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  • Lessons Learned From A History Of Oil [View article]
    Hi Veritas, the link at the top of the post is the link to A History of Oil podcasts. I believe it's a 21 part series.
    Jul 11, 2015. 11:11 AM | Likes Like |Link to Comment
  • Sotherly Hotels: Another Dirt Cheap REIT [View article]
    Philip, thanks for the article. I listened to the recent call, and while Drew left a small opening to issue equity if the right deal came along, he seems quite convicted that the stock is undervalued and unless it "got back into the double digits" he doesn't foresee issuing equity.

    As for the valuation, it certainly appears cheap on a price to AFFO basis. However, the glaring discrepancy when using that metric isn't as large when using EV/EBITDA or some of the more common valuation ratios that incorporate the debt. It's still cheap there also, just not nearly as cheap relative to peers as when just valuing the equity.

    I think they have a lot of leverage. They're guiding around $30 million EBITDA this year I believe, which puts the leverage at around 8x EBITDA, quite higher than the peers, and quite high period.

    I think there are a lot of good things here. The assets they have are good (I'm familiar with a few of them). And the argument that they are worth more than their book value is probably true, but I do think a big part of the relative valuation discount is more due to the leverage and less because of the small cap/liquidity (but that probably is a factor also).

    Last thing, management has been continuing to increase the dividend, and has stated that (since Drew is the largest shareholder) that this will continue. I think the fact that the stock is underfollowed and the fact that the yield is relatively low probably has helped the stock reach these levels. But again, I think the leverage is a big factor.

    Having said that, the leverage works both ways and the equity has significant upside if the value of the assets improve moderately.

    It's an interesting idea. Management said on the last call something about their efforts to get more analyst coverage, which might do something to close the valuation gap.

    Thanks for the article...
    May 30, 2015. 11:41 AM | Likes Like |Link to Comment
  • Sears And 7-Foot Hurdles [View article]
    I have no idea where SHLD will end up in the next 12 months (nor do I think anyone else has any idea, so I wouldn't put much stock in short term "forecasts" for stock prices). This was really designed to highlight the fact that some of the same viewpoints on Sears today were prevalent nearly 30 years ago. I'm not sure if folks will find this interesting or not, but I certainly did. I think this case study has a number of good lessons to keep in mind for investors.
    Jan 22, 2015. 01:53 PM | 2 Likes Like |Link to Comment
  • Sears And 7-Foot Hurdles [View article]
    Yeah those are good points, and I've thought about that as well. But basically, the businesses that had nothing to do with the retailer are the businesses that have done well. Sears as a retailer has done poorly. 15 years ago, Kmart and Sears had combined sales of around $65 billion and were modestly profitable (low double digit ROE's in good times). Today those two retailers have sales of around $35 billion and are producing huge operating losses. Kmart alone has seen sales deteriorate from $35 billion to around $13 billion in that time span. Sales per sq ft have gone from $333 to $119. And the bottom line looks just as bad as the top.

    So heretofore, the stock has done okay (depending on how far back you go) because of the unrelated businesses that they've been able to separate and monetize. But the retail business has significantly deteriorated, and I'm very skeptical of the value of a business that is losing significant money but trying to stave off bankruptcy by selling assets. It has worked so far (again depending on how far back you go), but as assets get depleted, this strategy will be harder and harder to prolong.

    Now, as I mentioned in the post, I have enormous respect for Lampert, and maybe SHLD as a stock could turn out well--I wouldn't own it but who knows, maybe Lampert can turn it into the "next" Berkshire (i.e. use the holding company of a terrible business and reallocate cash to better businesses). The problem I see with this idea is that Sears doesn't produce cash, it consumes it. The only cash the holding company produces is from asset sales and capital raises, and that strategy has a finite runway.

    I think that Eddie is one of the great investors of this era, and maybe he'll find a way to wring value out of the holding company, but I would be highly suspect of anyone being able to turn around the retail operations at those two brands.

    All this said, the post was not really supposed to be a prediction or analysis of Sears, it was really just a commentary on how interesting the viewpoint from nearly 30 years ago is. I think there are some general business lessons in there...

    Thanks for your comments!
    Jan 22, 2015. 01:13 PM | 2 Likes Like |Link to Comment
  • Market Truisms And Quarterback Controversies [View article]
    That's a good point. In general I would say that events (such as the OPEC decision to maintain production level) don't always mean that a mispricing will follow. I'm just saying mispricings can often occur when these types of situations occur. I have no idea where oil should be priced, and for the vast majority of oil and gas stocks, I wouldn't be able to tell you with any degree of certainty where intrinsic value is. But I'm sure that somewhere in that carnage, there is opportunity for investors that understand that industry well.

    So sometimes these mispricings can occur because of industry selloffs (the babies get thrown out with the bathwater). And sometimes it has to do with a company specific event. Just like the Patriots "stock" was getting beaten down after week 4, often times when it's clear that a business will struggle over the next few quarters, the stock gets sold off even if it's clear that the problem is short term in nature.

    Sometimes it's just that people are impatient. Barnes and Noble is the same company it was a year ago, but the stock is 75% or so higher. A large portion for the change in valuation is simply because the company announced a timetable for separating the bad business from the decent business. An analyst could have very easily identified the value that was getting hidden from the good business a year ago. Plenty of investors saw this opportunity, but passed simply because of the uncertainty (no timeframe for the catalyst).

    So I think the ability to look out past what just happened in the recent past (or what everyone expects to happen in the near term future) is hugely important for investors because it's not easy to do and most other market participants aren't willing or can't do this.

    So again, many times the market gets things right, but there are plenty of times it doesn't, as evidenced by the vastly changing prices in stocks of businesses that don't have vastly changing intrinsic values. This variation creates the opportunity. The key is sticking to situations you understand well and waiting for these opportunities to arise.
    Dec 13, 2014. 10:11 AM | Likes Like |Link to Comment
  • Some Thoughts On Markel's Intrinsic Value [View article]
    Hi Mingran,

    Thanks for the comment. I don't think it's dangerous to use historical figures as a guidance to the future. That's what we do as investors. We use what happened in the past, including historical financials, management effectiveness, business durability, etc... as a way to come up with what we expect earning power and intrinsic value will be in the future.

    That said, I completely agree that Markel's growth will not be what it was in the past. And as I've said in some of the writeups I've done on Markel, I assume both growth and ROE will be much lower (say somewhere around 10-12%) going forward. But even if they can do 12% ROE (they've grown book at 20% in the past, which as you say is unrealistic going forward--at least a level I wouldn't assume), you're still only paying 11 times earnings for a very high quality, well-managed franchise.

    That's really what I was trying to get at here...

    Thanks for reading!
    Dec 4, 2014. 10:32 AM | 2 Likes Like |Link to Comment
  • Circle Of Competence, Fat Pitches, And How To Become The Best Plumber In Bemidji [View article]
    Hi Bruce. Yeah he definitely has focused more in the recent letter on the non-professional investor than ever before, but this isn't a change of mind for him. He's always stated that he believes non-professionals should own a broad, diversified slice of American business. He's always said that if you understand business and can value stocks, then focus your investments and use your proverbial "20 punch card." If you can't value businesses, then just diversify and own America.
    Sep 22, 2014. 07:39 AM | Likes Like |Link to Comment
  • Circle Of Competence, Fat Pitches, And How To Become The Best Plumber In Bemidji [View article]
    Hi Bruce,

    Thanks for the comment. I'm not a big fan of using academic terms such as "confirmation bias" (nor do I fully comprehend their meaning or their practicality to the real world), so I'll leave that one alone. In fact, we had a discussion on my site about this after a Google post a few weeks ago.

    But regarding your comment on Buffett and the index funds, I've been getting a number of questions/comments on that lately. You are misinterpreting some of Buffett's advice here.

    Basically, there is a misunderstanding surrounding his remarks on that discussion. In his letter to shareholders, and then again at the annual meeting in May, he discusses his recommendation for putting 90% of his personal capital into an S&P index fund... and the key thing to realize is who his audience is. If you're a professional investor or an individual with the time, skill level, and expertise when it comes to valuing individual businesses, and if you want to use those attributes to attempt to outperform the averages, then Buffett's advice is (and always has been) to wait for the fat pitch. In other words, diversification is foolish for those who can understand and evaluate businesses. It's a far better idea to invest in the durable, high quality businesses that you can understand when they happen to become available at a cheap price. Diversification only waters down the results for this type of investor.

    However, Buffett has always said that if you can't (or don't want to) evaluate businesses on an individual basis, then his advice is to just own American business. A Vanguard S&P 500 fund allows you to do this virtually at no cost.

    Also, Buffett's son will not be the next CEO of Berkshire. He will become the non-executive chairman (a big difference--his son will be on the board to preserve corporate culture, not make business decisions), and Buffett's index advice has nothing to do with Howard (his son).

    So the key to remember is who Buffett's speaking to. In his letter, he was talking to individuals (such as his wife) who are not interested or equipped to pick individual stocks. For those types of individuals, I think owning a broad slice of American business at very low cost is good advice, and will likely beat 3/4ths or more of the professionals out there.

    Thanks for the comment Bruce. Hope that helps clarify your question regarding diversification vs. waiting for the fat pitch.
    Sep 21, 2014. 09:59 AM | 1 Like Like |Link to Comment
  • Markel: A Compounding Machine At A Cheap Price [View article]
    Hi Tony,
    Yes I've looked at Fairfax and respect the organization and especially Prem Watsa enormously. I'm more impressed with Markel's insurance operations and their historical profitability. Prem has an interesting investment portfolio and it is much more complicated than Markel's--which doesn't mean it won't do well, but it's more complicated. Historically, Prem also has a great investment track record. Currently, Prem is very bearish overall, which I suppose if you have a deflationary view, you might be interested in Fairfax as Fairfax is very well positioned for ever lower interest rates and a worsening macro picture (they did very well in 2008-09 during the crisis). I don't really have a strong macro opinion, so I don't place significant weight on the positioning of the investments, but I wouldn't be surprised to see Prem do well. His hedges and derivative positions have been a drag in this recent bull market, but he can still do well in an improving environment as well. He's basically paying insurance premiums (which creates the drag on the overall performance) to protect himself against deflation and other macro shocks.

    Both are well managed businesses. I prefer the simpler, more profitable insurance and investment operation at Markel, but I keep track of both along with a few others. I might write up some more details on Fairfax sometime.
    Sep 11, 2014. 11:25 AM | 2 Likes Like |Link to Comment
  • Barnes & Noble - A Bargain Hiding In Plain Sight? [View article]
    Thanks guys... glad to see the situation worked itself out.
    Jun 30, 2014. 10:19 AM | Likes Like |Link to Comment
  • Some Thoughts On The Berkshire Hathaway Annual Meeting [View instapost]
    I did... really enjoyed that as well.
    Jun 30, 2014. 10:19 AM | Likes Like |Link to Comment
  • Markel: A Compounding Machine At A Cheap Price [View article]
    Thanks for the comment Butterfly. Yes, Markel's portfolio--and maybe by extension its stock price--will likely be more volatile in the event of a market downturn.

    As for goodwill, I understand your logic for valuing insurance businesses on their net tangible assets. I view Markel as more of a holding company with $1100 per share in net investments. I wouldn't normally think of insurance businesses this way, and I understand completely the desire to anchor on tangible book. I think about Markel as much more than an insurance company, and I think over time this will only increase as MV grows.

    To me it's a financial holding company--almost akin to a closed end fund--with a vast and growing collection of stocks, bonds and businesses that are producing value that accrues almost exclusively to shareholders because the insurance business is both profitable and extremely conservative with their reserve practices.

    Thanks again for your thoughtful comments and thanks for reading!
    Apr 7, 2014. 07:24 PM | 3 Likes Like |Link to Comment
  • Markel: A Compounding Machine At A Cheap Price [View article]
    JA,

    Good comment and excellent points to consider. I've thought a lot about the Alterra acquisition, and the integration is always a big uncertainty.

    I watched this 9 months or so and carefully tried to get a gauge on management response in calls, and in their letters, and so far--they have seemed to have mostly positive things to say about Alterra operations merging with Markel's culture.

    But it's a good point--and its tough know--and something we won't really know for a few years most likely.

    My guess is that management will be ultimately successful here, and will be able to maintain the culture that is so important to them at Markel.
    Apr 7, 2014. 12:44 PM | Likes Like |Link to Comment
  • Markel: A Compounding Machine At A Cheap Price [View article]
    Thanks for the comment. Yes, I was having the same discussion with a friend (regarding the relative lack of interest around Markel) and it is really surprising given their record.

    It reminds me of something Peter Lynch wrote about it one of his books... basically Lynch said that certain companies remain almost perpetually undervalued--even as their stock occasionally reaches very high multiples based on a small snapshot in time (say last year's earnings).

    Lynch talks about Walmart, and how you could have bought Walmart 10 years after it was public and when the stock was already many multiples higher than the IPO price, and still achieved incredible investment results over time. You could have paid 50x earnings and gotten a bargain relative to the company's future cash flows. (Of course--I'm not recommending paying 50x earnings for anything, but in retrospect, he was right). Some businesses--even though their business model is not a secret and their past results have been outstanding, still don't seem to get properly valued by the market.

    Reminds me of the Forbes article on Coke in 1938, or even later as Buffett bought it in the 80's. Berkshire Hathaway itself is an excellent example of a perpertually undervalued stock--at least for most of its history.

    The market often has a hard time properly valuing these long term compounders. Why would the market allow us to buy a great business with a widely known business model and formula--and a long term history proving that model is successful--at a price that allows us to achieve returns in excess of average stock returns?

    I actually think it is a very inefficient portion of the market.
    Apr 7, 2014. 12:39 PM | 2 Likes Like |Link to Comment
  • Markel: A Compounding Machine At A Cheap Price [View article]
    WRB is a great business run by an excellent owner-operator. They produce excellent underwriting results, but their investment portfolio will very likely produce much lower returns than Markel's over long periods of time (10 years+).

    I am less interested in most insurance companies as their investment returns tend to be significantly lower because of their unwillingness to invest shareholder equity in stocks. Absent a really cheap price, these companies just aren't as desirable to own. This doesn't mean some can't be good businesses--and WRB certainly is.

    But I don't think it will produce the same results as Markel over time unless they use more leverage.

    Very few companies are willing to adopt the attitude that shareholder equity is permanent capital, and thus should be invested in permanent securities. This is a really underrated advantage for firms like Markel.

    As for dividends, I'm much happier with Markel retaining and reinvesting as much as it can as long as it continues to produce solid returns on capital.

    In businesses with self reinforcing business models (where competitive advantages can increase as size increases), shareholders should not desire dividends. This might change at a certain size, but for now--I'd much rather have Markel use their balance sheet to be opportunistic and increase their size and scale--and competitive advantages that come with it. There is a reason why Buffett never paid a dividend--his investment acumen along with Berkshire's growing size gave him advantages that meant that each retained dollar was much more valuable in Berkshire's hands than in the collective hands of shareholders.

    My vote would be to keep the capital--and the compounding going.

    Thanks for reading!
    Apr 7, 2014. 12:30 PM | 3 Likes Like |Link to Comment
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