Value Investing With a Contrarian Bent – Lisa O'Dell Rapuano [NOTES]

Value Investor Conference: Omaha, Nebraska – May 4rd, 2012

Lisa O’Dell Rapuano, Lane Five Capital – Value Investing with a Contrarian Bent

Lisa is the Founder and Portfolio Manager for Lane Five.

Two broad categories for Investments at Lane Five:

• “Compounders” – Great business at great price due to short term problem
  • Often not a severe mispricing
  • Not always as “great” as they seem
    • Technological changes, obsolescence
    • Cyclical or Regulatory risks
    • Shorter duration/elimination of competitive advantages
    • Out of Favor, unloved, cheap contrarian investments
      • Higher expected returns, but also wider range of returns…
      • Uncorrelated with the Indices – Performance driver is not market action
        • Creates highly differentiated return profile for portfolio

• Lane Five is hunting for:
  • News Lows
  • Hi price percentage down
  • Elevated trading volume
  • Sell side down grade
  • Hi short interest

• Characteristics of a potential candidate
  • Former good business model
  • Former high valuation
  • There is a competitor with better margins
  • Signs of investor capitulation, disgust
  • No visibility, no catalyst
  • Arguments for their competitive decline

• Cautions
  • OFTEN CONCENSUS IS RIGHT!
  • Determining consensus id difficult (Value group can have a bias)
  • Timing matters
  • Risk management/Hedging (Lane Five does not short much)
  • Loneliness (You are not in the ‘group’)
  • Retrospect Effect (No respect when you are right)
  • Complacency vs. patience

• Temperament for investors
  • Great amount of patience
  • Weirdness…
  • Ability to handle criticism
  • Ability to stand alone
  • Resourcefulness (Must hone analytical ability)

• Guidance in Analysis
  • Risk – easier…  Return – more difficult
  • Analyze the negative arguments
  • Analyze value “hooks” that could limit downside
  • Understand management’s ability and incentives
  • Understand potential for change
  • Understand how the story can unfold
    • Timing
    • Share changes
    • Earnings momentum

• Case study– Corintian Colleges (COCO)
  • Low end of the For Profit Education segment
    • Very negative press and Regulatory pressure
• Massive mispricing (emotional)
• Late 2011, bankruptcy rumors
  • Had sellable assets, good general cash levels, ability to meet covenants and pay off debts
• Vocational diploma programs huge benefit to U.S.
  • In 2011, placed 42,00- students in jobs
  • Typical student has 10k debt = High ROI if they graduate
• Currently, COCO is about $3
  • ½ normal FCF $175m
  • Per DCF, price implies $45m Cash Flow for 10years with no perpetuity
  • Earnings Power baseline $0.40
  • With 0 growth – $8-$10 stock
  • With modest growth – $9 -$20+ stock
• What could go right?
  • Competition could abandon the space
  • Regulatory environment could be less bad
  • Drop out levels below risky levels

• Q&A
  • COCO investment currently underwater; lessons?
    • In general, sometimes too early=wrong
    • Regulatory situation and ‘Steve Eisman’ effect powerful
• How do you get comfortable with management?
  • Don’t fall in love… form a view with facts before meeting them
  • Red Flags: (My note: This is where I almost did a spit-take)
    • Too tan
    • Too fit
    • Too much golf
    • On their 3^rd wife (Second wife is like a Mulligan)
    • Too much body gold (bling)

Lisa O’Dell Rapuano, CFA 

Founder and Portfolio Manager: 

Lisa founded Lane Five in January, 2007. She managed a long/short equity hedge fund for Matador Capital Management for over two years prior to founding Lane Five, and spent over ten years at Legg Mason Capital Management. At Legg Mason, she was the Director of Research and portfolio manager of the Legg Mason Special Investment Trust. She co-managed this fund with Bill Miller from 1997-2000. As sole manager of the fund from 2001-2003 she achieved top-decile returns as tracked by Lipper. Lisa graduated from Yale in 1988 and received her CFA designation in 1994.

These notes are collected by:

Dustin Hunter, SunRift Capital Partners (www.sunriftcp.com) on behalf of ValueWalk.