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Monday, November 25, 2013

Stealing From The Best. 13F review

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 fiancĂ© 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 (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

Anchors Aweigh

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.