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CCM Blog For The Week Ended July 6 And July 13, 2018

|Includes: Boardwalk Pipeline Partners, LP (BWP), L, PZZA
Summary

Monish Pabrai is not finding investments in the US.

Loews and BWP deal.

AmTrust Take Private.

Book Value.

Papa John Resigns.

This blog is a combination from the past two weeks including the light week from the July 4th holiday.

Monish Pabrai is not finding investments in the US.

Mohnish Pabrai's Advice for Value Investors. Pabrai is one of the top value investors to come after Warren Buffett. Pabrai’s fund is highly concentrated with a significant weight and confidence in Fiat Chrysler (FCAU).

Loews and BWP deal. Here is some background and chronology on Loews (L) and Boardwalk Partners (BWP).

April 30: https://seekingalpha.com/news/3350276-boardwalk-pipeline-partners-plus-11-percent-loews-may-take-company-private?v=1527021170. My opinion and comments on this article are at the bottom of the Seeking Alpha page.

May 10: https://seekingalpha.com/news/3355382-barclays-questions-loews-tactics-boardwalk-pipeline-tease

June 26: https://seekingalpha.com/news/3366311-boardwalk-pipeline-plus-9-percent-class-action-lawsuit-settlement

June 29: https://seekingalpha.com/news/3367294-loews-purchase-boardwalk-pipeline-partners-units

In November of 2017, I wrote a piece on Loews and highlighted a few strategic options to increase shareholder value. I did not anticipate the FERC ruling, nor did I think consolidating BWP was probable. Of the two energy-related assets, I like the Boardwalk Pipeline business more than Diamond Offshore, which I propose they divest with higher and stable oil prices. I think we are at that point now. Most of all, I am happy Loews management is doing something prudent and being more active.

Loews - A Value Conglomerate With Levers To Pull

AmTrust Take Private. AmTrust Stockholders Approve Amended Merger Transaction | AmTrust Financial Services, Inc.

In late June the (AFSI) deal was approved. I hope it fares better as a private company as the stock declined from $35/share in 2015 to about $10 at the beginning of 2018. I think there is a high certainty the deal closes and curiously it is trading at/above the takeout price of $14.75 rather than something capturing an interest rate slightly higher than the risk-free rate until the expected closing date as would be typical at this point in a cash merger arbitrage/going private transaction.

Book Value. The reliability and correlation of book value to market returns. “For companies in the S&P 500 today, the correlation between stock price and tangible book value has become quite small, just 14%. This is a very big change from 25 years ago when that correlation was 71%—or 5x stronger than it is now.” It also mentions Buffett’s focus on brands and intangibles which are generally not reflected on the balance sheet. Credit to Bill Nygren of Oakmark. CCM generally focuses on book value for two situations - select industry analysis such as financial stocks (banks, insurance, and real estate) and in cases of distress or depressed values where the market cap is less than the book value. But even in financials, we see more revenue and income from fees, mortgage originations - but instead selling it versus holding it until full repayment - and offering other services such as wealth management.

Commentary

Bill Nygren: Value Investors Need To Adapt Their Business Valuation Strategies

Papa John’s Founder, Chairman, and former CEO, John Schnatter resigned after reports of using a racial slur. (PZZA) is a previous holding of CCM and was at the time was a great value. At the time, it was the best franchise in a space that is dominated by three national players, though it is a fiercely competitive and delicious business to be in. Shares traded down on the announcement of the scandal and then rebounded, gaining value after Schnatter stepped down. There have been numerous cases of companies falling when a scandal is announced, such as JPM’s enormous trading loss or Facebook’s data sharing with Cambridge Analytics and eventually regaining value. But to have this happen in a matter of a couple of days shows the Wall St. opinion of Schnatter was not as high as it once was.

Docusign. Per Fortune: DocuSign is the only tech company that went public during the quarter to have positive free cash flow.

CA Technologies to be acquired by Broadcom at an 18% premium. M&A activity has been robust of late and is often seen as an indication of the equity market losing momentum and beginning a decline in price.

Thanks for reading. Carlos Sava, CFA, CPA

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in L over the next 72 hours.