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Thursday, October 31, 2013

Updates and Offers

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

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

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

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

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

December 5, 2006

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

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

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

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

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

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

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

Cheers  !

Tim Melvin

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