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Tuesday, September 10, 2013

Stealing Ideas

Originally published as a series on
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As the 13f filings piled in  like everyone else I reviewed some of the bigger ones just to see how was doing what. The Whole street was reading them at pretty much the same time so there was no information advantage to be gained but the information on the buying and selling of David Einhorn, Daniel Loeb and other heavyweights is useful background information. However the fact that Einhorn sold Microsoft (MSFT), Loeb bought Disney (DIS) and John Paulson still likes Gold is not really actionable research worthy information for me.

That’s not the case with Paul Isaac of Arbiter Partners. I find some useful investable information in his portfolio every quarter. I enjoy reading his portfolio filings and to be honest its really good for my ego. Mr. Isaac is one of the most successful hedge fund managers of the last decade and learned the craft from his father and legendary Uncle Walter Schloss. He owns and has been buying many of the same stocks that I have in the past year and that really increases my comfort level with stocks s like Calamos Asset Management (CLMS), Cowen Group (COWN), National Western Life Insurance (NWLI) and a host of small cap banks that we both own right now.

The fund opened some interesting new positions in the second quarter. Arbiter bought shares of oil and gas company Apache (APA) in the quarter. The stock has traded right around book value in recent months. The company is selling its Gulf of Mexico assets to focus on onshore operations in the  Permian/Anadarko basins. They also have operations in Egypt which is a concern for many investors right now. The large cap company is on my buy in a big decline list of stocks as the stock could easily move back over the $100 a share mark in the next couple of years.

The fund was also a buyer of the recent spin off from Brookfield Asset management (BAM). Brookfield Property Partners (BPY) was formed to hold the commercial real estate operations of Brookfield and owns shopping malls, multi-family housing, office properties and have been buying industrial properties of late. The shares trade at about 80% of the equity value as reported at the end of the second quarter and yields a little over 4%. I am a huge fan of Brookfield deals and will be reading further on this one over the weekend.

The filing also shows a large new holding in AMBAC  Financial Group (AMBC) that I suspect was gained through participation in the bankruptcy process. The bond insurance company emerged from bankruptcy back in May of this year. There is a lot of stock in the hands of distressed funds who will be looking to sell strength so I am not really interested in this one right now. The recent developments in the municipal market may make the stock more interesting should vulture fund selling push the stock back below the $20 area later this year.

The fund was also buying some of the battered technology stocks that have underperformed the market in the past few years. The fund added to its stake in Amkor Technologies (AMKR) the semiconductor equipment company in the quarter. The stock is pretty cheap trading at just around tangible book value and earnings should gain some momentum in the future driven by increasing demand form the smart phone and table computing markets. The company is working to restructure its debt load and success in this endeavor could help unlock the value of the stock in the next year.

Mr. Isaacs fund also opened a new position in shares of Emulex (ELX) the network solutions company. As the economy eventually improves and corporations and governments begin to spend on IT infrastructure again the company should see revenues and earnings begin to grow at a decent pace. The company has made acquisitions that broaden its product line and should also help drive future growth. This one is not really my cup of tea as it trades well above tangible book value but investors should note that Mr. Isaac is a lot smarter than I am.

The fund held firm on most of its small bank positions in the quarter but they did add to two banks that had outstanding earnings reports this month and showed strong improvements. Both Intervest Bancshares (IBCA) and Eastern Virginia Bancshares (EVBS) are in my trade of the decade portfolio and I am happy to see that a smart and successful fund manager is in agreement.

The reports from the larger fund managers have turned into just more market noise the past few years. However the smaller higher returning mangers like Arbiter are still a source of great ideas worthy of further investigation and investment.

 Last month as 13F filings were coming fast and furious I sat a couple aside with the intention of reviewing and reporting the information to viewers. They are two managers I respect enormously and as proof their all-around intelligence and stock picking prowess we often own many of the same stocks. As with everything else that gets set aside for later here at Chez Melvin the reports fell into the black hole of Tim’s desk and went unreported. Today I will begin to fix that.

EJF Capital was started back in 2005 by Emmanuel Friedman one of the co-founders of Freidman Billings the broker dealer and asset manager. The firm made a name of itself with its research and investment banking success in the finance and real estate fields. Mr Friedman partnered with the former head of FBR’s Alternative Investment and Wealth Management divisions Neal Wilson to start EJF and they have more than $4 billion under management.

The firm is doing some interesting stuff in both the banking and real estate fields. That of course is right in wheel house as I am a huge fan if both sectors when you can buy the securities cheap. EJF has been finding some opportunities in both that are cheap and appear to have significant long term potential.
They have been big buyers of little banks and the second quarter of the year saw the buying streak continue. EJF opened new positions in shares of Fidelity Southern (LION), Charter Financial (CHFN), VantageSouth Bancshares (VSB), Newbridge Bancorp (NBBC),Heritage Financial (HBOS), and ConnectOne Bancsshares (CNOB) as well as a few much smaller banks. Of these listed here, only Charters Tim cheap trading below book value as the rest have moved up in recent months. I continue to be big believer in the small bank trade of the decade and it appears Mr. Friedman also likes the sector.

The firm is also a big believer in the mortgage servicing story as they have large positions in leading servicers and added to several of them in the quarter. To my discredit I totally missed this story and left a lot of money on the table the past few years. They hold shares of Nationstar Mortgage Holdings, PHH Corp (PHH) and Ocwen Financial (OCN). They added to Nationstar and PHH Corporation in the quarter and they are now the largest positions at EJF Capital. At this year’s Ira Sohn Conference Steve Eisman gave a very bullish presentation of mortgage servicing companies and EJF appears to share his enthusiasm.

They bought a lot more of Colony Financial   (CLNY)in the quarter as well. The hybrid REIT is involved in several segments of the real estate market place as they have been buying troubled real estate related loans with an eye towards working them out at a profit. They have originated higher yielding loans on properties such as hotels and offices. They also invested heavily in a related company, Colony American Homes, that was created to invest in single family homes and rent them. There are a lot of moving parts to this company and I am going to have to spend a little time on it but it is cheap at 90% of tangible book value right now.

They were also big buyers of Silver Bay Real Estate (SBY) in the quarter. Silver Bay also owns and rents single family homes. Silver Bay Silver Bay currently owns single-family properties in Arizona, California, Florida, Georgia, Nevada, North Carolina, Ohio and Texas. They currently have more than 3400 homes for rent. Investors have not received the company well since its IPO as it has taken some time to get the homes rehabbed and rented but now the company is starting to see progress. The stock trades at 90% of tangible book and about 80% of managements estimate of current net asset value.  I have been watching this one closely since the IPO and am going to pull the trigger on the stock very shortly.

Small banks, real estate financing and single family homes all offer significant upside over the next decade. Tacking the holdings of investors like EJF Capital that have been earnings outstanding results in the sectors for decades is a solid way to uncover ideas. These guys are now on my must read list and if you are a long term investor they should be on yours as well.

I have one other 13F mea culpa file to share with you. This one also made its way to the bottom of the stack after being reviewed and marked up. It is also one of the probably the top 5 filings I follow every quarter simply because following this manger has made me quite a bit of money over the years. Joseph Stilwell is a value and activist investor who has been active in community bank stocks. He usually keeps a pretty low media profile but I have run across him in so many bank stocks that I have learned to pay attention to his buying and selling activity.

He is not afraid to take an activist stake, engage in proxy fights or do whatever else it takes to unlock the value of one his holdings. Since that process is going to make money for investors who get in early it makes sense to pay attention to his 13D and 13F filings. He also writes one of better letters to management when he takes an activist stake with a very blunt fix it, sell it or go home.

Looking at his latest filings Mr. Stilwell was fairly quiet during the second quarter. Smaller bank stocks were stronger in the quarter and there were not a lot of new opportunities to buy stocks at cheaper levels. The story thought out the sector continues to be improved credit conditions, weak loan demand and lower net interest margins. Most of us who invest in the space have our positions and saw little opportunity to add new names or buy more of existing stocks.

The fund did take a position in shares of Charter Financial (CHFN), joining  EJF Capital in owing shares of the recently converted thrift.  The bank has been around since 1954 and has 16 branches in Georgia, Alabama and the Florida Panhandle. Total assets are $1.1 billion. At first glance it looks like the bank has an asset quality program as nonperforming assets stand at more than 4%. A little deeper digging shows that most of those loans are covered by loss sharing agreements and assets not covered by such an arrangement are just 1.08% of total assets.

Like all recently converted thrifts the company has a lot of excess capital after completion of the stock offering and the equity to capital ratio right now is a little over 24. Eventually we hope to see that capital used to pay dividends and buy back shares when permitted. The stock trades at 85% of tangible book value and yields a little under 2%. As the Southeast region of the US continues to slowly recover this bank should see its stock price do very well over time.

Westbury Bancorp (WBB) is a Wisconsin based bank that also completed a thrift conversion offering earlier this year and Mr. Stilwell purchased shares in the bank. Westbury is a 12 branches bank with a little over $500 million in assets and serves the area just north of Milwaukee and is the largest bank in their service area. Post offering the bank has excess capital with equity to assets ratio of more than 15. Nonperforming assets have been steadily improving and are now just 1.72% of total assets. At the current price the stock is trading at less than 75% of book value.

Mr. Stilwell invests in these little bank stocks in much the same manner I do. The filing reports a total of 75 stocks owned and all of home are little banks. We have common ownership in about 10 tiny little banks that cannot be written about here for liquidity reason. Most of them trade at significant discounts to tangible book value and should provide enormous returns as conditions continue to improve. The difference between us is that he is willing to take an activist stake and push management o get the stock price higher, fix operating difficulties or simply sell the bank.  As passive investors we can sit back and benefit from his more aggressive approach. I probably owe him lunch after seeing several holdings improve substantially as a result of his efforts over the years.

Investors with an interest in the Trade of the Decade in small bank stocks would be well served to download and read his filings very carefully.

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