Not Friday, but still: Value Investing Congress, Day One

By Travis Johnson, Stock Gumshoe, October 12, 2010

I mentioned last week that I would try to send out an update or two to the Irregulars while I’m here in Manhattan attending the Value Investing Congress … and whaddya know, I’m actually doing it! There won’t be a “regular” Friday File this week, but I’ll share this note and hopefully another one tomorrow, and follow up by early next week with my “Idea of the Month” article running down some other thoughts from the Congress and choosing my favorite idea to share with you in more detail.

Day one was fascinating, with some solid doom and gloom about US government, politics, and monetary policy from Michael Lewitt and John Burbank and what impact that will have on investments … and a much more positive chat at the end of the day with the “celebrity of the day,” Bill Ackman from Pershing Square who described himself as “more bullish than most.”

You’ve probably seen the many, many articles that this conference generally generates — from Bloomberg, from the several value investing bloggers who are “live blogging” or Tweeting the event, or from the folks at CNBC who refer to it as the “Super Bowl of Value Investing” … but I’m not press credentialed, I’m just a regular guy trying to find interesting investments, so I wasn’t looking for headlines.  And I’ve found several ideas for future research in just one day of the conference, and gotten some valuable perspective, so it’s been a great experience so far.

But it struck me, after leaving the conference and perusing a few of the instant headlines that came out during the day, that the stories that make headlines are so rarely the most interesting ones.  Sure, Bill Ackman’s purchase of JC Penney may work out great, but that was headline news a few days ago and has already driven the share price up by several dollars … it might even end up being my “idea of the month” this month if it turns out to be my favorite investment that was covered during the conference (he does make some compelling points about the hidden value) … but I thought there was something else that stood out today.

I saw a dozen headlines in my evening browsing about Lee Ainslie, who justifiably gets a lot of attention wherever he goes — he’s the man behind Maverick Capital Management and is often described as one of the “Tiger Cubs” who learned at the knees of the great Julian Robertson, so when he floats an idea the investing pundits almost wet themselves in their rush to post the story (not as much as Ackman, perhaps, but still…).  There were several broader stories about his talk from the press in attendance, including one about his general thesis that tech stocks are unusually cheap (this is the VALUE Investing Congress, after all, what we’re looking for is dirty coins on the floor where we can stoop down to reach them, not shiny dollar bills floating in the air that we might or might not catch), but almost all the coverage of his talk was about Dell, a company he barely mentioned in the meat of his presentation.

Why? Because after some questions from attendees about how effectively tech companies use their massive cash hoards he mentioned that Michael Dell was “frustrated” and still a major owner of the shares and might do something dramatic, like pay some big dividends or take the company private with a partner. And believe me, THAT made Fox Business and and all the rest, and caused a sharp spike in the shares a couple hours after he said it as the rumor churned, though it didn’t exactly get the room chattering … to at least this observer in the room it seemed like an offhand comment and a “maybe” situation, and as I remember it he had just finished talking about how much more effective HP had been at acquisitions, and shrugging in response to a comment from Whitney Tilson that maybe Dell should have been doing a better job managing their business in recent years.

But Ainslie did say something that seemed much more interesting to me as a long-term investor — he mentioned that Maverick had “meaningful” positions in a half dozen stocks, including Dell (DELL), HP (HPQ) and a couple other big “tech value” companies, but when pushed by Tilson about whether any of these was especially notable he talked about a company that gets a lot less press, CommScope (CTV).

And that’s what I was hoping to hear from this conference: Ideas that are not quite as much in the mainstream (“big tech is cheap and pays dividends, it’s dumb not to buy Microsoft, HP and Cisco now” is a frequent refrain). CommScope was singled out by Ainslie as the one stock in their tech holdings that goes against the grain: most analysts hate it, and he loves it.

Frankly, it plays in nicely with the location of the conference, too, because CommScope sells networking gear to telecom operators, and one of the things that everyone gripes about is the terrible performance of AT&T in Manhattan, particularly for iPhones (and, to be fair, because of these bandwidth-hogging miracle boxes — be careful, Verizon!). I thought that was all a bit of Big Apple-centric exaggeration before I got here, but after a series of dropped calls and non-3G connections in the “greatest city on earth” it’s hard to pass off the concerns.

And how do telecom operators improve service? They install more equipment, wire more antennaes, and generally increase capital spending. Ainslie’s comment was essentially that CommScope is gearing up for the expected heavy capital investment by the big carriers starting in 2012, and buying back 10% of its shares, and should be growing their free cash flow to the point that they’ll have a free cash flow yield of 14-15% in 2012, which should be a big growth year.

Is that going to happen? Beats me … I don’t think I’ve had a thought about CommScope since I wrote about them while unraveling a teaser about three years ago — at the time the stock was around $30 and it’s at $23 now, but in the interim they’ve sure had a wild ride, hitting both $60 and $7 over those years. They’re growing, they’re profitable, and Ainslie’s nice comments didn’t have nearly the ripple that his Dell comments did but are arguably more meaningful for those looking for a new idea.

In the meantime, I’ve been hearing some interesting ideas about some Indian and European companies, and some big picture thoughts, and I’ll share as I can in the days and weeks ahead. Tomorrow we’ll be hearing from David Einhorn and Mohnish Pabrai, and if CNBC isn’t standing by waiting to see what Einhorn says I’ll be very surprised — hopefully it’ll be interesting and I’ll have some more ideas to throw on the pile soon.

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