10 Top Value Ideas From The Keeley Small-Cap Value Fund

With the market hitting all-time highs, it is extraordinarily difficult to find new value ideas. At times like this, using typical screens or the 52-week low list is often unproductive. However, the search for new ideas must go on. One of the best methods of finding ideas is to search through the publicly disclosed portfolio of a well respected value mutual fund. In this article, we are going to look at the Keeley Small Cap Value Fund (KSCVX) here.

As Investing 501 begins to build its model portfolio, this will be one of the main methods we will use to find new ideas. If you want to know why we selected this particular fund, look here. If you are interested in our process for conducting these reviews, see the methodology discussion at the end of this article. First, our favorite 10 ideas from the KSCVX portfolio:

 

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Central Garden and Pet: Every Dog Has It’s Day

With the markets at all-time highs, it is becoming increasingly difficult to find many potential investments while perusing the new lows list. Most companies on the list are either mortgage REITS or have some connection to mining raw materials. One of the few companies on the list that doesn’t fall into that category is Central Garden and Pet.

The clever descriptions of the company’s current state of affairs, (like the one in our title) are endless. As we have said many times before, most stocks that show up on value screens are cheap for a reason, or perhaps many reasons. Central Garden and Pet certainly fits that category. We wrote an analysis of some of the things that may go right in the future and posted it on Seeking Alpha. The article can be found here for the next 30 days.

What we find interesting is that the typical response we get from readers of our analysis is that it is interesting, is “cheap”, but there are no signs that any of our analysis is coming true or will come true.  Their conclusion is usually, “I want to wait for signs of improvement before I take any action.” It has been our experience that investors who wait for signs of improvement end up paying a much higher valuation for the company and therefore have a lower expected return than investors who took a “leap of faith” and bought at a lower valuation, but with much less clarity. Warren Buffett is often quoted as saying “investors pay a high price for certainty.” The implied message being that investors will get better returns by paying a lower price for uncertainty. Yet when those situations seem to present themselves, few investors actually put their money where Warren’s mouth is.

Here is the basic premise:

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Texas Pacific Land – The Ultimate Buy And Hold Stock

We continue to publish articles on Seeking Alpha to build awareness to our website. We have been fortunate that SA has recognized the quality of our work and has made this article part of their subscription service Seeking Alpha Pro. Unfortunately, the article will go behind their subscription wall in 30 days. But for now here is a summary of our article and a link to it.

Texas Pacific Land – The Ultimate Buy And Hold Stock

Warren Buffett has been quoted as saying his favorite holding period for owning a stock is “forever.” In this article we are going to analyze Texas Pacific Land (TPL), a company that an investor just might want to hold “forever.” In what could be called the “ultimate stock buyback program,” TPL is using multiple income streams to eventually repurchase all of its outstanding shares. Texas Pacific Land Trust is a passively managed liquidating trust that was established in 1888 as the result of the bankruptcy of Texas & Pacific Railway. It was granted over five million acres of land in Texas to build a railroad from Marshall, Texas to San Diego, CA. Ever since, the company has been slowly liquidating its land holdings and buying back the sub-shares of the Trust. For a more detailed summary of the history of TPL, readers can go here

The stock has increased 10 fold in the last 10 years and is not a typical type of investment we would discuss. But the uniqueness of the business model, the hidden value of the land on the books and the incremental benefit shareholders receive from higher oil and gas production and prices make it worth writing about. The company is currently buying back around 3-4% of its shares each year and under our base case scenario it appears as though the company can sustain a 2% buyback rate. As some point things will change and stocks will sell off. Many reasons will be given for the proximate cause and most will sound plausible and may actually be true. TPL stock may decline in value as well. Oil prices may plunge on China or European disaster fears or some other reason. But investors who stay focused on the long term strategy of TPL and view price declines as an opportunity, not a risk, should enjoy the benefits of buying low and holding “forever,” thus eventually being rewarded for their patience.

Intriguing Ideas From The Las Vegas Value Investing Congress Part 1.

We attended the Value Investing Congress in Vegas last week, and instead of listing all the presentations and giving a brief summary, which can be found many places on the internet (herehere and here), we thought we would look at some of the ideas that warrant further analysis. Developing a strong process and sticking to it is much more important that the outcome of any particular investment idea. Over the long run, the correct process with produce the desired results. In this sense, investing is like playing Texas Hold’em. If you had a pair of Aces and raised pre-flop almost every time, you would made money in the long term (maybe not the “optimal” strategy for you hardcore players). But you would also have times where your hand would lose to a far inferior hand. That did not mean that your methodology was invalidated, just that other factors impacted the desired outcome.  Most of the ideas presented have some investment merit and were well thought out and presented. While Peter Lynch always said you should be able to present your investment case in three minutes or less, 25-35 minutes to present some of the ideas weren’t enough to cover all the factors involved in certain ideas — and that is as it should be. There was something for every kind of value investor. Finding ideas with markets and most stocks at or near all-time highs means it is not the easiest time to find lots of profitable value ideas.

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Live Nation- Everybody Wants to Rule the World

Date: May 2, 2013 Price: $12.50 Mkt. Cap.: $2.4 billion

An investment in Live Nation (LYV) provides investors with an opportunity to buy into a unique set of assets that provides an ecosystem to maximize that amount of revenue and profits available in the live entertainment industry. Unlike most of our typical investment reports which focus on free cash flow utilization, net asset value investing, mean reversion of margins or special situations, this report will look at the investment merits of a company that generates little free cash flow at the moment and is somewhat of a growth investment if company management is successful in achieving its objectives. Their dominant size is a competitive advantage and the presence of a significant, value creating long-term investor (Liberty Media)  provides additional margin of safety from a liquidity standpoint. The strategy is not without risks and we will discuss those as well.. What follows is our analysis of the merits of Live Nation’s three year plan to grow its Adjusted Operating Income (AOI) by 30-35%.

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Don’t Wait For The Clouds To Clear – Buy ATI Now

Date: May 1, 2013       Price: 26.02    Mkt. Cap.: 2.8 billion

We recommend purchase of the shares of Allegheny Technologies (ATI).  ATI deserves enormous credit for wisely reinvesting in its basic business despite fluctuating earnings.  Too many U.S. industrial companies have increased dividends, made mistimed stock buybacks, or completed silly acquisitions.  ATI is nearing the end of a long capital investment cycle that will leave it well positioned for future growth and sustained profitability. Highly cyclical companies like ATI are notoriously difficult to understand, value, and predict.  However, it has been our experience that investors with patience and courage can profit from owning the shares of volatile companies that are competently executing a solid long-term strategic plan.

We will give an overview of ATI’s business, make an attempt at valuation, and finally discuss some of the “timing” issues involved in our recommendation

DESCRIPTION

ATI is a difficult company to understand.  It is in part a producer of many highly specialized steel alloys that have very interesting growth prospects, and above average profitability profiles.  These products include titanium alloys that have increasing importance in the manufacturing of commercial jet airframes and jet engines.  However ATI is also a large producer of stainless steel products that are closer to what one could call “commodity” grade and cannot really be considered a specialty product.   Stainless steel adds certain alloys (mainly nickel, but many other are used) to prevent corrosion and rust. Growth in these products in highly dependent on economic growth, and competition is higher, and profitability is lower and much more volatile.

The slide below is borrowed from ATI’s 2012 annual report.



Some important things to note:

  1. 79% of sales are high-vaue products, only 21% is commodity grade

  2. potential growth areas like aerospace and oil/gas are 51% of sales

  3. the remainder is widely diversified, withonly an 8% exposure to the cyclical automotive business

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One-Hour Analysis of Northrup Grumman

From Value Line

  • Stock has consistently underperformed since 2002, stock has been flat for over 10 years
  • Stock is cheap in term of cash flow, not that cheap in terms of book value
  • Took a big charge in 2008, a pretty good size negative
  • Made several large and probably bad acquisitions in 2001-2
  • Have done a spectacular job of deleveraging ever since
  • Balance sheet is almost “too good”, they could certainly afford acquisitions, over $3 billion in cash
  • Margins are at all time highs, this is more a negative than a positive
  • Impressive size of stock buyback, these guys have really “got religion” in terms of really working for shareholder
  • VL shows small pension liability, this needs further investigation
  • Lots of mixed signals here, not quite as clean as LLL

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