Portfolio Manager's Review -- The Superinvestor Issue, May 28, 2009, by The Manual of Ideas

PORTFOLIO MANAGER’S REVIEW Edited by the Research Team of

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A Monthly Publication of BeyondProxy LLC www.manualofideas.com May 28, 2009

When asked how he became so successful, Buffett answered: “we read hundreds and hundreds of annual reports every year.”

With

John Mihaljevic, CFA Managing Editor, The Manual of Ideas [email protected]

“If our efforts can further the goals of our members by giving them a discernible edge over other market participants, we have succeeded.”

Top 5 Ideas In This Report

EchoStar Corporation (Nasdaq: SATS) ……………… p. 57

EMC Corporation (NYSE: EMC) …………………. p. 59

Republic Airways (Nasdaq: RJET) ………………. p. 62

Ticketmaster Entertainment (Nasdaq: TKTM) ……………… p. 64

WellCare Health Plans (NYSE: WCG) ………………… p. 68

Also Inside

Editor’s Commentary …………….. p. 4

Portfolios with “Signal Value” …. p. 5

Exclusive Interview: Zeke Ashton p. 27

Exclusive Interview: Igor Lotsvin p. 35

100 Superinvestor Stocks ……… p. 38

Value Investing Congress Notes p. 139

Essay: Want to Be Next Buffett? p. 153

About Portfolio Manager’s Review

Our goal is to bring you compelling investment ideas on the basis of intrinsic value versus market price.

John Mihaljevic, editor, is a fund manager, former banker and analyst. He is a member of Value Investors Club, an exclusive community of top money managers, and has won the Club’s prize for best investment idea. John is a trained capital allocator, having studied under Yale chief investment officer David Swensen and served as research assistant to Nobel laureate James Tobin. John holds a BA in Economics, summa cum laude, from Yale and is a CFA charterholder. He resides in New York City with his wife and two kids.

THE SUPERINVESTOR ISSUE

► Snapshot of 100 companies owned by superinvestors ► 30 companies profiled and analyzed

► Proprietary selection of Top 5 candidates for investment ► Plus: Latest holdings of top investors

► Plus: Exclusive Interviews with Zeke Ashton, Igor Lotsvin ► Plus: Notes from Value Investing Congress

Superinvestor companies mentioned in this issue include Alexander's, American Express, American Railcar, AmeriCredit, AmerisourceBergen,

Amylin Pharma, Apartment Investment, Ark Restaurants, Borders, Bristol Myers Squibb, Burlington Northern, Canadian Natural, Capital Southwest,

CarMax, Cemex, Chesapeake Energy, Coca-Cola, ConocoPhillips, Consolidated-Tomoka Land, Costco Wholesale, Coventry Health Care, Cresud, CSX, Ctrip.com International, Deckers Outdoor, Dell, Dillard's, DISH Network, Dr Pepper Snapple, Eaton, eBay, EchoStar, Einstein Noah Restaurant, EMC,

Facet Biotech, Fair Isaac, Fairfax Financial, Fidelity National Financial, General Dynamics, Goldman Sachs, Greenlight Capital Re, Harman International,

Harvest Natural, Health Net, Helix Energy Solutions, Hertz Global Holdings, Hess, Horsehead, Ingersoll-Rand, Intel, International Assets Holding, Iteris, Jefferies, Johnson & Johnson, Jones Apparel, Lab Corp. of America, Lear,

Leucadia National, M&T Bank, MasterCard, MEMC Electronic Materials, Moody's, Mosaic, PDL BioPharma, Pfizer, Potlatch, Precision Castparts,

Premier Exhibitions, Procter & Gamble, Republic Airways, RHI Entertainment, Rockwell Collins, Ryanair Holdings, Schlumberger, Sears Holdings, Spirit

AeroSystems, St. Joe, Strayer Education, Syneron Medical, SYSCO, TAL International, Target, Telemig Celular Participacoes, Ticketmaster, Trident Microsystems, tw telecom, U.S. Bancorp, United Parcel Service, UnitedHealth,

URS, USG, Visa, Waters, WellCare Health Plans, WellPoint, Wells Fargo, Wendy's Arby's, Winthrop Realty Trust, Yahoo!, Yum! Brands, and more.

(profiled companies are underlined)

Table of Contents

EDITOR’S COMMENTARY ............................................................................ 4

PORTFOLIOS WITH “SIGNAL VALUE” ....................................................... 5

BILL ACKMAN, PERSHING SQUARE ............................................................................................... 6 ZEKE ASHTON, CENTAUR ............................................................................................................ 7 BRUCE BERKOWITZ, FAIRHOLME .................................................................................................. 8 WARREN BUFFETT, BERKSHIRE HATHAWAY ................................................................................. 9 IAN CUMMING & JOE STEINBERG, LEUCADIA .............................................................................. 10 DAVID EINHORN, GREENLIGHT ................................................................................................... 11 BRIAN GAINES, SPRINGHOUSE ................................................................................................... 12 TOM GAYNER, MARKEL GAYNER ................................................................................................ 13 GLENN GREENBERG, CHIEFTAIN ................................................................................................ 14 MASON HAWKINS, SOUTHEASTERN ............................................................................................ 15 CHRIS HOHN, CHILDREN’S INVESTMENT FUND ........................................................................... 16 CARL ICAHN, ICAHN PARTNERS .................................................................................................. 17 SETH KLARMAN, BAUPOST ........................................................................................................ 18 EDDIE LAMPERT, RBS PARTNERS ............................................................................................. 19 DAN LOEB, THIRD POINT ........................................................................................................... 20 STEVE MANDEL, LONE PINE ...................................................................................................... 21 MOHNISH PABRAI, PABRAI FUNDS .............................................................................................. 22 RICH PZENA, PZENA INVESTMENT MANAGEMENT ....................................................................... 23 KEN SHUBIN STEIN, SPENCER CAPITAL ...................................................................................... 24 PREM WATSA, FAIRFAX ............................................................................................................. 25 MARTY WHITMAN, THIRD AVENUE .............................................................................................. 26

EXCLUSIVE INTERVIEW WITH ZEKE ASHTON ....................................... 27

EXCLUSIVE INTERVIEW WITH IGOR LOTSVIN ....................................... 35

SNAPSHOT OF 100 SUPERINVESTOR-OWNED COMPANIES ............... 38

IN ALPHABETICAL ORDER .......................................................................................................... 38 BY MARKET VALUE ................................................................................................................... 40 NET CASH AND OTHER METRICS ............................................................................................... 42 STOCK PRICE PERFORMANCE ................................................................................................... 44 FREE CASH FLOW ..................................................................................................................... 46 P/E MULTIPLES ......................................................................................................................... 47 HISTORICAL AND PROSPECTIVE EPS ......................................................................................... 48 LATEST QUARTERLY EPS SURPRISE ......................................................................................... 50 REVENUE AND EPS GROWTH .................................................................................................... 52 PERCENTILE RANK WITHIN INDUSTRY ......................................................................................... 54 INSIDER BUYING AND OWNERSHIP ............................................................................................. 55

TOP 5 SUPERINVESTOR SELECTIONS .................................................... 56

ECHOSTAR (SATS) – OWNED BY EINHORN, JOHN GRIFFIN ........................................................ 57 EMC CORPORATION (EMC) – OWNED BY ACKMAN, EINHORN .................................................... 59 REPUBLIC AIRWAYS (RJET) – OWNED BY EINHORN ................................................................... 62 TICKETMASTER ENTERTAINMENT (TKTM) – OWNED BY EINHORN, WEITZ ................................... 64 WELLCARE HEALTH PLANS (WCG) – OWNED BY BERKOWITZ .................................................... 68

NEW OR INCREASED SUPERINVESTOR HOLDINGS ............................. 70

AMERICAN EXPRESS (AXP) – OWNED BY BUFFETT, BERKOWITZ ................................................ 71 BURLINGTON NORTHERN SANTA FE (BNI) – OWNED BY BUFFETT, WATSA .................................. 74 EBAY (EBAY) – OWNED BY HAWKINS, MILLER ........................................................................... 77 FACET BIOTECH (FACT) – OWNED BY KLARMAN ....................................................................... 80 PDL BIOPHARMA (PDLI) – OWNED BY KLARMAN ....................................................................... 83 HARMAN INTERNATIONAL (HAR) – OWNED BY EINHORN ............................................................. 86 PREMIER EXHIBITIONS (PRXI) – OWNED BY SELLERS ................................................................ 89 SEARS HOLDINGS (SHLD) – OWNED BY LAMPERT, BERKOWITZ, MILLER .................................... 91 ST. JOE (JOE) – OWNED BY BERKOWITZ, WHITMAN .................................................................. 93 WATERS CORPORATION (WAT) – OWNED BY GREENBERG ........................................................ 96

© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com May 28, 2009 – Page 3 of 156

UNCHANGED SUPERINVESTOR HOLDINGS ........................................... 99

AMERICREDIT (ACF) – OWNED BY CUMMING/STEINBERG, BERKOWITZ..................................... 100 CONSOLIDATED-TOMOKA LAND (CTO) – OWNED BY WINTERS, WHITMAN ................................. 103 HARVEST NATURAL RESOURCES (HNR) – OWNED BY PABRAI .................................................. 105 JEFFERIES GROUP (JEF) – OWNED BY CUMMING & STEINBERG ............................................... 108 LEUCADIA NATIONAL (LUK) – OWNED BY BERKOWITZ, PABRAI ................................................. 111 MEMC ELECTRONIC MATERIALS (WFR) – OWNED BY EINHORN .............................................. 114 PFIZER (PFE) – OWNED BY BERKOWITZ .................................................................................. 116 SYNERON MEDICAL (ELOS) – OWNED BY KLARMAN ................................................................ 120 TAL INTERNATIONAL (TAL) – OWNED BY BERKOWITZ .............................................................. 122 USG CORPORATION (USG) – OWNED BY BUFFETT, WATSA, WEITZ ......................................... 125 YAHOO! (YHOO) – OWNED BY ICAHN, ASHTON, MILLER .......................................................... 128

REDUCED OR ELIMINATED SUPERINVESTOR HOLDINGS ................. 130

AMERISOURCEBERGEN (ABC) – OWNED BY PZENA, ROBBINS .................................................. 131 ARK RESTAURANTS (ARKR) – OWNED BY RICHARDSON, GREENBLATT .................................... 133 DELL (DELL) – OWNED BY HAWKINS, GREENBERG, WATSA ..................................................... 135 URS CORPORATION (URS) – OWNED BY EINHORN ................................................................. 137

NOTES FROM VALUE INVESTING CONGRESS, MAY 5-6 .................... 139

ZEKE ASHTON, CENTAUR CAPITAL ........................................................................................... 139 JOHN BURBANK III, PASSPORT CAPITAL ................................................................................... 141 J. CARLO CANNELL, CANNELL CAPITAL .................................................................................... 142 DAVID CHU AND IGOR LOTSVIN, SOMA ASSET MANAGEMENT .................................................... 143 CHARLES DE VAULX, INTERNATIONAL VALUE ADVISERS ............................................................ 144 BRIAN GAINES, SPRINGHOUSE CAPITAL ................................................................................... 145 SCOTT KLEIN, BEACH POINT CAPITAL MANAGEMENT ................................................................ 146 DAVID NIERENBERG, D3 FAMILY OF FUNDS .............................................................................. 147 JED NUSSDORF, SOAPSTONE CAPITAL ..................................................................................... 148 DAVID RABINOWITZ, KIRKWOOD CAPITAL ................................................................................. 149 GUY SPIER, AQUAMARINE CAPITAL .......................................................................................... 150 WHITNEY TILSON AND GLENN TONGUE, T2 PARTNERS ............................................................. 151 WILLIAM WALLER AND JASON STOCK, M3 FUNDS ..................................................................... 152

ESSAY: WANT TO BE THE NEXT WARREN BUFFETT? ....................... 153

This report is printed on recycled paper that is FSC certified and endorsed by the Rainforest Alliance.

© 2009 by BeyondProxy LLC. All rights reserved. www.manualofideas.com May 2009 – Page 5 of 156

Portfolios With “Signal Value”

Revealing the Top Ideas of Top Investors

“Signal value” as opposed to “noise.” We present the

holdings of some of the world’s top investors. We look for

investors who have amassed impressive track records over

long periods of time. We choose these investors carefully

to avoid the noise inherent in most 13F-HR filings.

Top investors included in this section:

William Ackman, Pershing Square

Zeke Ashton, Centaur

Bruce Berkowitz, Fairholme

Warren Buffett, Berkshire Hathaway

Ian Cumming & Joe Steinberg, Leucadia

David Einhorn, Greenlight

Glenn Greenberg, Chieftain

Brian Gaines, Springhouse

Tom Gayner, Markel Gayner

Mason Hawkins, Southeastern

Chris Hohn, Children’s Investment Fund

Carl Icahn, Icahn

Seth Klarman, Baupost

Eddie Lampert, RBS (ESL)

Dan Loeb, Third Point

Steve Mandel, Lone Pine

Mohnish Pabrai, Pabrai Funds

Rich Pzena, Pzena Investment

Kenneth Shubin Stein, Spencer

Prem Watsa, Fairfax

Marty Whitman, Third Avenue

Missing your favorite superinvestor? Let us know at [email protected].

MOI Signal Rank answers the question, “What are this

investor’s top ten ideas right now?” Rather than simply

presenting each investor’s largest holdings as of the recently

filed quarter end, the MOI’s proprietary methodology ranks

the companies in each investor’s portfolio based on the

investor’s current level of conviction in each holding, as

judged by the MOI.

Our proprietary methodology takes into account

a number of variables, including the size of a position in an

investor’s portfolio, the size of a position relative to the

market value of the corresponding company, the most recent

quarterly change in the number of shares owned, and the

change in the stock price of a position since the most recent

quarterly filing date.

For example, an investor might have the most

conviction in a position that is only the tenth-largest

position in such investor’s portfolio. This might be the case

if an investor invests in a small company, resulting in a

holding that is simply too small to rank highly based on size

alone. On the other hand, such a holding might represent

19.9% of the shares outstanding of the subject company,

suggesting a high level of conviction. Our estimate of the

conviction level would rise further if the subject company

has a 20% poison-pill threshold, thereby suggesting that the

investor has bought as much of the subject company as is

practically feasible.


Bruce Berkowitz, Fairholme Bruce Berkowitz, manager of The Fairholme Fund, has been one of the most successful value-oriented investors of the past decade. From inception on December 29, 1999 through December 31, 2008, The Fairholme Fund has delivered a cumulative return, net of expenses, of 153.92%, versus a return of -27.83%, before expenses, for the S&P 500 Index. MOI Signal Rank™ – Top Current Ideas of Fairholme

Market Price ($) Shares Owned Holdings

Value Latest Filing ∆ Since Latest ∆ Since as % of

Company Ticker ($mn) Date Date Filing Filing 12/31/08 Co. Fund

1 Sears Holdings SHLD 6,271 49.87 45.71 9% 14,338,939 12% 12% 12%

2 Spirit Aerosystems SPR 1,825 13.21 9.97 32% 19,012,064 21% 18% 3%

3 St Joe JOE 2,207 23.30 16.74 39% 18,456,326 18% 20% 6%

4 American Express AXP 28,864 24.23 13.63 78% 23,813,050 76% 2% 6%

5 Hertz Global HTZ 2,338 7.01 3.93 78% 42,738,138 25% 13% 3%

6 AmeriCredit ACF 1,411 10.24 5.86 75% 32,307,322 0% 25% 3%

7 Leucadia National LUK 4,992 19.84 14.89 33% 18,249,025 2% 8% 5%

8 TAL International TAL 308 9.94 7.32 36% 2,436,697 0% 8% 0%

9 Markel MKL 2,817 280.96 283.88 -1% 750 0% 0% 0%

10 Bristol-Myers Squibb BMY 40,529 20.01 21.92 -9% 39,700 -18% 0% 0%

Top Holdings of Fairholme – By Dollar Value

Market Price ($) Shares Owned Holdings

Value Latest Filing ∆ Since Latest ∆ Since as % of

Company Ticker ($mn) Date Date Filing Filing 12/31/08 Co. Fund

1 Pfizer PFE 103,514 15.01 13.62 10% 88,241,991 -1% 1% 22%

2 Sears Holdings SHLD 6,271 49.87 45.71 9% 14,338,939 12% 12% 12%

3 Forest Laboratories FRX 7,012 22.91 21.96 4% 20,067,400 -2% 7% 8%

4 WellPoint WLP 22,710 46.88 37.97 23% 10,061,624 -16% 2% 7%

5 American Express AXP 28,864 24.23 13.63 78% 23,813,050 76% 2% 6%

6 Northrop Grumman NOC 15,795 48.09 43.64 10% 7,319,676 -18% 2% 6%

7 Boeing BA 31,546 43.00 35.58 21% 8,722,727 -4% 1% 6%

8 St Joe JOE 2,207 23.30 16.74 39% 18,456,326 18% 20% 6%

9 UnitedHealth UNH 33,068 27.51 20.93 31% 13,158,010 -28% 1% 5%

10 Leucadia National LUK 4,992 19.84 14.89 33% 18,249,025 2% 8% 5%

New Positions Sold Out Positions

None Berkshire Hathaway (BRK/B)

DISH Network (DISH)

Jefferies Group (JEF)

Mercury General (MCY)

Meritor Savings Bank (MSVP)

Mueller Water (MWA/B)

Portfolio Metrics Sector Weightings

Portfolio size $5.5 billion

Top 10 as % of portfolio 81%

Median market value $4.7 billion

Average market value $23.5 billion

Median price to earnings 9x

Median price to book 1.5x


Exclusive Interview with Zeke Ashton

Zeke Ashton of Centaur Capital Partners spoke eloquently on the topic of value investing and risk management at the Value Investing Congress in Pasadena earlier this month. We found Zeke’s presentation enlightening and asked him to elaborate on some of his key points. A week or so ago, we conducted an exclusive interview with Zeke, and it’s our pleasure to bring it to you here.

Before we proceed to the interview, we should point out that Zeke’s approach to risk management has worked. In 2008, the Centaur Value Fund was down 6.9%, trouncing the 37.1% and 40.0% declines of the S&P 500 and Nasdaq Composite indexes. From inception in August 2002 through the end of 1Q09, the Centaur Value Fund gained 134.6%, net of fees and expenses, versus returns of 15.1% for the Nasdaq Composite and -0.3% for the S&P 500 Index.

MOI: You spoke recently on the topic of value investing and risk management. The “backdrop” was the somewhat surprising fact that a number of prominent value investors suffered debilitating losses in the market collapse of 2008 and early 2009. Adherence to “margin of safety” principles apparently didn’t help. Why?

Zeke Ashton: I think that is a very good question, and I don’t think there is any one easy answer. Part of it was simply because very few investors were prepared for such an extreme negative scenario as the one that ultimately played out. I know we didn’t foresee things deteriorating as much as they did. What transpired in late 2008 and early 2009 was so far outside of the range of experience for most people that it didn’t seem like a plausible scenario twelve months before. With perfect 20/20 hindsight, of course, it is easy to see the warning signs that were present, but most investors simply continued to do the things which had rewarded them in the past, not knowing that this time might be different.

We and many other value investors have historically been rewarded for buying in times of fear and uncertainty, as well as for purchasing stocks that were cheap relative to asset values or normalized earnings power. However, in 2008 it wasn’t enough to buy stocks that looked cheap based on low multiples to book value or normalized earnings. Many companies, particularly in the financial sector, won’t get the chance to recover to normalized earnings because they got wiped out or were forced to dilute their shareholders to the extent that the losses are effectively permanent. In the end, it appears to me that when faced with an extreme environment like 2008 and early 2009, there are really only two things that can save you: the luck or skill to see it coming and get out of the way, or a portfolio structure and risk management approach that is specifically designed to promote survival in a catastrophic scenario that you didn’t see coming. I feel very fortunate that we had a portfolio that was able to take some hits and survive to play another day.


Exclusive Interview with Igor Lotsvin

Igor Lotsvin and David Chu of Soma Asset Management recently presented at the Value Investing Congress in Pasadena. Their talk was entitled, The U.S. Banking Sector: Chaos and Opportunity. Last week, we conducted an exclusive interview with Igor Lotsvin, and it’s our pleasure to bring it to you here.

Soma Asset Management benefited from its bearish outlook on credit in 2008, reporting a return of 26%, net of fees.

MOI: What was the impetus for starting Soma Asset Management and how would you describe the essence of your firm?

Igor Lotsvin: At the end of 2006 we noticed very rapid deterioration in the credit statistics of most consumer loans – residential housing, credit cards, auto loans, etc. This was surprising, as at the time, unemployment level was low and capital markets were flooded with abundant liquidity. As we further investigated various credit asset classes — leveraged loans, high yield, CDOs, etc. — we came to the conclusion that the world was in the middle of a credit bubble, not simply a housing bubble. The bubble began to burst in the weakest part of housing market – subprime, to be exact. But we felt that it would likely spread to all asset classes. At the time very few people shared our view, and David Chu and I decided to start our firm to effectuate that variant view.

We are value investors who pursue the most compelling risk-reward asymmetric opportunities across the entire capital structure. We can be invested in debt, loans, equity or options, depending on the risk-reward outlook. Moreover, we believe that capital markets are intricately and, over longer periods of time, always linked. Hence we try to find opportunities where we believe dislocations are temporary and markets converge.

Specifically we pursue three separate strategies – long/short across the capital structure, capital structure arbitrage, and distressed value investing.

MOI: What lessons have you and David learned running your own firm that you might not have learned in your previous role at Symphony Asset Management?

Igor Lotsvin: We have a much broader mandate at Soma than in a typical hedge fund. The ability to invest across the capital structure presents us with a unique vantage point into how different markets function and interact. Quite often, investors who are only limited to investing in equities, for example, miss the developments in credit markets completely and may miss the next big development.

MOI: You seek out investments with limited downside risk. How do you ascertain such risk?


Snapshot of 100 Superinvestor-Owned Companies In Alphabetical Order

Recent Market

Price Value

Company / Ticker Industry ($) ($mn) Superinvestor(s) Website

Alexander's / ALX Real Estate Operations 245.50 1,254 Ackman www.alx-inc.com/

American Express / AXP Consumer Financial Services 23.40 27,322 Buffett, Berkowitz www.americanexpress.com

American Railcar / ARII Railroads 8.40 179 Icahn www.americanrailcar.com/

AmeriCredit / ACF Consumer Financial Services 10.68 1,419 Cumming/Steinberg, Berkowitz www.americredit.com/

AmerisourceBergen / ABC Biotechnology & Drugs 36.58 5,523 Pzena www.amerisourcebergen.com/

Amylin Pharma / AMLN Biotechnology & Drugs 11.11 1,566 Icahn www.amylin.com/

Apartment Investment / AIV Real Estate Operations 8.91 1,043 Ackman www.aimco.com/

Ark Restaurants / ARKR Restaurants 12.46 44 Richardson, Greenblatt www.arkrestaurants.com/

Borders Group / BGP Retail (Specialty Non-Apparel) 2.31 137 Ackman www.borders.com/online/store/H

Bristol Myers Squibb / BMY Major Drugs 20.02 39,657 Berkowitz www.bms.com/

Burlington Northern / BNI Railroads 68.17 23,148 Buffett, Watsa www.bnsf.com/

Canadian Natural / CNQ Oil & Gas Operations 54.10 29,319 Berkowitz www.cnrl.com/

Capital Southwest / CSWC Misc. Financial Services 69.01 258 Whitman www.capitalsouthwest.com/

CarMax / KMX Retail (Specialty Non-Apparel) 9.91 2,185 Buffett www.carmax.com/

Cemex / CX Construction - Raw Materials 9.49 7,379 Hawkins www.cemex.com

Chesapeake Energy / CHK Oil & Gas Operations 20.50 12,837 Hawkins www.chk.com/

Coca-Cola Company / KO Beverages (Non-Alcoholic) 47.30 109,499 Buffett www.thecoca-colacompany.com/

ConocoPhillips / COP Oil & Gas - Integrated 44.38 65,751 Buffett www.conocophillips.com/

Consolidated-Tomoka / CTO Construction Services 30.77 176 Winters, Whitman, Shubin Stein www.consolidatedtomoka.com/

Costco Wholesale / COST Retail (Specialty Non-Apparel) 48.30 20,964 Gayner, Ashton www.costco.com/

Coventry Health Care / CVH Insurance (Accident & Health) 18.44 2,737 Gaines www.coventryhealthcare.com/

Cresud / CRESY Crops 9.23 438 Cumming/Steinberg, Pabrai www.cresud.com.ar/

CSX Corp. / CSX Railroads 28.16 11,024 Hohn www.csx.com/

Ctrip.com / CTRP Personal Services 37.04 2,474 Mandel www.ctrip.com/

Deckers Outdoor / DECK Footwear 50.21 659 Mandel www.deckers.com/

Dell / DELL Computer Hardware 10.85 21,169 Hawkins, Greenberg www.dell.com/

Dillard's / DDS Retail (Department & Discount) 9.45 697 Hawkins www.dillards.com/

DISH Network / DISH Broadcasting & Cable TV 16.82 7,514 Berkowitz www.dishnetwork.com/

Dr Pepper Snapple / DPS Beverages (Non-Alcoholic) 21.27 5,400 Ackman www.drpeppersnapplegroup.com/

Eaton Corp. / ETN Electronic Instruments & Contr. 44.15 7,311 Greenberg www.eaton.com/

eBay / EBAY Retail (Catalog & Mail Order) 17.36 22,335 Hawkins, Miller www.ebay.com/

EchoStar / SATS Broadcasting & Cable TV 15.91 1,380 Einhorn, J. Griffin www.echostar.com

Einstein Noah / BAGL Restaurants 7.96 128 Einhorn www.einsteinnoah.com/

EMC Corp. / EMC Computer Storage Devices 11.61 23,371 Ackman, Einhorn www.emc.com/

Facet Biotech / FACT Biotechnology & Drugs 9.31 229 Klarman www.facetbiotech.com

Fair Isaac Corp. / FIC Business Services 16.88 825 Hawkins www.fairisaac.com

Fairfax Financial / FFH Insurance (Property & Casualty 257.50 4,709 Gayner, Hawkins, Pabrai www.fairfax.ca/

Fidelity National / FNF Insurance (Property & Casualty 13.88 3,259 Gayner www.fnf.com/

General Dynamics / GD Aerospace and Defense 55.70 21,446 Greenberg www.generaldynamics.com/

Goldman Sachs / GS Investment Services 136.35 68,642 Buffett, Pabrai www2.goldmansachs.com/

Greenlight Re / GLRE Insurance (Property & Casualty 15.77 572 Loeb, J. Griffin, Ackman www.greenlightre.ky/

Harman International / HAR Audio & Video Equipment 16.89 991 Einhorn www.harman.com/

Harvest Natural / HNR Oil & Gas Operations 4.86 160 Pabrai www.harvestnr.com/

Health Net / HNT Insurance (Accident & Health) 15.30 1,589 Rosenstein, Gaines /www.healthnet.com/portal/home

Helix Energy / HLX Oil Well Services & Equipment 9.83 967 Einhorn www.HelixESG.com

Hertz Global / HTZ Rental & Leasing 6.26 2,027 Berkowitz www.hertz.com

Hess Corp. / HES Oil & Gas - Integrated 60.02 19,629 Einhorn www.hess.com/

Horsehead / ZINC Metal Mining 6.53 230 Pabrai www.horsehead.net

Ingersoll-Rand / IR Misc. Capital Goods 21.15 6,749 Hawkins, Buffett company.ingersollrand.com/

[Portfolio w 100 companies ● Top100_browser ● MOI_macros_100.xls, MOI100A, then MOI100B, then MOI100C, then MOI100D]


In Alphabetical Order (continued)

Recent Market

Price Value

Company / Ticker Industry ($) ($mn) Superinvestor(s) Website

Intel / INTC Semiconductors 15.05 84,054 Gayner www.intel.com/

International Assets / IAAC Investment Services 15.64 141 Cumming/Steinberg, Bares www.intlassets.com/

Iteris / ITI Communications Equipment 1.38 47 Riley www.iteris.com/

Jefferies Group / JEF Investment Services 20.06 3,432 Cumming/Steinberg www.jefferies.com

Johnson & Johnson / JNJ Major Drugs 54.77 150,922 Buffett, Watsa www.jnj.com/

Jones Apparel / JNY Apparel/Accessories 8.41 718 Einhorn www.jonesapparel.com/

Lab Corp. of America / LH Healthcare Facilities 59.81 6,477 Greenberg, Ashton /www.labcorp.com/

Lear Corp. / LEA Auto & Truck Parts 1.51 117 Pzena www.lear.com/

Leucadia National / LUK Conglomerates 19.54 4,660 Berkowitz, Pabrai, Shubin Stein www.leucadia.com/

M&T Bank / MTB Regional Banks 46.73 5,192 Buffett www.mtb.com/

MasterCard / MA Business Services 168.36 21,780 Mandel www.mastercard.com/

MEMC Electronic / WFR Semiconductors 17.06 3,813 Einhorn www.memc.com/

Moody's / MCO Business Services 27.89 6,574 Buffett www.moodys.com/

Mosaic Company / MOS Chemical Manufacturing 55.36 24,603 Burbank www.mosaicco.com/

PDL BioPharma / PDLI Biotechnology & Drugs 6.68 798 Klarman www.pdl.com/

Pfizer / PFE Major Drugs 14.96 100,950 Berkowitz www.pfizer.com/

Potlatch / PCH Paper & Paper Products 26.36 1,048 Berkowitz, Einhorn, Loeb, Watsa www.potlatchcorp.com/

Precision Castparts / PCP Construction - Supplies and Fi. 78.94 11,047 Mandel www.precast.com/

Premier Exhibitions / PRXI Recreational Activities 0.75 23 Sellers www.prxi.com

Procter & Gamble / PG Personal & Household Products 53.03 154,567 Buffett www.pg.com/en_US/

Republic Airways / RJET Airline 5.49 189 Einhorn www.republicairways.com/

RHI Entertainment / RHIE Motion Pictures 3.14 42 Klarman www.rhitv.com/

Rockwell Collins / COL Aerospace and Defense 40.42 6,402 Greenberg www.rockwellcollins.com/

Ryanair Holdings / RYAAY Airline 28.38 8,364 Greenberg www.ryanair.com

Schlumberger / SLB Oil Well Services & Equipment 51.75 61,914 Gayner www.slb.com/

Sears Holdings / SHLD Retail (Department & Discount) 55.40 6,687 Lampert, Berkowitz, Shubin Stein www.searsholdings.com/

Spirit AeroSystems / SPR Aerospace and Defense 13.26 1,859 Berkowitz www.spiritaero.com/

St. Joe Company / JOE Real Estate Operations 23.61 2,184 Berkowitz, Whitman www.joe.com/

Strayer Education / STRA Schools 188.32 2,639 Mandel

Syneron Medical / ELOS Medical Equipment & Supplies 7.09 195 Klarman www.syneron.com

SYSCO Corp. / SYY Retail (Grocery) 23.28 13,733 Gayner www.sysco.com

TAL International / TAL Rental & Leasing 10.30 323 Berkowitz www.talinternational.com

Target Corp. / TGT Retail (Department & Discount) 40.74 30,637 Ackman, Einhorn www.target.com/

Telemig Celular / TMB Communications Services 49.87 920 Greenblatt minas.vivo.com.br/

Ticketmaster / TKTM Retail (Catalog & Mail Order) 7.30 419 Einhorn www.ticketmaster.com

Trident Microsystems / TRID Semiconductors 1.72 108 Shubin Stein www.tridentmicro.com

tw telecom / TWTC Communications Services 11.16 1,664 Hawkins www.twtelecom.com/

U.S. Bancorp / USB Money Center Banks 17.83 31,359 Greenberg, Watsa www.usbank.com/

United Parcel Service / UPS Air Courier 49.65 49,404 Gayner www.ups.com/

UnitedHealth Group / UNH Insurance (Accident & Health) 26.30 31,284 Berkowitz www.unitedhealthgroup.com/main

URS Corp. / URS Construction Services 46.00 3,826 Einhorn www.urscorp.com/

USG Corp. / USG Construction - Raw Materials 11.85 1,176 Buffett, Watsa, Weitz www.usg.com/

Visa / V Consumer Financial Services 65.75 55,638 Ackman, Hohn, Mandel www.visa.com/

Waters Corp. / WAT Scientific & Technical Instrum. 43.19 4,164 Greenberg www.waters.com/

WellCare Health / WCG Insurance (Accident & Health) 18.91 798 Berkowitz www.wellcare.com/

WellPoint / WLP Insurance (Accident & Health) 44.75 21,688 Berkowitz www.wellpoint.com/

Wells Fargo / WFC Regional Banks 24.31 103,654 Buffett, Pabrai, Watsa /www.wellsfargo.com/

Wendy's Arby's / WEN Restaurants 4.20 2,241 Ackman, Shubin Stein www.wendysarbys.com/

Winthrop Realty Trust / FUR Real Estate Operations 9.69 153 Berkowitz, Shubin Stein www.winthropreit.com/

Yahoo! / YHOO Business Services 14.98 20,907 Icahn, Ashton, Miller www.yahoo.com

Yum! Brands / YUM Restaurants 33.85 15,625 Ackman, Hawkins www.yum.com/

[MFI100 ● Top100_browser ● MOI_macros_100.xls, MOI100A]


Harman International (HAR) – Owned By Einhorn Washington, DC, 202-393-1101

Consumer Cyclical: Audio & Video Equipment, Member of S&P 500 http://www.harman.com

Trading Data Consensus EPS Estimates Valuation

Price: $16.89 (as of 5/22/09) Month # of P/E FYE 6/30/08 9.8x

52-week range: $9.17 - $46.90 Latest Ago Ests P/E FYE 6/30/09 n/m

Market value: $991 million This quarter -$0.51 -$0.28 4 P/E FYE 6/30/10 n/m

Enterprise value: $1.3 billion Next quarter -0.29 -0.14 4 P/E FYE 6/30/11 6.8x

Shares out: 58.7 million FYE 6/30/09 -1.02 -0.38 4 EV / LTM revenue 0.4x

Ownership Data FYE 6/30/10 -0.25 0.41 4 EV / LTM EBITDA n/a

Insider ownership: 5% FYE 6/30/11 2.50 0.60 1 EV / LTM EBIT n/m

Insider buys (last six months): 0 LT EPS growth 16.0% 16.0% 2 P / tangible book 1.3x

Insider sales (last six months): 0 Latest Quarterly EPS Surprise Greenblatt Criteria

Institutional ownership: 95% Date Actual Estimate LTM EBIT yield -29%

# of institutional owners: 622 4/29/09 -$0.84 -$0.44 LTM pre-tax ROC -40%

Operating Performance and Financial Position

($ millions, except Fiscal Years Ended LTME FQE FQE

per share data) 6/30/02 6/30/03 6/30/04 6/30/05 6/30/06 6/30/07 6/30/08 3/31/09 3/31/08 3/31/09

Revenue 1,826 2,229 2,711 3,031 3,248 3,551 4,113 3,291 1,033 598

Gross profit 500 651 889 1,032 1,153 1,211 1,109 815 261 113

EBIT 103 167 255 351 397 386 139 (384) (7) (93)

Net income 58 105 158 233 255 314 108 (329) (3) (67)

Diluted EPS 0.85 1.55 2.27 3.31 3.75 4.72 1.73 (5.61) (0.06) (1.14)

Cash from ops 190 250 483 420 400 215 317 159 117 (28)

Capex 125 115 136 172 131 175 139 107 28 16

Free cash flow 65 135 347 247 270 41 178 52 89 (44)

Cash & investments 116 148 378 291 292 106 223 334 131 334

Total current assets 877 968 1,204 1,183 1,268 1,233 1,439 1,337 1,387 1,337

Intangible assets 199 222 252 345 381 404 436 80 442 80

Total assets 1,480 1,704 1,989 2,187 2,376 2,509 2,827 2,278 2,753 2,278

Short-term debt 4 5 7 3 18 19 1 1 1 1

Total current liabilities 434 487 662 729 888 816 907 655 832 655

Long-term debt 470 498 388 331 180 58 427 662 463 662

Total liabilities 954 1,048 1,114 1,126 1,148 1,015 1,487 1,452 1,454 1,452

Preferred stock 0 0 0 0 0 0 0 0 0 0

Common equity 527 656 875 1,061 1,228 1,494 1,340 826 1,299 826

EBIT/capital employed 16% 24% 38% 56% 62% 50% 15% -40% n/m n/m

Ten-Year Stock Price Performance and Trading Volume Dynamics

$0

$20

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Apr 09Apr 08Apr 07Apr 06Apr 05Apr 04Apr 03Apr 02Apr 01Apr 00


BUSINESS OVERVIEW Harman provides high fidelity audio products and electronic systems. The company operates in three segments:

Automotive provides audio, electronic and infotainment systems to be installed as original equipment by auto makers.

Consumer provides audio, video and electronics for home, mobile and multimedia. Products are sold through retailers such as Circuit City, Best Buy, MediaMarkt and Fnac.

Professional provides loudspeakers and electronic systems used by audio professionals in concert halls, stadiums, airports, houses of worship, and theme attractions. INVESTMENT HIGHLIGHTS

Owns renowned brands JBL, Infinity, Harman/ Kardon, Mark Levinson, and Becker. It is a leader in integrated infotainment for the auto industry.

Growth opportunities exist in all three segments: (1) automotive: potential to increase number of models offering Harman systems and to increase per-vehicle content of premium branded audio; (2) consumer: may benefit from convergence of home and multimedia technologies (offers branded accessories for iPod and iPhone); (3) professional: proprietary HiQnet system protocol incentivizes users to purchase complete compatible systems.

Targeting $400 million of annualized savings by FY11, of which $150 million have been realized. Total after-tax savings would amount to $4/share.

Mid-Infotainment system launch expected in fall 2009, ahead of original target. The company has been gaining share via new product introductions. China capacity has been doubled with a new plant.

Dinesh Paliwal (50) became chairman and CEO in July 2008. He was previously CEO of ABB North America. Herbert Parker (50) joined as CFO in June 2008. He was previously also at ABB N.A.

According to Greenlight Capital, Harman “could earn over $2 per share within the next couple of years, and much more in a normal environment.”

Shares trade at .3x LTM revenue, 1.3x tang. book. INVESTMENT RISKS & CONCERNS

Weak end markets in CQ1 2009, with global, U.S., European and China/India auto production down 38%, 56%, 41%, and 17%, respectively. Consumer and professional markets are also weak.

Debt of $662 million, partially offset by cash of $334 million. Debt appears manageable, as earliest maturity not until the end of 2011. $400 million convert carries 1.25% coupon and matures in 2012.

SELECTED OPERATING DATA

FYE June 30 2006 2007 2008 YTD

3/31/09 % of revenue by segment:Automotive 69% 70% 72% 70% Professional 16% 16% 15% 16% Consumer 15% 14% 13% 14% Revenue growth by segment:Automotive 5% 11% 19% -28% Professional 6% 8% 9% -20% Consumer 18% 1% 7% -28% Total revenue 7% 9% 16% -27% Headcount 4% 4% 0% -14% EBIT margin by segment: Automotive 15% 14% 5% -4% Professional 11% 14% 16% 12% Consumer 10% 3% -1% -11% Unallocated and other -2% -1% -2% -2% Total EBIT margin 12% 11% 4% -4% Selected items as % of revenue: Gross profit 35% 34% 27% 24% SG&A 23% 23% 24% 28% EBIT 12% 11% 3% -19% D&A 4% 4% 4% 5% Capex 4% 5% 3% 3% % of revenue by geography: Germany 44% 45% 42% n/a Other Europe 18% 18% 16% n/a U.S. 22% 21% 23% n/a Other regions 17% 16% 18% n/a % of revenue by major customer: Daimler and Chrysler 1 23% 23% 18% 16% Audi / VW 9% 10% 11% 15% BMW 10% <10% <10% 14% Return on tangible equity 33% 32% 11% -8% Tang. equity to assets (avg) 41% 47% 44% 36% shares out (avg) -1% -1% -6% -6%

Source: Gridstone Research, Company filings, Manual of Ideas analysis. 1 Standalone Chrysler accounted for 7% of revenue YTD 3/31/09.

Customer concentration. Daimler made a strategic

decision in 2006-07 to move to dual sourcing, causing Harman’s share of Mercedes business to decline in FY08 and again in FY09. The business should stabilize at a “substantial” level in FY10.

CEO received total comp of $17 million in FY08. MAJOR HOLDERS Insiders 1% │ Cap Re 12% │ Cap World 9% │ Greenlight 6% │ Relational 6% │ T Rowe 6% │ Elm Ridge 3% RATINGS VALUE Intrinsic value materially higher than market value? MANAGEMENT Capable and properly incentivized? FINANCIAL STRENGTH Solid balance sheet? MOAT Able to sustain high returns on invested capital? EARNINGS MOMENTUM Fundamentals improving? MACRO Poised to benefit from economic and secular trends? EXPLOSIVENESS 5%+ probability of 5x upside in one year?

THE BOTTOM LINE Harman occupies a strong competitive position in high-end audio products primarily for automotive applications. When the auto industry return to “normal,” Harman appears likely to reestablish profitability of several dollars per share. However, we view future earning power as too uncertain to warrant a meaningful multiple of projected earnings. We note that David Einhorn’s Greenlight Capital established its position at $11.07 per share, significantly below the recent market price. f


…additional insight into HAR: OVERVIEW OF FACILITIES USED IN COURSE OF BUSINESS

Seg- Size Utilized

Location ments1 (Sq. Ft.) Util. Sq. Ft.

Owned Properties – U.S.

Elkhart, IN P 223,000 86% 191,780

Martinsville, IN A 221,000 40% 88,400

Franklin, KY A 152,000 96% 145,920

Washington, MO A 101,000 100% 101,000

697,000 76% 527,100

Owned Properties – International

Suzhou, China A 145,000 50% 72,500

Chateau du Loir, France A, C 221,000 75% 165,750

Ittersbach, Germany A 565,000 100% 565,000

Straubing, Germany A 235,000 100% 235,000

Worth-Schaidt, Germany A 204,000 100% 204,000

Szekesfehervar, Hungary A 117,000 100% 117,000

1,487,000 91% 1,359,250

Total Owned Properties 2,184,000 86% 1,886,350

Leased Properties – U.S.

Moreno, CA C, P 301,000 100% 301,000

Northridge, CA A, C, P 589,000 82% 482,980

Rancho Cucamonga, CA P 212,000 100% 212,000

Atlanta, GA C 635,000 100% 635,000

Sandy, UT P 127,000 100% 127,000

1,864,000 94% 1,757,980

Leased Properties – International

Vienna, Austria P 193,000 100% 193,000

Juarez, Mexico A 109,000 100% 109,000

Tijuana, Mexico C, P 198,000 78% 154,440

Regensdorf, Switzerland P 108,000 93% 100,440

Bridgend, U.K. A 168,000 100% 168,000

Potters Bar, U.K. P 160,000 100% 160,000

936,000 95% 884,880

Total Leased Properties 2,800,000 94% 2,642,860

Source: Harman 10-K, Manual of Ideas analysis. 1 A = automotive, C = consumer, P = professional.

SLIDES FROM COMPANY PRESENTATION, APRIL 29, 2009


Notes from Value Investing Congress, May 5-6 Manual of Ideas research analyst Zain Griffith attended the Value Investing Congress in Pasadena. Here are his notes.

Zeke Ashton, Centaur Capital Zeke Ashton’s presentation was entitled Surviving the Worst Case: Risk Management and Value Investing.

LONG Investment Idea: Alleghany (Y)

Holding company that operates primarily in the specialty and property & casualty insurance industry.

Long term track record of value creation by building, acquiring, and selling businesses—particular expertise in the insurance, investment management, and natural resource areas.

Investment results are in high teens. Alleghany uses a “total return” approach to investing its float and has a good investment track record. Over the past five years, the company has produced a 10.6% annualized return vs. a -2.2% annualized return for the S&P 500 Index.

The company has a $4.1 billion investment portfolio and has a portfolio of valuable assets.

Valuation: Sum of Parts: RSUI (insurance with 80% combined ratio in 2008) 1.5x book = $1.65 bil. Capitol Transamerica – 1.2x book = $360 mil. EDC .75x book = $125 mil. Cash and investments at parent = $800 mil.

LONG Investment Idea: Odyssey Re (ORH)

Globally diversified insurance and reinsurance company, one of the top 20 reinsurance companies in the world.

71% owned by FFH, investment portfolio managed by Prem Watsa.

Grown BV/share by more than 20% annually since going public in 2001.

Buying back stock below book; spent $351 million on share buybacks in 2008, ~13% of shares outstanding in 2008.

Bottom line: ORH is classified as a medium risk stock. Current book value is about $43.80/share (as of Mar. 31), thinks BV/share should increase to $47-$48. At 1.3x book, company would be worth upwards of $55+/share.

Risk Management & Value Investing

Many value manager downfalls may have been due to complacency. Asks the question: If the core principle of value investing is "margin of safety" then how did so many well-known value investors lose as much or more than the market average during the bear market that began in 2007? Did they do something wrong or are they unlucky? Why did their value investing principles, years of experience, and long track records of success fail to protect them? Did they become overconfident?

Value investors previously assessed risk at the individual position level. This was all the "risk management" that seemed required. A lesson he recently learned was that risk must be assessed from the portfolio level—looking at the portfolio from the "top down" can be a useful exercise. He believes managers should try to determine if a bubble is building and where the economy is at in the business cycle.

Centaur doesn’t want: 1) excessive concentration—never wants the outcome of any one or two ideas to determine their ability to survive or dominate results in a given period, 2) Excessive portfolio-wide exposure to any one specific factor or theme (i.e. inflation, interest rate/currency fluctuations), 3) Excessive leverage at the portfolio level or the individual idea level, 4) Political risk – does not want investments to be overly vulnerable to change in government regulations, laws, tax codes, etc, 5) Liquidity risk, 6) Shorting stocks—wants to avoid “blow-up” risk. Believes we will see some short funds blow up due to recent market rally.


Concept of risk limits: Limits prevent investors from taking unacceptable risks, which should be thought about in advance. Home run style investors will have a different risk management style than high probability investors.

Helpful limits: 1) position size, 2) total exposure (long and short), 3) leverage, 4) limits on illiquid stocks.

Example of Fairfax Financial Holdings (FFH): Many people were short FFH in prior years when it really should have been a long (due to their large CDS portfolio). –Not a typical insurance holding.

Centaur’s ideal position is about 5%, i.e. 20 stock portfolio. Believes that 20 names in a portfolio is better than 6 or 100, thinks 20 is the sweet spot. The ultra-concentrated model increases the odds of experiencing occasional periods of outstanding performance, but also increases odds of really terrible performance.

Diversifying by idea doesn’t necessarily help if there is excessive sector or single factor correlation. “If you owned a bunch of different stocks in different industries that all had leveraged balance sheets, you probably didn’t benefit much from diversification in a year like 2008.”

Two types of leverage: 1) Recourse (high-risk leverage) 2) Non-recourse (smart leverage). Best way to achieve non-recourse leverage is by using in-the-money LEAPs—which offer reasonable implied borrowing costs as well as an implied put below a certain price.

Two Schools of Value Investing

1. Home run (i.e. Eddie Lampert) – magnitude of winners is the success factor. If one idea triples, you can afford to have a few ideas that do not do well.

2. High-probability (i.e. Seth Klarman) – Less concentrated portfolio, but more concentrated relative to the rest of the world. Centaur has 15-30 positions—1-2 big winners will not drive portfolio performance. Zeke follows the high-probability approach.

Each style depends on the type of investor. Key is matching investment style to the type/characteristics of the capital base and manager philosophy.

It is important to match the attributes of the capital base to the investment style of the manager. The "home-run" style investor must have stable, long-term capital in order to compensate for higher volatility of fund performance. These types of investors are at the highest risk of business failure.

“High probability” investors can operate with a much more fluid capital base—business failure is driven more by showing favorably divergent returns over time.

Centaur risk limits: Position 7.5% --10% maximum size at market. Sector – no more than 20% in any one sector—25% at market.

Ingredients of a blow up: 1) excessively sized bets, 2) excessive leverage, 3) unexpected negative event, 4) inadequate liquidity to unwind the position without negatively affecting price.

Take away from Kelly Formula: 1) The better the idea, the bigger you can go. 2) The more undervalued the idea, the lower the risk, the bigger the position should be. Believes that investors who rely on the Kelly Formula as intellectual support to take excessively sized bets will accelerate gambler’s ruin, not avoid it.

About Zeke Ashton

Zeke Ashton is the founder and Managing Partner of Centaur Capital Partners, a Dallas-based value-oriented investment firm. He and co-portfolio manager Matthew Richey are the advisors to the Centaur family of private partnerships using a long / short equity strategy, and are the sub-advisors to the Tilson Dividend Fund, a mutual fund utilizing a unique, income-oriented value investing strategy.


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Documents

Portfolio Manager's Review -- The Superinvestor Issue, May 28, 2009, by The Manual of Ideas