Last night was a horrifying example of what the next several weeks hold for us. The World Series had a travel day and there were no sports on television. Well, sure there were hockey games, but I have never warmed up to the sport -- and, other than this, after Friday night a long dark stretch of sports-free weeknights looms until December. So, with no ball game to watch, I've turned my attention to the filing of our last vulture of the week.
Howard Marks of Oaktree Capital is one of my favorite idea sources. Regardless of what your approach to the markets is, you need to be reading his quarterly investor letter on the firm's website. His book, The Most Important Thing, is a new classic and should be on everyone's reading list. As with many of the other distressed investors I follow closely, Mr. Marks has been at this a long time. He started trading and investing in distressed securities back in the 1970s and founded Oaktree in 1995.
Oaktree made the search easy for me. The firm has already filed its third-quarter 13F form with the Securities and Exchange Commission, several weeks ahead of the deadline. Marks' largest purchase in the quarter was more than 8 million shares of midmarket lender CIT (CIT).
CIT has seen its loan book run off over the past two years, but there are signs that the beleaguered firm'S loan book is stabilizing. CIT recently reported a loss as restructuring and early debt-repayment costs hurt the bottom line. Former NYSE Chairman John Thain is the CEO of the company, and he sees opportunities in asset sales by other lenders that could help CIT regain a growth trajectory. The bank has switched its funding to their online bank, and this should reduce funding costs going forward. When the market for business lending improves, the company will be positioned to experience rapid growth in earnings.
As with many other vulture and value investors Oaktree appears to be betting on a long-term recovery of the global economy. The firm opened a position in Eagle Bulk Shipping (EGLE) in the quarter. The dry bulk shipper operates 44 vessels after taking delivery of its two newest ships earlier this year. The shares currently trade at just 13% of tangible book value, so they are certainly cheap right now. The company is also heavily levered, with $1.7 billion of debt and just about $100 million of equity. Oaktree is also a large investor in Genco Shipping (GNK), so the firm must believe these companies can survive until economic activity regains strength.
When I see a noted vulture investor take a position in a company, I get interested. When I see that two of the most successful distressed investors are taking a stake in a company, I get excited. That's the case with EXCO Resources (XCO): Both Oaktree and Wilbur Ross have been buying shares of the company, which have headed directly south since EXCO turned down a $20-per-share buyout offer back in July. I love busted-deal stocks, and EXCO is a classic example of the genre.
EXCO operates in the continental U.S. and is positioned to be a major play in the oil-and-gas shale fields throughout the country. Since 2007 the company has aggressively positioned its operations to focus on the unconventional shale fields, and this should drive profits for much of the next decade. Oaktree bought its EXCO shares before the deal collapsed, but the firm apparently decided to stay in the position as a bet on increased energy demand when the economy does recover. Mr. Ross has been adding to his stake in the company since the rejection of the takeover, and arbitrage-related selling pushed the stock to new lows.
Reviewing the portfolios of long-term vulture investors has been an educational exercise. These somewhat grizzled veterans of the markets have been placing large bets on a global recovery in beaten-down industries such as banking, shipping and energy. It may be wise for the rest of us to consider behaving similarly.
