The 13F filing deadline has come and gone and my desk has disappeared. I am wading through all the filings to see what the fund managers I track were buying or selling in the second quarter of the year. While my major focus is the small-bank activists and specialists in what I think is an otherwise overpriced market, there are some value managers who I think are must-follows every quarter. These managers are off the radar screen of the media for the most part, but they have great track records and I have made money stealing their ideas.
At the top of this list is Paul Isaac at Arbiter Partners. Isaac has proved himself to be one of the very best value investors over the last decade as he has handily beaten the market indexes. I have stolen several ideas from him over the years and to say they have worked out well would be something of an understatement.
His top purchase in the quarter was an increase in the fund holdings in Cowen Group (COWN) . I have owned this stock in the past with great results and I want to own it again if the markets would cooperate by staging something that looked like a real decline. With shares of the asset management and brokerage firm trading at just 53% of book value, I may have to just close my eyes and hit the buy button.
The company took a loss in the second quarter as a result of a bad merger arb bet on the Pfizer (PFE) /Allergan (AGN) deal that was blocked by the U.S. government, but I think the firm is headed in the right direction. The acquisition of the credit research and trading business gives them an entry into distressed credit trading. I think that will be a major business line for Cowen and help drive future growth. (Allergan is part of TheStreet's Action Alerts PLUS portfolio.)
Arbiter is a big fan of what I call the "chicken short" strategy as it has purchased puts on several companies it thinks are overvalued. In the second quarter, it added to put positions in the Russell 2000 ETF (IWM) , Tesla (TSLA) and Cal-Maine Foods (CALM) . Arbiter also bought calls on the SPDR Gold Shares ETF (GLD) , Pioneer Natural Resources (PXD) and Devon Energy (DVN) . Although I am not sure what expiration or strike was purchased in the past, Arbiter has used long-dated in-the-money calls to establish long positions, so I have to assume that's what they did here.
Arbiter bought both sides of the failed Staples (SPLS) /Office Depot (ODP) merger. I suspect the firm was a buyer after the Justice Department blocked the deal and the shares collapsed. Both are currently very cheap on both an asset and earnings basis as they continue to struggle to deal with the intense competition from Amazon (AMZN) and other online vendors. The outlook for both companies is pretty poor and Wall Street has a very negative view on the stock, but there does appear to be some value to the office-supply chains. (Amazon is part of TheStreet's Growth Seeker portfolio.)
Arbiter also increased its stake in common shares of Chicago Bridge & Iron (CBI) by 600% and also bought some call options on the stock. The engineering and construction firm has seen weaker results as it does a lot of business with the oil and gas industry. With lower oil prices, most companies have cut back their capital expenditure and construction budgets. On a recent conference call, CEO Phil Asherman expressed optimism that conditions would improve, telling investors, "So all in all, we're pretty optimistic, and I think the market is going to continue to improve through 2017. It is premature to make any predictions, but I think as we get closer to the year, we're going to see some increased activities." If he is right, the stock could recover nicely, giving Arbiter a solid return on its positions.
Arbiter also added a little to its holding of Intelsat (I) the satellite and communications company. Arbiter has been buying the stock since early 2014 and the payoff could be huge as the satellite industry continues to mature. It has the world's largest satellite backbone with terrestrial infrastructure serving the broadband and video industries, both of which are growing globally, and that could help turn this into a very high-return longshot stock.
Arbiter's filing is a must read for me and it should be for any investors looking for undervalued stocks with strong long-term return potential.