The Ideas Report For Serious Investors

David Rabinowitz, who runs Kirkwood Capital, spoke at the Value Investing Congress today. The following are our notes from his presentation, entitled Stock-picking for the Scared and the Ignorant: Notes from an Expert.

Investment Approach

• David focuses on the downside of an idea more than the upside.
  
• He takes a very long time to understand an idea before taking a position.
  
• He often holds large amounts of cash—often for extended periods of time. Also, it takes him a very long time to find ideas.
• He believes in specializing in a few industries—he specializes in restaurants and retailers.
  
• He conducts extensive research, including reading 10-Ks, industry publications, even bankruptcy filings of former companies—which he says can be more helpful in understanding an industry or the competitive landscape than reading current annual reports.
  
• Understanding an industry very well will help an investor capitalize on an idea when it presents itself. It helps him act quickly when he sees opportunity.

• David does not own any restaurants or retailers right now.
  
• From his experience at looking at retail over the past 10-15 years, he does not feel that individual opportunities are currently as exciting as they’ve been in prior years (i.e. 1994-1995). 
  
• Retail valuations are currently much higher than in the recession of 1994-1995.

Investment Idea: LONG Lancashire Holdings (LCSHF)

• Four year old Bermuda based insurance company (specialty insurer) trading at book value. 
  
• Trades on the LSE under the ticker LRE. $1.27 bil market cap. Founded in late 2005.
  
• Not like a normal insurer. Only 14% of book is reinsurance, 86% of current business is primary.
  
• LRE is not “part hedge fund” 85% of investment book is “risk-free.” LRE has a very conservatively run investment portfolio
• CEO Richard Brindle has a very successful track record. The CEO cares more about underwriting, maintaining a strong balance sheet, managing capital through the cycle, and staying nimble. They’re not trying to rule the insurance world.
  
• Investment portfolio returned 3.1% in 2008, duration consistently below 2.0, $300mil in corporate bonds (none below investment grade) in $2bil portfolio. 
  
• Management has stated that they’re willing to walk away from premiums.
  
• Operating expense less than 10% of premiums and has about 91 employees.
  
• Gross written premium down 16% in 2008, Q109 GWP down 20-25%. Returned about $397 million of capital in 2007 and 2008. CAGR of book value since inception has been ~18%. 
  
• Management ROE goal = 13% plus risk free rate.
  
• Valuation: Believes it could trade between 1.5x-2x book value (profits made in the mean time are being returned to shareholders). Bases this multiple on: 1) reserve additions being highly unlikely, 2) investment book is not at risk, 3) Bermuda taxation, 4) Conservative management.
  

About David Rabinowitz

Dave Rabinowitz runs Kirkwood Capital, the Atlanta-based investment fund he founded with Gotham Capital in 2002. Prior to founding Kirkwood, he worked as an attorney with the Special Matters department of King & Spalding in Atlanta. Mr. Rabinowitz has also been an adjunct professor at Columbia Business School's Value Investing program. He is a graduate of Binghamton University and Emory Law School.

Disclosure: No positions.

Interesting Links

1. Kirkwood Capital's 13F-HR filings 
2. Recent SC 13D filing

The author of this post is MOI research associate Zain Griffith, who is attending the Value Investing Congress in Pasadena this week. Contact Zain directly at zain@manualofideas.com.