This should be a quick post covering a few threads that I've been meaning to catch up on given how busy the past week has been in the distressed debt market.
1) A month ago I posted a deliberate practice investing exercise where I displayed summary financials for 3 companies and you were to guess the stock price. The savvy trickster readers noted they could simply sort the index in which I was drawing stock tickers from to determine the names and prices of the companies. For those that are still wondering:
- The first company was BEBE. Stock price was $5.63. Of all the stocks, surprisingly this was the one most readers were closest to. I think most people realized that it was a weaker company given the lackluster sales grow combined with declining earnings and cash flows.
- The second company was EW trading at $100.66. I had never looked at Edwards Lifesciences before. This was the company that most investors undervalued and by a pretty dramatic margin. The average reader guessed in the $50-$60/range. Currently EW trades at 23x 2012E EBITDA. The stock is up 46% on the year.
- The last company was ITC at $69.13. The studious readers guessed this was a utility given increasing dividends, earnings, asset base and capex, and priced the utility accordiningly.
Zweig: Seth, you started your career at Mutual Shares, working for Max Heine and alongside Mike Price. Can you give us a couple of lessons you learned from those gentlemen?
Klarman: What I learned from Mike—and I worked most closely with him—was the importance of an endless drive to get information and seek value. I remember a specific instance when he found a mining stock that was inexpensive. He literally drew a detailed map—like an organization chart—of interlocking ownership and affiliates, many of which were also publicly traded. So, identifying one stock led him to a dozen other potential investments. To tirelessly pull threads is the lesson that I learned from Mike Price.Later in the interview, the "pulling of threads" comes up again. In asking what Baupost looks for in hiring:
Klarman: We also look for ideational fluency, which essentially means that someone is an idea person. In response to an issue, do they immediately have 10 or 15 different ideas about how they would want to analyze it—threads they would want to pull à la Michael Price—or are they surprised by the question? We don’t want them to be sitting at their desks not knowing how to pursue the next opportunity when it comes along.3) On June 20th, I wrote a post stating I was short CMEDY stock. After what I have described to colleagues as one of the craziest situations I have ever been a part of, a stock squeeze pushed the stock up to $12/share. I shorted a bit more with my average cost working out to around $7.50/share (I was a bit early in upping the short). I will admit that this one was an emotional one for me - angry emotions. Subsequently the SEC halted the stock and OTC slapped BB on CMEDY (buyer beware). The stock re-opened on Monday as the SEC can only halt shares for two weeks administratively. The stock trades in the grey markets now and closed the day at $3.00. Roddy Boyd, a favorite blogger and writer of mine (his book on AIG is one of the best out there) has been keeping readers up on the situation: Financial Investigator on CMEDY.
4) The Distressed Debt Investors Club has a job board for contributing members (guests are unable to see). If you have a distressed job you'd like to post there, please contact me and I will put it up for you. Our analysts and PMs are some of the best in the business with investment analyses they can point to that have been written up and vetted on the site.
5) I promised a Hawker valuation last week. I'll post one on Thursday. I think the Term Loan isn't the slam dunk everyone is saying it is with real deal risk and a deficiency claim that might not get you to the mid 80s recovery a number of desks are pointing to.
6) A number of new distressed funds have been announced in the past few months. For instance, Bloomberg broke a story that Buckley Ratchford, former head of bank debt trading and distressed investing at Goldman, plans to launch a fund next year. A few weeks ago it was announced Kiernan Goodwin would also be launching a credit fund (Panning Capital Management) with a pretty stellar staff. If you are launching a credit / event-driven fund, or know of someone that is, and would like to be interviewed on the site, please reach out to me. Last month the site received nearly 200,000 visits from across the world including many endowments, pensions, and fund-of-funds that are looking for emerging managers to invest in. The content of past interviews has always been a favorite of mine (and readers) on the site and I want to add more of it in the future.