Pabrai Wagons Stock by Stock Analysis - WAGNX

Key Concepts

• Value Investing: A strategy of investing in stocks that are trading below their intrinsic value.
• ETF (Exchange Traded Fund): A type of investment fund that holds assets such as stocks, bonds, or commodities, and trades on stock exchanges.
• Intrinsic Value: The actual worth of a company, independent of its market price.
• Margin of Safety: The difference between the intrinsic value of a stock and its market price, providing a buffer against errors in judgment or unforeseen events.
• P/E Ratio (Price-to-Earnings Ratio): A valuation ratio that compares a company's current share price to its per-share earnings.
• Wide Moats: A sustainable competitive advantage that protects a company's long-term profits and market share.
• Capital Allocation: The process of distributing a company's financial resources to various investments and projects.
• Illiquid Stakes: Investments that cannot be easily bought or sold without significantly affecting their price.
• Redemptions: When investors withdraw their money from a fund.
• Emerging Markets: Countries with developing economies that are experiencing rapid growth.
• Frontier Markets: Markets that are less developed than emerging markets.

Monish Pabrai's ETF and Investment Philosophy

The video discusses Monish Pabrai's new ETF, which allows investors to invest alongside him. The presenter expresses admiration for Pabrai's storytelling and marketing skills, noting his fame stemming from good returns and a notable dinner with Warren Buffett and Guy Spier. However, the presenter also raises concerns about Pabrai's recent performance, the shift from zero-fee to high-fee funds, and the management of multiple funds.

Performance and Concerns

• Past Performance: Pabrai's funds reportedly achieved exceptional returns, outperforming the S&P 500 by 10x in the early stages.
• Recent Performance: The last 8-9 years have seen a significant decline, with cumulative returns dropping by 60%. This suggests that "something hasn't gone well in Pabrai world."
• Fund Structure and Fees: The presenter notes the disappearance of zero-fee funds and the current environment of high fees across multiple funds (five to six funds). This is contrasted with the teachings of Buffett and Munger, who advocate for simplicity and low fees.
• Marketing: There's a perception that Pabrai uses Buffett and Munger for marketing, and that his stories, while engaging, can sometimes be questionable.
• Fund Management Complexity: Pabrai manages several entities, including private partnerships, Pabrai Investment Funds, and the Pabrai Vencores Fund. He employs an algorithm to distribute investments across his five funds, which the presenter finds complex.
• Zero-Fee Funds: The presenter recalls discussions about zero-fee funds in the 2010s, but notes that current funds have significant fees, which is not in line with Munger and Buffett's advice.
• Redemptions and Forced Selling: A key concern is that Pabrai has had to sell investments due to redemptions from a fund. This highlights the difficulties of managing other people's money, especially in a fund structure, and can force sales into unfavorable market conditions.
• Illiquid Stakes: Pabrai holds significant stakes in illiquid companies, such as Edelweiss Financial Services, which makes exiting positions difficult, especially during market downturns. This is presented as a potential risk.

Pabrai's Investment Principles

Pabrai's investment principles are rooted in value investing, emphasizing:

• Low P/E Ratios: Seeking companies trading at a P/E ratio of one.
• Distinguishing Risk and Uncertainty: Risk is defined as the possibility of losing money, while uncertainty is not knowing the outcome (e.g., getting two or four, as long as both are positive).
• Avoiding "Cannibals" and "Spawners": This likely refers to avoiding companies that destroy value or are overly reliant on external factors without strong internal fundamentals.
• "Circle the Wagons" Principle: Inspired by Warren Buffett, this involves holding onto a few great investments for a long time.
• Key Investment Criteria:
  • Hold onto great businesses for dear life.
  • Do not pay fancy prices for great businesses.
  • Invest in companies with wide moats.
  • Reinvest capital at high rates.
  • Avoid accounting gimmicks and excessive leverage.

Analysis of Specific Investments

The presenter analyzes several of Pabrai's investments, providing details on their market cap, P/E ratios, growth prospects, and associated risks.

1. Edelweiss Financial Services (India)

• Portfolio Weight: 20%
• Market Cap: Approximately $1.2 billion (Indian Rupees 10,000 crore).
• P/E Ratio: Reported as 20.
• Pabrai's Thesis: Edelweiss is expected to spin off four to five companies, each potentially valued at $1 billion or more, leading to a 4-5x increase in value compared to the current market capitalization. These businesses include alternative asset management, mutual funds, asset reconstruction, housing finance, and insurance.
• Presenter's Concerns:
  • High Valuation: The P/E ratio of 20 is considered high, especially for an emerging market.
  • Profitability: Profit after tax is around 450 crore (approximately $50 million), which is a small percentage of the market cap.
  • Emerging Market Risks: Potential for financial crises in emerging markets and the depreciation of the Indian Rupee against the dollar.
  • Margin of Safety: The presenter questions the margin of safety, especially if the spin-offs do not achieve the projected valuations. The dividend yield of 1.3% is considered low for an emerging market.
  • Liquidity: Significant stake in an illiquid company.

2. TAV Airports (Turkey)

• Business: Operates 15 airports in eight countries.
• Pabrai's Thesis: Pabrai highlighted Paris Almati airport as potentially worth $10 billion, while the entire TAV stock market cap is $2.5 billion, suggesting significant upside.
• Presenter's Concerns:
  • Valuation: While there's potential upside, the presenter notes that the profits are not "great value" when considering debt.
  • Turkey Risks: Investing in Turkey carries inherent political and economic risks.
  • Dividend Cut: The company has cut its dividend to invest heavily in Paris.
  • Expected Return: A potential 10% return (2.5% yield + 8% growth) is not considered sufficient for the risks associated with investing in Turkey, where a higher immediate yield is desired.

3. Warrior Met Coal (USA)

• Business: A coal mine with a replacement cost exceeding $5 billion.
• Pabrai's Thesis: Expectation of increased demand and exploding prices for metallurgical coal during future booms, leading to huge cash flows. The new Blue Creek mine is expected to be a low-cost producer.
• Presenter's Concerns:
  • Late Entry: The stock has already recovered significantly, making it difficult to buy at a margin of safety. The presenter feels it's "too late" for this investment.
  • Coal Industry Risks: The long-term viability of coal as an energy source is uncertain due to environmental concerns and the transition to renewable energy.

4. Mongolian Mining Corporation (Mongolia)

• Business: Another coal play, developing a new gold mine.
• Pabrai's Thesis: Potential for good cash flows and dividends from the gold mine at full capacity.
• Presenter's Concerns:
  • CEO Selling Shares: The CEO has been selling shares, which the presenter views as a questionable action, raising concerns about potential political risks or other undisclosed issues.
  • Market Cap: A billion-dollar market cap is not considered a "great position" by the presenter.

5. Homebuilders (USA)

• Business Model: Capital-light, strong buybacks, high cash flows, and good returns on equity.
• Presenter's Concerns:
  • Peak Valuation: The presenter believes they are investing at the peak of the housing cycle, with high stock prices.
  • Downturn Needed: As a value investor, the presenter prefers to invest during a downturn to benefit from recovery.
  • "Too Good to Be True": The current positive outlook makes the presenter hesitant to invest.

6. US Car Dealerships

• Valuation: Low P/E ratio of 8, with buybacks and cash flows.
• Presenter's Concerns:
  • Financing Risks: The dealerships are also involved in financing car sales, which could lead to issues if the financing market experiences a significant downturn.
  • Focus: Unclear if the focus is on dividends or buybacks.

7. Offshore Valaris

• Business: Drilling ships.
• Presenter's Observation: The presenter notes that Valaris was discussed previously and was cheap, but is unsure if Pabrai has sold it. The ships are considered cheap compared to their value, suggesting potential upside.

Presenter's Overall Opinion and Conclusion

The presenter acknowledges Pabrai's valuable insights but expresses significant reservations about investing in his current offerings.

• Limitations of Fund Management: Fund managers are compelled to stay invested, which can lead to taking on more risk and investing in less-than-ideal situations.
• Lack of Conviction: The presenter struggles to find the conviction to invest in Pabrai's current names, as they don't "slap them in the face" with obvious value.
• Emerging Market Risks: The presenter finds the risks associated with emerging markets like India and Turkey too high, especially when combined with illiquid stakes and potential for large redemptions.
• Marketing vs. Reality: The presenter questions whether the current investments truly align with the "great businesses with wide moats" narrative often promoted.
• Expected Return Calculation: The presenter estimates an expected return of around 9% for Pabrai's portfolio, factoring in low P/E ratios, growth, and emerging market risks.
• Learning Opportunity: Despite the reservations, the presenter intends to continue following Pabrai, as there is always something to learn from his discussions.

The presenter concludes by placing Pabrai's approach on their research quadrant and will continue to monitor his investments, hoping for opportunities to arise in the future.