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29-06-2013, 01:03 PM
An Interview with Whitney Tilson
WARNING: long interview but imho worth reading, especially the bold part
http://www.fool.com/investing/general/20...ilson.aspx
Brendan Byrnes
June 17, 2013
Join The Motley Fool for a conversation with author, investor and philanthropist, Whitney Tilson. In addition to managing Kase Capital, Whitney has coauthored More Mortgage Meltdown: 6 Ways to Profit in These Bad Times, Poor Charlie's Almanack, and most recently The Art of Value Investing, a collection of interviews with over 200 successful value investors.
Whitney shares a wealth of insights on value investing -- what he's learned from the hundreds of investors he's interviewed, as well as his own thoughts and conclusions. Learn his views on giants like Apple, AIG, and Berkshire Hathaway, the bull and bear case for Netflix, thoughts on shorting and auto rentals, and the three most dangerous words in value investing.
A full transcript follows the video.
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Brendan Byrnes: Hi folks, I'm Brendan Byrnes and I'm joined today by Whitney Tilson. Whitney is the coauthor of The Art of Value Investing, and also the managing partner of Kase Capital. Thanks so much for your time.
Whitney Tilson: My pleasure.
Brendan: I wanted to start with how you came about doing the book, and the idea for the book. It's a bunch of interviews and quotes of influential, successful investors.
Whitney: Right.
Brendan: How did you pick these investors, first of all? What are some common traits that maybe they all have, and what are some of the investors? Maybe give us an example of some.
Whitney: Sure. The book grew out of a business I started actually, with one of my investors, a guy named John Heins. He's my coauthor.
About eight years ago we created a monthly newsletter called "Value Investor Insight," and every month we interview, in-depth, two of the best money managers we know. Typically, the lead interview is with someone very well-known -- a David Einhorn, a Bill Ackman, a Bill Miller -- either in the hedge fund or mutual fund world.
Then the second interview is with a lesser-known, but we think promising, up-and-coming money manager. Maybe someone who focuses on small-cap stocks, something like that.
Over eight years, we've interviewed almost 200 managers. We select them through reputation, through personal relationships, though referrals from other people we've interviewed. We've interviewed, really, some of the legends in the investing business, from Julian Robertson to Leon Cooperman to Seth Klarman, David Einhorn, Bill Ackman...legends in both the hedge fund and the mutual fund business.
We've developed a good reputation. We don't do superficial interviews with little sound bites focusing on stocks moving today, but rather in-depth interviews both on how they differentiate themselves in the world of investing: What's their edge? How do they think about investing? How did they get into the business?
Half the interview is an in-depth look at their business, how they got into it, etc., and then the second half of the interview is an in-depth look at maybe five stocks that they are currently long and bullish on -- occasionally short, but mostly long -- in their portfolio.
From those 200 interviews, we pulled out the...no stock ideas. It's just the principles of sound investing, so there's a chapter on circle of competence and a chapter on doing research and a chapter on when to buy and a chapter on when to sell and a chapter on short selling; all the foundations of a sound investment program.
We've taken the best stuff from the 200-odd interviews and pulled it together into this book.
Brendan: Obviously with 200 different interviews, there have to be a ton of different ways in which to go about being an investor.
Whitney: Yes.
Brendan: ...a ton of different ways that work for different people. Are there some common themes that you notice in there, and common ways people go about things, or things that make them successful? Is it discipline? Is it a focus on the long term? Is it...?
Whitney: These are all value investors, but in value investing there are a lot of different flavors. Generally speaking, value investing is very simple in concept. It is rooted in the two timeless principles of intrinsic value, and then margin of safety.
All of the people we interview are practicing some form of that, but the most successful investors, I find, have a narrow -- not too narrow -- but a strategy that they can execute, that they've gotten good at, that they've built expertise over.
Some people focus on certain market caps, on certain industries, limit themselves to certain countries. There's a lot in here. I think value investing is simple in concept, very difficult to execute. You have to make some tough decisions about what you're going to do, but also what you're not going to do, and stay very disciplined around that.
This book gives a lot of different ideas about how everyone has a little bit different answer on how to answer the circle of competence, on how they do research and how they get an edge. There's a lot in here to chew on.
The book does give some answers, but not all the answers are the same so you, the reader, have to decide what resonates with you. Learn from what's made different people successful, and then incorporate it into your own distinct investment approach.
Brendan: As you mentioned, there could be a lot of different definitions of "value investing." How do you, yourself, define value investment?
Whitney: I cast a pretty wide net. I call myself an "opportunistic value investor," so there are some stocks in my portfolio that are sort of classical Ben Graham/Walter Schloss, cigar butt, statistically cheap but lousy businesses, all the way up to some of the world's greatest businesses, where I knowingly have paid up.
I've paid a higher price than I normally would, in terms of price to book or price to earnings, or so forth. Berkshire Hathaway (NYSE: BRK-B) is one of my largest positions, and in fact is the only stock I have owned continuously in almost 15 years now that I've been managing money professionally, but it's ranged from a 30% position to a 3% position in my fund, depending on how attractive it was, relative to its intrinsic value, but also relative to other things I could buy in the marketplace. Today it's about a 10% position.
I think I cast a pretty wide net; probably a wider net than most value investors, because I have yet to find someone who owns both Netflix (NASDAQ: NFLX) and Berkshire Hathaway. I saw a lot of value in Netflix at $50 just seven months ago, but I sized it a lot smaller than I sized Berkshire. It's not only picking the right stocks, but also managing a portfolio that's key to success.
Brendan: You said that the three most dangerous words in investing are, "I missed it."
Whitney: Right.
Brendan: I've definitely been guilty of this. Amazon (NASDAQ: AMZN) in the past, LinkedIn (NYSE: LNKD) more recently, when you look at that and you say, "Man, it's too expensive now. It's had this run up, why would I buy it now?" How should individual investors look at this? Should they reevaluate how they're looking at the company, and ignore that?
Whitney: This gets to the broader issue of controlling your emotions in investing. The reality is, there have been numerous studies over the years that show that, in so many different ways, human beings are hard-wired to be irrational when it comes to making financial decisions.
They buy at the very top, they sell at the very bottom. They won't buy a stock if they've been doing research on it and the stock runs up 10 or 20%. They say, "I missed it."
This scenario, where Warren Buffett has said, "Once you reach a certain level of IQ, and you have a certain amount of experience and training and so forth, what differentiates great investors from good investors from poor investors is the ability to control the emotional side of investing."
A very wise friend of mine once said -- he doesn't wish to be named, but he's the one who gave me this concept of "I missed it" -- he said, "Whitney, any time you look at a stock and it's run up, the value guy in you and I both say, 'you don't want to chase the stock.'
You don't want to buy it after it's run up a bit, and it's very frustrating to look at a stock at $10 and then by the time you finish your research it's at $12 and you say, 'I missed it.'"
He said, "Any time you say that, just put that idea out of your head and start with a clean mind that basically says, 'Today I have the opportunity to buy this stock at $12.' If intrinsic value is $20, I should still be buying that stock, even though it's run from $10 to $12. It's still cheap."
When I've been pounding the table on this principle of, "Get those words, 'I missed it' out of your head," I'm not saying to go and pile into stocks in general at all-time highs today. What I am saying, though, is that there are still some cheap stocks out there, and many of them have moved up quite a bit. They may have even doubled in the past year, yet they could still be bargains today.
Don't anchor on what the historical price was. Just look at what the price is today, and determine whether that's attractive or not.
Brendan: I think one of the stocks a lot of people might be saying "I missed it" on is Netflix.
Whitney: Yes.
Brendan: It's been a four bagger over the past seven months or so. You're still bullish. How come?
Whitney: I think it has enormous optionality on the upside. As a value investor, I'll say right up front it's very hard to value. I can't sit here and tell you, "Well, I've calculated intrinsic value as $300 a share plus or minus 5%" or anything like that, like I can do with Berkshire Hathaway. That's a company I can value in a pretty tight range.
Seven months ago, when I pitched Netflix at my conference, the Value Investing Congress, I said, "At $54, I can name a dozen companies that would love to own 30 million subscribers for $3 billion." About $100 a subscriber is what Netflix was valued at, at the time.
In a world where cable subscribers, cell phone subscribers, etc. are trading sometimes as high as $1000 a subscriber, here's Netflix at $100 a sub. Well, today Netflix is at about $400 a sub, having quadrupled.
I still think the company has a very, very long runway; that it could grow and grow and grow for the next 10 years, in the same way Amazon has in the past 10 years. I see a lot of parallels with Netflix today. I've been trimming Netflix all the way up. It's still a 3.5-4% position, where it was back at $50 a share. It's the same 3-4% position at $200 a share.
Brendan: You wouldn't necessarily be a buyer at this level?
Whitney: Well, look. To some extent, I buy my portfolio every day, in the sense that I could place an order in the next five minutes. I wouldn't own any Netflix, right?
I think, as a small piece of a diversified portfolio, Netflix makes sense to me as a small mispriced option, almost. I still think there's a lot of optionality to the upside, but I would caution people against buying stocks that have doubled, tripled or quadrupled in the last six months or so.
A lot of very dicey companies' stocks have ripped up a lot. I've suffered on the short side with some of those, but Netflix is bailing me out on the long side. I'd be very, very cautious in general about buying high fliers with a lot of momentum, that are difficult to value.
Netflix is one that I've gotten comfortable with, but there's really only one other stock in my portfolio -- and I own 17 stocks on the long side today -- there's only one other stock that looks like Netflix, and the rest of my portfolio is more things like AIG (NYSE: AIG) and Berkshire Hathaway, Goldman Sachs (NYSE: GS), Citigroup (NYSE: C), that kind of thing.
Brendan: You've also said that you think Netflix is a better business than Amazon. Why do you view it as a better business?
Whitney: Well, if you go back and you compare the balance sheet, the income statement, of Netflix today versus Amazon when it was the size of Netflix 10 years ago -- and by the way, Amazon stock has been a 20-bagger over those 10 years -- and by the way, Amazon has earned no profits, basically, in those last 10 years.
They have a deliberate policy of taking all of their cash flow and reinvesting it back into the business, such that their reported earnings are basically nil. That's the same thing that Netflix is doing, by the way. But Amazon's in a tough business. If you think about it, they actually have to ship products to you. They have to build huge warehouses.
It's a much more capital-intensive business than Netflix, whereas Netflix, the streaming business -- which is where most of the value is and where all the growth is for Netflix -- is if I'm streaming a show to you, and then a new subscriber comes along and I stream it to that household, there's almost no incremental cost for me to send some bits through the Internet pipeline.
Whereas if Amazon gets a second customer, they then have to ship more goods through the mail and build more warehouses to serve additional customers. Netflix, a streaming business, is inherently a lighter business model. The balance sheet is a lot cleaner. Amazon has always had net debt. Netflix has net cash.
I'm not sitting here saying I'm confident that Netflix, over the next 10 years, is going to grow in the same way Amazon has, but I think investing...once you've been around a while, everything starts to rhyme. Picking the right analogies between companies, as opposed to the wrong analogies -- because you can come up with an analogy to justify any position you want -- but getting that right, once you've been around a while, Netflix smells an awful lot like Amazon to me.
Brendan: A lot of the bear case for Netflix is surrounded around these big pocket competitors. Maybe Apple (NASDAQ: AAPL), maybe Amazon could come in and buy a bunch of content, and then Netflix could be left out. Do you buy that argument?
Whitney: It's definitely something I focus on. It's a major risk factor. By the way, it's the exact same argument people made about Amazon, 10 years ago, that Wal-Mart's (NYSE: WMT) just going to come in and crush them like a bug.
There are a couple of thoughts I have. Number one is, Netflix is $0.26 a day. It's $7.99 a month, so Netflix doesn't have to come at the exclusion of other things. A lot of people subscribe to Netflix and to Hulu, and to HBO, for example.
I think there's room for Netflix. It's such a low price point. That's one of the things. I was short Netflix, earlier in my young and foolish days, and I got burned as Netflix ran up a lot. One of the things I didn't appreciate was the value proposition Netflix is offering its customers.
It's not $80 a month like your cable bill. For $0.26 a day -- and the average Netflix streaming subscriber is watching more than an hour and a quarter a day -- so you're paying about $0.20 an hour to have 20,000 different movies and television shows. That's a heck of a value proposition. Even if something else comes along, I'm not likely to cancel my Netflix subscription. That's answer number one.
Answer number two is, Netflix now has about $4 billion a year of annual revenue, and they're plowing roughly $3 billion back into buying content; $3 billion a year, there are very few companies in the world that can subsidize -- that's the price of admission to the game now. To compete with Netflix, you've got to have comparable content, and that costs $3 billion a year.
Even mighty Amazon, with $100 billion-plus market cap, I think has to think very hard about whether they're really willing to write that kind of check to go compete with Netflix. They're trying, but as best I can tell they're not getting any traction, and we're not seeing much from Apple.
It's something I'm watching, but there are winner-take-all characteristics here. The more subscribers who sign up with Netflix, the more revenue that comes in that Netflix then reinvests in more, better content, which in turn attracts more subscribers. There's an incredible virtuous cycle happening right now with Netflix, that I think they could keep going for a while.
Brendan: Let's switch gears and talk about AIG, which I believe is your biggest holding in Kase Capital. What are some catalysts, going forward for this company?
Whitney: I see a number. First of all, the business is just going very well. They just reported earnings last week. They blew buy consensus estimates by about 50%. The combined ratio -- one of the key metrics for insurance companies -- dropped about three full percentage points.
Certainly, just underlying performance of the business, and generally insurance, the kinds of insurance that they're in, pricing is strengthening around the world. It's not just AIG that's benefiting, but it helps to have a tailwind for the industry.
Secondly, AIG does not pay a dividend, has not been buying back stock, other than the government auctions as the government exited. But now I think their balance sheet is strong enough, now that the government has been completely bought out of AIG, I think the company has a lot of flexibility to do some good things on the capital front.
Then lastly, just cheapness. The stock's trading at about $0.66 of book value, so about a third discount to book. This is in a world where most insurers are trading at one times book value, so right there I see 50% upside, just on the valuation multiple, on a multiple of book.
I think there are two reasons why it's cheap. One is just general historical taint. People still think of AIG as this ward of the government and an immensely complex business. Neither of those is true anymore, but old perceptions die hard.
Secondly, the company still hasn't worked its way back to generating a decent return on equity. They have a 5% return on equity. I think they should get to 10% in the next couple of years, and that will help drive a revaluation as well.
The last thing I'll add on that, just by the way, is management just got their stock options struck, so they had very strong incentives to sandbag earnings, keep the stock price low...
Brendan: Buy back from the government at a low rate.
Whitney: ...to get the government out at a low price, and that worked. They got out, and the government sold out in the $30 a share range, and now the government's out, they've got their options struck, and now management incentives have completely reversed.
I think the quarter we saw that they just reported, where they blew by estimates, I see that happening for the next year or two, as I think they've got some spring-loaded earnings to report over the next year or so.
Brendan: Let's talk about your second biggest holding, which of course is Berkshire. It's no longer crazy cheap like it was at the end of 2011, when it dipped under 1.1x book. How do you view it now, around 1.4x book value? How do you view that valuation, as opposed to intrinsic value?
Whitney: The way I value Berkshire is only secondarily as a multiple of book value, because book value is such an incorrect way to look at so many of Berkshire's holdings. Something like GEICO is being carried at book, but it's worth a significant premium to book.
Brendan: Do you think Warren Buffett should use a different metric, then, and look at repurchasing shares, when he says 1.1x book, and now 1.2x book, what he'd repurchase under?
Whitney: I think book value is tracking the intrinsic value of Berkshire, but intrinsic value is certainly higher, and that gap has probably been widening over time as GEICO has grown, for example, and Berkshire's businesses have gotten better over time.
Part of the reason Buffett increased the threshold at which he was willing to repurchase shares from 1.1x book to 1.2x book, was reflecting the fact that the actual intrinsic value is probably closer to 1.5-1.6x book. That's moved up, so he's increased his purchase price.
But again, this is a good example of the "I missed it" phenomenon. I think a lot of people look at Berkshire today and just say, "The A shares have run from closer to $100,000 a share to over $160,000 a share in not much more than a year. I've missed it."
Well, people have been saying "I missed it" on Berkshire...When it ran from $100 to $1000, they said "I missed it," and then $1000 to $10,000, then $10,000 to $100,000. Each time, they didn't miss it. They just had to wash that thought from their brains, and evaluate it.
I value Berkshire, just taking the cash and investments per share, as a little over $120,000 a share. Then I just put an eight multiple on the pre-tax earnings of the operating businesses, about $9000 a share. You take $9000 a share of earnings, times an eight multiple is $72,000 per A share. Add the cash bonds and investments of $120,000 per share, and you get a bit over $190,000 per share of intrinsic value.
Stock's at $160,000 or so, so I'd say Berkshire, one of the world's great businesses, just the underlying businesses are going gangbusters, is about an $0.85 dollar today. It's about a 15% discount to intrinsic value.
Look, as long as you have modest expectations -- I want to do better than an S&P 500 index fund while taking lower risk, but I'm not expecting to double my money any time quick -- Berkshire, I think, is a great addition to a portfolio.
Brendan: What's your biggest worry about Berkshire? Did Doug Kass bring up anything on the bearish side that made you say, "Wow?" It seemed like more he regurgitated a lot of the bear argument: "Warren Buffett, at some point, is going to be gone." "It's so big, how much bigger can it get?" Are you buying those?
Whitney: I think he raised the fair concerns. There was nothing there I hadn't heard before. Doug's a friend, and I've corresponded with him about Berkshire, so there wasn't anything that surprised me. I think he did a good job with a thankless task, which is trying to rain on what is one of the most incredible parades of all time.
The annual meeting was on Saturday. On Friday the stock closed at an all-time high, and Berkshire reported probably its all-time best quarter. That's what Doug had to try and poke holes in, right?
A company run by two of the greatest, highest integrity, smartest investors of all time, on top of that.
I think the most important questions he raised were, number one, is size going to be an anchor for you, and what kind of returns can we expect going forward, given how large Berkshire is? Buffett and Munger have been saying this for years, that size is going to be a huge anchor for us, like it is for everyone, so keep your expectations modest but we still think we can beat the S&P 500 and index funds, which in turn beats 80% of active managers.
The second question he raised is a fair question about Berkshire post-Buffett. I do worry about that. Warren Buffett is unique. He is irreplaceable, and I'm sure he has a great person lined up to fill his shoes, but that person will not be Warren Buffett.
What gives me comfort there are two things. One, my valuation metric assumes no Buffett premium. Cash investments, a multiple on the current earnings...none of that is there a Warren Buffett premium built in.
The second reason is Buffett, I think, is in great health. Mentally, I've never seen him sharper, and I think it's almost certain that he will be running Berkshire the next 5 years, and there's a decent chance he might be running it for another 10 years. If I don't have to worry about something until 5 or 10 years out, that's pretty good.
Brendan: We talked about one of the problems with Berkshire being, of course, it's so big. A lot of these mega large caps had that same problem. For Apple to return 15% a year over the next five years it would have to double, which would make it an $850 billion dollar company.
How do you view that when you look at your portfolio as far as investing in small caps, mid caps, and large caps?
Whitney: For someone who's running about $75 million like I am, it gives me a much wider universe to invest in. A lot of your viewers are running their own personal portfolios, with $50,000 or something.
One of the biggest advantages to running a smaller pool of money is you don't have to limit yourself to the world of mega caps. I have found a few that I thought were interesting, but they're getting, admittedly, a little long in the tooth.
I bought Citigroup at half of book, at $25 a share. Now it's at about book value, about $50 a share. Goldman, similar situation. AIG is really my highest conviction big cap idea, just because it's still trading at a big discount to book, because I see a lot of catalysts.
But generally speaking, I'm increasingly trying to shift into smaller cap, special situations, things that don't have 20 Wall Street analysts covering them, because that's generally where you're going to find mispricings.
Brendan: You're bullish on both Hertz (NYSE: HTZ) and on Avis (NASDAQ: CAR).
Whitney: Yes.
Brendan: You actually said the auto rental industry right now reminds you of railroads about 10 years ago. Could you expand on that?
Whitney: Yes. The auto rental industry in the United States has historically been a pretty terrible industry; cutthroat competition by a half dozen-plus competitors engaging in constant price wars. It's a very capital-intensive business, generally bad balance sheets, low margins, low returns on equity -- everything you would not like to see in an industry -- that was the car rental industry.
But by the way, that was the railroad industry until about 10 years ago. What happened there was, there was consolidation. Some of the big players bought the smaller players, and it consolidated into more of an oligopoly, with just a few big players.
All of a sudden, competition started to become a lot more rational. They stopped cutting each other's throats, and instead started collectively raising prices. Bill Miller, by the way, thinks this is what's happening in the airline industry, and I think it's what's happening in the car rental industry.
More than 90% of the car rental industry today is in the hands of only three players; two public companies, Hertz and Avis, and Enterprise. Enterprise has about 70% of the off-airport market. Hertz and Avis are primarily the airport market in the U.S.
I see some of the same dynamics here. Industry consolidated from, say, eight players down to three. They're all raising prices -- and this isn't theoretical -- last quarter, Hertz and Avis both raised prices a little over 4% in North America, which is their biggest market.
When you consider the impact of a 4% price increase on low-margin businesses, it has tremendous benefits to the bottom line. I see the car rental industry following the same path as the railroad industry over the next 5-10 years.
Even this is a good example of "I missed it." Both Hertz and Avis have doubled in the past year. I bought them at 52-week highs, after they've doubled, because I see another double or two in there over the next few years.
Brendan: Let's take a look at shorting. Doug Kass -- we talked about him earlier -- he asked the question at the Berkshire meeting and Charlie Munger says, "We don't like trading agony for money." How do you view shorting right now? Is there a set percentage of your portfolio you'd like to be short? What are some shorts you have right now?
Whitney: Sure. Shorting is a brutally tough business and we are right now, today, in a period where it's probably close to the toughest I've ever seen it, probably going back to 1999 and the Internet bubble there where -- in a super low-rate world with the Fed and governments around the world just pumping liquidity in -- a lot of that is just chasing into markets, so a lot of really dicey companies have just seen their stocks double or more.
It really seems the dicier the company, the more the stocks have been ripping, so it's been a brutally difficult time. I see a lot of things out there that make me think -- for example these big quant funds -- that just have computers running a long book and a short book, and as the shorts rip up, the computers don't care. They simple need to shrink that short book, so they're in there buying it. That of course rips the stock up further.
Fundamental guys like us are just sort of sitting there being rip-sawed by the computers. The only way you can deal with that is either just don't do it -- and that's probably the answer for most of your viewers -- just don't do it.
I think actually it's one of the most attractive times to be initiating new shorts right now in my career, because it's been such a brutal time to be short, so many of these stocks are ripped up. It means there's a lot of room for them to tumble, but unless you really know what you're doing, and really have an iron constitution, my general advice to most investors is just don't do it.
Pick a handful of good, solid companies on the long side, be in there for the long term, and just be willing to ride the ups and downs of the market without a short book.
I'm almost hesitant talk about specific shorts because they've been so painful and I look like such an idiot. My long book's been ripping.
Let me see if I can find...Look, my largest short for a number of years, and this will just show the agony of short selling, is an oil and gas company called InterOil (NYSE: IOC). I've probably been shorted for about five years. The stock has fluctuated from $40 to almost $100 a share.
Today it's up 10% on the company promising a major deal with a major oil company. They claim to have discovered one of the world's largest natural gas fields in Papua, New Guinea. I'm skeptical that they found what they've claimed, and that a deal that they've been promising for years is suddenly imminent.
But in the meantime, the stock's gone from $50 to $85 this year. It's been a painful ride in the short term, but if I'm right that they don't have what they say they have, the intrinsic value here literally could be zero. But I've been wrong on it for five years.
Brendan: I can't let you go without asking you about perpetually the most talked-about stock on the market, Apple. I believe you don't have a position at Apple anymore. Could you talk about how you feel about the company, going forward?
Whitney: Yeah. I actually do have a position, as of a couple of weeks ago. The stock, I was in it last year, and got out. It was a stock that I sort of felt emotionally attached to, so I needed to just get out.
I waited 30 days, took a tax loss, waited and waited, and finally got back in at about $396 a share, right before they reported their last earnings, when I just felt the negativity was so high and the stock was trading at something like 6x cash flow, if you net out their cash.
I felt like there were two significant catalysts that could move it up. Number one is the announcement of any new products, and I think they do have new products in the pipeline, many of which they just haven't announced.
They're sort of in an innovation air pocket right now, that's convinced everyone that Apple's just not going to come out with anything innovative in the future, and I think they are likely to.
Secondly, capital allocation. Apple's cash balance alone is larger than all but the market caps of 17 companies in the S&P 500. It's just gargantuan, and the company wasn't really doing much with that capital. Now they've announced a very large share repurchase program, it pays a nice dividend.
Right now I'd give them a grade of a C on both innovation and capital allocation, but the capital allocation grade has gone from an F to a C, and innovation I think could go from a C to a B in the next six months or so.
At a little under $400 a share, I saw a possible six month pop to in the $550 range, let's say, and then at that point I'm going to need to reevaluate whether I think it can double over the next five years or so.
I think I'm going to need to see more on innovation and capital allocation, to stick around for a multi-year time period, but sometimes even the most widely held stocks become too cheap and just hated, and everyone just piles on, on the negativity, and that enables you to get in at a good price and make a good six-month return, even if you don't stay around long term.
Brendan: Whitney Tilson, coauthor of The Art of Value Investing, great perspectives from over 200 very successful investors. Great book. Thank you so much, Whitney.
Whitney: Thank you.
WARNING: long interview but imho worth reading, especially the bold part
http://www.fool.com/investing/general/20...ilson.aspx
Brendan Byrnes
June 17, 2013
Join The Motley Fool for a conversation with author, investor and philanthropist, Whitney Tilson. In addition to managing Kase Capital, Whitney has coauthored More Mortgage Meltdown: 6 Ways to Profit in These Bad Times, Poor Charlie's Almanack, and most recently The Art of Value Investing, a collection of interviews with over 200 successful value investors.
Whitney shares a wealth of insights on value investing -- what he's learned from the hundreds of investors he's interviewed, as well as his own thoughts and conclusions. Learn his views on giants like Apple, AIG, and Berkshire Hathaway, the bull and bear case for Netflix, thoughts on shorting and auto rentals, and the three most dangerous words in value investing.
A full transcript follows the video.
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Brendan Byrnes: Hi folks, I'm Brendan Byrnes and I'm joined today by Whitney Tilson. Whitney is the coauthor of The Art of Value Investing, and also the managing partner of Kase Capital. Thanks so much for your time.
Whitney Tilson: My pleasure.
Brendan: I wanted to start with how you came about doing the book, and the idea for the book. It's a bunch of interviews and quotes of influential, successful investors.
Whitney: Right.
Brendan: How did you pick these investors, first of all? What are some common traits that maybe they all have, and what are some of the investors? Maybe give us an example of some.
Whitney: Sure. The book grew out of a business I started actually, with one of my investors, a guy named John Heins. He's my coauthor.
About eight years ago we created a monthly newsletter called "Value Investor Insight," and every month we interview, in-depth, two of the best money managers we know. Typically, the lead interview is with someone very well-known -- a David Einhorn, a Bill Ackman, a Bill Miller -- either in the hedge fund or mutual fund world.
Then the second interview is with a lesser-known, but we think promising, up-and-coming money manager. Maybe someone who focuses on small-cap stocks, something like that.
Over eight years, we've interviewed almost 200 managers. We select them through reputation, through personal relationships, though referrals from other people we've interviewed. We've interviewed, really, some of the legends in the investing business, from Julian Robertson to Leon Cooperman to Seth Klarman, David Einhorn, Bill Ackman...legends in both the hedge fund and the mutual fund business.
We've developed a good reputation. We don't do superficial interviews with little sound bites focusing on stocks moving today, but rather in-depth interviews both on how they differentiate themselves in the world of investing: What's their edge? How do they think about investing? How did they get into the business?
Half the interview is an in-depth look at their business, how they got into it, etc., and then the second half of the interview is an in-depth look at maybe five stocks that they are currently long and bullish on -- occasionally short, but mostly long -- in their portfolio.
From those 200 interviews, we pulled out the...no stock ideas. It's just the principles of sound investing, so there's a chapter on circle of competence and a chapter on doing research and a chapter on when to buy and a chapter on when to sell and a chapter on short selling; all the foundations of a sound investment program.
We've taken the best stuff from the 200-odd interviews and pulled it together into this book.
Brendan: Obviously with 200 different interviews, there have to be a ton of different ways in which to go about being an investor.
Whitney: Yes.
Brendan: ...a ton of different ways that work for different people. Are there some common themes that you notice in there, and common ways people go about things, or things that make them successful? Is it discipline? Is it a focus on the long term? Is it...?
Whitney: These are all value investors, but in value investing there are a lot of different flavors. Generally speaking, value investing is very simple in concept. It is rooted in the two timeless principles of intrinsic value, and then margin of safety.
All of the people we interview are practicing some form of that, but the most successful investors, I find, have a narrow -- not too narrow -- but a strategy that they can execute, that they've gotten good at, that they've built expertise over.
Some people focus on certain market caps, on certain industries, limit themselves to certain countries. There's a lot in here. I think value investing is simple in concept, very difficult to execute. You have to make some tough decisions about what you're going to do, but also what you're not going to do, and stay very disciplined around that.
This book gives a lot of different ideas about how everyone has a little bit different answer on how to answer the circle of competence, on how they do research and how they get an edge. There's a lot in here to chew on.
The book does give some answers, but not all the answers are the same so you, the reader, have to decide what resonates with you. Learn from what's made different people successful, and then incorporate it into your own distinct investment approach.
Brendan: As you mentioned, there could be a lot of different definitions of "value investing." How do you, yourself, define value investment?
Whitney: I cast a pretty wide net. I call myself an "opportunistic value investor," so there are some stocks in my portfolio that are sort of classical Ben Graham/Walter Schloss, cigar butt, statistically cheap but lousy businesses, all the way up to some of the world's greatest businesses, where I knowingly have paid up.
I've paid a higher price than I normally would, in terms of price to book or price to earnings, or so forth. Berkshire Hathaway (NYSE: BRK-B) is one of my largest positions, and in fact is the only stock I have owned continuously in almost 15 years now that I've been managing money professionally, but it's ranged from a 30% position to a 3% position in my fund, depending on how attractive it was, relative to its intrinsic value, but also relative to other things I could buy in the marketplace. Today it's about a 10% position.
I think I cast a pretty wide net; probably a wider net than most value investors, because I have yet to find someone who owns both Netflix (NASDAQ: NFLX) and Berkshire Hathaway. I saw a lot of value in Netflix at $50 just seven months ago, but I sized it a lot smaller than I sized Berkshire. It's not only picking the right stocks, but also managing a portfolio that's key to success.
Brendan: You said that the three most dangerous words in investing are, "I missed it."
Whitney: Right.
Brendan: I've definitely been guilty of this. Amazon (NASDAQ: AMZN) in the past, LinkedIn (NYSE: LNKD) more recently, when you look at that and you say, "Man, it's too expensive now. It's had this run up, why would I buy it now?" How should individual investors look at this? Should they reevaluate how they're looking at the company, and ignore that?
Whitney: This gets to the broader issue of controlling your emotions in investing. The reality is, there have been numerous studies over the years that show that, in so many different ways, human beings are hard-wired to be irrational when it comes to making financial decisions.
They buy at the very top, they sell at the very bottom. They won't buy a stock if they've been doing research on it and the stock runs up 10 or 20%. They say, "I missed it."
This scenario, where Warren Buffett has said, "Once you reach a certain level of IQ, and you have a certain amount of experience and training and so forth, what differentiates great investors from good investors from poor investors is the ability to control the emotional side of investing."
A very wise friend of mine once said -- he doesn't wish to be named, but he's the one who gave me this concept of "I missed it" -- he said, "Whitney, any time you look at a stock and it's run up, the value guy in you and I both say, 'you don't want to chase the stock.'
You don't want to buy it after it's run up a bit, and it's very frustrating to look at a stock at $10 and then by the time you finish your research it's at $12 and you say, 'I missed it.'"
He said, "Any time you say that, just put that idea out of your head and start with a clean mind that basically says, 'Today I have the opportunity to buy this stock at $12.' If intrinsic value is $20, I should still be buying that stock, even though it's run from $10 to $12. It's still cheap."
When I've been pounding the table on this principle of, "Get those words, 'I missed it' out of your head," I'm not saying to go and pile into stocks in general at all-time highs today. What I am saying, though, is that there are still some cheap stocks out there, and many of them have moved up quite a bit. They may have even doubled in the past year, yet they could still be bargains today.
Don't anchor on what the historical price was. Just look at what the price is today, and determine whether that's attractive or not.
Brendan: I think one of the stocks a lot of people might be saying "I missed it" on is Netflix.
Whitney: Yes.
Brendan: It's been a four bagger over the past seven months or so. You're still bullish. How come?
Whitney: I think it has enormous optionality on the upside. As a value investor, I'll say right up front it's very hard to value. I can't sit here and tell you, "Well, I've calculated intrinsic value as $300 a share plus or minus 5%" or anything like that, like I can do with Berkshire Hathaway. That's a company I can value in a pretty tight range.
Seven months ago, when I pitched Netflix at my conference, the Value Investing Congress, I said, "At $54, I can name a dozen companies that would love to own 30 million subscribers for $3 billion." About $100 a subscriber is what Netflix was valued at, at the time.
In a world where cable subscribers, cell phone subscribers, etc. are trading sometimes as high as $1000 a subscriber, here's Netflix at $100 a sub. Well, today Netflix is at about $400 a sub, having quadrupled.
I still think the company has a very, very long runway; that it could grow and grow and grow for the next 10 years, in the same way Amazon has in the past 10 years. I see a lot of parallels with Netflix today. I've been trimming Netflix all the way up. It's still a 3.5-4% position, where it was back at $50 a share. It's the same 3-4% position at $200 a share.
Brendan: You wouldn't necessarily be a buyer at this level?
Whitney: Well, look. To some extent, I buy my portfolio every day, in the sense that I could place an order in the next five minutes. I wouldn't own any Netflix, right?
I think, as a small piece of a diversified portfolio, Netflix makes sense to me as a small mispriced option, almost. I still think there's a lot of optionality to the upside, but I would caution people against buying stocks that have doubled, tripled or quadrupled in the last six months or so.
A lot of very dicey companies' stocks have ripped up a lot. I've suffered on the short side with some of those, but Netflix is bailing me out on the long side. I'd be very, very cautious in general about buying high fliers with a lot of momentum, that are difficult to value.
Netflix is one that I've gotten comfortable with, but there's really only one other stock in my portfolio -- and I own 17 stocks on the long side today -- there's only one other stock that looks like Netflix, and the rest of my portfolio is more things like AIG (NYSE: AIG) and Berkshire Hathaway, Goldman Sachs (NYSE: GS), Citigroup (NYSE: C), that kind of thing.
Brendan: You've also said that you think Netflix is a better business than Amazon. Why do you view it as a better business?
Whitney: Well, if you go back and you compare the balance sheet, the income statement, of Netflix today versus Amazon when it was the size of Netflix 10 years ago -- and by the way, Amazon stock has been a 20-bagger over those 10 years -- and by the way, Amazon has earned no profits, basically, in those last 10 years.
They have a deliberate policy of taking all of their cash flow and reinvesting it back into the business, such that their reported earnings are basically nil. That's the same thing that Netflix is doing, by the way. But Amazon's in a tough business. If you think about it, they actually have to ship products to you. They have to build huge warehouses.
It's a much more capital-intensive business than Netflix, whereas Netflix, the streaming business -- which is where most of the value is and where all the growth is for Netflix -- is if I'm streaming a show to you, and then a new subscriber comes along and I stream it to that household, there's almost no incremental cost for me to send some bits through the Internet pipeline.
Whereas if Amazon gets a second customer, they then have to ship more goods through the mail and build more warehouses to serve additional customers. Netflix, a streaming business, is inherently a lighter business model. The balance sheet is a lot cleaner. Amazon has always had net debt. Netflix has net cash.
I'm not sitting here saying I'm confident that Netflix, over the next 10 years, is going to grow in the same way Amazon has, but I think investing...once you've been around a while, everything starts to rhyme. Picking the right analogies between companies, as opposed to the wrong analogies -- because you can come up with an analogy to justify any position you want -- but getting that right, once you've been around a while, Netflix smells an awful lot like Amazon to me.
Brendan: A lot of the bear case for Netflix is surrounded around these big pocket competitors. Maybe Apple (NASDAQ: AAPL), maybe Amazon could come in and buy a bunch of content, and then Netflix could be left out. Do you buy that argument?
Whitney: It's definitely something I focus on. It's a major risk factor. By the way, it's the exact same argument people made about Amazon, 10 years ago, that Wal-Mart's (NYSE: WMT) just going to come in and crush them like a bug.
There are a couple of thoughts I have. Number one is, Netflix is $0.26 a day. It's $7.99 a month, so Netflix doesn't have to come at the exclusion of other things. A lot of people subscribe to Netflix and to Hulu, and to HBO, for example.
I think there's room for Netflix. It's such a low price point. That's one of the things. I was short Netflix, earlier in my young and foolish days, and I got burned as Netflix ran up a lot. One of the things I didn't appreciate was the value proposition Netflix is offering its customers.
It's not $80 a month like your cable bill. For $0.26 a day -- and the average Netflix streaming subscriber is watching more than an hour and a quarter a day -- so you're paying about $0.20 an hour to have 20,000 different movies and television shows. That's a heck of a value proposition. Even if something else comes along, I'm not likely to cancel my Netflix subscription. That's answer number one.
Answer number two is, Netflix now has about $4 billion a year of annual revenue, and they're plowing roughly $3 billion back into buying content; $3 billion a year, there are very few companies in the world that can subsidize -- that's the price of admission to the game now. To compete with Netflix, you've got to have comparable content, and that costs $3 billion a year.
Even mighty Amazon, with $100 billion-plus market cap, I think has to think very hard about whether they're really willing to write that kind of check to go compete with Netflix. They're trying, but as best I can tell they're not getting any traction, and we're not seeing much from Apple.
It's something I'm watching, but there are winner-take-all characteristics here. The more subscribers who sign up with Netflix, the more revenue that comes in that Netflix then reinvests in more, better content, which in turn attracts more subscribers. There's an incredible virtuous cycle happening right now with Netflix, that I think they could keep going for a while.
Brendan: Let's switch gears and talk about AIG, which I believe is your biggest holding in Kase Capital. What are some catalysts, going forward for this company?
Whitney: I see a number. First of all, the business is just going very well. They just reported earnings last week. They blew buy consensus estimates by about 50%. The combined ratio -- one of the key metrics for insurance companies -- dropped about three full percentage points.
Certainly, just underlying performance of the business, and generally insurance, the kinds of insurance that they're in, pricing is strengthening around the world. It's not just AIG that's benefiting, but it helps to have a tailwind for the industry.
Secondly, AIG does not pay a dividend, has not been buying back stock, other than the government auctions as the government exited. But now I think their balance sheet is strong enough, now that the government has been completely bought out of AIG, I think the company has a lot of flexibility to do some good things on the capital front.
Then lastly, just cheapness. The stock's trading at about $0.66 of book value, so about a third discount to book. This is in a world where most insurers are trading at one times book value, so right there I see 50% upside, just on the valuation multiple, on a multiple of book.
I think there are two reasons why it's cheap. One is just general historical taint. People still think of AIG as this ward of the government and an immensely complex business. Neither of those is true anymore, but old perceptions die hard.
Secondly, the company still hasn't worked its way back to generating a decent return on equity. They have a 5% return on equity. I think they should get to 10% in the next couple of years, and that will help drive a revaluation as well.
The last thing I'll add on that, just by the way, is management just got their stock options struck, so they had very strong incentives to sandbag earnings, keep the stock price low...
Brendan: Buy back from the government at a low rate.
Whitney: ...to get the government out at a low price, and that worked. They got out, and the government sold out in the $30 a share range, and now the government's out, they've got their options struck, and now management incentives have completely reversed.
I think the quarter we saw that they just reported, where they blew by estimates, I see that happening for the next year or two, as I think they've got some spring-loaded earnings to report over the next year or so.
Brendan: Let's talk about your second biggest holding, which of course is Berkshire. It's no longer crazy cheap like it was at the end of 2011, when it dipped under 1.1x book. How do you view it now, around 1.4x book value? How do you view that valuation, as opposed to intrinsic value?
Whitney: The way I value Berkshire is only secondarily as a multiple of book value, because book value is such an incorrect way to look at so many of Berkshire's holdings. Something like GEICO is being carried at book, but it's worth a significant premium to book.
Brendan: Do you think Warren Buffett should use a different metric, then, and look at repurchasing shares, when he says 1.1x book, and now 1.2x book, what he'd repurchase under?
Whitney: I think book value is tracking the intrinsic value of Berkshire, but intrinsic value is certainly higher, and that gap has probably been widening over time as GEICO has grown, for example, and Berkshire's businesses have gotten better over time.
Part of the reason Buffett increased the threshold at which he was willing to repurchase shares from 1.1x book to 1.2x book, was reflecting the fact that the actual intrinsic value is probably closer to 1.5-1.6x book. That's moved up, so he's increased his purchase price.
But again, this is a good example of the "I missed it" phenomenon. I think a lot of people look at Berkshire today and just say, "The A shares have run from closer to $100,000 a share to over $160,000 a share in not much more than a year. I've missed it."
Well, people have been saying "I missed it" on Berkshire...When it ran from $100 to $1000, they said "I missed it," and then $1000 to $10,000, then $10,000 to $100,000. Each time, they didn't miss it. They just had to wash that thought from their brains, and evaluate it.
I value Berkshire, just taking the cash and investments per share, as a little over $120,000 a share. Then I just put an eight multiple on the pre-tax earnings of the operating businesses, about $9000 a share. You take $9000 a share of earnings, times an eight multiple is $72,000 per A share. Add the cash bonds and investments of $120,000 per share, and you get a bit over $190,000 per share of intrinsic value.
Stock's at $160,000 or so, so I'd say Berkshire, one of the world's great businesses, just the underlying businesses are going gangbusters, is about an $0.85 dollar today. It's about a 15% discount to intrinsic value.
Look, as long as you have modest expectations -- I want to do better than an S&P 500 index fund while taking lower risk, but I'm not expecting to double my money any time quick -- Berkshire, I think, is a great addition to a portfolio.
Brendan: What's your biggest worry about Berkshire? Did Doug Kass bring up anything on the bearish side that made you say, "Wow?" It seemed like more he regurgitated a lot of the bear argument: "Warren Buffett, at some point, is going to be gone." "It's so big, how much bigger can it get?" Are you buying those?
Whitney: I think he raised the fair concerns. There was nothing there I hadn't heard before. Doug's a friend, and I've corresponded with him about Berkshire, so there wasn't anything that surprised me. I think he did a good job with a thankless task, which is trying to rain on what is one of the most incredible parades of all time.
The annual meeting was on Saturday. On Friday the stock closed at an all-time high, and Berkshire reported probably its all-time best quarter. That's what Doug had to try and poke holes in, right?
A company run by two of the greatest, highest integrity, smartest investors of all time, on top of that.
I think the most important questions he raised were, number one, is size going to be an anchor for you, and what kind of returns can we expect going forward, given how large Berkshire is? Buffett and Munger have been saying this for years, that size is going to be a huge anchor for us, like it is for everyone, so keep your expectations modest but we still think we can beat the S&P 500 and index funds, which in turn beats 80% of active managers.
The second question he raised is a fair question about Berkshire post-Buffett. I do worry about that. Warren Buffett is unique. He is irreplaceable, and I'm sure he has a great person lined up to fill his shoes, but that person will not be Warren Buffett.
What gives me comfort there are two things. One, my valuation metric assumes no Buffett premium. Cash investments, a multiple on the current earnings...none of that is there a Warren Buffett premium built in.
The second reason is Buffett, I think, is in great health. Mentally, I've never seen him sharper, and I think it's almost certain that he will be running Berkshire the next 5 years, and there's a decent chance he might be running it for another 10 years. If I don't have to worry about something until 5 or 10 years out, that's pretty good.
Brendan: We talked about one of the problems with Berkshire being, of course, it's so big. A lot of these mega large caps had that same problem. For Apple to return 15% a year over the next five years it would have to double, which would make it an $850 billion dollar company.
How do you view that when you look at your portfolio as far as investing in small caps, mid caps, and large caps?
Whitney: For someone who's running about $75 million like I am, it gives me a much wider universe to invest in. A lot of your viewers are running their own personal portfolios, with $50,000 or something.
One of the biggest advantages to running a smaller pool of money is you don't have to limit yourself to the world of mega caps. I have found a few that I thought were interesting, but they're getting, admittedly, a little long in the tooth.
I bought Citigroup at half of book, at $25 a share. Now it's at about book value, about $50 a share. Goldman, similar situation. AIG is really my highest conviction big cap idea, just because it's still trading at a big discount to book, because I see a lot of catalysts.
But generally speaking, I'm increasingly trying to shift into smaller cap, special situations, things that don't have 20 Wall Street analysts covering them, because that's generally where you're going to find mispricings.
Brendan: You're bullish on both Hertz (NYSE: HTZ) and on Avis (NASDAQ: CAR).
Whitney: Yes.
Brendan: You actually said the auto rental industry right now reminds you of railroads about 10 years ago. Could you expand on that?
Whitney: Yes. The auto rental industry in the United States has historically been a pretty terrible industry; cutthroat competition by a half dozen-plus competitors engaging in constant price wars. It's a very capital-intensive business, generally bad balance sheets, low margins, low returns on equity -- everything you would not like to see in an industry -- that was the car rental industry.
But by the way, that was the railroad industry until about 10 years ago. What happened there was, there was consolidation. Some of the big players bought the smaller players, and it consolidated into more of an oligopoly, with just a few big players.
All of a sudden, competition started to become a lot more rational. They stopped cutting each other's throats, and instead started collectively raising prices. Bill Miller, by the way, thinks this is what's happening in the airline industry, and I think it's what's happening in the car rental industry.
More than 90% of the car rental industry today is in the hands of only three players; two public companies, Hertz and Avis, and Enterprise. Enterprise has about 70% of the off-airport market. Hertz and Avis are primarily the airport market in the U.S.
I see some of the same dynamics here. Industry consolidated from, say, eight players down to three. They're all raising prices -- and this isn't theoretical -- last quarter, Hertz and Avis both raised prices a little over 4% in North America, which is their biggest market.
When you consider the impact of a 4% price increase on low-margin businesses, it has tremendous benefits to the bottom line. I see the car rental industry following the same path as the railroad industry over the next 5-10 years.
Even this is a good example of "I missed it." Both Hertz and Avis have doubled in the past year. I bought them at 52-week highs, after they've doubled, because I see another double or two in there over the next few years.
Brendan: Let's take a look at shorting. Doug Kass -- we talked about him earlier -- he asked the question at the Berkshire meeting and Charlie Munger says, "We don't like trading agony for money." How do you view shorting right now? Is there a set percentage of your portfolio you'd like to be short? What are some shorts you have right now?
Whitney: Sure. Shorting is a brutally tough business and we are right now, today, in a period where it's probably close to the toughest I've ever seen it, probably going back to 1999 and the Internet bubble there where -- in a super low-rate world with the Fed and governments around the world just pumping liquidity in -- a lot of that is just chasing into markets, so a lot of really dicey companies have just seen their stocks double or more.
It really seems the dicier the company, the more the stocks have been ripping, so it's been a brutally difficult time. I see a lot of things out there that make me think -- for example these big quant funds -- that just have computers running a long book and a short book, and as the shorts rip up, the computers don't care. They simple need to shrink that short book, so they're in there buying it. That of course rips the stock up further.
Fundamental guys like us are just sort of sitting there being rip-sawed by the computers. The only way you can deal with that is either just don't do it -- and that's probably the answer for most of your viewers -- just don't do it.
I think actually it's one of the most attractive times to be initiating new shorts right now in my career, because it's been such a brutal time to be short, so many of these stocks are ripped up. It means there's a lot of room for them to tumble, but unless you really know what you're doing, and really have an iron constitution, my general advice to most investors is just don't do it.
Pick a handful of good, solid companies on the long side, be in there for the long term, and just be willing to ride the ups and downs of the market without a short book.
I'm almost hesitant talk about specific shorts because they've been so painful and I look like such an idiot. My long book's been ripping.
Let me see if I can find...Look, my largest short for a number of years, and this will just show the agony of short selling, is an oil and gas company called InterOil (NYSE: IOC). I've probably been shorted for about five years. The stock has fluctuated from $40 to almost $100 a share.
Today it's up 10% on the company promising a major deal with a major oil company. They claim to have discovered one of the world's largest natural gas fields in Papua, New Guinea. I'm skeptical that they found what they've claimed, and that a deal that they've been promising for years is suddenly imminent.
But in the meantime, the stock's gone from $50 to $85 this year. It's been a painful ride in the short term, but if I'm right that they don't have what they say they have, the intrinsic value here literally could be zero. But I've been wrong on it for five years.
Brendan: I can't let you go without asking you about perpetually the most talked-about stock on the market, Apple. I believe you don't have a position at Apple anymore. Could you talk about how you feel about the company, going forward?
Whitney: Yeah. I actually do have a position, as of a couple of weeks ago. The stock, I was in it last year, and got out. It was a stock that I sort of felt emotionally attached to, so I needed to just get out.
I waited 30 days, took a tax loss, waited and waited, and finally got back in at about $396 a share, right before they reported their last earnings, when I just felt the negativity was so high and the stock was trading at something like 6x cash flow, if you net out their cash.
I felt like there were two significant catalysts that could move it up. Number one is the announcement of any new products, and I think they do have new products in the pipeline, many of which they just haven't announced.
They're sort of in an innovation air pocket right now, that's convinced everyone that Apple's just not going to come out with anything innovative in the future, and I think they are likely to.
Secondly, capital allocation. Apple's cash balance alone is larger than all but the market caps of 17 companies in the S&P 500. It's just gargantuan, and the company wasn't really doing much with that capital. Now they've announced a very large share repurchase program, it pays a nice dividend.
Right now I'd give them a grade of a C on both innovation and capital allocation, but the capital allocation grade has gone from an F to a C, and innovation I think could go from a C to a B in the next six months or so.
At a little under $400 a share, I saw a possible six month pop to in the $550 range, let's say, and then at that point I'm going to need to reevaluate whether I think it can double over the next five years or so.
I think I'm going to need to see more on innovation and capital allocation, to stick around for a multi-year time period, but sometimes even the most widely held stocks become too cheap and just hated, and everyone just piles on, on the negativity, and that enables you to get in at a good price and make a good six-month return, even if you don't stay around long term.
Brendan: Whitney Tilson, coauthor of The Art of Value Investing, great perspectives from over 200 very successful investors. Great book. Thank you so much, Whitney.
Whitney: Thank you.