Marty Whitman on the Current Market
1/4/2002 - 2:00:00 PM - Live Events
Host: Please welcome Marty Whitman, founder of Third Avenue Funds. For more information, visit www.thirdavenuefunds.com.
Marty Whitman: We've been very actively purchasing three types of securities. One, we do common stocks of two types, but in each case the company is extremely well financed. We don't buy common stock, unless the company has a super high quality balance sheet. Within those common stocks there are two types of common stocks. 1) Wealth creation, which means the companies strive to create value through having unrealized appreciation, merger & acquisition (M&A), restructurings, and refinancings. We've been acquiring common stocks of those well-financed companies when they have been available, at least a 20 percent discount from readily ascertainable net asset value, usually more like 40 percent. We buy them when we think managements have reasonable prospects over time for increasing those net asset values. We are also acquiring earnings common stocks for these well-financed companies, and our pricing criteria there is we pay under 10 times peak earnings provided we believe the next peak, whenever that will occur, will be better than the last peak. Third, we've also been investing rather heavily in the credit instruments of certain distressed companies. There our pricing criteria is to look for an internal rate of return (IRR) of at least 30.
The Chat
Question: Do you see any value in the Enron (ENE) washout?
We passed, mostly because one of my directors, who is an attorney for a competitor, would be angry if we did any Enron credit. I tried to buy some first mortgages of Portland General Electric, a subsidiary, but they never came within our price range.
Question: Why has "value investing" done so much better than "growth investing" over the last couple years?
Growth investing was a beneficiary up through the first quarter of 2000 of the greatest speculative excesses in the history of man. During that crazy period, nobody could outperform that.
Question: Loral Space & Communications (LOR) has a very high debt ratio and owned a significant portion of Globalstar Telecommunications (GSTRF). What do you think of the future for Loral?
No comment. We don't follow it. We don't do common stocks unless the company is extremely well capitalized, no matter what its other merits may be. I just don't know Loral.
Question: What stocks do you hold more than 5 percent of in your fund?
You can look at the annual report; there's a huge list since we're concentrated. You can view that at www.thirdavenuefunds.com, or call for our annual report, 800-443-1021. Off the top of my head, I think there are 26 issues where we own more than 5 percent of the common, and there are going to be six or eight distressed credits where the fund owns 50 percent or more of the outstanding debt of that class.
Question: Whose bonds have you been buying as of late?
The biggest name you'd find is Kmart (KM). We own over 50 percent of the outstanding class of debt of Home Products International (HPII) and CareMatrix (CMDCX). We're the largest creditor of USG (USG), and we're very large (I think the second largest) creditor of Exodus Communications (EXDSQ). We also have a dominant position in Frank's Nursery & Crafts. Also Kellstrom Subordinates, where we own over half the subordinates.
Question: Do you see any of the Regional Bell Operating Companies (RBOCs) as still being value plays, or are they likely to suffer the same fate as AT&T (T), WorldCom Group (WCOM), and Sprint FON Group (FON)?
We've passed on all of them; they're too hard for little us to analyze.
Question: Are there any technology stocks or dot com stocks that meet your criteria?
A huge list: American Power Conversion (APCC), AVX (AVX), Credence Systems (CMOS), Electro Scientific Industries (ESIO), KEMET (KEM), and Vishay Intertechnology (VSH).
Question: Have you perceived value in the Global Crossing (GX) or Providian Financial (PVN) situations?
No, but if we were interested in either of those issues, it would only be as a senior creditor and as of yet, we haven't spent a lot of time on it.
Question: What are five great values to buy today?
Other than the names I mentioned above for tech, try The Phoenix Companies (PNX), The MONY Group (MNY), Toyota Industries (TYDAF), Brascan (BNN), and Catellus Development (CDX). The latter that I mentioned are all basically wealth creation companies.
Question: Do you agree with Warren Buffett's recent comments that there is little value in stocks right now?
In general yes, in specific no. The general market appears to me to be overpriced.
Question: Do you think Kmart will be able to avoid Chapter 11?
I don't know; we're operating on the assumption of 70/30 to avoid bankruptcy, but we've been buying the credits anyway. I think we'll make lots of money whether or not they file. Kmart Common is not the kind of common we would do.
Question: Some of the bonds you've mentioned are not household names (Frank's, Kellstrom, CareMatrix). How do you find these, and how does one analyze the credits?
You find them by looking at lists, and you analyze credits the way anyone does. I gave a speech on September 10, "Introduction to Distressed Investing." If someone wants to call my secretary, Liz Coogan at 212-888-5222, we'd be happy to get you a copy of that "Introduction to Distressed Credits," which talks a lot about analyzing distressed credits.
Question: What is Mr. Wadhwaney buying for the International Fund?
In our portfolio, Toyota Industries, The Tokio Marine and Fire Insurance Company (TKIOY), Hutchison Whampoa (HUWHY), and Investor AB (INVE) - all common stocks. Whatever else he's doing, I'm really not up to speed, but I know we're doing those four securities.
Question: You seem to have a lot of holdings of Florida based common stocks. Can you say a word or two on that?
On The St. Joe Company (JOE), they presented at our investor conference, and the chief financial officer (CFO) told us that the duPont Trust, a dominant shareholder, might be looking to diversify and sell some stock, so we bought one million 200 shares. They own a million acres that they're developing in the Florida Panhandle. In terms of land plays, we own some Alico (ALCO) Common and Consolidated-Tomoka Land Co. (CTO), a dominant landholder in the Daytona area. Florida's gets 300,000 people moving in a day, so these are promising. Through a private offering, we were able to buy a large block of BankAtlantic Bancorp (BBX) below book value. BankAtlantic, I believe, is the largest bank headquartered in Florida.
Question: What happens with ACE Limited (ACE)?
No comment. Our group owns over 50 percent of the bonds, and I would refer you to the public releases, including the 10K that is just out.
Question: Where do you think the price of Intel's (INTC) shares will reach?
I don't know, we buy value not target prices. Target prices are for speculators.
Question: Were you referring to the Canadian Brascan? BNN?
Yes, that ought to be on the list I mentioned earlier.
Question: Danielson Holding (DHC) - in a previous forum you said you would have a deal by the end of 2001. What is the latest update on your thoughts on them?
Again, like with ACE Limited, I can only refer you to the public record. We're working very hard on doing the deal in the near future.
Question: Isn't bankruptcy a messy business, and who makes money besides the lawyers?
That's the best question I've heard! The principal problem with the business is the creditors are going to get ripped off by lawyers, investment bankers, and managers. It goes with the territory. You ought to know though that every kind of investment has something wrong with it.
Question: Do you own any retail common, and isn't there value in the home building stocks?
No. Probably. We were in them, but we're not in them now because the companies do not seem as strongly financed as we like them to be.
Question: Is now a good time to be an index investor in mutual fund investing?
No, it is not. I put out a report about how dangerous index funds were in January 1999, and I think the statistics still hold. Anybody who wants a copy of that report can call Liz Coogan at the number provided earlier.
Question: Do you see value in oil stocks? Worldwide energy demand is in a straight-line growth curve and the rate of new discoveries is slowing.
Gas is pretty good. As for oil, I own this wonderful car that gets 53 miles to the gallon, and I think it's the wave of the future.
Question: Your real estate fund has done very well. Is that likely to continue?
I hope so. I think the manager Mike Winer is just super, but who knows? I'm hopeful. I own a lot of stock in all the funds. |
