets and my bleeding portfolio for now.

2008 Oct 05 12:30 AM