Dan Ferris’ “Ultimate Hedge Fund”

By Travis Johnson, Stock Gumshoe, January 23, 2008

Apparently the sexy appeal of hedge funds has not worn off yet for individual investors, because the folks at Stansberry Research keep teasing their deep value picks by comparing them to hedge funds.

Last time around it was the “secret penny hedge fund” that turned out to be Winthrop Realty Trust.

This time around, the teaser is again for the same publication (one of their more successful and expensive newsletters, Extreme Value, edited by Dan Ferris). But it’s a different “hedge fund” stock.

They consistently sell Dan Ferris as a stock-loving hermit, living in rural Oregon and spurning the attentions of marketers and the nefarious herd influence of Wall Street … apparently, he even dislikes having to brag about his track record (though of course, the publisher is happy to do so for him). I’ve never met Ferris, but I assume all that is more or less true — whether living far away from Wall Street and reading SEC filings all day makes him an adviser you want to follow is, of course, your business.

The ad mentions many other picks that Ferris has apparently made for his newsletter readers — including Korean companies Korea Electric Power and Posco, tech values Microsoft and SonicWALL, and a few others.

But what they’re selling here today is a subscription to his value newsletter, and in exchange you get to enjoy a special report:

“The Ultimate ‘Hedge Fund’ … A family business that gives away money”

Now, the Gumshoe can’t tell you what all of his picks are — or whether he has a good audited record over time. But I can tell you what this “hedge fund” stock is ….

The clues?

“The same family has run this company since its inception.”

“In just the last 8 years, the stock has returned 415% … more than 100-times the gains of the S&P 500.”

“… when you invest, you’ll own profitable interests in commodities, stocks, insurance, energy, consumer goods and luxury property – in one single investment.”

And there are a couple quotes, as we have grown to expect from these teasers, from reputable financial press outlets … which gives the teaser a lovely hint of gravitas.

“The company ‘isn’t followed by many investment analysts,’ says Barron’s. Yet, ‘its finances have never been stronger.'”

“And Forbes recently reported: ‘[The company] is a cash machine.’ Yet, ‘Still it’s too cheap.'”

Dan Ferris thinks you’re getting the stock for at least 25% less than its worth if you buy today … so what is it?

Well, the clues are not exactly thick on the ground … but the company has been in the Gumshoe’s sights for quite some time, so I can tell you with certainty that this “Ultimate Hedge Fund” is …

Loews Corp (LTR)

No, not the big hardware store that competes with Home Depot (that’s Lowe’s). This is the Loews conglomerate, built on the luxury hotel chain but now incorporating many other brands and subsidiaries in disparate industries.

And for all the New York Giants fans who are getting all excited about the Super Bowl, the Tisch family, part owners of the Giants, is indeed the same family that’s behind this little empire.

A few of those that are indirectly teased are Diamond Offshore and Broadway Pipeline, a drilling company and a pipeline company in the energy space. Highmount is their commodity company that’s actually in exploration and production.

And Loews Hotels, of course.

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And, until they spin off the tobacco holdings, Lorillard is the big cigarette company that they also majority own — it produces Newport, Kent and several other brands, and until the spinoff is completed it will continue to trade as the tracking stock, Carolina Group (CG).

They used to own the Bulova luxury timepiece brand, but sold it to Citizen just a couple weeks ago … and they have an investment portfolio and a big net cash hoard of something near $6 billion. So when you talk about companies with “dry powder” for investing in values that might come up during this time of stock market distress, Loews would have to be on the list.

They also own, as do many other conglomerates (including most famously Berkshire Hathaway) an insurer — in this case, CNA. That helps to keep cash flow quite high and can give them plenty of ammunition for making investments since a great insurance company can essentially provide free “loans” for investing activities in the form of the float (the money that policy holders have paid in that doesn’t have to be paid out in claims). I expect that if you ask Warren Buffett, “float” is probably his favorite word.

But really, though there is a bit more to the company, if you’re valuing the company the keys are the combined energy businesses (Diamond Offshore, Boardwalk Pipeline, and Highmount), the hotels, and the CNA insurance business.

The Forbes article, from about a year ago, is here if you’re interested in reading it.

And more recently, there was a good article earlier this month in Smart Money that focused on the “conglomerate discount” — how much of a discount Loews trades at, relative to the sum value of its component businesses, simply because it’s a largely family-controlled conglomerate?

(Though the Tisch family, to be fair, does not have ultimate control of the company — the big institutional holders of shares probably would continue to trust them and vote with the family, since they’ve led the company so admirably in recent years, including the last ten years or so with the current family members in charge, but the family members themselves own less than a quarter of the shares.)

I’ve written before about Loews — it was teased, also by Stansberry but for a different service — as the “Boardwalk Club” secret society last Fall, and at the time I said that I really like the company as a long term investment, but have always stayed away because of their cigarette holdings (that’s one of the few areas in which I’m personally compelled to make moral judgements about the companies I invest in). Now that they’re spinning off Carolina Group/Lorillard sometime this year, I’ll get interested and will start watching them a little more closely. Here’s an explanation of the spinoff if you’re interested.

And I found the shares interesting at $50, so it definitely catches my attention that they’re now trading at $44, though I don’t know that there’s any immediate reason why the shares should go up in a tough market.

Got an opinion to share about Loews? About conglomerates in general? About Dan Ferris? Think the Gumshoe is an idiot? Let ‘er rip!