ADS - Alliance Data Systems

[buffetteer1984]

Valueact also has their biggest position in citigroup which they wanted a board seat and was only given so if they removed potential conflict of interest ie their board seat on ADS. 

[RVP]

Not to sound like a broken record, but I think the time spent trying to understand other fund(s) motivations in regards to their trading activities would be better directed at doing deeper diligence on the company to hopefully reach a better understanding. I think kab60's approach of keeping a steady hand while focusing on the business is a healthy one (regardless of if it works out or not).   

Regarding ValueAct specifically, there could be a host of reasons why they sold out. They might think the business will deteriorate. They might have better opportunities to deploy the funds into. They might want to take the tax loss to offset some of the potential large gains they are sitting on, and may very well buy it again next year. Or they might simply be wrong about their assessment and capitulated at the wrong time. Etc.

My point being - without being in the shoes of another investor, we are just speculating and I'm not sure that's the best use of our energies and time (though its entertaining for sure).   

[frank87]

Not to sound like a broken record, but I think the time spent trying to understand other fund(s) motivations in regards to their trading activities would be better directed at doing deeper diligence on the company to hopefully reach a better understanding. I think kab60's approach of keeping a steady hand while focusing on the business is a healthy one (regardless of if it works out or not).   

Regarding ValueAct specifically, there could be a host of reasons why they sold out. They might think the business will deteriorate. They might have better opportunities to deploy the funds into. They might want to take the tax loss to offset some of the potential large gains they are sitting on, and may very well buy it again next year. Or they might simply be wrong about their assessment and capitulated at the wrong time. Etc.

My point being - without being in the shoes of another investor, we are just speculating and I'm not sure that's the best use of our energies and time (though its entertaining for sure).

Agreed.

[NotSoWise]

They clearly made a mistake to buy (after the fact - easy one...), but there is a higher chance they did the right decision when they exited (better understanding of the business). At the entry they were outsiders, but at the exit they were insiders.

Agree also that there might be other reasons they sold out, in particular:

to quote KAB60:
So either they suddenly had a unique insight (after the stock had plunged), or perhaps they jumped ship because they weren't in agreement with the rest of the board re divestments and possibly a sale of the whole company. It's not inconceivable that ValueAct were pushing for a quick flip to recoup their investment/improve IRR versus holding for plus five years.

but as you guys pointed out its just speculation. My point is that being at the Board gives you so much more insight. There is simply no substitute to talking to managers about the business and the market they are in. You won't find this stuff in any research reports, etc.

[undervalued]

I think everyone brought up good points about there could be many reasons as to why ValueAct could be selling. Based on ValueAct's history related to BHC/Valeant saga, they hold their companies for the long term since they're still holding on to their shares even now. But who knows what the real reason is, I guess time will tell.

[kab60]

There is simply no substitute to talking to managers about the business and the market they are in. You won't find this stuff in any research reports, etc.

Lots of investors prefer not to speak with management to avoid alot of classic traps. And their timing in this case was horrific, so they probably should've read some of the bearish reports instead, because they were obviously drinking the same management Kool-Aid as I was. Didn't they also miss the a multibagger in Microsoft, and didn't they also stick around VRX a bit too long? From the outside they seem to have made a ton of mistakes - just like everyone else. I like to listen to Ubben, he's obviously extremely smart, but they were wrong all along on this one as well.

We all were it seems, but it's funny how a 50 pct. drawdown and ValueAct blowing out of their position has people dumping the stock. Perhaps the risk/reward has never been better? What's the downside here? (I already listed some, but it would be nice to get that ball rolling, because there might be money to make).

[nafregnum]

I'm glad to hear ValueAct may have bailed for other reasons (conflict of interest, Citi)

In my experience, boards of directors don't contribute much or even understand the business better than an outsider might.  The ones I've seen just get together for a meeting once or twice a year and watch manicured PowerPoint slide shows that the CEO and CFO put together.  They barely interact with anyone else in the company beyond the CEO, CFO, and controller.

My experience is only limited to what I've seen at three companies, but what I saw resonated with what Buffett once wrote about board members being as useful in the room as a potted plant because of what he called "boardroom culture" (a good old boys club of people who don't want to offend anyone else in the room)

This would be a separate topic maybe that belongs in the general discussion area, but does anyone watching ADS here have an example of a high functioning board of directors that really does contribute to the steering of a company?

Bull thesis:
I got interested in ADS after seeing it's one of Allan Mecham's bets, and then more interested after each time it fell since he started buying.  Currently my thesis sounds like this: "There is pessimism for ADS because the sale of the other business unit didn't fetch the price that some had hoped for, and there's pessimism about the future of branded credit cards.  The cash from the sale of the other business unit can be used to buy back shares at depressed levels."  I remember when there was a lot of pessimism about Target's future prospects a few years back -- I'm trying to decide whether this is the same kind of irrational pessimism ... so, the question for me is "Do these levels represent the correct valuation based on where the company will be in 2 years?" 

Bear thesis:
It sounds like the management team isn't very credible.  That brings up bad memories of some of my losers like OUTR (another Mecham bet) ... but I don't think branded credit cards are really a melting ice cube like OUTR.

[NotSoWise]

My experience comes from Boards of private companies in Europe. It might be different to what you have described as US or other public companies. However, given ValueAct involvement with selling Epsilon/ getting rid of Ed, I thought they were more involved than typical public company Board.

As for the current valuation I have no clue... On the one hand it looks cheap, but at the same time there is a myriad of reasons why the current price could be the right one (e.g. more reserves to come for old portfolios, lower IRRs for new ones, already high niche real penetration/ market share, further deterioration of retail customers, etc).

As for buybacks, my observation is they work best for good/ cash growing companies (e.g. Charter), however not so well for cash poor, bad or pressured business (e.g. Hertz).

I have a pretty bad track record with value plays (50% right, which might be close to random). So my view is worth close to nothing here.

[buffetteer1984]

Valueact has a good long standing track record of being on the board and making changes.  But they also have shown to exit at bad times leaving plenty on the table even AFTER having board seats ie selling out of MSFT in the 70-80s and ADBE under 100 (now 290).  I think the point is never depend your investment thesis on another investor because some can easily suggest arlington being a better investor and they've been building a massive stake while others are selling.

[kab60]

As for the current valuation I have no clue... On the one hand it looks cheap, but at the same time there is a myriad of reasons why the current price could be the right one (e.g. more reserves to come for old portfolios, lower IRRs for new ones, already high niche real penetration/ market share, further deterioration of retail customers, etc).

I'm still trying to flesh out the bear case. On the last call an analyst triangulated that they took at 60m hit to their portfolios held for sale (2b). I'd assume they're getting rid of their worst clients/portfolios, but even if one assumed all their receivables were impaired, that would be a 600m hit. Hardly threatening. I'd also expect their costs to fund their receivables portfolios would increase - I've seen nothing in their filings to suggest so.

We'll see about ROE, despite a bad performance and little credibility, they committed to +30 pct. ROE. Their overoptimistic ways means we shouldn't take that at face value, but they'd be stupid as hell when they could kitchen sink (but hey, they seem stupid as hell communication wise, so hardly would be surprising).

Anyway, I'd say a decline in ROE is pretty much baked in. So I think we'd be good at these levels. So do they have a viable future - are their services needed?

Ulta Beauty has 33m loyalty members, and their members are much more valuable than non-members (last Ulta investor day has some interesting info), so it does seem like the value they create for their customers is anything but trivial. If it's all just about loose credit and about to unravel, I've somewhat hedged my bet by going long Ulta. Perhaps one should go long Lands End as well, since their new agreement should be a meaningful contributor to sales going forward.