Spring 2012

At $20 per share, Avon common stock represents an opportunity to buy an $11 billion dollar iconic global beauty products company near its historical trough value. The company has strong market shares in emerging markets and a new management team that can improve operations and margins, potentially leading to significant equity value creation in the next 2.5 years.

The investor has been long Honda for a number of years, indicating confidence in its performance relative to competitors.

The investor has been long Toyota for a number of years, suggesting a belief in its stability and growth compared to other automakers.

The investor is short Ford, indicating a belief that the company may underperform compared to its peers.

The investor is short GM, suggesting a negative outlook on its performance relative to other automotive companies.

The investor is short Chinese property companies, indicating a belief in their declining value and potential risks in the sector.

The investor is long Macau casinos, suggesting confidence in their recovery and growth potential in the gaming industry.

Kodak is cited as a historical example of a value trap, where investors misjudged its declining business model and cash flow management.

Joy Global is a leading manufacturer of coal-mining and surface mining equipment, which is essential as coal continues to provide a significant portion of electricity generation in the U.S. Despite current market weakness due to low natural gas prices, global coal demand is expected to grow, particularly in emerging economies like China and India. Joy Global's strong competitive position and recurring revenue from its installed base make it a solid long-term investment.

Smuckers is a resilient company that performs well even in challenging economic conditions, making it a strong candidate for investment during downturns. The company was acquired at a low valuation of 6-7x EBIT while still maintaining growth, which presents a compelling opportunity for long-term gains.

Thermo Fisher Scientific is another company that has shown resilience in tough economic times, making it a worthwhile investment. Similar to Smuckers, it was acquired at a low valuation while still growing, indicating potential for future appreciation.

The market is currently undervaluing Owens-Illinois due to a focus on short-term earnings rather than its long-term earnings potential. The company is expected to earn $3.00 per share in 2012 and $3.40 the following year, with a strong earnings power exceeding $4. This suggests that the share price could potentially double within the next year.

Apple is currently trading at 12x earnings, which is attractive given its strong product lineup and significant cash reserves. The anticipated release of the Apple television set this year adds to the company's growth potential, making it a solid long-term investment.

Julian Robertson believes Apple is the world's cheapest stock, suggesting that if it had existed in the 1970s, it would be trading at five times its current value. He is considering shifting his TIPS into Apple due to its growth potential.

Julian Robertson is considering shifting his TIPS into something like Google, indicating a belief in its growth potential alongside Apple.

Julian Robertson loves WuXi, a Chinese employment agency for PhDs in the drug industry, as it disintermediates the pharmaceutical-focused PhD market and is experiencing earnings growth of about 20% a year while selling at 10x earnings.

We recommend a long position in Ingersoll Rand stock with a target price of $58.00, representing a ~43% upside from the current share price of $40.61. The stock has positive operational and cyclical catalysts expected over the next 12-18 months, and it currently trades at a 15-20% discount to its peer group. Key investment highlights include industry-leading market positions, significant free cash flow generation, and strong macro tailwinds in the construction sector.

The common stock of Legg Mason offers a compelling long opportunity as the market is discounting the past more than the future. With significant tax credits valued at $6.50 per share, LM trades at less than 5x EV/EBITDA and less than 8x cash earnings. The company is poised for a rerating as improved performance translates into reported financials, supported by catalysts such as better fund performance and an accretive stock buyback program.

H&R Block is an attractive investment trading at 11x earnings with an 11% free cash flow yield. Misunderstandings about its core business and excessive fears regarding liabilities from a discontinued subsidiary create a dislocation between price and intrinsic value. The company is expected to achieve significant earnings growth due to regulatory changes in the assisted tax market and plans to re-lever its balance sheet to return capital to shareholders, presenting a favorable asymmetric risk profile.

I recommended a short position in Baldwin-United at $24 based on language in the 10-K and 10-Qs, uneconomic annuities, leverage issues and a host of other concerns. The stock promptly doubled on me, but later the state insurance regulator seized Baldwin-United’s insurance subsidiaries, validating my concerns.

I was particularly focused on Integrated Resources which was playing unbelievable accounting games and financing itself with junk debt issued at 14%. The company was overpaying for office buildings and syndicating their ownership interest in uneconomic deals, leading to heavily negative cash flow and overstated earnings.

Jim Chanos is currently short the natural gas industry in the U.S. due to a technological innovation in fracking that has led to a significant oversupply, driving prices down to $2 per MCF. Many companies in this sector are struggling with weakened balance sheets and are engaged in questionable accounting practices, making it a fertile area for short selling.

Chanos believes that the coal industry is negatively impacted by the rise of natural gas, which is now half the price of coal. As utilities shift from coal to natural gas, the coal industry is expected to face significant challenges, making it a potential short opportunity.

Chanos mentions for-profit education as an area of interest, implying that there may be investment opportunities or challenges worth discussing, although he does not provide a specific position or rationale.

Nestlé represents a great opportunity for patient investors due to its ability to reinvest in markets like Africa, which may not provide immediate returns but have significant long-term potential. The company's strong brand awareness and management's capacity to endure short-term challenges make it a compelling investment.

Unilever is highlighted for its ability to operate in a socially responsible manner while also reducing costs, which can enhance efficiency and profitability. The company's commitment to sustainability and responsible reinvestment is seen as a positive attribute for long-term investors.

The interview discusses the flawed business model of the for-profit education sector, suggesting that high student debt levels and poor job outcomes will lead to increased defaults and a breakdown of the business model. This presents a short opportunity in companies operating in this space.

MasterCard is a preferred investment due to its lower valuation at 12x forward earnings compared to its growth potential. The company has significant international exposure and a new CEO with a strong global background, which positions it well for future growth, especially in emerging markets.

Nestlé has substantial growth opportunities in emerging markets where it currently has limited presence. The company's historical performance shows strong returns, and it can continue to grow by investing in these new markets.

Tom Russo believes that Martin Marietta has a strong business model that has been affected by the post-2008 economic environment, particularly in infrastructure and construction. Despite current challenges, he sees potential due to the company's pricing discipline and low price elasticity for their products.

Brown-Forman is a family-controlled company with a strong core business that has been undervalued due to misconceptions about its whiskey business. The company has successfully expanded its international presence, particularly with Jack Daniels, and has the capacity to invest for future growth without risking its stability due to family control.

E.W. Scripps has a history of investing in long-term growth opportunities, such as the development of Scripps Network Interactive, which has proven successful despite initial losses. The company's management has shown a willingness to endure short-term profit declines for the sake of building a valuable business over time.

Charlie Munger expressed discomfort with owning Freddie Mac due to concerns about management's integrity and the company's shift towards accumulating mortgages instead of securitizing them. He believes that the management's actions are corrupting a fundamentally good business and are not transparent about their strategies.

Kraft has valuable products like Chrystal Light, but faces significant pressure on its core businesses due to private label competition. The company is attempting to expand offshore and diversify its operations, which could lead to improved returns.

While I am intrigued by Pepsi, I have avoided owning it due to concerns about the carbonated drinks industry's challenges with sugary products. However, a potential spin-off of Frito-Lay could present an interesting investment opportunity.

If Mars were publicly traded, it would be an interesting investment due to its diverse businesses in pet food and confectionery. However, the company has not been as well run recently, which raises concerns about its potential.

I appreciate Danone's entrepreneurial approach in the yogurt category, but it has generally been more expensive than Nestle. The company's future seems more dependent on its CEO's personality compared to Nestle's stable culture.

Owens-Illinois is the largest maker of glass bottles in the world, with a strong market position and stable demand for glass packaging. The company has a solid EBITDA margin and pricing power, making it a favorable investment despite recent challenges.

Oracle is an excellent business that is currently out of favor with the market. The company has evolved its revenue model to include a significant recurring revenue stream from Update & Support fees, which has grown substantially over the years. This shift enhances the stability and predictability of Oracle's earnings, making it an attractive investment at current prices around $30.

Coca-Cola is one of the greatest businesses in the world, epitomizing sustainable competitive advantage. The stock was trading in the low $40s during late 2008 and early 2009, presenting a considerable discount to its intrinsic value at that time, making it a strong investment opportunity.

WD-40 operates an asset-light business model with high revenue and EBIT per employee, allowing it to maintain strong profit margins and manage costs effectively. The company has a solid dividend payout ratio and is actively buying back shares, indicating a commitment to returning capital to shareholders. At current levels, the stock is undervalued with a 7% free cash flow yield, making it an attractive long-term investment.

Colgate was identified as a strong business that presented an attractive buying opportunity after a recent sell-off. The investor emphasizes the importance of monitoring quality companies for potential entry points, suggesting confidence in Colgate's long-term prospects.