The 13-F filings are coming in fast and furious now ahead of the Securities and Exchange Commission's (SEC) weekend deadline. Most of the big guys will file at the last minute as they usually do but some of the lesser-known investors are filing ahead of time. That allows us to take an in-depth look at what some very good investors were buying and selling during the quarter.
Reviewing the trading activity of the very best investors every quarter is like having the world's most talented unpaid research service. Over the years, I have used this technique to find some wildly profitable ideas.
In 2008, I heard David Nierenberg of D3 Family Funds spoke at the Value Investing Conference in New York and I was very impressed. He talked a lot about earning multiples of his money over time rather than percentages in the short run, which is very much in line with my core philosophy.
I have stolen several ideas from him over the past five years and, while the past is not predictive of the future, they have all at least doubled over the next few years. He runs a very concentrated portfolio so he is not especially active every quarter, but the stocks he buys are worth further investigation.
In the third quarter, Nierenberg only made two purchases. He added to the same stock he bought earlier this year and both are interesting. He added to his stake in high performance speedboat manufacturer Malibu Boats (MBUU). Even in a weak economy, the company is doing pretty well -- it has gains of about 10% in sales and profits in the most recent quarter. Although it is not a classic value pick, it is an intriguing company with strong potential for earnings and cash flow growth over the next few years.
Houston Wire & Cable (HWCC) does not quite fit my rigid definition of undervalued but I wish it did. The company makes wire and cable products that are used in the utility, industrial and infrastructure markets. The company is profitable and pays a nice dividend, with the shares yielding 3.6%. Houston Wire & Cable is also buying back stock -- the company repurchased 118,000 shares in the most recent quarter.
Nierenberg increased his position by more than tenfold in the quarter and Houston Wire & Cable has moved up to the top of my "buy in a bad market" list. It is a quality company making basic products that never really go out of demand. I believe it will be able to grow nicely as the economic recovery gains strength over the next five years or so.
Nierenberg's two largest positions remain unchanged in the quarter. He has significant stakes in Rosetta Stone (RST), a language instruction company, and C&J Energy Services (CJES), which is a fracking services company. I have owned C&J before and would do so again happily. The price continues to tumble as a result of cheap oil. D3 funds sold of their stake in Tecumseh (TECU) as the compressor company continues to struggle.
Monish Pabrai is another early filer whose filing is worth reading. He made only one purchase in the quarter: shares of the WL Ross Holding Corp. (WLRH). Buying shares of the SPAC headed by Wilbur Ross is probably a pretty smart move, as Ross has a great track record when it comes to buying businesses. I haven't bought shares of this deal yet, but I probably should follow Pabrai into the name as I have a long and wildly profitable history of investing in deals that Ross has been involved in.
The interesting part of the Pabrai Investment Funds Report is the amount of selling in the third quarter. Monish Pabrai runs a very concentrated portfolio, so when he sells out his entire position in companies such as Chesapeake Energy (CHK) and Goldman Sachs (GS), it makes a powerful statement. His fund is now down to just seven positions and two securities, Horsehead Holdings (ZINC) and General Motors (GM), make up more than 45% of his equity holdings. He also sold some of his shares in Bank of America (BAC) and Posco (PKX), so I suspect that he is just not seeing much value in the equity markets right now.
In the time it took me to type up this article, it looks as though 150 new 13-F filings have been posted on www.sec.gov. The pace will pick up later today and tomorrow. I will be combing the buys and sells of the world's best unpaid research department to find safe and cheap stocks that can help us boost returns over the next year.