Grahamian Value Week in Review ― February 12, 2021
“The wise investor recognizes that success is a process of continually seeking answers to new questions.”
WEEK IN REVIEW
In the past week —
There have been material developments at two Grahamian Value listed companies.
In appreciation —
Kalani Scarrott (in Australia) and Ivan K. (in Europe), thank you for your contributions to this week’s issue. We’re thrilled to welcome you aboard as Grahamian Value Project Volunteers and most grateful for your unique insights.
Based on our methodology, just two names qualify for inclusion on the Grahamian Value Classic list. Each has had material developments in the past week.
In this issue, we proudly showcase insights from Bill Ruane and Rick Cunniff through excerpts from early Sequoia Fund letters which, in our eyes, particularly resonate in the current environment — with brief commentary, where warranted.
I. WEEK IN REVIEW
This marks our eighteenth consecutive week with no new additions to the Grahamian Value Classic list of companies.
Changes in Beneficial Ownership: Servotronics, Inc.
FMR LLC reported a change in their beneficial ownership of Servotronics, Inc. on a Schedule 13G/A filed February 8, 2021, detailing ownership of 140,130 shares (5.6% of the company) as of the filing, an increase from 138,130 shares (5.4%) reported on February 13, 2019.
Changes in Beneficial Ownership: Rubicon Technology, Inc.
Poplar Point Capital Management LLC reported new beneficial ownership of Rubicon Technology, Inc. on a Schedule 13G filed February 10, 2021 — the fund owns 133,000 shares (5.5% of the company) as of the filing.
II. WEEKEND READING
Timeless Insights from Bill Ruane and Rick Cunniff —
While we have a low opinion of stock market predictions and the correlation of foreign policy and the price of Capital Cities Communications, we do place the expectation of future serious inflation as the paramount factor in investment planning and stock selection. We try to analyze the effect of 8%-10% inflation on each company we study. There is a remarkable difference, for example, between the prospects of a steel company and those of a major advertising agency. One is plagued by huge costs to replace outmoded, fixed assets simply to meet competition, both domestic and foreign, in an industry with chronic overcapacity worldwide. For the most part, all reported earnings (and more) of the steel companies are devoted to this battle which has been made dramatically worse by inflation, and little is truly left for the stockholders. An advertising agency such as Interpublic, on the other hand, has almost a 15% automatic override on the growth, both real and inflationary, of the dollars spent on advertising in television, magazines and other media. Such a company has little in the way of fixed assets and no inventory, and almost all of its reportable earnings are available to the stockholders if they can’t be used internally for interesting acquisitions to further growth.
People readily understand the inflation protection which comes from owning real assets, particularly real estate, for which there has been substantial demand, especially from abroad, in order to hedge against inflation. It is less apparent that the ownership of stocks also represents ownership in real property, and to the degree that one uses discrimination, stocks can be every bit as good a hedge against inflation as the average piece of real estate. We believe there will be greater recognition of this fact in time. — May 12, 1978
“Inflation Can Threaten Your Mental Health....”
This caption from an article in The Wall Street Journal not only alludes to the basic cause of our disorganized financial market - uncontrolled inflation - but emphasizes that there is literally no end to inflation’s negative ramifications. The New York Times recently quoted Warren Buffett, the chairman of Berkshire Hathaway, with reference to what he terms “the investor’s misery index.” In essence, the index measures the gain or loss in the investor’s purchasing power after subtracting income taxes and the inflation rate from his gross return on his invested capital. During the post-war period to date, for example, a pre-tax annual compound return of 15% would have been regarded as a superior if not handsome investment performance; most investors did not fare nearly so well. If it is assumed, however, that this return is achieved through some combination of income and capital gains, it is likely that one-third of it, or 5 percentage points, would go to taxes. If in addition to this tax effect we postulate a 10% inflation rate it is very clear that an apparently superior return is a phantom and truly represents simply the maintenance of original purchasing power. Similar arithmetic applied to a 5% passbook savings account would make the headline above even more understandable. — May 19, 1980
The much heralded two-tier market situation has obviously become blurred. A significant number of the “nifty fifty”, as they were known, have registered sharp declines from their 1973 highs, and this has caused some but by no means all major investment managers to re-think what was known as the “one decision” approach to buying common stocks. The essence of that approach was that Avon Products, Polaroid or Disney, for example, had such assured long term growth prospects that one could virtually ignore price when making a long term commitment. In remarkably short order, however, the “assured” growth prospects of each of these companies came into serious question, and all three are currently selling at prices at least 55% below their high prices of last year. — April 1, 1974
We note this research project from Alta Fox Capital, which discusses how “82% of companies from the set [future multi-baggers] traded below these multiples [3x NTM sales, 20x NTM EBITDA, 30x NTM PE] and/or without forward multiples. These leave room for multiple expansion...” One does not need to pay through-the-nose for many future multi-baggers. We specifically recall that many of today’s multi-baggers were written up on ValueInvestorsClub.com at single-digit EV/EBIT multiples. — Grahamian Value Team
The prices of most of these tangible things have increased substantially, fostering further interest. We suspect, however, that this desire to own tangible assets at any price may lead to sorry long-term results just as happened from paying exorbitant prices for America’s finest stocks in the early 1970’s. We were told the other day that a watercolor which knowledgeable antique dealers would have ignored in 1970 for as little as $25 recently was sold at auction for $9,000. Who knows if this is an appropriate price, but if the professionals were right in 1970 we hope the buyer likes to look at the watercolor — it’s a funeral scene. Actually, the Sequoia Fund has also been enthusiastically collecting what we believe to be bargain color engravings, but these are in the form of stock certificates and are bought at stock exchange auctions. We’re lovers of this form of fine art and firmly believe these values will improve with age. — February 8, 1979
We found this passage humorous; while not necessarily timely, it is certainly timeless. — Grahamian Value Team
We think the following editorial from Harper’s magazine is interesting.
It’s a gloomy moment in the history of our country. Not in the lifetime of most men has there been so much grave and deep apprehension; never has the future seemed so incalculable as at this time. The domestic economic situation is in chaos. Our dollar is weak throughout the world. Prices are so high as to be utterly impossible. The political cauldron seethes and bubbles with uncertainty. Russia hangs, as usual, like a cloud, dark and silent, upon the horizon. It is a solemn moment. Of our troubles no man can see the end.
This particular editorial was written in 1847. We wish to thank our friend, George H. Michaelis, President of Source Capital who in his recent report to shareholders brought to our attention this Harper’s editorial. Since this editorial was written our country has grown enormously in terms of almost any economic indicator one may choose. Fears of one sort or another will always be with us, and somehow the world goes on. This fact only confirms our feeling that one should not be diverted by global concerns from recognizing outstanding opportunities in the stock market when they appear. — May 15, 1979
More timelessness. The referenced editorial could have been printed in 2020, 1990, 1979, etc., yet was from 1849. In line with the discussion of Mr. Ruane and Mr. Cunniff, we need not concern ourselves with the myriad of reasons to avoid stocks, and instead focus on spotting bargains when they come about. — Grahamian Value Team
As we commented on in our last quarterly report we are very impressed with the values offered in many of the stocks of companies with outstanding consumer brand franchises. Billions of dollars have been spent on advertising to create acceptance of these household name products, but the stocks of many of the companies who own these franchises are selling at prices which give scant recognition to the tremendous value of these intangible assets. We have built Sequoia’s stake in stocks of this category to 37% of our total net assets at present, and we expect to share fully in the fruits of their franchises whose futures seem well assured. — February 9, 1981
Bill Ruane and Rick Cunniff recognized that intangibles can have very real economic value, and intangible-heavy companies may present decent inflation hedges on their own — like the aforementioned advertising agency, which requires very little in the way of ongoing maintenance capital expenditure on tangible assets. — Grahamian Value Team
III. WEEKEND WATCHING
IV. WEEKEND LISTENING
Courtesy of The Acquirers Podcast: Tweedy, Browne Company LLC was established in 1920 as a dealer in closely held and inactively traded securities. The firm’s 100-year history is grounded in undervalued securities, first as a market maker, then as an investor and investment advisor. Benjamin Graham, through his investment firm Graham-Newman Corp., was one of the firm’s primary brokerage clients in the 1930s, 1940s, and 1950s. It was through Graham that the original partners of the firm developed brokerage relationships with investment legends Walter Schloss and Warren Buffett, and met Tom Knapp, who joined the firm in 1957 from Graham-Newman and led its conversion from broker to investor. In 1959, the partners of then Tweedy, Browne & Knapp pooled their capital in a partnership investment vehicle. In 1968, the firm accepted its first outside money management clients as limited partners of this vehicle. (March 30, 2020 episode date)
ABOUT GRAHAMIAN VALUE
Founded in 2020, Grahamian Value is a labor of love centered around our desire to openly share data and perspectives that we find helpful in our pursuit of Benjamin Graham-inspired investment ideas.
The co-editors of Grahamian Value, as of the date of this communication, may individually own shares of companies mentioned herein. The publishers do not receive compensation from the companies and people covered in Grahamian Value for such coverage. This communication is for informational purposes only. This is not intended to be investment advice. Seek a duly licensed professional for investment advice.