june 2011 trial

Like many ex-lawyers turned investors,Craig Albert has a simple explanationfor his own career switch: “I was far

more interested in what our business clientswere doing than arguing about whetherword number 72 on page 133 of theirprospectus was clear,” he says.

Which is not to say that Albert and part-ner Brian Feltzin give any less detailed atten-tion to their investing. Since the launch ofSheffield Asset Management in 2003 theyhave earned a net annualized 8.9%, vs.7.7% for the S&P 500, while averaging anet long exposure of roughly 35%.

Focused on industries and companiesundergoing significant change, they’re find-ing mispriced value today in such areas asbaby clothing, industrial cables, preparedfoods and alcoholic beverages. See page 10

I N V E S TO R I N S I G H T

Brian Feltzin (l), Craig Albert (r)Sheffield Asset Management

Investment Focus: Seek beaten-upstocks of companies not earning up to theirpotential but poised – for clear reasons – toreach that potential in the not-distant future.

ValueInvestor June 30, 2011

Rational OptimistDistilling massive amounts of information down to what really matters is a keyinvesting skill, one that Tom Gayner continues to apply with great success.

Inside this IssueF E ATU R E S

Investor Insight: Thomas Gayner

Filtering ideas through four “NorthStar” investing principles and findingopportunity in Wal-Mart, BerkshireHathaway, Nestlé and Intel. PAGE 1 »

Investor Insight: Sheffield Partners

Focusing on structurally changingindustries and companies and findingvalue today in Carter’s, Prysmian,Greencore and C&C. PAGE 1 »

Uncovering Value: Ocean Rig

Making the case for a little-knownplayer (for now) in a vibrant sector ofthe global energy market. PAGE 17 »

Of Sound Mind

Insight into fending off threats toone of the primary character traitsof successful investors. PAGE 19 »

Editors' Letter

Why Scout Capital sold two core –and still highly regarded – positionsin this year’s first quarter. PAGE 20 »

INVESTMENT HIGHLIGHTS

Other companies in this issue:

Britvic, Brookfield Asset Management,

CarMax, Coca-Cola Enterprises, Disney,

DryShips, Home Depot, Microsoft,

Sanderson Farms, UPS, Verisk Analytics

Supply and DemandMarkets particularly shun stocks with both company-specific and industry-wideproblems – which is when Brian Feltzin and Craig Albert start to get interested.

The Leading Authority on Value Investing INSIGHT

INVESTMENT SNAPSHOTS PAGE

Berkshire Hathaway 6

C&C Group 15

Carter's 12

Greencore 14

Intel 8

Nestlé 7

Ocean Rig 17

Prysmian 13

Wal-Mart 5

Having covered the company as ananalyst for Davenport & Co.,Tom Gayner jumped at the chance

to join nearby Richmond, Va. insurancefirm Markel Corp. in 1990 to help manageits investment portfolio. “They were smart,ambitious people with a permanent capitalbase,” he says. “What was not to like?”

He now oversees the company’s $7.5billion in equity and fixed income holdingswith a deft touch that remains a keyMarkel asset. His equity portfolio hasearned a net annualized 7.6% over the pastdecade, vs. 2.2% for the Russell 3000.

With a portfolio mostly filled withstocks he wouldn’t have touched ten yearsago, Gayner today sees opportunity in suchareas as discount retail, insurance, foodand integrated circuits. See page 2

www.valueinvestorinsight.com

I N V E S TO R I N S I G H T

Thomas GaynerMarkel Corp.

Investment Focus: Seeks proven compa-nies with attractive reinvestment opportuni-ties when they trade at earnings multiplesthat are unlikely to decline over time.

http://www.valueinvestorinsight.com

I N V E S TO R I N S I G H T : Thomas Gayner

Value Investor Insight 2June 30, 2011 www.valueinvestorinsight.com

Investor Insight: Thomas GaynerThomas Gayner of Markel Corp. describes the attributes he puts before a cheap price when looking to buy, why hisearnings models aren’t elaborate affairs, his “silver-medal” approach toward macroeconomic risks, why he chooses tobe a rational optimist, and why he believes Wal-Mart, Berkshire Hathaway, Nestlé and Intel are mispriced.

You described the last time we spoke [VVIIII,May 26, 2006] your four “North Star”investing principles. Have the past fiveyears caused you to reassess any of those?

Thomas Gayner: The four basic thingsI’m looking for in any investment haven’tchanged. The first is that the business isprofitable, which means generating goodreturns on capital without the excessiveuse of leverage. I was tempted in myyouth by turnaround stories or betting onnew product or service offers, where youcould hit the ball out of the park if thingsgot fixed or the new product took off. ButI’ve had enough failures pursuing thosetypes of ideas that I’ve for the most partlost the stomach for them. From a per-formance standpoint, I’m more focusedon what something is than what it can be.

I do care a lot about how sustainablethat profitability is. One of the greatepisodes of profitable growth in U.S. cor-porate history started with DuPont’s cre-ation of nylon. Rather than look to opti-mize profit at every moment, the compa-ny constantly cut nylon’s price in order tobroaden the market. At the same time,they instilled a discipline in the organiza-tion that it needed to constantly come upwith ways to produce the stuff for less.They were looking at the business as along-running movie, not a photo snap-shot – I try to do the same thing for thecompanies I’m looking to own.

Our second key principle is to invest inmanagement teams with equal measuresof talent and integrity, because one with-out the other is worthless. The talent partlargely speaks for itself through an objec-tive look at performance, especially overtime. Integrity is a bit harder to judge, butit’s one of those things that you knowwhen you see. Think about how youdecided whom you were going to marry.You spent lots of time together. You mether family. You met her friends. You

learned what she cared about and herbasic value structure. We do the sametypes of things to get to know manage-ment of the companies we invest in. It’simperfect, but to our way of thinkingnothing is more important.

Our next North Star is good reinvest-ment opportunities. The ideal businessearns a very good return on its capitaland can then reinvest that capital withequally good or better returns over andover again. That’s a long-term com-pounding machine and it’s particularlyimportant to us because, as an insurancecompany, we’re a full taxpayer on capitalgains and dividends. We’d much ratherhave value compound within a companywe own.

I ask myself all the time what the “it”factor is in any business that will allow itto continue to compound value. ForDisney [DIS], for example, even if I haveno idea how entertainment content willbe delivered in ten years, I’m quite confi-dent that its basic business model of cre-ating intellectual property that delights itscustomers and can be repackaged andsold in a wide variety of ways and withhigh incremental margins – what Disneyhas done very well for decades – will con-tinue to generate excellent compoundreturns over time.

For UPS [UPS], which we also own,the “it” factor is a distribution networkbuilt up over time that allows it to deliv-er packages more efficiently than anyoneelse. If you believe the amount of stuffthat’s going to be sent in the U.S. – andespecially outside the U.S. – is going toincrease, it’s highly likely that UPS will bea key beneficiary of that. Rising livingstandards in places like India, China andAfrica should sustain growth and rein-vestment opportunities at the companyfor at least as long as I’m alive.

To amplify that point, the great storyin my investing lifetime has been and will

Thomas Gayner

Ever So Humble

After graduating from the University of

Virginia in 1983, Tom Gayner earned his

CPA while working as an accountant in

the Richmond office of what became

PricewaterhouseCoopers. He quickly

concluded, however, that his heart wasn't

in it. “I was an accountant more interested

in dollars than numbers,” he says.

That interest led him to regional brokerage

Davenport & Co., where he was a jack of

all trades – analyst, retail broker and insti-

tutional salesman. It was while covering

Markel Corp. as an analyst that he met

Steve Markel, who hired him in 1990 to

help run the company's growing invest-

ment portfolio. Today, Gayner is Markel’s

Chief Investment Officer and a member of

its three-person Office of the President.

Ask him how the financial crisis made him

a better investor and the calm and self-

deprecating Gayner offers a typically

thoughtful, if somewhat surprising,

response: “I would say that the humility

that comes from going through something

like that has made me a better business-

man and even a better person. You're

more connected to people and all that is

going on and you listen better. That's so

important to being a good investor.”




continue to be the increasing affluence ofbillions of people around the world andhow that translates into increasingdemand for goods and services. A centralaspect of the long-term thesis for almostevery company we’ll talk about is howthey will benefit from that rising afflu-ence. Compared to that, hand-wringingabout whether Greece is going to defaultor what happens after QE2 ends is reallyjust noise.

Your final investing principle is to pay afair price. How do you define that?

TG: A fair price today is one that shouldallow us over time to realize on ourinvestment the same level of compoundannual growth we expect in per-sharebook value, earnings or cash flow –whichever is most appropriate for thecompany at hand. What that tries desper-ately to preclude is paying so much thatthe business can do extremely well but thestock price goes nowhere, which can hap-pen as businesses inevitably mature andvaluation multiples shrink.

What that means practically to us isthat if we find a business that meets allour criteria and we pay no more than 14-15x trailing earnings, we’re not going tobe wildly off on price. For any number ofmarket, industry or company-specific rea-sons, it’s been my experience that we’llepisodically get opportunities to pay thesekinds of prices. While price obviouslymatters, if we’re right on the big picture,I don’t need a screaming bargain to dowell – compounding value can cover up alot of sins.

I’ve been criticized for the fact that myearnings models are not elaborate affairsand that I don’t have every relevant oper-ating metric on the tip of my tongue forthe companies I own. I tend to think interms of allegories and stories and takegross, gist-of-it looks at where I see earn-ings going based on my understanding ofthe dynamics of the business. Differentapproaches work for different people andthat’s what has worked for me.

How would you characterize your idea-generation process?

TG: I wouldn’t really characterize it as aprocess, but I’ve found no substitution forconstant reading to immerse myself in theflow of information that eventuallyresults in ideas. The perfect day for me,which doesn’t happen often enough,starts with two or three uninterruptedhours of reading newspapers, businessmagazines, investing publications likeyours and anything else that can teach mesomething.

I also get exposed to many good ideasfrom relationships I’ve built over the

years with wonderful investors. Nobody’ssharing hot tips, just talking about com-panies and businesses they consider inter-esting. I find that a good way to getexposed to ideas I might not otherwisepursue.

Value investors often tend to buy on badnews they consider temporary. Is thatyour style?

TG: We’re not at all averse to that, butthere’s often no real “event” that triggersa purchase. That’s especially true today,when our portfolio is dominated by blue-chips like Wal-Mart, Disney, Diageo,Johnson & Johnson and Nestlé. WithNestlé, as an example, I can’t say any-thing’s really changed for it over the lastsix months since we started buying, otherthan the business continues to build valueas the stock price has gone nowhere.

Given my nature, it’s very rare for usto buy a full position all at once. We takea long time to get to know companies andtheir managements and even then I’malways worried that I might have missedsomething, so we’re more comfortablebuilding a position over time. We nowhave a core position in Brookfield Asset

Management [BAM], but our originalrelationships with the people there goback decades. You may not know the his-tory of the company, but it was once theunglamorous part of the Bronfman fami-ly empire, which owned many smallstakes in the types of companies thatdominate the Canadian exchanges, inindustries like paper, energy and timber.Over time it has parlayed those holdingsinto bigger stakes in more companiesaround the world by essentially putting incapital when times are bad and takingmoney off the table when cycles improve.As we better understood that ethic andthe results it generated, we graduallyincreased our position.

How concentrated do your portfolio betstend to be?

TG: We’ve been holding 90 to 100 stocks,which may be a bit more than last timewe spoke, but the concentration at thetop is about the same, with the top 20positions accounting for roughly 70% ofthe portfolio.

Even though I have more positions, I’dargue that I’m more concentrated todaythan I was ten years ago when I ownedfew of the high-profile large caps I dotoday. I’m making a spread bet that thiscategory of stocks is cheap, and I expectthe correlations among them over thenext five years to be quite high. Giventhat, I’m not spending a lot of time tryingto figure out if Coke is less expensive thanPepsi – they’re both selling at low valua-tions so I just own them both.

You’re responsible for Markel’s entireinvestment portfolio. How are you settingthe allocations today between fixedincome and equities?

TG: The size of the fixed-income alloca-tion is first and foremost driven by theneed to over-collateralize the insuranceliabilities of the corporation. Once thathas been done, we invest the residualbased largely on the relative opportunitieswe’re seeing, but also based on what’sgoing on in the insurance side of the busi-ness. Given the soft insurance-pricing

ON BLUE-CHIPS:

I’m making a spread bet that

this category of stocks is

cheap – I expect correlations

among them to be quite high.




market today, I’m less aggressivelyweighted toward equities than I would beotherwise.

As a practical matter, the highest allo-cation to equities of the residual has beenabout 80%, with the lowest closer to40%. It’s been moving up for a couple ofyears now and is today in the mid-60s.With 10-year Treasuries yielding less than3%, we’re finding plenty of equity ideasthat are relatively attractive.

What lessons did you take away from avery difficult 2008?

TG: Be really, really, really careful aboutthings that are leveraged, which is whatwent off the tracks in 2008. That includescompanies in which the level of leverageis more apparent – I unfortunately had arelatively large position in banks goinginto 2008 – and other things where I did-n’t fully appreciate the risk. GE, forexample, was the perfect play on growingglobal affluence, with very broad geo-graphic reach and exposure to industrieslike electricity generation and refrigera-tion and jet engines that the developingworld increasingly needs. Next time I’lllook for all of that in a company thatdoesn’t have a levered beast within it likeGE Capital.

How did you handle your long-time posi-tion in used-car dealer CarMax [KMX]when its stock fell by two-thirds duringthe crisis?

TG: We were criticized for it, but we did-n’t sell any. The biggest issue was its auto-finance business, but I didn’t think itthreatened the company’s ultimate viabil-ity and I always believed the basic funda-mentals of the business were intact. Beingthe best dealer of used cars is a good busi-ness, period, and CarMax was likely to beparticularly well-positioned through adifficult economic environment. Giventhat, why sell?

Did you buy more?

TG: I bought a little more near the bot-tom, but not nearly as much as I should

have. There was just too much uncertain-ty hanging over the system. I’m muchmore willing to be criticized for being tooconservative than for being too aggres-sive. [Note: CarMax shares at a recent$32.80 have quadrupled from their crisislows and are up more than 100% overfive years ago.]

Your private-equity division has steppedup its activity. How is that going?

TG: The basic premise in setting upMarkel Ventures was that the four princi-

ples we follow in making public invest-ments apply just as well to private compa-nies. Our first investment, in 2005, wasAMF Bakery Systems, a company head-quartered near us in Richmond andwhich has been the dominant manufac-turer of high-speed baking equipment for75 years. We now own full or controllingstakes in an eclectic bunch of businessesthat make everything from mobile homes,to dredging equipment, to pickle-slicingmachines, to dorm-room furniture. Thecommon themes are that they’re durablebusinesses, run by talented and honestpeople, and they produce lots of cash.

As in public equities, we steer clear ofbusinesses, mostly technology-related,where something fundamental couldchange in the business and kill it and wemight never see it coming. One companywe looked at provided systems to deliverinteractive educational products and serv-ices to classrooms. The numbers weregreat and the product demonstrationswere impressive, but I couldn’t with anyconfidence say their technology wasn’tgoing to get overtaken by something elsesix months from now. That type of thingisn’t our cup of tea.

I mentioned the importance of beingconnected, and our ownership of thesebusinesses has already paid great divi-dends from the diversity of people andindustries we’ve gotten to know. From aMarkel perspective, the Ventures unit is anice source of non-regulated cash flow atthe corporate level that can give us moreflexibility. That could allow us to throwbigger punches when times are tough bymaking acquisitions, say, or buying in ourown shares – things that would have beenharder to do 10 years ago.

Turning to your public-equity portfolio,describe why Wal-Mart [WMT] fits allyour investment criteria today.

TG: When I talk about Wal-Mart peopletend to look at me like I’m hopelessly ret-rograde, but its record of financial per-formance remains superb. Very few com-panies earn the returns it does on such agiant capital base, which is a credit to thetalent of its management and to what Iconsider its “it” factor, which is an exten-sive distribution system in the U.S. – andincreasingly around the world – thatdelivers products to customers at the low-est cost. That’s competitively very diffi-cult to displace and provides the compa-ny with a worldwide platform for contin-ued growth.

The knock on the company seems tobe that it can’t grow as fast in absoluteterms as it has in the past because it hassaturated the U.S. market and becauseInternet competitors like Amazon.comare taking market share. I accept all that,but believe the market is exaggerating theconcern, not giving Wal-Mart enoughcredit for its non-U.S. expansion opportu-nities, and not recognizing how aggres-sively it can buy back stock.

So much of Wal-Mart’s business is inbasic staples like toothpaste, underwearand milk that it’s hard for me to imaginean online competitor like Amazon figur-ing out a more efficient way to get thosetypes of things to you than by Wal-Martgetting them to your nearby store and youdropping by to pick them up. The biggercompetitive risk is in products like the$300 camera or $1,000 flat-screen TV,

ON MARKEL VENTURES:

It’s a source of non-regulated

cash flow that can give us flex-

ibility to throw bigger punches

when times are tough.




but that’s not the lion’s share of Wal-Mart’s business and there’s no reason whyit can’t have a comparable online optionfor buying those types of products ifthat’s what people want.

Earlier this month Wal-Mart’s boardauthorized another $15 billion in sharerepurchases, on top of the $14 billion orso they bought back last year. They’re notlevering the balance sheet to do that, asthey can fund those types of repurchasesout of operations. As a thought exercise,what would happen if the company con-tinued to buy back shares at that rate? In12 to 13 years there would be one shareleft. If the equity value of the company

didn’t increase at all over that time, thatshare would be worth today’s marketvalue of about $185 billion. Discountthat back at 20% over even 15 years andthe present value today is maybe $12 bil-lion. Say that’s silly and cut it in half,you’re at $6 billion. You can keep cuttingit in half for a long time and still come upwith a share value significantly higherthan today’s price [of around $53].

What I’ve described is never going tohappen, but my point is that on a per-share basis this is still a company that canincrease sales, earnings and cash flow atdouble-digit rates for some time. They getlittle credit for capital management.

The current multiple certainly seems to bewithin your buying range.

TG: I thought the stock was cheap at 18-19x earnings when I first started buying itfive years ago and now it’s going for lessthan 12x. The stock price is roughly thesame because earnings have gone up 50%while the P/E has compressed 50%. Am Iwrong, or am I just early? Sales keepgoing up, earnings keep going up, cashflow keeps going up, the dividend keepsgoing up – those are not typically the hall-marks of being wrong. As long as thevalue of the company keeps increasing,from this valuation level, I’m as confidentas I can be that the stock price will even-tually follow suit.

You put a lot of emphasis on managementintegrity. How would you judge that for acompany of this size?

TG: I spend a lot of time going throughthe proxy statement to understand howpeople pay themselves and I find thecompensation levels and plans here quitefair. There’s a lot of social criticism ofWal-Mart – that they run the local hard-ware store out of business, say – that Ijust think is unfair. How many of thepeople who worked at Jim’s Hardware orBob’s Drugstore had health insurance, a401(k) and career-advancement opportu-nities? I think there’s a false nostalgiaaround those types of displaced jobs thatisn’t justified. I’m not saying working atWal-Mart is any panacea, but it’s hardlythe net negative that some people make itout to be.

Turning to another company about whichthere are plenty of disparate opinions,describe your investment case forBerkshire Hathaway [BRK-A].

TG: I find it rather absurd, but the mar-ket seems eager to second-guess justabout anything Warren Buffett does andthen marks down the stock as a result. Hepaid too much for Burlington Northern.Berkshire Hathaway owns too manybusinesses in the building-materials sectorthat aren’t doing well. The insurance mar-

Wal-Mart(NYSE: WMT)

Business: World's largest retailer, with

some 9,000 discount stores, supercenters

and warehouse stores in 15 countries.

Employs more than 2 million people.

Share Information

(@6/29/11):

Price 52.6452-Week Range 47.77 – 57.90Dividend Yield 2.8%Market Cap $182.80 billion

Financials (TTM):

Revenue $426.23 billionOperating Profit Margin 6.0%Net Profit Margin 3.9%

THE BOTTOM LINE

With its difficult-to-replicate distribution system, international growth opportunities and

capacity to buy back stock, Tom Gayner believes the company will continue to grow

per-share earnings at double-digit rates. With the shares trading today at less than 12x

earnings, “I’m as confident as I can be that the stock price will follow suit,” he says.

I N V E S T M E N T S N A P S H O T

WMT PRICE HISTORY

Sources: Company reports, other publicly available information

80

70

60

50

402009 2010 2011

Valuation Metrics

(@6/29/11):

WMT S&P 500Trailing P/E 11.5 15.8Forward P/E Est. 11.8 12.8

Largest Institutional Owners

(@3/31/11):

Company % Owned

Vanguard Group 2.3%State Street 2.3%Wellcome Trust 1.5%BlackRock 1.4%Berkshire Hathaway 1.1%

Short Interest (as of 6/15/11):

Shares Short/Float 2.1%

80

70

60

50

40




ket is soft. The whole David Sokol affairhighlights how difficult the successionissue is. There are always single datapoints people jump on to say Berkshirehas lost it and I mostly consider it mind-less noise that obscures the fact thatBuffett has built an incredible capital-allocating machine and set of operatingbusinesses that should prosper for a verylong time. This is not a business thatshould trade for a modest premium tobook value.

How do you think through the successionissue, given Buffett’s unique talents andthe fact that he’s 80 years old?

TG: Let’s talk about a couple other enti-ties created by unique geniuses. I’m ahuge fan of John Wooden, the UCLA bas-ketball coach who retired in 1975 after arun of success that has never – and willnever – be matched. I’m sure it’s been nopicnic for all the coaches who have fol-lowed in his footsteps, but guess what,UCLA nearly 40 years later is still a pret-ty good basketball program. SinceWooden left they’ve won one nationalchampionship and have been fairly regu-lar visitors to the Final Four.

In the world of business, think aboutExxon, the predecessor of which wasstarted by John D. Rockefeller, another

singular business genius of his age whostopped running Standard Oil before hewas 50. I once asked a roomful of maybe300 investment professionals if anyonecould name four CEOs of Exxon, and noone could come close. My point is thatover the next several decades there will bea series of top executives at BerkshireHathaway whose names probably won’tbe on the tips of everyone’s tongue, butthat doesn’t mean the company won’tcontinue to thrive in the same way Exxonhas. The assets and the capital disciplinewon’t go away when Warren Buffett is nolonger in charge.

How are you looking at valuation withthe A shares trading at a recent $115,500,not far from a 52-week low?

TG: I break the business into three parts,insurance, investments and the otheroperating companies. For the insurancebusiness, which is currently relatively softbut is well-positioned and well-run, I lookat the level of insurance premiums run-ning through the business and assume atthe low end that it breaks even on anunderwriting basis, in the middle rangemakes 4-5 points of underwriting profitand at the high end makes 8-9 points. Forthe investment portfolio, I assume it earnsfrom 3% at the low end up to 10-12% atthe high end. For the operating business-es, I look at the actual cash flow pro-duced over the past three years and over-lay my expectations over the next fewyears to get a range of possible normal-ized earnings.

On all of that, I apply 10x, 14x and18x earnings multiples to arrive at a fair-value range for the company overall. Ateven the low ends of the range, the result-ing value is significantly higher thantoday’s share price.

It’s a bit weird to say for such a high-profile company, but I really believeBerkshire is a stock that people by andlarge don’t think about. They seem to beeither true believers whose analysis stopsand ends with Warren Buffett’s presence,or they’re people who are dismissivewithout really taking a close look. On thesad day Buffett is no longer there, neither

Berkshire Hathaway(NYSE: BRK-A)

Business: Highly diversified conglomerate

and investment holding company, with key

operations in insurance, rail transportation,

utilities and real estate brokerage.

Share Information

(@6/29/11):

Price 115,540.0052-Week Range 109,925.00 – 131,463.00Dividend Yield 0.0%Market Cap $190.87 billion

Financials (TTM):


THE BOTTOM LINE

The single data points the market appears to jump on to say the company has lost it

obscure the fact that it’s “an incredible capital-allocating machine and set of operating

businesses that should prosper for a very long time,” says Tom Gayner. Even the low

end of his current fair value range is significantly higher than the current market price.


BRK-A PRICE HISTORY


150k

120k

90k

60k2009 2010 2011

Valuation Metrics

(@6/29/11):

BRK-A S&P 500Trailing P/E 17.6 15.8Price/Book 1.19 n/a


(@3/31/11):

Company % Owned

Fidelity Mgmt & Research 2.6%First Manhattan 2.0%Capital World Inv 1.1%Ruane, Cunniff & Goldfarb 1.0%Davis Selected Advisers 1.0%



150k

120k

90k

60k




of those default positions will apply. Thatmay result in the market taking a muchcloser look at the company and appreciat-ing what’s actually there.

Is Nestlé [NESN:VX] a standardbearerfor your global-affluence theme?

TG: Yes. Rising standards of living don’tjust mean people start buying moreRolexes or BMWs, a lot of it is aboutbuying a better brand of coffee or choco-late, or buying baby formula for the firsttime. Over time that can’t help but bene-fit Nestlé, which is the largest and mostgeographically diversified food companyin the world.

I’m not sure I can name a more consis-tently profitable and durable business.Whether you look at the last year, the last

five years or the last 100 years, this is acompany that generates mid-teens andbetter returns on equity with very conser-vative finances. Is that going to continue?Well, they’ve been at it successfully formore than 150 years, over a period inwhich a few things have happened – likethe introduction of electricity, two WorldWars, the advent of the jet engine, the cre-ation of the Internet.

I don’t spend a lot of time looking atwhether the percentage of revenues theyhave coming from this sector or that is ashigh as I think it should be or whethergross margins in the ice cream businessare going up or down. The record speaksfor itself and I have every reason tobelieve management knows what it’sdoing and the future looks as bright asthe past.

Have rising commodity prices beenweighing on the stock?

TG: Probably, but that’s the type of short-term issue that really doesn’t concern me.These things go in cycles, but even if highcommodities prices persist, I can make anargument that that eventually works tothe long-term advantage of branded foodcompanies like Nestlé. The only reasonpeople buy generics is the price differencewith branded products. Say a bag ofNestlé chocolate chips costs $2 and thestore brand costs $1. If input costs go upsuch that each needs to increase price by50 cents, the branded chips are still $1more expensive, but now the price differ-ential is 67% rather than 100%. I’m notsaying absolute prices don’t matter, but atthe margin I believe branded companieslike Nestlé will benefit if or when the rel-ative price premium goes down.

At a recent 51.90 Swiss francs, whatupside do you see in the shares?

TG: After accounting for the hugeamount of cash on hand – much of it fromthe sale of the company’s stake in contact-lens company Alcon – Nestlé’s shares havebeen stuck in the 14-15x earnings rangefor quite a while. To me, it’s a way-above-average company trading at an averageprice. The price might even get belowaverage, but what matters to me is thatNestlé persists as a way-above-averagecompany. When I look at their mix ofproducts, their global footprint, risingaffluence and the skill with which they’veconducted their operations, I think there’sa good chance that will persist.

Even with no increase in the multiple,I’m earning a 3.6% dividend yield andshould see earnings grow on a per-sharebasis in the high single-digits per year.That would produce a double-digit annu-al return on the stock. If you look atsomething like this against a Treasurybond, the risk/reward strikes me as high-ly favorable.

Your portfolio is usually light on technol-ogy names. Why do you find Intel [INTC]interesting today?

Nestlé (Swiss: NESN:VX)

Business: Largest global food and bever-

age company. Key product categories

include coffee and tea, water, dairy, choco-

late, frozen foods and pet food.

Share Information

(@6/29/11):

Price CHF 51.9052-Week Range CHF 48.92 – CHF 56.90 Dividend Yield 3.6%Market Cap CHF 171.43 billion

THE BOTTOM LINE

The company’s product mix, global reach and operating skill, overlaid with rising levels

of global affluence, make it a “way-above-average” company, says Tom Gayner. But at

14-15x earnings (after accounting for its cash hoard), the stock trades at just an aver-

age price. He expects at least low double-digit annual returns on the shares over time.


NESN PRICE HISTORY


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302009 2010 2011

Financials (Full-year 2010)

Sales CHF 109.72 billionEBIT Margin 14.8%Net Profit Margin 31.2%

Valuation Metrics

(Current Price vs. TTM):

NESN S&P 500P/E 20.0 15.8

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TG: I certainly don’t consider myself atechnology expert, but this is essentially asimple bet on a cash-generating machinethat the market seems to think has a dis-mal future. I disagree.

The primary knock on Intel today isthat it hasn’t been at the forefront of chiptechnology for mobile devices. That’s afair criticism, but the negative argumentfalls short in a couple key respects. Forone, it makes it seem like Intel isn’t bene-fiting at all from the proliferation ofmobile computing. In fact, all thosemobile devices have to be connected withsomething, which happen to be theservers and network machines in which

Intel is still the dominant chip supplier.The company’s revenue growth of latewould indicate the mobile craze isn’t justpassing it by. Second, the company is soprofitable that it can fund research anddevelopment spending that is unmatchedin the industry. That’s obviously no guar-antee that they blow everybody else outof the water in mobile computing, but Ithink it’s a mistake to assume a companywith its capabilities is always a step ortwo behind in any important market inwhich it wants to compete. There’s a veryhigh likelihood it will be a bigger and bet-ter player in mobile computing as the gen-erations go by.

Intel is also a company with every bitof the upside from increased developing-market demand. Just as people will wantto buy better toothpaste and put beer inthe refrigerator, they’ll be increasinglyusing computers with Intel chips like theynever have before.

How have you gotten over your naturalaversion to technology here?

TG: Part of it is just trying to use somecommon sense about what areas of tech-nology tend to be more durable than oth-ers, which has certainly been the case overtime in Intel’s primary businesses.Leading box makers may come and go,but Intel has pretty consistently beeninside each of them.

Tech companies like Intel have alsoadopted more mature corporate behavioraround capital allocation and compensa-tion. I had little patience for most of theoptions-heavy compensation schemes ofthe past, which I considered excessive andalso deceptive from an accounting stand-point. That’s changed in companies likeIntel, which have shifted more towardcash-based compensation and the use ofrestricted stock.

I do believe the odds that I’m flat-outwrong here are higher than in many ofthe other stocks I own, which I address bynot having as big a position in it or in anyone technology name.

How inexpensive do you consider theshares, now around $21.40?

TG: This is a real head-scratcher for me.This is the leading company in the worldat what it does, with 35% operating mar-gins and earnings that grew in the latestquarter by 30%. What it does is and islikely to remain in high demand. But thestock trades at 10x trailing earnings andhas a 3.4% dividend yield. It’s hard forme to imagine ten years from now consid-ering that as anything but an incrediblebargain.

You also own Microsoft. What do thinkof David Einhorn’s criticism of CEO SteveBallmer?

Intel(Nasdaq: INTC)

Business: Largest designer, manufacturer

and seller of integrated circuits, used by

makers of a wide array of computing and

communications products worldwide.

Share Information

(@6/29/11):


Financials (TTM):


THE BOTTOM LINE

The leading company in the world at what it does, with 35% operating margins and

earnings growth in its latest quarter of 30%, should not trade at 10x earnings with a

3.4% dividend yield, says Tom Gayner. Of the current valuation, he says: “It’s hard to

imagine ten years from now considering that as anything but an incredible bargain.”


INTC PRICE HISTORY


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102009 2010 2011

Valuation Metrics

(@6/29/11):

INTC NasdaqTrailing P/E 10.0 12.1Forward P/E Est. 9.4 14.0


(@3/31/11):

Company % Owned

State Street 3.9%Vanguard Group 3.9%BlackRock 2.6%Capital Research Global Inv 2.5%Bank of NY Mellon 1.9%



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TG: If I believed that, I just wouldn’t ownthe stock. I would say that there’s a bigdifference between the success of the busi-ness and the success of the stock invest-ment. Objectively speaking, it’s a bitharsh to say Steve Ballmer has been abomb. He took over the top job whenMicrosoft stock was wildly overpricedand has had to live that down as the com-pany’s earnings have probably tripled.Whoever is the CEO, it’s my view that ifthe value of the business continues tokeep rising from here, the stock will even-tually follow.

What’s your biggest macroeconomic con-cern today and how are you dealing withit in your portfolio?

TG: It seems to me that the currentcourse of government action is unsus-tainable and that if something doesn’tchange there is a real threat of inflationand a falling dollar. That said, I’m takingwhat I call a silver-medal approach that

hedges my bets. If we continue to have adeflationary environment, which is theclassic way debt bubbles unwind, thegold-medal idea is probably governmentbonds. Next best, in my opinion, arestocks of high-quality companies likethose I mostly own, with the balancesheets and market positions to best navi-gate a tough economy.

If inflation takes off, the gold-medalidea is probably going to be commodities,but the silver medal would likely go tohigh-quality companies with strong glob-al brands and low-cost distribution sys-tems that have a better chance of main-taining returns on capital even if the unitsof measurement change. Given the uncer-tainty over how things will play out, I’llbe happy to end up with the silver medaleither way.

We spoke last time about your findinginvestment inspiration in the writings ofMark Twain. Have you read anythingrecently that you recommend?

TG: I really liked The Rational Optimist,by Matt Ridley. The general theme of thebook is that while it may not feel like it allthe time, things are getting better in theglobal economy and will continue to doso. Technology and the increasing inter-connectedness of the world are causinggood ideas and best practices to rise tothe top more quickly and get disseminat-ed more broadly. That makes all of usbetter off.

Do you consider yourself to be a rationaloptimist?

TG: I’ve been accused of being an irra-tional optimist, but as ugly as our systemlooks from time to time, it works. I con-tinue to operate under the assumptionthat however bad our problems are, we’llfigure it out and be okay. I’ve always saidyou might as well assume the world isgoing to work, because if it doesn’t, itdoesn’t really matter what your invest-ment portfolio looks like. VII


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I N V E S TO R I N S I G H T : Sheffield Asset Management


Investor Insight: Sheffield PartnersCraig Albert and Brian Feltzin of Sheffield Asset Management explain the evergreen idea source they consistently tap,why they’re currently far more apt to invest in Europe than the U.S., how their views on cotton inform several portfo-lio positions, and what they think the market is missing in Carter’s, Prysmian, Greencore and C&C Group.

Your portfolio has both a European and acyclical bent. How did that come about?

Brian Feltzin: When I came into the busi-ness and even when I started Sheffield in2003 there were more inefficiencies inclassic special situations like spinoffs ordistressed securities – things hedge fundstypically pursue. While those opportuni-ties can still exist, there are many moresmart and aggressive people out therelooking to exploit them.

Recognizing that the game haschanged somewhat, our sourcing processis focused primarily on identifying areasof the market which are the most out-of-favor, and then looking for change thatwill drive material earnings improvementand thus a change in sentiment. From ageographic perspective, this approach forsome time has frequently led us toWestern Europe, and that’s certainly stillthe case today.

In terms of the cyclical bent to ourportfolio, cyclicals by their nature repeat-edly experience boom and bust periodsthat create opportunities for investors likeus who pay careful attention tosupply/demand economics and believe inmean-reversion.

If you look at the average equity hold-ing period over the last 15 to 20 years, it’sclear that there are a lot of people outthere just renting stocks. The primaryinefficiency we’re trying to exploit is thatinvestors don’t like it when things aren’tgoing well and a company is underearn-ing its potential or what’s normal, so ourfocus on the long side is to identify over-reactions in the stock when that happens.In Europe in particular, companies get putin the penalty box quite severely if theystumble. It doesn’t happen all the time,but reliably enough both there and in theU.S. that we’re rarely at a loss for ideas byfocusing on cyclical but temporary issuesin a company’s business.

We see you’ve owned on and off overtime shares in chicken producerSanderson Farms [SAFM], a classicallycyclical business. Describe why some-thing like that plays to your strengths.

Craig Albert: The chicken business is verycyclical and the cycles are very short. Thecurrent industry downturn, for example,is the fifth one since 2003. The time toown a chicken company is when badnews is everywhere and most participantsin the industry are losing money. Badnews is good news because lossesinevitably lead to the production cuts nec-essary to bring supply and demand intobalance, starting the up-cycle anew.Recently, the industry has suffered fromthe double-whammy of weak restaurantdemand and soaring corn and soybean-meal prices. This caused Sanderson'sstock price to decline from close to $60 ayear ago to under $40 early this year,when it was trading at around 8x ourestimate of normalized earnings and at amore than one standard deviation dis-count to its normal valuation on a price-to-book-value basis.

Our investment thesis – and we’ve seenthis movie before – is that this was and isa temporary problem that will mean-revert. Chicken supply will be reducedand prices will improve. Sanderson willbe a major beneficiary of this improve-ment because it is the best-capitalized,lowest-cost producer in the industry andtherefore can hold out while its higher-cost competitors are forced to reduce pro-duction. Some of these dynamics havestarted to play out, but we still see upsidefrom here. [Note: Sanderson shares cur-rently trade around $47.]

You’ve done a tremendous amount ofwork on cotton. Describe what promptedit, what conclusions you’ve drawn andhow you’ve acted on them.

Brian Feltzin, Craig Albert

Nice Complement

After becoming friends on a study-abroad

program in London between their junior

and senior years of college, Brian Feltzin

and Craig Albert stayed in touch as they

each eventually embarked on investment

careers. Albert earned a law degree from

NYU but turned to investing through stints

at Sanford C. Bernstein & Co. and hedge

fund firm Ospraie. Feltzin spent three

years at real estate firm JMB Realty and

then seven years working at a go-any-

where investment partnership started by

his mentor from JMB, David Richter.

They reconnected in early 2004 when

Albert joined Feltzin's year-old Sheffield

Asset Management. As in many enduring

partnerships, each describes the other's

greatest strengths as complementary to

his own. As Feltzin explains: “I like the

relationship aspect of business, so if we're

looking at solving a problem in dissecting

a company, I might think about who we

know or who we can get to in order to try

to develop an information and analytical

edge. To do the same thing, Craig might

tear apart the 10-K, dive into 10 years of

analyst reports and lay out a massive

spreadsheet. We team tackle a problem

from multiple angles and like to believe we

come to better answers because of it.”


CA: We consistently look to commoditymarkets as signals for ideas. Our interestin cotton stemmed from our due diligenceon Carter’s [CRI], the children’s clothingcompany whose business and stock hasbeen greatly impacted by high cottonprices. Spot prices earlier this year wentabove $2.10 per pound, against 10-, 20-,30- and 40-year averages of around 65cents. As we dug into it, we concludedthat cotton was massively mispriced,maybe even a bubble of historic propor-tions. [Note: Current spot prices for cot-ton are now around $1.60.]

We could talk about this for hours, butour basic conclusions are as follows: Highcotton prices will cause substantialdeclines in cotton consumption as userscut back or readily switch to alternativessuch as polyester and rayon. The invento-ry build-up that occurred across the sup-ply chain in the past year is now reversingitself, as industry participants move intoinventory-liquidation mode. Weather per-mitting, farmers will harvest record cot-ton crops in 2011. The combination ofincreased supply and reduced demandwill move the cotton market to a largesurplus position that will rebuild invento-ries to above-normal levels. Finally, thislarge surplus and substantial inventoryposition will drive cotton prices backtoward their historic norm of around 65cents per pound. From an investment per-spective, it’s important that we clearlyhave a variant view, as virtually everyonewe talked to in our due diligence was con-vinced that cotton demand wouldincrease in the 2011-12 crop year.

In addition to our holding in Carter’s,which we’ll speak about later, we haveestablished a cotton-related long equityposition in U.K. soft-drink maker Britvic[BVIC:LN], a basket of short equity posi-tions in mostly Asian chemical companiesthat have benefited materially from sub-stitution away from cotton to polyester,and a long position in put options on cot-ton futures. All will benefit nicely if cot-ton prices fall.

What’s the cotton connection to Britvic?

BF: Britvic is the Pepsi bottler in the U.K.and Ireland and owns three of the top five

on-premise soft-drink brands in the U.K.The company’s margins have been hurtby rising prices for PET resin. PET standsfor polyethylene terephthalate and it isnot only the primary resin used to makeplastic bottles – a significant cost factorfor Britvic – but the chemicals used tomake it are the same ones used to makepolyester staple fiber, which is the pri-mary textile substitute for cotton.Because of switching from cotton to poly-ester fiber, producers along the entirepolyester chain, including PET-resin mak-ers, have enjoyed substantial pricingpower, with prices up 30% in 2011.

When Britvic announced it was goingto miss its guidance largely as a result ofthis input-cost pressure, the stock fellfrom 500 pence to 380 or so – aboutwhere it is today – which is only 10xtrough earnings. We believe that’s anattractive valuation for a high-quality,stable business and given our view thatcotton prices will correct, this temporarycost problem for Britvic should go awayand the stock can trade at a normal mul-tiple of normal earnings, which in ourview would result in a share price of atleast 550 pence.

Do you tend to look for ideas in a partic-ular market-cap range?

BF: Our sweet spot tends to be in compa-nies with market caps from $1 billion to$5 billion. Illiquidity in smaller-cap com-panies is fine for a portion of your book,but it’s nice to have the ability to changeyour mind and more easily sell if thingsdon’t develop as you hoped. The largestcompanies can certainly be mispriced, butour ability to create an analytical edgegiven the number of people looking atthem is more limited.

You have standardized your researchprocess to a certain extent. Describewhat’s behind that?

CA: It all stems from our formula forwhat constitutes a great idea. To avoidwasting time researching ideas that can'tget into the portfolio, we focus from theoutset on teasing out whether the stock inquestion meets our criteria. That meansanswering a standard set of questions,including: What happened to make thestock hated or neglected? Is it a tempo-rary or permanent problem? Have weidentified a material change that willcause fundamentals to improve? Howimminent is that improvement? Howcapable is management? How sound isthe balance sheet? Do we have a differen-tiated view on earnings?

BF: We believe sourcing is central to ourability to outperform. This industryattracts talented, hard-working peoplewho when faced with the same set offacts are fairly likely to come up withsimilar conclusions. That makes itimportant for us to be looking whereothers aren’t or before they get there. Wethink our criteria for what makes a goodidea fosters that, and helps us filter theexcessive information we have coming atus every day.

Can you generalize about how you lookat valuation?

CA: We try to buy businesses that arecheap based on what they should earnacross an economic cycle. Valuation sup-port alone isn’t enough, so having immi-nent catalysts is an important part of ourformula. In arriving at our view of intrin-sic value, we typically look out two yearsand apply what we consider to be a nor-mal multiple to normal earnings. We’reonly interested if we believe there is 50%upside from our entry price as the tempo-rary problem goes away over that time.

Walk us through your investment case forCarter’s.

BF: The company is the largest U.S. mar-keter of apparel for babies and young



ON COTTON:

As we dug into it, we conclud-

ed it was massively mispriced,

maybe even a bubble of his-

toric proportions.


children, sold under two of the most-trusted names in the industry, Carter’sand OshKosh. The products are sold pri-marily through department stores anddiscount retailers, as well as throughsome 320 Carter’s and 180 OshKoshretail stores.

The Carter’s brand is by far the com-pany’s best business. Its principal prod-ucts are essentially consumer staples fornewborns, including bodysuits, pajamas,towels, washcloths and blankets. Thecore brand has increased revenues by12% and operating profit by 21% annu-ally over the past ten years. Even throughthe downturn the company kept intact itsstring of 21 consecutive years of salesgrowth.

It’s not surprising that the price of cot-ton has been weighing on the stock, asroughly 85% of the company’s productsare made of cotton and the cost of cottonaccounts for 15-20% of its total cost ofgoods sold.

So is the thesis as simple as cotton pricesreverting to the mean?

BF: That’s an important part of it, but wealso see other upside options that wedon’t believe we’re paying for at the cur-rent market price. One is store growth, asthey continue to expand the number ofCarter’s branded stores at 7-10% annual-ly. Competitors Gymboree and Children’sPlace operate more than 1,000 and 600stores, respectively, so we believe Carter’shas plenty of runway here.

Another opportunity the company isjust now capitalizing on is building itsonline sales channel. Managementexpects Internet sales to hit 5% of totalrevenues before long, or $100 million,which we think is conservative. Newmoms are especially busy and time-starved and Carter’s is the trusted brandin the space, so we see no reason why itcan’t generate at least 10% of revenuesonline as its competitors do. That ofcourse won’t all be incremental, but webelieve a decent portion of it will be.

In addition to raw-materials costsdeclining, we see opportunities for costsavings on the sourcing side. Carter’s has

historically relied on a company called Li& Fung in Hong Kong to identify andmanage its contract manufacturers inChina. However, management is nowconsidering whether it makes sense to godirect to its manufacturing partnersrather than through a middleman. Even ifthis just forces Li & Fung to sharpen itspencil to keep the business, it shouldresult in cost savings for Carter's.

With the shares now around $30.60, howare you looking at valuation?

BF: If we assume store growth of 50 newoutlets or so per year and a normalization

of cotton prices, we expect earningsbefore interest and taxes in 2013 ofapproximately $245 million. On an EPSbasis, that translates to about $2.75 pershare. At a reasonable historical and peermultiple of 13x, plus the $4 per share ofnet cash we expect the company to haveat the end of 2012, our fair-value pricetarget is around $40. That assumes nosavings elsewhere on the cost side, noimprovement in OshKosh’s financial met-rics – which have been lagging and are infocus – and no incremental upside fromonline sales.

Is being wrong on cotton the biggest risk?



Carter’s(NYSE: CRI)

Business: Designs, sources and sells –

through owned and independent outlets –

baby and children's clothing under brand

names such as Carter's and OshKosh.

Share Information

(@6/29/11):


Financials (TTM):


THE BOTTOM LINE

The market has been fixated on the company’s exposure to high cotton prices and

seems to be ignoring its solid growth prospects, says Brian Feltzin. Assuming store

growth of 50 new units per year and a normalization of cotton prices, he pegs 2013

EPS at $2.75, resulting in a fair-value price target – including dividends – of $40.


CRI PRICE HISTORY


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102009 2010 2011

Valuation Metrics

(@6/29/11):

CRI S&P 500Trailing P/E 13.3 15.8Forward P/E Est. 17.3 12.8


(@3/31/11):

Company % Owned

Berkshire Partners 11.4% Royce & Assoc 5.6%Vanguard Group 5.0%T. Rowe Price 4.7%BlackRock 4.6%



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CA: We actually don’t believe persistentlyhigh cotton prices would materiallyimpact the long-term earnings power ofthe company. Carter’s brand equity isvery strong – evidenced by its meaningfulmarket share gains over time – so thecompany is in a good position relative toits peers to offset the impact of raw-mate-rial inflation, even if it might take morethan one season to do so. Our experiencewith commodities in general gives us con-fidence that sharp increases in an indus-try’s costs that affect all producers rela-tively equally – which is the case here –can ultimately be passed on to the endcustomer in the form of higher prices.

BF: One last positive item I’d add is thatBerkshire Partners, a well-respected pri-vate equity firm that had taken Carter’sprivate in 2001, is back in the stock andhas been buying very recently. They orig-inally filed as a passive owner, but havesince increased their position and filed a13D, indicating they may attempt to takea more active role. Regardless of how thatplays out, we like that they must see someof the same latent value here that we do.

Turning to some European ideas, describeyour interest in Italian industrial-cablemaker Prysmian [PRY:IM].

CA: Prysmian is one of the world’s lead-ing manufacturers of power and telecomcables. Its power cables are used in avariety of different applications, includ-ing transmission and distribution of elec-tricity as well as power distribution inhomes, buildings and industrial equip-ment. On the telecom side, it producestraditional copper cables as well as opti-cal fibers used to transmit video, dataand voice.

The company is widely regarded as themost profitable, best-run company in itsindustry, stemming from a large-scalerestructuring led by the current manage-ment team in the early 2000s and from itsstrategic focus on the fastest-growing,highest-value-added industry segments.With lower costs and a favorable productmix, its return on capital has averagedmore than 25% over the past five years

and operating margins have exceededthose of peers by approximately 400 basispoints over the cycle.

Our basic thesis is that the market isignoring major catalysts that will causeearnings to double or possibly triple overthe next few years. The biggest catalyst isPrysmian’s acquisition earlier this year ofDraka Holding, the #3 cable-marketplayer in Europe. This deal marries thelow-cost producer (Prysmian) with one ofthe highest-cost producers (Draka) at thebottom of the cycle, which should resultin major synergies and, importantly,improved pricing discipline across theindustry. Management has committed to€ 100 million in annual cost savings fromthe combination, but has expressed confi-dence that number could reach € 150 mil-lion. If Prysmian were able to capture

€ 125 million in synergies, it would addroughly 35 euro cents per share to theearnings of the pro-forma company.

An investor today also is paying noth-ing for recovery in the more cyclical partsof the combined company’s business. AtPrysmian alone, operating profit in thecyclical, lower-value-added areas of itsportfolio declined by some 60% between2007 and 2010. If they were to recoverjust 50% of that decline over the nexttwo years it would add another 30 eurocents per share to EPS.

Lastly, the company's entry into theflexible-pipe business – in which its cablesmove underwater oil and gas productionto the surface – is potentially a significantsource of value. Its market entry issecured by a multi-year contract withBrazil's Petrobras, which guarantees it

Prysmian (Italy: PRY:IM)

Business: Milan-based producer of highly

engineered cable products used in the

global power, energy, telecommunications

and construction-related industries.

Share Information

(@6/29/11, Exchange Rate: $1 = €0.69):

Price € 13.7352-Week Range € 11.55 – € 16.25 Dividend Yield 1.2%Market Cap € 2.94 billion

THE BOTTOM LINE

Craig Albert believes the market is ignoring three catalysts – merger synergies, a

rebound in the low end of the market and a growing flexible-pipe business – that

could double or triple the company’s earnings over the next few years. At 10-12x his

2013 EPS estimate of €2.50, the stock would trade at roughly twice its current price.


PRY PRICE HISTORY


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52009 2010 2011

Financials (2010)

Revenue € 4.57 billionOperating Profit Margin 8.5%Net Profit Margin 3.3%

Valuation Metrics


PRY S&P 500P/E 18.1 15.8

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5


€ 120-130 million in revenues, at highmargins, when the plant is fully opera-tional in 2012.

How do you see all that translating intoearnings and share-price upside?

CA: The two companies’ combined oper-ating profit was just over € 400 millionin 2010. If we assume € 125 million ofrealized merger synergies and another€ 125 million from market recovery in itscyclical businesses, our EBIT estimate for2013 is € 650 million. Running thatthrough the rest of the P&L, taking intoaccount things like integration costs, taxsavings from the use of Draka’s net-oper-ating-loss tax carryforwards and an esti-mated payment to the EU Commissionrelating to an antitrust investigation, our2013 EPS forecast is € 2.50 per share. Ata not-aggressive 10-12x earnings, thatwould make the business worth € 25-30per share, roughly twice today’s price [of€ 13.75].

Tell us more about this potential EUCommission fine.

CA: Since 2009 the EU has been investi-gating whether Prysmian and its peerscolluded in the high-voltage transmis-sion-cable market. The way these largehigh-voltage projects typically work –similar to what you sometimes see indeepwater offshore drilling – is that cablesuppliers will jointly bid on a projectbecause the projects are too large for asingle company to accept the entire order.The EU alleges that industry participantsimproperly shared information regardingpricing in their preparation of bids forthese projects.

Under EU rules, the maximum finethat Prysmian could be assessed is € 450million, or about € 2 per Prysmian share.While we've spent significant time andresources investigating the likely outcomeof this investigation, we frankly don'thave a strong opinion on the outcome.But given the current gap between ourestimate of intrinsic value and the currentshare price, this issue doesn’t at all changeour conviction on the investment. The

market clearly doesn't like the financialoverhang and we think the resolution ofthe investigation, however it turns out,will be a major catalyst for the stock.

What do you think the market is missingin Irish food company Greencore[GNC:ID]?

CA: Like a lot companies in Ireland,Greencore historically was a mini-con-glomerate that in order to find growth insuch a small country had expanded intomany different businesses. It was thecountry’s monopoly sugar provider. Ithad a malt business. It had a water busi-ness. Those are all gone and what’s left isa convenience-food company that pro-vides fresh food-on-the-go and preparedmeals – things like salads, sushi, sand-

wiches, lasagna, etc. – to supermarketsand convenience stores primarily in theUnited Kingdom. These types of productsare very popular in the U.K., where peo-ple make more shopping trips per weekand are less inclined to stock up on frozenfoods.

There appear to be two primaryknocks on Greencore today. One is thatit’s a small-cap company sitting inIreland, which is nobody’s idea of anattractive market. Second, the marketbelieves that the convenience-foods busi-ness is a lousy one, with low barriers toentry and little pricing power due to thehighly concentrated nature of the U.K.supermarket industry.

Our view is that the market fundamen-tally misunderstands the convenience-foods business, which we believe is actu-

Value Investor Insight 14June 30, 2011



Greencore Group (Ireland: GNC:ID)

Business: Manufacture and distribution of

prepared foods and related products sold

to commercial vendors as well as through

convenience and grocery stores.

Share Information

(@6/29/11, Exchange Rate: $1 = €0.69):

Price € 0.9952-Week Range € 0.99 – € 1.48 Dividend Yield 7.6%Market Cap € 207.1 million

THE BOTTOM LINE

The company’s prepared-foods franchise is a better business than the market seems to

believe, says Craig Albert. As it takes share in a growing market at home and becomes

profitable for the first time in the U.S., the company can earn 19 euro cents per share in

2012, he says. With a 10x multiple, that would result in a share price of €1.90.


GNC PRICE HISTORY


2.50

2.00

1.50

1.00

0.502009 2010 2011

Financials (2010)

Revenue € 856.0 millionOperating Profit Margin 7.0%Net Profit Margin 2.9%

Valuation Metrics

(Current Price vs. 2010):

GNC S&P 500P/E 8.5 15.8

2.50

2.00

1.50

1.00

0.50


ally a good business if one does it well, asGreencore does. There are many differentskills required to produce and deliverhigh-quality, freshly prepared, good-tast-ing food consistently on a daily basisacross the country – in sourcing, logistics,quality control and manufacturing effi-ciency. While it’s true that four supermar-ket chains in the U.K. dominate the mar-ket, they will pay for value-added servic-es when provided. As the lowest-cost andbest operator, Greencore earns around7% operating margins.

As for the competitive set, many of theother publicly traded players in the mar-ket have struggled. But over the past sev-eral years the supply/demand balance hasimproved and pricing has stabilized.Further, there has been recent consolida-tion in the industry and we expect moreto come. As the low-cost market leader,Greencore should benefit from that con-solidation whether it is an active partici-pant in it or not.

Are there organic growth opportunities?

CA: Despite the negative perception ofthe industry, the prepared-foods marketin the U.K. is actually growing in the midto low single-digit range, as time-starvedpeople turn to convenience foods. Ascompetitors retrench, Greencore has alsohad some significant new-business winsand thus is gaining market share. Alsointeresting is the company’s investment inthe U.S., built around its 2008 acquisitionof a company called Home Made BrandFoods in Massachusetts. After roughly$50 million in total investment to-date,management expects the business to bebreakeven in 2011 and to start earningcomparable margins to the U.K. businessin 2012. If that happens it would high-light the U.S. as a source of significantvalue within the company, somethingwhich we don't believe the market is pric-ing in at all today.

At a recent €1, how cheap do you consid-er the shares?

CA: Last year the business earned 16 eurocents per share in net income and we

think with growth of the overall market,growth in market share, and improve-ment in the U.S., that number will bemore like 19 euro cents by 2012. Aftermaking adjustments for unfunded pen-sion liabilities, the stock trades at only 6xour 2012 earnings estimate. If we’re righton our estimate, a 10x multiple would bemore appropriate, which would result ina stock price closer to € 1.90, 90% abovetoday’s level.

We believe Greencore is well-posi-tioned to lead further industry consolida-tion. Last year it agreed to merge withcompetitor Northern Foods, but ulti-mately lost a bidding war for that asset.There are other opportunities on the hori-zon – including Uniq plc, which is for sale– so we’re optimistic this could be anoth-er source of value creation over the next

few years for the company. Our price tar-get includes no value for that.

Describe the potential you see in fellowIrish company C&C Group [GCC:ID]?

BF: This is a company that attracted ourattention in 2009 as a turnaround storywhen the board brought in new manage-ment from a much larger competitor andincented them with a private-equity-likecompensation structure that aligns man-agement’s interests with shareholders andencourages them to realize any value theycreate rather than empire-build. The pri-mary business is alcoholic cider, under theMagners and Bulmers brands. They alsohave a beer business, the crown jewel ofwhich is the Tennent's brand, which is thedominant lager in Scotland.



C&C Group (Ireland: GCC:ID)

Business: Manufacturer, marketer and dis-

tributor primarily in the United Kingdom of

beer and alcoholic cider, the most popular

of which is sold under the Magners brand.

Share Information

(@6/29/11, Exchange Rate: $1 = €0.69):

Price € 3.5352-Week Range € 3.00 – € 3.69 Dividend Yield 1.9%Market Cap € 1.19 billion

THE BOTTOM LINE

Obscured by a difficult economic environment, the company has made great strides in

repositioning its products, expanding distribution, improving marketing, and pricing

more effectively, says Brian Feltzin. He believes the endgame for the company is its

sale to a large multinational – at a better-than 50% premium to today’s share price.


GCC PRICE HISTORY


4.00

3.50

3.00

2.50

2.00

1.50

1.00

0.502009 2010 2011

Financials (FY2011)

Revenue € 529.6 millionOperating Profit Margin 19.0%Net Profit Margin 15.1%

Valuation Metrics


GCC S&P 500P/E 13.9 15.8

4.00

3.50

3.00

2.50

2.00

1.50

1.00

0.50


Since we made our initial investmentin the company, management has madesubstantial progress on several fronts. Ithas divested a non-core spirits businessand completed two strategic acquisitionsthat broaden the portfolio and deepen thecompany’s trade relationships. It has alsoinvested in sales and distribution, over-hauled marketing with more segmentedadvertising, introduced new products likepear cider, and started pricing morestrategically, which in some cases meantlowering selling prices.

What exactly is alcoholic cider?

CA: Cider across the U.K. was historical-ly known as a drink for “youths andvagabonds,” but C&C and others werevery successful in turning it into more ofa premium category by lowering the alco-hol content, improving the taste – whichis basically like regular apple cider –improving the packaging and promotingit as something to drink “over ice” in apint glass. It’s considered a more naturalalternative to beer and is the rare alco-holic drink that seems to appeal equallyto both men and women. Cider as a cate-gory is growing nicely in C&C’s homemarkets – 5% annually in the U.K., forexample.

The stock, at a recent €3.50, doesn’tappear to have been going gangbusters.

BF: The economic environment certainlyhasn’t helped, but we believe that ismasking latent earnings power as the topline starts growing again. When over-icecider sales were peaking in 2007, priormanagement doubled the size of the com-pany’s Clonmel, Ireland manufacturingfacility, which is now operating far belowcapacity. That fact plus other moves thecompany has made to better align costswith current revenues tells us that C&C’sincremental margins are much higherthan what they’re earning today.

Assuming overall growth in the mar-ket and modest market-share gains fromthe improved product mix and distribu-tion, we believe the company this yearcan generate 30 euro cents in EPS. That

means the shares trade at only 12x whatis still a below-normal earnings level.

Longer term – which we define as aftermanagement’s options-vesting periodexpires in December 2011 – we think theend game here is that C&C is sold to alarge multinational alcoholic-beveragecompany. The cost synergies would besignificant and every asset the companyowns would benefit on the revenue sidefrom being plugged into a more extensivedistribution system. Given those synergiesand prices paid for comparable acquisi-

tions in the past, we estimate the compa-ny’s private market value at around€ 5.50 per share.

You bought shares in Home Depot [HD]during the financial crisis, but have sincesold. Does that say anything about yourviews on the U.S. housing market?

CA: I wouldn’t say we have any particu-lar insight on the timing of the housingrecovery. When we bought Home Depotwe liked the duopoly structure of its mar-ket and thought it had a lot of levers topull in its restructuring under a new CEO.During the worst of the crisis, the marketwas pricing the stock as if there would beno recovery ever. When we sold it lastsummer, the recovery was priced in butwe didn’t have an opinion on when itwould actually arrive. Since we were nolonger getting the improvement to a nor-mal environment for free, we recycled themoney into ideas we thought offeredmore upside.

In your latest investor letter you describeddefensive portfolio moves you were mak-ing based on concerns about inflation andeconomic growth. Would we have seen

that same depth of macro analysis in apre-financial-crisis letter?

BF: We like a lot of people have beentrained to be bottom-up stock pickers andnot worry about the market. The fact is,however, that most of the risks we seetoday in our individual ideas are macro innature, so as stewards of capital weignore those risks at our peril.

Summarize some of your conclusions.

BF: This has already somewhat started toplay out, but our main conclusion wasthat U.S. and global consumers could notabsorb $110-per-barrel oil, $2-per-poundcotton, $7-per-bushel corn, $900-per-tonsteel, etc. without reducing their con-sumption. At the same time, the expira-tion of the Fed’s QE2 program this monthand its lack of viable policy alternativeswas unlikely to result in a positive envi-ronment for equities.

In response, we adjusted our portfoliopositioning in an effort to profit substan-tially from our cautious view while tryingto limit our losses if we were wrong. Wereduced our gross exposure from 95% to75% and our net exposure from around35% to 25%, near the low end of ourtypical ranges. We reduced or fully exitedour most U.S.-GDP-sensitive longs. Weincreased the position sizes of our high-est-conviction longs. On the short side, inaddition to our cotton-related shorts,we’ve sharply increased our positions in avariety of retail and restaurant stocks,representing the more discretionary areasof consumer spending.

We’re curious how you’ve informed yourbroadened focus on all things macro.

BF: It’s not really any different than thework you do to inform yourself about acompany or an industry. You read. Youtalk to people. You learn from the com-panies you own. You subscribe to thebest services in the field, such as ISI,GaveKal, Empirical and Bianco. It clear-ly takes time and energy to do it right,but to do otherwise today strikes us as abig mistake. VII



ON MACRO ISSUES:

The fact is that most of the

risks we see in our individual

ideas are macro in nature, so

we ignore them at our peril.


Operating an offshore drilling rig atwater depths of several thousand feet andoften in terrible weather is no simple task,as BP’s Deepwater Horizon disaster lastyear in the Gulf of Mexico made abun-dantly clear. Yet as complicated as thedrilling is, the analysis involved in invest-ing in companies that provide such rigscan be surprisingly straightforward. Noteasy, mind you, but the key decisionpoints are quite clear.

Take the case of Ocean Rig, theCyprus-based operator of giant, moderndrillships used in deepwater and extreme-weather drilling, four of which are cur-rently operating and two more of whichare planned for delivery by September.Taken private by then high-flying drybulkshipper DryShips [DRYS] in 2008, sharesof Ocean Rig were refloated lastDecember on Norway’s over-the-countermarket, with DryShips retaining a 78%ownership stake. A U.S. Nasdaq listing iscurrently planned for August.

With only six products “for sale,” thecrux of the analysis on Ocean Rig centerson prospective supply and demand fordeepwater rigs and how that will impactcapacity utilization and rental day-rates.Once those assumptions have been made– often with high visibility due to longer-term contracts – it’s relatively easy to cal-culate the company’s resulting estimatedprofitability.

Count Evan Claar of New York’s CBICapital as bullish on both the industry’sand Ocean Rig’s prospects. Ultra-deepwa-ter energy production today accounts formaybe 5 million of the 85 million barrelsof oil equivalent [BOE] produced world-wide on average each day, he says, but theabsolute and relative number of BOEscoming from it over the next decade islikely to increase sharply, as productionin such relatively unexplored areas has toramp up to meet increased overalldemand and to offset natural declines inexisting production.

While demand for the sophisticatedequipment required to deliver this newproduction increases, the supply is likelyto remain somewhat constrained. It takesmore than 30 months to produce thehighest-end units and manufacturers suchas Samsung Heavy Industries and KeppelFELS have the capacity today to producea total of only 25-30 new units per year,many of which have already been con-tracted out before delivery is made. Nextyear, counting planned new deliveries thataren’t yet rented out and existing drill-ships that come off contract, Claar says

that, at most, 25 rigs will be available forrental. Against that, he counts 41 projectscurrently looking to procure rigs.“There’s simply not enough supply to goaround right now,” he says.

That translates into a very positivepricing market. All of Ocean Rig’s drill-ships have been contracted through atleast 2012 at day-rates averaging around$500,000. Assuming $150,000 per day inoperating expenses, 95% total capacityutilization for the company’s six rigs forthe year, and $75 million in overheadcosts, Claar says that should result in

In DeepThe little-known but well-positioned player in what is expected to be a dynamic and growing global marketcan be an investment gem – which is what Evan Claar is betting on with drilling contractor Ocean Rig.

U N C O V E R I N G VA L U E : Ocean Rig


Ocean Rig (Oslo OTC: OCRG)

Business: Cyprus-based owner and opera-

tor of state-of-the-art drilling rigs contracted

out to oil majors for ultra-deepwater and

extreme-weather energy exploration.

Share Information

(@6/29/11, Exchange Rate: $1 = NOK 5.45):

Price NOK 99.0052-Week Range NOK 99.00 – NOK 125.00 Dividend Yield 0.0%Market Cap NOK 13.04 billion

THE BOTTOM LINE

Once its full cash flows move from prospective to actual, its stock lists in the U.S. later

this year and it starts paying a dividend next year, Evan Claar believes the company

can earn the $950 million per-rig valuation currently accorded larger and more estab-

lished peers. At that valuation level, the shares would trade for around NOK 185.


OCEAN RIG PRICE HISTORY

Sources: CBI Capital, company reports, other publicly available information

130

125

120

115

110

105

100

952009 2010 2011

Financials (Est. 2012):

Revenue $1.04 billionEBITDA Profit Margin 62.5%Net Profit Margin 27.7%

Valuation Metrics

(Current Price vs. 2012 Est.):

OCRG S&P 500Forward Est. P/E 8.3 15.8

130

125

120

115

110

105

100

95


some $650 million in EBITDA for thecompany in 2012.

How should that translate into sharevalue? The company’s stock at a recent 99Norwegian kroner currently trades at6.5x that estimate of EBITDA on anenterprise value basis, which adds rough-ly $1.8 billion in projected year-end netdebt to the current market capitalization.Claar believes it’s reasonable to assumethe company – once its full cash flowsmove from prospective to actual, its stocklists in the U.S. and it starts paying a div-idend next year – can earn the $950 mil-lion per-rig valuation currently accordedlarger and more established competitorslike Seadrill. At that level – assuming nochange in the asset base – Ocean Rigshares within the next two or three yearswould trade for around 185 kroner.

The key risks? One is another largeBP-type disaster that either directly

affects Ocean Rig or causes temporary orpermanent changes in the oil majors’ abil-ity to hunt for oil offshore. While clearlya risk, says Claar, he argues that height-

ened sensitivity after the BP spill hasworked somewhat in Ocean Rig’s favor.“Oil companies don’t want to be seen asmore cost-conscious than safety-con-scious,” he says. “That increases thedemand for new, safer rigs and the pricethey’re willing to pay.” The second big

risk is that the company’s fortunes areclosely tied to the price of oil, although hebelieves oil prices would need to staybelow $80 for an extended period of timefor the day-rates Ocean Rig is earning tomaterially decline.

One back-door way to own the compa-ny’s shares would be through publiclytraded DryShips, whose CEO, GeorgeEconomou, also calls the shots at OceanRig. DryShips’ 78% stake in Ocean Rig iscurrently worth some $2 billion, while itsown market cap – after a vertigo-inducingfall in its share price from as high as $120pre-crises to around $4 today – is only$1.4 billion. That seeming bargain bringswith it a leveraged-to-the-hilt companyoperating in a terrible competitive envi-ronment in drybulk shipping. “It’s techni-cally a cheaper way in,” says Claar, “butyou have to have a very strong stomachfor what’s happening in that market.” VII


U N C O V E R I N G VA L U E : Ocean Rig

ON THE BP SPILL’S IMPACT:

Oil majors don’t want to be

seen as more cost-conscious

than safety-conscious. That

increases new-rig demand.

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In a landmark Stanford Universitystudy started more than 40 years ago,psychologist Walter Mischel devised adeceptively simple test of four-year-olds'self-control. Each child was escorted intoa small gameroom and allowed to pickone treat from a tray of marshmallows,cookies and pretzel sticks. The researcherthen offered the child a choice: eat thetreat right away, or don't eat it and waituntil the adult returned, at which pointthey could have another treat and eatthem both. Video footage of the experi-ments is fascinating, as the children visi-bly struggle with the decision. In the end,only about 30% held out for the delayed,extra gratification of an additional treat.

When the 650 study participants werein high school, Mischel sent out detailedquestionnaires to their parents, teachersand academic advisors. From the respons-es, he found clear evidence that the sub-jects who as four-year-olds had been ableto delay gratification had fewer behav-ioral problems and were higher academicachievers. Their SAT scores, for example,were an average of 210 points higher.Similar research efforts have producedcomparable results: One Duke Universitystudy of more than 1,000 subjects trackedover 30 years – after controlling for IQand socioeconomic status – showed thatchildren with the least self-control at ayoung age had more frequent healthissues, more financial problems and weremore likely to have trouble with the law.

The patient children in the studies ulti-mately were more successful in using rea-son to control their impulses. Rather thanfocusing on the “hot stimulus” of eating amarshmallow now, they were able tofocus on the longer-term goal of gettingtwo marshmallows and devised variousstrategies to resist immediate temptation.Some sat on their hands. Others pretend-ed to play hide-and-seek under the desk.Still others paced the room singing theirfavorite songs from Sesame Street. As

Mischel, now a Columbia University pro-fessor, recently recounted in an interviewin The New Yorker: “If you can deal withhot emotions, then you can study for theSAT instead of watching television. Youcan save more money for retirement. It'snot just about marshmallows.”

In adults, this ability to manage emo-tions successfully and remain focused onlonger-term goals often comes down tobeing aware that those emotions are at

work. Here's how author Jonah Lehrerexplains it in his first-rate book on deci-sion-making, How We Decide: “How dowe regulate our emotions? The answer issurprisingly simple: by thinking aboutthem. The prefrontal cortex allows eachof us to contemplate his or her own mind,a talent psychologists call metacognition.We know when we are angry; every emo-tional state comes with self-awarenessattached, so that an individual can try tofigure out why he's feeling what he's feel-ing. If the particular feeling makes nosense, then it can be discounted – the pre-frontal cortex can deliberately choose toignore the emotional brain.”

Overt defensive strategies can alsoblunt emotions’ impact. In Greek mythol-

ogy, Ulysses knew the sirens' song wouldentice him to follow them, which he alsoknew was a bad idea. Recognizing hisweakness, he instructed his sailors to tiehim to the mast when they starting singing.In an investment context, such defensivestrategies might mean committing never tomake an emotionally charged buy-or-selldecision without sleeping on it first orgoing through a checklist of critical ques-tions to always answer.

A further check on emotions undulyaffecting decisions is to foster a decision-making environment in which a diversityof viewpoints is freely shared. In How WeDecide, Lehrer describes how the adventof “Cockpit Resource Management”[CRM] principles have contributed to asignificant decline in pilot error in air-plane emergencies. Rather than defer tothe pilot in all circumstances, CRM callsfor constant communication amongflight-crew members, shared responsibili-ty for catching errors and the obligationof all to make dissenting opinions known.“Bad decisions happen when the mentaldebate is cut short,” writes Lehrer, “whenan artificial consensus is imposed on theneural quarrel.”

Value investors, of course, know allabout the importance of self-control andits corollaries of patience, perseveranceand long-term thinking. But the tempta-tions to behave differently are always outthere – keeping the population of tradi-tional value investors in check. As JoelGreenblatt once put it: “Value investingstrategies have worked for years andeveryone's known about them. They con-tinue to work because it's hard for peopleto do, for two main reasons. First, thecompanies that show up on the screenscan be scary and not doing so well, sopeople find them difficult to buy. Second,there can be one-, two- or three-year peri-ods when a strategy like this doesn'twork. Most people aren't capable ofsticking it out through that.” VII

Value Investor Insight 19June 30, 2011

O F S O U N D M I N D : Self-Control


Good Things Come ...Value investors know all about the importance of self-control and its corollaries of patience, perseveranceand long-term thinking. Right? But the temptations to behave differently are always out there.


We’re asked from time to time howthe stocks featured in Value InvestorInsight by specific investors have faredsince appearing in the newsletter. It's alegitimate question and we meticulouslytrack it as best we can. We know, forexample, that had one bought an equallyweighted portfolio of the four stocks rec-ommended by James Crichton and AdamWeiss of Scout Capital at then-currentprices in our December 2, 2010 issue –Verisk Analytics, Coca-Cola Enterprises,Sensata Technologies and QR National –the portfolio would be up 23.6%, notcounting dividends. The comparable riseover that time in the Russell 3000: 8.1%.

As satisfying as it is to report such per-formance, the big flaw in any such analy-sis is that it requires an assumption aboutwhether or when the recommendedstocks are sold. Whether the analysis ofintrinsic value turns out to be right orwrong, it may take years for that tobecome clear or it may happen in threemonths. Making a call on that is obvious-ly of comparable importance to the buydecision in determining the success of anyinvestment. If after doing your own workyou end up buying something an investor

has recommended in VII, that sell callnecessarily has to be your own.

We bring all this up because in review-ing Scout Capital's 13F filing for 2011'sfirst quarter we noticed that Weiss andCrichton had sold their entire stakes intwo of the stocks they'd highlighted inVII, Verisk Analytics and Coca-ColaEnterprises. They had owned each stockfor a year or less and made well-reasoned,in-depth arguments for their continuedlong-term upside. The share price of eachwas up, but not markedly since the issuedate. What had changed?

In this case, not much, as Adam Weissexplains: “There is nothing negative we'dsay about either company. Sometimes wesell when we've been right, sometimes wesell when we've been wrong, and some-times we sell because there are four morethings that became more compelling.That is what happened here. There's acommon expectation that people who doprimary research in the depth we do toarrive at their own fundamental view ofwhat value is over a three- to five-yeartime horizon should hold the stocks forthat long. That can happen, but the reali-ty is it often doesn't work out that way.”

In other words, timing can be every-thing: “When we first bought Coca-ColaEnterprises [in February 2010 when itannounced a dramatic restructuring in atransaction with parent Coca-Cola] webelieved it was at a special moment in itshistory. Same thing with Verisk, which wefirst bought when its property/casualtyinsurer owners took the company publicin an IPO. I would stress that we couldget back into either of them at any time,but when we looked at our portfolio dur-ing the first quarter, we felt we had other,fresher ideas more in the early innings ofthe market's misunderstanding than themiddle innings, and we will consistentlymake that swap.”

Brilliant reporters that we are, weasked Weiss if he'd share one or two ofthe new ideas with us. Scout is still assess-ing and accumulating those positions, hesays, “so call me back in two weeks.”Will do. VII


E D I TO R S ’ L E T T E R

Value Investor Insight™ is published monthly at www.valueinvestorinsight.com (the “Site”), by Value InvestorMedia, Inc. Chairman and Co-Editor-in-Chief, Whitney Tilson; President and Co-Editor-in-Chief, John Heins. Annual subscription price: $349.©2011 by Value Investor Media, Inc. All rights reserved.All Site content is protected by U.S. and international copyrightlaws and is the property of VIM and any third-party providersof such content. The U.S. Copyright Act imposes liability of upto $150,000 for each act of willful infringement of a copyright.

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Value Investor Insight and SuperInvestor Insight are published at www.valueinvestorinsight.com (the “Site”) by Value Investor Media, Inc. Useof this newsletter and its content is governed by the Site Terms of Use described in detail at www.valueinvestorinsight.com/misc/termsofuse. Foryour convenience, a summary of certain key policies, disclosures and disclaimers is reproduced below. This summary is meant in no way tolimit or otherwise circumscribe the full scope and effect of the complete Terms of Use.

No Investment AdviceThis newsletter is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solic-itation would be illegal. This newsletter is distributed for informational purposes only and should not be construed as investment adviceor a recommendation to sell or buy any security or other investment, or undertake any investment strategy. It does not constitute a gen-eral or personal recommendation or take into account the particular investment objectives, financ ial situations, or needs of individualinvestors. The price and value of securities referred to in this newsletter will fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of all of the original capital invested in a security discussed in this newslet-ter may occur. Certain transactions, including those involving futures, options, and other derivatives, give rise to substantial risk and arenot suitable for all investors.

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