Re-Examining a Trio of Holdings

 | Oct 14, 2011 | 10:30 AM EDT  | Comments
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Stock quotes in this article:

fly

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cwh

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PSEC

While watching the Detroit Tigers pull off a very rare natural cycle in last night's baseball game -- making the series not only more interesting, but historic -- I spent some time going over reader comments to my last few articles. One reader asked for updates on previous positions that I have mentioned on Real Money. He wondered given all that has recently gone on in the world, if I had bought more, sold or just held the course. I will say first that I try to always post when I sell a stock out of my portfolio. Here is my follow-up on a three of the more interesting names.

First up is Fly Leasing Limited (FLY), which was formerly called Babcock and Brown Air. I have no intention of selling this stock until the global economy is booming and its  shares are trading at a premium to book value. Management has done an excellent job of navigating the difficult economy and they have been even better at managing capital and the balance sheet. The company recently added 49 new airplanes to its fleet on very favorable terms. The transaction was funded entirely by available cash flow and the assumption of debt with favorable terms. Currently all 109 of its aircraft, including those being acquired, are under lease with an average life of four years. The aircraft portfolio is quite diversified -- 53 different airlines lease planes from the company.

Since its IPO, the company has used cash flow to buy back 24% of the outstanding shares with an average cost well below tangible book value. Fly Leasing has also repurchased $169 million of its outstanding debt at significant discount to face value. The company has paid 15 consecutive quarterly dividends and the shares currently yield a comfortable 6.68%. At tangible book value, the shares are cheap and worth buying. This is one of those stocks that is always on my list to buy if the markets melts down and the shares drift back toward the low of the year.

Second, Prospect Capital (PSEC) has been a round trip for me. I bought the stock at roughly current price levels (around $9) in 2008 and have watched it soar above $12 a couple of times and then drift right back down. If I had not collected 40% or so of my purchase price in dividends along the way, I might be upset. Prospect has done over $900 million of loan originations this year and its loan portfolio yields $12.8 million (as of the end of the second quarter). With the shares trading at 90% of tangible book value, the yield to shareholders at the current price is almost 14%.

My major issue with this company is that it is almost continually accessing the capital markets and issuing new shares. This does not seem to bother the insiders of the company, as they have continually bought a large amount of stock in the open market. The shares may see some weakness, as the market for mezzanine loans has been slipping along with the high yield market, but a look at Prospect's loan-and-investment portfolio shows that is caters to a fairly diversified portfolio of decent companies.

Third, CommonWealth Real Estate Investment Trust (CWH) has hurt its stock price with excessive stock issuance over the past two years. In spite of that, I am a huge fan of the company's decision to sell off its suburban properties and focus on urban office and commercial locations. CommonWealth just sold $167 million of suburban properties and expects to redeploy the proceeds in class central business district properties. This strategy makes a lot of sense. Suburban markets are likely to remain weak for some time while many downtown areas are already seeing signs of improvement. Trading at half of book value with a dividend yield above 10%, Commonwealth is a solid long-term play on an eventual real estate recovery.

All three of these companies need a strong economic recovery to see their stock prices recover and move substantially higher. I am confident this will happen sometime over the next several years; in the meantime, the dividend yields more than compensate investors for waiting. I have not sold any of them and am content to hold them for as long as necessary.

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