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The Manual of Ideas: The Proven Framework for Finding the Best Value Investments by John Mihaljevic

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CHAPTER 3

Sum-of-the-Parts Value

Investing in Companies with Excess or Hidden Assets

Vodafone does not consolidate Verizon Wireless and, as a result, sell-side analysts seem to ignore its significant value.

—David Einhorn

The investment thesis David Einhorn, president of Greenlight Capital, articulated on Vodafone in 2010 was as straightforward as it was surprising. Einhorn made the case that the market was ignoring the value of a 45 percent stake in Verizon Wireless because Vodafone did not consolidate the financial results of Verizon Wireless. While such an argument might be expected in the case of a small company that lacks an institutional following, Einhorn argued the existence of a major analytical oversight in the case of a company with a market value of more than $100 billion. Einhorn may not have argued that analysts were unaware of Vodafone's equity stake, but rather that it was not top of mind due to the reporting peculiarity. The fact that Einhorn felt comfortable putting forth such a seemingly unlikely argument reveals the degree to which he views sum-of-the-parts situations as fertile grounds for pricing inefficiency.

The Approach: Why It Works

Investors usually analyze a company as a monolithic whole, appraising value based on overall book value, earnings, or cash flow. However, many companies can be appraised most accurately by analyzing each of their distinct businesses or assets separately and then adding up those components of value to arrive at an estimate of ...

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