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Mario Gabelli

On trading costs, diverse portfolio and passion.

Published on:
August 24, 2019
Last Update:

Hiller the Elder, who lived in the first century before the common era, said that we should first take care of ourselves so that we can take care of others. Not unlike his comment, I research companies for my own benefit but hope that others may benefit from the research too.

The topic of this meditation is what attracted me to stock research in the first place. I will then mention three reasons why I decided to not let others manage money and three reasons why I decided to buy stocks on my own.

Why I don't let others manage my financial destiny

The first reason is cost. Gabelli Funds, a mutual fund, charges 1.35% management fee. That means that if I was to give them $100,000 to manage, they would charge $1,350 a year.

To put in perspective what the fee of $1,350 is, excluding transaction costs, it is more than what I pay for all research and trading software. Guru focus annual fee is $450. Seeking Alpha annual fee is $200. The annual subscription fee for Barron's, WSJ, The Economist and Forbes is less than $300 in total.

And the high fee didn't meet higher return. Open to investors since 1986, the fund's average annual return is 9.98% after fees. The S&P 500 return, which you can buy for a management fee of less than 0.10% was 10.07% during this time.

The second reason is that I don't believe in neither the Noah Approach[1] to investing.  Consider the Gabelli fund again. The fund has an equity interest in over 40 sectors of the economy, from airlines and computer hardware to telecommunications and machinery. And the fund owns over 700 stocks.

To me, successful investing is not about consistently beating a performance index. And since every mutual fund’s manager knows their performance will be judged quarterly - even monthly - they focus on the flawed metrics, such as Sharp Ratio, Alpha and Beta. This is also known as the Greek approach to investing.

Why I decided to manage my money

As a business hobbyist I enjoy reading about companies; researching their profit margins, risks and business plans. My friends remind me that when I was eight or nine, I bragged to everybody that I bought a bargain: a pen on which I didn't have to pay taxes since it was bought in the city of Eilat. (In contrast to Tel Aviv where you would pay VAT. )

I am also contrarian. I ride my bike to the office and hardly drive. I much prefer to exercise alone than in a groups and you will not see me on social media. So, if the common convention is to let someone else - be it a financial advisor or a mutual fund manager - manage money, perhaps I chose the opposite just to prove a point.

There is a wealth of information that is widely available. This is a key point I believe many do not fully appreciate. It was only two decades ago that if you wanted to read the financial statements of a company, you would call the United States Securities and Exchange Commission (SEC), pay for the shipping of the statements to be delivered to your home and wait for a few weeks. Today, you can get the information in less than five clicks.

Another boon to investors was the SEC's requirement of Form 13F filing. Today the SEC requires anyone who manages above $100 million and more to publicly disclose which stocks they bought and sold. Using websites such as Guru Focus or WhaleWisdom , you can read what legendary funds and investors, such as Third Street Avenue or Mohnish Pabrai, are doing. In the last quarter of 2018, Third Avenue bought the stock of PNC Financial, Hawaiian Holding. Pabrai bought shares of Micron Technology.    

Trading costs are minimal too. If you decide to sell your home, the real estate commission and other fees can eat up about 10 percent of the sale price, according to Bankrate.com. Yet if you would like to sell your stock in, you could easily do so and it would cost you $4.95.

Your parents paid a much higher transaction fee. According to a Columbia University study, in December 1968, to trade 100 shares with a value of $400 (about $3,000 in today's currency) would cost you $3 of 1968 currency (which is about $22 today) plus 2% of the amount traded. So, it would cost a total of $82 to sell a position, about 16-fold higher than the cost of today' markets.

I believe in taking responsibility. If I lose money, I would much rather blame myself for an omission of thought than to blame another person. Jerry Seinfeld, perhaps, said it best:

"People always tell me, you should have money working for you. I've decided I'll do the work. I'm gonna let the money relax."  
FOOTNOTES
[1] The Noah approach to investing is when a fund manager has an equity interest in hundreds of companies.
   

SUP dropped by 75% but I bought it anyway

Published on:
May 12, 2019
Last Update:

Act one:  An acquisition gone wrong

Investors were shocked when Superior Industries International (SUP on Nyse) announced a $760 million acquisition. Up to that May 2017 dispatch, Superior was considered a conservative, docile company run by straight -laced, prudent management. The company had zero long term debt, showed a leverage ratio of less than 25% and was not paying interest expense. To put in perspective - the size of the company acquired, Uniwheels, represented 140% the size of the buying company, Superior that is.

Shocking was not only Superior's Animal Spirits but also the price management had paid. To buy Uniwheels, management booked $286 million in goodwill (read: the premium paid over the fair value of the assets) and $205 million for intangible assets: the brand ($9 million), technology ($15 million), trade names ($14 million) and customer relationships ( $167 million.)      

Shareholders immediately questioned the deal. The monstrous size of the transaction was wrong. The price paid for the acquisition was wrong. And surely how the acquisition was financed was wrong too. To acquire Uniwheels, Superior borrowed $669 million and agreed to pay a weighted interest of about 6% per year.

Lenders, I speculate, must have required a fat equity base, so Superior raised preferred equity too. It sold $150 million of preferred stock, redeemable at a conversion ratio of $28.162. The preferred stock holder (TPG Growth II Sidewall LP) was promised a 9% dividend rate per year. Common shareholders were unhappy.

"I wish we weren't holders of 1.4 million shares," lamented Steven Borick in the last earnings call. "We're highly disappointed in the stock price and certainly the cut in dividend. And I'm voicing this opinion on this line for those that are listening that we feel the acquisition was very poorly timed." Borick knows  the business. He was Superior’s Chief Executive Officer (his father founded the business 60 years ago.)

Act two: The market's response

Since that May 2017 announcement, the market discounted the price of the stock by over 75%. Prior to the acquisition, the company traded as low as $20 and as high as $30. A year after the announcement, the stock traded as low as $15 and as high as $22. It now trades at less than $6 a share.

The penalty was warranted. And a comparison of 2018 operations to 2015 operations explains why. If we go back in years, in 2015 the company reported pre-tax earnings available to common shareholders of $35 million or $1.39 per share.

Fast-forward to 2018 and the company reported pre-tax earnings of $32 million or $1.42 per share. The company reduced the number of outstanding shares from 26.1 million to 25 million during this time. All well.

But in 2015, Superior did not carry any preferred equity. TPG Growth, the current preferred stock holder, is now paid prior to common shareholders. And so, $32 million in pre-tax earnings went to TPG's bank account. The common stockholders were left with a minuscule pre-tax earnings of $3.6 million, or $0.14 per share.

GPORT five year financial results
Table A: A five-year look of Superior's financial results

The timing of the capital allocation decision was questionable. As Superior purchased Uniwheels, more uncertainty prevailed in the Euro zone. The key word "trade wars" is now googled 10 times more compared to five years ago, when the word “Brexit” was yet to be coined.  

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A NOTE FROM NOAM 

In Pen&Paper, I only write about companies I am personally invested in, and on finance topics, I find it important to share.

Buying a stock is easy. But it requires a lot of effort and discipline to keep track of the company's performance. And no matter how much a stock appreciates, you're not capturing those returns until you sell. Join the waitlist to get real-time updates.

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Act three: Why I bought SUP

Fully aware of the above risks, I went ahead and bought Superior's stock. First: On a per share basis, I paid less than what Superior paid for Uniwheels. Superior paid 1.5 times the Uniwheels sales. I paid one tenth of the 2018 sales. The same applies to the pre-tax earnings multiple. Superior paid 4 times the pre-tax earnings of Uniwheels. I paid 1/2 times the multiple of the two companies.

While Superior reported $0.29 in earnings per share for 2018, an earnings multiple of 20 times, the careful reader would note that Superior’s operating expenses included a non-cash item called amortization for intangibles.

This non-cash amortization expense was $26 million or $1.03 per share. I added back the expense and the adjusted price to earnings ratio was less than 10 times (management projects to amortize of $20 million each year until 2023).

Second: the company's management is buying back the stock. Stebbins, the prior CEO, recently bought 31,249 shares at a price of $8 per share. Matti Masanovich, Superior’s CFO, bought 29,050 shares at $8.34 per share. James Strauss, a director, bought 69,757 shares at $8.53 per share.

Table B: Large holders of  the stock

Third: Mario Gabelli is a shareholder too. His fund, GAM Investments, disclosed last year that it owned 375,000 shares of Superior, which cost the company a total of $6 million or about $16 per share. In short, I am in good hands.