Newsletter Value Investor Insight carried an interview October 30th with Jim Clarke, who picked small cap stocks for Brandywine Global from 2001 through 2004, during which time he generated annual returns net of fees of 23.1%, versus 9.2% for the Russell 2000, according to Value Investor Insight. He started his own investment firm with partner Justin Bennitt in July 2006. Here's the excerpt from the interview in which they discusses Cavalier Homes (CAV), which was trading at $3.23 at the time of the interview:
Manufactured housing has had a valuetrap air about it for some time. Why are you interested in Cavalier Homes [CAV]?
JB: You’re right that the business has been absolutely horrible for almost a decade, as financing dried up and low interest rates made traditional homes more affordable in comparison. We look at this as a Ben Graham-type stock: very, very cheap and with very little downside. Cavalier’s market cap is currently $60 million and they have $20 million of excess cash and “idle” assets – real estate and factory property they’re in the process of selling – on their balance sheet. So the enterprise value of $40 million is under 20% of the $230 million in revenues we expect they’ll have this year.
JC: The industry is at a 40-year low, but the company is still making some money with only half of its plants operating. If the industry comes back at all, there’s a great deal of leverage on the upside. We’re not trying to call the turn, but it wouldn’t surprise us if we were at an inflection point for manufactured housing in their region. Hurricane Katrina is likely to prompt rebuilding that hasn’t materialized yet and most of Cavalier’s factories are located within 350 miles of New Orleans.
With the shares around $3.20, what do you see as a representative intrinsic value?
JB: Berkshire Hathaway’s Clayton Homes recently bought Southern Energy Homes, one of Cavalier’s competitors that has similar characteristics, at a multiple that translates to a share price of more than $5 for Cavalier. That's a Berkshire buy price, so we don't by any means see that as full value. But even that would be a very nice upside, with what we see as very little downside. Something with this balance sheet trading at less than 20% of revenues is highly unlikely to go down very much.