I’ve heard Chris Mayer talk about his “Coffee Can” strategy before, but this new way that Agora is marketing it caught my eye:
“Investing tips for the couch potato
“This has got to be the laziest investment strategy out there today.
“Imagine investing in stocks and coming back 10 years later to discover your money has multiplied.”
You’re probably not as lazy as I am, so perhaps that doesn’t jump out at you — but man, there’s nothing better than having your money multiply without having to do anything.
And, really, academic studies continue to find that investors are our own worst enemies — nothing hurts your eventual 401(k) balance like spending your 30s, 40s and 50s “tweaking” your account to buy and sell stocks or funds as you see the market changing. Humans are terrible at predicting the behavior and direction of markets, all humans — I think the most important differentiation among investors is not their skill at forecasting, but their emotional resolve to avoid being swayed by the headlines and the daily market chatter.
Which is hard, because here I am, writing a daily note to a few thousand of my closest friends about money and investing. And, frankly, it’s quite likely true that writing about my investments and about the investment hype spewed out by the newsletter industry for you every day makes me a worse investor. Studying the market daily, watching those ticker symbols blink green and red, and reading hundreds of investing articles a day gives you an almost overwhelming urge to act, even when the more sage advice for most people would almost always be, “don’t do something, just sit there.”
So in that vein, I thought I’d look into what Chris Mayer is now teasing as his “Coffee Can” stocks. The Coffee Can strategy is more or less just “buy and hold” — you take five stocks, buy them now, and do not look at them or pay any attention to them for five or ten years or more, bury them in a metaphorical (or real, if necessary) coffee can in your back yard. Then come dig ’em up in 2020 and see how they did. If you picked solid companies, and you’re not otherwise an expert trader who consistently beats the market (some do — but be honest with yourself), then those coffee can stocks will probably have appreciated more than whatever else you were doing with your investing during that time period. And without any angst or panic.
Whether they’ll do better than the S&P 500 or some other broad market index, well, who knows — lots of stocks are above average, so it’s certainly possible.
Or, of course, you could be the poor sap who picks three companies that go nowhere and two that go bankrupt. It’s not a perfect system.
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This broad strategy is not shocking, of course — we’ve all heard of buy and hold. But it puts the onus on you to choose stocks in which you have extraordinary confidence, and to resist questioning yourself once you’ve done your analysis and made your decisions. Can you do it? I have a few stocks that have been “buy and hold” for me for ten years or more, though I can’t say that I’ve avoided fretting about them.
So… let’s move on and see which stocks Mayer is actually recommending for that “coffee can”… and, to be fair, I should note that although this ad has hit my inbox a few times in the last week, the text of it may well be a year or two old… which shouldn’t make us fret if we’re holding forever, I suppose, but might mean these aren’t currently Mayer’s most actionable ideas. Often, ideas are promoted by publishers long after they cease being the favorite pick of a particular pundit.
“In my search to find the very best stocks for the “Coffee Can Portfolio,” I narrowed down the list to five specifics. Let me tell you a little about each one here…
“COFFEE CAN STOCK #1: Profit From the Fire Sale of the Century
“It’s no secret that we’ve just witnessed the biggest real estate bust of our lifetimes. Banks lent too much money to people who had no chance at paying it back.
“Now, in an effort to shore up their balance sheets, the banks are desperate for cash… and they’re unloading their real estate portfolios for mere cents on the dollar.
“Luckily, there’s one company there to take advantage of this fire sale. And it’s the first company I recommend you buy and store away for safekeeping.
“Shares of this company have nearly tripled since going public a few years ago. But I believe we’re still in the early stages of this winning play.
“It’s a ‘done for you’ way to turn the crisis of the 2008 meltdown in housing into opportunity — without having to become a landlord and without having to fix a single leaky toilet.
“If you buy it and store it away, my guess is that you’ll come back to find that it’s multiplied your money.”
That is very similar to a “Coffee Can” stock pitch he made a couple years ago — but there’s a bit of a twist, since I guessed wrong last time I looked at it and have since learned more about Mayer’s portfolios and ideas by seeing him at a few conferences. This is almost certainly Kennedy Wilson (KW), which is a distressed real-estate buyer and operator that did indeed make a big move to snap up real estate assets after the downturn, and has been buying pretty relentlessly ever since. They haven’t posted a lot in the way of earnings or cash flow, since they’ve been such active buyers, but the stock’s rise over recent years can generally be explained by an increase in their tangible book value per share, which has doubled in five years (and shrunk over the past year) and an increase in investor interest, as represented by the premium that investors have been willing to pay over that tangible value — back in 2011 they were trading at about 1.5X tangible book, now they’re closing in on 3X tangible book.
This is a high quality company, with strong insider ownership and a proven ability to buy property and increase its value, and they have a very large exposure to European real estate that they’ve been buying in recent years — they even started a separate London-listed company, Kennedy Wilson Europe Real Estate (KWE in London, KWERF on the pink sheets), to fund more acquisitions across Europe, where the need of banks to offload real estate and shore up their balance sheets in the last couple years has been much more severe than it’s recently been in the US. I think I might be a bit more tempted by Kennedy Wilson Europe right now as an opportunistic buy, since it’s trading at very close to Net Asset Value per share and has had a strong start in their first year as a separate publicly traded real estate fund, but with that you’re essentially buying a concentrated portfolio of UK and Irish real estate so it’s certainly much riskier than the parent Kennedy-Wilson. If you’re really thinking “coffee can” and you’re not going to look at it for five or ten years, then probably papa KW is far safer than the European property group — it’s just not particularly inexpensive right now. Last year, when Mayer presented at the Value Investing Congress,he suggested that Kennedy Wilson Europe should provide returns of 10-15% annually
Next for the can?
“COFFEE CAN STOCK #2: Get Paid FOUR Times the Average Savings Rate
“Our next Coffee Can recommendation also takes advantage of the busted real estate markets.
“But instead of housing, this next company picks up distressed retail locations on the cheap.
“It’s a great forever stock to own because it’s a safe company that holds little to no debt.
“They’re in a firm uptrend, having almost doubled since going public.
“And simply holding the stock pays a steady dividend that’s more than FOUR TIMES what Americans are receiving in their savings account.
“Buy it. Store it away in your Coffee Can. And watch it compound.”
That’s obviously not enough to give you a definitive name, not based on those clues — but I can cheat a little bit, because I know Chris Mayer’s fondness for owner-operators and have seen him present on one retail oriented REIT before, one that did indeed launch as a way to buy “distressed” West Coast shopping centers… so I’ll bet that Mayer here is again suggesting Retail Opportunity Investments Corp (ROIC), which has almost doubled since going public in 2010.
ROIC is also a stock I own and have written about many times. The safe-and-stable part of it that would make me pretty confident to “own and ignore” it is that they have a strong, well-connected management team that has large insider ownership and a CEO in Stuart Tanz who has “done it before” in building (and in his previous company, selling at a stiff premium) a portfolio of shopping centers. It’s not cheap right now, either, but I’ve been holding it for essentially its whole life as a public company and enjoying the compounding dividends, and I wouldn’t mind holding it for a decade more — they are growing the dividend nicely, they are reasonably valued, they own low-risk real estate… what’s not to like?
Well, there is that whole “REITs get clobbered when interest rates spike up” fear — but it turns out, for most traditional REITs (like those that actually own property — not mortgage REITs), rising interest rates are not necessarily a bad thing in the long term. That’s largely because rising interest rates generally come at a time when inflation is rising, and real estate has historically kept up with inflation. That’s what keeps me from loading up on several other REITs that I also like at these relatively high prices (valuations are on the top end of where REITs typically trade, though they’re not wildly out of line by any means), the assumption that… sometime… the Fed or the market is going to give us an interest rate panic, send the 10-year bond back up to 3%, and REITs and pretty much all other income equities will fall by 10-20% and create a nice buying opportunity.
It might not happen, but I can dream — I’m certainly holding my ROIC, and I’ve seen some bullish assessments of the company even at these prices (like Brad Thomas, who writes about Real Estate for Forbes and Seeking Alpha and pitched it as a “buy before it gets acquired” stock), but with REITs in general on the expensive side and with ROIC itself priced at a bit of a premium to the retail/shopping center REIT group I’d much rather do a big buy on this one when the group is getting washed out a bit. That said, the last time I added to this position was about two years ago… so I may be being a bit too patient. On the positive side, they own largely “necessity retail” (centers anchored by grocery stores, pharmacies, etc.) that they buy at good off-market prices because of the connections and market knowledge of Tanz and his team… and they have a substantially more conservative balance sheet than most of their competitors, so they do have flexibility to keep growing (as they have been, with steady property buys) and no real pressure from debt maturities in the near future.
ROIC management has given guidance for growth of 4-9% in FFO (funds from operation — the REIT equivalent of “earnings” that ignores depreciation and asset purchases/sales) per share in 2015, which is pretty good, and should allow for continued gradual dividend growth, but it’s not spectacular or sexy. There’s no real reason for the stock to go down other than the fact that it’s a REIT, it yields a little less than 4% but is owned primarily for that yield, and I suspect we’ll see better buying opportunities in the group soon.
“COFFEE CAN STOCK #3: Turn Every $5,000 into $12,256
“The third company I’d like to show you is one of the world’s most mysterious investment opportunities…
“Management holds no conference calls. They don’t do corporate presentations.
“What they do instead is run a solid company and not take any big risks. They just keep piling up value per share as if they were laying bricks, building to impressive heights over time.
“And here’s perhaps the most amazing fact: Insiders in the company own more than 44% of the entire company. So by buying alongside them, you’re in good company.
“According to my research, I believe this company could earn 9%, year after year — safely compounding an initial $5,000 stake into more than $12,000 over the next 10 years.”
There aren’t a lot of good, “coffee can worthy” companies that have insider ownership levels that high — mostly you’re talking about founder-controlled startups, biotechs, very volatile or levered or commodity-based stocks, or companies that have just been re-floated by private equity or otherwise have something strange going on. Who’s this one? Well, with those clues I confess to not having found the answer yet… I’ll keep looking, but don’t want to delay sharing the other solutions with you while I ponder (if you’ve got a good answer from your own Thinkolator, well, toss it on the pile). Mayer does generally like a lot of small banks (he was a banker when he started his newsletter), and there are some with huge insider ownership, but I’m not so great at analyzing banks. Will let you know if I find an answer.
“COFFEE CAN STOCK #4: How to Buy the Company That Holds 20 Acres of Prime Maui Real Estate… At NO COST on Their Balance Sheet
“Our next recommendation comes from a spin off of America’s largest owner of mall properties. And here’s the thing…
“Despite being worth millions, some of their properties are carried on the company’s financial statement at NO COST, creating a huge market anomaly in their share price.
“Other properties are carried well below their market cost.
“Each creates huge hidden opportunity in the balance sheet of this company. And don’t just take that from me.”
This one is Howard Hughes Corp (HHC), the “odd” property owner spun out of General Growth Properties when it went through bankruptcy a few years ago, including a lot of the assets of the Rouse companies that didn’t fit in with the GGP mall properties. Bill Ackman at Pershing Square was instrumental in this spinout, and is Chair of HHC, and Pershing owns about 10% of the company. It has done extraordinarily well, doubling about every two years since becoming independent in 2011 on the strength of revitalized planned communities, renovation and rebuilding projects, and, well, several “name brand” value investors who are quite in love with the stock and talk about it a lot (including Bill Ackman, Whitney Tilson, Chris Mayer, and others I’m not thinking of at the moment).
They do own many valuable projects and potential projects, including the old South Street Seaport in Manhattan that’s being redeveloped as the “Seaport District,” trophy assets in downtown Honolulu, master planned communities in Houston, Maryland and Las Vegas where sales activity picked up dramatically last year. You can check out their presentation of 2014 results and 2015 plans here. They have some tremendous opportunity from their four key projects (the Woodlands in Houston, Summerlin in Las Vegas, The Ward Centers in Honolulu, and South St. Seaport in NY), and many of their assets are really “trophy” properties that should always hold substantial value — I’m comfortable letting my Pershing Square Holdings holdings give me exposure to Howard Hughes Corp., and I’ve never bought this one personally, but analysts think they’ll be profitable this year and they are now making the transition to being a developer and owner of income-generating properties instead of just a “land bank,” so if the economy stays generally strong for the next decade in Las Vegas, Houston and Hawaii the prospects are probably very good for HHC.
And no, I wouldn’t overthink that Maui ranch property. I assume they still own it, and like a few other odds and ends it’s carried at low cost on their books, but it’s not going to drive their returns and it’s not like Howard Hughes is trading at a steep discount to book value — the shares are now at close to 3X book, so investors have realized over the years that the properties are worth substantially more than their carrying value. Their 60 acres between downtown Honolulu and the beach (Ward Centers/Ward Village, being redeveloped as a master planned community) are a far bigger deal when it comes to their Hawaii assets.
“COFFEE CAN STOCK #5: A Billionaire’s Tax Shelter That YOU Can Use, Too
“You’re probably aware that the Cayman Islands have been a tax shelter for the rich and famous for years now.
“Mail Online reports that Mitt Romney holds ‘millions of dollars of his massive fortune saved in offshore tax shelters in the Cayman Islands.’
“Of course, the former presidential candidate isn’t alone. According to CBS, ‘The world’s tax havens house anywhere from $21 trillion to $32 trillion in money that governments cannot tax.’
“Now, I don’t like to use the word ‘loophole’ much. But there’s really no other way to describe this final Coffee Can stock…
“It gives you a loophole inside the tax shelter of the billionaires.
“Not only that, you’ll have one of the world’s best investors managing this pile of money. So you’ve got growth… that’s hidden from taxes… all with just one click of your mouse.”
Hoodat? Thinkolator sez that here he’s teasing David Einhorn’s Greenlight Capital Re (GLRE), another stock I own. Apparently I’m pretty simpatico with Chris Mayer on a lot of these things. Greenlight Re is a Cayman Islands reinsurance company (think “wholesale insurance” — they sell coverage to primary insurers), and it is a real reinsurance company and has decent performance on that side of the business… but the value of the stock is driven by the other side of the business, the investment portfolio.
Insurance companies make money two different ways, by pricing risk well or by investing their cash well. Some companies can do both, but most are better at one or the other — with Greenlight, the focus is definitely on investing, with the hope that their reinsurance business will break even or make a small profit most of the time without exposing them to huge losses… which gives a large cash portfolio for the investment manager to handle. And in this case, the investment manager is one of the best, David Einhorn, whose Greenlight is a prominent and successful hedge fund. Einhorn is also Chair of Greenlight Re, so he’s actively involved in the business, and he gives the reinsurance company a small discount on Greenlight’s hedge fund management fees (the other large hedge fund-connected reinsurer, Dan Loeb’s Third Point Re (TPRE), which I also own, does not get a discount on the management fee).
So David Einhorn manages both the portfolio and the float for Greenlight Re, which — as long as the insurance operations are roughly break-even — means that GLRE shareholders get some leverage on Einhorn’s investing performance, because the investment portfolio is substantially larger than the market cap of the company (the insurance “float”, money GLRE has taken in in premiums but doesn’t yet owe to settle claims, is on the books as a liability — but, like all insurance companies, they get to invest that money while they have it, and keep the investment returns… when a company underwrites at break-even or better, that’s “free” leverage without borrowing money).
That means GLRE (and TPRE too, by the way) usually looks very cheap on an earnings basis because of those often outsize investment returns, but what’s important to my mind is their ability to compound returns — to grow the book value over time, which grows the investment portfolio, which makes more money in the future from that larger base. Book value per share has grown by about 65% over five years at GLRE, but the stock has lost its “premium to book” valuation over the last year or so — during its history GLRE has traded between 1X book and 1.4X book, fluctuating largely based on Einhorn’s lumpy investment performance and on a few very bad quarters of underwriting that depressed returns a couple years ago. That looks like an opportunity to me.
I’ve written about GLRE a great many times for the Irregulars, and I’ve been tempted to add to my holdings this year but haven’t recently done so — right now, I’d argue that it’s cheap largely because reinsurance is a lousy business today, there is too much capacity in the sector, with too much alternative capital from hedge funds and other investors chasing too little reinsurance business. That means there’s no relief in sight for the “soft market” of too-competitive pricing that most insurers have been facing for several years, especially since we’ve gone many years without a big disaster that scares everybody into tighter pricing… but although there is certainly some risk, and many pundits say the industry needs to further consolidate into a few giant players to get better scale, I think there’s still room for small guys like GLRE and TPRE if they can find niches of business to keep the insurance side breaking even. They don’t need to make much money on underwriting like their competitors do, because they should continue to get dramatically better returns on their investment portfolio than does the average insurer or reinsurer (most insurers have much more risk-averse investment portfolios, dominated by fixed income that provides little return now).
So yes, I think GLRE is a pretty easy buy at book value (roughly $32) — particularly if you can hold it for at least several years through lumpy underwriting and investment portfolio performance and let the book value compound. I also like TPRE, which has a stronger “insurance guy” in charge, just started to “break even” on underwriting for the first time, and also trades at book value. It’s an uncertain world, to be sure, and no one likes to see the huge amounts of money that hedge fund guys earn on their incentive fees — but some of them are clearly far better than others, with spectacular records for a decade or more, and I like having some of my money professionally managed… I call it “diversifying away from my own mistakes” and I’d be a very willing buyer of Greenlight Re (GLRE), Third Point Re (TPRE), or Pershing Square Holdings (PSH in Amsterdam, PSHZF OTC) when the price is right, and with GLRE and TPRE at book value and PSH.AS at a small discount to NAV, I think the price is right. Not “jump on the fire sale” right, where you want to borrow money and go crazy to buy this second, but well-priced for the long-term outperformance (15-20% compounded annual returns for at least ten years in each case) that I expect those three fund managers can continue to deliver… and, yes, all three operate without taxation (TPRE in Bermuda, GLRE in the Caymans, PSH.AS in Guernsey), and they don’t pass along dividends or gains to you directly, so they can compound even faster than a standard onshore mutual fund (you do, of course, still owe capital gains taxes if you sell the shares with a gain — but if you stuff these in a coffee can that may be decades down the road).
So there you have it — four ideas from Mayer for your “coffee can,” I’ll throw in the similar Third Point Re and Pershing Square Holdings to make it an even half dozen worthwhile ideas for consideration… but one of those solutions eludes me, and I do, of course, await your opinion with bated breath. If you’ve got thoughts on any of these companies, or on Mayer or the idea of the “forever” portfolio crammed into your coffee can, well, let us have ’em — that’s why we have the friendly little comment box below.
To clarify my disclosures, since I own many of these: I own shares of Greenlight Re (GLRE), Third Point Re (TPRE), Pershing Square Holdings (PSH.AS), and Retail Opportunity Investments Corp (ROIC). I currently have a limit buy order in for Pershing Square Holdings, but otherwise will not trade any of these stocks for at least three days.