Monthly Archives: May 2009

Monthly Update: Valuehuntr Portfolio Gains 89% in May

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Wall Street sealed the month of May with yet another advance. Friday’s gains gave the major market indexes their third straight monthly gain and longest winning streak since October 2007.  The Dow was up 4.1% for May, the S&P 500 index was up 5.3%, and the Nasdaq gained 3.3%.

The ValueHuntr Portfolio gained 89% for the month of May, thanks to a whopping 835% surge of Vanda Pharmaceuticals (VNDA). Kevin Tang, a VNDA shareholder, had proposed liquidating the business and returning the cash to shareholders. At the time of our purchase, VNDA’s net cash value was nearly 100% above market value.  FDA approval of VNDA’s Fanapt drug to treat schizophrenia prompted investor Kevin Tang to withdraw its proxy to liquidate the business.

When VNDA is excluded from our portfolio, May returns are a more reasonable 6.5%, still outperforming the S&P500 by over 100 bps.



Our Portfolio Management Method

We select stocks which are undervalued and with a catalyst in place. However, as a group, our stocks are managed based on their price advances relative to intrinsic value using CAVM, a model we have developed as an alternative to the CAPM model used by analysts and professors today. CAVM allows us to account for risk by defining it as the probability of loss rather than as volatility.To read more about CAVM, see our explanation here

According to CAVM, our portfolio’s expected return has diminished greatly as our stocks have advanced. Our expected return is currently 20% (annualized), a sharp contrast relative to our expected returns of 43% at the the time the model was developed. We are still well above the 6% historical market returns, which indicates that our portfolio as a whole will at least achieve returns greater than the average investor.



Update: Ackman loses in Target proxy contest

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By Nicole Maestri

WAUKESHA, Wisconsin (Reuters) – Target shareholders dealt a blow to activist investor William Ackman on Thursday, rejecting his slate of proposed directors and voting instead to keep four incumbents on the retailer’s board.

Despite a tearful appeal in which he invoked Martin Luther King Jr.’s famous “I Have a Dream” speech in a final effort to win votes, Ackman did not come close to gaining any seats on the board.

Target, which spent roughly $11 million defending itself during the proxy contest, said that, based on a preliminary total, each of its four nominees received support from more than 70 percent of the shares voted.

Each of the five nominees on Ackman’s slate received support ranging from the high-single digits to the low 20s in terms of the percent of votes cast, the retailer said.

Target also said shareholders voted in its favor to set the board size at 12. Ackman wanted it set at 13.

“We’re disappointed,” said Ackman, whose Pershing Square Capital Management has a 7.8 percent stake in Target, of the results. “We’d love to be on this board, but shareholders voted.”

His said a pledge made earlier in the week to remain a Target shareholder for five years was conditioned on winning a seat on Target’s board. With no seat on the board, he said he now had more flexibility with his Target holdings, although he expected to be a “long-term holder.”

Target shares fell 1.2 percent, or 46 cents, to $39.14 in Thursday’s New York Stock Exchange trading.

“The pressure on the stock could be over concerns that Pershing Square will sell some, or all, of its position, but we do not anticipate that will occur given that it would be damaging to Mr. Ackman’s credibility,” Telsey Group analyst Joseph Feldman said.

The hedge fund director launched his proxy contest in March after Target rejected his proposal to spin off the land under its stores into a real estate investment trust to boost its stock price.

He has since said he was running the proxy contest to add executives to Target’s board who have expertise in credit cards, real estate and food retailing.

But Target argued he sought the seats as a way to push through his risky real estate transaction.

“Ackman certainly raised the awareness of corporate governance, and likely helped Target to be more focused than ever on this important issue,” Telsey’s Feldman said.


The power struggle was unusual because many analysts and investors have praised Target as a best-in-class retailer with a capable management team.

But some investors acknowledged Ackman, who is known for well-researched and often successful proxy battles, could have brought a fresh perspective to Target’s board and pushed the retailer to explore new business opportunities.

In his speech, Ackman said the annual meeting was a “great day” for shareholders because the contested election meant they were being given a choice as to who they wanted to vote to have on Target’s board.

“Let me end by saying that I have a dream. … a dream deeply rooted in the American dream,” Ackman said. “A dream that one day board members will be selected purely based on character, competency and relevancy of experience.”

During the meeting, which held at an unfinished store outside of Milwaukee under overcast skies, Target Chairman and CEO Gregg Steinhafel repeated that its current board was the right one to lead the retailer.

Once the meeting was over and the preliminary results were announced, Steinhafel said he would now be able to refocus on the company’s retail and credit operations, and spend more time in its stores.

“It’s a challenging environment and there are a lot of retail companies that are struggling and our same-store sales are not where we’d like them to be,” he said.

Target shares are up about 15 percent this year, while those of rival discounter Wal-Mart are down roughly 12 percent.

But Target’s shares have fallen 33 percent since April of 2007, when Ackman began accumulating his stake, while Wal-Mart shares have risen 5 percent during that time.

Target’s business faltered amid the recession as shoppers pared back purchases of its clothes and home decor, and stuck to buying basics, such as food or medicine — a trend that favored rival Wal-Mart.

Target is now trying to add more food to its merchandise assortment to lure shoppers into its stores more frequently, a strategy it again highlighted at the meeting.


Thomas Russo Lecture

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Thomas Russo, partner at Gardner Russo & Gardner, recetly delivered a lecture at Columbia Business School. Mr. Russo’s investment philosophy emphasizes return on invested capital, principally through equity investments. Mr. Russo oversees $4 billion through separately managed accounts and partnerships.

The lecture can be found here.

If You Think Worst Is Over, Take Benjamin Graham’s Advice

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By Jason Zweig

It is sometimes said that to be an intelligent investor, you must be unemotional. That isn’t true; instead, you should be inversely emotional.

Even after recent turbulence, the Dow Jones Industrial Average is up roughly 30% since its low in March. It is natural for you to feel happy or relieved about that. But Benjamin Graham believed, instead, that you should train yourself to feel worried about such events.

At this moment, consulting Mr. Graham’s wisdom is especially fitting. Sixty years ago, on May 25, 1949, the founder of financial analysis published his book, “The Intelligent Investor,” in whose honor this column is named. And today the market seems to be in just the kind of mood that would have worried Mr. Graham: a jittery optimism, an insecure and almost desperate need to believe that the worst is over.

You can’t turn off your feelings, of course. But you can, and should, turn them inside out.

Stocks have suddenly become more expensive to accumulate. Since March, according to data from Robert Shiller of Yale, the price/earnings ratio of the S&P 500 index has jumped from 13.1 to 15.5. That’s the sharpest, fastest rise in almost a quarter-century. (As Graham suggested, Prof. Shiller uses a 10-year average P/E ratio, adjusted for inflation.)

Over the course of 10 weeks, stocks have moved from the edge of the bargain bin to the full-price rack. So, unless you are retired and living off your investments, you shouldn’t be celebrating, you should be worrying.

Mr. Graham worked diligently to resist being swept up in the mood swings of “Mr. Market” — his metaphor for the collective mind of investors, euphoric when stocks go up and miserable when they go down.

In an autobiographical sketch, Mr. Graham wrote that he “embraced stoicism as a gospel sent to him from heaven.” Among the main components of his “internal equipment,” he also said, were a “certain aloofness” and “unruffled serenity.”

Mr. Graham’s last wife described him as “humane, but not human.” I asked his son, Benjamin Graham Jr., what that meant. “His mind was elsewhere, and he did have a little difficulty in relating to others,” “Buz” Graham said of his father. “He was always internally multitasking. Maybe people who go into investing are especially well-suited for it if they have that distance or detachment.”

Mr. Graham’s immersion in literature, mathematics and philosophy, he once remarked, helped him view the markets “from the standpoint of eternity, rather than day-to-day.”

Perhaps as a result, he almost invariably read the enthusiasm of others as a yellow caution light, and he took their misery as a sign of hope.

His knack for inverting emotions helped him see when markets had run to extremes. In late 1945, as the market was rising 36%, he warned investors to cut back on stocks; the next year, the market fell 8%. As stocks took off in 1958-59, Mr. Graham was again pessimistic; years of jagged returns followed. In late 1971, he counseled caution, just before the worst bear market in decades hit.

In the depths of that crash, near the end of 1974, Mr. Graham gave a speech in which he correctly forecast a period of “many years” in which “stock prices may languish.”

Then he startled his listeners by pointing out this was good news, not bad: “The true investor would be pleased, rather than discouraged, at the prospect of investing his new savings on very satisfactory terms.” Mr. Graham added a more startling note: Investors would be “enviably fortunate” to benefit from the “advantages” of a long bear market.

Today, it has become trendy to declare that “buy and hold is dead.” Some critics regard dollar-cost averaging, or automatically investing a fixed amount every month, as foolish.

Asked if dollar-cost averaging could ensure long-term success, Mr. Graham wrote in 1962: “Such a policy will pay off ultimately, regardless of when it is begun, provided that it is adhered to conscientiously and courageously under all intervening conditions.”

For that to be true, however, the dollar-cost averaging investor must “be a different sort of person from the rest of us … not subject to the alternations of exhilaration and deep gloom that have accompanied the gyrations of the stock market for generations past.”

“This,” Mr. Graham concluded, “I greatly doubt.”

He didn’t mean that no one can resist being swept up in the gyrating emotions of the crowd. He meant that few people can. To be an intelligent investor, you must cultivate what Mr. Graham called “firmness of character” — the ability to keep your own emotional counsel.

Above all, that means resisting the contagion of Mr. Market’s enthusiasm when stocks are suddenly no longer cheap.


Mohnish Pabrai Lecture

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Mohnish Pabrai, founder of Pabrai Investment Funds, recently explained the lessons he learned during a terrible 2008 at a Columbia Business School lecture. He also went through several of his most recent investment ideas. The lecture can be found here.

Track the ValueHuntr Portfolio

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Our portfolio performance can now be tracked at, a website that allows the general public to compare the ValueHuntr Portfolio with the portfolio of professional investors and funds. To follow track our portfolio, click below.


SEC to Consider 1% Threshold for Board Nominations

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By Jesse Westbrook (Bloomberg)

The U.S. Securities and Exchange Commission may let shareholders who own 1 percent of the biggest companies nominate directors on corporate proxy statements, giving investors a new tool to overhaul boards at banks blamed for helping fuel the financial crisis.

The SEC will probably consider the proposal, which would apply to companies with market values exceeding $700 million, at a May 20 public meeting in Washington, said three people familiar with the matter. Investors would have to own a larger proportion of shares to nominate directors at smaller companies, said the people, who declined to be identified because the plans are still under discussion.

“This is going to strike chief executives of all public companies as confrontational,” said James Cox, a law professor at Duke University in Durham, North Carolina. “It gives shareholders a significant amount of leverage.”

The SEC is responding to investor complaints that directors are too cozy with management and failed to block decisions that led to $1.4 trillion of writedowns and credit-market losses at banks including Citigroup Inc. and Bank of America Corp. Efforts by labor unions and public pension funds to gain more authority over corporate boards have stalled amid company opposition.

A final decision on the proposal’s content hasn’t been made, SEC spokesman John Nester said. “We are committed to considering new rules that would remove barriers so that shareholders are able to exercise their right to nominate directors.”

Activist investors such as Carl Icahn and Nelson Peltz have waged successful proxy fights to get their nominees elected to boards of companies they say are underperforming. Under current SEC rules, the process requires distributing a separate ballot listing dissident nominees. Unions and pension funds say the process is too expensive for most investors to pursue.

Share Threshold

The SEC plan would let shareholders, or groups of investors, who have held 1 percent of a company’s shares for one year nominate directors on the proxy. The threshold would be 3 percent for companies with market values of less than $700 million and 5 percent for companies below $75 million.

SEC officials are discussing whether to make clear that the proposed rules wouldn’t supersede state measures, the people said. Including such a provision may protect the SEC against lawsuits, Cox said.

The U.S. Chamber of Commerce, which represents more than 3 million businesses, argued in an April 28 letter to SEC Chairman Mary Schapiro that states, not the SEC, have authority over director elections. The nation’s biggest business lobby has been consulting with lawyers at Gibson, Dunn & Crutcher LLP, which represented the group in a successful 2006 challenge of an SEC rule that required mutual funds to name independent chairman.

Schumer Support

The agency may get a boost from U.S. Senator Charles Schumer, a New York Democrat who plans to introduce legislation that clears the way for the SEC to “grant shareholder access to the corporate proxy,” according to an April 24 letter he sent to other lawmakers.

The SEC may stipulate in its proposal that investors can revise corporate bylaws that govern director elections, the people said. Doing so would give investors a pathway to nominating directors on corporate ballots in states with restrictive proxy rules.

The SEC typically seeks comments on rule proposals for 30, 60 or 90 days. The agency’s staff then determines whether to make any changes before the SEC chairman and the agency’s four commissioners hold a second vote to make regulations binding.

Delaware, where Citigroup and Bank of America are incorporated, last month passed a law that allows companies to revise their bylaws so shareholders can nominate board candidates on proxy statements.

Update: EDEN Position Closed

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On our article regarding the liquidation of Eden Bioscience Corp, we estimated liquidation distribution to stockholders at $1.60/share. It is now clear that we underestimated the costs associated with professional fees associated with the company’s dissolution. We also underestimated the expenses expected to be incurred until the time of liquidation. We now estimate the liquidation value at $1.30/share, which indicates there is currently no discrepancy between value and price. We are exiting our position at the current market price of $1.28/share.


Value Vet Weitz Regains His Mojo

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By Diya Gullapalli (WSJ)

After blowing up his funds in 2008 with disastrous financial picks, veteran value manager Wally Weitz has changed strategy and staged an impressive comeback this year.

Weitz Partners Value fund is up 14% while the Standard & Poor’s 500-stock index total return is still down about 2%. That is a big improvement from last year, when the fund fell 38%, much the same as the broad market. That followed an 8.5% drop in 2007.

The results illustrate how value managers are starting to dig out of their embarrassing losses. Helping value mavens like Mr. Weitz are the drastic changes they have made to their portfolios, after accepting that their approach has been wrong.

“I thought we had healthy humility two years ago, but we’ve been further humbled,” Mr. Weitz says.

Still to be seen is whether the improved results will be enough to lure investors back to the value fold. Value managers’ biggest selling point — that they can find cheap stocks that will rally in coming years — is lately open to question.

For now, the results are putting Weitz Partners Value far ahead of the average large value fund, which is up only one percentage point this year. But many of Mr. Weitz’s best-known value peers also are showing strong results, including Bill Miller’s Legg Mason Value Trust, up 10%, and John Rogers’s Ariel fund, up 13%. U.S. stock funds broadly have gained this year, especially since the market’s March low.

Mr. Weitz, based in Omaha, Neb., tried to distract himself with golf trips last year, but couldn’t escape soul-searching about his mistakes. “I and the other old-timers got a little too mechanical about finding someone who is temporarily a problem people are afraid of and taking the other side of it,” he says.

The “old-timers” he refers to include friends like Legg’s Mr. Miller. Mr. Weitz half-jokes that he plans to include in one of his investment reports a photo of the two of them riding horses with other prominent investors in Wyoming last year. The caption, he kids, would read: “Formerly smart money managers put out to pasture.”

Well-known for his plaid shirts and close relationship with that other prominent Omaha value investor, Warren Buffett, Mr. Weitz, 60 years old, says he has no plans of retiring as long as he “believes the value process really works.”

Mr. Weitz started Wallace R. Weitz & Co. in 1983 after spending 13 years researching stocks in New York and Omaha. His son, Drew Weitz, 29 years old, joined his father’s company in March after a stint at Ariel in Chicago.

Mr. Weitz’s changes are among the most significant in value land. He is cutting back on stocks like Washington Post Co. and Wal-Mart Stores Inc., which once represented some of his best thinking in media and retail.

Instead, he is buying oil stocks for the first time in decades. He also is snapping up shares of tech giant Google Inc., which is usually considered a quickly expanding “growth” stock. He thinks last year’s market crash left such stocks oversold. That has been a smart call so far — Google and another recent Weitz pick, oil stock XTO Energy Inc., are up 30% and 20%, respectively, this year.

Mr. Weitz has studied the energy area for years but stayed away because he worried the companies were too dependent on oil prices, which is a factor that is outside their control.

Now that the commodity bubble has burst, with energy prices remaining well off their peaks, he is diving in, also buying stock like ConocoPhillips. Mr. Weitz’s thinking is that energy prices falling below the cost of production has set the stage for gains.

In recent years, value gurus thought U.S. lenders were undervalued based on earnings. But it turned out these financial companies were overvalued because their earnings didn’t fully reflect their problems. So Mr. Weitz famously lost big on financial names like American International Group Inc., Fannie Mae and Countrywide Financial Corp. His firm has fallen to $2 billion in assets from a peak of $8 billion about five years ago.

Now he is treading more carefully with financials. He is mainly adding to longtime holdings, like mortgage investment firm Redwood Trust Inc., which with a 15% advance this year has panned out.

He is winning with hunting and fishing retailer Cabela’s Inc., which is up 120% this year thanks to big gun sales.

RiskMetrics Supports Ackman and Donald For Target Board

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RiskMetrics said yesterday it is backing hedge-fund investor William Ackman and former Starbucks Chief Executive James Donald to join Target’s board, bringing Ackman one step closer to at least a partial victory in his proxy battle with the retailer. This is the first advisory firm to endorse Ackman to Target’s board.

The advisory firm said Ackman’s other three nominees, who have expertise in corporate governance, credit cards and real estate, respectively, shouldn’t be elected because Ackman himself has some knowledge in all three of those areas  (we disagree because knowledge does not equate expertise).

Target hasn’t approved what’s called a “universal proxy card,” so RiskMetrics said it couldn’t support any specific Target incumbents. If it were able to, the firm said it would recommend re-electing incumbent Mary N. Dillon, a McDonald’s marketing executive, and voting against incumbents George W. Tamke, partner at private-equity firm Clayton, Dubilier, and Solomon D. Trujillo, chief executive of Australian telecom company Telstra Corp.

Because the two slates are on separate proxy cards, shareholders have to attend Target’s May 28 shareholder meeting in order to pick and choose among the company’s and Ackman’s nominees. If they don’t attend, they can only select from Target’s white proxy card, or Ackman’s gold card.

Previously, Proxy Governance said it was supporting two of Ackman’s nominees, Donald and real-estate industry veteran Michael Ashner. Egan-Jones backs none of Ackman’s nominees but says holders should withhold votes for two of Target’s incumbents.

Previously, we wrote an article questioning the objectivity of these advisory firms, as their recommendations may be in conflict with what their revenue-generating clients (mostly institutional investors) would like to see recommended. Therefore, we do not put much weigh on these recommendations.

Lastly, we found a short article titled “You Shouldn’t Need Proxy Advisers”, written by CNBC’s David Faber where he makes the case against proxy advisory firms. At Valuehuntr, we agree with Mr.Faber’s general sentiment: “While I dutifully report their conclusions, my own conclusion … is that these firms should not exist in the first place.