These investments can take advantage of adversity to strengthen their competitive situation. By Whitney Tilson, Contributing Editor and John Heins, Contributing Editor June 30, 2009 With the stock market up 37% in barely two months, you'd think speakers at the recent Value Investing Congress would have been ebullient. But that was hardly the case.Among the topics fretted over by conference presenters: "Not Dead Yet: Surviving Today to Triumph Tomorrow"; "Banks: Have We Seen the Worst of It?" (the answer was an emphatic no); and "Low-Risk Bets in a Risky World." As a rule, value investors focus on what can go wrong before they turn their attention to what can go right. Companies that can survive a variety of economic shocks -- and, even better, can take advantage of adversity to strengthen their competitive situation -- often make excellent long-term investments. Bank basher This concept was well illustrated at the conference by Jason Stock, of M3 Funds, an Arlington, Va., investment firm. Stock is anything but bullish about the health of the banking system. He says it is deeply undercapitalized and faces enormous additional losses as loan defaults accelerate beyond residential real estate into commercial real estate, business lending and credit cards. Advertisement Still, Stock and partner Will Waller are finding many banks that resisted the temptation to chase risky lines of business and that now have the capital needed to prosper beyond this uncertain time. A good example, they say, is First of Long Island Corp. (symbol FLIC), a bank with $1.3 billion in assets, virtually no nonperforming loans and a large, low-cost deposit base. But at $22 at the May 8 close, its shares traded at just 140% of tangible book value. As the company continues to grab market share in loans and deposits from struggling local rivals -- while it also aggressively buys back shares -- Stock believes First of Long Island is likely to double over the next few years. David Nierenberg, of D3 Family funds, a Camas, Wash., outfit that specializes in micro-cap stocks, made the case for Move Inc. (MOVE). It generates most of its revenue through advertising sales at Realtor.com and other Web sites that serve people in search of a home, so it has suffered mightily from the housing bust. Move also had to deal with the costly wrap-up of litigation tied to accounting fraud at the company under its former name, Homestore. Even without a quick upturn in the residential real estate market, Nierenberg sees better times ahead for Move. He expects a significant increase in its operating efficiency and its ability to generate revenue under new chief executive Steven Berkowitz, who came aboard in January. Berkowitz was last at Microsoft, but earlier this decade he led the dramatic turnaround of Ask.com before its sale in 2005 to IAC/InterActive Corp. As the housing market heals and Move reaches the profitability levels of its Internet-company peers (which may take three to five years), Nierenberg believes Move's stock, at about $2, could hit $10. Advertisement Zeke Ashton, of Centaur Capital, in Dallas, offered up property-and-casualty insurer Alleghany Corp. (Y) as a "truly low-risk idea." Last year most property-and-casualty insurers' investment portfolios declined, and they had large losses from Hurricane Ike. That helps explain why Alleghany's share price fell from $420 last September to $268. But Ashton believes the company's exemplary record as both an underwriter and an investment manager will allow it to prosper as insurance pricing improves -- as he believes it will -- and investment markets stabilize. Based on his sum-of-the-parts analysis, Ashton pegs Alleghany's value at $360 a share. Count us among those who don't see uninterrupted sunny skies ahead for investors. But you can still find many diamonds in the rough -- just remember to search for them with a skeptical eye. Columnists Whitney Tilson and John Heins co-edit Value Investor Insight and SuperInvestor Insight. Funds co-managed by Tilson own shares of First of Long island corp., and Heins owns shares of Move Inc.