Let This Fund Manager Be Your 'Arbiter' of Value

 | Nov 15, 2016 | 2:00 PM EST
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The post-election trading has been nothing short of insane. For the past year, we have been told that rising bonds and oil was fantastic for stocks. Now it seems that falling bonds, leading to higher interest rates, and falling oil prices are also wonderful for stock prices.

Just last week we were told by the pundits that a Donald Trump victory would be cataclysmic for the markets. Every poll that indicated that Hillary Clinton was showing strength caused a rally on Wall Street. But Trump's victory continues to be wildly bullish for stocks.

I own a lot of bank stocks so I can't complain at all, but I do find the sudden change in the storyline amusing.

This week, of course, is the deadline for 13F filings by fund managers, and I am spending the bulk of my time staying on top of the buying and selling activities of my favorite value and activist managers in the third quarter.

Arbiter Partners filed mid-morning yesterday and is one of my favorite managers to track. Using a value approach, Paul Isaac and his team have put up some great numbers over the past decade, and I have made a decent amount of money "stealing" his ideas. I pay attention to what Arbiter is selling every quarter as I don't want to get caught owning something too long and see a big gain turn back to break-even or a loss, which has happened more than once in the past.

In the third quarter, Arbiter lightened up on tech stocks, selling completely out of eBay (EBAY) , Micron Technology (MU) and Amkor Technology (AMKR) . The firm also sold its stake in Atlantic Coast Financial (ACFC) over the summer. In addition, Arbiter trimmed its stake in ESSA Bancorp (ESSA) by about 19%.

But don't take Arbiter's two bank sells to mean that it is throwing in the towel on the trade of the decade in community banks. The firm still owns 18 small bank stocks, including some of my favorites such as Bay Bancorp (BYBK) , HopFed Bancorp (HFBC) and Bank of Commerce Holdings (BOCH) . Arbiter has been an enthusiastic owner of small banks since the end of the credit crisis, and I suspect it will continue to be involved in the trade for a few more years.

Meanwhile, the fund opened a new position in William Lyons Homes (WLH) over the summer. This homebuilder sells to first-time and first move-up buyers in California, Arizona, Nevada and Colorado. The company recently reported a strong quarter, delivering 19% more homes year over year. Combined with an increase in average selling prices this drove a 40% gain in homebuilding revenues compared to the year-earlier period.

WLH stock has moved up some, but even now is priced at just 1.2x book value and 11x earnings so this is probably still a decent entry point.

During the quarter Arbiter was also buying more shares of Capital Senior Living (CSU) . The manager owns almost 10% of the senior living operator and recently filed a 13d announcing it was changing its position from passive to active. Arbiter said it intended to engage in conversations with management about the business, operations, corporate governance, management and strategic direction of Capital Senior Living. The filing also revealed that Arbiter has continued to buy the shares since the end of the quarter.

Capital Senior Living has been growing via acquisitions and now owns 29 senior housing communities in 23 states with an aggregate capacity of approximately 16,300 residents, so there's plenty of assets here, although Arbiter will have to push to unlock shareholder value and stop the stock price decline. In the past year, the shares are down about 30%.

Arbiter also continued buying shares of Cowen Group (COWN) , the asset manager, investment banker and brokerage firm. I have not yet pulled the trigger to buy back into Cowen, but at 45% of book value, it is likely that this name will return to my portfolio sometime soon.

Cowen has used the weak conditions for investment bankers and asset managers to add some divisions at bargain prices, including credit research and trading, which I think can be a growth driver in the future. In my view, management has done a solid job of repositioning the firm for future gains and at some point the shares should once again trade at a premium to tangible book value.

The changing narratives and volatility surrounding the new Trump administration are not going to change anytime soon, but I am sticking with my game plan and doing my best to ignore the noise.

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