For True Value Investing, Look to Warren's Teacher

 | Apr 29, 2013 | 2:00 PM EDT
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Much of the focus of the alleged value-investing world has turned its eyes toward Omaha, Neb., this week as capitalist Super Bowl that is the Berkshire Hathaway (BRK.A) annual meeting kicks off -- and the faithful have come to genuflect and buy stuff. Endless amounts of ink has been and will be devoted to what Warren says and does at the meeting. However, I personally do not think the man has been a real value investor for decades now. He is more of a private-equity guy in disguise, and his activities and advice don't apply as much to the individual investor today as they once did.

I will have more to say on this later in the week, but for now I want to focus on the man who taught Warren the basics of investing. Buffett used the Ben Graham cheap­-stock approach to build the first part of the fortune that is Berkshire today, and those techniques can still be used by most of us now. Buying stocks that trade for less than asset value, and with a margin of safety, still constitutes a successful investing approach. The strategy gives individuals an edge they can use to profit even in today's snake pit of a stock market.

One stock that I think might have attracted Graham's attention is an old favorite we haven't discussed in a while: Volt Information Sciences, which trades under VISI on the "pink sheets." The company still hasn't issued a completely audited financial statement, but unless it has committed massive fraud, we can piece together some information from its periodic updates.

Business at Volt is not setting the world on fire, but the staffing company is holding its own in a weak economy. Revenue is coming in flat, and the company achieved a small profit in the first quarter, according to its recent release. If I put it all together, the stock appears to trade at about 4x operating cash flow and at 60% of tangible book value. Because of the long delay in restating its financials, no one cares about the stock. Wall Street is not following it, and very few people -- outside a select group of asset-based types -- have been buying it. If you do not own the stock, I would start scaling into it at current prices.

Meanwhile, a whole bunch of parts are in motion at MFC Industrial (MIL), but the stock appears to be safe and cheap right now. The company has snapped up oil-and-gas-related assets in Canada, and it has abandoned its Indian mining operations entirely. It has also made acquisitions in Mexico at what appear to be bargain prices, thus increasing its operations in the commodity-supply-chain business.

While it take a little sorting-out, the stock is cheap based on the most recent numbers. Similar to Volt, MFC shares fetch about 4x earnings and are at 60% of tangible book value. The challenge for the company now is to integrate its recent acquisitions while continuing to look for cheap commodity operations to buy while they remain out of favor. MFC has $280 million in cash and short-term securities, compared with just $118 million in long-term debt, so the company appears to have an adequate margin of safety right now. It also just increased its dividend by 9%, and the stock now yields at 3%.

I would be a buyer at the current price. Back in 2009 and 2010, falling real estate prices led to heavy investment in real estate investment trusts and real-estate operating companies -- and, in similar fashion, the collapse of commodities is leading to a heavy concentration of these stocks in 2013. I do not make market or sector calls, as such, but there are times when the focus on cheap takes me into a specific corner of the market. I have no idea when commodity and resource stocks will recover, but I am pretty sure that buying them at the current low prices will end very well for me.

I will read the notes on the Berkshire meeting, and will be particularly interested in the interplay between Messrs. Buffet, Charlie Munger and our own Doug Kass. But, again, while there is much to admire about Buffet the businessman, as a deep-value-asset-based investor I do not think he has much to add to a discussion of stock-picking for individual investors any longer. For that, I think we can turn to his teacher and some of the less promotional and popular classmates in the now-famous Columbia classroom that gave birth to value investing.



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