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Two Great Interviews with Smart Investors and Three Quick Pitches

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18

September 07, 2010 – Comments (13) | RELATED TICKERS: BGH.DL2 , SPA , AEPI

I came across two very interesting interviews today.  The first is a Bloomberg summary of an interview that it conducted with Michael Burry.  For those of you who aren't familiar with Mr. Burry, his story was told in the fantastic Michael Lewis book, The Big Short.

Yes, Burry correctly called the subprime implosion and made a bundle from doing so, but he is not just a one-trick pony like some of the people who took that ride.  He was an extremely well-respected investor prior to that trade.  Both The Big Short and the Bloomberg interview are worth a read:

Burry, Predictor of Mortgage Collapse, Bets on Farmland, Gold

The second interview is much, much longer.  It is a nine-page Wall St. Transcript interview with T2's Whitney Tilson.  I have not had an opportunity to take more than a quick look at it yet, but it looks excellent.

Investing in Undervalued Value Stocks - Wall St. Transcript Interview with Whitney Tilson

And now onto the "Quick Pitches"

The first is a merger arb play on a stock called 

Long Buckeye GP Holdings (BGH

"BPL is purchasing BGH for 0.705 in BPL stock.

BPL is currently at $61.88/share.

Multiply that times .705 and we get an approximate value of $43.63/share for BGH.

BGH closed today at $41.97. That represents an upside of a little over 4%, which should amount to an excellent annualized return depending upon when the deal closes. 

Of course, merger arb plays like this don't translate all that well to CAPS because the market could rise between now and then, forcing me to lock in a loss for CAPS purposes on what would be a great real-world trade. I'll roll the CAPS dice and see what happens.

Buckeye Partners, L.P. and Buckeye GP Holdings L.P. Announce Merger Agreement"

Long Sparton Corp (SPA)

"Sparton's stock has come a long way since it was left for dead by investors and fell to less than two dollars per share in late 2009. If only I had purchased the stock then.  

"If "ifs" and "buts" were candy and nuts, wouldn't it be a Merry Christmas?"  

I didn't, but I still feel as though it is an attractive investment opportunity today. After the its previous management, and the whole Great Recession thing, ran the company into the ground they were ousted and new, much more effective management, lead by CEO Cary Wood, was brought in. The company has already taken a number of steps to improve the company, slashing costs and making its operations more efficient.  

The mew management has wisely decided to focus its growth in its higher margin Defense and Medical products segments. While these two sectors have been pretty beaten up by Mr. Market lately, I think that in many instances this sell-off has been an overreaction and many good values are available.  

The company recently completed its purchase of Delphi Medical Systems, which is expected to add $32 million in revenue to the company's medical product segment. If Sparton management can work the magic that is has pulled off on this company on its new acquisition, Delphi has the potential to be a big winner. If anyone is familiar with the company, it should be Sparton's current CEO. Cary Wood worked at Delphi Medical for nine years. If he didn't think that the company was fixable, he wouldn't have bought it.  

Check out the following great articles for more information on this interesting turnaround:

Sparton: Delphi Medical Acquisition Should Be Highly Accretive

and

Sparton: An Undiscovered Turnaround"

Long AEP Industries (AEPI)

"This one's more of a follow-up to a stock that I believe I have mentioned here earlier:

AEP produces a commodity product known as plastic film.  

While the company does not appear cheap at first glance, its numbers should improve as time passes.  

It was hit by a double whammy of high oil prices in 2008 causing its input costs to soar and the Great Recession after that crushing demand for its products.  

It's a testament to AEP's management that it survived this mess. As an added bonus it even was able to pick off the assets of a competitor, Atlantis Plastics, after the aforementioned headwinds forced it to file for bankruptcy. I love it when companies see competitors go bankrupt. It often leads to dramatic gains in revenue and profits for the survivors. It's even better when a company can purchase the assets of the competitor that is in BK on the cheap. AEP was able to grow its production capacity by 40% in one brilliant move.  

Add to this shrewd acquisition an improvement in margins as a result of AEP closing its terrible European business.  

The prices of the company's key inputs have fallen significantly lately. This and any continued synergies that can be squeezed out of the Atlantis acquisition should lead to a dramatic improvement in margins and profits in the second half of the year.

UPDATE:

We can now add the catalyst of an activist investor to the AEP mix. Last week JMB Capital reclassified its 9.5% investment in AEPI from “passive” investor to “active." AEP already seems to be headed in the right direction. It will be interesting to see what action, if any, JMB takes."

Deej 

13 Comments – Post Your Own

#1) On September 07, 2010 at 10:39 PM, MegaEurope (< 20) wrote:

Thanks for the post.  Tilson's bullish case for MSFT is quite convincing.

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#2) On September 08, 2010 at 6:07 AM, TMFDeej (99.26) wrote:

You're very welcome, Mega.  

I agree with you about Tilson's case for MSFT.  His slideshow on the company from earlier this year was one of the things that convinced me to go long it in CAPS.

Deej 

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#3) On September 08, 2010 at 4:06 PM, lawndale1 (< 20) wrote:

Mr. Deej,

 While I appreciate your review and link of my Seeking Alpha article "Sparton: Delphi Medical Acquisition Should Be Highly Accretive" at < http://seekingalpha.com/article/224029-sparton-delphi-medical-acquisition-should-be-highly-accretive >  , and agree with your conclusion that if Cary and his team can recreate the 'magic'  [its still a work in progress -see below] they performed at Sparton over the last year and a half again on Delphi then there will be some additional nice growth here.

However, I need to point out one error in your post regarding CEO Cary Wood's experience at Delphi CORP. I wrote "Sparton CEO Cary Wood was quite familiar with Delphi Corp. as his LinkedIn profile shows he spent the first nine years of his career as a Manufacturing Engineer there. While he didn’t work in the medical products division, the business’ potential fit with Sparton’s was quite obvious." 

If you can correct this one item that would be great.  

 

Also you can become a direct Follower of my Seeking Alpha blog at http://seekingalpha.com/author/andrew-shapiro/instablog

 

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#4) On September 08, 2010 at 4:49 PM, TMFDeej (99.26) wrote:

Thanks for reading and for the correction, Andrew.  

Your write-up on Sparton was excellent.  

I wish that I had the power to edit posts, but alas Motley Fool does not provide users with that power.  I'll try to post a update with a correction in the future.  I've been pretty swamped lately so it could be a day or two.

I'll definitely make sure to keep tabs on your articles.

Thanks again and see you around.

Deej 

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#5) On September 08, 2010 at 5:58 PM, lawndale1 (< 20) wrote:

I am sure you saw that Sparton reported very good Q4 June 2010 numbers today but still with room for improvements. I posted/blogged some quick thoughts on what I read this AM on the Seeking Alpha stock talks section for SPA.  http://seekingalpha.com/author/andrew-shapiro/my_stocktalks

Medical segment gross margins last quarter BEFORE this past month's Delphi purchase [August in present Q1 FYE 2011] increased 300 basis points, despite with headwind of lower overhead absorption from sequentially lower revenues.  

Sparton's earnings would have been better if it weren't for a deterioration in the EMS segment. That segment had gross margin drop into negative territory.

I am confident THIS mgmt team will either improve the segment to their target margins or divest it. Either way SPA shareowners win. But if they can hit the bottom range of their 3% target mgn for the EMS segment, that would have been an additional $1.3MM/qtr or $0.52/share pre-tax annual earnings bump alone on top of medical segment improvements and delphi medical accretion. 

Earnings conference call will be this Friday AM 

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#6) On September 09, 2010 at 1:16 PM, buylowersellhigh (56.04) wrote:

TMFDeej,

   Love your blogs.  I always notice your CAPS picks and try to understand the reasoning.  Notice you picked EPM today.  Any pitch for that? 

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#7) On September 09, 2010 at 1:16 PM, buylowersellhigh (56.04) wrote:

TMFDeej,

   Love your blogs.  I always notice your CAPS picks and try to understand the reasoning.  Notice you picked EPM today.  Any pitch for that? 

Report this comment
#8) On September 09, 2010 at 1:43 PM, TMFAleph1 (95.09) wrote:

Good finds, Deej -- thanks! One comment, though: Burry is in a completely different league than Tilson. No disrespect to Tilson, he is a competent hedge fund manager; however, Burry is one of a extremely rare breed -- a genuine super-investor.

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#9) On September 10, 2010 at 12:51 PM, lawndale1 (< 20) wrote:

On this AM's Sparton conf call (without seeing the transcripts yet) some additional items came out on Delphi Medical acquisition.
1) Delphi would be accretive within 6 months by Q3 ended March 2011. They have a 100-day implementation plan and the first 30 days have gone "quite" well. 
2) Sparton Medical previously had no sales reps and obtained 5 via this acquisition.
3) Working capital opportunities will additionally flow.
4) An additional item in the Delphi purchase contract not in my original seeking alpha article on the acquisition- Post closing purchase price adjustment based on closing inventory audit (in process) would work in Sparton's favor as follows: For each dollar that closing inventory is below $10MM purchase price reduced $1 for $1. If closing inventory is greater than $10MM, Sparton pays only 50 cents on the $1 and still retains the $2MM refund oppty on inventory not sold after 18 months. 

This acquisition will prove to be quite favorable for Sparton's results. Note - recently released balance sheet shows over $30MM of NET cash at end of June. Current SPA price (around $50MM market cap), means current enterprise value of only $20MM on pre-acquisition $160MM revenue run rate.

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#10) On September 13, 2010 at 4:35 PM, TMFDeej (99.26) wrote:

Thanks Alex.  I completely agree, Burry is an absolute genius.  It takes a rare type of person to be as incredible at something as he is with investing.  Alas, it appears as though his personal life suffers from time to time as a result of his gifts, but he is absolutely still capable of being an absolutely amazing investor.

Deej 

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#11) On September 13, 2010 at 4:38 PM, TMFDeej (99.26) wrote:

Thanks buylowsellhigh.  I can't talk about EPM too much because it's an official recommendation of one of the TMF services.  I usually leave the pitch section blank for those so I don't step on any toes.  I don't own the company in real-life yet, but I am seriously considering buying some if it drops a little here.

What I can say is that EPM seems to be a remarkably similar situation to CFW.  EPM has better management and better assets but probably will take a lot longer than CFW to play out (I expect some news on Cano before the end of the year).

Deej 

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#12) On September 13, 2010 at 4:40 PM, TMFDeej (99.26) wrote:

Thanks for the update, lawndale.

 Sparton certainly seems to be firing on all cylinders.  It was an excellent find on your part.  Kudos.

Deej 

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#13) On September 15, 2010 at 8:43 PM, BillyTG (29.12) wrote:

So how does an average Joe invest in agricultural land? Are there Ag Land REITs? Am I supposed to look on craigslist for real estate deals in Idaho?

 Thanks for the interesting link Deej

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