Crimson Wine Group Follow-up

by hihih222

Since I submitted my ValueInvestorsClub writeup on CWGL, the stock is up 25%. Short-term price action shouldn’t be a determinant factor in whether or not my idea holds up, but it is comforting to see the stock move so quickly. In reality, I think investors will still be rewarded over the next 3 years if they buy now as many catalysts are still on their way(including the much-awaited 10-K filing).

Since my post, many across the blogosphere have also found Crimson Wine as a potential opportunity. I have yet to come across a bearish post that can’t be easily refuted by going a bit deeper into the sec filings and looking at 1) how the future will differ from the past due to the revealing of hidden value, 2)how incentives all favor shareholders, and 3)looking at intrinsic asset valuations . I think the best bear case now is still that if we go into a recession, high operating leverage could force CWGL into high losses. In any case, the hedge fund TAM  Capital Management posted its bull thesis on Market Folly just 5 days after I posted mine, and I thought it would be interesting to see how my thesis differed from that of a professional hedge fund manager. I definitely have a lot to learn.

TAM Capital Management’s Thesis (Marketfolly)

1) I missed the whole story on the incentive

That would imply that Leucadia management believed it was worth more than stated book value since they decided to spin this off. If Leucadia management were willing to accept stated book as the valuation than there would be no reason for the spin.

In my own analysis, I said that insider ownership, low liquidity and company size would cause the company to be incorrectly valued, but the fact that Leucadia and Jefferies clearly disagreed on the value of Crimson and that Jefferies’ base case(valuing the company at book value) implied that Leucadia’s experienced management believed Crimson was worth much more than book was lost on me. In hindsight this seems obvious, but I missed it and it is crucial to understanding the whole story and just how lucrative this stock could be.

2) I also missed some detail on the valuation.

I pretty much nailed my valuation on the earnings side, perhaps going into even further detail than the hedge fund’s report did, but my asset analysis(perhaps more important since it’s backed in hard assets rather than expectations for future earnings) was lacking. The hedge fund’s asset analysis was a very non-speculative thought out and well-sourced asset reproduction value analysis. It didn’t seem to use any expensive or exclusive resources to find reproduction values, so it was a process I should have been able to undergo myself. While their result was much the same as mine(I used a comparable multiple, they used intrinsic value), their conservative intrinsic valuation was of higher quality and would’ve given a lot more certainty to the valuation. Moreover, they used more than one comparable, which I now realize is a large flaw in my comparable’s analysis.

Anyways, I have a lot to learn, but I think I did pretty well on the Crimson Writeup. Hopefully I will be back soon, I have quite a few potential ideas as the market continues to buzz with spin-offs, activists, and special situations galore.