Pope Brar is a
money manager based on the West Coast who has spent a considerable amount of
time analyzing the success (as well as the failure) of some of the greatest
investors.
Brar has
carefully examined the records of such legendary investors as Warren Buffett,
Seth Klarman and others to see what they have done to achieve such success over
such a long time in the equity market.
Brar had worked
as an analyst and investment banker and using the knowledge gained from his
research, he opened his own fund last year after first seeding it with his own
capital for five years to make sure he could achieve the superior results he
desired.
See
also: How To Unlock The Secret Of Superstar Investing
When asked about
his investing approach, Brar said, “One of the best ways to achieve elite
returns over a long period is to purchase businesses that are selling for less
than half ofintrinsic value. Buffett invested in two major categories. Plan A is always
to buy the Coke and Moody’s of the world at 50 percent off. If you buy these
types of businesses at that discount and it takes 2-3 years to trade at
intrinsic value, you’ll do very well. Intrinsic value will be much higher in 2
to 3 years. So 50 cents may be worth $1.30 or $1.40. This is always Plan A. But
plan A is virtually impossible to execute across the entire portfolio because
they are so very, very rare. When plan A fails, go to plan B. Plan B is to buy
at half off, regardless of business quality (as long as you’re pretty sure
intrinsic value is very unlikely to decline.)”
As he says, Plan
A is difficult to achieve because it can usually only be found when we have a
full on market meltdown like in 2002 or 2008 that creates extraordinary values.
However, as asset-based deepvalueinvestors, we can combine the concept of steep discounts
from intrinsic value as well as a discount total asset value to find some
potentially outstanding opportunities.
For intrinsic
value, we can use the Benjamin Graham number, which uses a theory developed by
Graham to determine the intrinsic value using both earnings and asset values.
When reverse engineering Graham’s theory, we can establish that the book value
(multiplied by 22.5) and multiplying that product by the earnings per share, we
have a rough estimate of a firm’s ongoing intrinsic value (note that this is
not Mr. Brar’s methodology, but a ‘quick and dirty’ way for us to get an
approximate fair value of the company).
It is then a
simple matter to screen for stocks trading at half of this value and also trade
at a discount to asset value (again note that these are not Mr. Brar’s picks,
but the results of a stock screener using his theories and approach).
One
thing that shows in the screen immediately is that both Brookfield Office
Properties (NYSE: BPO)
and Brookfield Property Partners (NYSE: BPY)
trade below book value and healthy discounts to intrinsic value.
The two REITs
are probably going to combine under a takeover offer made by BPY for BPO. It is
a share for share offer, so with BPO trading at a discount, BPY investors can
back into what will be a world class portfolio of commercial real estate
including huge chunks of downtown Manhattan.
Bond
insurer MBIA (NYSE: MBI)
also shows up as a potentially severely undervalued stock.
The company has
spent the past several years cleaning up the mess it made during the mortgage
meltdown and arguing with banks, most notably Bank of America as
to who owed who what for the massive losses that were incurred. The company has
a lot house cleaning to do so it can get back to its core municipal bond
insurance business, but if they are successful, the potential upside for
current levels is nothing short of spectacular. The stock trades at about 70
percent of book value and one third of the company’s Graham number.
Harvest
National Resources (NYSE: HNR)
is also on the list.
The company has
reached an agreement to sell its interest in an oil and gas partnership in
Venezuela and is attempting to sell its interests in Gabon in Indonesia. If all
the transactions are concluded successfully, the stock would have an asset
value of more than double the current stock price with most of that in cash.
There are
obstacles when dealing in nations with less-than-friendly governments, but
insiders seem confident and deal will get done as officers and directors have
been pretty big buyers of the stock in the last three months. The stock
currently trades at about 40 percent of book value and one third of its Graham
number, so the shares are definitely cheap.
Combining
intrinsic value and book value to find stocks with the potential for huge gains
makes a lot of sense. Although you can certainly use other methods, the Graham
number proves to be a decent representation of intrinsic value and is usually
within 10 percent or so of the values uncovered using more sophisticated
valuation models.
Read more
Benzinga.com small-cap articles: http://www.benzinga.com/news/small-cap
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