Deep Value Letter - Banner Ad / Email Capture

Saturday, January 11, 2014

In the Long Run, Deep Value works and it works very well

Over the past few months I have sent you some examples of how well my value stock picks have done over the past year. Today I want to take a step back in time and show you the real power of value at work. My holding period on stocks tends to be much longer than most people today, especially those who offer a newsletter product. They all tend to favor holding periods of days and weeks looking for the quick profit. In my experience that only works in bull markets (and not always even then) and misses the real money to be made in the markets. Buying business when they are deeply undervalued and trading for less than their asset value and earnings power and holding for several years is where the real money is made.

Back on February 22 of 2012 I wrote a column on I wrote a column entitled Value-Its Not For Everyone. I suggested buying five stocks at the time. The reruns have been extraordinary for some relatively boring stocks that have never showed up on the hot moneys radar screen but have made investors who heeded the value call a pile of money.

JBSS- + 137%
FIBK - +127%
PSTB- + 52.21%
TUES-  +287%
SNBC +17%

On July 17 of 2012 I penned an article titled Asset Based Value Investing Works. Again I suggested a few stocks that were trading at a discount to book value. Since then:

FBNC +90%
KELYA +107%
HERO +86%
BANR +111%

Let’s go back a bit further to September 27 of 2011. I worte a column titled Tried and True that emphasized using book value to pick stocks. I mentioned 5 stocks as buy candidates. Since then we have:

TLABS  -21%. A rare stinker that was recently taken over
AIZ +97%
PFG  +124%
CINF +111%
MU +267%

I show you this not to hold myself out as a genius or smart guy. The thing I have been smart enough to do is to study and learn from great investors like Ben Graham, Walter Schloss, Seth Klarman and apply what I learned from them, I have developed the patience and discipline to buy cheap and hold until the stock return to fair value and beyond. I still own most of the stock mentioned in this note as they are not yet overvalued.
During the years I have owned these stocks I have not traded around them or worried very much about the day to day quotes. I stayed in top of business conditions and as long as they were safe and cheap I held them. I never left a ball game or party because the one of my stocks made a major move and I had to act.  I didn’t have to ruin a dinner party by obsessively checking my stock prices. I never sat up after everyone else went to sleep reviewing my stock charts. I let time and value do the work for me and I simply do not know too many traders who have racked up the profits that deep value investing has provided over the years I have been doing this.

Deep Value Investing works and it works very well. I can teach you how to use patience and discipline to make it work for you so you can enjoy profits in the market by investing in a business-like fashion. I have three newsletters that can help you make more money over time by ignoring short term noise and focusing on the only important questions.

Is it safe?

Is it cheap?

I have put together a package of three offers for you. Pick the one that’s right for you and join me in becoming a successful deep value investor.

Monday, December 30, 2013

Small Banks and a Special Offer

It was pointed out to me that I made a special Holiday offer for my Deep Value product but not the Banking on Profits letter. I had to sit and think about this for a bit as it goes against my grain to offer a special deal on this letter outside the all in one package we offer. It is a premium product for investors who want to take advantage of the enormous potential in the small banking sector over the next decade. It uses my 20+ years of experience in small bank stocks to find those most likely to benefit from the powerful economic and social trends that will impact the industry. Frankly , this letter is a lot of work and I am hesitant to discount it.
But fair is fair and it is the Holidays. Take Note that this is a ONE TIME offer. Banking for profits will hit our max subscriber count in the New Year and will be closed to new subs so you will not see this offer again. To take advantage of the small illiquid nature of these stocks we have to keep our subscriber count at a manageable level and we will hit it in 2014 and close the service to new subscribers.
So here my offer. From now until  Midnight New years day you can subscribe to Banking on Profits for just $499. That is $300 off the regular subscription price.
Use this link to sign up before this offer expires.

On the off chance you forgot how powerful the potential of small bank stock is right now here are two refresher articles on why you need to subscribe to banking on profits today.

Wednesday, December 18, 2013

Value Explodes This Week

 I am fond of saying that time and value work and they work well in the stock market. This week for some reason Value decided to pack its lunch pail, put on some steel toed boots and work at an extraordinary pace. If you look at the top performing stocks so fat this week (and its only Wednesday) here are some the big gainers.
LSI Logic (LSI) is up  34% after receiving a takeover bid
NorthStar Finance (NRF) has jumped 26% after they announced a spinoff of their asset management business
AerCap Holdings (AER) is up a whopping 64% after an announcement that they were investing heavily in their finance unit
Cross Country Healthcare (CCRN) announced they were buying the assets of Alled Heathcare and saw their stock rise by 23% so far
KKR Capital (KFN) announced that it is being bought by Kohlberg Kravis and the stock jumped 35%
A jump in the Baltic Dry Index helped drive Star Bulk Carriers (SBLK) and Global Ship Leasing (GSL) higher by more than 20%
All of these huge gainers so far this week share a common trait. They were recommended by me in the past year or so. To top it off the gains this week are just the icing on the cake. I have owned all of these for a while now and the total gains are nothing short of spectacular. Our long term gain in NorthStar is more than 200% since 2011. Since the initial recommendation in May of 2012 we have total return of more than 70% in KKR Capital. Cross Country is up more than 77% since March of 2012 when I suggest long term investors take a position. LSI has provided us with a gain of 77% since May of this year while AER is up more than 100% since I recommended the stock in November 2012. I just added the shipping stocks to my International Deep Value Portfolio in September and have gains already of 24% in GSL and 38% in SBLK.
I am not going to be one of the guys who blows smoke at you and says that all of my stock picks will work this well. Some will not. However I will tell you that cheap stocks with a huge margin of safety such as the ones I like to buy do usually work out given enough time. Value investing takes patience and discipline and when it works (as it does most of the time) the gains can be extraordinary and well in excess of the market returns.
If you are a trader or investor who likes sitting up all night playing with stock charts or has the time to spend in front of the screen all day trading frantically in search of returns, the idea of long term value investing might not work for you. However if you have a life, a career,  a family or hobbies and other interests in life besides the stock market and still want high returns on your hard earned investment capital the taking advantage of deep value investing with margin of safety as the primary concern should be your approach.
It’s the holidays so I want to make a special offer in the spirit of the season. We are getting ready to kick off our first full year of both the Tim Melvin Deep Value and the International Deep Value Letters. If you are looking for a way to put your money to work in safe and cheap stocks as well as learn the concepts and tools of this approach to the markets I have an offer for you. The Deep Value Letter sells for $490. So does International Deep Value. I have run several specials this year in a buy one get one get one free promotion so I will do that again.
But its Christmas and I am in the holiday mood. If my approach to the markets emphasizing the margin of safety and private equity mindset appeals to you, I want you to be a part of the value investing community here at The Tim Melvin Value Letters on Marketfy so I will sweeten the pot from now until Christmas Eve. I will give you the buy one get one but for just the next few days I am marking the price down a bunch. You get both letters for one full year for just $359.
No Hype or amazing claims. Just a good deal on solid common sense investing that has been proven to work.
Use this link to sign up for my Holiday offer.

Monday, November 25, 2013

Stealing From The Best. 13F review

One of the earliest filers this time around a firm that has leapt up to near the top of my favorite reports to read each quarter.  EJF Capital was formed by Emmanuel Friedman and Neal Wilson who were previously at FBR Capital. They have some serious chops as stock pickers and did very well for investors at FBR particularly in financial stocks during their years at the brokerage and investment banking firm.  They bring a lot of experience in small banks, REITs and other sectors to the table and have made a name for themselves since opening the doors in 2005. One of their funds was up almost 30% in 2012 as a result of figuring out how new legislation would cause banks to alter their capital structure and buy back their trust preferred to comply with Dodd-Frank and other legislation that emerged post financial crisis.

I started paying attention to this firm when they started popping up in many of the small banks I follow and own. In the latest filing they continue to show a strong belief in the Trade of the Decade and added to many of their existing small bank positions and taking a new stake in several others. Like my little banks a lot of their picks are too small to mention here but they did open new positions in a few of the larger small banks. New banks in the EJF Portfolio include VantageSouth Bancorp(VSB), Omniamerican  Bancorp(OABC), Independent Bancorp of Michigan (IBCP), and First Horizon National Corporation(FHN).Small bank stocks have had a pretty good quarter so be sure od do the homework on these to make sure they are still cheap enough to meet your investing guidelines instead of just blindly jumping into the shares.

The fund apparently has a high degree of confidence that Puerto Rico will recover from its current financial difficulties. In particular they have bet that the banks will recover and eventually thrive as they bought shares on two of the biggest banks in the regions. They better than doubled their stake in Popular (BPOP) the Puerto Rican based bank. Although Popular is thought of as a Puerto Rican bank they now have more offices on the mainland that they do in the islands. Credit conditions are improving for the bank and they just filed application to be a allowed to repay TARP money to the treasury. The stock is still very cheap at less than 70% of tangible book value in spite of decent prices gains this year.

EJF was also a buyer of First Bank (FBP), the second largest bank in Puerto Rico. The bank has struggled with bad loans and nonperforming assets are still around 6% of total assets but this is improving, albeit very slowly. The stock has been pressured by a recent sale by large shareholders including Oaktree capital (OAK), private equity fund Thomas Lee and the federal government. It is important to note that Oaktree and Thomas Lee both still own around 20% each of the and one cannot blame them for taking partial profits on their shares.  I have little doubt that they are expecting much higher returns off their remaining holdings of the banks shares.

The fund also increased their holdings in real estate related companies in the quarter.  They almost doubled their stake in shares of Colony Financial (CLNY) to more than 3 million shares. The REIT is primarily in the commercial real estate fiancĂ© business but they also have a substantial portfolio of single family rental homes bought at distressed prices during the real estate meltdown. The shares are cheap at less than 90% of book value and yield almost 7% at the current price.

EJF opened a position in New Residential Investment (NRZ) during the third quarter. This REIT specializes in owning excess mortgage servicing rights, nonperforming mortgage loans, mortgage backed securities and other assets related to residential housing and consumer finance. There are a lot of moving parts to this one but I am intrigued by the company and am adding it to my homework list. The also added shares of one of my favorite real estate related investments by buying more than 800,000 shares of Apollo Commercial Real Estate Finance(ARI) that also trades at less than 90% of book value and yields  almost 10% right now.

As an asset based value investor I have a long standing love affair with real estate related investments and small bank stocks. Apparently so do the principles of EJF Capital and their filings have become a wonderful source of ideas for these investments. If they are not on your reading and research list they should be.

One old reliable that has filed their holdings for the third quarter is the Royce Funds,. Headed up by veteran stock picker Chuck Royce the firm has a long tradition of using value principles to pick small cap stocks. I have stolen many solid ideas from Mr. Royce and his team over the years. I always wince a little when I crack open the filing because it is long and takes some time to review. The firms has more than 30 funds and $38 billion under management and like to own a lot of different stocks with relatively small position sizes in most of their funds.

One of his new buys in the quarter has since run into earnings and guidance difficulties and had its stock price hammered since the end of the quarter. Atlas Air Worldwide Holdings (AAWW) has seen its stock price drop by 15% in the last month after lowering guidance below Street expectation. The company, which provides outsourced aircraft and aviation operating services in the United States, lowered its forecast for the full year to between $3.40 and $3.80 per share. The always highly accurate Wall Street analysts had been hoping for $4.73 a share for the year. The stock now trades at about 80% of its tangible book value and is buying back stock at very low valuations. This company has the largest fleet of Boeing 747 freight aircraft in the world and is doing pretty well in a difficult air freight market. They have also been hit by reduced military cargo shipments this year. The company is worth a deeper look here as it appears to be a good business on sale.

Royce clearly likes the long term future of the homebuilding segment, especially the smaller builders. They have new positions in UCP Incorporated (UCP), AV Homes (AVHI), Meritage Homes (MTH) and TRO TRI Point Homes (TPH) in the quarter. The thesis makes some sense to me as they should benefit from a long term recovery in the housing markets but the stocks simply are not cheap enough for me yet with the exception of AV Homes which I have owned for some time now.  UCP, which is 57% owned by Pico Holdings (PICO) is at 1.1 times book value and may have the most upside with its large exposure  but the way to play it is probably buying the parent to gain exposure to its other businesses such as water and agriculture.  Pico is also at 1.1 times book value and would be a tremendous buy in a market decline.

The firm also opened a potion in a stock that is creeping up on my buy list. Baltic Trading (BALT) shares are changing hands at a little less than 50% of book value even after a strong run up this year. They are in the dry bulk shipping business and own 11 vessels right now. They just completed a stock offering and raised $50 million to buy new ships in the current depressed market. I detest stock offerings at less than book value but have to admit that expanding with equity proceeds makes more sense than using debt financing a very volatile shipping market. I haven’t pulled the trigger on this stock yet but I am getting close.

The firm apparently shares some of my enthusiasm for the long term future of the shipping industry as they also initiated positions in Ardmore Shipping (ASC) and GasLog (GLOG) over the summer. They also added to their stake in Genco Shipping and Trading (GNK) in a big way during the quarter and own several other shipping stocks including Diana Shipping (DSX). This sector is not for the faint of heart but offers the potential for enormous long term returns.

I have always gotten at least an idea or two from the Royce filings. Given the level of buying and selling activity by the giant value firm it would be hard not to find something worth buying. It is worth your time to read over the filing in search of small cap value stocks worth owning.

PL Capital, the bank stock activist hedge fund is one of my favorite firms from which to steal ideas as they are big believers in the trade of the decade.  They are not exactly passive outside investors as they are more than willing to go hostile and take an aggressive activist approach to unlock shareholder value. They are pretty good at as they have won every proxy battle buy one in the past 15 years. The firm has been wonderful to talk with over the past year and have been very open about sharing ideas. The 13 F actually gives us a chance to see the ones they might not have wanted to mention and is a great source of small bank stock ideas.

PL Capital was more active in the bigger banks this quarter than usual. In a conversation earlier this year they mentioned that they thought some of the bigger banks were still undervalued relative to their long term potential and they took advantage of some weakness over the summer to open new positions in the common stocks of PNC Bank (PNC), Wells Fargo (WFC) and Capital One (COF). They already owned decent positions in the 2018 warrants issued by PNC and Capital One so these are more of an add than a new buy for the fund. They also upped their stake substantially in the warrants issued by JP Morgan that allow investors to buy shares at $42.42 and expire in October of 2018.

The firm opened positions in several smaller banks in the quarter as well. They add Sussex Bancorp (SBBX) to the portfolio. The Franklin New Jersey based bank has 10 offices and about $530 million in total assets. The stock is trading at just 65% of tangible book value and has decent capital levels with an equity to assets ratio of 10.4 Nonperforming assets are higher than I like to see at 3.12% of total assets but have declined rapidly over the past couple of year.

They added another New Jersey based bank to the portfolio be establishing a new position in shares of BCB Bancorp (BCBP). The 11 branch bank is headquartered in Bayonne New Jersey and has about $1.1 billion in total assets. They have a low equity to asset ratio at 8.27% but the loan portfolio is in decent shape with non-performing assets at just 2%. The Greater New York market that the bank serves is one of the most overbanked in the country and this bank could benefit from the consolidation activity I expect to see in the region.

The firm also picked up a new position in Mid Penn Bancorp (MPB) in the quarter. The bank has 14 branches in south central Pennsylvania and currently has 697,000 of assets. They have a lower equity to assets ratio that I like to see at 7.87% but nonperforming assets are just 1.81% of the total asset base.  The bank is 11% owned by insiders and they have been adding to their shares in recent month. The stock trades at less than 90% of book value at the current price.

The made a substantial addition to their position in Charter Financial (CHFN), a bank that underwent the thrift conversion process earlier this year.  They more than doubled their stake in the West Point, Georgia based bank. Charter has 16 branches in Georgia, Alabama and the Florida panhandle with about $1 billion in assets. The bank is flush with proceeds and has equity to assets ratio of more than 18 and nonperforming assets are just 2.01% of total assets so the bank is in great financial shape. At the current price the shares are changing hands at 90% of book value.

I have not exactly made a secret of my attraction to the small bank sector over the past few years. I believe it is the trade of the decade for investors and can be the source of the type of gains that fund retirements, college costs and increase your wealth at a very high rate. PL Capital are not only great stock pickers when it comes to these little banks they have the skillset and experience to take an activist position  and force banks to unlock shareholder value. When it comes to stealing stock ideas, I like to steal form the very best and right now in small bank stocks that is PL Capital.

When I first started out in the world of investing you actually had to send away to the SEC for the reports and they would show up in the mail a few weeks later. We actually paid for a service that broke down who was buying what that would come in a few weeks after the deadline. When I started writing for Real Money back in 2008 the filings were available online but they did not attract anywhere near the attention they do today. I was one of the few people who covered them every quarter. That has changed a little over the past five years to say the least.

Warren Buffets filing had barely cleared the SEC before the world was abuzz with the news of his large stake in Exxon (XOM). People have sliced and diced the report and puzzled long and hard about why Warren bought the oil and gas giant. They may be over thinking the matter as its probably just that oil stocks are cheap, fossil fuel demand is not going away and Berkshire (BRK) could buy a lot of shares without ending up owning the entire company.

I tend not to comment too much on the filings of the larger better known investors as a couple of dozen other people will be doing so and I can’t real add much value either for myself or readers. I do follow some of the less well known investors who have compiled strong track records and can be a valuable source of overlooked ideas. One such firm is Arbiter partners run by Paul Isaac. I had the pleasure of meeting Mr. Isaac in New York recently and not only is he a fantastic stock picker he is a genuinely good guy carrying on a family tradition with deep roots in the history of value investing.

He runs a long short fund and is not afraid to use options ot create short bets. During the third quarter he made specific short calls on stocks like (CRM), Cliffs Natural Resources (CLF), Barclays (BCS), TAL International (TAL) and Groupon (GRPN). While I hope he is dead wrong about Cliffs as I am long he has done pretty well on the short side since I started tracking his holdings.

Mr. Isaac is apparently a fan of the trade of the decade as he owns several small banks in his portfolios and has commented on the sector in the Columbia Business Schools Graham and Doddsville magazine. It looks like he currently owns a total of 15 community and small regional bank stocks and held firm with the bulk of then in the quarter. He opened one new position In Independent Bank Corporation (IBCP) a 72 branch bank in Iona Michigan. The bank has about $2 billion in assets and recently completed an equity offering that allowed them to exit TARP. The shares currently trade at a small premium to tangible book value. The firm also increased its stake in Intervest Bancshares (IBCA) by about 30% in the quarter.

I was pleased to see that the firm doubled its stake in ARMOUR Residential (ARR). I have been long the mortgage REIT for some time now with less than wonderful results so far. He also increased his position in bond insurer AMBAC (AMBC) over the summer and added warrants to his stake in that company as well. According to the firms SEC filings The Warrants are exercisable for cash at any time on or prior to April 30, 2023 at an exercise price of $16.67. With the stock currently at $21.51 and the warrants at $12.94 it is an interesting 10 year bet on the company’s survival.

Mr. Isaac has outperformed the market by a substantial margin over the past decade and appears to me to be positioned to continue to do so for years to come. I do not have the space to cover all his holdings here but it is worth your time to check out the entire filing at WWW. SEC.GOV.

Saturday, November 23, 2013

Anchors Aweigh

I have been a bull on the shipping stocks pretty much all of the last year. I have noted that most analysts expect a turnaround in 2014 as more ships have been scrapped and fewer new vessels ordered. Slowly but surely we are seeing the excess capacity in the industry decline , The Baltic Dry Index is still well below the high levels of the last five years has shown some improvement this year albeit in a volatile fashion. Tanker rates have been showing a steady increase this year as well as global demand is picking up form the low levels of the past few years. It is not going to be a rapid recovery and will most likely take a few years to play out fully but these stocks started moving form a very low level.

The industry has been so battered that a lot of private equity and distressed money has found its way into the shipping industry to take advantage of the astronomical returns that will be earned if shipping recovery in full over the next decade. Firms like WL Ross, Apollo (APO), Oaktree (OAK), Kohlberg Kravis (KKR and   Blackstone (BX)have all entered into sizable shipping deals in the past year. It is patient money but like me they are looking for returns from this industry measured in multiples not percentages.

A lot of these stocks have made huge moves already this year. My two favorites coming into the year were International Shipholding (ISH) and Tsakos Energy (TNP). They are up 66 and 43% respectively. Our own Jim Cramer was bullish on Diana Shipping (DSX) earlier this year and that stock is up 62% so far in 2013. Shipping quickly went form a lonely trade to a rather popular one as money came looking for a cheap home on the heels of high profile fund buying.

You can still put some money to work in the sector but a degree of caution and common sense is called for here. We want to look for the cheapest stocks that are showing some signs of fundamental improvement or have some catalyst to move the stock higher. Initially we can use price to book value and F-scores to find some stocks that are cheap and will benefit form a shipping recovery. The biggest caveat with shipping stocks is that this is a long term sector. If you are not investing with at least a five year time frame you might want to go back to trading Apple (AAPL) and leave the shipping stocks alone.

Stealth Gas (GASS) is a good example of a stock that can still be bought at current levels. The stock is up off the lows it hit after a bad earnings report but the stock is still at just 85% of book value and has an F-score of 7. They are the only publicly traded Liquified Petroleum Gas tanker company right now (that will change when Wilbur Ross completes the navigator group IPO)and that should be a growth sector for the shipping industry for several years.

International Shipholding may be up quite a bit this year but the stock still trades for less than 80% of book value and has an F-score of  7. The company has several carries that are flagged under the Jones Act sand is benefitting from port to port shipping within the United States.

Star Bulk Carriers (SBLK) is another stock that is still trading cheap on a price to book basis. In fact it is one of the cheapest stocks trading at a little less than 40% of tangible book value. The F-score is not that strong but the catalyst here could be some serious smart money buying. They recently did a stock offering to buy new ships and working capital and the stock price took a hit after the deal was closed. However Howard marks distressed funds were a big buyer of the stock and now own more than 20% of Star Bulk. The folks at Oaktree Capital have pretty sharp pencils and one imagines they figure the company is worth a lot more than the current stock price. It is worth taking a position to invest in a shipping recovery beside one of the best distressed investors of all time.

Shipping stocks should provide huge returns over the next five years. The smart aggressive patient money is continuing g got invest in the sector. Some of the stocks have bounced quite a bit this year but there are still some opportunities to buy assets very cheaply in the sector.

Thursday, October 31, 2013

Updates and Offers

I have mentioned before that I really am not a huge fan of all the marketing and promotion stuff that goes along with offering a newsletter service. Left to my own devices I would prefer to just hunker down in my little office and focus on research and managing the portfolios. I am something of a geek and   think that a day of finding and researching stocks followed by an evening with a good book, a bottle of wine and a ball game on in the background is pretty much a perfect day. But apparently all this comes with the territory so I want to take a minute to remind you of some things that are going on with the Tim Melvin portfolios.

Since June 6th of this year when we introduced the newsletters and bought the first stock the S&P 500 is up about 9.44%. That’s pretty impressive in and of itself for a five month period. However our stocks are doing even better than that. 16 of our 26 stocks in the Deep Value Portfolio are up more than that.  We have had two companies receive takeover offers at higher than market prices and 6 or our stocks are up more than 25% already. We have also already had a takeover offer at more than a 50% premium in our bank stock portfolio already this year. Buying stocks at a significant discount to book value works and it works very well. The Deep value Portfolio currently averages about 70% of tangible book value and the Banking on Profits portfolio averages right around 80% of tangible book value.

We have been sending you some examples of past picks that have generated 50, 100 and even 200% gains over the past couple of years. My method does not involve trading in and out of stocks all day and trying to balance watching the markets while working or spending time with your family. It is based on buying business at good prices with a large margin of safety and letting time and economics take care of the rest. You have things that you need to do and want to do during the week and a bunch of time chasing electronic dots across the screen with some trading system might not be the best use of your time. Let me pick the best stocks for you to profit from as a long term investor and spend your time doing what is important to you.

I also have a strong focus on margin of safety. It is not enough to be cheap the business has to be safe with a strong credit and fundamental profile. We believe that to thrive you first have to survive. That spills over into my approach to the overall market as well. I am not a market timer but when times are bad and most folks are scared and selling there lots of bargains and I trend to be a buyer. When markets are strong as they are now opportunities are scarce and we tend to hold a lot of cash. Right now we have 40% cash in our Bank Stock portfolio and close to 70% in the Deep Value Portfolio.

Here is an example of how this non market timing approach has worked in anticipating past market corrections and crashes. Both of these comments come from the blog I kept at the time and are a matter of public record:

December 5, 2006

                “You might be able to sell me the fact that this market is fairly priced, providing I’ve been drinking heavily, but undervalued, I can’t see it. The bond market and the dollar are telling you it’s just not that good out there right now. We have rallied almost 12% since August without a real pause of any length and anybody who is not cautious now pretty much deserves what they get.”

April 1, 2008
                “Even if I am dead wrong here I think the risk of being fully committed to stocks carries too many risks for the idea of a margin of safety to exist. I am willing to miss this run up to protect capital. There appears to be very little common sense being used on Wall Street these days when it comes to the overall economic and financial matters, as well as a total lack of fear. Bottoms are accompanied by fear and loathing not cheerleading and bottom predictions. The bullish arguments are laughable.

By the way we got back in pretty much at the lows because even though it looked like the world was ending stocks were cheap.

As for the market itself there is a fortune to be made over the next several years. I see companies that are profitable trading for less than 3 times E/EBITDA. I see an ever growing list of companies that sell for less than cash in the bank. We are fast approaching the depths of an ugly bear market and there is money to be made.
March 14, 2009
                You can buy stocks like ADPT, TECD, and ESIO for less than the value of the company’s liquid assets. You can literally build a portfolio of 40-50 of these that have a good credit scores, viable businesses and excellent recovery prospects. That’s enough to make me salivate at the possibilities for gains over the next several years.

                DIS trade for about two thirds of my appraisal value. That is provided we give no value at all to the film library or character rights and price the parks as raw land and put a 5 multiple on after tax earnings .DELL trade for less than two cash. HTH is a pile of cash in the hands of a proven investor in distressed banks and other financials. As a bonus the company landed a back door bank charter and will be able to bid on distressed assets and institutions. Southwest Airlines is stupid cheap, trading below tangible book value. Oil service companies like RDC and PTEN trade below net asset value at these levels. I like the idea of buying the Forest City senior debentures at a 30% YTM and what looks to be more than adequate asset coverage.

Using my value approach can help you find stocks with outstanding long term returns. It will also help you avoid overheated markets that present the chance of a permanent loss of capital and have cash on hand to buy when we get to that point of maximum pessimism that offers the very best long term opportunities.
Thats my whole pitch folks. No fantastic claims just hard evidence that this works and can help you accomplish the two most important goals of a long term investors. First service and avoid grievous and permanent losses of capital. Second to find those stocks that offer the potential for returns measured in multiples rather than percentages of your initial purchase price.

I had my partners at put together a couple of offers for you to start putting deep value investing to work for you. Check them out and pick the one that works best for you. I look forward to having you as part of the Deep Value family.

Cheers  !

Tim Melvin

Tuesday, October 29, 2013

Betting Longshots and Turnarounds

I have frequently confessed a strong attraction for longshot stocks in the past. I like these stocks that are ridiculously out of favor and struggling to execute a turnaround. Most of my efforts are focused on safe and cheap stocks with the potential for high returns but I confess to having a few longshots around most of the time. I have advised my son and daughter that they should have an even higher percentage of these stocks in their portfolio than their old man does as the math is just too compelling.

Consider a portfolio of carefully selected long shots with the potential to triple in price over the next three to five years. If you are right about 40% of you selections and just average break even on the rest of the bundle you end up handily beating the markets historical returns. If it takes three years you end up averaging 21% and if stretched out to five you still have a compound annual return a little over 12%. A 30% win rate gives you a  return of between 8 and 14% depending on the time it takes to play out. With the application of a hardy dose of common sense and strong stomach for volatility the 40% win rate should not be difficult to achieve. It is the same mindset that makes private equity and distressed investing so successful.

If you look at the stock I identified as longshots in the second half of 2011 and all of 2012 there were 25 names on the list. 22 of the stock are higher although admittedly with a boost form a strong stock market. The biggest loser is my old nemesis Hampton Roads Bancorp (HMPR) with a nice loss of almost 80%. The biggest winner is Cemex (CX) with a tidy 200% return already. More importantly taken as a group the package of stock is up more than 80% over just an 18 month time frame. I have not graded out 2013s long shots yet but we have already seen some big winners in stocks like Cumulus Media (CMLS) and Cowen Group (COWN) that were long shot portfolio suggestions.

One way of searching for long shots is to set some of my traditional metrics aside and simply look for companies with higher leverage that I normally accept that also have high Piotroski F scores indicating improving fundamentals. I then cut that list down to companies that have tumbled into single digits and have a long way to climb if management is successful in turning the business around.

Skilled Healthcare Group (SKH) operates skilled nursing facilities, assisted living facilities, hospices, home health providers, and a rehabilitation therapy business. This used to be a $14 stock but now fetches less than $5. The stock was over $7 back in July but missed analyst forecasts for earnings and revenue and investors dumped the stock aggressively. The debt to equity ratio is a a daunting 400% but the company does have an F-score of 7 indicating fundamental improvements are taking place and not being recognized by Wall Street just yet. At the first sign of good news this stock could begin a climb back in the direction of the old highs.

Alaska Communications Group Company (ALSK) provides integrated communications services to consumer and business customers in and out of Alaska. The Company's wireline and wireless communications networks extend throughout Alaska. The company recently announced new broadband capabilities for businesses that should help drive future growth. The new service will be rolled out shortly in the Anchorage area and introduced to the rest of the state over the next few years.  Five years ago this stock traded for more than $10 a share and just halfway back to that level would be a huge return. They carry a high debt load with a debt to equity ratio of 500% but the F-score is an impressive 8 indicating better times ahead for the company and hopefully the stock.

Although I do run screens looking for long shots my favorite way is to simply sit down with the new issue of Value Line and electronically thumb through the issue looking for stock with enormous upside potential over the three to five year time frame I find most effective. The list of stock that have performed poorly in the last quarter and those with the highest three to five year appreciation potential as calculated by the research service have been particularly fertile hunting grounds over the years. The longshot and turnaround portfolio break form some of my basic valuation tenets and are more of a distressed/private equity view of certain stocks. This approach suits my son more than it does me at this point in my life but I have an affinity for having a few of these in my personal accounts.

Looking at the list today I see that a few of my recent longshot picks from earlier this year still make the grade. I am a huge fan of both McDermott (MDR) ACCO Brands (ACCO) and Amkor Technologies (AMKR) still make the grade. I am big fan of all three of these issues and am very hopeful that the politicians will gum things up for a few more days and panic the market. I would love to have all three of these in my classic value portfolios and they don’t need to fall that far to trade at a healthy discount to book value.

Central Pet and Garden (CENT) makes the grade as a turnaround as well. The company has seen its share price plummet from over $18 pre-crisis to a little over $7 today. The company has been struggling to get its act together and saw earnings fall again last quarter and the stock was further punished by disappointed investors. The company has turned its attention to cost controls and that should help improve the bottom line. They have already reduced headcount once and may have to do so again before its all said and done.
Unless suburbs suddenly disappear the company will have a market place for their lawn and garden supplies, seeds and insecticides. Most of their revenue actually comes from the pet side of the business with products like treats, toys and animal health products. Many people I know, including my wife, would take care of their pets before themselves so that should remain a solid market for the company as well. With a little attention to costs and margins this stock should have no trouble getting back near the highs in a stronger economy.

Golar LNG (GLNG) is a little higher priced than y usual longshot picks but this stock appears to have enormous upside.I t is involved in the acquisition, ownership, operation, and chartering of LNG carriers and floating storage regasification units and the development of LNG projects. Currently the company owns six LNG carriers and operates Golar LNG Partner LP's fleet of seven LNG carriers and floating units. LNG rates have slipped this year as a result of delays and plant outages and the company actually took two vessels out of service in the second quarter rather than pay the costs of operation. The company is expanding their fleet and other shippers are rushing to get into the LNG business so there may be some excess LNG shipping capacity next year but this is eventually going to be a rapidly growing industry and Golar is positioned to be a leader.

The outlook for the floating storage and regasification units is strong right now. Golar commences a new contract in Jordan during 2015 and is considering converting older vessels to FSRU platforms to meet the growing demand. This stock could easily triple as the LNG industry continues to expand. You get paid to wait with this stock as the shares are yield 5.1% at the current price.

Before moving on from Value Line and the search for longshots with an above average chance of success over the 3 to 5 year time frame these investments usually need to work I like to go to amore familiar section of the weekly edition. Each week the venerable research service publishes a list of stock trading with the widest discounts from book value. While they use sated book and not my preferred tangible book value I find that the list has been an excellent source of stock ideas with longshot potential for a return of several times the initial purchase amount over time. This week’s list did not disappoint and there were several stocks worthy of further consideration.

FUJIFILM Holdings  (FUJIY)has suffered over the past few years as the film and camera business became a buggy whip business. No matter how good the products might be the demand for regular photographic supplies is disappearing as photography moves into the digital world. The company has taken steps to diversify the business and now offers products for the medical imaging markets, optical devices and office equipment. They own 75% of Fuji Xerox and have been developing export markets in other Asian nations for these products. They have restructured their basic photography related businesses and are migrating more towards higher end digital cameras in an effort to slow losses from that product line. It will take some time to get the ship fully righted but there is more than enough potential upside in the stock to justify waiting. The shares trade at just 50% of book value and cold easily double or more over the next few years.

Atlantic Power (AT) is a stock that will either be a big hero or a large zero. The stock trades at about 25% of its 2011 after a weak economy pressured the highly leverage power generator and they were forced ot cut the dividend payout. Even after slashing the payout by 66% the yield at the much lower price is still fairly enticing as the stock yields 8% at todays price. They were able to turn a profit in the second quarter to the surprise of many analysts and the stock has moved op off the lows but us still very cheap. Management is committed to paying down debt and reduced its debt load by $172 million in the second quarter. They are also looking to sell assets considered noncore operation and will use the cash form these efforts to further reduce the debt burden. If the restructuring and turnaround plans are successful this stock could easily double or more over the next few years.

Aircastle Limited (AYR) is in the aircraft leasing business and currently y has a fleet of 158 aircraft. The fleet has a utilization rate of 98% with a portfolio yield of more than 13% so business is pretty good for the company right now. They have been disposing of older aircraft and upgrading he fleet in in 2013. They have sold 11 aircraft so far and spent more than $960 million on new planes. The comonay also recently sold a little more than 15% of the company to Marubeni , Japanese trading company. Aircastle CEO Ron Wainshal said of the deal that “We're extremely pleased to welcome Marubeni as an important new strategic shareholder. Marubeni brings a long-term, globally minded perspective to our business and we believe there are exciting business opportunities for us as we work together."   The stock is cheap at just 81% of book value and the shares sport a yield of 3.7% at the current price. This was the 29th consecutive quarter of dividend payments by the firm. The company is also buying back stock and since 2011 have repurchased 11.7 million shares and still have $30 million to spend under the current buyback plan. Patient investors could collect a nice yield and see the stock double over the next five years.

Investors should spend more time looking for longshots and turnarounds that they do trying to trade the news or predict market direction. Both strike me a futile exercises and are a significant part of the reasons individuals tend to under perform the market.Investing in turnarounds and longshots may not be for many investors but it probably should be. Although the short term volatility of the share prices can be daunting investing in these stocks forces investors to adopt what I call a private equity mind set. By viewing the potential return five years out and not worrying so much about the daily trading of the companies they own most investors would see a substantial increase in their portfolio value Not all longshots work out. However it has been my experience that if you use a little common sense and look for decent companies simply dealing with a rough patch more than you might think work out very nicely indeed. Patient aggressive investing in stocks with significant upside potential should prove to be a far more profitable exercise.