The Microcap Speculator submits: The recent freefall in BKF Capital (NYSEARCA:BKF) has me very tempted. Operating through its subsidiary John A. Levin & Co., BKF is both a traditional institutional money manager (like Nuveen or T. Rowe Price) and a hedge fund operator. Before we get too far into the bull case, let's talk about the reason it has lost so much of its value.
BKF shocked the market in mid-October with back-to-back announcements that it was winding down the event-driven hedge fund that represented 44% of revenues, and that it was restating results to correct the way it classified restricted stock it granted to high level employees as part of their compensation.
With news like that, why even consider the stock?
First, the event-driven hedge fund did not collapse a la Refco. Rather, the fund manager (Henry Levin, son of founder John A. Levin) was asking for more money than the company thought was reasonable. BKF made a business decision to shutter the fund rather than pay the $10 million Levin is believed to have demanded. The end result is that the company will lose a large chunk of revenue, but will also face reduced trading risk and reduced expenses. At the end of the day, I believe this will be at most a slight negative.
Second, the restatement had no effect whatsoever on BKF's earnings. It seems to be an honest and rather trivial mistake, not fraud.
Third, the balance sheet is great. BKF has a market cap. of $128.39M, and $47.64M in net cash, giving it an enterprise value of roughly $81M. That is a pittance compared to the $8.8 billion in assets under management for just the traditional money management. At today's prices, you get that core business on the cheap, and whatever is left on the hedge fund side for essentially free.
Finally, this stock is in the control of shareholder activists led by Steel Partners. I like to be in that company. They will keep costs under control and maximize value in the core asset management business.
DISCLOSURE: I have no position in BKF. Not a recommendation to buy or sell any security. For informational and educational purposes only.
BKF 1-Yr Chart