Value Investing

Denali Investors 2009 Annual Meeting [Slides]

Denali Investors‘ slides from the 2009 annual meeting.

An Uncommon Fund…

  • Modeled after the original Warren Buffett
  • Partnerships hedge fund of the 1950’s
  • Value-Based
  • Special Situations
  • Opportunistic
  • Concentrated
  • Net Cash

Our framework is rare in today’s world

Overview

Objective: Produce superior long-term absolute and relative returns versus the S&P index

Strategy: Combine “Generals” and “Workouts”; Focus on identifying value-based investment ideas and margin of safety

Portfolio: Build a portfolio of 5 – 15 very attractive, non-market correlated investment ideas which have high conviction through fundamental research

“Generals” + “Workouts”

Generals

  • Undervalued stocks
  • Neglected
  • Long time horizon
  • Favorable risk/reward
  • Shorts
  • Flawed business, management
  • Unrealistic expectations
  • Negative catalysts

Workouts

  • Non-recurring; Catalyst
  • Internal/External
  • Mergers
  • Tender Offers
  • Spin-offs
  • Capital Structure Arbitrage
  • Reorganizations
  • Liquidations
  • Bankruptcies

Flexible search for opportunities…

Investment Philosophy

Value: Buy Cheaply. Invest at steep discounts to intrinsic (business) value

Fundamentals: Be an Owner. Approach investments as an owner of a business, rather then chasing momentum or technicals

Concentration: Be Selective. A handful of great, highconviction ideas is better than a hundred mediocre ones

Long-term View: Use Time. Patient long-term investing creates a distinct advantage over short-term speculation

Net Cash: Don’t Risk Ruin. Leverage is hazardous no matter the number of PhD’s

Deal Background

Precision Drilling (PDS) buys Grey Wolf (GW)

  • GW and PDS announced a merger in Aug 2008
  • Tail end of an energy boom.
  • The election merger consideration for each GW share was either 1) $9.02 in cash per share, or 2) 0.4225 share of PDS. Election subject to proration.
  • By December 2008, in combination with the market market, GW traded down from $9 per share to about $6 per share. PDS from $20 – 25 to $6 – 7 per share.

An opportunity hiding in plain sight…

Possible Outcomes

Outcome Band includes:

  • The deal closes (PDS buys GW)
  • The deal breaks (PDS does not buy GW)
  • GW shareholder makes cash election
  • GW shareholder makes share election
  • GW shareholder makes no election (defaults to share election)

Something in between…

Ways to Place an Investment The Approach…

“Short” GW & hedge PDS

  • Counterintuitive (typical to long target / short acquirer)
  • Tactics are critical
  • Standard merger arb analysis on GW alone is limited
  • Insurance/hedge “cost”
  • Combination increases safety
  • “The Ratio” – 1/10 risk/reward ratio

Denali Investors

See full PDF below.