Heinz Update: Who's Next?

So it's been about a year since BRK and 3G Capital acquired Heinz (HNZ).  This is old news to most of you as the 10-Q for the first quarter was posted more than a month ago.  It is pretty amazing to read and you will see how incredible the 3G folks really are.  To find it you have to search Hawk Acquisition Intermediate II at the SEC website.

The thing about the 3G book, even though it 's a great read, is that there aren't that many figures in there.  This is true with a lot of books and even newspaper/magazine articles in general, but I guess it's too much of a hassle for most non-financial people to talk numbers.  In journalism, there is some standard about "who what when where why and how".  Someone should come up with a similar standard for financial/business news.  I'm always baffled at how little information there is in articles in the U.S.  They never seem to ask, "at what valuation?".   They seem only to focus on notional size; like, "$28 billion, wow, that's like, huge!!".   But never mind.

Anyway, first of all, let's take a look at HNZ before the acquisition:

Heinz Margins 2008-2013

It looked pretty decent.  15% margins in the highly competitive food segment seemed reasonable.  SGA expenses in the 20%-ish range also looked pretty normal.   Most would wonder how you could possibly increase margins from here in this segment as we all know that with big customers like Walmart, Target and Costco, there isn't a whole lot of pricing power.

But of course, we all know what 3G Capital is capable of.   Let's see what these guys did with HNZ:

If you look at the headline figures, there is not much progress:

                          2013 1Q                        2014 1Q
Sales :                 $2,856                            $2,800
Gross profit:       $1,040                               $955
Gross mgn:          36.4%                             34.1%
SGA:                     $629                                $521
SGA%:                   22%                             18.6%
Op income:           $410                                $433
Op mgn:              14.4%                              15.5%

But of course this is not the whole story.  In these figures are a bunch of one time expenses to cut cost.

The one time charges and expenses from the 10-Q were:

(5)	Restructuring and Productivity Initiatives

During the second half of 2013 and the first quarter of 2014, the Company invested in restructuring and productivity initiatives as part of its ongoing cost reduction efforts with the goal of driving efficiencies and creating fiscal resources that will be reinvested into the Company's business as well as to accelerate overall productivity on a global scale. As of March 30, 2014, these initiatives have resulted in the reduction of approximately 3,500 corporate and field positions across the Company's global business segments (excluding the factory closures noted below). Including charges incurred as of March 30, 2014, the Company currently estimates it will incur total charges of approximately $300.0 million related to severance benefits and other severance-related expenses related to the reduction in corporate and field positions, of which $279.6 million has been incurred from project inception through March 30, 2014.

In addition, the Company has announced the planned closure and consolidation of 5 factories across the U.S., Canada and Europe during 2014.  The number of employees expected to be impacted by these 5 plant closures and consolidation is approximately 1,650, of which 175 had left the Company as of March 30, 2014. The Company currently estimates it will incur charges of approximately $93.0 million related to severance benefits and other severance-related expenses related to these factory closures, of which $48.6 million has been incurred from project inception through March 30, 2014.  In addition the Company will recognize accelerated depreciation on assets it plans to dispose of but which are currently in use. The charges that the Company expects to incur in connection with these factory workforce reductions and factory closures are subject to a number of assumptions and may differ from actual results.  The Company may also incur other charges not currently contemplated due to events that may occur as a result of, or related to, these cost reductions.

11

---

The Company recorded pre-tax costs related to these initiatives of $140.8 million in the three months ended March 30, 2014, which were comprised of the following:

•	$53.7 million for severance and employee benefit costs relating to the reduction of corporate and field positions across the Company.

•	$13.7 million associated with other implementation costs, primarily for professional fees, and contract and lease termination costs.

•	$73.4 million relating to non-cash asset write-downs and accelerated depreciation for the planned closure and consolidation of 5 factories across the U.S., Canada and Europe.

Of the $140.8 million total pre-tax charges for the three months ended March 30, 2014, $118.8 million was recorded in Cost of products sold and $22.0 million in Selling, general and administrative expenses ("SG&A"). 

So adjusting for these one timers, the actual results are:

Results Excluding Special Items

  

Management believes that this measure provides useful information to investors because it is the profitability measure used to evaluate earnings performance on a comparable year-over-year basis.

2014 Results Excluding Charges for Productivity Initiatives and Other Special Items

The adjustments were charges for productivity initiatives, amortization of deferred debt issuance costs related to new borrowings under our current Senior Credit Facilities and the Notes, incremental depreciation and amortization as a result of preliminary purchase accounting adjustments and stock based compensation expense that, in management's judgment, significantly affect the assessment of operating results. See “Restructuring and Productivity Initiatives” sections for further explanation of certain of these charges and the following reconciliation of the Company's first quarter of 2014 results excluding charges for productivity initiatives and other special items to the relevant GAAP measure.

	Successor
	First Quarter Ending March 30, 2014
(Continuing Operations)	Sales			Gross Profit			SG&A			Operating Income			Pre-Tax Income			Net Income attributable to Hawk Acquisition Intermediate Corporation II
	(In thousands)
Reported results	$	2,800,159		$	954,599		$	521,175		$	433,424		$	249,099		$	195,202
Charges for productivity initiatives	—			118,793			22,014			140,807			140,807			104,560
2014 special items(a)	—			4,153			4,318			8,471			8,471			6,029
Amortization of deferred debt issuance costs	—			—			—			—			12,200			$	7,534
Incremental depreciation and amortization from preliminary purchase accounting adjustments	—			18,453			—			18,453			18,453			12,917
Stock based compensation	—			—			1,418			1,418			1,418			876
Results excluding charges for productivity initiatives and 2014 special items	$	2,800,159		$	1,095,998		$	493,425		$	602,573		$	430,448		$	327,118

(a)	Includes incremental costs primarily for additional warehousing and other logistics costs incurred related to the acceleration of sales ahead of the U.S. SAP go-live, which was launched in the second quarter of 2014, along with equipment relocation charges and consulting and advisory charges not specifically related to restructuring activities.

Redoing my above table, we get these figures:

                                                                                                Adjusted
                          2013 1Q                        2014 1Q                  2014 1Q
Sales :                 $2,856                            $2,800                    $2,800
Gross profit:       $1,040                               $955                    $1,096
Gross mgn:          36.4%                             34.1%                    39.1%
SGA:                     $629                                $521                       $493
SGA%:                   22%                             18.6%                    17.6%
Op income:           $410                                $433                       $603
Op mgn:              14.4%                              15.5%                    21.5%

HNZ averaged an operating margin of 14.9% for six years.  And then comes 3G and boosts that to 21.5% in less than a year.  In a single year, they took out 7.1% of revenues in costs;  4.4% out of SGA and 2.7% from COGS.

They increased operating earnings +47% in less than a year.

At BUD, I think they also took out around 6% of combined sales from expenses.  Since there wasn't a lot of overlap, this was probably mostly costs taken out of the old BUD, so as a percent of old BUD revenues, the cost savings were probably much higher than that.

It is still a little early so we have to see how things go going forward, of course.  But things look pretty good so far.

Heinz as a Platform
OK, so you may be rolling your eyes.  First, this guy (me) trips over himself seeing "outsider" CEO's everywhere; every acquisitive company is an outsider CEO company.  And then when a great CEO takes over a company, it suddenly becomes a "platform" for more acquisitions.

So yes, maybe I get a little caught up in these things and maybe it's the fad of the moment.  But as long as what I am looking at makes sense and are operated by competent people with track records of success (and we don't go out and overpay), I suppose there is nothing wrong with that.

I thought I'd just mention that since I too sometimes wonder if I take things too far.

Anyway, having said all of that, I do actually think that HNZ is a platform for further acquisitions.   Why not?  This has been the M.O. of 3G from the beginning.  The current BUD is a perfect example.

Think about it.  They got 6% of revenues worth of costs out of BUD and that was probably with very little synergies as operations didn't overlap too much.  At HNZ, they took out 7% of revenues in cost and this wasn't even a merger so there were no synergies or scale advantages.  It was just pure cost cutting and increased efficiency.

Can you imagine what they can do if they did a merger?  If HNZ bought another food company, they can probably take out 6-7% or more in cost savings, but then they can probably get more value from scale advantage and cost synergies (one human resources department instead of two, one legal department instead of two, consolidating manufacturing/distrubution/sales organizations etc...).

Now that would be incredibly value-creating.

HNZ Buying Power
Obviously, since HNZ is loaded up on debt, the question is whether HNZ can do anything in the near term.  They have $14.6 billion in long term debt on the balance sheet as of March 2014.  Annualizing the 1Q EBITDA, we get $2.8 billion.  So HNZ has leverage of 5.2x, but excluding cash and using net debt we get a leverage ratio of 4.2x.  4.2x is lower than the typical 5.0x or so in LBO's, but on it's own it doesn't look like HNZ has a lot of room to take on too much debt to do any huge deals right away.  With free cash to increase substantially going forward, maybe the gun gets loaded more quickly than we think.

But then again, there is Buffett sitting there with a lot of cash he wants to put to work.  Maybe he buys HNZ stock to help fund a deal (and more bonds/preferreds as needed); he would no doubt love to buy more HNZ and see a big value creating deal.

Recap of HNZ Deal
Before we look at who might be next, here are some figures from the HNZ deal last year (valuation).
The deal was a 20% premium at $72.50/share and a total deal value of $28 billion.

The EPS and EBITDA estimates for the year ending April 2013 and 2014 and respective valuations at the time (at $72.50/share) were:

                             EPS       P/E        EBITDA                 EV/EBITDA
April 2013e          $3.58     20.3x     $2,057 million         13.6x
April 2014e          $3.78     19.2x     $2,195 million         12.8x

Not cheap, right?

Shopping List? 
Here's a list of some of the big food companies. K and CPB are often mentioned as potential BRK/3G candidates and that does sort of make sense.  The companies with an asterisk on them have one time things that impact the figures.  For example, K is not trading at a 12.7x p/e and 8.1x EV/EBITDA, and KRFT is not as cheap as it looks there either.  They had one times gains and CPB is not as expensive as it looks in the table.

Anyway, GM is gross margin, SGA% is sales, general and administrative expense as percent of revenues, OM is operating margin, MC is market capitalization, EV is enterprise value, and p/e cye is current year estimate p/e.  I put that there due to some of the abnormal figures in the ttm p/e; I think the current year estimate reflects a more normalized p/e.

For K, it looks cheap on a ttm basis, but it is trading at 17.6x 2013 EPS and 11.8x 2013 EV/EBITDA (actually, current EV to 2013 EBITDA).

For CPB, it is trading at 17.3x July 2013 year end EPS and 18.0x July 2014 estimate EPS.  It is also trading at 12x 2013 EV/EBITDA.

KRFT is trading at 13.8x 2013 EV/EBITDA.


Precedent Transcactions for Food Companies
And just for reference, here are some valuation analyses from past deals.  This is from the HNZ merger proxy.  A valuation analysis was done by Centerview, BOFA Merrill Lynch and Moelis.



Centerview Analysis

Selected Precedent Transactions Analysis

Centerview analyzed certain information relating to selected transactions since 2000 in the food industry with transaction values over $3.5 billion that Centerview, based on its experience and judgment as a financial advisor, deemed relevant to consider in relation to Heinz and the merger. These transactions were:

Date of Transaction Announcement

Target

Acquiror

Transaction Value ($billion)

Enterprise Value / LTM Sales

Enterprise Value / LTM EBITDA

November 2012

Ralcorp Holdings Inc.

ConAgra Foods, Inc.

$

6.8

1.5x

11.9x

November 2010

Del Monte Foods Co.

Funds affiliated with Kohlberg Kravis Roberts & Co. L.P., Vestar Capital Partners and Centerview Partners

$

5.3

1.4x

8.8x

January 2010

Kraft Foods’ North America frozen pizza business

Nestlé S.A.

$

3.7

1.8x

12.5x

July 2007

Group Danone S.A.’s biscuits division

Kraft Foods Group, Inc.

$

7.2

2.6x

13.2x

December 2000

Quaker Oats Co.

PepsiCo, Inc.

$

14.0

2.8x

15.6x

October 2000

The Keebler Company

The Kellogg Company

$

4.4

1.6x

11.1x

July 2000

Pillsbury

General Mills, Inc.

$

10.5

1.7x

11.0x

June 2000

Nabisco Holdings Corp.

Philip Morris Companies Inc.

$

18.9

2.1x

13.2x

June 2000

Bestfoods

Unilever PLC

$

24.3

2.6x

13.9x

No company or transaction used in this analysis is identical or directly comparable to Heinz or the merger. The companies included in the selected transactions are companies with certain characteristics that, for the purposes of this analysis, may be considered similar to certain of Heinz’s results, business mix or product profile. Accordingly, an evaluation of the results of this analysis is not entirely mathematical. Rather, this analysis involves complex considerations and judgments concerning differences in financial and operating characteristics and other factors that could affect the public trading or other values of the companies to which Heinz was compared.

For each of the selected transactions, based on information it obtained from SEC filings, FactSet, Wall Street research and Capital IQ, Centerview calculated and compared transaction value as a multiple of LTM sales and LTM EBITDA, with LTM EBITDA excluding one-time expenses and non-recurring charges. This analysis indicated the following multiples:

		Implied Enterprise Value as a Multiple of:
		LTM Sales				LTM EBITDA
Mean			2.0x				12.4x
Median			1.8x				12.5x

Centerview then drew from this analysis and other considerations that Centerview deemed relevant in its judgment and experience an illustrative range of multiples of implied enterprise value / LTM EBITDA of 11x-14x. Centerview then applied the illustrative ranges of multiples to Heinz’s LTM EBITDA for the period ended October 28, 2012. The results of this analysis implied a value per share range for shares of Heinz common stock of approximately $55.75 to $74.00, based on the outstanding number of shares of Heinz common stock on a diluted basis. This range of $55.75 to $74.00 per share was compared to the $72.50 per share merger consideration to be paid pursuant to the merger agreement. 

BofA Merrill Lynch Analysis

Selected Precedent Transactions Analysis. BofA Merrill Lynch reviewed, to the extent publicly available, financial information relating to the following nine selected transactions valued over $3.5 billion involving companies in food industry, which, based on its professional experience and judgment, BofA Merrill Lynch deemed relevant to consider in relation to Heinz and the merger:

Announcement Date		Acquiror		Target		Transaction Value ($bn)		Multiple of LTM
								Sales		EBITDA
November 2012		•    ConAgra Foods, Inc.		•    Ralcorp Holdings, Inc.		•    $6.8		•    1.5x		•    11.9x
November 2010		•    KKR & Co.		•    Del Monte Foods Co.		•    $5.3		•    1.4x		•    8.8x
January 2010		•    Nestlé S.A.		•    Kraft Foods’ Frozen Pizza Division		•    $3.7		•    1.8x		•    12.5x
July 2007		•    Kraft Foods Group, Inc.		•    Danone S.A.’s Biscuits Division		•    $7.2		•    2.6x		•    13.2x
December 2000		•    PepsiCo, Inc.		•    The Quaker Oats Company		•    $14.0		•    2.8x		•    15.6x
October 2000		•    Kellogg Company		•    Keebler Foods Company		•    $4.4		•    1.6x		•    11.1x
July 2000		•    General Mills, Inc.		•    Diageo PLC’s Pillsbury Division		•    $10.5		•    1.7x		•    11.0x
June 2000		•    Philip Morris Companies Inc.		•    Nabisco Holdings Corp.		•    $18.9		•    2.1x		•    13.2x
June 2000		•    Unilever plc		•    Bestfoods		•    $24.3		•    2.6x		•    13.9x

BofA Merrill Lynch reviewed transaction values, calculated as the enterprise value implied for the target company based on the consideration payable in the selected transaction, as a multiple of the target company’s latest 12 months EBITDA. The overall high to low latest 12 months EBITDA multiples observed for the selected transactions were 8.8x to 15.6x. Based on its professional judgment and after taking into consideration, among other things, the observed data for the selected transactions, BofA Merrill Lynch then applied a selected range of latest 12 months EBITDA multiples of 11.0x to 14.0x derived from the selected transactions to Heinz’s latest 12 months (as of October 28, 2012) EBITDA. Estimated financial data of the selected transactions were based on publicly available information at the time of announcement of the relevant transaction. Financial data of Heinz were based on Heinz’s public filings. This analysis indicated the following approximate implied per share equity value reference ranges for Heinz, as compared to the merger consideration:

Moelis Analysis

Selected Precedent Transactions Analysis. Moelis reviewed financial information of those transactions announced between 2000 and 2012 involving large target companies with significant food businesses that Moelis deemed generally comparable to Heinz in product mix and geographic scope. Moelis reviewed, among other things, transaction values of the selected transactions and the merger as a multiple of EBITDA for the most recently completed twelve-month period (“LTM”) for which financial information had been made public at the time of the announcement of each transaction, unless otherwise noted. Financial data for the selected transactions were based on publicly available information at the time of announcement of the relevant transaction. The list of selected transactions and the related multiples are set forth below:

Date Announced

Target

Acquiror

EV ($ in thousands)

EV/LTM EBITDA

Dec. 2012

Morningstar Foods, LLC

Saputo Inc.

$

1,450

9.3x

Nov. 2012

Ralcorp Holdings, Inc.

ConAgra Foods, Inc.

6,775

12.1x

Feb. 2012

Pringles Business of Procter & Gamble Company

Kellogg Company

2,695

11.1x

1

June. 2010

American Italian Pasta Co.

Ralcorp Holdings, Inc.

1,256

8.3x

Jan. 2010

North American Frozen Pizza Business of Kraft Food Global, Inc.

Nestlé S.A.

3,700

12.5x

Nov. 2009

Birds Eye Foods, Inc.

Pinnacle Foods Group, Inc.

1,371

9.5x

Sept. 2009

Cadbury plc

Kraft Foods Inc.

21,395

13.3x

June 2008

The Folgers Coffee Company

The J.M. Smucker Company

3,398

8.8x

Apr. 2008

Wm. Wrigley Jr. Company

Mars, Incorporated

23,017

18.4x

Nov. 2007

Post Foods

Ralcorp Holdings, Inc.

2,642

11.3x

1

July 2007

Global Biscuit Business of Groupe Danone S.A.

Kraft Foods Global, Inc.

7,174

13.6x

1

Feb. 2007

Pinnacle Foods Group, Inc.

The Blackstone Group, L.P.

2,142

8.9x

Aug. 2006

European Frozen Foods Division of Unilever plc

Permira Advisors Ltd.

2,199

9.9x

1

Aug. 2006

Chef America, Inc.

Nestlé S.A.

2,600

14.5x

Dec. 2002

Adams Confectionary Business of Pfizer Inc.

Cadbury Schweppes plc

3,750

12.8x

1

Oct. 2001

The Pillsbury Company

General Mills, Inc.

10,396

10.1x

2

Dec. 2000

The Quaker Oats Company

PepsiCo, Inc.

14,010

15.6x

Oct. 2000

Keebler Foods Company

Kellogg Company

4,469

10.7x

June 2000

Nabisco Holdings Corp.

Philip Morris Companies Inc.

19,017

13.7x

June 2000

International Home Foods

ConAgra Foods, Inc.

2,909

8.5x

May 2000

Bestfoods

Unilever plc

23,503

14.5x

1 Financial data were based on latest available fiscal year end information; not latest quarter-end information.

2 Financial data reflected revised deal terms pursuant to a second amended merger agreement.

This analysis indicated the following mean and median multiples for the selected transactions and the merger were as follows:

Selected Transactions										The Merger
				Mean		Median
EV/LTM EBITDA		(all transactions)
				11.8x		11.3x				13.7x
EV/LTM EBITDA		(transactions since 2009)
				10.9x		11.1x				13.7x

Moelis then used its professional judgment and experience to apply a range of selected multiples derived from the selected transactions of 11.0x to 14.0x LTM EBITDA to Heinz’s LTM EBITDA as of the announcement date of the merger.


So, it seems like all three advisors came up with a fair value range of 11-14x LTM EBITDA.  They are all looking at similar past deals, so I suppose that's to be expected.

Conclusion
BRK/3G paid 20x p/e and 14x EV/EBITDA for HNZ which at the time didn't look cheap at all, but we see how much value they created already in one year.  And this was done in a deal as a 'financial' deal, meaning no operating synergies from a merger or anything like that.

This, to me, would suggest that they would have some room to pay more if there were going to be operating synergies / scale benefits from a real merger instead of pure LBO.

For KO and PEP, I am thinking about BUD, of course.  But for other food companies, it might make sense for HNZ to combine with them.  Thinking about the fact that they can get 7% of revenues in cost out in the first year, imagine what they could do to an undermanaged food company if they can get the synergies too.

There seems to be plenty to do!

Is Coke Undermanaged?!

OK, now that's a silly idea.  Coke (KO) is one of the most respected companies and known to be very well managed.   It is an excellent company for sure.

One great thing about running a blog is that I can just think out loud here and sometimes someone pulls on a thread and gets me thinking about other things (or corrects my mistakes).

After posting about a possible (or impossible) BUD/KO merger, someone commented that the operating margins can't be compared because BUD and KO operate under different models.  KO lets the bottlers do the heavy lifting and KO only makes the syrup.  This is increasingly less so due to the non-carbonated drinks they sell.  They also took over the bottling operations in the U.S.  But OK, that only accounts for 20% of global volume so it is still mostly a syrup selling operation; a very high margin and lucrative business.

But as I pointed out in the comment section, that makes the BUD/KO merger argument even stronger.  If KO has the better operating model, then how come BUD has an operating margin of 32.5% versus KO's 21.8%?    That makes no sense at all.

And as I went about my usual daily routines, I kept thinking about it and couldn't get over the fact that KO has been run so long by insiders, on how insiders tend to respect 'sacred cows' and respect tradition (in other words, it's been a tradition for 100 years to do it that way, so let's keep doing it that way).

Also, if you went up in the organization, that means you have a lot of subordinates that you helped promote over the years.  It's really hard to give a hard-working underling a department to run and then later take it away saying that we don't need it anymore.  The more likely scenario is, well, it doesn't cost us so much and we can still make our numbers so let's keep that department going.   It's probably also hard to give people nice offices over many years and then suddenly say, hey, no more offices!  We are all going to work in cubicles now.

I keep going back to that comment by the new Sony CEO that said they will never stop producing televisions because the engineers in that division are very proud of their work.  Is it any wonder what is happening there?  I've seen a lot of that when I worked in a big company too.

At KO, it's probably not so much product lines, but activities.  They probably spend a ton of money on all sorts of events with questionable returns.  I don't know (but I'm sure it will take a couple of days for 3G-type people to figure out).


It's Return on Capital, Stupid.  Not Margins!
And as I was thinking about this stuff all of the sudden I slapped my forehead and said to myself, geez, it's not the margins!  Well, margins do matter and the higher the better.  But the KO model was meant to be an asset-light model; let the bottlers build the bottling factories.  Let them do the capital intensive part and we'll just keep producing Super Bowl commercials.

So when this occurred to me, I rushed back to my desk to look at the return on capital figures for the relevant companies.

Operating Margins
So first of all, here are the operating margins for the businesses we are talking about.  Oh, and I also added Dr. Pepper Snapple Group (DPS) because they are in a similar business to KO but they are integrated, meaning they bottle their own drinks instead of relying on bottlers.   DPS is way smaller than KO so may not be a fair comp, but still, it would be an interesting benchmark.  Actually, the advantage should be to KO; size/scale benefit etc.

Here are the operating margins:

KO       21.8%
DPS     17.4%
BUD    32.5%
PEP     14.6%

So here it looks like KO is doing well against DPS and PEP.  But PEP is attached to a snack business which might have slightly different economics.  But the margin is a lot lower than BUD, who bottle and deliver their own drinks.

Return on Capital
But as I said, it may be the capital that matters, so let's look at some return on capital figures.  For capital, I will use the total of long-term debt and total equity.  I will look at operating earnings against this and call that return on capital.  Also, I won't use average equity or anything like that; I just use whatever is on the balance sheet at the end of the year.

So this is not text-book correct, but should give sort of an indication.

              Operating earnings /
              (LT debt + Total Equity)
KO*            24.2%
DPS            21.9%
BUD           14.5%
PEP            19.9%

For KO, I deducted the $10 billion or so of equity investments on the balance sheet as the equity income from those investments (bottlers) don't show up in the operating income line.  I also use total equity as minority interest is not deducted before the operating income line.

But here, the first thing you notice already is that KO's return on capital is better than DPS and PEP, but not that much better.  I thought it would have been a much bigger gap given the advantageous  business model.

And then you say, "aha!", look how awful BUD is!  But then we have to remember that BUD was created by a giant merger (and more mergers in the past) so there is a lot of goodwill on the balance sheet.

So I decided to take a look at return on tangible capital.  Here, I will only deduct goodwill, and not other intangible assets as goodwill is the pure premium paid on acquisitions, and intangibles were identifiable (but not tangible) assets that were put on the balance sheet.  I don't want to get into if the intangible valuation is fair or not.  Plus, if I deduct those intangibles, DPS capital would be negative so would destroy the elegance of my argument so let's just keep that in.

Return on Tangible Capital
So deducting goodwill from the above definition of total capital, the return on tangible capital (ROTC) becomes:

                     ROTC
KO               34.2%
DPS             58.2%
BUD            52.7%
PEP             30.2%

I was a little surprised by this result too.  KO's return on capital is good, but look at DPS and BUD.  And KO's is not much higher than PEP's ROTC given it's supposed asset-lightness.  My image is that the soda business is much more lucrative than the snack business (growth problem aside), so it was surprising to me that KO and PEP were so close here.

Greenblatt Return on Capital
And for fun, as one more layer of return on capital comparisons, I decided to use Greenblatt's Magic Formula return on capital as it does exclude all intangibles.  I will again use operating earnings on top and for the denominator I will use net current assets plus net PPE.  Let's call that NCAPPE.  

Using that I get:

                Operating earnings
                 / NCAPPE
KO              55.4%
DPS            82.9%
BUD           67.2%
PEP            42.3%

Again, this was surprising.  Both DPS and BUD beat KO on this measure.  So what happened to the asset-lightness?    Is KO pissing away the benefit of the operating model with unnecessary spending?

Here is a table that summarizes the above stuff:

Again, I deducted the equity method holdings for KO from the capital.  Net current assets was negative for BUD, so that's why it's zero there.

Conclusion
I don't think anyone can look at KO and think it's poorly managed.  And there is a question as to whether everything has to be super-optimized for super-efficient, super-returns-on-capital.

But it was interesting to go through this exercise and realize that KO is not that way out in terms of performance as I thought it was.  And again, it shows partly how incredible the 3G guys are.

If Heinz, which was considered pretty well-run (people wondered what more 3G can do after years of restructuring there) can improve so much and they can get so much value out of it, imagine what they can do at KO.  From these figures, you can see that there is a lot of room for improvement.

So while Buffett has denied Berkshire Hathaway and 3G taking KO private, that doesn't mean that Buffett doesn't want some more value extracted from KO.

And KO is so big they will need some sort of vehicle to do that with, and what better vehicle is there than BUD?

Although it is more likely that BUD acquires SABMiller, PEP and even DPS (too small?), a deal with KO would be very interesting.

Some of the pieces of the puzzle are lined up already.

• Buffett loves what 3G is doing; he would probably love to see their work on some of Buffett's holdings 
• KO has not been a great performer recently.  It has done well, though, but not supergreat
• Like Ackman owning Allergan (I just threw that in there for fun; not comparing Buffett to Ackman), Buffett already owns a big stake in KO so BUD would already have some votes for a deal (and a potential supporter on the board in Howard)
• Buffett has owned BUD in the past and probably likes the business.  We know he loves the management already, so he would gladly take all stock and maybe even buy more BUD stock or preferreds if needed to get a deal done.  Buffett would love something big to put a big chunk of capital to work. 
• Unlike an LBO, a BUD/KO merger would have the benefits of synergies.  I know, we hate that word, but there would be a lot of synergies here, including procurement.  Someone pointed out that KO doesn't do it's own bottling, but if BUD and PEP can do a procurement deal, surely KO bottlers can do a procurement deal with BUD, so the same benefits may be realized either way. 
• etc... 

So there are a lot of things when you think about it that makes a lot of sense here.  And yes, there are things that may be difficult.  Can you imagine the uproar of a foreign firm buying Coke?  The size of the deal alone makes it look impossible. 

But again, what's the fun if we don't dream big?! 

Big Dream: Anheuser-Busch InBev (BUD) / Coca-Cola (KO) Merger

This morning KO's stock price popped up on a comment by David Winters that Buffett and 3G are planning to take KO private.  He said that there are indications that something is going on, including press reports in Brazil regarding something related to 3G, KO and Buffett.

Now, I don't want to speculate on mergers and that's not what this blog is about, but it can be fun sometimes to do so.  I would usually ignore this sort of noise in the market.  Oh, and Becky Quick from CNBC called Buffett and he immediately said there's no chance 3G/BRK will take KO private.  It is way too big being bigger than the Heinz deal ($180 billion versus $23 billion for the HNZ deal).

But something has been nagging me for a while now and it was reinforced after reading the very interesting book, Dream Big: How the Brazilian Trio behind 3G Capital - Jorge Paulo Lemann, Marcel Telles and Beto Sicupira - acquired Anheuser-Busch, Burger King and Heinz.

It's really a great book that tells the story of the rise of the folks at 3G.  All business success stories are very similar but what I kept going back to is how these guys started out small and kept building things up.  They tend not to buy something to sell, but to build up.  Each acquisition turns into sort of a platform for growth and further deals. And they also give a lot of freedom to employees to take risk and grow as long as they do so prudently.  Their acquisition of BUD was seen as a long shot but it eventually happened.  It was a "big dream" that was realized.

What will they do next with BUD?  I don't think they are in it to maintain the status quo.  That's why I thought they would bid for Pepsi's snack business, for example.   I also wonder about Burger King (BKW) too.  You know 3G is in it for the long haul, so they are not going to be content sitting on it; they will make it grow and at some point down the line there will probably be some deals there too once they finish modernizing their restaurants (they already finished franchising out all the restaurants).

OK, back to BUD.

A few years ago, BUD had some agreement with Pepsi on some procurement deal so they can save costs on procurement as they share many common inputs.  Of course, this should make Pepsi too a target of a potential deal for BUD  (And in South America, beer companies also frequently sell the sodas too).

This procurement deal suggests that there would probably be some significant synergies in BUD selling sodas.  Imagine the synergies in procuring aluminum cans, and maybe even media/advertising.

And look at these figures comparing BUD and KO:

                                      BUD                    KO
Gross margin:                59%                     61%
SGA % sales:                 27%                    37%
EBIT margin:              33%                    22%

BUD's SGA includes stuff that may not technically be SGA; I just took whatever came in between gross margin and operating earnings.  In KO's case, I just took SGA as reported in the 10-K and there are other things in between SGA and operating earnings.  Also, there are probably a lot of differences in accounting standards that make a direct comparison difficult.

But in any case, this is just a quick look to see if KO might benefit from Zero-Based Budgeting (or whatever it was called).

And sure enough, as high margin and amazing KO looks, BUD is even better.

KO is very highly regarded and well-managed, but I can imagine that over the years with such a lucrative, high-margin operation, maybe there is a lot of waste that has built up over the years.  And maybe KO insiders are too generous to cut wasteful spending  (lifers sometimes have too many friends they don't want to offend).

So, maybe there could be some significant synergies between the tie-up between these two.  Getting KO operating margins up to BUD levels would increase operating earnings by 50%; that alone can pay for the premium that BUD would have to offer (presumably in a lot-of-stock / maybe-some-cash offering).

And then think of the obvious synergies of selling liquids in cans and bottles to similar retailers and other points of sale (restaurants/bars).

If what is in the above book is all true (and there is no reason to believe otherwise), this can create some huge value.

As a sanity check, here are the respective market caps and enterprise values of each:

                                             KO                BUD                       combined
Market Cap:                        $180 bn          $180 bn                  $360 bn
Enterprise Value                 $198 bn          $218 bn                  $416 bn

Yeah, that would be a huge deal.  Ridiculous, actually.  But this is a blog so I can imagine and fantasize about whatever I want!

But you know, I bet that somewhere within BUD is a spreadsheet that has all of this pro-forma-ed out on what a combined operation would look like and what synergies and costs-savings can be achieved and what the value-added would be.

Who knows, maybe it's on Brito's laptop, or maybe it's just some low-level financial analyst/intern doing it as an exercise at the suggestion of a mid-level boss.  But either way, the spreadsheet is there somewhere at BUD.  To be fair, the same one would exist for PEP, SAB Miller and every other big company that might make sense (or might not make sense).

Even a combined market cap of $360 billion (of course more if you include a takeover premium) is still way lower than the $560 billion market cap of Apple!  It's a different world.

So Buffett might have said "absolutely no chance of that" to a Berkshire Hathaway / 3G deal for KO, but he didn't say "absolutely no chance" of a BUD/KO deal, right?  And Buffett may participate too; he can buy BUD common or preferreds to help fund the deal.    So in a sense, it would still be a Buffett/3G deal, and Buffett's denial would still be true (maybe that's why he needed Quick to clarify the question to make sure that he is only denying that BRK will take KO private with 3G).

Both Buffett and Munger think Muhtar Kent is a great CEO and they seem to love him, but it's also true that Buffett really loves the guys at 3G and is impressed with what they are doing at Heinz.  HNZ too was regarded as pretty well run.  So who knows?  Maybe Buffett would really support a BUD/KO deal!

Also, BUD may have trouble doing more large beer deals due to anti-trust issues, so BUD/KO might make a lot of sense.

What To Do in this Market II: Gotham Funds

Many people seem to be worried that the market is a little toppy.  This is kind of strange because the market is basically flat and hasn't done anything.  But OK, the market was up 30% last year so if you include that (and the whole rally since the 2009 low) the market has come up quite a bit.

But still, smart folks like Howard Marks (who was just on CNBC yesterday) said that the market is not in bubble territory at all; maybe somewhat overvalued.   The market is still in what Buffett called the "zone of reasonableness". 

Others say the market is in nosebleed territory and is due for a correction or at least subpar returns for a long time. 

David Einhorn is short a basket of really expensive momentum stocks but he says that is only a small part of the market (mid-single-digit percentage of the market bubbled up compared to 30% of the stock market in a bubble back in 1999/2000). 

I wrote about what to do in a market that has gone up a lot and you wonder what to do.   You can see that post here: What to do in this Market.

My thoughts haven't really changed at all.  I also wrote a series of posts on market timing (even including 'pricing' the market instead of 'timing' it).  You can see my posts about Buffett the market timer here. 

In order for people to have earned 10%/year in the last 100 years, you had to own it through the depression, through war and peace, when p/e's were 7x and when p/e's were 30x.  The point is that most people would not have been successful getting in and out of the market and doing better than 10%/year, even if you used market valuation levels (instead of economic forecasts).  10% returns were not earned by being fully invested at 7x p/e, 50% invested at 15x p/e and 0% invested at 25x p/e or anything like that. 

Another way to illustrate this is if you look at something like Berkshire Hathaway.  BRK has gone down 50% three times in the past (or maybe more).  Once in the early 1970's, once in 1999 and then again during the recent crisis.  Of all the investors who owned BRK in 1970, how many have done better than the 20% or so return of the stock over the years by getting in and out of it in order to avoid the 50% drawdowns?  There may be some who were able to improve on that buy and hold.  But I doubt that there are too many people, even if they used very good valuation methods to time the sales and repurchases.

So that's sort of the way to look at the market.  As long as you have faith in the U.S. and the system at work here, you can look at the stock market in the same way.  Most people who sound clever now telling us what the market is worth and getting in and out accordingly is probably not going to outperform the market over time.   They will look good temporarily when the market goes down, though. 

OK.  So we all get that. 

Having said all of that, it is still interesting to look at what's out there in terms of alternatives for people who don't like stock market exposure.  I am really skeptical about those market-timing funds that change asset allocation according to market valuation, economic forecasts and things like that.  A lot of that stuff is great for asset gatherers and marketing; everyone hates volatility and a lot of presentations by these tactical allocators just make a whole lot of sense.  The problem is that I don't think that they perform all that well over time.

So here's the punch line: 

Gotham Funds

As you know, I am a big fan of Joel Greenblatt, and this is the latest iteration of his fund operation.  Initially, he had Formula Investing funds but shut those down and started these new funds.  Why?  Why is he running a long / short fund when he said about shorting that it is really difficult and that guys that do this are like the baseball outfielders that go, "I got it, I got it..." and then inevitably at some point go, "I don't got it..."?

He also said that buying the Magic Formula stocks and shorting the most expensive stocks on the list would have led to much more volatility on the overall portfolio than just being long because you can get really killed on the short positions. 

But here we are with Greenblatt running long/short funds. 

I'll get to that in a second, but first let's take a look at the cool website and his returns so far. 

Here's the website:  

     gothamfunds.com

There are some nice links there of Greenblatt's interviews on Bloomberg and CNBC.  Also, his interview in Value Investor Insight is posted there too and it's a great read.  Read that here. 

The Funds

And these are the funds that they offer: 

I know, I know.  This looks suspiciously like the long/short funds that was popular with the big mutual fund companies not too long ago.  I think most of those haven't done too well over the years.  The problem, I think, with the long/short funds that the mutual fund giants put out was that they were usually run by long only managers who suddenly had to start shorting stocks and they had no idea how to do that. 

They would buy a nice value stock and then short an expensive mo-mo stock.  It makes sense on paper, but then the value stock goes up 15% for a nice return and then the mo-mo stock goes up 50%. Oops.   

So running a long/short portfolio requires different skills than running a long only equity portfolio.  I've actually seen this happen (a long only manager transitioned to a long/short manager) with predictable results (even though this manager turned it around eventually; it helped to have been part of a legendary hedge fund firm). 

Plus, if you are working for one of the big mutual fund firms and can actually do long/short well, you would either get hired at a hedge fund or start your own.  Why would you not go out and earn your own 2 and 20? 

Performance

The funds are too new to really evaluate them, but here are the figures anyway: 

The S&P 500 total return isn't listed with these figures, so here are the year-to-date and one year returns of these funds versus the S&P 500 index  (the figures below are as of June 10, 2014):

                                                            YTD                           1 Year                        

Gotham Enhanced Return                  +10.5%                      +34.4%

Gotham Absolute Return                    +6.4%                        +21.5%

Gotham Neutral                                  +7.4%                          n.a.

S&P 500 Index                                  +5.5%                       +18.7%

So it looks like even the Neutral fund is outperforming the S&P 500 index year-to-date.  Of course, the time period is way too short for this to be relevant.

But, you know, I have been a big fan of this approach (Magic Formula) and I have a lot of confidence in Greenblatt so I would have no problem recommending any of these funds to anyone interested in this sort of thing.  I don't own any mutual funds but if I had to pick funds to invest in, I would definitely consider one of these. 

I usually don't like these long/short type funds unless they are run by people with a proven track record of doing well with the strategy.  

And I am also very skeptical of quantitative/mechanical investment methods.  Yes, value has been proven over and over to work in study after study. But when things get mechanical, I start to worry and have never been a big fan of investing mechanically  (I actually don't know how purely mechanical these funds are because there does seem to be some room for input from the managers).

But Greenblatt is different.  He came up with something after years of experience in the markets.  Usually, it's the other way around:  Some folks in academia or research departments at wire houses come up with some sort of screening method to try to create baskets that outperform.  I've seen tons of these things over the years but never saw anything that was as simple and consistent as Greenblatt's Magic Formula. 

And whatever they do here in these newer funds is an improvement on that (partly going long/short, and then an added layer of weighting the portfolio according to how cheap or expensive something is instead of equal-weighting it). 

The Evolution of Joel Greenblatt

So, let's get back to the question:  After dismissing shorting as too difficult and saying people eventually get killed doing it, why is he now running a long/short fund!? 

In order to understand this, we must go back and look at how Greenblatt has evolved over the past decade or so.

Stock Market Genius

After a nice long run as a hedge fund manager and putting up some impressive figures, Greenblatt wrote You Can Be a Stock Market Genius.  He said that he initially wrote this for individual investors.  After it was published, he realized that much of the material was over the head of most individual investors.  It turns out that this book was used successfully by many young hedge fund managers.  So he said, hmmm...    How can I reach the less experienced, more typical individual investor? 

Magic Formula

Then a few years later he wrote The Little Book That Beats the Market.   This was meant to explain how value investing works, and he even gave readers a formula to calculate return on capital and earnings yield.  He even set up a website to list the cheapest stocks according to this methodology.

Formula Funds

And then he realized that even with all of that stuff provided to the public, people still didn't act correctly and ended up not doing too well.  I think he had a record of people using the formula but human intervention prevented some from actually doing well (I forget the details, but it was something like not wanting to buy the crappy (cheap) stocks on the list, or getting scared out of the market during declines). 

So he set something up where someone will do all the work for them. 

I don't really know what went on between the Formula Funds and Gotham Funds, but my guess is that it went something like this: 

Greenblatt realized that even if Formula Funds did all the work, people will still get scared out of the market at the worst time.   I'm sure he had some experience with that and studies show that individuals tend to do way worse than the funds they own as they put money in at the highs and run away at the lows.  Some research even showed that investors collectively actually lost money in a fund that performed well.

This reminds me of the person (I mentioned this on the blog before) who told me that he has never made money, ever, in the stock market and he has been investing in the stock market during the period the Dow went from 4,000 to 12,000 (or something like that).  How can you be an "investor", have the stock market triple, and not make money?!  I think this is very typical. 

Big Secret

And at some point he wrote The Big Secret for the Small Investor.   This book was about value-weighting the indices.  Market capitalization-weighted indices didn't make sense for value investors because you were forced to own the larger cap names regardless of their valuation level.  Someone improved on this by removing the big-cap bias by equal-weighting the index.  The Big Secret is to take it a step further; the value-weighted index would give a higher weighting to the cheaper stocks and less to the more expensive ones.  This makes a whole lot of sense and I was sort of looking forward to some development in this area. 

I wrote about that here, but it seems to have gone nowhere (the website data only goes through 2010). 

But hold this thought for a second, the idea of putting more into cheaper names (instead of equal-weighting it like the Magic Formula). 

Gotham Funds

So now we get to Gotham Funds.  He once said that shorting is very difficult and that trying to long/short the Magic Formula would create more volatility, not less.  But I guess he revisited the idea after realizing that even if a method worked well, most people won't benefit from it because they can't sit tight long enough to make any money. 

So he must have been working on figuring out a way to get the long/short to work.  Plus the Magic Formula was so incredibly consistent that it must work, somehow.    By consistent, I mean that the 1st decile stocks through the 10th decile stocks performed exactly as expected over time according to their relative cheapness.  This sort of vertical consistency was strongly indicative that some sort of long/short strategy must work.  

By using a larger number of stocks and weighting the components by how cheap/expensive they are, he figured the volatility of the portfolio will be more stable (than say, buying a basket of 20 cheapest stocks and shorting the 20 most expensive ones). 

With the various options above, an investor can choose how much market exposure he wants.  Someone who is comfortable with the stock market can just buy the Enhanced Return fund, and others who don't like stock market volatility can go with the Neutral Fund. 

He did say in an interview that he wouldn't use these funds as market timing devices because most people won't be able to do that well. 

I can see the temptation to roll into the Neutral or Absolute Return funds when things look expensive and then get into the Enhanced Return when the market goes into a bear market (and gets cheap).  I imagine the fund flows would actually be the opposite of that, though.   

There is a fee for redeeming early so there will be a cost to doing that.  

And I wouldn't really advocate that at all. 

But this would still be far better than switching in and out of the stock market versus cash and bonds.  If you have to time and switch, it would be far better to do so between funds that would probably do well either way.

Plus I would guess that that would be far better than owning a fund that tries to outperform over time by switching between stocks, bonds, cash, commodity proxies and whatever else based on economic forecasts, market valuations and things like that.  Again, good luck with that. 

Why Kill Formula Funds? 
So why did he have to get rid of the Formula Funds?  I don't know.  My guess is that he thinks he found a better way so why bother keeping the old funds if these new ones are better?  He doesn't want to build a mutual fund giant by offering many variations of funds.  Most mutual fund companies love putting out new funds and using every new fad to increase AUM.  That works great for them; more funds, more work for their employees (young apprentices can gain experience by trying to run a new fund etc...).

But that's not what Greenblatt is trying to do.  He is trying to help the average individual investor make money in the market, and as long as he finds better ways to do that, he will replace the old strategies with the better ones.  If you invent and start selling refrigerators, maybe you can just stop selling ice.

But this is just my guess.  Plus,  the cost of running multiple funds is probably a big factor too.  He probably wants to keep this a small, simple operation and invest resources into research and improving the product and not wasting money increasing administrative overhead by running a bunch of different funds.

Has Greenblatt Really Evolved? 

One question is, has Greenblatt changed his views on investing after all these years?  He said in the Value Investor Insight interview that he hasn't changed. In fact, if he started all over again he would do exactly what he did the first time;  run a highly focused fund of special situations.  He said that this approach is highly volatile and he was OK with that.  In the early years when he made high returns (40-50%/year), every two or three years he would have a 20%-30% drawdown that happened pretty quickly.  But he didn't mind that. 

These recent ideas are his ideas that he thinks will work better for most people.

So this evolution is more of Greenblatt's evolution in trying to help the average investor make money in the stock market.  He wrote a book.  That didn't work.  He wrote another book. That didn't work.  He did the research for them. That didn't work.  He set up a fund for them.  That may or may not have worked, but he found a better way to make the average individual investor stick to the strategy and not get scared away. 

Bifurcated Market
By the way, here again is the performance figures for the Superinvestors of Graham and Doddsville from 1966 through 1982, a period when the stock market went nowhere.  The market was overvalued back in the late 1960's and the Nifty Fifty peak was in 1972.

But these Superinvestors did well overall through the period.   I use this table to remind myself (and others) that the overall stock market level is not always the most important thing in long term performance.

The other point, looking at this table now, that I realize is that during this time the market was probably highly bifurcated.  The mo-mo stocks were expensive back in the late 1960's, and then having been fooled by the conglomerates boom and tech stocks (-onics was the .com of the time; end your company name with these and the stock price went to the moon), investors rushed into the nifty-fifty one decision stocks (they were high quality blue chips, not fad stocks.  What can go wrong, right?).   My guess is that these Superinvestors did well during this period because they stayed away from the bubbled up areas.

I think we may be in a similar period now.  I don't really see the overvaluation that people keep talking about; I don't see excessive margins in the companies I am interested in and I don't see high p/e ratios there either.

But there are pockets of silliness here and there.  If you look at TSLA, AMZN, NFLX not to mention FB, TWTR, things look a little bubbly.  As Einhorn said, this area is not as big a part of the market as internet/tech bubble back in 1999/2000.   The collapse of some of these names may or may not take down the whole market, but either way, it's not such a big part of the stock market.

This is one reason why I am not a big fan of looking at the stock market valuation as a whole in making investment decisions.  The Superinvestors wouldn't have done so well if they sat out the market in 1966, 1972 etc...   And there was plenty do to even in 1999/2000 despite the market trading at 30x p/e (or whatever it was).

So why is this relevant to this post?

A highly bifurcated market is a great time to be long the market (if you own the right stocks) but can also be really interesting for a long/short strategy.  But of course, only if the person running it is competent.  I don't think just any long/short fund will do well;  I think most will do horribly; they will get killed on both sides (the shorts will go up and the longs will underperform!).  But if I'm right, Gotham Funds may do well on both sides; at least relatively.

Conclusion

So although nothing has changed as far as I'm concerned (with respect to what to do in the markets) I like to follow Greenblatt and I think he is the real deal. 

I am usually not a fan of long/short mutual funds (or even hedge funds unless run by someone with a good track record; never buy these things offered by the large mutual fund companies!), and I am not really a big fan of mechanical investing either. 

But again, Greenblatt is a veteran that has a proven track record in the markets so he is not just some academic coming up with a nice theory trying to sell you something.  So I wouldn't have much reservation about these funds based on it being a long/short strategy and quant-based. 

Also, I know that the Magic Formula has been controversial in the past; that people have not been able to duplicate Greenblatt's results.  I haven't done any work on that myself but I suspect a lot of that is going to be because of the data. 

When I worked at big firms, a lot of resources went into cleaning up the database (that were presumably already cleaned up by the vendor).  So it would be really difficult in any case to duplicate results without a good staff actually going over the raw data first.  You'd be surprised how much silliness gets into these backtests if you don't actually check the data yourself (or have someone do it for you).  This would include things like dropping stocks where the financial data is suspect or meaningless (data vendors won't do that).

So,

• In this bifurcated market we know that there are decent stocks to buy and the Magic Formula type things will outperform over time.  No need to get out of the market even if the whole market is expensive (and some great investors say it's not) if there are reasonably priced stocks to own.  And the Magic Formula is not a bad way to be long (assuming the Gotham Funds use a similar methodology). 
• On top of that, the returns in these funds will be enhanced by the weighting strategy of buying more of things that are cheaper instead of equal weighting them (read the The Big Secret for the Small Investor and go to the website (valueweightedindex.com) to see how that works).
• And then you have a short portfolio overlay on top of this using the same strategy in reverse; shorting more of the more expensive things.  The short book is risk managed by having smaller positions per name so as not to get killed by the occasional NFLX / AMZNs.  
• People will always be afraid of some stocks due to recent bad news (and therefore underprice them) and will always adore others (and therefore overprice them).  As long as this continues to be the case, the strategy should work.  

It's such a simple idea and it sounds too good to be true. And yes, the mutual fund industry is littered with funds that tried similar things in the past.  

I will tell you, though, that this is different than those past attempts by a wide margin; mostly due to the experience of Joel Greenblatt, the research that he has done and disclosed to demonstrate that the ideas actually work etc...  

The $250,000 minimum investment might be a high hurdle for some younger individual investors, but if I wasn't actively managing my own account, I would certainly consider putting a decent chunk of my risk capital into these funds. 

Anyway, I don't recommend mutual funds here all that often, but take a look!