Dan Miller’s “Investing with Conviction”

By Travis Johnson, Stock Gumshoe, April 3, 2014

These are my notes and instant reactions from a presentation at the Value Investing Congress, the notes below might contain errors, paraphrases, incorrect quotes, or misinterpretations.

Daniel Miller runs the “Focus five” portfolio at Gabelli, which is designed to overweight a small number of the very best ideas that that money management shop.

They look for companies that are fairly small, that will sit down with them and they want a share price 30-50% less than it would be worth in a private market transaction… and they want a catalyst within 18 months. They need an even that will help them make money, unlike with personal accounts, money managers don’t get paid to sit on an undervalued stock for a decade.

He covered three stock ideas in New York in the Fall, all of which had strong franchises in niche markets, large net operating losses,

RealD (RLD) — had about a 60% gain. Mostly a 3D projection systems company. Also investing in consumer electronics. Still owned in the fund, he thinks it should be worth in the high teens over the next year.

Guidance Software (GUID) — had a 28% gain. He sold recently.

Internap (INAP) — in data center business, doing all the right things, only up about 7.5% (it came back to earth recently, most data center stocks have dipped on the news that Amazon is cutting prices), looks like a good deal again. They sold some when it spiked up on Barron’s attention, but still own some.

The ideas this time around:

Both small caps, in management transition, niche firms, rapidly growing free cash flow.

Bon-Ton Stores (BONT)

Market cap $225 million, EV $1 billion (lots of debt, about half of it tied to mortgages and an acquisition from Saks). Debt is low cost.

Has 270 locations, mostly in the midwest. Small and mid-market communities, they can’t compete in urban centers. They have their own brands.

New CEO has been restructuring the business, changing merchandising and brand offerings and bringing in national brands (Coach, etc., brands with much higher margins) and investing in e-commerce, which is up to 5% of revenues. Better now at managing inventory and expenses, even with a difficult few quarters recently.

2015 EBITDA should be about $200 million, he thinks the private market value is about $23, largely because of weather (it’s at $11 now). They were having ...

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