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Summary: New York-based hedge fund MFP Investors LLC, led by legendary investor Michael F. Price, manages more than $1 billion including $640 million in U.S. equity assets. The fund uses a value-based approach targeting small cap out-of-favor stocks in picking the investments. Four attractive buys from the fund portfolio include multimedia publisher McGraw-Hill Companies (MHP), medical supplies and instruments provider Becton Dickinson & Co. (BDX) and diversified conglomerate ITT Corp. (ITT).

New York-based MFP Investors LLC, founded in 1998 by Michael F. Price is a value focused hedge fund manager. The firm manages more than $1 billion in assets, including $640 million in U.S. equity assets. Price started his career when he joined Max Heine at Mutual Series in 1973, eventually taking over the firm after Heine’s death and selling it to Franklin Templeton Investments. In 1998, he stepped down from day-to-day fund management activities at Templeton, and in 2001 he left to begin his own hedge fund, MFP Investors LLC. He is worth an estimated $1.4 billion and ranked as the 562nd richest person in the world. He has been featured on the cover of Fortune magazine and has been listed by Time magazine as one of the 25 most influential people in America. Price’s unique value-based approach to investing includes buying out-of-favor small-cap companies at good valuations.
The fund holds a moderately diversified portfolio of 117 positions, with a third of its holdings in large caps, a fifth in mid caps, and the remaining 45%-50% in small caps and micro caps. Its portfolio turnover is 50% implying an average holding period of two years. Based on the most recent SEC 13-F filing for the March 2011 quarter, we determined that the portfolio is over-weight transportation (5%), services (23%) and financial (27%) sectors, and it is under-weight technology (4%), energy (8%), utility (1%) and consumer non-cyclical (3%) sectors, compared to the weighting of these sectors in the overall economy.

The following summarizes its largest new buys and sells in the latest reported 13-F filing for the March 2011 quarter, and updated based on any 13-G filings since the end of the quarter:

  • Financial sector: MFP maintained its portfolio in the financial sector at $170 million. However, this was accomplished by some re-shuffling, including adding $13 million to its $20 million position in global financial services company Citigroup Inc. (C). The position in C was opened in the $40 range at the end of 2009 and the stock has been in a $35-$50 trading range since then, so MFP adding more to this position is a sign of their conviction in this position. Besides, it also has a large $27 million position in regional bank West Coast Bancorp (WCBO) and a $24 million position in life insurance company Symetra Financial Corp. (SYA).
  • Service sector: Buy McGraw-Hill Companies (MHP). MFP added $18 million to the prior $128 million position in the services’ sector, including adding $22 million to the prior $1 million position in department store chain Penney J C Co. (JCP). JCP trades at a forward price-to-earnings (P/E) ratio of 16, which is near the top of its historic P/E range while revenue is flat year-over-year with good margin growth. Analyst targets for JCP are in the mid-$30s to $40, so there is not much upside from current levels. MFP also has a large $18 million position in McGraw-Hill Companies (MHP), a publisher of information products for the education, financial services and business information markets worldwide. The company has rapidly transformed itself from a book publisher to a multimedia publisher, including books, magazines and newsletters as well as software and online data services. The position in MHP was opened in the $40 range at the beginning of 2008. MHP trades at a forward 15 P/E, near the low end of its historic P/E range, both revenue and margins are expected to grow year-over-year and analyst targets are in the $40. We believe that MHP is attractive at these levels, and a position can be built on any pullback.
  • Healthcare sector: Buy Becton Dickinson & Co (BDX). MFP added $7 million to the prior $28 million position in the sector, including mostly $6 million in French pharmaceutical giant Sanofi (SNY) that doubled their prior position to $12 million. The position in SNY is from the conversion of Genzyme shares that was acquired by SNY in October 2010; the position in Genzyme/SNY was opened in the low-$30s in the summer of 2010. The doubling of that original position is a sign of high conviction in this position. SNY trades at a forward P/E of less than 8, near the lows of its historic trading range. However, revenue is projected to be flat going forward while margins are projected to drop, so the stock is not that attractive from a fundamental standpoint. Furthermore, MFP also added $6 million to its prior position in medical supplies and instruments provider Becton Dickinson & Co. (BDX). That position was initiated in the $70 range at the end of 2009, so MFP adding more in the $80 last quarter is a high conviction buy. BDX trades at a forward 15 P/E, near the bottom of its historic trading range and revenues and margins are projected to rise modestly, making this an attractive buy on any pullback near $80.
  • Capital goods sector: Buy IIT Corp. (ITT). MFP opened a new position in diversified conglomerate ITT Corp. (ITT), a provider of tactical networking, electronic defense, surveillance, pump systems and fluid handling equipment. ITT currently trades at a forward 12 P/E near the bottom of its historic P/E trading range; revenue and margins are projected to rise modestly, and analyst targets are in the mid-$60s to $70, making this an attractive buy at current levels and especially on a pullback. MFP also closed out its $13 million position in Ingersoll-Rand Co CLA (IR), a manufacturer of a diverse range of industrial and commercial products, including climate control units, fluid handling systems, compressed air systems, biometric access control systems and energy efficient solutions. The position was opened in the $40s at the beginning of 2008, and they have been on the wrong side of this position since as it fell to below $12 in 2008/09 crisis. IR currently trades at a forward 15 P/E, which is near the low end of its historic range while revenue and margins are expected to grow strongly in the short-term. The stock has pulled back almost 20% from its rally highs set in May, making it an attractive buy on any further pullback.
Table

Company

Ticker
Action
Market Value at end of March 2011 Quarter
Change in Value from Prior Quarter
Percent of Portfolio
Percent Shares Owned
Top Buys and Sells
ITT Corp.
New
$ 37 million
$37 million
5.82%
0.34%
Penney J C Inc.
Add
$ 23 million
$22 million
3.64%
0.30%
Ingersoll-Rand Plc
Drop
$ 0 million
($13) million
0.00%
0.00%
Citigroup Inc.
Add
$ 33 million
$13 million
5.11%
0.03%
Airgas Inc.
Drop
$ 0 million
($8) million
0.00%
0.00%
Abitibibowater Inc.
ABH
Drop
$ 0 million
($6) million
0.00%
0.00%
Sanofi
Add
$ 12 million
$6 million
1.93%
0.01%
Encore Cap Group Inc.
Drop
$ 0 million
($5) million
0.00%
0.00%
Top Holdings
Conocophillips
Same
$ 28 million
$0 million
4.34%
0.02%
West Coast Bancorp
Same
$ 27 million
$0 million
0.93%
8.84%
Gulfmark Offshore Inc.
Same
$ 25 million
$0 million
3.86%
2.08%
Symetra Finl Corp.
Same
$ 24 million
$0 million
3.82%
1.51%
Becton Dickinson & Co.
Add
$ 19 million
$6 million
3.00%
0.11%
Mcgraw Hill Cos Inc.
MHP
Same
$ 18 million
$0 million
2.75%
0.15%
Credit: Historical fundamentals including operating metrics and stock ownership information were derived using SEC filings data, I-Metrix® by Edgar Online®, Zacks Investment Research, Thomson Reuters and Briefing.com. The information and data is believed to be accurate, but no guarantees or representations are made.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Disclaimer: Material presented here is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. Further, these are my ‘opinions’ and I may be wrong. I may have positions in securities mentioned in this article. You should take this into consideration before acting on any advice given in this article. If this makes you uncomfortable, then do not listen to my thoughts and opinions. The contents of this article do not take into consideration your individual investment objectives so consult with your own financial adviser before making an investment decision. Investing includes certain risks including loss of principal.
Source: 3 Buys From Legendary Investor Michael Price