Friday, August 29, 2014

Stocks DD Opines: An investment methodology


Read, understand and consent to the blog's DISCLAIMER here before proceeding to read the article
Disclosure: I am NOT a registered investment advisor. Investing in stocks is very risky. Please consult your RIA and read all the disclaimer here.

Invest in quality stocks
1. Invest in Strong businesses (high barriers to entry and historically less competition) 
2. Invest in Management with excellent track record for shareholder value creation. 
3. Invest at undervalued prices

Invest in special situations 
1. Firms in temporary Distress 
2. Drug development firms, with an asymmetric reward/risk...where you have strong conviction on an event (Eg: Clinical event). For example, reward could change valuation by 6 times and risk could shave it by 50%. 
3. Firms with huge growth potential but growth is not factored in the price today. (Eg: MMYT 2 years ago)

Where to scout for ideas ?
1. Look for the stocks that the best Funds (that have a good 10-15 year return history) have recently increased position and is in their Top 5 of their portfolio. You can see this in whalewisdom
  • Pershing Square
  • Carl Icahn
  • Baupost
  • Perceptive Advisors
  • Baker Brothers
  • Greenhorn
  • Orbimed
2. If fundamentals have not changed since these funds took their huge positions, research their stock thesis, if publicly available. Activist funds generally publish their thesis. (Avoid shorting as it entails limitless risk)
3. Read the stock coverage in Seeking Alpha including comments
4. Listen to 2 years of Conference calls from Management to get a sense of business and management. Does management sound and act honest and accountable to shareholders and are they dedicated to shareholders.
5. Go over their last 2-3 years of 10-K's and 10-Q's (esp Business, Management outlook, Risk Factors)
6. Look at stock chart to understand how it has reacted to news/business fundamentals
7. Try to develop the bull thesis. Make sure it is not value trap (look for business trends, governance risk, dilution risk, etc) before buying.
8. Sell purely based on valuation, or if a better investment comes along. Good businesses with management having a track record for shareholder value creation can remain in the portfolio even if they are fairly valued.
9. Have a concentrated portfolio
10. Frequently engage with management of the stocks you own. Ask them, "how they plan to improve shareholder value?" Provide ideas or solutions to improve shareholders value. Compliment them, if they have done a good job for shareholders

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Wednesday, August 27, 2014

Stocks DD Cites: Could Fannie Mae relist in NYSE?


Read, understand and consent to the blog's DISCLAIMER here before proceeding to read the article

http://seekingalpha.com/news/1955705-fannie-mae-job-listing-sends-stock-higher

The GSE job posting that caused this speculation. This could be a red herring (one never knows).
->Link
->Link
Keep in mind, shareholders like Fairholme have rightfully asked the Fannie Mae Board of Directors to re-list the stock in NYSE. Link

It is my opinion relisting is very significant, if at all it happens. Remember most mutual funds and index funds are barred from investing in a OTC stock. 

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Thursday, August 14, 2014

Stocks DD Cites and Opines: Funds (including one of the best biotech funds, Perceptive advisors) significantly increase holdings in Taro


Read, understand and consent to the blog's DISCLAIMER here before proceeding to read the article
Disclosure: Long Taro.

Here is Q2 Whale wisdom 13F filings- link

As Taro continues to deliver on adding shareholder value, funds have significantly increased their stake. After >120% increase in share price from last year, Taro in June 2014 announced significant price hikes; This, in my opinion, is a signal that the board is continuing its intent on building value for ALL shareholders (as it should be; all shareholders are the owners). Taro's cash at the end of Q2 was ~$650m, expected to grow significantly in the 2nd half. In SUN's Aug 13th earnings call, Mr Shanghvi responding to an analyst question on the use of Taro's $650m cash said "Taro continues to look at potential acquisition opportunities. But we will remain disciplined about acquisition like we have been in SUN also. It needs to make long term business sense in terms of yield expectation post-synergy". This can be listened to between 27-30 min into the call. (I like Taro to lower risk profile and grow inorganically. I would like them look at specialty assets beyond just Derma, for example, an Opthalmology asset like Opthotech.) 

Notable Q2 Institutional shareholding change - Top 10 shareholders hold greater than 4 million shares (30%) out of 13.33 million minority/float shares
  • Consonance founder Mr. Blutt, a physician-businessman was a board member and part of the Corp Governance committee at Questcor. 
  • Perceptive Advisors in a dissidence vote successfully changed the entire Board at Penwest Pharma in 2010
  • While Bluemountain reduced its holdings, we have seen  Schroder, Consonance, Perceptive, Hotchkis, Renaissance and Acadian all buy into Taro. Together the top 10 hold greater than 4 million shares (30%) out of 13.33 million minority/float shares. This is a significant development as Israel provides minority shareholders significant voice and protections including a vote on the 2 independent director seats. There is a suit by Blue mountain and Iszo capital in Israel challenging the last proxy vote for independent director election. Please note that the margin of defeat for minority nominees wasn't wide. Here is Bluemountain's request for investigation of the proxy vote. Note that ALL current members of the Board are nominees from majority.
  • Consonance capital's founder Mitchell Blutt is a physician businessman with significant investment and medical experience and had served on the board and the corporate governance committee of Questcor. As a shareholder, I would like to see such experienced minds contribute ideas (even if, passively) and help take our company to new heights.
  • Joseph Edelman leads Perceptive Advisors and since 1999 the fund has returned an annualized 30.2%. Last year, the fund returned about 48%. Edelman works with six biotech analysts.  Ahead of Amicus P3 data release, Perceptive advisors significantly increased its holdings in FOLD in Q2. Amicus(FOLD) released data in August. The stock has since tripled from Q2. You can see Perceptive's Q2 activity and their current top holdings here
  • In addition, other green shoots can be seen in the Q2 13F filings. Taro is finally starting to be noticed by the most ubiquitous mutual funds of America namely the Dimensional fund advisors, Janus Capital, etc. This is great for the long term as these big mutual funds make the market in most of the listed stocks in blue chip companies. 
Valuation notes: 
Credit Suisse's Mumbai-based analyst recently in coming up with $150 price target has made the following assumptions:
  1. Taken into account only half of the $300m expected EBITDA increase due to the June price hikes. 
  2. Used 9 times EBITDA in valuing Taro (The Agila transaction that closed in Dec 2013 happened at 18.6 times EBITDA)
  3. ROW market potential and Novexatin ($6b Onychomycosis NDA opportunity) have no mention in the report.


ISZO CAPITAL MANAGEMENT LP1,104,168$ 154,849,00080.27%73.74%140
HOTCHKIS & WILEY CAPITAL MANAGEMENT LLC510,952$ 71,656,0000.25%0.19%8955,700
CONSONANCE CAPITAL MANAGEMENT LP378,372$ 53,063,0007.89%4.55%3103,140
RENAISSANCE TECHNOLOGIES LLC371,200$ 52,057,0000.12%0.07%182102,800
SCHRODER INVESTMENT MANAGEMENT GROUP310,800$ 43,586,5920.05%0.00303310,800
PERCEPTIVE ADVISORS LLC301,333$ 42,260,0004.15%1.13%6204,322
GREYWOLF CAPITAL MANAGEMENT LP277,936$ 38,978,0005.77%6.29%63,751
RAGING CAPITAL MANAGEMENT, LLC253,236$ 35,514,0003.78%5.08%96,378
BLUEMOUNTAIN CAPITAL MANAGEMENT, LLC192,389$ 26,981,0000.46%0.86%59285,999
ACADIAN ASSET MANAGEMENT LLC178,791$ 25,071,0000.12%0.02%183139,691
KENNEDY CAPITAL MANAGEMENT, INC.100,711$ 14,124,0000.26%0.21%111639
MOAB CAPITAL PARTNERS LLC93,133$ 13,061,0006.27%4.54%5300
MORGAN STANLEY58,267$ 8,171,0000.00%0.00%221518,382
JANUS CAPITAL MANAGEMENT LLC56,806$ 7,966,0000.01%0.00%72041,455

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Wednesday, August 13, 2014

Stocks DD Cites: Bill Ackman's letter to investors



Has some correct thoughts on shareholder activism.

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Tuesday, June 24, 2014

Stocks DD Cites : Valeant's Rebuttal to Allergan's Rebuttal


Read, understand and consent to the blog's DISCLAIMER here before proceeding to read the article

http://valeant.com/Portals/46/PDF/Allergan%200623.pdf

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