4 Intriguing Stock Ideas From the Value Investing Congress
The Value Investing Congress is the biggest investing event of the fall. Top value-centric minds like Bill Ackman and David Einhorn gathered to pitch their top investing ideas to a tough crowd of hundreds of like-minded pros. We made our predictions on the top stocks and biggest themes of this year's event before we headed up to New York to catch it in person. These, though, are the best of the guru's pitches that jumped off the PowerPoint slide and left us itching to do further research:
Joe Magyer, Inside Value: Greenlight Capital's David Einhorn laid out a great case for a stock I predicted would be pitched: General Motors (NYSE: GM) . The case is clear to investors willing to judge a stock by more than its paint job. GM has streamlined its brands and cost structure, weaned itself off aggressive discounting, and has a slate of new vehicles rolling off the line over the next two years. Yes, the European business is struggling and the company is still slimming down its pension gap, but a forward P/E of six and $32 billion in cash leave plenty of wiggle room for the stock price and balance sheet.
I was also intrigued by turnaround specialist Lloyd Khaner's case for juice-slinging Jamba (Nasdaq: JMBA) . Jamba isn't my usual cup of OJ -- it isn't profitable and doesn't boast any meaningful competitive advantages -- but I'm interested because of the trio of low expectations, accelerating same-store-sales growth, and Jamba's logical high-margin brand extensions into consumer packaged goods and self-serve units geared toward public schools. I want to do more research on this one, but based on Khaner's case it is easy to see a path where patient investors could land big returns from Jamba over the next three years.
Michael Olsen, CFA, Special Ops and Million Dollar Portfolio: If nothing else, give Alex Roepers, head of Atlantic Investment Management, credit for the courage of his convictions. He's earned that right; his Cambrian Fund has averaged 18.5% annualized returns from inceptions. Yesterday, Roepers somewhat boldly proclaimed: "Coal consumption may be declining in the states, but it's a growth market globally." Of the fossil fuel trifecta, coal is roundly maligned these days. Recently depressed natural gas prices prompted power companies to switch from coal to natural gas feed, and its reputation as the dirty fuel hasn't helped.
Coal consumption concerns and fears of a global slowdown have pushed shares of Joy Global (NYSE: JOY) , one of his picks, to the cheap threshold. One of only two truly global players in the underground mining and service industry -- think new age picks and shovels -- it derives about three-quarters of its revenue from the global coal industry. For all the concerns over U.S. coal consumption and a global slowdown, there's a large and growing market in China (which derives 70% of its power from coal), increasing electrification in India, and something of a wildcard in Germany, where politicians recently swore off nuclear power. That should mitigate the sting if U.S. coal consumption declines, in the long run. The U.S. story is also a bit more nuanced: I expect U.S. natural gas prices to move higher, and absent regulation, some coal demand will return. That demand will probably wane in the long run, but in the interim, emerging markets will continue growing.
Most significantly, maintenance revenue streams equaling 60% of sales bring some ballast to cash flows, reducing the risk posed by a nasty recession and the mining industry's sometimes erratic capital spending patterns. With the stock trading at eight times earnings, I'll be giving this one a closer look.
Joel South, Fool.com: With natural gas prices just off 10-year lows, it seemed inevitable that either an out of favor explorer and producer or a value play with exposure to a natural-gas-based feedstock would find its way into the Value Investor Congress. As it turned out, two firms pitched companies with exposure to gas but neither one was chosen for the reasons I suspected. The much revered JANA Partners pitched Agrium (NYSE: AGU) , the nitrogen-based fertilizer company, to the VIC. JANA detailed that the company could unlock significant value by separating its stable retail operations from its commodity-linked wholesale business, thereby moving away from a suboptimal conglomerate structure, which is currently draining value by inefficient capital allocation, stripping $50 per share of value. JANA's case rationalizes its thesis by comparing Agrium to its pure-play competitor CF Industries, and determined the company has consistently underperformed the weighted average returns from its pure-play competitors. Despite the estimated 50% increase in valuation JANA believes Agrium can obtain from better capital allocation, I like the nitrogen fertilizer industry as a whole, not only for the cheap natural gas input, but also because of growing global protein and agriculture consumption -- Agrium is my favorite in the space and a stock I recommend.
Bryan Hinmon, Pro and Options: Glenn Tongue of Deerhaven Capital Management thinks AIG (NYSE: AIG) is cheap. Why? "Taint." AIG was the poster child for the financial crisis -- its derivative exposure was the center of the spider web whose silk was tightly wrapped around nearly every global financial institution. AIG was too big to fail, and the U.S. government stepped in with $182.5 billion of taxpayer dollars to save it from death and the entire financial system from catastrophe. Yes, AIG earned that "taint."
But today, AIG looks much different. Its derivative exposure is virtually nonexistent and will be run off completely over time. The bulk of the company's profits comes from two respected insurance businesses, Chartis and Sun America, that operate in the mundane property and casualty and life insurance markets. Tongue points out that AIG is perhaps the most scrutinized company ever, with multiple government agencies requiring additional layers of disclosure, so the AIG of today has actually been scrubbed clean. The government has exited the bulk of its position, making AIG pretty close to just another insurer. But it isn't priced that way. Tongue believes AIG should be valued at least like an ordinary insurer (at about one times book value) and probably more. From today's price, that would be a doubling, and it will be a moving target as AIG grows its earnings and book value. AIG is a B-U-Y.