Tough Times for Value Hunters, Part 1

 | Jun 16, 2014 | 11:00 AM EDT  | Comments
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pah

I read a lot. As an investor, I believe constant reading is an absolute must -- an essential part of the job of allocating capital. For instance, I'm learning more about Amazon (AMZN) in Brad Stone's The Everything Store than I would from any analyst report, or even the Amazon annual report.

When it comes to investing, I read it all -- The Wall Street Journal, The New York Times, Financial Times, Washington Post, Fortune, Businessweek, The Economist, Forbes, Barron's, The New Yorker, Value Line and others. It's safe to say that 75% of my time is devoting to poring over periodicals and annual reports. I can't think of a better way to keep abreast of possible investment opportunities than scouring everything I can.

The latest edition of Barron's offered up stock picks from more than a dozen professionals, a group of distinguished money managers and analysts who make up Barron's roundtable. While this group has clearly earned their spurs in investing, their stock picks, in my very humble and individual opinion, are illustrative of the tough valuations in today's market. Of the nearly 50 recommendations for stocks and exchange-traded funds, no more than 10 really captured my attention from the perspective of value and margin of safety.  

Mario Gabelli, an incredibly talented investor, proposed the more intriguing ideas, and one of them was for Madison Square Garden (MSG). For one thing, MSG owns both the New York Knicks and the New York Rangers -- and this is amid reports that former Microsoft (MSFT) executive Steve Ballmer may buy the Los Angeles Clippers team for $2 billion.

The company also owns MSG Networks, a regional sports TV network has eight million subscribers each paying $5 a month, and it generates some $480 million a year in subscription and advertising revenue, with high profit margins. MSG has market capitalization of $4.4 billion, and Gabelli says MSG Networks alone is worth the entire market cap. That means you're getting the rest -- including the teams and the famed Madison Square Garden venue in New York -- for free.

Another Gabelli pick is Chemtura (CHMT), a specialty chemical maker. The stock is trading around $25, and Gabelli feels the company could command a private-market value of between $40 and $45 a share. Interestingly, Gabelli recommended the company when shares were trading higher than they are now. He is a big fan of CEO Craig Rogerson, who has a track record of making money for shareholders.

Later this year, Chemtura is expected to close a deal to sell its agrichemicals business to Platform Specialty Products (PAH) for $1 billion. Net of debt, the deal should leave the company with nearly $500 million in cash, which Gabelli expects will be used for share buybacks. Seeing as Chemtura's current market cap is $2.4 billion, a buyback could retire more than 20% of the company shares -- and the resulting company could generate more than $400 million in earnings before interest, taxes, depreciation and amortization. That, Gabelli says, would make the stock a bargain at its current price.

It's slim pickings out there but markets always offer opportunities. Finding them simply requires the commitment of old-fashioned hard work -- digging everywhere for potential ideas.

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