JetBlue: A Stock All Value Investors Should Consider

All value investors should pause for a moment and consider an investment in the airline industry. JetBlue Airways (JBLU) has done an outstanding job of building a niche franchise in a miserable industry. Very few investors seem to understand the unique franchise that JBLU has built. Selling for less than a pretty clean book value, and with a balance sheet that is better than it appears, I believe JBLU is a stock that value investors should own.

After a brief review of my sanity, I will explain some of JBLU’s unique characteristics, review its current valuation, and discuss a few miscellaneous topics.

THE WORLD’S WORST INDUSTRY

“It just might be a lunatic you’re looking for” – Billy Joel

Let’s answer the most important question first. Would any sane person invest in the airline industry?

-the big airlines have lost roughly $55 billion in the last ten years

-all the big airlines (except for Southwest Air (LUV)) have gone through bankruptcy

-Warren Buffett said, “The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.” – Warren Buffett, annual letter to Berkshire Hathaway shareholders, February 2008.

As a generalist value analyst for the last 30 years I must admit I seldom wasted a minute looking at this industry. Even though many of the stocks were often statistically very cheap, other than an occasional glance at LUV, I always had better things to do.

What changed? In a desperate search for new ideas, I reviewed the portfolios of professional investors who I have great respect for. One whom I particularly admire is Donald Smith & Co. This firm manages over $3 billion in institutional money using a strict discipline of investing in only the bottom 10% of price/book value stocks. Looking at their portfolio, I think they really understand this unique universe. Smith & Co. has owned JBLU since 2008, and they are now the largest shareholder with just over 10%.

It is also worth noting that the guys at PRIMECAP Management own 8% of JBLU and 11% of LUV. These guys are too growth oriented for me; they own things like Google and Amgen. Even the well respected John Hussman started a small position in the last quarter.

Have these apparently smart investors all gone mad? When I spent some time looking at JBLU, I must admit I was surprised by what I found.

The complete article can be found here on Seeking Alpha.

Please contact us for a copy of our report.

WPX Energy Trades Below Tangible Book Value, Smart Investors Are Buying

A few months ago, we looked at the merits of Rosetta Stone (RST), the investment idea presented by David Nierenberg of D3 funds at the Value Investor Congress in Las Vegas. In this article, we are going to examine, WPX Energy (WPX). The idea was presented by Guy Gottfried of Rational Investment Group. The presentation can be found here. Readers will have to scroll down the page to find it. What intrigued us about WPX initially was that at the time it was presented it was trading for 66% of TANGIBLE BOOK value. While that might be expected if the company was a bank or insurance company or had a huge debt maturity looming, it is rare for an E&P company to trade at less than even 1.5X book.

Using reasonable estimates for the value of the company’s oil and gas reserves, WPX appears to be even more undervalued. In this article, we will expand on Mr. Gottfried’s analysis to show that WPX appears to have considerable upside with a reasonable margin of safety for investors. We  also like it when other value investors whom we respect come to similar conclusions on valuations and investment thesis. In addition to reading company annual reports, we read the reports and commentaries of mutual fund companies such as FPA, Third Avenue Value, GMO and Aegis. Many times these funds go into detail on an idea and the methodology used to analyze a company. In the first quarter Aegis Fund quarterly commentary, the portfolio manager Scott Barbee makes his case for WPX in the following excerpt. Mr. Barbee also expands on the thesis a bit more in the latest Value Investor Insight publication.

(click to enlarge)

Source: Aegis Fund Q1 Shareholder Letter.

Here is a summary table of his valuation metrics. Please do not let the precision of the numbers give you a false sense of certainty in them.

Aegis Value Fund Valuation Price per Unit Value ($M)
Nat Gas Proved Reserves (TCF) 4.1 $1.25 $5,130
Bakken Oil (MBBL) 68 $20.00 $1,360
NGLs (MBBL) 132 $6 $792
Undeveloped Bakken/Marcellus $450
Total $7,732
Net Debt $1,500
NAV $6,232
NAV per share $31.16
Current Price $19.00
Upside 64%

 

This was the starting point for our analysis. Our entire report can be found on Seeking Alpha, here. Please email us if you want a copy of the report.

 

Dick’s Sporting Goods: The Catalysts are Here – Take a Position before Analyst Day

We are posting a report by Shaun Currie, a former co-worker. Shaun’s work has been featured before and believe he is a good example of how a young analyst can improve his skills over time with a modest amount of mentoring. We encourage other young analysts to read his reports and follow his progress. He has started a research firm that you can find with this link.  Young investors should develop their own process and analytical style by exposing themselves to a multitude of investors and deciding what fits their personality and mental make up. Value investing takes a certain type of personality and mental outlook and isn’t something that everyone can succeed at. The wide variance in styles of successful value investors (Schloss, Gabelli, Tweedy Browne, Buffett, Whitman, etc.) shows that there is a place for many types of personalities.  At Investing 501 we try to encourage individuals to think for themselves, but try to focus that effort with examples and concepts we have found personally helpful.

Dick’s Sporting Goods: The Catalysts are Here – Take a Position before Analyst Day

Dick’s Sporting Goods recently presented at the Goldman Sachs (GS) retail conference, and the stock responded quite positively (up 10% since the presentation). But, with an investor day only a week away, there are plenty of catalysts to take the stock 20% higher. Catalysts Include:

  1. The new Field and Stream concept
  2. 2014 guidance is possible at the analyst day, and the company has a low bar to beat
  3. Increased guidance on store expansion makes the original 900 store goal more feasible
  4. The company is testing smaller store concepts, which has been something investors have been hoping for
  5. The company has a plan in place to reach double-digit margins
  6. The company is growing their e-commence and omni-channel platform, while increasing margins in the business at the same time
  7. The company is investing in more employees, which investors have been hoping for
  8. The company is taking share through their store-inside-a-store concepts with the major apparel companies

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Crimson Wine Group: You can buy the wine for a 20% discount, but not the stock.

In the past few years, investors have come to understand the investment opportunities that corporate spin-offs can provide. The successful five-year track record of the Guggenheim Spin-Off ETF (CSD) has highlighted this opportunity. This article is going to examine the investment merits of Crimson Wine Group (CWGL), which was spun out of Leucadia National (LUK) earlier this year at around $7.30 per share. The company is not followed by Wall Street and keeps its conversations with investors to a minimum. Company does not issue earnings press releases, doesn’t hold conference call and doesn’t give guidance or much detail about the operations of its business. Most of the information about the company has to be gleaned from SEC filings and outside sources. Information voids such as this can lead to opportunity for diligent investors.

Before going any further we think it is important to repeat what Ian Cummings wrote about the wine industry in a past LUK annual report:

“We repeat our mantra on the wine industry: Even in good times, it is difficult to make estate wineries profitable, though as real estate investments they are good inflation hedges. The entire industry suffers from oversupply and intense competition from home and abroad. The sheer number of brands, combined with owners having to sell out last year’s vintage at (or below) cost, is a constant anchor on price. Estate wineries have high fixed costs and require large marketing dollars, making volume the key profit driver. We need more volume to make our goal of consistent, yearly cash flows a reality.”

There seem to be two basic investment angles that investors are considering when evaluating CWGL. The first is that the current book value of the assets on the balance sheet understates their current value and the second is the potential for the company to expand its current operations and to roll-up wineries to boost case sales, leverage costs and produce free cash flow. Even though there is much to like about CWGL, we find it hard to make a case that it offers a compelling valuation with a sufficient margin of safety at its current valuation.

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The Illusion of Control

The genesis of this post is couple of documents that I rediscovered on the ValueWalk Scribd page. The first is a speech given in 1981 by Dean Williams of Batterymarch Financial Management entitled, “Trying Too Hard”.  The second is a research publication written by James Montier called, “Seven Sins of Fund Management”.  Ironically, one of the main points made in both pieces is that investors (me included) spend too much time exposing themselves to all the informational noise that is distributed over the internet in the hope of boosting confidence enough to be comfortable with our investment decisions. As my co-founder Gregg constantly points out, over the long-run you will probably do better building a portfolio of companies that makes you uncomfortable than building one that makes you comfortableIn this article I am going to discuss why your investment process should be focused simply on understanding and valuing businesses, and being better at it than other investors. Trying to increase your confidence by gathering information that is supposedly unknown to most others really only makes you more comfortable with your investment decisions, not better at them, and is generally an unproductive use of your limited time.

 There are no answers in this business. There’s just a hell of a lot of questions.”-George Russell Jr. of Frank Russell Co.

Relative to the last ten to fifteen years, there has been a significant increase in the amount of investment-oriented information available to investors. In trying to provide investors with information that “is not in the current stock price” and therefore giving them an “edge”, many Wall Street, and independent investment research providers have begun focusing on such areas as “forensic” accounting, “channel checking”, public policy analysis, “lie detection” on conference calls, data mining and “expert” networking. Investors can find a diversity of opinion on a company because professionals and non-professionals alike publish and share their investment ideas on sites such as Seeking Alpha, Motley Fool, GuruFocus, Value Investors Club and SumZero. There are numerous investor conferences where attendees can hear ideas from “gurus”, portfolio managers, activist investors and contest winners. There are bloggers who aggregate news stories and analysis.  Investors can set up RSS feeds and use websites like Reddit to keep abreast of all the investment news they deem important. But do we really need to be doing all of this? How much information is enough and how much is too much? Let’s just say that the signal-to-noise ratio for investors has degraded substantially over the yearsIn spite of the large increase in investment information relative to the past, there is little evidence that active managers in aggregate have improved their performance relative to passive strategies. In addition, assets in passive investing strategies continue to increase as a percentage of total invested assets. Instead of lengthening investing horizons because investors have more information to make supposedly better long-term decisions, the obsession with trying to utilize all of this information has actually shortened them. Average holding periods of stock in mutual funds is under 11 months and the SPY turns over its assets once a week (investment periods which are too short for fundamental oriented investment returns to manifest themselves). It appears as though trading a stock on “the new news” has replaced investing in a real business for the long-term as an acceptable investment strategy.

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10 Top Value Ideas From The Keeley Small-Cap Value Fund

With the market hitting all-time highs, it is extraordinarily difficult to find new value ideas. At times like this, using typical screens or the 52-week low list is often unproductive. However, the search for new ideas must go on. One of the best methods of finding ideas is to search through the publicly disclosed portfolio of a well respected value mutual fund. In this article, we are going to look at the Keeley Small Cap Value Fund (KSCVX) here.

As Investing 501 begins to build its model portfolio, this will be one of the main methods we will use to find new ideas. If you want to know why we selected this particular fund, look here. If you are interested in our process for conducting these reviews, see the methodology discussion at the end of this article. First, our favorite 10 ideas from the KSCVX portfolio:

 

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Central Garden and Pet: Every Dog Has It’s Day

With the markets at all-time highs, it is becoming increasingly difficult to find many potential investments while perusing the new lows list. Most companies on the list are either mortgage REITS or have some connection to mining raw materials. One of the few companies on the list that doesn’t fall into that category is Central Garden and Pet.

The clever descriptions of the company’s current state of affairs, (like the one in our title) are endless. As we have said many times before, most stocks that show up on value screens are cheap for a reason, or perhaps many reasons. Central Garden and Pet certainly fits that category. We wrote an analysis of some of the things that may go right in the future and posted it on Seeking Alpha. The article can be found here for the next 30 days.

What we find interesting is that the typical response we get from readers of our analysis is that it is interesting, is “cheap”, but there are no signs that any of our analysis is coming true or will come true.  Their conclusion is usually, “I want to wait for signs of improvement before I take any action.” It has been our experience that investors who wait for signs of improvement end up paying a much higher valuation for the company and therefore have a lower expected return than investors who took a “leap of faith” and bought at a lower valuation, but with much less clarity. Warren Buffett is often quoted as saying “investors pay a high price for certainty.” The implied message being that investors will get better returns by paying a lower price for uncertainty. Yet when those situations seem to present themselves, few investors actually put their money where Warren’s mouth is.

Here is the basic premise:

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