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A Practical Definition
An investment is an operation which upon thorough analysis promises safety of principle and a satisfactory rate of return. Operations not meeting these requirements are speculative.
Investment is most prudent when it is most businesslike Ben Graham All intelligent investing is value investing Charlie Munger
GAD CAPITAL MANAGEMENT
www.gadcapital.com
4. 5. 6.
A sound investment philosophy A good search strategy Ability to value business & assess quality of management Discipline to say no Patience Courage to make a significant investment at point of maximum pessimism
The Intelligent Investor by Ben Graham Stick to what you know You are part owner of a business so think like one Let the market SERVE you, not GUIDE you
2.
See what the smart investors are buying www.gurufocus.com, www.stockpickr.com Value GAD CAPITAL MANAGEMENT Line
www.gadcapital.com
3.
Stick to your circle of competence Invest with managers who think like owners because they are owners Alignment of interest is another type of margin of safety Seek those who EAT THEIR OWN COOKING!
Discipline to Say NO
Good Businesses do not mean good investments (Google) Businesses are undervalued at one price, fairly valued at another price, and overvalued at yet another price. Always ask yourself how much do you stand to lose before thinking about how much you stand to gain.
5. 5.
Patience
Businesses are usually very cheap in times of distress Be greedy when others are fearful Warren Buffett
Have the conviction to make a big investment when your data and reasoning tells you to do so.
Assisted Living Participants were performing poorly and stock prices were falling. Industry participants were disappearing due to poor balance sheets & high costs of capital High barriers to entry (4 years before properties become cash flow even
Not surprisingly, Sunrise was being punished as well although the company seemed to be well managed and GADcapitalized. CAPITAL MANAGEMENT
www.gadcapital.com
Founded in 1981 by husband/wife team of Paul & Theresa Klaaseen who owned 10% of SRZ at the time. Operated over 200 assisted living centers in U.S., Canada, & U.K Properties did not take the form of traditional assisted living communities instead they looked liked Victorian houses, high rises and elegant mansions While driving home from the airport one day, I happened to pass a Sunrise facility in Atlanta and stopped in for a visit very impressive
The Numbers
$11.7 million to build using $2.5M in equity Sell for $16M or pre-tax profit of $4.3M (170% ROI) Retained 20% residual interests SRZ was building & selling about 20-30 a year, so that meant about $60M in income or $3 a share. Management fees were growing at over a 25% annual rate
EPS: $0.59(2000), $0.79 (2001), $1 (2002), $1.29 (2003) Avg. resident stay was 2.5 yrs and growing 29% a year so safe to assume that 20% was achievable over next 4-5 years
Valuation
15-20x multiple comes to $19 to $25 a share. Multiple is reasonable as it is below the EPS growth rate and implies a PEG ratio < 1
Between 2000 and 2002, completed six transactions where properties were sold for an average of 53% premium to book value $800M worth of property on balance sheet in 2002 Past transactions suggested that properties were undervalued by as much as 50%
Valuation
Book value was understated by as much as $14 a share. Tangible BV: $19 a share Real BV: ~ $33 a share Management Division Value: $19 - $25 Intrinsic Value: $52 - $58 per share Actual Stock Price: ~$28 a share Very high margin of safety $2.55 (NI) + $1.25 (Dep.) - $0.25 (Cap Ex) = $3.60 14-15x FCF equals $50 to $53.65 per share
Thank you.
Contact Info:
Gad Capital Management 1260 S Milledge Ave, Ste. C Athens, GA 30606 +1.706.340.4817 sham@gadcapital.com