Originally published as a series on RealMoney.com
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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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