TMFDeej (99.47)

Relying on special opportunities rather than economic growth to produce gains + another quick pitch

August 30, 2010 – Comments (5) | RELATED TICKERS: WPO

Lately the direction of the overall market has been working against investors.  While this obviously is somewhat depressing to many, it is actually a good thing. The color red is always ugly in the world of investing, but when prices are falling better bargains can be found...which lead to higher yields in the long run. 

I have been very skeptical of the economic recovery for a while now. I don't think that we're necessarily headed for a double dip recession or worse like many of the bears out there foresee, but I think that we're in more if a "square root" shaped recovery, one with a huge dip, followed by a modest recovery, and then flat (though there may be a lot of volatility the net result will be flat stock prices for a while to come). The economic tailwinds that the rapid debt-fueled growth of the 90's and early 2000's provided are no longer there. 

I don't want to buy a plain old company that drifts at the whim of the economy, even if it is well-run company. I'm looking for trick and trinket stocks, ones that will perform well on their own merits in the long run and won't be significantly impacted by an economic recovery, or lack there of.  Just this afternoon I liquidated a real-life position in a well-run, stable company that pays a decent (though not amazing) dividend because it is heavily dependent upon an economic recovery to grow and I don't see any catalyst that could potentially cause its stock price to rise significantly in the future.  I'd rather sit partially in cash and be poised to pounce on any number of fascinating investments that I have been finding out there than be invested in something that just drifts on the seas of the economy.

Lately, I have actually been dedicating more and more of my real-world portfolio to special situations, companies...particularly ones that are small enough that they are ignored by the big boys (hedge funds, etc...) that I believe are either significantly mid-priced because of some sort of selling pressure that is unrelated to their business' fundamentals, i.e. a spin-off, change in accounting, temporary drop in margins, removal from an index, etc. or that have some sort of specific catalyst(s) that will unlock significant value in the future, i.e. the ouster of ineffective management, interest from an activist investor who has a successful track record, liquidations, emergence from bankruptcy, a potential positive legal verdict, or a stock where the sum of the parts is greater than the company's market cap.

One of my latest quick pitches is based upon the aforementioned "sum of the parts" thesis.

Long The Washington Post Company (WPO) 

"I'm no fan of newspapers nor of for-profit higher education right now, but The Washington Post Company's stock seems to be irrationally cheap at the moment. The value of its assets appears to be higher than its current stock price.

Here's a valuation of the company's various parts from a recent Barron's article:

Cable Television Assets: $2 billion ($3,000/subscriber)

Television Station Assets: $1 billion

Net Cash & Securities on the books: $650 million

Those three things add up to $3.65 billion, or nearly $400/share, without assigning any value at all to the company's Kaplin test prep / college unit or the Washington Post's namesake newspaper operations.  WPO's current market cap is only $3.42 billion.

The Bears have crushed the stocks of for-profit colleges lately...and rightfully so. I shorted a number of them myself in CAPS. Only a painful 28% of the students who took out government loans to attend Kaplin college courses are currently paying down the principal of their loans. Under newly proposed Federal rules, that repayment rate must rise to at least 35% in order for the school to be eligible for the government loan program.

Even with this overhang, on a sum-of-the-parts basis The Washington Post's stock looks cheap. At some point Uncle Warren might even step in and try to fix this company (one of his most famous purchases) up."

I went long WPO in CAPS this morning at $384.37/share.  I do not currently have a real-money position in this company.

Deej