The pile on the desk is slowly disappearing as I wade through the stock of quarterly 13F filings. All the paperwork is in at the SEC and I am studying the moves of my favorite institutional managers and hedge funds.
I make this comment every quarter, but I always make it a point to randomly click on filings to see if I uncover any new, interesting managers to follow. What I find each and every quarter is that there is an enormous amount of money being managed at 1% or even 20% by firms that are just index tweakers. These managers are basically closet indexers who change the weighting a little bit and charge for the exclusive service. I hate to agree with Charlie Munger's very negative view of Wall Street, but there are a lot of fees being scooped up there for very little real work.
That is not the case if you are investing with or following Arbiter Partners. Paul Isaac and his team are about as far from close indexers as you can get. I have been following them for several years and we have stolen some wildly profitable ideas over that time. They have a mix of classic value stocks, turnarounds and shorts that has worked very well for them since the fund was started back in 2001.
One thing they do differently compared to just about every other value investor on the planet is short stocks. They short in a fashion similar to my chicken-short strategy using put options to bet against high fliers while limiting the risk. Unlike most option traders, they do not appear to trade the position. It looks like they buy the puts and wait for the high fliers to stumble and collect their gains. At the end of 2015, they had chicken shorts on Amazon (AMZN), volatility (VXX), China (FXI), Sears Holdings (SHLD), the yuan (CYB) and Rackspace Hosting (RAX).
The firm is also a participant in the trade of the decade. They have a total of 97 positions and Arbiter added 20 of them to four community banks in the quarter. They were buyers of First Citizens (FCNCA), United Bancshares (UBOH), Citizens Community Bancorp (CZWI) and Bank of Commerce Holdings (BOCH). Investors who do not have a significant stake in community bank stocks are making a big mistake. Clearly, Arbiter is not making the mistake of ignoring the trade of the decade.
I am not a big user of the ubiquitous Redbox service offered by OuterWall (OUTR), but my adult kids most definitely are customers. They say it's a lot cheaper than pay-per-view and if you are not as lazy as I am it is pretty convenient. At the local Publix there is usually a line in the evenings for Redbox, so apparently this is another one of those major social trends I am missing.
OuterWall also owns CoinStar coin-counting machines and a service that allows customers to buy and sell electronic devices. The stock has been falling since mid-year and it has attracted the attention of Arbiter, which bought 40,000 shares of the stock. It is worth noting that activist investor Engaged Capital owns 14% of the company and is urging OuterWall to find a private equity buyer.
I have not talked to the folks at Arbiter, but they clearly see something happening in the asset management and investment banking business. They were buyers of Cowen Group (COWN), JMP Group (JMP), Oppenheimer Holdings (OPY) and PJT Partners (PJT). I am not sure if they see a merger wave hitting the industry, a pickup in restructuring and workouts across certain industries that provides increasing fee streams or simply think the stocks are too cheap. I do see that, with the exception of PJT Partners, they all trade below book value at current prices.
Arbiter also took a new position in eBay (EBAY) in the final three months of last year. I have never been on eBay, although I have used its Stub Hub service to buy the occasional baseball ticket. My wife loves the eBay service. When it comes to tech, social media and such services, I know very little and can only note that I do know some enthusiastic and committed eBay users. The stock appears to be reasonably priced at 14x earnings, and Arbiter apparently sees something it likes about the stock.
Arbiter Partners has put up some terrific numbers and its unwillingly supplied stock ideas have made us some money. If you are not reviewing this filing every quarter, you should be.