It was a busy weekend of number crunching and file reading at Chez Melvin. I am not a high-tech guy, so I updated all my files and spreadsheets manually this weekend, which is always a fun task, and read more 13-F filings.
Every quarter, as I plow through stacks of these things, I am always amazed by the lack of original though that dominates the money management and investment business. The vast majorities of the filings contain the same positions and are nothing more than index funds with minor tweaks. In a rising market that obviously works pretty well, but I am not sure it is worth a 2-and-20 fee structure and even a 150 bps management fee. Finding original thinkers with good ideas becomes more difficult even as the numbers of companies filing 13-Fs grows every quarter.
One firm that does provide a steady stream of original thinking and fantastic stock picks in EJF Capital. The founders came from Friedman Billings and Ramsey and have a strong background in financial and real-estate-related securities. As a broker back in the 1990s I hated competing against these guys in the small bank stocks market as they has huge trading and research edge over the little firm where I worked. But today, I love stealing their best ideas.
They continue to participate in the trade of the decade in a big way. I count 11 banks as new purchases this week. New buys include Central Pacific (CPF), Zions Bancorp (ZION), Flagstar Bancorp (FBC), Independent Bancorp (IBCP), Fifth Third (FITB), Waterstone Financial (WSBF), Heritage Financial (HBOS), Seacoast Financial (SBCF) and Hampton Roads Bancshares (HMPR). They have 50% of the portfolio in financial stocks and the bulk of that is in trades-of-the-decade-type regional and community banks.
EJF Capital also appears to like the private equity story. The logic of this is simple. Private equity firms that put money to work back in 2009 and 2010 are going to do very well on those investments purchased at rock-bottom prices. They have started to monetize a lot of their older investments at huge profits and that's going to continue. Those profits result in large fees from investors and show up as higher earnings, which should result in much higher stock prices. The firm was a buyer of Apollo Global Management (APO), Ares Management (ARES), Blackstone (BX) and KKR (KKR). I prefer to steal ideas from the P/E folks, but the stocks are on my buy-in-a-crash list and I do own a little KKR in income oriented portfolios.
It appears that EJF is still a big fan of the single family home story as well. It has large positions in Colony (CLNY), American Homes 4 Rent (AMH), Silver Bay Realty (SBY), Home Loan Servicing Solutions (HLSS) and Radian Group (RDN). It is no secret that I think the housing turnaround will take longer than most think, but the long-term picture of five-plus years for the hosing stocks is pretty bright. Sales levels and pricing are still well below the peaks of 2008 and when the recovery does start it will have a long way up and the stock prices should move in the same direction.
They say you can measure a person's intelligence based on how much he agrees with you. By that standard the folks at Aegis Financial in Northern Virginia are some very smart guys. I started following these guys when I noticed that they were in just about every deep value stock I looked at the past few years and a little research revealed a strong track record. The firm has been buying energy names like Hercules Offshore (HERO), WPX Energy (WPX), and Peabody Energy (BTU). They also were buyers of one of my favorite stocks, Resolute Forest Product (RFP). Emerson Radio (MSN) and Natuzzi SPA (NTZ) are both stocks that appear in my portfolio of net-net stocks and Aegis was a buyer of both. The firm also tripled its stake in Tecumseh Products (TECU), a stock I did very well with a few years ago. It has sunk back to a deep discount to book value and it's probably time to revisit the air compressor concern at current levels.
The 13-F filings are a fantastic tool. Reading the filings is like having all the smartest minds of Wall Street as your personal research department at no cost. Keep in mind that, as with all lists, screens and research reports, it's a starting point. Never follow anything blindly and do the homework before you ride the coattails of even the best investors.
