Value Investing Congress – Day 2

October 21, 2009 · Leave a Comment

William Waller & Jason Stock-M3 Funds
The U.S. Banking Sector: Chaos & Opportunity

M3 was founded in 2007, and invests (long and short) in small and mid cap names in the US bank and thrift sector. There are 1300 publicly traded banks, and 93% have market caps less than $500 million.  Stock presented his view of the current state of the banking sector:

• Significantly undercapitalized
• Credit quality still deteriorating
• More bank failures
• Unemployment rate will continue to rise
• Commercial real estate is in trouble

Stock believes that there will be in excess of 150 bank failures in 2009.  Still, he and Waller are still finding opportunity on the long side, and look for the following:

• Low Price/Tangible Book
• Excess capital
• Low loan/deposits
• Attractive markets
• Bearish management team
• Share repurchase plan
• Attractive deposit base

One long name Waller and Stock like: First of Long Island (FLIC: $21.00)

• 140% of tangible book
• 11 times LTM earnings
• Excess Capital; 8.5% tangible equity/assets
• 68.5% loan to deposit ratio
• $1billion high quality deposits with 1% cost
• Positive credit quality, just .01% non-performing loans
• Hidden value in branch ownership
• Near-term catalyst- R2000 index addition
• Could be worth twice current price

Scott Klein-Beach Point Capital Management
Opportunities in Stressed and Distressed Credit

Beach Point, which has $3.75 billion in assets, specializes in high yield bonds, distressed debt, and other credit related strategies. With the high yield market currently yielding 15-16%, Klein believes that the distressed market is currently offering opportunities of a lifetime.

Despite the acknowledgement that defaults will continue to rise, Klein sees this as a lagging indicator, and believes that continued forced selling of distressed bonds will create continued opportunity in an extremely inefficient market.

According to Klein, the high yield market has gained an average of 35% in the 2 years following monthly declines of 5% or more. Such declined have only occurred four times, with the latest, and most severe in late 2008.

With the average high yield bond trading at 70 cents on the dollar, with an 8% coupon, Klein sees ample opportunity in this area, even if the worst default scenarios we’ve ever experienced (Great Depression) are repeated.

J. Carlo Cannell – Cannell Capital
Hydrodamalis Gigas

Carlo Cannell always manages to surprise, and this Congress was no different. He brought with him a co-presenter, Karthik Panchanathan, a graduate student in Biology from UCLA who very articulately presented interesting examples of animals that had become extinct, or were on their way there. Before the audience scratched their head in wonder, Cannell very interestingly tied these situations to companies and industries that had followed a similar path.

Who knew that Hydrodamalis Gigas (the presentation title) is actually the scientific name for the Steller Sea Cow, a huge manatee-like animal that went extinct in 1741? Cannell tied the plight of this animal to that of the restaurant business: both had trouble adapting to environmental changes, the Steller Sea Cow faded into oblivion, and so have many restaurant chains.

The main point of Cannell’s presentation was that the laws of nature also apply to Wall Street, and investors would be wise to look for the “cockroaches” of companies – those that can survive nearly any situation. Look for businesses less prone to predators or extinction, says Cannell.

Currently, Cannell finds the following industries attractive: Oil and gas, agriculture, death care, precious metals, energy service.

Whitney Tilson and Glenn Tongue-T2 Partners
An Update on the Mortgage Crisis and a Discussion of Wells Fargo

The conference concluded with Whitney Tilson and Glenn Tongue.

Last year, conference co-founder Tilson and Tongue, his partner at T2, hit the nail squarely on the head with their bleak outlook for the housing and mortgage markets; it was one of those sobering presentations that you hoped would not come to fruition. But it did, and the T2 guys were astonishingly accurate both with their macro views, and list of shorts and longs.

This year they put it in print with their book More Mortgage Meltdown: 6 Ways to Profit in These Bad Times, which was the basis for much of their presentation. If their scenario continues to unfold as suggested, there is much more pain to come in housing land.

The reams of statistics and data they presented seem difficult to dispute, and they put it all in such easy to understand terms that they are well on their way to becoming the de facto experts on the crisis.

All is not lost though; this will not morph into the Great Depression in their view, and they still see opportunities in the markets, both on the long and short side.

Tongue presented the bullish case for Wells Fargo (WFC), which they were short earlier this year. Now they are long WFC:

• Capable of earning $3.35-$4.26/share, $17.1-$20.1 billion net
• Worth $40-$50/share at a multiple of 10-12
• Business has enormous yield spreads
• Buffet bought for his personal account
• The Wachovia portfolio already significantly marked down

Incidentally, waiting for the 10:35 flight back to Philly post Value Investing Congress West has become one of my opportune times to catch up on some reading. Last year, it was David Einhorn’s Fooling Some of the People All of the Time, a VIC giveaway, that I could not put down. This year it was Tilson and Tongue’s just released book (the giveaway at his year’s VIC). With all of the confusion about the genesis of the housing crisis, this book is a must-read.

Categories: News
Tagged: beach point, cannell, M3, t2 partners, tilson, value investing congress

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