I talk a lot about compounders–businesses that produce lots of cash flow and have opportunities to reinvest that cash flow at high rates of return. Such businesses that produce high returns on capital can compound their intrinsic value at above average rates over time, and the stock price follows intrinsic value over the long haul.
But while I spend time reading and researching great businesses, occasionally I come across an opportunity to buy a bargain–a stock trading for less than the value to a private owner. Sometimes these opportunities are created through special situations such as a spinoff.
Associated Capital (AC) is an example of this type of bargain. It trades for less than the net cash on its balance sheet, for about 70% of tangible book value (a portion of which is hidden due to an accounting rule), has an insider with over $500 million invested in it who wants to close this value gap, and a recently announced buyback.
The Bedford Park Opportunities Fund returned 13.5% net of all fees and expenses in the second quarter of 2021, bringing its year-to-date return to 27.6%. Q2 2021 hedge fund letters, conferences and more In the fund's second-quarter investor letter, which ValueWalk has been able to review, Jordan Zinberg, the President and CEO of Bedford Read More
AC is basically a big pile of cash worth about $40 per share that can be purchased for the current stock price of around $29. This $40 per share of tangible value gives no value to a $1 billion hedge fund that AC manages.
Given the insider incentives, future buybacks which will add to value per share at these prices, and a stock price that is trading at far less than book value, I think the stock is certainly a safe and cheap bargain.
This post is just a snapshot of the idea. I wrote a post on Seeking Alpha that covers this investment in more detail as well as my thoughts on how the situation came about.
John Huber owns shares of AC. Clients of Saber Capital Management own shares of AC. This is not a recommendation. Please do your own research.
John Huber is the portfolio manager of Saber Capital Management, LLC, an investment firm that manages separate accounts for clients. Saber employs a value investing strategy with a primary goal of patiently compounding capital for the long-term.
I established Saber as a personal investment vehicle that would allow me to manage outside investor capital alongside my own. I also write about investing at the blog Base Hit Investing.
I can be reached at [email protected]