With Barron’s recently proclaiming “Next Stop, Dow 30,000,” it may be time to start thinking about downside protection.

As value-oriented investors, we like to think that we always consider the downside. However, no one is immune to complacency as successes pile up and our investment theses play out as expected. We start attributing success more and more to our own intelligence rather than the benign market environment. As human beings prone to biases, we therefore need to remind ourselves that markets can go down as well as up, and that securities can become “unjustifiably” cheap at times—and then proceed to get even cheaper. Patience is a virtue.

Howard Marks suggested in an interview with The Manual of Ideas that investors be aware of the “temperature of the market”—not as a way of replacing or diluting their bottom-up approach, but rather as a way of modulating the aggressiveness with which they pursue returns. As investors become almost uniformely optimistic and markets seemingly have only one way to go (“Next Stop, Dow 30,000”), it may be time to focus less on return on capital and more on return of capital.

That said, great investment opportunities remain, and we were fortunate to discover some of them at Best Ideas 2017, the online conference we hosted a couple of weeks ago. More than forty value-oriented investors shared their favorite ideas. Inside this issue, we summarize most the investment theses articulated at the conference, and in The Manual of Ideas Members Area, we include full replays of three sessions—Phil Ordway on community banks, OceanFirst, and Wells Fargo; Stephen Yacktman and Jason Subotky on 21st Century Fox and Samsung Electronics preferred shares; and John Lewis on Rosetta Stone and Franklin Covey.

As always, we also analyze selected ideas, in this case twenty investment candidates chosen by our research team.

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Table of Contents

EDITORIAL COMMENTARY 3

IDEA HIGHLIGHTS FROM BEST IDEAS 2017 7

JAY WILLOUGHBY ON MANAGER SELECTION 15

SHAWN KRAVETZ ON INVESTING IN GAMING AND SOLAR 19

EQUITIES THAT ARE SHARPLY OFF THEIR SEVEN-YEAR HIGHS 24
MV > $50MN 24
MV > $50MN, NEXT FY EPS > $0 26
MV > $50MN, NEXT FY EPS > $0, ∆ TTM REV. > 0 28
MV > $50 MN, NEXT FY EPS > $0, ∆ TTM REV. > 0, TBV > 33% OF MV 30
MV > $50MN, NEXT FY EPS > $0, ∆ TTM REV. > 0, TBV > 33% OF MV, EV/REV. < 1X 32

PROFILING TWENTY INVESTMENT CANDIDATES 34
21ST CENTURY FOX (FOXA) – DODGE & COX, CAP WORLD, YACKTMAN, WELLINGTON, IFP 34
ABERCROMBIE & FITCH (ANF) – FIDELITY, DFA, GLENHILL, AQR, MS, JPM, DENVER 38
AVON PRODUCTS (AVP) – CAP RE, YACKTMAN, WELLINGTON, CAP RE, T ROWE, BARINGTON 42
BRIDGEPOINT EDUCATION (BPI) – WARBURG PINCUS, MANGROVE, NANTAHALA, DFA 46
CGG (CGG) – BPIFRANCE, DNCA FINANCE, FINANCIÈRE DE L’ÉCHIQUIER, IFP ENERGIES 50
CHINA YUCHAI (CYD) – HONG LEONG, SHAH, BRANDES, FOSUN, ACADIAN, BLEICHROEDER 54
CROCS (CROX) – WELLINGTON, ALLIANCEBERNSTEIN, FRONTIER, DFA, NORTH RUN 58
ERICSSON (ERIC) – DODGE & COX, SWEDBANK, AMF, MFS, PRIMECAP, NORGES 62
FIRST SOLAR (FSLR) – CAP WORLD, WELLINGTON, AQR, SUSQUEHANNA, GUGGENHEIM 66
FOSSIL (FOSL) – VULCAN VALUE, FIDELITY, MELLON, TSW, CITADEL, WEITZ 70
GUESS (GES) – FIDELITY, DFA, SCHRODER, CEREDEX, VAN BERKOM, FULLER & THALER 74
JAMBA (JMBA) – ENGAGED CAPITAL, WELLINGTON, PACIFIC GROVE, INDUS, MS, PRIVATE 78
LSB INDUSTRIES (LXU) – ROBOTTI, TONTINE, STARBOARD, FRONTIER, INDABA, HORIZON 82
MOLSON COORS (TAP) – FIDELITY, JPM, LAZARD, WELLINGTON, TIAA-CREF, FRED ALGER 86
MORGAN STANLEY (MS) – MITSUBISHI UFJ, T ROWE, VALUEACT, JPM, FIDELITY 90
MOVADO (MOV) – DFA, ROYCE, FIDELITY, PERKINS, JPM, COLUMBIA, DEUTSCHE, GEODE 94
OCH-ZIFF CAPITAL (OZM) – T ROWE, PAMET, BLUE RIDGE, ABRAMS, ODEY, NORTH RUN 98
OFFICE DEPOT (ODP) – HOTCHKIS, ALLIANCE, FAIRPOINTE, PAULSON, GLENHILL, BAUPOST 102
WHITE MOUNTAINS (WTM) – FRANKLIN, T ROWE, FULLER & THALER, WELLINGTON, WALLACE 106
WYNN RESORTS (WYNN) – SOUTHEASTERN, NORTHERN CROSS, CAP RE, PLATINUM 110

ESSAY: INVEST IN CHANGE 114

TEN ESSENTIAL SCREENS FOR VALUE INVESTORS 116
“MAGIC FORMULA,” BASED ON TRAILING OPERATING INCOME 116
“MAGIC FORMULA,” BASED ON THIS YEAR’S EPS ESTIMATES 117
“MAGIC FORMULA,” BASED ON NEXT YEAR’S EPS ESTIMATES 118
CONTRARIAN: BIGGEST YTD LOSERS (DELEVERAGED & PROFITABLE) 119
CONTRARIAN: CHEAP FREE CASH FLOW GUSHERS 120
VALUE WITH CATALYST: CHEAP REPURCHASERS OF STOCK 121
PROFITABLE DIVIDEND PAYORS WITH DECENT BALANCE SHEETS 122
DEEP VALUE: LOTS OF REVENUE, LOW ENTERPRISE VALUE 123
DEEP VALUE: NEGLECTED GROSS PROFITEERS 124
ACTIVIST TARGETS: POTENTIAL SALES, LIQUIDATIONS OR RECAPS 125

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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.