Don't Try to Time Value

 | Aug 23, 2011 | 1:00 PM EDT
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Stock quotes in this article:







  • Buy 1 shares of ALEX at $30.00 / share
  • Buy 1 shares of PBY at $8.50 / share

These are times when investors are scrambling for direction. The more uncertainty, the more investors demand certainty.

Lack of certainty is the cause for the exceptional volatility the markets have been experiencing over the past several weeks. No one really knows when housing will pick up. In 2009, predictions were made that by late 2011 housing demand would have picked up. Recent news that the Fed plans to suppress interest rates until 2013 is essentially Bernanke's way of saying that he sees no economic (housing) recovery until then. Last week in an interview with Charlie Rose, Warren Buffett opined that things may get better sooner than the Fed thinks.

I would much rather test my odds at a Blackjack table than bet when stock prices or the economy will strengthen again. You cannot time value opportunities. The best bull runs have come after investors have abandoned equities.

Today, specific valuations seem attractive. At the same time, having some dry powder available to pounce over the next several months is likely going to offer even better opportunity. Of course, some pleasant comments about QE3 on Friday may bring a lot of capital sitting on the sidelines rushing in.

You can start to see why market timing will lead to gray hairs. If you are willing to accept some temporary volatility today and be disciplined with your security selections, there are attractive areas to nibble.

Shipping and real estate company Alexander & Baldwin (ALEX) is trading at $37 a share after sliding from $55. The company has a market cap of $1.6 billion and an EV of $2.1 billion. Both shipping and real estate have been terrible industries over the past year, but not for ALEX. The company owns nearly 90,000 acres of prime Hawaiian land sitting on the company's books at $150 an acre. Over the years, management has demonstrated a decent track record of selling high and buying low.

The shipping business, Matson, commands a 60% market of the Hawaiian shipping lane and Matson is Hawaii's lifeline. The other 30% belongs to small-cap Horizon Lines (HRZ), which is currently dealing with a mountain of debt and very little flexibility to grow the business. Hawaii's economy is improving at a faster clip than the overall US economy. Today, both shipping and real estate are generating operating profits.

Activist Bill Ackman has been sitting on a stake in ALEX for a bit now. Speculation is that the real estate business could one day be turned into a REIT. ALEX has assets that are undervalued and generating a profit. The company's intrinsic value is easily north of $50 if investors are patient. That means if shares drop from $37 to $30, the value proposition just got better. Shares pay a fruitful 3.4% in the interim.

Automotive repair and supply company Pep Boys (PBY) is now trading at about 50% of its value several months merely because the market has declined some 15% in the past several months. Nothing about the business has changed. In fact, if the economy gets worse, people will choose to repair older cars rather than buy replacements. Pep Boys is redefining its business model and investing in growing its smaller, less-capital-intensive service and tire centers (STCs). The company is locating these STCs in the biggest Pep Boys markets and using the existing super centers, typically located five to 15 minutes away, to serve them. The end result will be reduction in capital expenditure leading to increased cash flows. PBY generated $50 million in FCF against $70 million in cap ex. With planned annual capital expenditure of $40 million over the next couple of years, fiscal 2011 FCF should approximate $1.25 a share, 6x today's share price.

If I knew PBY or ALEX were going to $6 and $25 next week, I would certainly advise waiting for an even better entry. But that's not how investing works. Instead of being fearful, investors should be assessing valuations, weigh the downside versus upside risk, and participate when the fundamentals suggest value.

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