Ralph Lauren


We invested in Ralph Lauren (RL) during the quarter. The investment case is simple:

1. It is a good business with a competitive advantage

RL is one of the strongest apparel brands in the world which has led to high returns on capital employed and earnings growth. Since the IPO in 1997 they have grown earnings per share from $1.2 to $7.9 in 2015, an annual growth rate of 11%. 

As a value investor I am not interested in businesses that operate in industries that change fast or are subject to fashion risk. But, I do not think RL is one of those businesses. The company has been around for 49 years. The brand has been strong throughout the decades. A large share of the profits come from styles and products that are not fashion. The best example is the Polo shirt that has been sold by RL since 1972. Also, it seems that brand longevity among these kind of brands is fairly high. The big luxury brands, Louis Vuitton, Gucci, Chanel, Hèrmes have been around for 50-180 years. RL is not as luxurious as those specific companies (although there are sub-brands that aspire to) but I think it tells something about the stability of these kind of brands. 

2. RL is currently not earning as much as it should be able to

The last couple of years RL’s profit margins have been declining for a couple of reasons:

  • The current retail market is tough with lower foot traffic and more promotions which has pushed gross margins down. 
  • RL has not managed its recent growth well and lost focus of profitability. They have opened too many underperforming stores and have too many weaker sub-brands.
  • Their execution has been poor. Inventory levels has gone up faster than sales and that has forced them to more promotions to shift the excess. They have also let general costs rise too fast. 

Overall the factors above have affected the brand strength and profitability. Based on peer group analysis and historic performance RL should be able to earn about 40% more compared to today.  

3. It is trading at a low price compared to historic norms

If RL can achieve profit margins in line what they have done historically the stock is trading at 10 times earnings. For a stock that historically has demanded a premium multiple of 19.5x that seems cheap. 

4. Management has a viable plan for earnings recovery

The new CEO, Stefan Larsson, has outlined a plan to turn things around. 

  • They are going to focus on the three big brands that are strong and produce high returns on capital. By focusing their efforts and advertising dollars on fewer brands they will hopefully be able to strengthen the brand again.
  • They are going to cut costs by reducing the number of management layers, close unprofitable stores and other general cost reductions. 
  • They are cutting the lead time from 15 to 9 months which will enable better inventory planning, reducing the share of discounted sales and thereby improving gross margins.

The good thing about the plan is that it is already half done. The headcount reductions were done during the year and half of the planned stores closures are completed. They still have some general cost cutting to do but my peer group analysis indicate that the target is achievable and possibly even too low. 

Going forward I think the company has a lot of growth potential. They have only a fifth of the marketshare in Europe and Asia compared to the US. There is potential to increase sale of womenswear and accessories. Besides that, the global market is expected to grow 4-5% annually the coming years. 

5. There is downside protection

First, the brand provides protection. I have trouble imagining a brand that has been built patiently for almost 50 years suddenly becoming obsolete. Second, we are paying a low price. If you look at what we are paying compared to sales it has only been this low in the two previous US recessions. 

There are a couple of reasons the stock is cheap. As with most of my cases, it is one that needs a couple of years to work out. Most investors are not willing to wait that long. Second, near-term, it will become a bit worse before it becomes better. Third, the retail industry itself is very unpopular now due to the recent poor performance. But, none of these factors matter for the long-term investor. 


Säljer Moody's


During the quarter we sold our shares in Moody’s. When we bought the stock in February the market was worried about the company’s prospects and the stock seemed undervalued to us. In September the market’s view on the business and its future had changed and the stock was not undervalued anymore. We made a 42% return over 7 months which translates to 75% annualised return.

Although I always invest with the attitude that we will hold the position for a couple of years I do not mind having our investment thesis play out faster.  

Sports Direct International


The Brexit caused a stir in the market and we used the opportunity to invest in Sports Direct International (SPD), an UK-based sports retailer. SPD sell their own and branded sports-goods in stores and online. They have become the largest sports retailer in the UK through a well executed low cost/low price strategy. 

It’s run by Mike Ashley (founder, Chairman and majority owner) and David Forsey who has been CEO since 2001. Although they have been getting a lot of criticism lately I like everything about them. They have integrity, are hard working and good at what they do. An example of this is the compensation structure they’ve set up for themselves. Mike doesn't get paid anything. David has a very low salary of 150,000 GBP but earns a (big) bonus if he reaches ambitious five-year targets. It’s not very common to see these kind of true “pay for performance” structures. 

The shares of SPD has gone from c. 8.00 GBP a year ago to 2.80 GBP today because of several reasons, none of which I think affects the company long-term:

  • A report by The Guardian revealed that SPD paid some of its workers less then minimum wage (by not paying them while they were going through security checks after work). It led to SPD being investigated by the Commons Business Select Committee. The investigation showed some other minor malpractices. After going through the findings and the subsequent actions from SPD I’m even more impressed by the team. The practices had developed organically, as many of these things do, and were not known or approved by the senior management. Mike and the team showed sincere concern and immediately took action on the raised issues. Although SPD did get bad publicity these things usually subside. 
  • The results for 2015 were not as good as the market had expected due to various reasons that are more short term in nature.
  • SPD was then removed from the FTSE 100 and Stoxx 600 indices which forced some index funds to sell the stock.
  • The final blow was the Brexit vote. The expected recession and weakened Pound are both negative for SPD and near term results will suffer. That said, I would expect the low cost/low price operator of the industry to be the most resilient in such an environment. 

To sum up: it’s been a bad year. But looking at the fundamentals, a bad year for SPD means producing a return on equity of 22% and an operating profit of 280 million (slightly less than last year). Most importantly I don’t expect any of the events above to have a long-term negative effect on the company. Things might of course become worse, but the price of the stock more than reflects that. We paid around 6 times last year’s earnings for SPD. For comparison, their largest competitor in the UK, JD Sports is trading at 25 times and the FTSE 100 is at 20 times.

Säljer WL Ross Holding Corp


I mentioned our investment in WLRH in the Q4 2014 letter. I said that it was a heads we win, tails we don’t lose situation. We didn’t lose. In March it was announced that WLRH would acquire Nexeo, a chemicals and plastic distributor. The market’s reaction was muted and the stock stayed at 10 USD per share (the minimum redemption price for those wishing not to participate in the acquisition.) After reviewing it I concluded that the stock was correctly priced and sold it. We got a 1.5% return for the holding period, which being the worst case is not bad. We made an additional 6% on the currency but that was pure luck. 

MSC Industrial Direct


MSC Industrial Direct (MSM) is a MRO (maintenance, repair and operations) distributor in the US. It means that they sell screws, light bulbs, locks, brooms and another million different products that business customers need to run their daily operations.

Although not often thought about the MRO industry is huge. There are around 150,000 distributors in the US with combined sales of USD 140 billion. The top 50 distributors represent around 30% of the total market. MSM is one of the larger ones. This is great because there are obvious advantages with being large. MSM can afford to keep a large number of products in their inventory and build the distribution system needed to be able to deliver them fast. As an example, MSM sells more than 55,000 different fasteners (screws, nuts, nails and bolts) that they can deliver the next day if the order is made before 20.00. Being big also means that they can serve large national customers from different locations. 

The industry itself is more attractive than one might think. When people need a small and cheap component for a machine that does not work without it, price is not the main concern. Getting the missing part quickly is more important. This enables MSM to have gross margins of around 45% and high returns on equity. 

Going forward I think it is highly likely that MSM will continue to grow. The market itself grows with the general economy. MSM has a solid base of satisfied customers that likely will stay and potentially increase their spending. Further, they will probably continue to take market share from their smaller competitors, both organically and through acquisitions.

Insiders of MSM owns around a fifth of the company. The CEO, Erik Gershwind, owns stock worth around USD 100 million compared to a salary of USD 2 million. Incentives are clearly aligned with the shareholders. 

The share price of MSM has historically followed the development of the manufacturing economy in the US. So when the indicators started to decline at the end of 2014 MSM’s share price went down with them. It is true that MSM’s business is cyclical. But the benefit of being long-term is that if we can be reasonable sure that revenues and profits will bounce back we do not have to be too concerned with it. In MSM’s case each recession has been followed by a period of above average growth. That’s because the products MSM sells are things that wear out and needs to be replaced at some point. Another reason is that MSM’s smaller and less well-managed competitors often go out of business or struggle during recessions, enable MSM to take market share. 

The market’s short-term focus enabled us to invest in MSM at a below average valuation, which together with the future growth and capital returns should produce a good return. We paid USD 59 per share.

Let me just make a short comment about the investment process. Most of my time is spent trying to find companies that possess certain features. I’m looking for simple businesses with good prospects that are run by honest and capable managers. Usually these companies are not cheap enough. So what I do is to set a target price and wait. Often the prices don’t go down enough but sometimes, like during the January turbulence, a couple do. If the thesis is still intact we then invest. Sound investing involves a lot of waiting. 

Säljer TARP warrant korgen


I sold our basket of financial institutions that was described in the Q3 2014 letter. We made a 19% return during the 18 months we owned it. I sold the basket because I liked LUK’s risk/reward profile better and felt that we already had a too large exposure towards US financials. 

Alignment of interest


When I evaluate managers of potential investments one of the most important factors is alignment of interest. People will always act in their own best interest, so I want to make sure that managers are paid based on performance and that they share the downside. It is important that both apply. A manager that gets large bonuses if everything goes well, but does not suffer the consequences if it goes bad will take too much risk. On the other hand, a CEO that is not rewarded for good results but penalised for bad, will not try to deliver anything above the minimum required to stay employed. 

When starting Pandium we did not want to hold ourselves to a lower standard than we hold others. We therefore decided to adopt a, for the fund industry, very uncommon incentive structure that puts us in the same boat as our investors. Here is a summary:

Paid based on performance

  • We only charge a fee when we have generated returns that are above those of the global equity index MSCI World. As active managers our purpose is to beat the index and we should only be paid when we do.

Sharing the downside

  • We at Pandium (employees, owners and board members) are together the largest investor in the Fund, representing 47% of assets. Every single employee, owner and board member has invested in the Fund. 
  • I have (happily) agreed that I will not have any other investments than Pandium Global. All my money is and will be invested in Pandium.

Besides being fair towards our investors I actually think that this structure will make us better. We will always have to earn our fees and we will not take unreasonable risk doing so. 

Leucadia National Corporation


Leucadia National Corporation (LUK) is a diversified holding company consisting of financial services businesses and investments in other industries. Holdings include the investment bank Jefferies, Spectrum Brands (the manufacturer of e.g. Varta batteries and Stanley tools), an auto dealership system, a maker of plastic netting and an Italian fixed wireless broadband. 

LUK has great management. When Ian Cumming and Joseph Steinberg took over LUK in 1978 it had a negative book value of USD 8 million. Through clever contrarian investments they grew the value to USD 6.8 billion by 2012 when they merged with Jefferies. Then Ian and Joseph stepped down from the day to day operations and the leadership duo of Jefferies, Richard Handler and Brian Friedman, took over. Joseph stayed as Chairman of the Board. Their track record is equally impressive. From 2001, when Richard took over as CEO, until 2013 Jefferies was by far the best performing investment bank in the US. It produced a total return of 220% compared with e.g. Goldman Sachs that only returned 57%. 

I like LUK for other reasons as well. It owns a portfolio of companies with strong position in their respective industries. LUK is also unique in that it is combining permanent capital from the Leucadia balance sheet, the deal sourcing capability of the Jefferies investment bank and the flexibility and speed of a lightly regulated entity. This has enabled them to develop a niche as a provider of emergency capital, meaning that the provide cash to companies in trouble. If done correctly this provides low valuations and control. 

The investment in FXCM, a leading online foreign exchange trading platform, is a good example. On the morning of January 15th, 2015, the Swiss National Bank scrapped the Swiss franc peg to the Euro. The franc immediately soared 30% which led to huge losses for some of FXCM’s customers. By 14:00 its customers owed FXCM over USD 200 million and the company was in risk of being shut down because of its inability to meet the regulatory capital requirements. The management of FXCM contacted LUK (through Jefferies) and asked for help. At 15:00 the next day LUK had analysed the company, written agreements and sent over a check, thereby saving FXCM from bankruptcy. Needless to say, FXCM was not a very tough negotiator and less than a year later it seems that the deal will be very profitable. There are very few companies that can provide these sums of money as fast and that is a great advantage. 

There are a couple of reasons LUK is cheap now. Profits have declined lately, mainly because of poor results from a recently acquired futures trading business, that is now being wound-down. Further, Jefferies has gotten a fair amount of investment banking business from the oil and gas industry, which is obviously slowing down. Besides that LUK is not a well understood company. It is complex, with diverse assets in unrelated industries, and there is just one analyst covering the company. 

We bought LUK at a 20% discount to the tangible net asset value. Historically LUK has been valued at a 20 - 40% premium. Going forward I think LUK might produce a 10% or higher return on tangible book. Of that about half will be returned to the shareholders through dividends and share repurchases. Adding up the dividend yield, the expected book value growth and the change in valuation multiple implies a high double digit return over a couple of years. At this valuation, combined with the track record and quality of assets, I see low risk of permanent capital loss.