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Oakcliff Capital / Bryan Lawrence

Oakcliff Capital / Bryan Lawrence



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Published by thistle705
Interview in Manual of Ideas with Bryan Lawrence, founder of Oakcliff Capital
Interview in Manual of Ideas with Bryan Lawrence, founder of Oakcliff Capital

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Published by: thistle705 on Jun 22, 2011
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Value-oriented Equity Investment Ideas for Sophisticated Investors
A Monthly Publication of BeyondProxy LLC
Subscribe atmanualofideas.com
“If our efforts can further the goals of our members by giving them a discernible edge over other market participants, we have succeeded.” 
Copyright Warning:
It is a violation of federal copyright law to reproduce all or part of this publication for any purpose without the prior written consent of BeyondProxy LLC. Email support@manualofideas.com if you wish to have multiple copies sent to you. © 2008-2011 by BeyondProxy LLC. All rights reserved.
Investing In The Tradition ofGraham, Buffett, Klarman
Year IV, Volume II February 28, 2011When asked how he became so successful, Buffett answered: “We read hundreds and hundreds of annual reports every year.” 
Top Ideas In This Report
Seagate Technology
(Nasdaq: STX) ……………………114
Sprint Nextel
(NYSE: S) …………………….......118
Zimmer Holdings
(NYSE: ZMH) ……………………..130
Also Inside
Editor’s Commentary
………………... 5
 Interview with Brian Bares
………… 8
Interview with Bryan Lawrence
…… 12
Portfolios with Signal Value™
…… 18
New or Increased Holdings
………. 70
Reduced or Offsetting Holdings
…. 134
100 Superinvestor Stocks
 Essay by Josh Tarasoff
…………… 156
 Favorite Value Screens
…………… 158
 This Month’s Top Web Links
…….. 167
About The Manual of Ideas
Our goal is to bring you investmentideas that are compelling on thebasis of value versus price. In our quest for value, we analyze the topholdings of top fund managers. Wealso use a proprietary methodologyto identify stocks that are not widelyfollowed by institutional investors.Our research team has extensiveexperience in industry and securityanalysis, equity valuation, andinvestment management. We bring a“buy side” mindset to the ideageneration process, cutting acrossindustries and market capitalizationranges in our search for compellingequity investment opportunities.
Snapshot of 100 companies owned by superinvestors
Latest holdings of 50 top investors
19 companies profiled by
research team
Proprietary selection of Top 3 candidates for investment
Plus: Exclusive interview with Brian Bares
Plus: Exclusive interview with Bryan Lawrence
Plus: Favorite stock screens for value investors
Superinvestor companies mentioned in this issue include AbitibiBowater, Accuride, Alere, American Tower, Amylin Pharma,Anadarko Petroleum, Anheuser-Busch InBev, Applied Materials, Arris,BP, Broadridge Financial, Brookfield Infrastructure Partners,
CareFusion, CBS, Charter Comms, Chesapeake Energy, China Mobile,Cisco Systems, Coca-Cola, Comcast, CommScope, Copart,Corporate Executive, DaVita, Dean Foods, Electronic Arts, Ensco,Enstar Group, Express Scripts, Exxon Mobil, Fiserv, Flextronics,Flowserve, Fortune Brands, Foster Wheeler, Gap, Gastar Exploration,
General Growth, General Motors, H&R Block, Hain Celestial,Harvest Natural Resources, Hewlett-Packard, International Paper, ITT,J.C. Penney, Johnson & Johnson, Kraft Foods, Lab Corp. of America,Lamar Advertising, Leap Wireless, Learning Tree, Level 3 Comms,Liberty Global, Liberty Interactive, Lions Gate Entertainment,Loral Space, LyondellBasell, Massey Energy, MasterCard, McDonald's,McKesson, Microsoft, Molson Coors, MRV Comms, Omnicare,Owens Illinois, PDL BioPharma, Pfizer, Plains Exploration, POSCO,Praxair, Procter & Gamble, Radian Group, Raytheon, Ross Stores,Schlumberger, Seagate Technology, Sears Holdings, Snap-on,
Spectrum Brands, Sprint Nextel, Stanley Black Decker, Steris,
Teck Resources, Texas Industries, Theravance, Time Warner Cable,Tyco International, Vail Resorts, Valeant Pharma, Vishay Precision,Vulcan Materials, W.R. Grace, Wal-Mart, Watson Pharma, Wendy's/Arby's,
Zimmer Holdings, ZipRealty, and more.
(analyzed companies are underlined) 
 Exclusive Interview with Bryan Lawrence,Oakcliff Capital 
With compliments of The Manual of Ideas 
Value-oriented Equity Investment Ideas for Sophisticated Investors
© 2008-2011 by BeyondProxy LLC. All rights reserved.
SUBSCRIBE TODAY! www.manualofideas.com
February 28, 2011 – Page 12 of 170
Exclusive Interview with Bryan Lawrence
We had the pleasure of spending time and learning from Bryan Lawrence at therecent VALUEx in Zurich/Klosters, Switzerland. We caught up with Bryan afterthe event and are pleased to bring you some of his insights in this interview.After eleven years as a banker at Lazard, Bryan started his own partnership,Oakcliff Capital, in 2004 in order to invest his family’s capital and the capital of partners and CEOs of the private equity firm his father founded. In 2010, Bryanpartnered with Glenn Greenberg to start Brave Warrior, but has returned toOakcliff full-time because he found investing only in larger U.S. companies tobe confining. Bryan is a graduate of Yale University.
The Manual of Ideas:
Tell us a little about the genesis of your firm. What goalsdid you have at the outset, and what operating principles have guided you sincethen?
Bryan Lawrence:
Oakcliff was started in 2004 in order to invest capital for myfamily and our business partners. My family’s and most of my partners’ wealthcomes from a private equity firm that invests in energy companies. So a goalfrom the beginning has been to diversify into non-energy investments (thoughsometimes our knowledge of the energy industry has made it hard to pass up onthings that we see in the public market). Another goal is to maximize returnswhile taking as little risk as possible. If you look at how to do this, you quicklycome to concentrated value investing as the most sensible way, especially on anafter-tax basis.One of the best advantages you can have as an investor is patient capital,and so we have done everything that we can to be able to stand at the plate allnight. My family owns roughly 65% of Oakcliff, and we consider our capital tobe permanent. Our partners have all been known to us for decades, and have thesame goals that we do. There has not been and never will be a marketing effort.When new people enquire about becoming Oakcliff partners, we think carefullyabout taking them on. We have found that asking for a two-year lock-up is asmart test of someone’s commitment to our strategy. We also have found thatpeople who like to talk with us about businesses are usually great partners, asthey are likely to think long term, and also can be great sources of investmentideas. We only need a couple of ideas a year, and so a partner who comes upwith one of them, or who helps us think through something, is adding anenormous amount of value to the partnership.Another principle is that this really is our money. So we do not do anythingthat might cause financial distress, which we define as being forced to dosomething when we don’t want to do it. This rules out leverage at thepartnership level, and makes us suspicious of companies with too much debt.Experience shows that the highest returns come from the investments with thelowest risk of permanent loss at the time the investment was made. That is notwhat they teach in business school, but that is what we have found, in bothenergy and non-energy.
“Experience shows that thehighest returns come fromthe investments with thelowest risk of permanent lossat the time the investment was made. That is not what they teach in businessschool…”
Value-oriented Equity Investment Ideas for Sophisticated Investors
© 2008-2011 by BeyondProxy LLC. All rights reserved.
SUBSCRIBE TODAY! www.manualofideas.com
February 28, 2011 – Page 13 of 170
Our goal is for the partnership to beat the market by double-digitpercentages, which it has done overall against the S&P. Net of all fees andexpenses, returns to limited partners have been 10% annualized. More than 90%of these returns have been unrealized or long-term gains, and they wereachieved with cash balances that ranged from zero to 70% of the portfolio. Weweren’t smart enough to hold onto our cash until the bottom, but the experienceof living through the crash makes us even more certain that we want to owngood businesses, have a clear sense of how much cash they generate, and haveno way for the bank to take the keys away. It’s just too painful to live otherwise.
Help us understand the kind of investor you are, perhaps by highlighting acouple of examples of companies you have invested in or decided to pass up.What are the key criteria you employ when making an investment decision?
At the core of our investment process are five basic questions thatwill be familiar to most value investors: (i) do we understand the business; (ii) isit a good business; (iii) is it run by people who act like owners; (iv) is it cheap;and (v) why is it cheap. To get these questions answered positively, we arewilling to look at small and big companies, as well as overseas. Our capitaltotals $55 million today, which means that we are able to look at a broad rangeof equity investments, as well as options and debt instruments that can createinteresting risk/reward situations.One example was Dr. Reddy’s Laboratories, an Indian company that sellsdrugs in developing countries, and develops challenges to the patents of largeWestern drug companies. The company has an attractive business modelbecause Indian researchers are very high quality but cost 80% less than Westernresearchers, and developing country demand for pharmaceuticals is growingrapidly. The company sounds like it has a silly name, but Dr. Reddy was one of the most respected businessmen in India, and his family was a significant ownerof the company. In mid-2005, the company looked cheap. The branded drugbusiness generated predictable cash flows worth $18 per share, and a portfolioof twelve patent challenges was worth $5-8 per share assuming a 30% successrate, compared to a historical success rate of 70%. Including $2 per share of cash, intrinsic value was $25-28 per share, compared to the market price of $17per share. An unlevered balance sheet, strong free cash flows, and low shareprice relative to the value of branded business looked like a pretty good marginof safety, and there was also a decent case to be made that the low valuationwould be temporary. Patent challenges require three to four years of legalexpense before success or failure in court. This was obscuring the cash flows of the branded drug business. The company had recently lost its challenge of Prozac’s patent, which was the largest potential pay-off in its portfolio. Thisreduced investor confidence about the remaining twelve challenges. Finally,India had recently agreed to begin respecting Western patents, causing investorsto worry about entry into India by Western drug makers. But Western drugmakers worried about global pricing consistency had to price at Western levels,which were 5-10x Indian prices, so it seemed very unlikely that Western drugmakers would gain much share. We had a positive answer to all five of our basicquestions, and the investment played out happily. Oakcliff bought at $17 pershare in mid-2005, and exited after 14 months at $31 per share, a long-term gainof 88%.
“At the core of our investment process are fivebasic questions: (i) do weunderstand the business; (ii)is it a good business; (iii) is it run by people who act likeowners; (iv) is it cheap; and (v) why is it cheap.”

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