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Finding Opportunities with Sam Zell

By    |   Tuesday, 06 January 2009 09:13 AM

Sam Zell, the billionaire vulture investor, has been in the news quite a bit recently.

In early December, Zell took newspaper giant Tribune Company into bankruptcy. He had acquired control of the company a year earlier in an $8.2 billion deal. Strapped for cash, Zell has tried to sell parts of the company, including the Chicago Cubs, which may be worth as much as $1 billion.

This setback had no discernable impact on the unstoppable dealmaker. Less than a month later, it was reported that Zell had acquired 8 percent of hotel operator Starwood Hotels & Resorts Worldwide and was looking to buy more.

Zell made his first fortune buying and selling cheap real estate from distressed owners in the 1970s as credit tightened. He sold his real estate investment trust Equity Office Properties to Blackstone Group for $39 billion cash in 2007, near the top in the real estate market.

Now worth an estimated $5 billion, Zell is well positioned to take advantage of the current credit crisis.

Zell takes a hands-on approach to investments. He thinks investors should look past the financial statements and understand the business. He wants to see good management and a good business model.

He also wants managers to have as much at stake as investors do. His Tribune deal may not have worked as planned, but employees were significant investors in the original deal.

This investment philosophy forms the basis for this week’s stock screen:

  • As a vulture investor, Zell looks for companies that are marked down in value. This criterion can be quantified by searching only for stocks that have underperformed the market over the past year.

  • The best way to quantify management is by looking at return on equity. We will look only at stocks that have an average five-year return on equity greater than the industry average. This will help identify companies with good long term management and business models.

  • Finding companies with below-average debt allows Zell to use the company’s assets to finance the deal.

  • Insider ownership of at least 15 percent ensures that the interests of management are aligned with those of the shareholders.

  • In order to have an impact on his wealth, Zell needs to make large investments, which restricts the investable universe to only the largest companies, quantified as the largest 15 percent by market capitalization.

    We are left with nine companies on the list.

    Dick's Sporting Goods (DKS) operates more than 400 stores. Retailers have had a tough year in the shopping mall as well as in the stock market and DKS is no exception, having lost almost 45 percent of its market value in the last 12 months. Analysts expect earnings growth of more than 15 percent a year for the long-term, which makes DKS slightly undervalued at the recent price of 15.03.

    DST Systems (DST) is an IT company that stands to profit from President-elect Obama’s pledge to computerize medical records. The company consistently attains a return on equity greater than 30 percent in an industry where the average is less than 9 percent. At a recent price of 39.64, the stock is priced at valuations well below its peers.

    eBay (EBAY) is expected to see earnings decline by 3 percent next year before the company returns to doubl-digit growth for the long-term. eBay owns PayPal, which recently announced a partnership with Wal-Mart. The retailing giant now allows online customers to pay with PayPal on their Web site, even offering customers a $20 credit to their PayPal account on purchases over $20. eBay believes merchants like PayPal in economically challenging times because of the low costs that it offers. The recent price of 14.66 seems to ignore the possibilities that PayPal offers.

    Garmin (GRMN) is the industry leader in GPS navigation systems, with a 55 percent market share. At a recent price of 21.77, GRMN yields 3.4 percent and has significant growth potential with a new product expected to be released soon based on Google’s Android phone.

    Google (GOOG) is unlikely to be a takeover target of Zell or anyone else. The company has more than $14 billion in cash on its books, and is likely to be acquiring other companies or introducing new products based upon their comprehensive research and development capabilities. At a recent price of 321.32, GOOG is priced at what seems like a bargain of 15 times next year’s earnings.

    Morningstar (MORN) is a well-known mutual fund ratings service. MORN also provides investment consulting, produces independent equity research, and publishes investment newsletters. With $300 million in cash and no debt, the company is well positioned to survive a market downturn. The company recently told investors that, “We believe the recent market downturn will leave investors looking for trusted sources of independent investment research. Morningstar remains well-positioned to meet that need.” Recent price: 36.96

    Southern Copper Corporation (PCU) offers a bet on economic recovery. Copper has turned higher ahead of the economy in the past making it an early signal that recovery is on the way. PCU was recently trading at 18.27, paying investors a 7.4 percent yield which appears to be safe based upon earnings estimates and the company’s billion-dollar cash balance.

    Titanium Metals (TIE) provides the lightweight metal to airplane manufacturers. Insiders have taken advantage of the recent price decline to add to their already sizable positions. The company delivered average earnings growth of 50 percent a year for the past five years, but will face pricing pressures in the short-term. At a recent price of 9.26, TIE has a P/E ratio of 9 and a dividend yield of 3.2 percent.

    Washington Post (WPO) is one of Warren Buffett’s long-term holdings. Berkshire Hathaway owns more than 18 percent of the company. Newspaper stocks are down an average of more than 80 percent of the past year. WPO has declined by only 50 percent, making it the best performer in the group. The company is aggressively cutting costs and pays a dividend yield of 2.1 percent at the recent price of 413.20.

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    Sam Zell, the billionaire vulture investor, has been in the news quite a bit recently.In early December, Zell took newspaper giant Tribune Company into bankruptcy. He had acquired control of the company a year earlier in an $8.2 billion deal. Strapped for cash, Zell has...
    Tuesday, 06 January 2009 09:13 AM
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