Santangel's Review

Commentary

REGISTER to ATTEND THE FORUM

Interview with 2013 Ira Sohn Contest Winner Simeon McMillan

Last month we had a chance to chat with the 2013 Ira Sohn Contest winner Simeon McMillan, a Columbia University MBA student. His idea, Tribune Co. (TRBAA), was selected by a panel of judges, including Joel Greenblatt, Bill Ackman, David Einhorn, Seth Klarman, and Michael Price.

Tell me about your background and how you came to be interested in investing:

Simeon McMillan: I am originally from Baldwin, NY, a town in Long Island. I initially enrolled at the University of Pennsylvania to do a dual-degree in engineering and finance but I found out I was way more passionate about the finance aspect of it and so I dropped the engineering degree and graduated from Wharton in 2008.

While in college, I did two summer internships at several sales and trading desks at Goldman and ultimately, I got a full-time offer as an investment banking analyst at their Tech, Media and Telecom (TMT) group here in New York. And then after doing that for two years I wanted to go to the buy side and so I spent another two years at a middle-market private equity shop in Chicago called Sterling Partners. And then from there, I knew I wanted to transition from private equity to public equity and in my mind the only place I wanted to go was to Columbia Business School and that is what brought me to Columbia.

Had you been investing during that time?

SM: I had been investing in my own personal account since sophomore year of undergrad. I experimented with different investing philosophies. At times I was a little more momentum based, at times a little bit more event-drive but it probably wasn’t until my time in investment banking where I got more experienced in doing deep dives of companies and doing equity valuation and equity research that I then really discovered value investing. My sort of realization of my interest in value investing didn’t come until on a business trip, I read the Warren Buffett biography, The Snowball, by Alice Schroeder and that was actually my first real understanding of Buffett and his background—I mean I had heard of him, of course, but I had never really read about him in any depth. It was from reading that that I became interested in reading Ben Graham and I read Security Analysis and from there I sort of went through all the standard value investing books and got more and more books.

That is a very typical story actually. A lot of investors bounce around and try different things and then find value investing and it just clicks:

SM: It just made sense and from there I never sort of looked back really.

Do you think you were predisposed to value investing as you look back on your early life? Some people are just naturally “cheap.”

SM:Yeah I felt like value investing suited my temperament pretty well. I’ve always considered myself a pretty inquisitive person, I’ve had an investigative mindset. What actually brought me to do engineering at first at Penn was I was actually a national and international science fair champion through the Intel STS [Science Talent Search] and Intel ISEF [International Science and Engineering Fair] throughout high school. So I was really into doing research and always interested in solving problems. And when I was at Wharton I also spent about two years writing for the Daily Pennsylvanian which also sort of fed my desire to do research. I always like looking at what questions aren’t being answered and trying to have a novel view on things. So value investing and just equity research in general I felt was a good fit for my temperament.

Turning to the Ira Sohn Contest, you were a finalist last year as well, correct?

SM: I applied once before. How I came to the contest actually was I was finishing my first year in my private equity associate program and one day in the news I read all about this college junior who had won Ira Sohn and I was first really impressed because I didn’t even know that non-professionals, let alone students, could even apply and I didn’t know they could even be competitive. So I read a lot about the conference. I actually remember when I came across his interview on Santangel’s Review’s site a little while later. It was from that point that I worked backwards and made it a goal to try to apply a year later and when I did, I made the top 12 semifinalists and got a free ticket to go to New York and watch the conference. And it was my first time watching these famous investors in person and I was in the audience, it was really exciting and I was taking notes and throughout the course of the next year, I followed the stock that I picked [Nationstar Mortgage (NSM)] and it outperformed all of the stocks at the conference from $14 a share all the way up to $40. And it was at that point I said to myself, OK well let me try this again next year and see if I can improve.

What was your thesis on Nationstar Mortgage at the time?

SM: The thesis at the time was that the mortgage servicing companies were a misunderstood and underfollowed subset of the mortgage industry that were poised to experience a lot of growth in the coming years as the major financial institutions were looking to get out of the business of doing mortgage servicing in-house and you were going to see this major shift from the banks to the non-banks. It first got my attention when I was reading about the scandals of how the banks were getting into trouble with the robo-signing–basically, because they weren’t set up to do that much volume and that many delinquent mortgages. So they were looking to get out of the business and you had a handful of publicly traded guys who I felt were underfollowed.  Nationstar at the time had just come public and it didn’t have any analyst research coverage on it and I thought that the market was not giving them any credit for any growth in their mortgage servicing portfolio so that is what brought me to the name. The other thing about that, too, is that they were in the running to win the mortgage servicing assets from ResCap [Residential Capital] and that put an event-driven spin on the name that was going to coincide with the conference so I thought it was very actionable.

Any speculation why do you think you didn’t win last year?

SM: I don’t really know. I probably could have done a better job explaining the thesis in my write-up. I also learned since then that different investors have different things they look for in an investment pitch and when I learned that Joel Greenblatt was going to be the head judge for 2013 as opposed to Michael Price, who was the head judge in 2012, I then went back and read their background and saw the type of investments that they typically made and that helped me then pick my stock to be tailored to what I thought they would find more interesting. I had the conference on my calendar for about a year in advance, but it wasn’t until January of 2013 that I identified Tribune and started doing some work on the company.

Tell me about the process. You applied with your Tribune write-up and then what?

SM: The way it worked, I submitted my write-up at 5pm on a Thursday, it was all text. There were no Powerpoint, graphs, anything like that. And then by Monday morning, I heard that I was a semi-finalist through an email and then early Monday evening, I found out that I was a finalist also through an email. And it was at that point I was told that I needed to prepare a presentation and be prepared to talk since I had a one in four chance of winning. When I found out, I was actually in Las Vegas for a separate conference which I had won a ticket to go see for free because another write-up I wrote for the same company, Tribune, won a Benjamin Graham Fellowship (a stock write-up contest exclusively for MBA students).  I spent the entire 2nd day of the conference in my hotel room just working on my slideshow and then I took the red-eye back on Tuesday night and worked the entire night on the plane from Las Vegas to New York and got home, showered, and went straight to Lincoln Center. I had been up for about 36 hours. I was so tired when I got to Lincoln Center around lunchtime and knew the winner wasn’t going to be announced until 5:30pm so I literally was writing parts of my speech in the audience just because I had been so tired working on my slideshow for about 30 hours straight.  And when we were backstage and I was talking with the other three finalists and I heard the other three stocks that were in the running, I then began to wonder to myself whether it was going to be my stock. My stock was, I felt, the most similar to the types of special situations stocks that Joel Greenblatt had written about and so I thought that mine was the best fit for his mentality. It wasn’t until early afternoon that I began to think to myself that there is a chance that I actually might go up [on stage and present]. And I finally learned on stage when everyone else did. All four of us were backstage and I heard my name and I was happy for about five seconds and then I immediately started focusing on delivering the speech and about 10 seconds later they pushed me onto stage and then I just had to go. I didn’t have any time to practice actually or rehearse at all.

Did you get any feedback from the judges?

SM: I didn’t get any feedback from the judges–the only one was Joel Greenblatt because he met with us back stage in the green room and he also introduced me on stage. But he had another commitment so he actually left immediately after he gave his introduction so I didn’t get a chance to speak with him after. I have gotten a lot of feedback from different investors, professional as well as individual investors, of all different types of styles in the months since then. I’ve gotten a lot of phone calls and coffee chats and emails about the stock pitch–some people who also owned the stock, people who were aware of it and were interested and some people who are just starting to look at it and wanted to know how they could get started.

What has been most surprising about the whole experience?

SM: I think the most surprising thing was that it wasn’t until after the conference that I realized the irony that Tribune, a multi-billion dollar conglomerate whose media properties literally touch hundreds of millions of Americans could be such an under-the-radar stock. Based on all the investors who reached out to me, I was really surprised that there were so many hedge fund investors who do this for a living had no idea what was going on with the company and the lesson I took away from that was you should never assume that the market is efficient and that there are always bargains out there that maybe other investors haven’t yet discovered. Don’t assume just because it is a large company that someone has looked at it and priced it accordingly because as it turns out a lot of people didn’t realize that it was publicly traded.

Can you briefly share your thesis on Tribune?

SM: So the thesis was, it was a post-bankrupt equity that was underfollowed and traded over the counter. And it had a number of publishing assets that they were in the process of selling as well as some minority investments in some other media properties. Following the sale of the newspapers what you have left is a combination of television broadcast stations as well as an under followed cable network called WGN America. You also had an underlevered balance sheet that had some optionality if they put the appropriate capital structure on it and you had a new management team that was just brought in place with a track record of creating value and specifically in the cable television space. So I thought that there were several catalysts in the near and long term to value creation and that the television broadcast industry in general was relatively misunderstood and as more and more investors began to see the value in television broadcast companies—and since the Ira Sohn there has been even more M&A in this space. In the past couple of weeks you have seen a lot of attention on the merger of Belo and Gannett as well as Media General buying Young Broadcasting and that along with other transactions has brought more attention on the investment merits of the television broadcast industry of which a Tribune is a big player in that space.

I valued the company on a sum of the parts analysis which I thought was appropriate because they had made it clear that they were taking some steps to shed the newspaper divisions because the stock around the time of the conference and still now [Note: this interview was conducted on June 17th, 2013] was about $55 per share Today [July 28th], Tribune is around $64 per share] and I felt that my base case sum of the parts analysis was closer to $90 per share. In the slide deck it laid out very clearly what I think the value is for all the different parts.

In your conversations with people after the conference, have people challenged or disagreed with your thesis?

SM: The feedback that I have gotten challenging the thesis is valid concerns as to whether or not they will be able to sell the newspapers as planned. The company is a little behind schedule in the auction process for the newspapers and it also remains to be seen whether or not the new CEO is able to improve the ratings of the cable network, WGN. Currently he is trying to introduce new original programming which it remains to be seen whether or not that strategy is successful–although I think all of that is fairly reflected in the current valuation and I think there are multiple ways to win with the stock and if any one piece doesn’t play out, there are still several others.

You just finished your first year at Columbia Business School. What are you summer plans and for after graduation?

SM: Right now I am interning at a hedge fund called Frontfour Capital. It has been incredibly educational and I am having a great experience. Starting in the fall I’ll be in the Applied Value Investing program at Columbia and I’ll be taking investing related courses for the majority of my schedule. And I am still learning and practicing and I think that once the summer is over and I get back to school and have more time to reflect and look to what sort of investing role I want to pursue for full-time employment. I don’t graduate until 2014. I think I am still trying to figure out the type of investing that I would like to do. No matter what I do, I know that I want to invest with a value mindset and I am just taking it one step at a time.