Brookfield Asset Management (BAM – 7.5%), a best in breed asset manager focused on delivering value to shareholders by producing increasing, recurring high quality free cash flow (beautiful isn’t it?). The recent pullback, due to concerns surrounding the credit, housing and commercial real estate markets, is providing us with what we believe to be nothing short of an incredible opportunity to buy into what we consider to be one of the preeminent wealth creation companies in the world today.
Run by Bruce Flatt (who is often referred to as a Canadian Warren Buffet...a quick look at his track record assures us that the comparison is not nearly as bold as it at first may seem), shareholders are in good hands. We can't think of very many people we would rather have allocating our capital in times like these.
BAM’s basic strategy is to opportunistically acquire and manage long lived assets, at reasonable prices, that generate sustainable and growing free cash flow, finance them with cheap debt and equity financing, and manage them actively to maximize total returns. Asset classes include commercial and residential property, financial assets, power generation and transmission, timberlands, and renewable energy.
In case you were wondering, BAM’s debt on the balance sheet is all non-recourse (making it a non issue as only 2.4B of it has recourse to the parent company) and its access to capital at attractive rates (as the last year has shown) is still intact. Notably, their 20 billion in permanent capital is a tremendous advantage today, as this debt does not come due, has no margin calls, and is not effected by the mark to market volatility that has beset so many other financial institutions as of late.
In what can only be described as one of the worst operating environments on record, BAM's operating cash flows have remained and in all liklihood will continue to remain robust and its capitalization and liquidity situation remains strong. Indeed, on top of their 3.5 Billion dollar cash hoard, Brookfield is on track to generate free cash flow from operations at or around the $1.5 Billion for the full year '08.
In today's environment where most companies are without access to financing, BAM's liquidity position is a tremendous competitive advantage, essentially placing them in the cat bird seat to opportunistically take advantage of others distress if and when sufficiently attractive investment opportunities arise.
Thanks to investor myopia and the extreme panic within the capital markets, we where able to initiate our position at a cost basis of roughly $14 (which is both a meaningful discount to current NAV and a gigantic discount relative to BAM's long term earnings power).
Tuesday, December 30, 2008
General: Greenlight Capital (GLRE)
Greenlight Re (GLRE – 10%) is a Cayman Islands-based property and casualty reinsurer focused on writing policies in markets where it considers capacity and alternatives to be limited. It is run by it chairman David Einhorn, one of the investment community’s brightest young minds and founder of Greenlight Capital (an equity based, long/short hedge fund).
Their basic strategy is similar to what Berkshire Hathaway or Markel tries to do: generate superior underwriting results on a contract by contract basis, without any concern about growth in premium volume, while reinvesting a significant amount of its float in an equity based strategy that is meant to generate incremental returns. In this case, the float is invested in a long/short strategy run by Einhorn that replicates his hedge fund, which has compounded capital at a roughly 25% annualized for over a decade.
Notably, Einhorn purchased $50M of stock last year (with a cost basis around $19) and he currently owns roughly 18% of the outstanding common. We think it is safe to say that his money is where his mouth is, and his interests are firmly aligned with shareholders (something we love to see).
Our thesis here is simple. A disciplined insurer like GLRE, who can execute on both sides of the balance sheet, should experience growth in book value per share that is well above average for the foreseeable future. Any insurance firm that has been consistently generating costless float and redeploying that float into an investment portfolio that generates attractive risk-adjusted returns deserves to trade hands at a premium to book (at an absolute minimum). For GLRE, all things considered (such as the inherent power of the business model coupled with Einhorn's unique skills in utilizing it), we believe 2x book is a much more appropriate valuation.
We were recently delighted to have the opportunity to accumulate a sizable position in GLRE at a basis of roughly $12 per share, or a meaningful discount to tangible book value. Today’s price is simply too cheap for this “little Berkshire”. After all, this is a competitively advantaged, high return business with above average growth prospects and a best in class management team.
Eventually, we believe the market will come to its senses and assign a more appropriate valuation. When it does, we expect a combination of growth in BV per share and multiple expansion to drive outstanding risk-adjusted returns for years to come.
Their basic strategy is similar to what Berkshire Hathaway or Markel tries to do: generate superior underwriting results on a contract by contract basis, without any concern about growth in premium volume, while reinvesting a significant amount of its float in an equity based strategy that is meant to generate incremental returns. In this case, the float is invested in a long/short strategy run by Einhorn that replicates his hedge fund, which has compounded capital at a roughly 25% annualized for over a decade.
Notably, Einhorn purchased $50M of stock last year (with a cost basis around $19) and he currently owns roughly 18% of the outstanding common. We think it is safe to say that his money is where his mouth is, and his interests are firmly aligned with shareholders (something we love to see).
Our thesis here is simple. A disciplined insurer like GLRE, who can execute on both sides of the balance sheet, should experience growth in book value per share that is well above average for the foreseeable future. Any insurance firm that has been consistently generating costless float and redeploying that float into an investment portfolio that generates attractive risk-adjusted returns deserves to trade hands at a premium to book (at an absolute minimum). For GLRE, all things considered (such as the inherent power of the business model coupled with Einhorn's unique skills in utilizing it), we believe 2x book is a much more appropriate valuation.
We were recently delighted to have the opportunity to accumulate a sizable position in GLRE at a basis of roughly $12 per share, or a meaningful discount to tangible book value. Today’s price is simply too cheap for this “little Berkshire”. After all, this is a competitively advantaged, high return business with above average growth prospects and a best in class management team.
Eventually, we believe the market will come to its senses and assign a more appropriate valuation. When it does, we expect a combination of growth in BV per share and multiple expansion to drive outstanding risk-adjusted returns for years to come.
Generals -- Excellent Businesses Purchased At Attractive Prices
When we speak of a General, we are speaking of an excellent business in which we were able to aquire at an attractive price. By excellent business we mean those businesses that are growing their per share economic values, have high returns on capital, and have managements with a history of intelligent capital allocation and acting in the best interests of shareholders. When we speak of attractive prices we mean prices that are cheap relative to there assets or free cash flows.
With Generals we intend to invest for the long term (3-5yr time horizon), and have no particular catalyst or time table as to exactly when the undervaluation will correct itself. Sometimes the discount to intrinsic value will narrow very quickly; many times the discount may take years to do so. Essentially we expect these businesses to grow at their own reasonably predictable pace over time, ultimately driven by the economics of the businesses underlying their stocks.
We expect generals to behave market-wise very much in sympathy with the S&P 500. Just because something is cheap does not mean it will not go down. We believe that during periods of abrupt downward movements in the market, this segment may very well be down % wise just as much as the S&P. But over a period of years, we believe these generals are very likely to outperform the S&P as a whole, and during years of significant market advancements, it is this portion of our partnership we believe will do the best.
It is worth mentioning, that due to the large declines in the general market over the past year, we have begun to meaningfully change the character of our security holdings recently. The percentage held in our special situation basket (arbitrage, spinoff's, liquidations, restructurings, etc.) has been slightly reduced, while our "general" commitments have correspondingly increased. As a rule of thumb, we tend to ratchet up our purchase of General's when general market sentiment is pessimistic and prices are generally low, and to sell them out in periods of optimism and high prices.
Current opportunity within the general segment of our portfolio operations is considerable. Thankfully, we have been able to build meaningful positions in three high quality companies at prices we believe to be truly ludicrous (i.e. rub our eyes cheap) relative to their respective long term earnings power. Recently purchased generals include sizable position's in Greenlight Capital (GLRE) and Brookfield Asset Management (BAM), with a smaller, starter position in Sears Holdings Corporation (SHLD).
Notably, at or around today’s quotes, we believe our generals possess some of the widest gaps between price and value that we have ever seen (unsurprisingly, that's why we bought them).
Consider for a moment that for the most part (SHLD being a partial exception) these businesses are not textile produces or heavy machinery makers, but well managed, competitively entrenched, high return businesses with above average growth prospects. Yet they are priced as if the opposite was true (at meaningful discounts to BV/NAV). This is not supposed to happen. Luckily for us, it has! Like Buffet said during the '73-'74 bear market, "This is the first time I can remember that you could buy Phil Fisher (growth) stocks at Ben Graham (Cigar-Butt) prices." Indeed! Our next few posts will drill down deeper on our newly aquired generals, and why it is exactly we feel they represent such incredible values for the long term investor.
With Generals we intend to invest for the long term (3-5yr time horizon), and have no particular catalyst or time table as to exactly when the undervaluation will correct itself. Sometimes the discount to intrinsic value will narrow very quickly; many times the discount may take years to do so. Essentially we expect these businesses to grow at their own reasonably predictable pace over time, ultimately driven by the economics of the businesses underlying their stocks.
We expect generals to behave market-wise very much in sympathy with the S&P 500. Just because something is cheap does not mean it will not go down. We believe that during periods of abrupt downward movements in the market, this segment may very well be down % wise just as much as the S&P. But over a period of years, we believe these generals are very likely to outperform the S&P as a whole, and during years of significant market advancements, it is this portion of our partnership we believe will do the best.
It is worth mentioning, that due to the large declines in the general market over the past year, we have begun to meaningfully change the character of our security holdings recently. The percentage held in our special situation basket (arbitrage, spinoff's, liquidations, restructurings, etc.) has been slightly reduced, while our "general" commitments have correspondingly increased. As a rule of thumb, we tend to ratchet up our purchase of General's when general market sentiment is pessimistic and prices are generally low, and to sell them out in periods of optimism and high prices.
Current opportunity within the general segment of our portfolio operations is considerable. Thankfully, we have been able to build meaningful positions in three high quality companies at prices we believe to be truly ludicrous (i.e. rub our eyes cheap) relative to their respective long term earnings power. Recently purchased generals include sizable position's in Greenlight Capital (GLRE) and Brookfield Asset Management (BAM), with a smaller, starter position in Sears Holdings Corporation (SHLD).
Notably, at or around today’s quotes, we believe our generals possess some of the widest gaps between price and value that we have ever seen (unsurprisingly, that's why we bought them).
Consider for a moment that for the most part (SHLD being a partial exception) these businesses are not textile produces or heavy machinery makers, but well managed, competitively entrenched, high return businesses with above average growth prospects. Yet they are priced as if the opposite was true (at meaningful discounts to BV/NAV). This is not supposed to happen. Luckily for us, it has! Like Buffet said during the '73-'74 bear market, "This is the first time I can remember that you could buy Phil Fisher (growth) stocks at Ben Graham (Cigar-Butt) prices." Indeed! Our next few posts will drill down deeper on our newly aquired generals, and why it is exactly we feel they represent such incredible values for the long term investor.
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