Monday, November 25, 2013
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 fiancé 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 Salesforce.com (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
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
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 Marketfy.com 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.
Tuesday, October 29, 2013
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.
Tuesday, October 08, 2013
If you are like me your email inbox gets a lot of those oh so enticing offers promising instant stock trading profits in just 15 minutes a day and endless stock promotions. I spend a lot of time visiting financial sits on the web kicking over rocks in search of ides so it is no surprise that I end up on many of these mailing lists. What is surprising to me is that many of these firms have been in business for some time so apparently people are spending money to become the next Stevie Cohen or George Soros between dinner and dessert. Folks must be buying those stocks that will benefit from the looming crisis or loading up on those $.10 stocks with breakthrough technology that will change the world.
It must seem silly for me to say this since write for a subscription service but there is a huge difference between advice and hucksterism. The guys and gals on Real Money share their thoughts, ideas and the trades they make with their own money which is light years away from Five Stocks to Buy if the Government Shuts Down , or Six Stocks to Sell If The President Trips On The Way to the Podium.
We need to see a healthy dose of common sense applied when it comes to trading and investing our money. There is no magical system that will make you risk free millions in just minutes a day. When you open the account and decide you will make your living trading stocks or forex in your spare time you are stepping into someone else’s arena and odds are you are mere lunch money. I have done a lot of work on trader survival rates and returns of late and you have a better chance of beating Lebron James in a one on one basketball game than you do of being a consistently profitable trader in your spare time. When I talk to successful traders like Tim Collins, Bob Lang or Bob Bryne they are always working to define and refine their edge. You are up against the best minds armed with the best technology and you have a better chance of earning outsized profits betting a hard 8 every roll at the craps table.
The other area where I see any illusion of common sense thrown out the window is this idea that we can somehow predict where the market is going and book huge profits in the process. Predicting the market sis an absolute waste of time and the lucky ones who get a call right are then usually wrong for the next several dozen predictions. We make stars out of folks like Elaine Garzarelli and the Joe Granville for a lucky coin flip and spent a long time paying for that mistake. The economic, financial and psychological stews that are the financial markets are impossible for anyone to predict with any sustained accuracy.
Big money is made in the stock market by reacting to what the markets do, not in predicting their future movements. If you look at the most successful investors they made their biggest returns by buying when markets were ridiculously undervalued or hopele4ssly overpriced. Investors like Jon Paulson and Michael Burry didn’t sell subprime mortgages because of a chart pattern or trading system. They made billions because they correctly recognized that the securities traded at price will beyond their true value. The markets went against them for a while but they held on until the process inevitably corrected themselves.
Investors like Wilber Ross, Warren Buffett and Howard marks did not get rich by predicting the direction of the stock market. They did it by buying assets they were egregiously undervalued and held them until the market entered another euphoric stage and selling them to over excited traders and investors. They are far more active when the markets are crashing down around our ears and everyone else was panicking. They bought assets and earnings cheaply by acting as the buyer of last resort for scared sellers. They got rich by applying common sense to the markets and waiting for a chance to react rather than predict.
I have no idea what the market will do in a reaction to a government shutdown. I do know that the best way to lose some serious coin here is to try and predict the outcome and the market’s reaction. Common sense tells me that if the markets react negatively we could sell some bargains created. In the long term the shutdown has no real impact on the future of my small bank and cheap stock so I would be foolish to rush to sell.
As investors we need to apply common sense to the markets and quit chasing impossible pipe dreams. Charlie Munger once attributed his success to the fact that he acted rationally when other did not. We need to do the same.
Friday, October 04, 2013
As I have mentioned in the past I am something of a geek. Once I finished running stock screens and checking the stocks in my portfolio for any important fundamental changes I turned to serving business school websites for interesting new papers or research article that might contain significant information that would help us as investors. I found a few on interest and will report back on them after I have digested them but at the University Of Michigan Webster School Of Business I found something that interested me greatly and should you as well. They are running two portfolios that are posted on the website identifying stocks that are undervalued and another one that lists what they call earnings torpedoes.
Earnings torpedoes are stocks that the students have identified as having the potential to blow up as a result of poor earnings. They use academic theories such as earnings quality, cash flows, momentum and valuation to identify stocks that could be set to sink your portfolio. I checked through the historical lists they keep on the site and the theory actually worked very well at finding potential disasters and torpedoes underperform the market much of the time. I have mentioned more than few times I am cautious about the markets and sometimes the best way to make money is to lose it so the list is worth a review to see where danger may lurk.
The list is littered with energy related Mater Limited Partnerships (MLPs). Many of these oil and gas collection, transmission and storage partnerships have been bid up to very high levels as a result of strong oil prices and indiscriminate yield seeking by investors. Billions of dollars have flooded into the sector as ETFs and funds were formed to take advantage of the higher yields offered by these vehicles. Some of the better known MLPs that are potential torpedo stocks include Atlas Resource Partners (ARP),Atlas Energy (ATLS), Cheniere Energy Partners (CQP) and Eagle Rock Energy Partner (EROC). Investors who own these names may want to review their holdings and consider lightening up on the shares.
The list is absolutely dominated by small cap biotech stocks. 50% of the list is biotech’s like ARIAD(ARIA), VIVVUS (VVUS) and Idenix Pharmaceuticals (IDIX). Biotech has been red hot this year with the industry indexes and ETFs up more than 30% but investors might want to get some money off the table. I have ling maintained that this is an incredibly specialized filed and if you don’t possess, or have an advisor who possesses, a medical degree with a biotech concentration, small biotech’s are a danger zone for individual investors. Using traditional fundamental or technical analysis techniques on these stocks is a game of financial Russian Roulette in my opinion. If you own individual small biotech’s it is worth your time to go the schools website and see if you are hanging on to a potential torpedo stocks.
There are some big market darlings on the list that momentum investors need to be aware of before you take a torpedo amidships to your net worth. Salesforce.com has shown up on several of my red flag lists in recent weeks even as the stock has run higher in recent weeks. With a forward earnings estimate multiple of 100 times the slightest disappointment form this company is going to cause an implosion in the share price and all but the most nimble of traders should probably avoid the stock at this level. Zillow (Z) is another trader favorite that has had a nice run as housing markets have recovered somewhat but it is now on the danger list. At more than 150 times estimated profits it would not take much bad news to explode the stock and your portfolio along with it.
It is worth your time to check out the torpedo list on the Webster Business school site. Even if you decide you do not agree with them on certain stocks or sectors it is thought provoking and educational. Next I will take a look at the stocks the students have identified as undervalued and see if we can find any potential gems to buy.
. The folks at University of Michigan Webster School of Business not only has a list of stocks you should avoid they have one that gives you 40 stocks they think are undervalued. They do not reveal exactly which metrics they use but the website says they use Value, Momentum, Quality and Predictability. It is a combination of several of the more successful academic theories and it producers a really interesting list of stocks that might appeal to ling term investors. According to the site the screen has beaten the market handily in 8 of the last 10 years.
It is easy to see that momentum and value are heavily weighted in the 40 stock list as many of them are former deep value stocks where the price has begun to improve. It was no that long ago that basset Furniture traded at a fraction of book value and was wildly out of favor on Wall Street. The company is firing on all cylinders now with three quarters in a row of strong sales growth and the stock is now at a small premium to book value. Insiders have been buying stock outright and exercising options and keeping the stock so that’s another academic theory at work in this stock. The company has plenty of cash and little debt and seems to have put the recession in the rear view window. Basset is doing much better than many other consumer related companies right now.
They have a few little banks as well which comes as no surprise to me at all. I will highlight two from opposite ends of the bank spectrum. Monarch Financial Holdings (MNRK) is a little bank with 11 banking offices, 15 residential mortgage offices, and 1 investment services office in the Norfolk /Virginia Beach area. It also operates 2 full-service banking offices and 2 residential mortgage offices in the Outer Banks of North Carolina, as well as 28 additional residential mortgage offices outside of its primary banking market area, The bank is in great shape with nonperforming assets of .29% of all assets and an equity to assets ratio of more than 10. The stock trades at 1.2 times book value and has momentum on its side with the share up almost 40% this year.
Parke Bancorp (PKBK) is on the other end of the spectrum. The New Jersey bank has 6 offices in in its home state and one if the greater Philadelphia area and about $740 million of assets. The stock is much cheaper than Monarch at 75% of book value and there is a good reason. The loan portfolio is a mess with non-performing loans at more than 7% of total loans and nonperforming assets at a staggering 9% of total assets. They do have excess capital with equity to assets ratio of a little over 13 but asset quality has been slow to improve. This one has more a long shot feel to it but if they do succeed in getting their house in order the upside could be huge.
There are also lots of small insurance stocks on the list including one, Eastern Insurance Holdings (EIHI) that announced a takeover bid yesterday at a pretty big premium. This stock was one of my top picks for 2011 and has more than doubled thanks to the acquisition offer. This is going to be repeated throughout the industry over the next few years as smaller life and property and casualty insurance companies are very cheap compared to historical valuation level. It is worth your time to go to the schools site and run through the insurance picks stock by stock.
For fans of sin stocks Ricks Cabaret (RICK) makes the grade as a University of Michigan cheap stock. The only publicly traded operator of Gentleman’s Clubs. The stock trades at 12 times earnings and 1.27 times book value and business is apparently pretty good. The CEO and CFO like what they see as much as the customers as they have been buyers of the stock over the past few months.
Star Gas (SGU) makes the grade as well as this remains one of my favorite little long term income stocks. The propane company is not going to set anyone’s portfolio on fire but it will continue to roll up Mom and Pop propane dealers and pay a strong dividend. The stock yields 6.75% and is a good fit for most income investors in addition to the schools value stock list.
Tracking the academics makes a lot of sense to me. When they have proven they can outperform and are willing to publish their stock lists as Michigan has it makes even more sense to check the page regularly.
Friday, September 27, 2013
I was going through my desk this morning looking for some research material I was using to set up my new International Deep Value Letter when I came across some print outs of articles I wrote in July 2012. I had used them as handouts at a business networking event and then just stuck them in desk drawer.
One was on the power of asset based investing and why it worked. I suggested buying 4 deeply undervalued stocks in an article called simply Asset Based Investing Works published on July 17, 2012. I suggested four stocks, an oil and gas driller, two banks and a staffing company. Had you purchased an equal dollar amount of all 4 your return through today's close would be 82% in a little over a year.
The second article was called Real Estate is the New Plastics published on July 31 of the same year. I suggested that 7 REITs were deeply undervalued based on the concepts used in deep value investing. If you put an equal dollar amount through today would be 41%. Not as good as the first article but not too shabby either.
Deep value investing works. It works very well and it works consistently though all sorts of different market conditions. I want to help use it to make you money over time.
In order to encourage you take the leap and put deep value to work making you outsized profits here is what I am going to do. If you sign up for my Deep Value letter this weekend I will give you $100 off . Instead of $499 I will let you have it for just $399 for the year. To add a little extra incentive if you join me today at the deep Value letter I will GIVE you a free year of the brand new International Deep Value letter just launched today.
That’s what I call a deep value. Use this link to sign up.
Saturday, September 21, 2013
I have long held the opinion that for most investors the money is made on the edges. The two top performing strategies I have uncovered over the years are deep value and what I call real growth. Real growth companies are those that are growing revenues, earnings and the net value of the firm higher consistently over the years. It is basically an earnings momentum and growth strategy based on high profitability and management execution. As long time readers are aware I am a bit of a geek and spend a good amount of time reading academic research and I recently forum a paper that basically confirms my thoughts on this subject and brings some interesting new data and possibilities for individual investor.
Robert Novy-Marx is a professor at the University of Rochester and a fellow at the National Bureau of Economic Research. His research efforts are spent studying asset pricing, real estate and finance, He recently produced two studies that are of interest to me as a value investor. The first paper has the provocative name of The Other Side of Value: Good Growth and the Gross Profitability Premium that was originally published in Journal of Financial Economics. The other is a working paper titled the Quality Dimension of Value Investing. The papers make two discoveries that are extremely useful to us as long term value investors.
The first is that companies with a high level of profitability are as useful as price to book value when it comes to predicting future performance of their shares. However he eschewed the usual standards of profitability such as earnings per share and return on equity. He remarked in one paper that “gross profitability performs better predicting future stock returns than ROE, the profitability variable most frequently employed in earlier academic studies, because it is a better proxy for true economic profitability. In particular, the study points to the fact that accountants treat many forms of economic investment (e.g., R&D, advertisement, sales commissions, and human capital development) as expenses, so these activities lower net income but increase future expected profitability. This makes earnings a poor proxy for true expected economic profitability.” He compares group profitability to total assets an finds that those stocks with high gross profits as a percentage of assets used to produce the profits as the best way to measure profitability.
His study cover a period from July 1963 to December 2012 and finds that stock with high profitability using his measures outperform the market at a rate comparable to those that fit in to the classic deep value approach. The conclusion supports my conclusion that investors would do better focusing on the what I call true growth firms and what he calls profitable firms and classically cheap stocks based on book value. While I prefer picking one for or the other there is a suggestion n the data that investors might be best served by focusing on both strategies.
While that seems like an interesting concept and would probably work very well over the long term the two studies give us another useful idea to apply it the investing process. What would happen if you combined the profitability factor with traditional value approaches? You end up outperforming the market, straight value approaches, and true growth strategies by a pretty significant margin with lower drawdowns and fewer years of underperformance according to the study. It works on both large and small cap stocks over a long period of time. He concludes the study by saying “The basic message is that investors, in general but especially traditional value investors, leave money on the table when they ignore the quality dimension of value.
I am a geek but I am also a cynical optimist. I had to go back and look at some results for myself and how it has worked recently. I looked back one year and selected stocks that had high profitability using Mr. Novy -Marx’s profitability calculation and also traded below tangible book value. The results are incredible. The list of stocks over $100 million in market cap returned on average 45% over the past year. 79% of the profitable value stocks are higher a year later. For the microcap stocks under $100 million the average return was 54.8% and 70% of the small profitable value stocks went higher.
Naturally I then sat down and ran the screen on the current universe of stocks. I found two things to be of great interest. The first is that there are a lot fewer cheap profitable companies right now than there were this time a year ago. The second is that there are some pretty interesting names of the list worthy of further exploration by long term value investors.
That is impressive performance to say the least so I quickly built a screen that looked for cheap stock that have very high gross profits when compared to their asset base.I found some surprises when I ran the screen. Some companies you might not think of as wildly profitable actually are when you measure it by gross profitability. Keep in mind that gross profitability is simply total sales minus cost of goods sold and leaves out all the overhead and other expenses. Mr. Novy- Marx found that this was the best measure of profitability and that it has strong predicative value so that is the one we will use.
Arcelor Mittal (MT) is a large integrated steel company and one would not necessarily think of it as wildly profitable as they have struggled in recent years. They took a bottom line loss in 2012 but had managed to paint the bottom line black in the preceding decade. The CEO of the company recently told investors he believed the company had turned the corner and should see conditions in the steel market in 2014. When we measure it in terms of gross profitability compared to assets we find that the company has assets of $112 billion and gross profits over the last four quarters have been a little over $74 billion. That is one of the cheapest ratios in the deep value high profits screen. The stock is certainly cheap trading at less than 60% of tangible book value.
I almost feel out of my chair I when saw Radio Shack (RSH) on the list of high profitability cheap stocks. This has been one of dogs the past few years as I was way to early buying the stock in anticipation of a turnaround or takeover. The company has its issues but it also has a very high level of gross profitability with $1.4 billion of gross profits in the past year on an asset base of $1.9 billion. The stock is still cheap at 78% of book value so if they can find a way to improve the items between gross profits and the bottom line my patience may yet be rewarded.
I was further happily surprised that although my credit and fundamental models use a lot more than 1 factor the gross profitability and book value combination picked out a lot of the companies I have mentioned here on Real Money and own for myself as well as family and friends. Stocks like Kimball International (KBALB), Xyratex (XRTX), Real Networks (RNWK) and Sky West (SKYW) have very high gross profits as a percentage of assets. Transworld Entertainment (TWMC)is one of the stocks I hate to love as I think the brick and mortar music and video stores is an industry in the way out but those stock has high gross profits as a percentage of asset and trades at just 85% of book value.
So do a couple of companies I have had my eye on but haven’t pulled the trigger and purchased yet. Tropicana Entertainment is Carl Icahn’s casino empire based purchased out of bankruptcy a few years back. They now own casinos in Nevada, Indiana, Louisiana, Mississippi, and New Jersey as well as one in Aruba. The stock may not do much until Carl decides to sell or otherwise transform the company but it trades at just 3 times gross profits and 80% of tangible book value.
I have also been negative on for profit education stocks for several years now and Apollo Group (APOL) is one of the best shorts I have ever put on in my life. However many of the stocks in the group such as Corinthian Colleges (COCO) and Career Education (CECO) are now trading below book value and have high gross profits when compared to assets. I haven’t bought in yet as I am still a fan of the business model but the valuation is getting quite compelling.
The idea of using gross profits as a measure of profitability when selecting stock is clearly effective and should be an arrow in every investors analytical quiver. When used with value stocks it appears to work extremely well at locating stocks that can survive to thrive.
Friday, September 13, 2013
Now that we have launched the Tim Melvin Deep Value Newsletter and Banking on Profits we have seen a steady flow of subscribers and I think over time we will grow this service. I have been told that if I would be more self-promotional and dramatic about my offerings we could probably accelerate the sales process. I am just not that guy. Even if I wanted to pose in front of fancy cars with half naked women all gained as a result of my terrific trading advice I am pretty sure my wife would kill me for even suggesting it. The fact that I drive an old Jaguar that fits me like a glove and I refuse to part with might also hamper my efforts in that type of marketing.
I am not going to make shrill dramatic pronouncements about my ability to make you millions of dollars in minutes a day. Value investing does not work that way. This is a long term approach to the markets that puts margin of safety first and lets the upside take care of itself. It works but it won’t make you rich overnight either. It is a service for investors who are tired of the hype and the promises and want a way to earn solid returns over time and build their net worth the way private equity and other long term investors do it by buying cheap assets and selling them when they are fully valued.
Rather than try to convince you to subscribe to my newsletters with hype and promises I am just going to run on my track record. Listed below are comments dating back to 2006 that were recorded in my personal blog or published on Real Money, Daily Speculations or one of the other sites where my work has appeared over the years. This is value investing at work over the long run. It runs through the credit crisis when investors were losing a fortune ,the late 2008-2009 period when everyone was terrified to buy and up to 2011 when we started to feel like the worst was behind us. Judge for yourself if my approach to investing makes sense for you and is worth the small cost of an annual subscription. I think it is and hope you will join me by subscribing to the newsletters and putting deep value investing to work for you.
Good luck to us all,
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. Anyone who does not clearly see that the recent pullback in gold and other commodities is deleveraging by hedge funds in light of recent volatility is not looking close enough. Anyone who thinks that the bank write offs are at an end has just simply lost their mind. Yes, eventually they will write all this crap down too far and it will create an opportunity. I particularly look forward to moves like that of UBS to separate the bad assets into separate vehicles as this will create huge pools of underpriced and unloved mortgage assets that no one wants to own, reminiscent of the Texas bad Banks of the late 80s and early 90s. But that time is not now. Small community banks will thrive and benefit from the tighter credit conditions and steeper yield curve. But not yet. Patient investors will see one of the best buying opportunities of their lifetimes. But it is too soon.
Interest rates are starting to rise. I continue to think that only an illiterate deaf mute kamikaze could be aggressively long the US stock market. Of course there are lots of those around. We call them mutual fund managers.
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. I am buying DAR, HDNG, DOW,ASH and other like a crack addict at a rock convention.
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. Whitman has been a buyer and although struggled with everyone else last year, he is one of the best credit analysts and distressed guys around.
This is the type of trade I am hoping begins to develop in earnest in the first half of 2010. As commercial and real estate woes continue to fall I am looking for the market to wake up to the problems facing the small banks. When it starts the stock market, being the bastion of irrational insanity that it is ,the baby will go out with the bathwater. This type of activity created a situation back in the early 1990s that allowed many people to literally get rich over the next decade. When the good get sold with the bad I am looking to buy up a portfolio of small banks below tangible book value that have low loan losses and adequate reserves. As real estate improves-and it will someday- we will start to see a wave of mergers and acquisitions in the banking community. These transactions will occur at multiples of book, not at a discount. Those solid bank stock bought in this next sell off will show tremendous gains for those bold enough to step up.
The current turmoil in the markets is creating some opportunities. Any type of corporate disappointments is leading to a steep and drastic sell off. Right now foreign banks are god-awful, point of maximum pessimism cheap. I like two of the larger Japanese banks, Mitsubishi UFJ (MTU) and Mizhou (MFG). Both sell at a fraction of tangible book value and for an investor with a time horizon of five years or more should be very profitable. The same is true for Royal Bank Of Scotland (RBS). The stock is at 40% of tangible book and management has a solid plan to de-risk the balance sheet and return to profitability. As a final foreign excursion the shares of Dutch insurer Aegon (AEG) are also very, very cheap. They have repaid the Dutch government for the emergency funding and should pay a dividend again starting next year.
Here at Home Hudson City Bancshares (HCBK) have sold off sharply. After the reorganization of the balance sheet the bank should do very well going forward and at a discount from tangible book and yield of 4.40% it’s an attractive long term investment. First Bancorp (FBNC) is also cheap and replacing the TARP funding with Treasury Small Business program funding will be an enormous boost to the bottom line. Locally Shore Bancshares(SHBI) has been a severe disappointment as loan losses have continued to mount. I am going to hold that name and add Severn Savings (SVBI) at this price. I have a lot of faith in the Hyatt families’ strong desire not to lose the millions they have invested in the bank. Insiders have been buying so it’s worth a shot at one third of book value.
Force Protection (FRPT) missed earnings and is now trading at very cheap prices. This company should have sold out last year and now I think it is just a matter of time. They have a decent business but will function better as a division of a larger defense contractor. LB Foster has decent earnings but there is a product liability claim with Union Pacific involving 1.6 million rail road ties. The question becomes is that worth the 50% of market cap the stock shed? They will be a huge winner when we finally get all this crap behind us and our economy is once again growing to the point that infrastructure spending resumes. Demand for computers and other tech products may be slow but it will come back when the economy does. That makes Micron Technology (MU) a screaming long term buy at 75% of book value in my opinion.
I like the idea of buying a small package of mortgage REITS here. I would buy a little Annaly (NLY) and a little Invesco Mortgage (IVR) here with the idea of building the position over an extended period of time. You are likely to get a chance to buy lower based on conditions and volatility in the bond markets going forward. However they are cheap and the yields of 15 and 20% respectively make them worth a shot here.