With the Dow Jones industrial average near its high for the year so far, many investors may wonder whether all of the stock market’s deals are gone. To find the answer, 600 investors went to the 6th Annual Value Investing Congress in New York City to hear some of the nation’s top value investors.
Over the two-day conference, well-known hedge-fund managers, such as William Ackman, of Pershing Square Capital Management, and David Einhorn, of Greenlight Capital, presented some of their best investing ideas:
The value play: Short St. Joe
The manager: David Einhorn
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Founder and president of Greenlight Capital, a hedge fund based in New York City
The most anticipated presentation came from David Einhorn. Three years earlier, at the same conference, the famed short-seller made a strong case for shorting Lehman Brothers. A year later, the investment bank went belly up. This year he presented an amusing, yet devastating, portrait of The St. Joe Company (symbol JOE).
Einhorn says the Jacksonville, Fla., timber and real estate development company has spent hundreds of millions of dollars developing its land, but now the best properties have been sold. Most of the remaining developments, he says, are “ghost towns” with little value. Einhorn says St. Joe needs to take “substantial” charges on the 577,000 acres it holds, most in the Florida panhandle.
Florida’s real estate market has been one of the hardest-hit by the popping of the U.S. housing-market bubble. Einhorn says developing the land further will destroy the company’s value. Because of this, “Joe’s business has essentially stopped,” says Einhorn. “It can’t build, it can’t sell and it can’t generate enough value to cover its operating costs.” With expenses of $50 million a year, St. Joe needs to sell about 40,000 acres of land per year to cover costs. Einhorn valued the company at between $7 and $10 a share. The day of the presentation (October 13), St. Joe shares plunged 10%, to $22.16. They closed at $20.48 on October 20 (all prices in this story are as of that date).
Einhorn’s analysis pits him against another highly regarded bargain hunter -- Bruce Berkowitz, manager of the Fairholme Fund (FAIRX), a member of the Kiplinger 25. Berkowitz’s firm holds 29% of St. Joe’s shares.
The value play: Buy J.C. Penney
The manager: William Ackman
Founder and CEO of hedge fund Pershing Square Capital Management, in New York City
For William Ackman, it’s not enough to buy some stock. He is an activist, one who buys a large stake in a company and then lobbies executives to take steps that, he hopes, will boost the firm’s share price. In the past, Ackman has pushed for changes at such companies as McDonald’s (MCD), Wendy’s/Arby’s Group (WEN) and General Growth Properties (GGP), a real estate investment trust that owns shopping malls and is in bankruptcy reorganization.
His most recent target is J.C. Penney (JCP), the venerable retailer. “I like brands that live for 110 years,” says Ackman (the company was founded in 1902). Ackman, who took a 16.5% stake in October, says that Penney is a high-quality company with untapped potential that’s selling at a bargain share price ($32.96 at the October 20 close). It generates a lot of cash and has a strong balance sheet, with $2 billion in cash and $3 billion in debt. Ackman thinks Penney’s cash holdings may equal or exceed debt outstanding by the end of 2010.
The value play: Steady-Eddie Tech Stocks
The manager: Lee Ainslie
Managing partner of Maverick Capital Management, a hedge fund in New York City
After the tech bubble burst in 2000, the sector remained out of favor for most of the next ten years. Although tech stocks, led by Apple (AAPL), have been performing better lately, the group is still cheap, says Ainslee. In fact, on the basis of the sector’s price-earnings ratio relative to the overall market’s P/E, tech stocks are as cheap as they’ve been over the past 20 years.
As a value manager, Ainslie favors bargain-priced, though slower-growing, tech companies, over those that may be growing more quickly but sport higher valuations. Many of these companies, he says, generate healthy free cash flow (the cash profits left after a company makes the capital expenditures needed to maintain the business) and have plenty of the green stuff on their balance sheets. Most of them derive at least half of their revenues overseas, a good thing because emerging markets are growing much faster than the U.S. It’s also becoming more difficult, Ainslie says, for new companies to gain a footing because corporate customers increasingly tend to stick with existing suppliers.
Ainslie’s portfolio includes Cisco Systems (CSCO, $23.40), Dell (DELL, $14.69), International Business Machines (IBM, $139.07), Hewlett-Packard (HPW, $42.82), Intel (INTC, $19.64), Microsoft (MSFT, $25.31) and Adobe Systems (ADBE, $28.21). Less-familiar names include Amdocs (DOX, $29.84), which produces software for media and communications companies; CommScope (CTV, $22.55), which makes communications gear; and Marvell Technology (MRVL, $17.05), a maker of specialized chips, switches and other devices.
The value play: Buy Xerox
The manager: Alexander Roepers
President of Atlantic Investment Management, a New York City-based hedge fund he founded in 1988
Roepers favors an old-line manufacturer and a technological innovator that’s trying to broaden its scope. Best known for its photocopiers, Xerox (XRX) bought Affiliated Computer Services in 2009 and is now, as the names of the firm it acquired suggests, a major player in computer services. Through Affiliated, Xerox, which generates annual revenues of $23 billion, runs corporate technology departments, manages company benefits and even processes electronic toll-management systems, such as EZ Pass, ubiquitous on highways in the eastern states.
Xerox has paid off the $2 billion in debt it took on to buy Affiliated, and Roepers says the company is poised to deliver annual earnings growth of 20% over the next few years. Because investors still tend to view Xerox as a manufacturer of copiers, he says, the stock is unfairly depressed. That, in his view, makes Xerox a tempting takeover candidate for the likes of a Hewlett-Packard, Dell or IBM. Roepers sees Xerox, which closed at $11.09, hitting $18 in six to 12 months.
Owens-Illinois (OI), Roepers’s other pick, is the world’s largest maker of glass bottles. He sees the company benefiting from industry consolidation and a growing presence in emerging markets. Owens-Illinois got hurt during the recession because many consumers bought less wine and liquor. But drinkers are returning to spirits, and that will boost OI’s sales. The stock closed at $28.88. Roepers sees it at $45 in the next six to 12 months.
The value play: Bank Loans and Corporate Debt
The manager: Michael Lewitt
Co-founder and investment strategist at Harch Capital Management, in Boca Raton, Fla.
For the bears at the conference, Michael Lewitt brought a hefty serving of red meat. The author of the HCM Market Letter and the book The Death of Capital (Wiley, $27.95) detailed the reasons he thinks the financial crisis will worsen. Among them: The country is much more leveraged than in 2007; both the U.S. and Japan are trying to “trash” their currencies; regulators have failed to limit a form of high-speed trading known as flash trading; and both Uncle Sam and the business community continue to sacrifice long-term growth for short-term gains.
Lewitt recommends investing in bank loans and corporate debt rated triple-B (the lowest investment-grade rating) and double-B (the highest junk rating). He also likes KKR Financial Holdings (KFN), a unit of Kohlberg Kravis Roberts (KKR), the private-equity giant. KKR Financial manages collateralized loan obligations, securities from financial institutions that are backed with receivables from loans. Because these debt instruments are backed by collateral, they are the safest bond-like investments around, he says. KKR Financial’s current dividend rate is 48 cents a year. At a price of $9.00, the stock yields a healthy 5.3%. And Lewitt expects KKR to boost the annual payout to about 70 cents next year.
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