Ugly Duckling

 | Jun 08, 2012 | 2:00 PM EDT  | Comments
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Stock quotes in this article:

rsh

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hrg

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spb

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noa

It may seem like a strange time to be on a bit of a buying spree, but that's where I found myself over the past week, adding to positions or adding new positions in names that have been on the watch list and that have gotten too cheap to ignore. Keep in mind, though, a buying spree for a value investor typically involves a few names and not dozens. In these cases, there's some distress, and I expect a bumpy ride.

I've yet to pull the trigger on Radio Shack (RSH); I'm having difficulty shaking the cringe factor with this one but may take a flyer on it below net current asset value -- if it gets there (currently at 1.12x NCAV).

Speaking of the cringe factor, Harbinger Group (HRG) also looks interesting. This name is controlled by Harbinger Capital, the CEO of which is hedge fund manager Philip Falcone, the very same Philip Falcone embroiled in the LightSquared bankruptcy fiasco.  There may be some lingering fears that Harbinger Capital, which invested $3 billion in LightSquared, will have to unload some of its 84% stake in Harbinger Group in order to meet redemptions, but that appears unlikely at this point.

While Harbinger shares are up 23% year-to-date, this is primarily being driven by the 26% rise in shares of consumer products name Spectrum Brands (SPB), of which Harbinger owns nearly 58%. That Spectrum stake alone is worth more than $1.03 billion, while Harbinger's current market cap is just $691 million. Even if you were to apply an extremely conservative 35% discount to the Spectrum stake, as some of the academic research I've read over the years has suggested to be appropriate in cases where one publicly traded name has a large, stagnant ownership stake in another, that still gets you to $670 million, fairly close to Harbinger's current market cap.  Theoretically, if you are really interested in Spectrum Brands, you can get exposure indirectly through Harbinger for just over $23 a share, a 32% discount to Spectrum's current price.

But there's more to Harbinger than just the Spectrum stake. The company also owns Fidelity & Guaranty Life Insurance, which it acquired for $350 million, and a 19% stake in North American Energy Partners (NOA), which is small in the scheme of things but worth about $20 million. The company also recently launched a new business, Salus Capital Partners, which provides asset-backed loans to the middle market.

This is indeed a sum-of-the-parts story but not without some fleas. The association of Harbinger Group with LightSquared may be scaring away some investors, and Philip Falcone has not been without his share controversy.  There is a buying ugly element to this name, but that certainly fits my M.O. recently.

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