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  • 2007VICW Pabrai

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    Ashish Agrawal
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    This document discusses Abhimanyu's dilemma in investing in USAP, a company that manufactures steel products. It describes how Abhimanyu purchased shares of USAP in 2002 when it was trading at $14-15 per share based on strong past earnings, but the stock price dropped to $5 per share in 2003 due to an industry slump. Abhimanyu chose to do nothing and wait as the intrinsic value was still over $5 per share. In subsequent years as the company's financials improved and the stock price rose to $10-11 and then $15 per share, Abhimanyu's decision to be patient and wait was validated, and he ended up realizing strong annualized returns of

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    This document discusses Abhimanyu's dilemma in investing in USAP, a company that manufactures steel products. It describes how Abhimanyu purchased shares of USAP in 2002 when it was trading at $14-15 per share based on strong past earnings, but the stock price dropped to $5 per share in 2003 due to an industry slump. Abhimanyu chose to do nothing and wait as the intrinsic value was still over $5 per share. In subsequent years as the company's financials improved and the stock price rose to $10-11 and then $15 per share, Abhimanyu's decision to be patient and wait was validated, and he ended up realizing strong annualized returns of

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
    Flag for inappropriate content
    Download as pdf or txt
    95 views19 pages

    2007VICW Pabrai

    Uploaded by

    Ashish Agrawal
    This document discusses Abhimanyu's dilemma in investing in USAP, a company that manufactures steel products. It describes how Abhimanyu purchased shares of USAP in 2002 when it was trading at $14-15 per share based on strong past earnings, but the stock price dropped to $5 per share in 2003 due to an industry slump. Abhimanyu chose to do nothing and wait as the intrinsic value was still over $5 per share. In subsequent years as the company's financials improved and the stock price rose to $10-11 and then $15 per share, Abhimanyu's decision to be patient and wait was validated, and he ended up realizing strong annualized returns of

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
    Flag for inappropriate content
    Download as pdf or txt
    of 19

    Abhimanyus Dilemma

    www.pabraifunds.com

    Risk vs. Uncertainty

    www.pabraifunds.com

    Low Risk + High Uncertainty = High Rewards

    www.pabraifunds.com

    Abhimanyus Dilemma

    www.pabraifunds.com

    Founded 1994; Bought 3 mothballed facilities for close to zero. Dunkirk: $1 Million Cash Paid; $10-20 Million a year in FCF potential. potential Bought stock at $14-15/share in 2002. Had earned $1.26/share $1 26/share in 2001 Dunkirk could add $1.50 to $2.50/share in earnings in a few years. How could I miss? No downside; Huge Upside!

    www.pabraifunds.com

    One year later (2003), USAP was trading at $5/share versus our purchase price of $15 in 2002! Severe industry slump slump. Business was break-even. break even Dunkirk losing money. What was intrinsic value? Hard to tell, but easily over $5/share. Conclusion: Do nothing. Wait!

    www.pabraifunds.com

    www.pabraifunds.com

    One year later (2004), USAP was trading at $10-11/share. Dunkirk slightly profitable. Rest of business profitable. Huge backlog and growing growing. IV easily over $11/share. Conclusion: Do nothing. Wait!

    www.pabraifunds.com

    www.pabraifunds.com

    Rule No. 1 and Rule No. 2. In 2005, USAP trades at $15/share. Now we can sell at break-even. Buy More? Sell? Do Nothing? Answer: Buy More: IV over $30/share. Thesis finally playing out after 3 yrs.

    www.pabraifunds.com

    www.pabraifunds.com

    In 2006, USAP is rocking! Huge Backlog. All plants running fullout 24x7 Stock goes over 90% of IV Start Selling: ROI 19-100% annualized.

    www.pabraifunds.com

    www.pabraifunds.com

    A Current Dhandho Stock Pick


    Meets seven of the nine criteria in The Dhandho Framework: 1. 2 2. 3. 4. 5 5. 6. 7. Simple Business Existing Business Distressed Business in a Distressed Industry Durable Moat Few Bets, Bets Big Bets, Bets Infrequent Bets Margin of Safety Huge! Low-Risk; High-Uncertainty Business

    Do your own thorough research before making any investment. Pabrai Funds has lost money in the past on several stocks.

    www.pabraifunds.com

    Delta Financial Corp. (DFC)


    Subprime Mortgage Lender. Severely Distressed Industry Several bankruptcies in 2007 Delta is very different, but its stock price is at a throwaway price due to the severe industry distress and misunderstood business. 50% loans originated at own Retail Centers 1.1% (Ultra-Low) 78% average Loan to Value. 92% of Loans are Fixed Rate Conservative portfolio accounting revenue recognized over life of loan but expenses recognized immediately.
    www.pabraifunds.com

    Delta Financial Corp. (DFC)


    Minimal California Exposure Mostly a Re-fi Lender. Not affected much by housing starts. 1/3 owned by insiders; Plus Pabrai Funds owns 19.8% About 1/2 of the total stock is locked locked up up 20% of shares are shorted. Float is quite thin. If you buy, please use limit orders. Market Cap: ~250 250 Million Earnings out today higher volume today. Solid Management They are the biggest owners . Conservative.
    www.pabraifunds.com

    Delta Financial Corp. (DFC)


    Intrinsic Value: Mortgage Banking Earnings Engine: Securitized Portfolio Fair Value Adj. Adj : Excess Book Value: >$1.50/share >$8 31/share >$8.31/share ~$4.25/share

    Earnings will be growing as now there is less competition and DFC has been hiring and growing its business. Earnings could be much higher than $1.50/share in 2 2-3 3 years. Lets apply a 15x multiple on it. Intrinsic Value: >$35/share; Current Stock price: $10.20!!
    www.pabraifunds.com

    Delta Financial Corp. (DFC)

    Pabrai Funds Buys DFC


    Subprime Meltdown

    www.pabraifunds.com

    Thank You. Mohnish Pabrai Managing Partner Pabrai Investment Funds Irvine, California, USA mpabrai@pabraifunds.com Tel. e +1949.275.5652 9 9 5 565 www.pabraifunds.com
    www.pabraifunds.com

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