The Long Game of Deep-Value Investing

 | Apr 13, 2012 | 1:00 PM EDT
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I was pleased to see fellow Real Money contributor Tim Melvin's piece last week on the regional electronics retailer Conn's (CONN), a former net/net that has finally paid off. In fact, Conn's is up 280% since February 2010. It's always nice when you are rewarded for taking a position in a seemingly questionable story in which few others saw any value.

The paths in these situations are rarely smooth, and it's easy to second-guess yourself along the way. The fact that you may have to wait years for a payoff usually scares many investors away from deep-value plays. In such a fast-paced world, two or three years may seem like an eternity to wait for an idea to come to fruition, and it's easy to let the frustration push you to the point of selling out.

I've certainly been there. I've closed positions early when my patience has worn thin. Before you reach that point, you need to review the story and ask yourself some questions. Are there new developments, positive or negative, that change your original reasons for taking a position? Would you still take a position in that name, knowing what you know today?

If you can't answer yes to those questions, it may be time to head for the exits. But if the story remains compelling, you can't bow to the pressures of what the rest of investors think -- the herd mentality.

I've owned mini-conglomerate PICO Holdings (PICO) for years. I may even be responsible for the company being referred to as the "poor man's Berkshire Hathaway". I've also been very frustrated by the path PICO has taken. Shares are just coming off a seven-year low hit in late December. Two years ago, this was a $37 stock. At midday today, it was trading at $22.73. There's been nothing but frustration here, yet I remain long.

PICO remains an asset story, although it appears that many investors have given up on that story. The company's combination of water rights and storage, real estate, insurance operations that are currently in "run-off" and the associated investment portfolio, plus a new foray into canola-oil processing, still makes for a compelling package of assets. Trading at just over book value, PICO ended 2011 with $78.3 million in available-for-sale securities and $126.6 million in cash, for a total of nearly $9 per share in cash and securities.

There's $93.4 million in debt, about half of which was recently incurred to finance construction of 88%-owned subsidiary PICO Northstar Hallock's canola plant in Minnesota, which is set to come on line by the third quarter.

One of the issues that investors have with PICO, in my view, is that revenue is never consistent, and the company never seems to generate a positive bottom line. Management has instead been focused on buying and selling assets, and growing book value per share. But that has been a difficult case to make with investors, seeing that book value has actually fallen the past several years, from $27.84 at year-end 2009 to the current $22.22. The company certainly has not been winning the public relations war, and some have deemed management's compensation as excessive.

I, however, remain long. Perhaps long-suffering is a better term. I still believe that there's great value in the assets. I am hopeful that the entry into agribusiness, via the canola processing plant, will be fruitful and perhaps even begin to generate a somewhat consistent bottom line. That might attract some investors.


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