What Just Happened?

After 18 months and barely a rumble, have I got a treat for you!

First, it was time for some spring cleaning, so yesterday I completely sold my shares in Crimson Wine and Sears Canada.  Both these positions originated from spin-offs (Leucadia and Sears Holdings), and as a result were just a small fraction of my portfolio.  In fact, the combined proceeds were just over $2K.

My next move was to trim LUK - I sold 917 shares at $30.67 for total proceeds of $28,119 (this leaves me with 1,250 remaining shares).  Most of my LUK shares were purchased via JEF (and their subsequent merger with LUK).  However, my original LUK purchases actually predate this blog (late 2008 and early 2009).  Anyway, for those keeping score, my average purchase price is $13.68, so yesterday's transaction locked in a substantial gain.

Now this next move may surprise you... but before I tell you what it is, I'm going to tell you how it came about.

A few months back I read "The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success" (which was fantastic).  Basically, the book is a series of case studies outlining how smart capital allocation by the folks in charge can lead to truly extraordinary returns.  In many cases, this was accomplished through aggressive share buybacks.  

So, a couple of weekends ago with this book fresh in mind, I found myself looking for new stock ideas on a Saturday morning.  But rather than try to find "cheap" companies, I figured I'd try to find talented "jockeys" first, and only then look at the companies they were running.  One thing I looked at was the historical winners of Morningstar's "CEO of the Year" award.  I also looked for aggressive share buybacks.

And this brings us to my newest purchase - Strayer Education (STRA).  Specifically, yesterday I purchased 525 shares at $45.04, for a total outlay of $23,651.

Now, it's no secret that the for-profit education industry is in shambles.  In fact, it reminds me a little of the real estate bubble.  Basically, a bunch of unscrupulous folks fan the debt-fueled flame, the industry collapses under its own largess, government intervention/regulation ensues, and then finally the dust settles and opportunities emerge... (remember this? http://mevsemt.blogspot.com/2010/04/transaction-alert-sold-usg.html)

In the case of Strayer, I'd argue that Robert Silberman (Chairman and former CEO) never allowed the company to go down the dodgy path being blazed by his competitors.  In fact, in Morningstar's 2007 CEO of the Year write-up (http://news.morningstar.com/articlenet/article.aspx?id=221469), they describe in great detail the "culture of quality" that Silberman built.  So, after reading their write-up, I quickly skimmed Silberman's most recent annual letter, then I re-read it in detail, and then I read his previous letters all the way back to 2001 (so much for my Saturday morning!).  Anyway, here's my takeaway...

This guy gets it.  He understands that providing value for the customers creates value for the company.  He also gets capital allocation - in the last five months he's repurchased almost 10% of the company's shares!  By the way, if you look at the BoD, you'll see overlap with Liberty and ESL companies, both of which are notorious for smart share buybacks.  And finally, he's built a deep leadership bench.  So, although he recently stepped down as CEO (but will remain as Chairman), I have nothing but confidence in the newly appointed CEO (Karl McDonnell).

Oh yeah, and the company is cheap cheap cheap... (at least I think so).

Questions? Comments? Email mevsemt@gmail.com

Reshuffling the Deck

Generally speaking, some of my best stock picks have happened when the company is under duress.  Assuming the company is able to survive/turnaround, you've made several times your investment simply because so much of the perceived risk has disappeared.  For example, I bought Fairfax back when it was at $100 and sold several years later just shy of $300 (pre-blog).  I bought USG at the height of the financial crisis, and here's how it turned out: http://mevsemt.blogspot.com/2010/04/transaction-alert-sold-usg.html.

In fact, if you look at some of the best investments made by the great investors, you'll see they've done the same thing (Buffett - Geico & American Express, Berkowitz - Wells Fargo).  Of course there's a risk to this approach - maybe the market is right, and there's always a chance the company could indeed fail!  In fact, I bought AIG just as the financial crisis was hitting the fan, and lost over 50% before selling.

With this in mind, on Friday I decided to add to two of my "stressed" positions, and sell one of my holdings where I may have overestimated the upside.  Specifically, I bought an additional 500 shares of JEF at $9.92 and 1000 AIG warrants at $5.37.  The stock I sold was MIL (formally Terra Nova) at $6.80 (2268 shares).

Questions?  Comments?  Email mevsemt@gmail.com

Couldn't Resist

If you've been paying attention to the financial markets, then you probably know MF Global declared bankruptcy earlier this week.  Jefferies Group (JEF) is a similar company, and much like Lehman followed Bear Stearns, people are concerned JEF will follow MF.  

In fact, JEF plummeted over 20% today before trading was briefly halted.  When trading resumed the stock recovered somewhat, but is still down about 10%.  Having a significant % of my portfolio in cash, and being a big fan of JEF's management and a huge fan of their largest shareholder (Leucadia, which also happens to be a big holding of mine), I decided scoop up some shares.  More specifically, I bought 1250 shares at $11.11 for a total outlay of $13,886 (including commissions).  

So what's going to happen with JEF?  Frankly, I don't know.  However, my guess is they'll be just fine.  If so, JEF could be a huge home run.  But in the meantime I'll be keeping my fingers crossed!

Questions?  Comments?  Email mevsemt@gmail.com