Cara Denver Jacobsen Likes Tam Airlines

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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

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  • 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.