market folly

We've posted up notes from the Value Investing Congress in Las Vegas and next up in the series is Lisa Rapuano of Lane Five Capital Management who pitched Markel (MKL) as well as Bed Bath and Beyond (BBBY).


Lisa Rapuano's Presentation at Value Investing Congress Las Vegas

•    Probabilities, know how much to bet and how to react – can you handle it psychologically. •    Think about what can go right- the probability – how much can we make? How much money can we lose, and what’s the probability – think of scenarios ahead of time.
•    Process leads to three outcomes – compounders, contrarian investments (what Lane Five is known for) and finally getting involved as an activist or being proactive. They have become more aggressive in this act.

•    Compounders – good ROIC, strong balance sheet, moats and strong capital allocation. Infrequent. Temperament requires to invest in these businesses” Generally boring, underperform in up markets – require patience to acquire when the price drops and patience to keep in it as it under performs.

•    Contrarians – priced very cheap, higher expected returns – lots of ways to make money, yet much greater variations between these outcomes. Can be less correlated to the market. Always some management team screwing something up. Have to be selective in turnarounds – see if the peers have a good business model and margins. 
•    Look for shareholder turnover, new low lists. Look for sell-side to give up on the name. Could be difficult to hedge. Patience for the turnaround, patience for entry and exit. Need to be resourceful as people don’t like to talk about these names and finally, you need to have humility. 
•    In regards to timing in contrarians – COCO example. Has been on the new low list for four years! Bought it at the first deep dip, triple downed two years and still sitting at the same price. Much longer and much worse. Time is killing the IRR.
•    One investment – waited for the new management team to come in and understood the business and incentive plan – patience for entry.

•    Activist engaged investments – generally talks with them tries to be collaborative, sometimes they need a push. This can work on the compounding side. This takes a lot of money for lawyers, you can become illiquid and it is a fairly large time commitment. Generally once you are on the board – generally worse than you think!
•    Why does Lane Five pursue several paths? Likes the way the portfolio comes together. If you are wrong about one – doesn’t sink you, further time cycles are different.


•    Compounder idea – Markel (MKL) the biggest position. Specialty insurer with an investment portfolio ran by Tom Gayner. Disciplined underwriter. Excess capital reinvested into equities at high rate of return. Bonus system – paid in 5 year trailing BV growth, in excess of 11%. Valued at an insurance multiple. Made an acquisition of Alterra – which significantly increased investable assets. Markel ventures is another growth leg – able to invest capital in private businesses.

•    Contrarian idea – Bed Bath and Beyond (BBBY) – a  home goods retailer – people think internet will outdate BBBY – their variant view is that BBBY is similar to home depot or goods, where people want to see the item in person, further they have strong pricing – and continue to be competitive vis a vis online competitors. Fabulous capital allocation – share repurchases and useful CapEx measures. Four other concepts which have good economics. BBBY trades lower on all multiples versus peers – even while having better returns than most. Unlevered FCF $1B used to repurchase shares. They don’t talk to the street – non-promotional mgmt. team. 

Be sure to check out the rest of the Value Investing Congress presentations.