Chris Mayer’s “Focus on Owner Operators”

Special Notes from the Value Investing Congress for the Irregulars

Chris Mayer, who we’ve covered from time to time as Agora has teased his letters, was the last presenter of the day. He talked about owner operators, which generally means “skin in the game” — founders, families, large investors.

Owner operators have their wealth at risk, look for long term profits, it all makes perfect sense — we know that owners treat a company better than renters.

At the end of last year, the companies that paid big special dividends were heavily insider owned. During times of crisis or trouble, owner operators put MORE money to work.

Matt Houk, Virtus Wealth Masters — mutual fund that follows this strategy.

S&P 500 is float adjusted — so if insiders buy stock, the weighting in the S&P 500 goes down. The opposite of what you would want.

Examples — Bill Ackman and Howard Hughes, Covanta and Zam Zell, Kennedy Wilson (distressed bank debt) and Bill McMorrow, and Retail Opportunity Investments Corp (ROIC) and Suart Tanz

Two specific ideas:

Banks are trading at much lower price/book levels than historically — there are pretty good banks below book value. At some point, those valuations will recover.

Most of his picks, he says, and the majority that he buys personally, are thrift conversions — they’re easy money if you’re a small investor. The ones in his portfolio now where the price hasn’t yet climbed are Beneficial (BNCL), a Philadelphia thrift that’s facing DOJ investigation into their mortgages that he says will resolve itself over the next year or so, and Republic (RBCAA), which apparently has a good owner operator and strong earnings.

But the two picks he highlighted for the conference were First Citizens (FCNCA) and Atlas Financial Holdings (AFH).

First Citizens (FCNCA) — Tangible book has been rising for ten years, valuation has been falling for ten years. NC and VA, family owned and 30% controlled, refused TARP Money, trades around book. Good track record over a long period of time.

They bought back 6% of the stock at good prices when a founding family member resigned from the board. Have done FDIC-assisted transactions. Risks are in home equity lines (15% of portfolio), though they originated them. The FDIC-assisted transactions might not work out, though they look good. Could safely return 10-12% a year for five years. Where does the price/book value return? Downside is limited.


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