Sharing My Enthusiasm

 | May 15, 2014 | 3:30 PM EDT  | Comments
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Stock quotes in this article:

ne

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tdw

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asc

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pbip

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wsbf

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colb

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sifi

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bpop

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qep

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cpe

The 13F filings are piling up again as the deadline looms. I will read the filings from Seth Klarman, Bill Ackman and Daniel Loeb because they are very smart guys and I have stolen some profitable ideas form them over the years.

I also find value in covering the filings of some of the smaller, pure-value guys who do not attract a lot of attention from the media. These investors may not attract the same attention as the rock star hedge fund managers but they do have great track records and solid ideas.

Donald Smith & Co. is one of my favorite firms from which to steal ideas. It is a true deep-value shop that invests in stocks based on price-to-book value. Smith started the firm in 1983; since then, it has earned more than 15% annually for his clients (according to Gurufocus.com) and grown the firm to over $5 billion in assets. The focus on the very cheapest stocks is very similar to my own and I frequently find that he uncovers stocks I have missed.

The firm opened new positions in some familiar names in the quarter. Smith appears to share my overall enthusiasm for the energy sector, as he added new stakes in Noble Energy (NE) and Tidewater (TDW) during the first three months of the year. Both stocks are still down by double digits this year and may offer attractive entry points. Both stocks trade at about 95% of book value, so they are attractively priced -- particularly if you buy on a down day in the overall market or energy sector.

Smith's firm more than tripled its holdings in Bermuda-based Ardmore Shipping (ASC). The company has 11 vessels for shipping petroleum products and chemicals operational and ten more that are currently on order for future use. The stock trades right at tangible book value at the current price and yields 3.07%. The company has enormous earnings power when its entire fleet is delivered and deployed, so long-term, patient investors might want to consider adding this stock on a pullback.

When I first started investing and managing money as a broker back in the 1980s, news that Michael Price was buying or selling stock was market moving news. Of course, you had to wait to have the filings mailed to you back then, but whenever he mentioned a stock in a media appearance, it was snapped up by those who wanted to piggyback on his wildly successful Mutual Shares value fund. Since he sold the company to Franklin Templeton and moved on to managing just a few accounts and his own money at MFP Investors, he does not attract as much attention but he should. He simply downsized his operation -- he didn't lose any IQ points or investment acumen in the process.

I am happy to see that he continues to be a fan of my trade of the decade: small bank stocks. He initiated a position in Waterstone Financial (WSBF), which is a recent mutual conversion that is trading at about 85% of book value. He added a little bit to his ownership of Prudential Financial (PBIP) another thrift conversion that is at about 80% of book value at the current price. He also more than tripled his stake on Oregon-based Columbia Banking (COLB) and doubled his position in SI Financial Group SIFI , a small Connecticut-based bank. Price also jumped into the maximum pessimism trade in Puerto Rican banks by buying 153,700 shares of Popular (BPOP) in the quarter.

MFP Investors also added to its position in the energy sector in the quarter by buying shares of QEP Resources (QEP). The company not only engages in exploration and production of oil and gas in the U.S., it also provides midstream services such as natural gas gathering, processing and storing. The fund also opened a holding in Callon Petroleum (CPE), an oil and gas exploration and production company that operates in the Gulf of Mexico.

I am not really a thematic investor, but my current holdings are heavily weighted toward small banks and U.S. energy stocks because of their valuations. It is gratifying to see that smart, successful investors such as Smith and Price share my enthusiasm for these stocks. They have some great picks to help investors unlock the profit potential of these two undervalued sectors of the overheated market.

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