February Idea of the Month: Buying a Manager Whose Performance We Love

By Travis Johnson, Stock Gumshoe, February 15, 2013

I broke up today’s piece into several different articles because there have been quite a few things going on this week with companies I follow or am interested in, so this “Idea of the Month” piece profiling one of our watchlist stocks will not (I hope) be overly long. The other piece I shared today are these if you want to catch up with those:

Sandstorm Steps Away from Political Stability, Gets Punished
Africa Oil — Results Look Great, Market Underwhelmed
Iron Falls off a Cliff — What does that mean for Altius?

And now, on to our Idea for this month — MFC Industrial.

When you buy shares of MFC Industrial (MIL), you’re really buying into the long-term performance and contrarian asset-management of CEO Michael Smith, who has compounded earnings for investors at something like 15% a year for well over a decade through a confusing array of investments, splits, company changes and contrarian investments. I haven’t bought shares myself personally just yet, but I put it on the watchlist last month, and this month I want to recommend that you take a look and consider it for yourself after we’ve dug into the business a little bit.

MFC Industrial is the result of a long history of financial engineering — takeovers, mergers, spinoffs, etc. — and it is not a company that is likely to provide rapid outperformance over the next few months, but I think it has great potential for continuing to create real shareholder value over the next several years as they roll up an inefficient and undercapitalized industry and take advantage of some very undervalued assets.

You might know MFC Industrial under the prior names Terra Nova Royalty and KHD Humboldt Wedag — the latter, in particular, was often a stock that popped up on investor screens for cash-rich companies because it traded at less than the value of its net cash on the books. KHD spun off its cement plant business and renamed itself Terra Nova Royalty, based largely on their royalties on the Wabush Iron Ore mine, and has more recently been re-engineering itself, under the new name MFC Industrial, as an industrial commodity supplier and trader. Not a sexy business, but quite a profitable one and ripe, it appears, for consolidation.

The reason MFC Industrial came to mind is that they made a big, contrarian deal ...

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