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Archive for September, 2010

Bruce Berkowitz’s Fairholme Capital Management filed a Schedule 13D notice Friday for its holding in American International Group, Inc. (NYSE:AIG). It’s an interesting development. Fairholme’s previous AIG disclosure was a 13G, indicating a passive holding. The 13D may indicate that Fairholme intends to take an activist approach to AIG. It’s not entirely clear because the “Purpose” item contains somewhat unusual boilerplate:

The Reporting Persons have acquired their Shares of the Issuer for investment. The Reporting Persons evaluate their investment in the Shares on a continual basis. The Reporting Persons have no plans or proposals as of the date of this filing which, relate to, or would result in, any of the actions enumerated in Item 4 of the instructions to Schedule 13D.

The Reporting Persons reserve the right to be in contact with members of the Issuer’s management, the members of the Issuer’s Board of Directors (the “Board”), other significant shareholders and others regarding alternatives that the Issuer could employ to increase shareholder value.

The Reporting Persons reserve the right to effect transactions that would change the number of shares they may be deemed to beneficially own.

The Reporting Persons further reserve the right to act in concert with any other shareholders of the Issuer, or other persons, for a common purpose should it determine to do so, and/or to recommend courses of action to the Issuer’s management, the Issuer’s Board of Directors, the Issuer’s shareholders and others.

Berkowitz has earlier discussed his AIG position with Consuelo Mack on WealthTrack (via DailyMarkets.com). Berkowitz’s view of AIG at the time of the interview was as follows (at about 11.30):

A great company that stumbled for various reasons, that still has intact franchises, that still has the ability to repay tax payers, the New York Fed and the US Treasury, and will hopefully emerge a smaller, yet streamlined organization with [Charters], and the old SunAmerica, and with… It’s sad but some very valuable divisions will be sold: AIA, Alico… but we see the company has the ability to pay back tax payers over time.

Perhaps something has changed.

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Seahawk Drilling Inc (NASDAQ:HAWK) President and CEO Randy Stilley presented to the Barclays Capital CEO Energy-Power Conference on Thursday. I’ve been following HAWK closely (see the post archive here). It’s a deeply undervalued asset turnaround play with a bad case of seconditis. Once Stilley finds the person sticking the pins in the HAWK voodoo doll, HAWK should do fine. Here’s Stilley discussing HAWK’s current liquidation value (at around the 14:30 minute mark):

The other thing that is almost ridiculous to talk about in some ways, but if you think about the underlying asset values of the fleet, if you look at our current market cap less working capital, you end up with a value per rig of about $3-and-a-half million. We just had – within the last couple of months – a third party fleet value established that came out to $313 million, which is over $15 million per rig. And the book value of course is about $20 million per rig.

And the other way to think about that is, Hercules sold a less-capable mat. slot rig earlier this year for $5 million that had no drilling equipment on it, and it was a rig that had been stacked for 10 years. So, if you think about that, and you think about that we had rigs that have all worked with the past few years that are in better condition than that, it’s obvious that our rigs are worth more than $3 million. And if we were to just start cutting them up, you could, over time, sell the drilling equipment of a rig to generate $6 to $8 million in income by doing that. Now, I’m not saying we’re going to do that today, but we’re certainly going to think about it.

Here’s the relevant slide:

Listen to the Barclays Capital Presentation.

Long HAWK.

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In July Ramius Capital disclosed an activist holding in Aviat Networks, Inc. (NASDAQ:AVNW). I thought then, and continue to think, the opportunity described by Ramius in the letter annexed to the 13D is compelling (outlined in the original post here).

AVNW has announced that it has settled with Ramius and will nominate to the board a director candidate recommended by Ramius. Here’s the announcement:

Aviat Networks Announces Settlement Agreement With Ramius LLC

Company to nominate one candidate recommended by Ramius to serve on Board of Directors

SANTA CLARA, Calif., Sept. 15 /PRNewswire-FirstCall/ — Aviat Networks, Inc. (“Aviat,” Nasdaq: AVNW), a leading wireless expert in advanced IP network migration, today announced that it has reached a settlement agreement with Ramius Value and Opportunity Advisors LLC, a subsidiary of Ramius LLC (together with its affiliates, “Ramius”).

Under the terms of the settlement agreement, Aviat Networks will include one candidate recommended by Ramius as a nominee on management’s slate for election at the Annual Meeting. The nominee would serve as an independent director of the Company. Aviat Network’s Board of Directors will consist of eight directors, seven of which will be independent. The Aviat Networks 2010 Annual Meeting will be held on November 9, 2010, at the Company’s headquarters in Santa Clara, California. Ramius, which beneficially owns approximately 7.6% of Aviat Networks’ outstanding shares, has agreed to vote its shares in favor of each of the Board’s nominees at the 2010 Annual Meeting and has agreed to certain, limited standstill restrictions.

“We believe that open dialogue with our shareholders is essential as we continue to execute our restructuring plan and outline our strategic vision for Aviat Networks,” said Chuck Kissner, Chairman and CEO of Aviat Networks. “Ramius is an important investor and we believe that this agreement aligns the interests of management and all of Aviat Networks’ shareholders. We expect the Ramius nominee will be an asset to the Company and we look forward to working with him as we continue building out a platform to drive sustainable, profitable revenue growth and enhanced shareholder value through innovation, prudent cost management and operational excellence.”

Peter A. Feld, Managing Director of Ramius, added, “We are pleased to have worked constructively with Aviat Networks with the shared goal of enhancing value for all shareholders. With the recently announced management change and cost reduction initiatives, we believe the Company is on track to significantly improve operating performance and profitability. We are confident that our nominee will provide valuable insight as the Company drives towards the goal of generating profitable growth.”

I hold AVNW.

Hat tip Oozing Alpha

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In a post in late November last year, Testing the performance of price-to-book value, I set up a hypothetical equally-weighted portfolio of the cheapest price-to-book stocks with a positive P/E ratio discovered using the Google Screener, which I called the “Greenbackd Contrarian Value Portfolio”.

The hypothetical portfolio is based on Josef Lakonishok, Andrei Shleifer, and Robert Vishny’s (“LSV”) Two-Dimensional Classification from their landmark Contrarian Investment, Extrapolation and Risk paper.

The portfolio has been operating for a little over 3 quarters, so I thought I’d check in and see how it’s going.

Here is the Tickerspy portfolio tracker for the Greenbackd Contrarian Value Portfolio showing how each individual stock is performing:

And the chart showing the performance of the portfolio against the S&P500:

The portfolio is up about 22.4% in total and 20.9% against the index. It’s volatile, but I’ll take volatility for a ~20% gain in an essentially flat market. The results are tracking approximately in line with the results one might expect from LSV’s research.

[Full Disclosure:  No positions. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]

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Michael R. Levin, who runs The Activist Investor website, has produced a white paper, Effective Activism, on the Cheap that identifies 36 undervalued companies that fit his profile for “effective activism, on the cheap.” Michael likens the list to the companies generated in an Endangered Species / Darwin’s Darlings strategy.

Says Michael of the target companies in his white paper:

  • These companies conceal significant potential value relative to their current market cap, with a potential to increase the average investment by about 75%.
  • They have a concentrated investor base (ten largest investors own at least half of the outstanding shares), which allows an activist to influence management in creative and low-cost ways.
  • They are also hardly micro- or small-cap investments, with an average market cap of $375 million (the highest at $1.8 billion), which should provide ample liquidity.

How cheap is “cheap”?

We estimate that an investor that confines its activism to companies with highly concentrated holdings can spend a tenth of the cost of a full proxy contest, and avoid the proxy solicitors, public relations firms, and legions of attorneys. For a fund manager that earns income in the form of fees (management and performance), this savings can make an activist strategy feasible, and even attractive.

Click here for more information on and to obtain a copy of the report.

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Warren Buffett has long eschewed any ability to foresee the path of the markets or the economy, but according to this BusinessWeek article, he’s resolute that the economy will not slide back into recession:

Warren Buffett ruled out a second recession in the U.S. and said businesses owned by his Berkshire Hathaway Inc. are growing.

“I am a huge bull on this country,” Buffett, Berkshire’s chief executive officer, said today in remarks to the Montana Economic Development Summit. “We will not have a double-dip recession at all. I see our businesses coming back almost across the board.”

Berkshire bought railroad Burlington Northern Santa Fe Corp. for $27 billion in February in a deal that Buffett, 80, called a bet on the U.S. economy. The billionaire’s outlook contrasts with the views of economists such as New York University Professor Nouriel Roubini and Harvard University Professor Martin Feldstein, who have said the odds of another recession may be one in three or higher.

Now that the great man has prognosticated on the state of the economy, I have to ask, “Are we all macro investors now?”

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Jay at Market Folly has introduced a quarterly newsletter “Hedge Fund Wisdom,” which Jay bills as a “complete guide to what hedge funds have been buying and selling.” The newsletter includes:

  • Complete portfolio updates on 20 prominent hedge funds
  • Commentary and analysis of each fund’s moves
  • Consensus buys & sells among the hedge funds profiled
  • In-depth analysis of 3 stocks hedge funds were buying. We take you inside the head of a hedge fund manager to examine the investment thesis, upside & downside, potential catalysts, market valuation, contrarian viewpoint, company background & more

Here is an example of the holdings of Seth Klarman:

To celebrate the launch, Jay is providing two special introductory offers:

  • HFW Member – Annual (most popular choice! lock in additional cost savings before rates go up!) @ $199 / year
  • HFW Member – Quarterly (limited time offer, rates going up soon!)@ $60 / quarter

If you have any questions or issues, please send Jay an e-mail atinfo@hedgefundwisdom.com and he will get back to you.

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