Yes and Not Yes

Barron’s interviewed Irving Kahn in October 7, 2002. Kahn was then 96 years old and still running an investment management firm in New York (right now he’s still alive at 102). Also, Kahn was one of the oldest active investors and among the few who sold stocks short before the 1929 Crash.

At the time this article was published, the markets were still feeling the effects of the tech bubble burst. The S&P 500 was down about 32% ytd and down about 49% from the last peak. I believe that some of Kahn’s picks from 2002 are back in the same position they once were. The same stocks might also be suitable for purchase for the same or similar reasons. So here are some select quotes from the ‘02 interview and my short comments.

Irving, for instance, is a nuclear-power proponent, arguing that it will continue to play a vital role in electricity generation around the world. This led the Kahns to an investment in USEC, the leading supplier of enriched uranium to the nuclear industry. The formerly government-owned USEC now trades under 7, below its book value of more than $11 a share.

USEC (USU) eventually rose to the lower 20s by mid 2007. Right now, USEC trades at 4.05, which is far below its current book value of approximately $12 a share. Its trading at a deeper discount that it was over six years ago.

Irving also likes Seaboard, a thinly traded conglomerate run by the secretive Bresky family that trades at about 220 a share, a little more than half its book value of $363 a share. Seaboard has a large hog operation in rural Oklahoma and also owns Seaboard Marine, one of the largest cargo operators in the Caribbean and South America. The company amounts to a Cuba play because it’s poised to benefit if U.S. trade relations with Cuba are normalized.

“You have to think of Seaboard as an investment in a private company and not pay attention to the stock quote,” Tom says, adding that he thinks the company is worth at least double its current price.

It turned out that Seaboard (SEB) was worth way more than double its price. Seaboard appreciated rapidly, reaching a price of 1,800 in 2005. Seaboard eventually peaked at around 2,700 in 2007 and is now trading at 1,036 with a price to book ratio of 0.89.

Alan [Kahn] is partial to American National Insurance, a low-profile Texas life insurer whose thinly traded shares are around 70, a discount to their book value of $110. “American National is a wonderful statistical bargain,” he says. The stock trades at 14 times projected 2002 profit and yields 3.5%. Alan thinks the controlling Moody family eventually will sell it. “This is a stock that could double or triple overnight, but they aren’t going to tell you ahead of time when that will happen,” he observes.

Right now, American National (ANAT) is trading at 67 with a book value of 127. That’s a 52% discount.

I hope these old ideas are helpful for the present. As always, do your own due diligence.

I am a shareholder of the DWS Global Commodities Stock Fund (GCS). The 2008 Annual Meeting is coming up and there is currently an interesting and important choice. The choice will be either to elect the current Board’s nominees or the nominees of activist investor Art Lipson and his Western Investment LLC fund. I made my decision to purchase GCS solely based on the arguments set forward by Art Lipson, but I want to set out the arguments made by each side in this upcoming vote.

Directors’ Arguments

First, GCS claims that the fund has performed well. YTD, “the fund has outperformed its peer group on both an NAV total return basis and on a market total return basis.” GCS experienced a -0.17% market return versus a -6.25% market return for the peer group. Since inception (Sept. ‘04), GCS delivered a total NAV return of 106.55% while the total market return has been 80.22%.

Second, GCS believes the Fund’s closed-end structure has helped contribute to its returns because it allows the Fund to remain fully invested in the markets and respond more quickly to market conditions.

Third, GCS is against the possibility of converting GCS into an ETF or ETN, open-ending, or liquidating the fund. GCS argues any of these actions would involve significant costs that would be borne by the fund.

Fourth, GCS claims that Lipson’s interests are not aligned with GCS stockholders. GCS calls attention to Lipson’s statement in an SEC filing where he says he has hedged out the commodity exposure and is just “playing the discount to narrow.”

Fifth, GCS argues that if Lipson and his nominees are elected to the Board, they will have have conflicting loyalties because they will owe allegiance both to the fund and its stockholders and also to the Western Investment funds.

Lipson’s and Western Investment’s Argument

First, Lipson feels that GCS’s NAV discount is unacceptable:

GCS’s Share price has traded at a persistent discount to its per Share net asset value that has averaged 13.3% between January 1, 2005 and June 30, 2008, and as great as 16.6% on August 17, 2007.  Thus, when GCS stockholders sell their Shares they are forced to leave behind a sizeable portion of the value underlying those Shares.  We believe that the persistence of this discount is, in part, due to the perception that the persistent and substantial NAV discount is not being addressed by the GCS Board.  Any time a stockholder chooses to sell his or her ownership of a closed-end fund at a steep discount to NAV, that stockholder is harmed no matter what the fund’s discount was at the time the stockholder purchased their shares of that fund.  When a NAV discount is excessive, a selling stockholder is forced to leave behind a substantial portion of the value underlying the shares at the time of sale.  We believe the fair value of a share of common stock of a closed-end fund should be its NAV, or a value very close.

Lipson notes that GCS has frequently been among the worst of all closed-end funds in terms of discount to NAV and has frequently traded in the bottom 1% of all closed-end funds in terms of discount to NAV.

Second, Lipson believes the current independent members of the GCS Board, who receive compensation from service on 133 funds, may be too beholden to the Fund’s investment manager. All incumbent independent GCS directors are a director of at least 133 of the 136 total funds in the DWS fund complex.

While the current composition of the GCS Board appears to satisfy applicable securities and investment company laws, Lipson questions whether service by each of GCS’s handpicked independent directors of at least 133 funds is in the best interests of GCS’s stockholders.  Lipson believes an independent director should not be a director of 133 funds in the DWS fund complex. Also:

• we believe that in serving as a director of so many registered investment companies inherent conflicts may arise.  For example, we believe a person serving in such multiple positions may become unduly beholden to the Fund’s investment manager, and less inclined to act in the best interests of GCS’s stockholders, although we have no direct evidence that any of GCS’s directors have acted in this way;
• we question whether directors who collect, on average, over $200,000 each in annual fees in the aggregate for their service on at least 133 DWS boards are too beholden to the investment manger to take decisive action that benefits stockholders if it would negatively affect the fees collected by Deutsche Investment Management, the Fund’s investment manager;
• we question whether the current directors are the best people to perform the essential task of evaluating the performance of the Fund’s investment manager

Third, contrary to GCS’s opinion that the Fund has performed will, Lipson points to the performance since inception as an indicator of sub-par performance. Annualized return for the GCS market price since inception is 16.53% compared to a return of 20.95% for the benchmark.

My Thoughts

I am still going to vote my shares for Western Investment. I find Western’s arguments to be more persuasive. Western Investment has a history of creating shareholder value in closed-end funds trading at steep discounts to NAV. I feel that Western Investment’s interests are more aligned with the other shareholders of GCS because Western owns 11.29% of the outstanding shares. I do not believe that the interests of the current GCS directors are aligned with shareholders because they seem to earn a living from their hundreds of directorships on the boards of other funds. Also, pretty much every one of the GCS directors have a paltry stake in their own fund. Like Warren Buffett, I believe a director ought to have a sizeable stake in their company or fund.

Last night I stayed up way past my normal bed time listening to excerpts of the Longleaf Partners Funds’ most recent annual presentation. Though the presentation took place back in May, I’m glad I eventually got around to listening. Mason Hawkins and Staley Cates are the two main guys who run Longleaf and they are true-blue value investors.

The two qualities that impressed me the most - aside from their impressive investing record at Longleaf - were their confidence in themselves and their wit. Hawkins and Cates responded to questions with commanding knowledge and reiterated their investing philosophies in a way that their audience could easily understand.

Turning now to stocks, Dell (DELL) is the top holding of the Partners Fund (LLPFX), taking up 9.3% of the portfolio. This is a huge stake, and after listening to the excerpts of this year’s presentation, I am pretty convinced that Dell is presenting a great opportunity for investors.

Cates and Hawkins go into some detail on the reasoning behind their Dell investment during their response to a general question about technology investing. According to Longleaf, Dell has:

• strong, organic revenue growth;
• cash flow growth that’s even higher;
• value that’s growing even faster than cash flow because they’re buying back very cheap stock at a rapid pace; and
• an opportunity to provide their products to everyone in the world

Hawkins says that Dell isn’t a tech company—it’s more an assembler or retailer.

Additionally—and more tantalizingly—Hawkins feels that Longleaf has “an eight- to ten-bagger” with Dell. Hawkins made this statement in May when Dell was at $20. Today, Dell is back at $20 after plunging the most in almost eight years after saying the U.S. slump in technology spending has moved abroad. I think this is probably another opportunity for Longleaf, Dell, and perhaps other like-minded investors to purchase even more shares.

Bloggingstocks writes about ten stocks that are better than CDs. There are two separate posts: this one and this one. Most of them are related to the energy sector, a couple of banks, and one consumer discretionary pick.

However, if you feel safe trusting your money with WaMu, they are offering 5% for a 12 month CD in an environment where few banks are offering more than 4.25%.