Value-oriented Equity Investment Ideas for Sophisticated Investors A Monthly Publication of BeyondProxy LLC Subscribe at manualofideas.com

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Investing In The Tradition of Graham, Buffett, Klarman

Year V, Volume IX September 2012

When asked how he became so successful, Buffett answered: “We read hundreds and hundreds of annual reports every year.”

Top Ideas In This Report

General Motors (NYSE: GM) ……………………… 96

Marvell Technology (Nasdaq: MRVL) ……………….. 116

WellPoint (NYSE: WLP) …………………… 144

Also Inside

Editor’s Commentary ……………….. 4

Interview with Alan Zafran ………… 6

Interview with Brian Boyle ……….. 11

Robert Leitz on Digital River ……… 14

50+ Superinvestor Portfolios …….. 17

20 Superinvestor Holdings ……….. 72

Screening Superinvestor Stocks …. 152

10 Essential Value Screens ……… 162

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.

THE SUPER- INVESTOR ISSUE

► MOI Signal Rank and top holdings of 50+ superinvestors

► Screening 800+ superinvestor holdings

► 20 companies profiled by The Manual of Ideas research team

► Proprietary selection of Top Three candidates for investment

► Plus: Exclusive interview with Alan Zafran of Luminous Capital

► Plus: Exclusive interview with Brian Boyle of Boyle Capital

► Plus: Exclusive write-up by Robert Leitz on Digital River

Superinvestor holdings profiled include Aeropostale (ARO), Apache (APA), Brookfield Asset (BAM), Colfax (CFX), Cooper (COO),

FLIR Systems (FLIR), General Motors (GM), Heineken (HINKY), Humana (HUM), Lazard (LAZ), Marriott Vacations (VAC),

Marvell Technology (MRVL), Phillips 66 (PSX), Procter & Gamble (PG), Range Resources (RRC), Rovi Corp. (ROVI), Sirius XM Radio (SIRI),

Thermo Fisher (TMO), W.R. Grace (GRA), and WellPoint (WLP).

New Exclusive Videos in the MOI Members Area (log in at www.manualofideas.com or email support@manualofideas.com)

Paul Sonkin shares insights into micro-cap investing

Tom Russo discusses investing in great businesses globally

Lisa Rapuano and others share their investment ideas

Inside:

Exclusive Interview with

Brian Boyle, CEO and CIO, Boyle Capital

With compliments of The Manual of Ideas

Value-oriented Equity Investment Ideas for Sophisticated Investors

© 2008-2012 by BeyondProxy LLC. All rights reserved. JOIN TODAY! www.manualofideas.com September 2012 – Page 12

Exclusive Interview with Brian Boyle We recently had the pleasure of interviewing Brian Boyle, CEO and CIO of Boyle Capital, a research-driven investment management firm founded in 2004. The firm is based in Clive, Iowa and specializes in value equity strategies.

The Manual of Ideas: Please tell us about your background and the genesis of your firm. What motivated you to set up Boyle Cap ital and what operating principles have guided you since then?

Brian Boyle: I graduated with a degree in Finance and Economics from the University of Northern Iowa. After a couple of years as a portfolio manager, I struck out on my own and started Boyle Capital in 2004. We are 100% employee owned and today we manage around $120 million. Our strategy is heavily influenced by the works of Buffett, Ben Graham and Phil Fisher. That is, we try to act like owners. We only focus on a handful of companies and we only invest when we believe there is significant margin of safety against a permanent loss in capital. This is the way I ran my own money prior to starting the firm in 2004 and the last eight years have really been a continuation of that. One of my major goals when starting Boyle Capital was to become personally wealthy from the investments we make. As such, nearly all of my net worth is in the same stocks as clients.

MOI: How do you generate investment ideas?

Boyle: We really don’t have a rigid process or use screens to generate ideas. However, there is usually a common linkage among our investments. For example, Fairfax Financial has been a major hold ing for years, which led us to Sandridge Energy. We owned Canadian Oil Sands Trust in the past because of Seymour Schulich. Likewise, when he became a significant investor in Birchcliff Energy we took notice. We also study the investments of other great investors. I have files on over 50 other investors that we respect, so we look at what others have been doing to see if anything might be interesting. At the end of the day, you must do your own homework though. MOI: What are your key stock selection criteria, and what types of businesses have you favored historically?

Boyle: We generally focus on a few key principles. One, we look fo r companies generating or holding a lot of cash. Two, they have to be run by smart, honest people with a great paper trail of success that have a lot of skin in the game. Lastly, we have to be able to buy at prices where we believe the odds of having to take a permanent loss are limited.

We really don’t favor any single type of business or sector. We are opportunistic in that we try to go wherever we see the best opportunities with the least risk. Today, we think those opportunities are in the natural gas and financial services space. As such, we are heavily focused in those two areas at the present.

MOI: How do you assess the quality and incentives of management, and what CEOs do you admire most? Boyle: We really try to focus on the track record to understand the quality of management. It is critical to understand how a manager behaves and more importantly how they have behaved in difficult situations. Are they honest and do they provide shareholders with a consistent way to measure results? As it

“Fairfax Financial has been a major holding for years, which led us to Sandridge

Energy. We owned Canadian Oil Sands Trust in the past

because of Seymour Schulich. Likewise, when he became a

significant investor in Birchcliff Energy we took

notice.”

Value-oriented Equity Investment Ideas for Sophisticated Investors

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relates to incentives, we expect the management of our major positions to have significant ownership of the same securities we purchase. Managers who actually own common stock tend to be much more responsive than those that have been granted huge stock option packages and have little actual skin in the game. As we have seen in recent years, a situation where it is heads I win, tails shareholders lose can end up very badly. Obviously, heavy ownership by insiders doesn’t guarantee anything, but at the end of the day we want to know that the managers of the companies we invest with share the same risks as we do. Some examples of CEOs we admire are Prem Watsa of Fairfax Financial, Warren Buffett of Berkshire Hathaway and Ken Peak of Contango Oil and Gas. All three have fabulous paper trails of success, eat their own cooking and treat shareholders with great respect.

MOI: Would you outline the summary thesis behind one or two of your best ideas at this time?

Boyle: Sure, I mentioned Birchcliff Energy (Toronto: BIR) earlier. We became interested in this junior exp loration company a few years ago when Seymour Schulich got involved. For those not familiar with Schulich, he was a co-founder of Franco-Nevada, which later became Newmont Mining. More importantly in the case of Birchcliff, Schulich has a great track record in the oil and gas space investing in smaller resource rich companies that eventually get bought out. He has been a buyer of Birchcliff at various prices over the last several years and today Schulich currently owns 40 million shares or nearly 30% of all outstanding shares. If you look at the daily volume on the stock it is virtually impossible for him to liquidate his position in the open market so the exit has to be a sale or merger of the company. In fact, the company headed in that direction last fall when it announced it was putting itself up for sale. Unfortunately for investors, gas prices continued to plummet following one of the warmest winters in the past 100 years and Birchcliff made the decision to terminate the sales process in March, despite having received several offers. Following the news of the failed sales process and the continued slide in gas prices, shares plunged and today trade around $6 per share.

Today, that leaves Birchcliff as a pure play on the Alberta portion of the Montney natural gas trend of Alberta and Brit ish Columbia. Buyers from each of the major Asian consuming countries, China, Japan and Korea have already completed deals with Canadian producers focused in that region over the past 18 months. Last April [April 2011], PetroChina spent C$5.4 billion for a half interest in Encana’s Montney position, which happens to surround Birchcliff’s. Encana had 1,100 net sections of Montney acreage. Birchcliff has around 200 net sections of Montney land. Using similar comps to the PetroChina transaction, we estimated Birchcliff’s shares were worth around $18 per share. Clearly that number has gone down as a result of the natural gas environment we find ourselves in, but there is still huge interest from Asian buyers looking to get in on liquefied natural gas (LNG) from Canada. In fact, just a few weeks ago Petronas of Malaysia acquired Canadian producer Progress Energy, which is in the same Montney play as Birchcliff, for C$5.5 billion. The offer price was at a 70% premium, so there continues to be strong interest in the region. Birchcliff recently renewed its bank loans so they are not callab le fo r two years. It also had a successful preferred raise to help bolster the balance sheet. All signs signal to us that the company is working towards a sale and we believe that once gas

“Birchcliff has around 200 net sections of Montney land. Using similar comps to the PetroChina transaction, we estimated Birchcliff’s shares were worth around $18 per share. Clearly that number has gone down as a result of the natural gas environment

we find ourselves in, but there is still huge interest

from Asian buyers looking to get in on LNG from

Canada.”

Value-oriented Equity Investment Ideas for Sophisticated Investors

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prices rebound it will happen and at a much higher price than where it trades today. MOI: Your interest in natural gas investments makes you a contrarian, though some other savvy value investors have also made investments in companies focused on the commodity. How do you refute the bearish argument that no catalyst exists to boost natural gas prices to levels that would make producers solidly profitable again? Boyle: I think it is Stein’s Law that says “if something cannot go on forever, it will stop.” First, you had a winter that was the warmest in 100 years that added to the already elevated inventory levels. Producers have significantly reduced producing wells over the past six months and I think that you will see this reflected in the inventory numbers as the year wears on. In fact, if you look at the inventory numbers from last week, we are currently at 3.163 trillion cubic feet in storage, which is 19% above year ago levels. While that is still a far cry away from a supply shortage, as recently as May we were nearly 50% h igher than the prior year levels. In other words, the reduction in drilling is starting to have an effect. More important, though, is the difference in gas prices around the globe. If you go overseas you will find prices in Europe over $10/mcf and higher yet in Asia. In free markets, gaps of that magnitude do not last forever and if you look you will see that some $100 billion has been invested in LNG facilit ies that will come online in the next three or four years. Eventually that gap will shrink. Lastly, over time I expect that we will see increased use of natural gas in automobiles, especially with respect to large truck fleets.

MOI: You run a fairly concentrated value strategy. How do you determine the appropriate size of a holding and how do you manage risk in the portfolio?

Boyle: First off, we are b lessed with a great mix of clients that understand and believe in our strategy of concentration. They know that focused portfolios like we run can have more volatile results and are willing to have the requisite patience. Historically, this patience has been rewarded. As for the sizing of our positions, we have learned to have a great deal of respect for liquidity. Consequently, the less liquid the company the smaller the position it will be for us. Ideally, we like to be around 15 positions in a portfolio. MOI: How has market volatility over the past several years affected your investment process, and have you tweaked your approach in any way as a result? Boyle: The volatility of the past few years has meant we have been more active than normal and have also been a little slower to build positions. Outside of that, we haven’t changed our process in any material way. MOI: What is the single biggest mistake even smart investors tend to make?

Boyle: The biggest one I see is overconfidence. The markets have a way of taking care of that though. This can be a very humbling business and it is important to remember that.

MOI: Can you recommend one or two recent books that have given you new insights into the art of investing? Boyle: The one book I would highly recommend is Get Smarter by Seymour Schulich. It is an excellent book about the investment and business lessons learned during the career of one of Canada’s most successful businessmen. I constantly find myself going back and re-reading the book.

MOI: Thank you very much for your insights.

“…the reduction in [natural gas] drilling is starting to

have an effect. More important, though, is the difference in gas prices

around the globe. If you go overseas you will find prices in Europe over $10/mcf and

higher yet in Asia. In free markets, gaps of that

magnitude do not last forever and if you look you will see that some $100 billion has

been invested in LNG facilities that will come

online in the next three or four years.”