Great Ideas From a Great Investor

 | Feb 12, 2014 | 4:00 PM EST  | Comments
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One of my favorite investors to track filed his 13f this morning. Paul Isaac of Arbiter Partners has deep ties to the world of value investing. His father was an arbitrage trader who worked with Max Heine of Mutual Series and his uncle was none other than Walter Schloss. He has taken what he learned around the kitchen table and used it a base to develop the skill and knowledge to become one of the best hedge fund managers in the game. He has a strong record of success, with average annual returns over 20% since 2001.

Isaac appears to be pretty bullish on energy, which makes me happy since I am as well. He bought what I assume are long-term call options on Anadarko Petroleum (APC) and added to his stockpile of call options on Exxon Mobil (XOM). The fund also increased its holding of Apache (APA), as that company continues to sort out is operation in Egypt. He also has positions Devon Energy (DVN) and one my favorite long term energy picks WPX Energy (WPX).

The simple truth is that the economy will eventually recover and the world's population will increase. Energy demand will continue to grow and oil and gas are still the most plentiful and cost effective fuels sources available. A portfolio of energy stocks bought at low multiples of assets and earnings should do very well over the next decade.

Isaac continues to be an apparent fan of "the trade of the decade," as he currently owns stakes in 17 of the smaller regional and community banks that I think will offer tremendous returns over the next several years. He opened a stake in a brand-new micro-cap bank and also bought shares of recent thrift conversion Waterstone Financial (WSBF). The fund also added to positions in HopFed Bancorp HPFC, Intervest Bancshares (IBCA), and Kentucky First Federal Bancorp (KFFB). If you do not have these types of small, healthy banks in your portfolio, you are missing what I think is one of the greatest investment opportunities of the next 10 years.

Arbiter established a new position in (again, I am assume are in long-dated calls) Hartford Financial Services (HIG). The company has done a great job over the past several years of repositioning its business and is poised to do very well as the economy strengthens. Management recently said that they will repay $656 million of debt over 2014 and 2015; they also announced a $2 billion share buyback plan. Trading at just 60% of book value, this stock would appear to have substantial upside over the next few years.

The fund also opened a new position in shares of Stonegate Mortgage (SGM) during the final three months of 2013. Stonegate is one of the leading nonbank mortgage originators and it is growing, via aggressive acquisitions in the past year. Management raised more than $200 million in equity capital last year and has not been shy about putting it to work. The strategy appears to be working, as mortgage origination volumes increased 70.2% over the fourth quarter of 2012 and the servicing portfolio increased by 188%. Non-bank originators stand to gain market share from the banks as new regulations make it more difficult for banks to originate mortgages. In addition, it's a very fragmented industry and Stonegate should find plenty of attractive acquisition opportunities to fuel continued growth. You don't pay much for the potential of the company right now as the stock currently trades at just 5x earnings.

Arbiter Partners' most intriguing new purchase appears to be outside the purview of value investors because it trades at pretty high multiples. However, the business of PowerSecure (POWR) is fascinating, and would seem to hold enormous potential. The company provides products and services to electric utilities and their industrial, institutional, and commercial customers to produce, manage and deliver power more efficiently. The company also provides LED lighting products to high-end retail and grocery stores, as well as utilities and municipalities. It appears to be right in the path of two powerful trends: The need to update the grid and the push for green power. It could become an explosive company. It is not quite my cup of tea, but this is an intriguing stock.

It just makes good sense for investors to track the moves of someone who has earned 4x the market's rate of return for more than a decade. When you consider the deep connections that Paul Isaac has to some of the greatest investors of the last 100 years, it makes even more sense to me to use his 13f filings as a source of ideas.

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