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