12/2/13
Did you realize that Warren Buffett returned 81% a year from 1980 to 2003?
Guess what? He didn’t do it by buying Wall Street darlings like an Apple Inc. (NASDAQ:AAPL) or a Facebook Inc (NASDAQ:FB). Buffett accomplished this amazing feat by using a strategy called “takeover speculation.” He bet big, and with leverage, on stocks he thought had a very high likelihood of being acquired.
The average person on the street thinks Warren Buffett is a safe value investor who holds stocks forever. This is only partially true. The other half of his portfolio, and the part of his strategy that has juiced the biggest returns for him, was takeover speculation, where he used significant leverage and options to produce 80+% annualized for 24-years.
Buffett said in a New York Times interview that he made the greatest returns ever in his portfolio employing this takeover speculation strategy.
But Buffett ran into a problem. He became too big. He had to stop using this strategy because the assets he was managing, which in 2003 reached $50 billion, were too big to successfully execute it.
He said in a BusinessWeek article that he guaranteed he could make at least 50% a year if he were managing smaller assets. And he can back it up. We have documented proof from Berkshire Hathaway letters, and from an academic paper on Buffett, which showed that he produced an 81% annualized return over a 24 year stretch.
For those who are interested in what 81% annualized compounds to over 24-years here are some scenarios:
1) A $1,000 account compounded at 81% for 24-years would turn into $1 billion.
2) A $10,000 account compounded at 81% for 24-years would turn into $15.2 billion.
3) A $20,000 account compounded at 81% for 24-years would turn into $30.2 billion.
Learn more about me and how we follow Billionaire Investors into stocks by visiting the Billionaires Portfolio.
Will Meade
President of The Billionaires Portfolio Providing Sophisticated Hedge Fund Strategies and Analysis For The Everyday Investor
The world’s greatest investor is not Warren Buffett. Sure, Buffett is one of the richest men in the world. But there is a man who will overtake Buffett as the richest investor. His name is David Tepper.
David Tepper has the best track record of any investor in the world. Over the last 20 years he has averaged a 40% annual return.
Let me repeat that again because it’s a staggering number. David Tepper has averaged 40% a year over the last 20 years.
Let me put this in perspective for you. If you would have invested $10,000 with David Tepper in 1993 you would now have an incredible $8.3 million. Now, that highlights the two keys to building wealth as an investor. You need big returns. But also, consistent returns. And you need to compound those returns overtime.
That is why David Tepper is the world’s greatest investor. He has done it for a long time. And continues to do it. In what has been considered a tough market.
That is why David Tepper is worth over $7 Billion dollars at only 55 years old.
Now, here is where it should be particularly interesting to you.
David Tepper is just like you!
David Tepper is the true American Dream. He is the stereotypical average American male. He is a little overweight. He is balding. He is average height. And believe it or not, he is not some hot shot Ivy League grad or rocket scientist with a PHD from MIT.
David Tepper is just a graduate of a state school, the University of Pittsburgh. I say this not to disparage his education. I say this because it doesn’t really matter if you went to Harvard or Yale or Pittsburgh. I have a pretty fancy degree. But I can tell you this: It learned nothing about becoming a good investor. I’m a good investor because I have common sense. And because I know how the system works.
The masses will always lose money or, at best, underperform. And that creates an opportunity for me and those like me.
I say all of this to emphasize that you can be, and should, be returning 40% a year like David Tepper.
I have told you numerous times in my blog that if you are not fully invested in stocks and if you not returning 30% to 50% a year then you are failing at investing. If you were in school you would get an F.
But look it’s not your fault. You have been suckered and sold by Wall Street. You’re invested in mutual funds that will never ever make you anything more than 6% to 7% returns on average.
You probably have your money with a stock broker, who is ripping you off by charging you large commissions, spreads, sales fees, plus another 2% to 3% management fees while giving you 5% annual returns – while putting your money at risk of being halved.
So I don’t blame you. But I will blame you if you do not change your investing strategy. If David Tepper, the stereotypical average American male can return 40% a year simply buying stocks, then so should you.
But you need a game plan to do this. And I can help you. My blog and my premium research service The Billionaires Portfolio is built on the same philosophy that David Tepper uses. I like buying cheap undervalued stocks with catalysts and holding them to make triple digit returns. My goal is just like Mr.Tepper’s: To make all of us multi-millionaires by compounding our money at 30% to 50% returns annually.
So fire your broker. Sell your mutual funds. And learn from the world’s greatest investors how to compound your money at 30% to 50% a year.
Will Meade
President of The Billionaires Portfolio Providing Sophisticated Hedge Fund Strategies and Analysis For The Everyday Investor
Finding stocks with asymmetrical risk-reward characteristics is at the core of successful deep value investing. And it’s a key ingredient in the success of our Billionaire’s Portfolio service.
Another important ingredient in our process is identifying stocks with these characteristics that also have the presence of an influential investor. When we have a deeply distressed stock, and a bulldog investor that owns a huge stake in the stock, our chances of a positive outcome increases dramatically.
With that said, in addition to searching through SEC filings for investors that are building controlling
interests in companies, we like to run a series screens to search for stocks that have a 100% to 200% potential upside, combined with limited downside risk. Many times, when we find stocks that fit the bill, we will find a big investor already involved.
In running our screens for the first week of November, the following five stocks have hit our radar as high potential, deep value candidates. Plus they all have the presence of a huge private equity firm:
1) Dice Holdings, Inc. (NYSE:DHX) has a current share price $7.49. The $15 billion dollar private equity firm General Atlantic, LLC owns more than 15% of this stock.
2) Noranda Aluminum Holding Corp (NYSE:NOR) has a current share price $3.04. Apollo Global Management, the $22 billion dollar private equity firm, owns more than 48% of NOR.
3) Red Lion Hotels Corporation (NYSE:RLH) has a current share price of $6.00. The private equity firm Columbia Pacific Advisors owns more than 28% of this stock.
4) Sun Bancorp Inc. (NASDAQ:SNBC) has a current share price $3.20. The private equity firm Invesco Private Capital owns more than 24%.
5) Exco Resources Inc. (NYSE:XCO) has a current share price $5.41. The $15 billion dollar private equity firm Oaktree Capital Management owns more than 16% of this stock.
This gives us a great starting point to identify a stock that may be deeply undervalued with the added kicker of an influential shareholder on board.
To receive our weekly email of top value stocks that hedge funds, private equity firm and/or billionaire investors own, email us at info@billionairesportfolio.com.
Will Meade
President of The Billionaires Portfolio Providing Sophisticated Hedge Fund Strategies and Analysis For The Everyday Investor
1) A study out of Citigroup’s quantitative research group showed one of the best predictors of an earnings beat is a stock’s prior one-month performance going into the earnings report. Apple is up more than 10% over the past month, versus a 3.5% move in the S&P 500.
2) Technically, Apple has just broken out of an intraday bullish flag pattern. And it’s just broken the neckline of a bullish inverse head and shoulders pattern projecting a near term price target for Apple of $570. That out-performance indicates smart money is jumping into this stock before Apple reports earnings on Monday.
3) Analysts have raised their target price over the past week on Apple. Ed Parker with Lazard Capital raised his price target to $570 and reiterated a buy rating on Apple. Cantor Fitzgerald’s Brian White upped his Apple price target to $577 and believes the stock could surprise on the upside. And Goldman Sachs’s Bill Shope reiterated a Buy rating on the stockand a $560 price target last week. These analyst moves are usually a good predictor of a stock set to beat earnings expectations.
4) Apple now has a billionaire activist, Carl Icahn, who is hell-bent on forcing the company to deploy its cash to buy a huge chunk of stock back. Don’t be surprised if Apple on Monday announces another huge stock buyback or increase in its dividend payout.
5) Apple finally has price momentum and product momentum. After Apple’s Media day this week, people were excited for the first time in over a year about Apple’s new products, especially their new more powerful mini iPad. All of this shows that Apple is getting its buzz back. And this means the company will probably forecast better sales and earnings in 2014.
If you want to know what the world’s best Billionaire Investors and Hedge funds are buying, then you can visit The Billionaire’s Portfolio.
Will Meade
President of The Billionaires Portfolio Providing Sophisticated Hedge Fund Strategies and Analysis For The Everyday Investor
With the stock market tracking back toward record highs, Apple back above $500 and Facebook working on a double for the year, finding value can be more challenging than finding the latest hot stock.
As I’ve shared in recent weeks, at billionairesportfolio.com we constantly scour the universe of stocks, through our many proprietary screens, to uncover undervalued stocks that have the potential to produce multiples on our investment. And despite the run-up in broader stocks, we continue to find great opportunities.
One of our favorite “deep value screens” not only identifies cheap stocks, but also situations where a rich, influential investor has taken a significant stake. As a shareholder, the presence of this type of investor can mean you have a partner on your side, working everyday to push management to unlock value in the company.
Selecting deep value stocks, with the presence of an influential investor that is hell-bent on unlocking value, is a very powerful formula. It’s especially powerful when we find situations where the big investor is down 10% or more on their investment. That tends to raise their sense of urgency and their aggressiveness with management. And that tends to result in bigger winners.
With all of that being said, here are five stocks that some top hedge funds and billionaire investors are down on, by 10% or more:
1) Transocean (RIG) – Billionaire Carl Icahn owns almost 6% of this oil and gas exploration company. Icahn’s average cost is $49. The stock currently sells for $45. This means you are getting a 10% discount to what Icahn paid for this stock. To even sweeten the deal RIG currently pays a 5% dividend.
2) J. C. Penney Company, Inc. (JCP) – Four different hedge funds own this stock, and all four paid a much higher price than where JCP currently trades. Glenview Capital, Perry Capital, Tiger Consumer and Soros Fund Management together own more than 15% of this stock. The average price that these hedge funds paid for JC Penney is more than $13 a share. If you bought JC Penney today you are getting a 41% discount to what these top hedge funds paid for their shares. Moreover, JC Penney is selling at distressed valuation levels. It has a price-to-sales of 0.13 and price-to-book of 0.68.
3) Dynavax Technologies Corporation (DVAX) – Two top hedge funds that own more than 8% of this biotech stock. The two funds, Orbimed Advisors and RA Capital Management, are both biotech focused hedge funds run by MDs and PhDs. They paid an average cost of $3.10 for Dynavax. That means if you buy Dynavax today you are buying it at 61% discount to what these top biotech hedge funds paid for their shares.
4) RadioShack Corp (RSH) – Three top hedge funds own Radioshack at much higher prices that what the stock is selling for today. Highfields Capital Management, top private equity firm Blackstone Group and Donald Smith & Company Inc. own more than 15% of RadioShack. The average cost these three hedge funds paid for RadioShack is $4.25. That is more than 20% above what RadioShack is selling for today. If you piggyback these top funds into Radioshack today you are paying a 20% discount to what these top investors paid for this stock.
Will Meade
President of The Billionaires Portfolio Providing Sophisticated Hedge Fund Strategies and Analysis For The Everyday Investor
In our research at billionairesportfolio.com, we have looked at every private equity and corporate takeover deal going back more than 15-years. In our analysis of that history, we have found over ten statistically significant and predictive factors for companies that tend to be acquired.
At a high level, if you want to try to find companies that may be takeover targets, you want to look at stocks in sectors where there have been a lot of recent and historical takeover activity. Of course, a company that has little or no debt, plus lots of cash flow is very attractive. And if you can find a stock that satisfies those factors and is trading near a 52-week low, you have a very viable candidate.
Based on recent buyout activity this year, no sector is hotter for takeovers than retail . Still, a number of retail stocks are selling near their 52-week low and many of these companies have little or no debt, and lots of cash flow.
Below is a list of retail companies we think could be acquired for a significant premium in the next three to six months:
1) Aeropostale (ARO) has already seen private equity interest. Sycamore Partners recently acquired almost 9% of Aeropostale a month ago. Sycamore Partners has a history of taking companies private at a significant premium. Based on past takeover multiples in the retail sector, we believe Aeropostale could be acquired for as much as $15 a share. That would be a 66% premium to its current share price.
2) American Eagle Outfitters AEO +1.02% (AEO) has zero debt and currently is selling at very low multiples, based on enterprise value-to-free cash flow and enterprise value-to-ebitda. The company has a very strong brand name and is currently selling very close to its 52 week low of $13.14. When you consider previous takeover multiples in the retail sector, the incredible amount of free cash flow American Eagle generates (over $400 million last year), and the fact that they have zero debt, almost any private equity company should be interested in this stock. According to analysts, American Eagle is worth at least $20 on a takeover or a 52% premium from its share price today.
3) Body Central BODY -2.03% (BODY) is a retail company that focuses on young women’s apparel and accessories with stores located mostly in the east coast and south. The company has zero debt, a market cap of only $85 million and is selling right at its 52 week low of $5.15 (the stock price is currently $5.19). Based on previous takeover multiples in the retail sector analysts at Jeffries believe Body Central is worth more than $8 a shares on a buyout or a 54% premium from its share price today.
4) Francesca’s Holding Corp. (FRAN) is another female based accessory and clothing store with locations throughout the United States. The stock has zero debt and is currently selling near its 52-week low of $16.49 (the stock price is currently $17.08). Based on previous takeover multiples in the retail sector Francesca’s could be worth more than $26 on a takeover, or a 52% premium from its current share price.
Average investors make a lot of mistakes. Among those mistakes, they spend so much time worrying about complex stock picking issues and unrealistic “win rates.” They ignore the very simple things that are fundamental to investing. Perhaps the biggest mistake investors make is ignoring the concept of diversification.
Now, I’m not talking about adding gold or Chinese stocks to your portfolio. A basic, yet powerful diversification tool is position sizing. Most people blindly buy a fixed amount of shares of a stock, regardless of the price of the stock, regardless of the volatility of the stock.
An easy way to position size is to give each holding an equal chance to perform for you. This means for
each position you buy, you allocate the same amount of money.
Let’s look at a simple example: Assume I have a $100,000 account with a portfolio of 20 stocks … if TEN of my stocks over the next year do nothing (trade sideways), SIX stocks go up an average of 30%, TWO stocks go up an average of 150%, ONE stock drops 50% and another stock goes to zero (a 100% loss).
Would you consider that a success or failure?
My guess is most average investors would consider it a failure. They held ten stocks that didn’t go up. One went to zero.
My take: If you could replicate the performance of that portfolio, year-in and year-out, over your entire you life you would be the best investor in the history of the world. And your wealth accumulation (just on compounding that initially $100k over a lifetime) would land you in the top 1/10th of 1% of the wealthiest people in the world.
So, let’s do the math on the above portfolio scenario.
On a $100,000 account 20 stocks equal weighted would mean that you would invest $5000 on each stock. So TEN stocks that went up zero would still be worth $50,000. The SIX stocks that went up on average of 30% would now be worth $39,000 (on $30,000 originally invested). The TWO stocks that went up 150% on average would now be worth $25,000 (on $10,000 originally invested). The one stock that dropped in half would be worth $2500 (on $5,000 originally invested), and the one stock that went down 100% would be worth zero ($5,000 loss).
Okay, so let’s add these values: $50,000 + $39,000 + $25,000 + $2500 +0 = $116,500
Our $100,000 portfolio is now we worth $116,500. That is a 16.5% annual return. That’s double the average historical return of the S&P 500. And a 16.5% annualized return, compounded on a $100,000 initial investment, goes to $177 million in 50 years.
So now you see the value of diversifying. And the easy way to get diversification is through position sizing.
Put simply: It increases your odds of making money. And making money is THE PRIMARY GOAL in investing.
10/7/13
In past weeks, I’ve talked about some simple, yet powerful screens we run at billionairesportfolio.com
The goal for all of our screens is to identify stocks where the potential reward greatly outweighs the risk, or stocks that have an asymmetrical reward to the risk taken. Finding stocks with these characteristics is the genesis of deep value investing. This is also a key criteria we utilize at the billionairesportfolio.com.
In addition to searching through SEC filings for investors that are building controlling interests in companies, we like to run a series screens to try and find stocks that have a 100% to 200% potential upside combined with limited downside risk.
Here’s another example of one of the top screens we use:
First, we look for companies with a market capitalization greater than $25 million. For the second level of the screen, the companies much have more than three analysts covering the stock. Third, there has to be more than three analysts that have a price target on the stock. Finally, we want to find stocks that are trading at a huge discount to analyst consensus price targets.
Anyone that has worked at a hedge fund or mutual fund knows that Wall Street analysts move stocks. Stocks that have consensus analyst price targets well above their current share price, have strong sentiment and Wall Street sponsorship which usually pushes these stocks higher in the short term.
In running this screen for this this week in October, the following five stocks have hit our radar as high potential, deep value candidates. These stocks have an average analyst price target that is at least 200% higher than its current share price.
1) Ceres Inc. (CERE) has a current share price $1.46. The consensus analyst target price is $5.67. That gives us a “street projected return” of 288%.
2) GSE Holding Inc. (GSE) has a current share price $2.10. The consensus analyst target price is $6.40. That gives us a “street projected return” of 205%.
3) Kior Inc. (KIOR) has a current share price of $2.32. The consensus analyst target price is $7.10. That gives us a “street projected return” of 206%.
4) Echo Therapeutics (ECTE) has a current share price $2.55. The consensus analyst target price is $9.33. That gives us a “street projected return” of 266%.
5) Immunocellular (IMUC) has a current share price $2.67. The consensus analyst target price is $10.25.
That gives us a “street projected return” of 284%.
This gives us a great starting point to identify a stock that may be deeply undervalued coupled with strong Wall Street sponsorship and sentiment.
On Monday Blackberry’s biggest shareholder, Fairfax Financial , announced a bid of $9 a share to take the company private. This is not the end of the Blackberry saga, it’s likely just the beginning.
Of course, the investor behind Fairfax is Prem Watsa. Watsa’s Fairfax owns around 10% of BBRY at much higher prices, roughly $17 per share.
With an official bid now on the table, and a November 4 deadline, Watsa’s bid creates a virtually risk-free trade for other influential investors to enter the trade. By stepping in today, an activist investor or group would have a floor in Watsa’s bid, and the power to influence shareholders to fight for a higher price for their shares.
Moreover, we have 42 days to see if another buyer, with a better bid, will come to the table. In Blackberry, we have the real opportunity for a bidding war. An activist investor that enters Blackberry may find himself owning shares in a company with an implicit floor, while composing a bidding war.
Are there challenges associated with Canada’s takeover laws. Yes. Will that mean one of the world’s best technology providers in the cell phone/mobile computing space quietly goes away for half of its book value? Unlikely.
Back in 2011, there was a company by the name of America Online. AOL AOL -0.51% too was considered a rapidly dying business. It was hated by and poorly understood by analysts. But it had a fantastic balance sheet, and valuable patents and technologies. Starboard Value stepped in and acquired a huge position in AOL. They forced the company to sell its valuable patents and technology. In doing this they created instant value for the shareholders. AOL’s stock price went from a low of $10 in August of 2011 to over $40 in April of 2013.
Blackberry is a stock with about $5 in cash per share with zero debt. The company, according to a consensus of analysts has anywhere from $8 to $10 worth of patents and technology. Regardless of the synergistic value creation that those patents and technology could mean for another big mobile player (Apple AAPL -1.46%, Samsung, Microsoft MSFT -1.02% …) Blackberry is still selling for a substantial discount to its break-up value.
We may see three potential outcomes for Blackberry, with the involvement of an activist investor entering this situation:
Scenario 1 – Mr. Watsa has supplied a floor from which an activist investor can negotiate from on behalf of shareholders. The result: Virtually no risk and a potential premium to Watsa’s bid won for shareholders.
Scenario 2 – With an approaching November deadline and a bid on the table from Watsa, a rapidly evolving bidding war could ensue for the coveted Blackberry technology.
Scenario 3 – An activist investor could block Watsa, force the sale of Blackberry’s most valuable assets, and then force management to pay out a one-time special dividend to its shareholders.
Bottom line: With a takeover bid in place, Blackberry offers a very attractive asymmetric risk/return profile. The stock is just in need of at least one influential investor to fight for the highest value for shareholders in a Blackberry sale.
Consider this: Comparing a Blackberry outcome to the AOL outcome (where Starboard Value forced the company to sell patents and change its strategy), Blackberry could be worth anywhere from $21 to $25 a share.
Another interesting comparable: Dell.
According to Bloomberg, when Dell was taken private by Michael Dell and Silver Lake Partners, at under 6 times its EBITDA for the prior 12 months. The valuation ranked as the lowest multiple ever paid in a buyout of a technology company for more than $1 billion.
At $9 per share, BBRY would be valued at just 1.3 times EBITDA – a quarter of the cheapest takeover in the history of billion dollar+ tech takeovers.
At BillionairesPortfolio.com, I am always looking for deep value stocks that are owned by some of the world’s top hedge funds and billionaire investors.
Nothing represents a great value play more than a stock that is trading below the cash it holds on its books.
A stock that is trading “below cash” means the company has more cash on its balance sheet than its entire market capitalization. As billionaire hedge fund David Tepper put it “buying cash for less than cash” is one of the easiest ways to make money in the stock market.
Here are five stocks that top hedge funds own that are also trading below cash:
1) STR Holdings, Inc. has $1.74 per share in cash and has zero debt. The stocks sells for only $1.72. Top hedge fund Red Mountain Capital Partners owns nearly 15% of this stock.
2) Career Education Corporation has $3.44 in cash per share and zero debt. The stocks sells for $2.66. Blum Capital Partners, a top hedge fund/private equity firm, owns almost 14% of this stock.
3) AVEO Pharmaceuticals AVEO +0.96%, Inc. has $3.04 per share in cash and has zero debt. The stock sells for only $2.09. Billionaire and legendary hedge fund manager, Seth Klarman of the Baupost Group owns more than 7% of this stock.
4) The First Marblehead Corporation has $1.23 per share in cash and has zero debt. The stock sells for just $0.85. Value-based hedge fund Mangrove Partners owns almost of 10% of this stock.
5) Savient Pharmaceuticals, Inc. has $0.71 per share in cash and has zero debt. The stock sells for only $0.62 cents. Top biotech hedge fund Palo Alto Investors owns more than 13% of this stock.
Disclosure: Clients of Billionaire’s Portfolio, own shares of STR Holdings (STRI)
