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Notes from David Nierenberg

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January 30, 2007 – Comments (2)

We were lucky enough to meet with David Nierenberg, master investor and head of D3 Investments, earlier today. Here are my quick notes. The general stuff is up top; more specific stock info is at the bottom. Others at the meeting may have jotted down very different points. After all, I'm a sucker for my own biases...

The rise of ETFs and the decline of Wall Street research has made for a huge opportunity for individual investors will to do due diligence on undercovered stocks. This is hard work, but the rewards are huge. The popularity of ETFs indicates that many are much more comfortable making sector calls than individual stock picks. And why not? It's easier, and there's not as much squishy work to be done -- such as a comprehensive evaluation of management integrity.

D3 has returned about 18% annually for the past 10 years. Why does the firm have an advantage? Neirenberg saw five advantages:

1. Long-holding periods/concentrated portfolio. Only swing at fat pitches.

2. In-depth research of undercovered companies.

3. They buy big stakes and can take an activist position in their company to exact beneficial changes.

4. Only stay within their circle of competence.

5. Not focused on AUM; clients are all friends and family.

***Nierenberg says they get about 3 out of 4 investments "right."

Nierenberg is currently focused on getting small cap tech companies to shed their "green blankets." These are the enormous cash hoards they've built up to protect themselves against down years By getting rid of the cash via special dividends/share repurchases/accretive acquisitions, the firms not only reward shareholders, but also indicate a willingness to manage their newly light balance sheets responsibly going forward.

How can investors be activist without millions of dollars to take big stakes? Nierenberg thinks Peter Lynch had it right. Do the laborious work of asking any contacts, stores, customers, clients, or employees what you can about prospective investments. And ask those people for more names to follow up with. It takes a lot of time, but it's worth it. Again, many on Wall Street aren't bothering to ask these questions, or if they are, aren't analyzing the answers with a long-term view.

BABY-- Nierenberg says $40 price target in a few years. Wall Street hasn't appreciated the accretive nature of recent acquisitions. Look for the company to dominate its niche, continue building its sales force, and be sold down the line.

PSAI -- New management is managing the business down to the local level. Previous management wrongly believed this was a national industry. It's not. Health care is very local. Nierenberg sees another $40 stock here when the local strategy is running full force.

BRKS -- Had to oust former founder/chairman and two independent directors who were "bad guys." They were bad managers and had presided over the options backdating. D3 worked with the "good guys" to get it done. But Nierenberg was flabbergasted when ISS advised its clients to vote against many of the incumbent "good guys." They simply didn't know the facts. If ISS can get something that easily researched so very wrong, then Nierenberg seriously questions what's passing for "in-depth research" at the big firms these days.

That's all. Again, I probably butchered formerly eloquent thoughts.

Fool on,

Tim

2 Comments – Post Your Own

#1) On January 31, 2007 at 2:01 AM, TMFSpiffyPop (99.45) wrote:

I noticed Bill Mann used the phrase "shed their green blankets" tonight on CNBC, and basically he was analyzing Motorola as a company that had an $11 billion "passbook savings account on its balance sheet." Did Bill get the phrase from David, OR did David get the phrase from Bill? ;) --D

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#2) On January 31, 2007 at 9:51 AM, TMFPencils (99.81) wrote:

Great stuff, Tim, thanks a lot for the summary.

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