Doing What Wall Street Doesn’t

Last year, I was at a dinner with a bunch of fertilizer analysts from Wall Street and Toronto. To my right was a guy who was really getting on my nerves:

Annoying analyst: We have PotashCorp at overweight. We believe with the structural deficit in potash that —

Me (interrupting): I have a sell on it and dropped coverage.

Annoying analyst: You did what? What did you do that for? Is your firm making a strategic change in direction? You can’t cover fertilizers and drop PotashCorp! (chuckling incredulously.)

Me: I can. I don’t have to cover anything. I cover what I like. When the Street hates the stock, I’ll put it back at buy.

I think the other analysts thought I had six heads. But I do remember one analyst made a point of coming around to me afterward and asking for my card.

Most of the time I just go with the flow. I am an easygoing fellow. But every now and then I like to tweak these clowns. I remember I was at a conference in which about a dozen companies presented. After one company’s presentation, I got tired of hearing all the softball questions and the overly promotional CEO fielding them. Listening to him, you’d think his company were the greatest thing since sliced bread, instead of a flimsy money loser.

So I got in the queue to ask a question. Finally, I got the chance to ask the obvious:

Me: This may seem like a simple question, but I hope to get a serious response… Why doesn’t your company make any money?

CEO: Excellent question!

But sometimes the Street is overly pessimistic. I remember being at a conference in February 2009. There were about 16 companies presenting. The mood was glum. One CEO stood up and said, “It feels like a funeral.” It did. The world was ending. In six weeks, we’d all be eating dog food and howling at the moon. So everyone seemed to think.

At lunch, at about the midway point, I was just trying to make conversation with the analyst next to me:

Me: So you have any favorites you like so far?

Analyst: How about none of them.

I’ll always remember that. Here were some great little industrial companies selling cheaply. And no one was excited. I left that conference determined to recommend Flowserve (NYSE:FLS), which has done very well since. I met the CEO after his presentation, standing alone in the hallway drinking his ice water. I was the only one who came up to him.

A year later, I went to the same conference. The stock had doubled. But the room was full and the CEO wasn’t alone standing in the hallway after giving his talk.

Sometimes I have to hurdle some skepticism from people who are not sure what I’m up to. I remember I called up one CFO of a small company. I told him who I was and what I did and that I was thinking of recommending his stock, but I had some questions first. I remember he said, “Well… How much is this going to cost me?”

Ha! Obviously, he had been approached by others before who wanted some kind of compensation for writing favorably about his stock. The idea that I was truly independent, beholden only to my subscribers, was refreshing and unusual to him.

Anyway, enough of my reminiscences. It is good to rub elbows with the Street now and then. Sometimes you do get some good nuggets…

Recently, I wrote about the big opportunity shaping up in Europe as its banks look to unload assets. I recently listened to Dan Och give a presentation at a Goldman Sachs conference in New York, which had a little more insight into that idea.

Remember, Och is a pretty darn good investor himself. His Och-Ziff Master Fund has returned nearly 10% annually since inception in 1998. And it’s done so with about a third of the volatility of the market as a whole. So Och’s opinions are not like some random CEO popping off about the market.

Let’s get to the presentation…

Asked about the investment landscape in 2012, Och had this to say about Europe:

“We are starting to see certain areas [that] we consider to be asymmetric opportunities. There’s been some substantial dislocation in credit and structured credit in the US and Europe that are very good opportunities for us… Longer term, we see some big opportunities. For example, European banks at some point are likely to start selling substantial amount of assets, and we’re well positioned for that…

“The vast majority of assets that have to be sold have not been sold. If you look at the proposal that was made in late October by the various European authorities that talked about increasing Tier 1 capital on their banks, a big part of how they intend to do that is selling assets…”

“We’ve been in London for 14 years. We have 65 people. We have a distressed credit team. We have a structured credit team. We have a real estate team. We have all of the resources and capabilities. We’ve done an enormous number of transactions there.”

After hearing this, I started to think OZM itself might also wind up being a good play on the “Biggest Fire Sale in History.”

Regards,

Chris Mayer,
for The Daily Reckoning