What are we reading?

  1. Getting Started (MicroCapClub)
  2. Mr. Market (FundooProfessor)
  3. Seth Klarman presentation in Bruce Greenwald’s class (Valuewalk)
  4. Warren Buffett buys into Phillips66 Here’s why (Valuewalk)
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What are we reading?

In search of value (here)

Markel Corporation at $800/share (here)

Super Investor stock ranking (here)

Piramal’s IndiaREIT investors gets screwed (here)

Our own Sanjay Bakshi’s featured page (here)

Permanent loss of capital (here)

Nestle and ITC

Nestle

Maharastra government joined forces with a few other states banning Nestle’s Maggi creating a classic case of the government attacking a well entrenched moat Here

While it will take a while to sort this out, there is an air of uncertainty around Nestle’s flagship product in India. The biggest asset that Nestle carries on its balance sheet is its brand and this controversy puts Nestle’s most precious asset into the cross hairs. While the company has definitely the in-depth resources and financial wherewithal to survive the crisis, it still remains to be unknown as to the extent to which the moat will be breached. As warren says, ‘You only know who is swimming naked when the tide goes out’, this episode will really test the endurance and reputation of Nestle in India.  Even with the recent dip of 18%, the stock continues to enjoy a PE of 47, which takes the earnings yield just north of 2% making it a very expensive proposition even today.

While one might look at companies like Coca Cola which have faced such issues globally before and have emerged our relatively robust earnings power for the future here  Nestle still does not have the margin of safety required to evaluate Nestle fully. It must also be noted, there is a new breed of investors (the Buffett clones) who are watching quality companies with one-time resolvable issues to take advantage of the discrepancies that occur with these companies including Sanjay Bakshi in India (latest update on Nestle here)

Disclosure: No Position

ITC

We had written previously about ITC here.

In the recent market volatility that we have been seeing and with Maharastra (after Chandigarh) banning loose cigarettes, another stalwart in the FMCG space is fighting for the relevance of its business model and its flagship products (here). The company is trading at 25 times earnings or 4% earnings yield. With the excise duty hikes and the resilience that we have seen in the past with respect to the business model, it might be worth another look to see whether this stalwart is worthy at the current prices.

Disclosure: Long ITC

Thomas Cook and Fairfax

Prem Watsa, Chairman and CEO of Fairfax Financials, has compounded book value at 21.2% and stock price at 19% since 1985. There was a great deal of excitement when Fairfax took over the Thomas Cook operations in India. All investors, value, momentum and traders piled up on the stock. The best analysis post the acquisition was provided by renowned value investor, Sanjay Bakshi on Thomas Cook as an investment vehicle for Fairfax in India. See here

Fast forward, a couple of years and below is what appeared on the annual report of Fairfax Financials in March.

Fairfax

It raises the following questions

  • Looks like Thomas Cook will also be a acquisition vehicle but all big ticket items would go through this new entity.
  • Given the fees that Fairfax would gain from the transactions through the new entity, it seems it is logical that the best of ideas might flow through the new entity.
  • Why could Fairfax just not recapitalize Thomas Cook to be owned through an entity in Canada and issue more stock at the current price?
  • Will there be any conflict of interest every time Fairfax uses the allocation vehicle instead of Thomas Cook to Thomas cook shareholders? Will Thomas Cook shareholders be shortchanged in the long run?

I have always been a big fan of Prem Watsa but it looks like the current move is more beneficial to Fairfax owners than to Thomas Cook.

Disclosure: Own shares of both Fairfax and Thomas Cook India