Insights From a Born Value Investor

 | Jul 16, 2012 | 2:30 PM EDT  | Comments
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For the past several years I have had a subscription to Barron's online, and I've tried to read it every Saturday. I discovered that I just didn't get as much out of it on the Internet as I had in print, so I recently dropped the online version and went back to buying the paper copy on my Saturday morning errand runs. Sitting on the porch with my coffee and paper is just much more satisfying than reading it on the computer screen. It may cost a little bit more, but the information I gather just reading "Market Laboratory" every week will more than cover the cost.

I picked up last weekend's copy at the local Publix and found one of the best interviews in recent months waiting for me. Barron's talked to Paul Isaac of Arbiter Partners about his current views on the world and on markets. Mr. Isaac is worth listening to, as his hedge fund has averaged 21% returns per year since 2001. He is doubly interesting, in my eyes, as his father worked with the legendary investor Max Heine and had his own long career in arbitrage. If that isn't enough, his uncle is none other than my personal value investing hero, Walter Schloss. With that pedigree and with those returns, I decided more research was in order.

I went to the Securities and Exchange Commission website and looked at the last 13-HR filing for Arbiter Partners. When I'm evaluating portfolios of very successful value investors, I am always relieved if I find we have some holdings in common. It helps verify that I'm on the right track and not just wandering in the wilderness of the markets. Mr. Isaac and I do share a few names in common, most notably a fair-sized position in Presidential Life (PLFE). This stock recently rewarded my patience with a takeover offer that resulted in a return of almost 100% in less than three years.

The fund also appears to share my enthusiasm about energy stocks right now. Energy-related issues are currently among the cheapest sector, and Arbiter has a good-sized stake in the group. The fund has holdings in Devon Energy (DVN), Anadarko Petroleum (APC) and WPX Energy (WPX). It would appear Mr. Isaac is also a fan of the lagging defense sector, in spite of expected cuts in spending. He owns stakes in General Dynamics (GD) and Northrop Grumman (NOC), two of the largest defense contractors.

Among his largest positions are some that I confess I just flat-out missed. I did not, and really still do not, see the attraction of Microsoft (MSFT) as a long-term value play. I think the company needs to return cash to shareholders in the form of a special dividend, in addition to the ongoing payouts. He also has a big position in Newmont Mining (NEM), a company I have steadfastly refused to buy in spite of constant urging by curmudgeonly friends in Chicago. Arbiter also owns Goldman Sachs (GS) in pretty decent size. Goldman is on my list of large financial institutions I would buy only on a dip under 40% of book value, and the stock is well above the $55 or so that would get me interested.

In this latest filing I also noticed that several small positions in small banks have started to appear in the fund's list of holdings. Mr. Isaac's largest small-bank holding appears to be ASB Bancorp (ASBB) of Asheville, N.C. The bank is a familiar story for those familiar with my attraction to small banks. It is a 13-branch bank with a slowly improving credit portfolio and plenty of capital, trading well below tangible book value. Mr. Isaac also has added a few other "toe in the water" bank-stock holdings in the past few quarters.

His short portfolio looks almost exactly like my list of stocks to sell, short or avoid of the past year. He is short high fliers like LuluLemon Athletica (LULU), Green Mountain Coffee (GMCR) and Amazon (AMZN), among others.

Paul Isaac not only has the right pedigree toward being a successful value investor; he has the returns, as well. In our search for quality investable ideas, it is worth paying some attention to the portfolio of Arbiter Partners.

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