As a value investor, I have to constantly guard against the tendency to buy a stock too soon, before it has hit bottom. After all, the early bird may get the worm, but the second mouse gets the cheese.
Last year, my initial purchases were too early more often than not. I typically try to scale into a position and with all of the volatility last year, there was ample opportunity to do that. I’ve got our portfolio set for 2011, and I don’t expect dramatic changes over the next few months, barring drastic price changes.
We have a unique strategy for my firm’s flagship spoke fund, The Freedom Fund. We put a portion of the portfolio in value stocks, a portion in stocks who we feel have superior leadership, and a portion in special situations. This approach served us well in 2010, and we’re excited about the prospects in 2011.
To kick off the New Year, let’s take a look at our top 11 picks for 2011 in The Freedom Fund, along with a short thesis for each choice.
- Barnes & Noble (BKS): While I don’t like the business model, there continues to be a battle between CEO Len Riggio and activist investor Ron Burkle. The company is currently up for sale and Riggio must make a higher offer because of Barnes & Noble relationships that are friendly to his family. Bill Ackman recently said he’d finance a buyout through Borders up to $16/share. It currently trades just under $17, and I expect a buyout price above $20.
- Synovus Financial (SNV): 2011 will be the year of the regional bank. Synovus raised new capital earlier in 2010, and now has a tremendous cushion. In any scenario, this bank will survive. Loan loss reserves are declining quickly and I expect profitability to return in 2011.
- Biglari Holdings (BH): I’ve written on Biglari Holdings before. See Biglari Holdings: Ready for the Next Phase of Growth. Their largest holding, Steak n Shake, will see growth in 2011, and I expect Sardar Biglari to continue to properly allocate capital within this holding company structure. 2011 will be an investment year for them, and earnings may be flat to down, but those investments will pay off in the future, and we want to be around as shareholders to collect.
- Bank of America (BAC): It’s not just regional banks that will do well in 2011. Bank of America will start to get to normalized earnings as well. Dodd-Frank will hurt, but no one should doubt that banks will find other ways to ding customers and replace revenue. Plus, the Merrill Lynch acquisition (read: bailout) will be very accretive to earnings. Wikileaks dump or not, BAC should be a lucrative place to be this year.
- Huron Consulting (HURN): I’ve held Huron Consulting since I was sure they would survive after a scandal in the summer of 2009. They’ve thrived since then, and as those problems become more of a dot in the rearview mirror, the market will reward them with a multiple more in line with their history.
- SuperValu (SVU): There have been some good things written about SuperValu on Seeking Alpha and I encourage you to take a look at them. Cash flow remains strong and they continue to pay down debt. Despite their margins getting squeezed, SuperValu is just too cheap based on nearly any metric.
- Greenlight Re (GLRE): This is a reinsurance company where their float is invested in David Einhorn’s hedge fund. If you’re a fan of Einhorn, as I am, then you’ll happily ride on his coattails until the stock becomes obviously over-valued. This investment is a classic example of our superior leadership play.
- Neutral Tandem (TNDM): My friend Cale Smith of Islamorada Investment Management wrote up a great piece early last year on Neutral Tandem. I encourage you to read High Conviction: A 'Stunningly Cheap' Telecom Stock. While they’ve made a large acquisition since the write-up, the stock continues to be too cheap.
- Protalix (PLX): Protalix is an incredible company that I’m proud to be an investor in. In the short term, they have a drug for Gaucher disease that will be approved in the U.S. in early 2011. That approval will, of course, be great for the company and profitable for its shareholders, but the most important aspect of Protalix is the unique manufacturing process they’ve developed. They use a much cheaper plant cell process, as opposed to an animal cell process. They’re the only company that does this and this process is the future for other biotechs. Protalix will either be bought out because of this process or be able to license it to other biotechs. The stock price gives this no credit.
- Compass Diversified (CODI): Joe Massoud runs this public company like a private equity shop. He makes shrewd investments, and smartly raises money to make acquisitions, while returning cash to shareholders. We'll happily own the stock and let Joe do all the work for us.
- Feihe International (ADY): This Chinese dairy company manufactures milk and baby formula. It’s a bet on the rising middle class and China’s new focus on expanding and sustaining the income of its vast workforce. They were one of only a few Chinese dairy companies who were not implicated in a melamine scare in 2008. The stock price has been crushed over the last few years, but I expect considerable gains this year.
Most of these companies are small, with the notable exception of Bank of America. That’s not necessarily by design, but the small cap space is where you’ll find the most disparities between price and value.
I also believe in a focused portfolio. These 11 holdings make up about 75% of The Freedom Fund. That concentration shouldn’t scare you. The diversity of the industries we hold will help blunt some of the natural volatility. More importantly, though, the large margin of safety in these stocks provides protection from extreme downside losses.
I don’t know where the overall market will be at the end of 2011 and, to be honest with you, it’s not something I think or worry about. I do know these companies very well, though, and I’m confident that however the overall market does, these holdings will perform well.