Deep Value Letter - Banner Ad / Email Capture

Monday, April 18, 2011

Where we are now

As usual I have taken entirely too long to come back and update this space. I always seem to have the best of intentions but after doing the daily writing and various investing and household activities I just do not seem to get as much time as I think I have. We are moving into spring here in the Mid Atlantic and the warmer weather beckons on the occasional teaser day we have experienced so far this year. Baseball season has started with the usual high expectations and low delivery for the Orioles but we will touch on that later in this epistle.

I will start with the markets. The most powerful lesson learned is that o interest rates trump everything. Never fight the fed when your opponent pulls out a bazooka. Low interest rates mean more than troubled real estate markets, stagnant economies, high unemployment, geopolitical turmoil and natural disaster. There have been literally dozens of valid reasons to worry about the stock market. There has only been one to be bullish. The bulls have won a resounding victory so far. Money has been literally, and by the Feds admission, forced into stock the stock market. Much smarter traders than I have recognized this and used valuation neutral ETFs and black box trading to lift offers in the market and create a self feeding frenzy pushing prices still higher.

The other thing that the last two years have proven true is my philosophy of always buying stocks that are too cheap not to own regardless of my macro views. I was literally forced to be a buyer of cheap stocks back in 2008 and 2009 and it has paid off with some big winners. The Forest City debentures (FCY) have gone up six fold over that time. Hardinge has doubled as has West Marine. Capital Source and Tech Data has doubled in value as have a whole host of hotel REITS that were picked up at the height of the panic. Had I relied on my world view instead of valuation I might have hid in a closet sucking on a bottle of scotch but the “too cheap not to won” concept carried the day. A usual my stock picking is a hell of a lot better than my macro thinking.

With that thought in mind I am pretty much going to ignore the current macro environment. If you own a TV or read my RealMoney column (please subscribe btw) you know what’s going on out there. I have no idea when the zero rate policy stops forcing the mass asset allocation trade. Some say it will be when QE2 ends in June. It’s a pretty safe bet that so many expect that result that it is almost impossible for it to be the case. Perhaps today’s downgrade of US government debt to negative status will be the straw. I do not know and I suspect on one else really does either. I do know there a few cheap stocks around worthy of our attention.

Hilltop Holdings (HTH) has been on the cheap stock list for some time now. I have no idea when Gerry Ford will make an investment or strategic move to unlock the value of this company. I see that he just did a deal for an ownership stake in SWS Securities at a favorable price so that may be the catalyst. I do know that the $50 million he invested does not even put a dent in the almost $650 million cash stockpile he has available. I also know the stock remains not only cheap but safe trading below net cash levels. TSR (TSRI) is still trading for less than cash and receivables. The business has struggled but it is still profitable and has been for 10 years. It is just an okay business in a crappy industry. But it is safe and cheap and management is a big owner and will have to monetize their interest in the company at some point. Heavy machinery and as[halt plant manufacturer Gencor (GENC) will someday see a huge surge in business from infrastructure spending. That day is not today and the company trades for less than cash on the balance sheet.

I have a toe or toe in the mortgage backed securities market as well. I think that aggressive investors can own some of the high yielding mortgage back REITS right now. I favor Invesco Mortgage(IVR) and Chimera CIM with 19% and 14% yields respectively. I also like the public partnership Ellington Financial with its hedged fund approach and 22% dividend yield. The caveat here is that there is a lot money getting ready to move into this market. A bunch of companies including giants like TCW and PIMCO are planning IPOs of mortgage backed funds. Several companies including Invesco are doing secondary offerings to take advantage of the messy pricing in this market. This could push prices higher between now and the end of the year and its going to be necessary to exit a pop in these things. Too much money in a sector is always bad news. The good news is that when they push it too high the weak ends will get flushed when the market cracks and we can do this all over again.

We continue to move into the small bank trade as well. Here I am playing a barbell approach. I like the higer quality banks like mutual conversions like Capital Financial (CFFFN ) and FoxChase Bancorp (FXCB). I still like Shore Bancshares here on the Eastern Shore of Maryland. I am also taking the long shot picks in the industry. I am trying to invest alongside the private equity money going into the industry. Hampton Roads Bancshares (HMPR)), Sun Bancorp of New Jersey (SNBC) and United Community Banks (UCBI) are among the names on this list. I am also mining the recent filings by noted bank activist like Lawrence Siedman and Joseph Stillwell for potential big return troubled bank stocks. There is a long list of stocks like Renasant (RNST) in the South and First Interstate (FIBK) in the Upper Midwest that I want to buy when the market finally does stage a decent pullback. They have great balance sheets and pay decent dividends. Now we just need an acceptable discount to tangible book value.

Now onto baseball at last. We added bats that are not hitting. Out team average and home run count can be generously said to suck like a hungry hoover. One would hope that changes soon. On the plus side the young arms seem to be doing about what they were expected to do. They are not great but they have great moments and don’t get blown out too early. They have however developed a disturbing tendency to give up the long ball and fall behind hitters. This has to improve or it will be another long losing year. Matt Wieters is starting to drive the ball with authority but not enough are falling in or clearing the fences yet. He is one of the best defensive catchers in the game. I just hope his bat gets as great as it can be before his contract is up and he is out of here. On the plus side the Red Sox look like crap and that is always a happy thought. It is a long season so here’s hoping they stay awful and we get better as the weather warms.

I have to stay away from the politics this time around. I am so sick of the twisted corrupt assholes on both sides of the aisle I want to puke. I don’t have time to spend an hour or tow vomiting away the sour taste of stolen dreams and leveraged futures. My wife will take it badly if I kick the cat in frustration at budgets, taxes, lies and empty statements. So this time around I ll skip discussing those twisted souls and thieving minds that have conspired to push our nation into a morass of political and monetary bullshit. Don’t worry. It wont be long before one of these $1000 suit wearing corrupted mentally frigid assholes pisses me into a rant of Thompsonesque proportions. But for today we will skip it

Summer is indeed just off the horizon. Every once in awhile you catch one of those gusts of heated air that smells of boat engines, barbecue pits and suntan oil. If you strain in the evening you can almost hear the crash of the surf and the band at the dock bar. It was not a bad winter around these parts just a long one. Now the days are just a little longer, the air is a little warmer and its almost time to get excited about all that summer has to offer on the island. Not yet, but almost. Life is good.Unlike years past I have someone to share the goodness with and that makes it even better than I had imagined it could be. And I have a good imagination!