Jason Stock and William Waller, M3 Funds
Banks & Thrifts: Opportunities in a Troubled Sector

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:

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

The team is bearish overall on the sector, believing that banks are currently priced for perfection. Still, he and Waller are 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 of their favorite long ideas:
Beneficial Mutual Bancorp (BNCL)

• $4.2 billion in assets
• Oldest/largest bank in Philly
• Excess capital
• Owns 42 of 68 branches
• Mutual holding company structure has benefits
• Trading at 79% “fully converted book value”

Kian Ghazi, Hawkshaw Capital Management
Kicking the Tires

Ghazi, who runs a concentrated long/short US equity portfolio, emphasizes proprietary, investigative research in his investment process:

• Focuses on value
• Identifies high-quality one-of- a-kind franchises
• Ensures financial strength, have excess cash, strong balance sheet, and monetizable assets
• “Kick the Tires Hard”- know what you own
• Asks: “What could cause stock to drop 30% or more, that would cause you to not want to buy substantially more?”

Ghazi presented the case for Coremark (CORE)

• Second largest distributor to convenience stores
• $300 million market cap
• $30 million net debt
• Trading at 12 times est 2009 earnings, 8 times TTM earnings
• Admits that this is a low margin business with low ROC, but is well capitalized, difficult to replace, underfollowed
• Highly fragmented industry
• Cigarette sales account for 70% of revenue, but just 29% of gross profit
• Company moving toward providing more fresh foods, which have much higher margins. This should more than supplant potentially declining cigarette sales.
• Believes company may ultimately be worth $45-$50

Eric Sprott, CEO Sprott Asset Management
The Financial Crisis Isn’t Over

Sprott began by pointing out that Dow 10,000 is meaningless; we were there 10 years ago, and since then, have “accomplished nothing”. He is highly skeptical of the US banking industry, and predicts many more bank failures in the days ahead.

Sprott also took shots at the “Quantitative Easing” process being used at the Fed these days, likening it to the very dangerous practice of simply printing more money. He questioned who is buying all of the US govt debt, with issuance up 200% this year, and concluded that it’s the central banks doing all of the buying. Sprott then asked the most relevant question: “What happens when quantitative easing is done?”

Sprott believes that gold is a relevant place to invest these days, pointing out a sticky supply/demand situation, fact that more demand is consumed than produced each year, central banks have been selling as the price has risen substantially over the past ten years. He doubts that some who claim to have gold in their vaults actually do.

Some Favorite Ideas:

• Norseman Gold PLC (ASX:NGX)
• Corridor Resources (TSX:CDH)
• Sensio Technologies (TSX-V:SIO)

Jonathan Heller, CFA
No postions

Boykin Curry, Eagle Capital

Curry led off day 2 at the Fourth Annual New York Value Investing Congress, with a presentation on “Time Arbitrage”. Curry believes that investors are still too focused on short-term company performance, which leaves plenty of opportunities on the table for those wiling to do their homework, and look past the next 8 quarters.

Curry sees this prevalent short-term focus as an arbitrage opportunity of sorts, one that unlike most arb scenarios is actually widening. He cited an unbelievable statistic, that being that 81% of questions asked during quarterly earnings calls are focused on the next 12 months, while just 19% are longer-term oriented.

Curry cited American Express as a great example of a company that is currently mispriced due to the shortsightedness of Wall Street and the investment community at large:

• Amex is not a credit card company-just 20% of revenues
• Amex is the world’s largest buying cooperative of affluent buyers
• Analyst haircuts to forward estimates don’t equate to the reduced market cap they place on the company
• Credit crisis/chare off concerns are overdone for Amex

Kian Ghazi, Hawkshaw Capital Management

Ghazi presented “ Investing With Conviction”. Hawkshaw’s Philosophy is centered on intensive, “deep dive” oriented research:

•  Concentrated long/short US equity portfolio
• Proprietary investigative research
• Value focused
• Identifies high quality, “one of a kind” franchises
• Ensures that they are financially strong (ample cash, FCF)
• Asks; “What could go wrong and send stock 30% lower, that would cause us to not want to but more?

Ghazi presented the case for Universal Technical Institute (UTI), which provides in-depth auto technician training.

• Stock has been beaten down in recent years due to excess capacity, falling enrollment, poor marketing strategies, and rising tuition
• Company turning things around: Congress Increased student loan limits
• Currently at $15, Ghazi believes company could earn $2.00 per share in 2009, could be worth at least $30

Jonathan Heller, CFA

Disclaimer: I have no positions in any of the companies mentioned