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

Candace King Weir and Amanda F. Weir, Paradigm Capital Management
Bottom-up Stock Picking Back in Fashion?

Candace King Weir and Amanda Weir presented the case for bottom-up stock picking, especially in the small cap universe, believing that in this space:

• Management is more accessible
• Business models are more easily understood
• Companies tend to be domestically based, and have less currency and commodity exposure
• Companies are more nimble, have ability to scale, and can react more quickly to changing events

Part of the Weir’s strategy involves frequent contact with management. They focus on one name at a time, and are agnostic to both sector weights and macro trends. They believe the current market provides unique opportunities for investors, and such markets occur only once every 1 or 2 decades.

One of their current favorites is retailer Wet Seal (WTSLA):

• Cheap clothes with a fashion edge
• $350 million market cap, $150 million in cash
• 575 stores (495 Wet Seal, 80 Arden B)
• Hired New merchandise managers
• Sees expansion opportunities for Arden B

Paul Isaac, CIO Cadogan Management
Investing as a Pari-Mutual Proposition

Isaac, a first-time VIC presenter, is a 40-year industry veteran. Issac presented the long case for Waste Management (WM):

• Largest waste management company in the US
• 273 landfills, 355 transfer stations
• Trading at 15 times trailing earnings, 14.5 times 2010 consensus estimates
• Trades at 6.8 X EV/EBITDA
• Return on Invested Capital: 8.5%
• Free Cash Flow Yield: 8%
• Dividend Yield : 3.7%
• Bought back 17 percent of outstanding shares over the past ten years; new buyback recently announced
• Barriers to new entry in this business due to regulation
• Permitting new sites is difficult
• Could trade up to 8 X EV/EBITDA
• Potential IRR up to 20%
• Rising operating and net profit margins

Jonathan Heller, CFA

Leon Cooperman, Omega Advisors

Cooperman his presentation with a somewhat optimistic (or “realistic” as he called it”) view of the current state of the markets. Cooperman believes that the bulk of the damage has already been done to the markets, and was hopeful for several reasons:

• Evidence that housing is finally bottoming
• Residential investment is at recession lows
• Housing affordability is improving
• Equity valuations are reasonable, if not better
• Price to replacement cost book values are at below average
• ROE for S&P 500 is near historically high levels
• More companies (13% of S&P 500) are yielding more than 10 year Treasury—most in 15 years
• Yield curve is positively sloped
• Corporate America is in good shape from a balance sheet perspective- Debt to capital near 30 year lows
• Liquidity is high (although there is fear to use it)
• Inflation expectations are receding.

Cooperman likes Atlas America (ATLS), which owns three other publicly traded MLP’s (Atlas Energy Resources (ATN), Atlas Pipeline (APL), and Atlas Holdings (AHD). Currently trading at $23, Cooperman believes the entire package could be worth $30-$77.

Aaron Edelheit- Sable Value Management

Edelheit presented at the Value Investing Congress West last May, and his deep passion and conviction for value investing was equally apparent in New York. Edelheit pointed out the outstanding returns from the small cap value area of the market since 1970 (16.2%), but noted the disinterest here from many investors. He cited the following reasons for this situation:

• Small Cap Value can be very boring to investors
• There may be long periods with no news
• Illiquidity associated with SCV companies scares investors
• Too much volatility
• Little or no analyst coverage

One of Edelheit’s favorite ideas is Photo Channel Networks (PNWIF), which provides online digital photography solutions for retailers.

• At $1.50 per share, trades at 9 times eps (7 times 2009)
• Rapidly growing, revenue up 250% last quarter
• New customers Sam’s club, Costco, Kodak China
• Digital printing business growing rapidly (64% last year)
• No analyst coverage

Jonathan Heller, CFA

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