Cara Denver Jacobsen Likes Tam Airlines

Cara Denver Jacobsen, Nierenberg, D3 Family Funds– 10 Years in Micro Cap Land
Cara is a portfolio manager at the fund.

• D3 Funds
o Typically hold 8-12 stocks
o Typically hold 6-7 years
o Seek growth – not cigar butts
o 3 year lockup
o Micro caps are least efficient; they look for ‘insight information’
o Pay attention to macro as well
• Micro Cap
o Least Efficient capitalization
o Historic small cap performance advantage
o Liquidity as an investment style (Roger Ibbotson)
o Ability to influence management and board
• Concentrated
o Competitive advantage (now each idea better)
o Diversification vs. Di-worsification (too many stocks dilute best ideas)
o High Conviction (must be able to ‘move the needle’)
o Ability to influence management and board (yes, intentionally here twice)
• General idea sources
o Read…
o Look at out of favor issues
o Look at lots of issues
o Look at multiple industry cycles
o Look at lots of sources
? Home health care 08’-09’, Tech 02’, Gold mining 04’, Mortgage/Housing 08’-09’
? 2012-13’ potential ideas
• Natural gas (more rational behavior), Solar, Western Europe, Tankers (scrap prices above ship values, order books low)
• Specific idea sources
o 52 week lows
o Daily price % decliners
o Read a lot…
o Screens
o Spin outs
o Busted IPO’s

• 300 Limited partners and CEO’s of former invested companies
• 13-F’s of smart people (issues may not be down long)
• Build high conviction
  • Pattern recognition in similar situations
  • Relative values of similar situations
  • Normalized operating and value metrics
  • Learn the specific industry
  • Dig for value creation opportunities
  • Look at multiple cycles for specific company
  • Due diligence – in addition to typical items
    • Interview major shareholders
    • Focus on the people running the business – in a long term investment, they are your partners
    • TAM S.A. (NYSE:TAM) Brazil
      • Loyalty Coalition Network – (TAM air frequent flier program)
      • Spin out from the airline business  – Network effect (barrier to entry) in established relationship
      • Market share leader
      • Uses ‘points’ which are like float in insurance and have an expiration
      • Spun out 2-1/2 years ago & average ROE has been 37%
      • Cash flow machine
        • Compare to toll road
        • Negative working capital
        • 10 month float
        • Minimum fixed assets and little capex
• Risk is poor use of cash
• TAM merger could lead to additional business
• Reasons for depressed prices
  • Spin out IPO so parent is controlling shareholder
  • Complicated accounting
  • Only 1 comparable company (Aeroplane, Canada)
  • Potential TAM conflict of interest
  • Q&A
    • Define micro-cap
      • Up to $1.5B if not followed
      • Average under $400M
• How concentrated in a single name?
  • Up to 20%

Value Investor Conference: Omaha, Nebraska – May 4rd, 2012
Dustin Hunter, SunRift Capital Partners (www.sunriftcp.com)
(These notes are to the best of my recollection and trusty ink pen. Discrepancies are due to my error in understanding & transcribing.)

Cara Denver Jacobsen, Nierenberg, D3 Family Funds– 10 Years in Micro Cap Land
Cara is a portfolio manager at the fund.