The Manual of Ideas - The Superinvestor Issue (Preview)

Value-oriented Equity Investment Ideas for Sophisticated Investors
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Investing In The Tradition of
Graham, Buffett, Klarman
Year IX, Volume III
March 2016
When asked how he became so
successful, Buffett answered:
“We read hundreds and hundreds
of annual reports every year.”
Top Ideas In This Report
Fiat Chrysler
(NYSE: FCAU) …………………… 84
Franklin Resources
(NYSE: BEN) …………………….. 88
VimpelCom
(Nasdaq: VIP) ……………………120
Also Inside
Editorial Commentary ………………. 3
Christopher Begg on Investing …….. 8
Superinvestor Portfolio Analysis … 12
Michael Mauboussin on Investing .. 48
Profiling Superinvestor Ideas …… 52
10 Essential Value Screens ……… 142
Highlighted Events — Join Us!
Asian Investing Summit 2016
April 5-6, 2016, fully online
valueconferences.com
The Zurich Project Workshop 2016
June 8-9, 2016, Zurich
zurichworkshop.com
Wide-Moat Investing Summit 2016
June 28-29, 2016, fully online
valueconferences.com
Latticework 2016
September 14, 2016, New York
latticework.com (coming soon)
VALUEx Munich 2016
September 20, 2016, Munich
valuex.org
THE SUPER-
INVESTORISSUE
► Screening the Top Holdings of the Signal Value 100™
► 20 Companies Profiled by The Manual of Ideas Research Team
► Proprietary Selection of Top Three Candidates for Investment
► Exclusive Interview with Christopher Begg
► Exclusive Interview with Michael Mauboussin
► 10 Essential Screens for Value Investors
Superinvestor holdings analyzed in this issue include
American Express (AXP), Ametek (AME), Anheuser-Busch (BUD),
Antero Resources Corp. (AR), Apache (APA), Banner Corp. (BANR),
Delta Air Lines (DAL), Dover Corp. (DOV), Fiat Chrysler (FCAU),
Franklin Resources (BEN), McGraw-Hill (MHFI), Outerwall (OUTR),
Range Resources (RRC), Royal Dutch Shell (RDS.A),
Taiwan Semiconductor (TSM), Unit Corp. (UNT), Verisk Analytics (VRSK),
VimpelCom (VIP), Whirlpool (WHR), and Whole Foods Market (WFM).
New Exclusive Content
in the MOI Members Area
(log in at www.manualofideas.com
or email support@manualofideas.com)
 Pabrai, Shearn, and Spier on Investment Checklists
 Fang Li on Business Quality and Valuation
 PREMIUM: Michael Mauboussin Shares His Wisdom (video)
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2016, the fully online conference
hosted by ValueConferences and
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Table of Contents
EDITORIAL COMMENTARY ......................................................................... 3
CHRIS BEGG ON THE “LOGARITHMIC PATH” TO WISDOM ................... 8
SUPERINVESTOR ACTIVITY: SNAPSHOT ............................................... 12
SUPERINVESTOR PORTFOLIOS: SIGNAL VALUE 100™....................... 14
MICHAEL MAUBOUSSIN SHARES HIS INVESTMENT WISDOM ............ 48
PROFILING TWENTY SUPERINVESTOR HOLDINGS .............................. 52
AMERICAN EXPRESS (AXP) – AQUAMARINE , BRK , DAVIS , TWEEDY  ..........................52
AMETEK (AME) – ARTISAN , FMR , SQ , T ROWE , WELLINGTON  .............................56
ANHEUSER-BUSCH INBEV (BUD) – GARDNER RUSSO , LONE PINE , SENATOR ...............60
ANTERO RESOURCES (AR) – APPALOOSA , BAUPOST , BRAVE WARRIOR , CITADEL ....64
APACHE (APA) – CLEARBRIDGE , DAVIS , DODGE & COX , HARRIS  .............................68
BANNER CORP. (BANR) – APG , DAVIS , GSAM , OAKTREE ..............................72
DELTA AIR LINES (DAL) – APPALOOSA , MUHLENKAMP , OLSTEIN , OMEGA ..................76
DOVER CORP. (DOV) – GARDNER RUSSO , HARRIS , OLSTEIN , PZENA ..........................80
FIAT CHRYSLER (FCAU) – AQUAMARINE , EXOR , HARRIS , PABRAI  ...........................84
FRANKLIN RESOURCES (BEN) – ABRAMS , ARIEL , OLSTEIN , PZENA , VULCAN .......88
MCGRAW-HILL FINANCIAL (MHFI) – CANTILLON , EGERTON , FMR , MARKEL  ............92
OUTERWALL (OUTR) – ARLINGTON , ENGAGED , FINE , MUHLENKAMP ........................96
RANGE RESOURCES (RRC) – APPALOOSA , CAP RE , SAILINGSTONE , WEITZ ........100
ROYAL DUTCH SHELL (RDS) – DODGE & COX , FRANKLIN , PZENA , TWEEDY  .............104
TAIWAN SEMICONDUCTOR (TSM) – ACADIAN , AQR , CAP WORLD , OAKTREE  .............108
UNIT CORP. (UNT) – CENTURY , FRANKLIN , HEARTLAND , ROYCE , VICTORY ...........112
VERISK ANALYTICS (VRSK) – AKRE , BAMCO , BRK , MARKEL , WEDGEWOOD .........116
VIMPELCOM (VIP) – ABRAMS , JERICHO , OAKTREE , PAMET , VAN ECK  .................120
WHIRLPOOL (WHR) – APPALOOSA , CITADEL , GREENHAVEN , HARRIS  .......................124
WHOLE FOODS (WFM) – CAP RE , GSAM , HILLMAN , SANDS , THORNBURG  ........128
SCREENING THE HOLDINGS OF 100 SUPERINVESTORS................... 132
TOP 100, BY MARKET VALUE...................................................................................................132
TOP 100, BY THIS FY EPS YIELD (CONSENSUS ESTIMATES) .....................................................134
TOP 100, BY NEXT FY EPS YIELD (CONSENSUS ESTIMATES)....................................................136
TOP 100, BY TRAILING GROSS PROFIT TO ENTERPRISE VALUE .................................................138
TOP 100, BY TANGIBLE BOOK VALUE TO MARKET VALUE..........................................................140
TEN ESSENTIAL SCREENS FOR VALUE INVESTORS ......................... 142
“MAGIC FORMULA,” BASED ON TRAILING OPERATING INCOME...................................................142
“MAGIC FORMULA,” BASED ON THIS YEAR’S EPS ESTIMATES ...................................................143
“MAGIC FORMULA,” BASED ON NEXT YEAR’S EPS ESTIMATES..................................................144
CONTRARIAN: BIGGEST YTD LOSERS (DELEVERAGED & PROFITABLE).......................................145
CONTRARIAN: CHEAP FREE CASH FLOW GUSHERS ..................................................................146
VALUE WITH CATALYST: CHEAP REPURCHASERS OF STOCK .....................................................147
PROFITABLE DIVIDEND PAYORS WITH DECENT BALANCE SHEETS .............................................148
DEEP VALUE: LOTS OF REVENUE, LOW ENTERPRISE VALUE .....................................................149
DEEP VALUE: NEGLECTED GROSS PROFITEERS.......................................................................150
ACTIVIST TARGETS: POTENTIAL SALES, LIQUIDATIONS OR RECAPS ...........................................151

© 2008-2016 by BeyondProxy LLC. All rights reserved. JOIN TODAY! www.manualofideas.com March 2016 – Page 3 of 152
About The Manual of Ideas:
Our goal is to bring you investment ideas that are compelling on the basis of value versus price. In our quest for value, we analyze the top holdings of top
fund managers. We also use a proprietary methodology to identify stocks that are not widely followed by institutional investors.
Our research team has extensive experience in industry and security analysis, equity valuation, and investment management. We bring a “buy side” mindset
to the idea generation process, cutting across industries and market capitalization ranges in our search for compelling equity investment opportunities.
Editorial Commentary
We have expanded and improved our superinvestor coverage, bringing the number
of investors tracked to one hundred and including new aggregate statistics tables in
this issue. We will keep pruning our list of “superinvestors” to bring you the most
impactful information, i.e., the portfolios with the most “Signal Value”.
In addition to the superinvestor analysis and profiles of twenty superinvestor-owned
companies, we are pleased to bring you two brand-new exclusive interviews in this
issue: Christopher Begg of East Coast Asset Management on his investment
philosophy and the “logarithmic path” to wisdom; and Michael Mauboussin of
Credit Suisse on a range of investment-related topics, including responses to
questions arising from some of his writings. Enjoy!

We highlight the following three ideas as worthy of closer consideration:
Fiat Chrysler (NYSE: FCAU, $7.30 per share; MV $9.4 billion)
Mohnish Pabrai and Guy Spier kept Fiat Chrysler at 51% and 22% of their respective
disclosed portfolios at the end of Q4, representing major allocations to the
automaker. Bill Nygren increased his position by 5% to 3.2% of Oakmark Select.
Fiat has been a driver of consolidation in the global mass-market automotive
industry, taking control of Chrysler in 2010 and increasing its ownership to 100% by
2014. The merged company enjoys greater scale, which management views as
crucial to global competitiveness. Fiat spun off luxury automaker Ferrari in January
in an effort to highlight the value of that business, while retaining the Maserati brand
on the high end. With highly regarded CEO Sergio Marchionne at the helm and John
Elkann’s Exor the controlling shareholder, Fiat owners should benefit from smart,
shareholder-oriented capital allocation. In 2016, management expects EBIT of more
than €5.0 billion, up from €4.8 billion, net of Ferrari, in 2015. With €5 billion in net
debt following the Ferrari IPO, Fiat’s recent market quotation implies a forward EV-
to-EBIT multiple of ~3x. We view this as overly pessimistic in light of Fiat’s
shareholder-friendly management and decent operating performance.
$0
$2
$4
$6
$8
$10
$12
Mar 16Mar 15Mar 14Mar 13Mar 12Mar 11Feb 10Feb 09Sep 07


A look back: Top three ideas highlighted in The Manual of Ideas, March 2015:
Century Communities (NYSE: CCS, $18 per share; MV $380 million)
Colorado-based Century Communities is a growing U.S. homebuilder focused on several
attractive housing markets, including Denver, Colorado Springs, Austin, San Antonio, Houston,
Las Vegas, and Atlanta. Co-CEOs Dale and Robert Francescon have executed well since
founding the company in 2002, operating profitably each year—albeit mostly on a small scale.
In 2013, the company started raising major equity and debt financing to fund acquisition-driven
growth, culminating in a June 2014 IPO on the financing side and a $165 million acquisition of
Las Vegas-based LVLH on the M&A side. Most recently, the company acquired Peachtree in
Atlanta in November 2014, securing a foothold in the growing Southeastern U.S. housing
market. The fast-growing lot inventory and home backlog suggest that Century is poised for
continued revenue growth and increasing profitability. With adjusted EBITDA just starting to
ramp up, from $9 million in 2012 to $21 million in 2013 and $41 million in 2014 (with a small
contribution by Peachtree), investors have yet to appreciate the company’s growing earning
power. Even assuming no further acquisitions, Century appears well-positioned to keep
growing quickly over the next few years, notwithstanding general conditions in the U.S.
housing market. We like the fact that the founding Francescon brothers own a combined 27% of
the equity, giving them strong incentive not only to create value but also to protect the
downside. Management authorized a two million share buyback in November. Howard Marks’
Oaktree Capital Management recently increased its common equity stake in Century to 5.9%.
BlueMountain Capital Management and Capital World Investors also own more than 5% of the
equity each.
Chicago Bridge & Iron (NYSE: CBI, $47 per share; MV $5.1 billion)
Chicago Bridge & Iron may be the proverbial “baby thrown out with the bathwater,” as
investors have cut the share price roughly in half from the 52-week high, apparently due to the
feared impact of the downturn in the oil and gas sector. Interestingly, while the company serves
the energy infrastructure markets globally, including the oil and gas sector, a closer look under
the surface reveals backlog that is largely concentrated in the power and LNG segments rather
than in E&P-related projects. At yearend 2014, the engineering segment backlog of $25 billion
accounted for four-fifths of total backlog and was comprised of projects in the power (50%),
LNG (30%), refining (5%), gas processing (5%), and oil sands, petrochemical, and other end
markets (10%). These end markets, while not unaffected by the decline in oil prices, are hardly
bearing the brunt of the impact. As a result, patient investor have the luxury of valuing CBI’s
franchises on a long-term basis. The business model has delivered industry-leading operating
margins (versus comparables such as JEC, KBR, and FLR). We find CBI attractive at 0.5x EV-
to-revenue and a low-teens forward EPS yield.
Layne Christensen (Nasdaq: LAYN, $6.75 per share; MV $130 million)
Layne recently brought in a new CEO as the company attempts to emerge from a period of poor
execution. Losses in most parts of the business have overshadowed profits in the inliner and
water resources divisions. We believe that Layne should be able to improve overall results as it
continues to possess competitive strengths, especially in the key water infrastructure services
business. At 0.7x tangible book value and 0.3x EV to revenue, the shares offer material upside
if and when a turnaround takes hold. We view the risk-reward tradeoff as highly favorable
given Layne’s strong market positions and manageable balance sheet (the company issued
convertible notes recently, with the conversion price more than 50% above the recent equity
quotation). The wide disparity in segment profitability suggests that Layne shares may be
valued most appropriately on a sum-of-the-parts basis. Based on estimated combined pretax
income of nearly $40 million in water resources and inliner, those two segments alone may be
worth materially more than the recent enterprise value of the company. Arnold Van Den Berg’s
Century Management recently increased its stake in Layne Christensen to 15% of the common
equity. BlackRock, Dimensional Fund Advisors, Gamco, Invesco, Kopernik Global Investors,
Royce & Associates, and Rutabaga recently also owned more than 5% of the company each.

In an effort to help you quickly identify “consensus picks” of the superinvestors we
track, we present selected summary data below. The detailed portfolio analysis is
contained inside this issue, along with analysis of twenty superinvestor-held equities.
Roughly a year
later, CCS traded
at $16 per share
Roughly a year
later, CBI traded
at $37 per share
Roughly a year
later, LAYN traded
at $7 per share

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