market folly

Continuing our notes from the London Value Investor Conference 2013, the next speaker is Michael Price of MFP Investors.  He talked about his investment process and presented two long ideas: Hospira (HSP) and Hess (HES).


Price's Background

Michael Price first came to London as an investor in 1984. At the time few people in Europe used  a balance sheet focused value approach. Many companies were not covered by an analyst at  all and this encouraged Price as the lack of coverage made him feel that he was discovering new  opportunities. Price said that this was the opposite situation that you find at recent Berkshire  Hathaway annual meetings where 40,000 people focus on one company. He said to find opportunity  you need to get off the beaten track.


Price's Investment Process

Price talked about his investment process. Two-thirds of his portfolio is made up of stocks that trade  below two-thirds of their intrinsic value. The other third are special situations e.g., firms involved  in proxy fights, liquidations or a fight for control. From his 40 years of experience, excluding 2008  - he said we all need to forget about 2008 - that type of value portfolio will weather the storms.

What’s important is to buy cheap and be well diversified with at least 30-70 holdings. When you are  convinced that what you already own is cheap compared to comparable businesses you add to it.  When you have done lots of work and you gain conviction about an idea you can take the stake up  to 3 to 5% of your portfolio. Your top five positions might each be 5% of your portfolio. If you have  conviction you should add to holdings as they get cheaper. He values businesses by asking what a  potential owner would pay for the whole company.

Be prepared to wait patiently. If there is nothing to do, sit with cash. Cash is ammunition. An  investor should spend all of his or her time working on calculating intrinsic values waiting for the  market to throw out an opportunity. The definition of luck is preparation meeting opportunity.

Bad news creates opportunity: wait for bankruptcies, the death of a control person who owns  a large part of the business, litigation, government intervention and accidents. Always look at  the companies whose share price is most down to find value. Price said he also likes investing in  companies where management has built up intrinsic value and made mistakes.

In terms of market valuation today, Price said the market was reasonably priced but there are still  some opportunities to find securities that trade at two-thirds of their asset value.


Long: Hospira (HSP)

Idea: Long Hospira (HSP:NYSE).  Hospira had been a growth story until the FDA shut down one of its largest plants. The share price  went from $45 to $28 overnight. The growth investors sold to the value investors. Price thinks that  the company will have completely recovered in two years.


Long: Hess (HES)

Idea: Long Hess (HES)  Hess is a case where the management have stumbled. Hess is involved in a proxy fight with Paul  Singer’s Elliott Associates. It trades at a 50% discount. Price thinks there is likely to be four or five  new directors. The company with be divided into two parts and share buybacks with be agreed.  Assets will be sold off. John Hess is likely to step down. The outcome of the vote is due on May 16.  It is also possible that Hess may get bought out.


Michael Price said he also likes US banks (not European banks, though). He thinks Berkshire  Hathaway is 20% overvalued.


Book Recommendation

Michael Price highly recommended a book about Peter Cundill’s  investment approach by Christopher Risso-Gill (2011) “There’s Always Something to Do: The Peter Cundill Investment Approach."


Be sure to check out other investor presentations: notes from the 2013 London Value Investor Conference.