Value investments, and other random lucubrations

More on the mischief caused by Templeton money

I received a hilariously angry email in response to yesterday’s post, and also an email linking to this 2008 article by Dan Gardner in the Ottawa Citizen that does a much better job than me at describing the corrupting influence of the Templeton foundation. 

Here I reproduce some bits, with comment:

But John Templeton’s fundamental belief in the harmonization of science and religion still guides the foundation’s philanthropy, with occasionally dubious results. This includes the foundation’s funding of what Richard Sloan, a professor of behavioural medicine at Columbia University Medical Centre, called “garbage research” into the healing power of prayer. Sloan was so annoyed he wrote the book Blind Faith: The Unholy Alliance of Religion and Medicine in response.

I think when Gardner says “occasionally dubious results” he’s being too nice. I mentioned the $5 million afterlife study yesterday, and if you want another example of a Templeton funded study that is almost certain to deliver very little of value, look at this $2.7 million Philosophy and Theology of Intellectual Humility project. Gardner continues:

The Templeton Foundation is controversial in scientific circles. And yet, its influence grows. How could it not? Scientists and universities find it hard to say no to free money [itwillfluctuate: probably not as hard as I do, so I don't blame them]. “Largely as a result of Templeton grants,” wrote science journalist John Horgan in The Chronicle of Higher Education, “some 90 American medical schools now offer courses on links between health and spirituality.”

Horgan himself was the beneficiary of a Templeton-funded fellowship for science journalists to attend Cambridge University — a fellowship he accepted reluctantly because, he wrote, “I had misgivings about the foundation’s agenda of reconciling religion and science.” The program of study provided by the fellowship was excellent, Horgan reported, but he was struck by the comments of a Templeton executive who told the journalists “the meeting cost more than $1 million, and in return the foundation wanted us to publish articles touching on science and religion.”

In conversation, Horgan told the official he felt humanity would be better off if, one day, it simply outgrew religion. “She replied that she didn’t think someone with those views should have accepted a fellowship. So much for an open exchange of views.”

Exactly. The foundation is out to promote the idea that science and religion can be BFF, however much it might want to pretend to be a “catalyst for discoveries”. Gardner again:

The Templeton Foundation is no disinterested benefactor. The Templeton Prize is no Nobel. Treating them as if they were is to accept and honour the crude force of money.

And that is an unfortunate legacy for a man devoted to higher things.

Yes, it is unfortunate. And it is an especially sad spectacle for value investors like me who admire Sir John for his investment skills and who hate to see money being wasted.

John Templeton’s unfortunate legacy

There’s a new film out called Contrarian about John M. Templeton, who many of us admire for his investment skill, and who seems to have been a very nice man.

Unfortunately, as the film shows, Sir John put much of the money he accumulated during his investing life into the Templeton Foundation, with what I think have been tragic results.

The foundation’s aim is to help bring about discoveries relating to the “Big Questions” and to “encourage civil, informed dialogue among scientists, philosophers, and theologians“. What that really means is that it tries to make religion respectable by pretending its methods for producing knowledge are just as valid as those of science.

The foundation gives an annual £1 million prize that has often gone to the most prominent scientist it can find who is willing to say that science and religion can be pals, and the “research” it funds includes stuff like this $5 million study of immortality, that gets scientists and theologians to convivially study things together.

The trouble, of course, is that theologians don’t do research and they don’t try to falsify claims, but instead make things up – that’s why centuries of theological work haven’t gotten any questions answered, let alone the “big” ones (if you disagree, please name one demonstrably true fact we have learned through theology).

I think it’s a tragedy that so much money, amassed over a lifetime by a decent, smart, and generous man who wanted it to be used for the good of society, has been spent trying to undermine rationality.

The reason it happened is obvious: as the film makes clear, Sir John was a very religious man. And that’s what baffles me: how can some of us be very objective and rational in one field and at the same time very irrational in another?

John Templeton was a good investor because he could look dispassionately at a security to determine its value. Doing that well requires independent thinking, while religious faith requires believing things on other people’s say so. Good investors bet only when the evidence is clearly on their side, while faith means reaching conclusions on insufficient evidence.

Sir John is not alone, of course. For instance, Donald Yacktman appears to take his Mormon faith very seriously, to the point of having once been a bishop. And bear in mind that Mormons believe some particularly improbable things, consisting of Christianity plus a bunch of other odd ideas.

Templeton and Yacktman are two more names in a long list of people who are very rational in some fields, and also religious believers. But my guess is that, just as religious believers are a small minority among elite scientists, they also are a minority among elite value investors.

Buffett has publicly said he’s agnostic, and although I don’t think Munger has spoken publicly of his beliefs, I’d bet a large amount he doesn’t think Jesus actually resurrected.

Maybe Pabrai believes in reincarnation and Eveillard prays to baby Jesus, but I doubt it.

I’d love to see a poll done.

Jewett-Cameron is doing well, and is still cheap.

Jewett-Cameron’s annual report just came out.

The company did well: book value increased by 18% to $20.6m, despite the idle cash pile, which throughout the year probably averaged something like $7m. That’s pretty good, and Mr. Boone (the CEO) should be congratulated.

Is the company cheap?  This is why I thought the company was cheap back in May:

So, today the whole company sells for $26m ($30m mkt cap + $0 debt – $4m cash), or about 6x the $4.5m TTM pre-tax earnings, which have been growing, and might possibly grow a lot more if their wood distribution business eventually improves. This is in a company managed by a CEO (Donald Boone) who owns over 30% of the shares but pays himself only $40k, who has done a great job of containing the costs of the business that is suffering while growing the business that is thriving, and who repurchases shares like a madman when they’re cheap. Can you ask for better management?

Today, I think Jewett is still cheap, and for the same reasons: even though its market cap has gone up, it still sells for about $26m once you subtract the $8.3m in cash. And it sells at less than 6 times the (growing) operating earnings. And one still gets the great management.

Additionally, since practically all the earnings come from one division (lawn, gardening and pet), at today’s price the other three divisions are thrown in for free. One of them used to make $1.7m in operating income a few years back, and it’s resuscitation, however remote, is at least possible.

One thing I would have liked to see is a lot more buybacks, of which Jewett had previously been doing quite a bit.


Nam Lee is cheap $G0I

It would be silly to write at length about a stock when someone else has summarized the investment case in a tweet.

Floris Oliemans tweeted this some weeks ago:

Nam lee pressed metals trading at 4 x ex cash pe, 40pct mgmt ownership, no loss over the past 10 years, 0.85 x net net value, 12pct roic.

There’s not much more to say.

Long $G0I

Winland’s swan song?

I’ve been buying Winland Electronics (WELX), a tiny company that’s been loosing money for many years, because it sells for 84% of NCAV (the last 10-Q shows current assets of $3.26m, 60% of which are cash, minus total liabilities of $572k), and has two activists on the board who will try a turnaround, and maybe a sale.

Winland might well perish soon, in which case the turnaround effort will prove to have been the company’s swan song. But the risk/reward is attractive.

I stole the idea from Whooper.


The best use of your money, and a conundrum

If you haven’t watched this TED talk by Peter Singer, please do so:

In summary, your money is better employed saving lives than buying stuff you don’t need. And if you want to give money away, you should find the most effective charity.

There is another reason, not mentioned in the talk, to give your money away: Doing so makes you happy.

But for people who, like me, are in the profession of making money grow, a conundrum arises: Should we give a little now, or a lot in the future?

Take the extreme example – Buffett. If he had lived every year on $30k and given away everything else each year, he would have ended up giving away a lot less.

On the other hand, there are good reasons for giving now: If people were dying in my garage instead of miles away, I wouldn’t postpone helping them. And as Singer notes, a few miles don’t alter the ethical case.

Also, if a good friend or a family member, even if geographically far away, needed a bit of money today to stay alive, you and I would give it to them. Why should it be different when talking about people we’re not related to?

Indeed, some value investors have decided to start giving early, like Jae Jun, who writes Old School Value.

So, what’s the right thing to do? I’m baffled.

Jewett-Cameron: quick update

Jewett reported financial results today. Things look good to me:

Book value increased by 5.5% in the three months from February to May.

Cost of sales as a percent of sales went down “largely due to a more favorable product mix in the current quarter, and an increasing shift towards e-commerce sales of our metal products through our customer’s online websites”, which sounds auspicious.

Net income was about a million.

So, there’s really not much to say. And “that’s good, not bad”.


The terror of the lone $LAKE

But when the Night had thrown her pall
Upon that spot, as upon all,
And the mystic wind went by
Murmuring in melody-
Then-ah then I would awake
To the terror of the lone lake.
– Edgar Allan Poe, “The Lake

I have looked at Lakeland Industries with interest several times in the past, and recently three of my favorite bloggers, Saj Karsan, Whooper, and Nate Tobik, have written about it favorably (the first two at a much lower price than today’s, so they’re likely sitting on a nice profit). I don’t have much to add to what they wrote, and agree that, at this price, the odds favor the investor.

But I haven’t invested, because of the debt. There’s some chance, and not a negligible one, that the debt sends Lakeland into bankruptcy, and then into liquidation. How much would the receivables and inventories be worth then? I don’t know, but since those two assets make 80% of the company’s total current assets, any haircut there would hit NCAV very badly.

I’ve made some of my biggest investment mistakes in companies with substantial debt, wrongly assuming that, as usual, it was enough to make sure that value exceeded price by a nice margin. It turns out that debt can distort that calculation (one obvious way is by forcing a sale at a discount), and that’s why I’d rather invest in net-nets that don’t have much debt, like Automodular, which has been discussed here, or Solitron, or Aadvantage Technologies. After all, investing is not “all about what you give versus what you get“. It is about that, but also about what you could get elsewhere.

If Lakeland finds new loans to replace those of TD Bank (and in the unlikely case that the price of its shares don’t go up a lot immediately after the event), I might reconsider.

Long everything mentioned above, except LAKE.

Automodular liquidation calculation

An alert reader just informed me that the spreadsheet link in my June 5th article on Automodular does not work anymore. That was the crucial bit of the thesis, so now that it’s gone I’ll write my own calculation here.

Based on the March 31 financials we get NCAV, which is likely a good proxy for liquidation value, of $33.2m (27.7m cash+12.5m receivables-total liabilities of 7m. Ignore PPE of 8.8m).

From NCAV, we’ll deduct $6m of termination costs (management’s estimate), and the recently paid dividend of $1.2m.

So if the business had closed its doors on March 31 and liquidated, we might get something around $26m (33.2m of NCAV – 6m of closing costs – 1.2m dividend paid on June 6th).

But Automodular will keep working for Ford until the end of 2014, so we need to add the money it will make until then. Here things get a bit more speculative:

In 2011 and 2012 quarterly after-tax profit averaged $3.6m (that average includes some one-time windmill related work, but that’s not been part of the earnings of the past few quarters, which have still come at $3.6m), capex averaged less than $0.6m, and depreciation about $1.6m. So we get average quarterly owner earnings of $4.6m.

Between March 2013 to year end 2014, when the Ford contract expires, there are 7 quarters: if the company were to make the same $4.6m per quarter in that period, they would end with an additional $32m. Is that a reasonable estimate? I don’t know. Maybe we should assume a straight line earnings decline, and we’d get $15m less. Maybe my capex is too high, since there’ll be no need to keep the plant fit for future years anymore. Who knows? (actually, management probably has some idea, so I will try to ask them – expect an update soon).

Even if that last part of the analysis is speculative, the investment is not. Ben Graham used to say that you don’t need to know the exact IQ of your nephew to know he’s a complete idiot, or something like that.

All you need to justify the gap between the current $33m market cap and the liquidation value of $26m that we came up with above is $7m more of FCF. That looks easy: from March 31 to today, the company has probably already made more than half that amount.

All the extra earnings, and the money that would come from other more far-fetched but still possible outcomes, are pure profit to the investor.

It seems there’s little to loose here, and much to gain.

Long AM.

Disclaimer: Don’t take anything on this website as investment advice.

Don’t talk and drive

This New York Times article lead me to two meta-analyses (here and here) which found that there are significant risks to talking while driving, which “appear to be manifested primarily in measures of response time to critical road hazard or stimuli”. “[D]rivers responded about 1/4 of a second later to stimuli in the presence of a cell phone distractor for all studies that were analyzed”, and that number “probably underestimates the behaviour of drivers when not being observed”.

And “hands-free cell phones do not eliminate or substantially reduce those costs”.

I listen to audio books while driving. There is not much research on that, but this study suggests it might not be a good idea either: “In-vehicle activities such as listening to the radio (1.21) or an audio book (1.75) were associated with a small increase in cognitive distraction, the conversation activities of talking to a passenger in the vehicle (2.33) or conversing with a friend on a hand-held (2.45) or hands-free cell phone (2.27) were associated with a moderate increase in cognitive distraction,and the speech-to-text condition (3.06) had a large cognitive distraction rating”.


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