Deep-value investor Daniel Khoshaba's KSA Capital Partners (now renamed KSA MidOcean) has delivered an annual return of 10.1% after fees since inception in 2004 - trouncing its competition and the S&P 500. He walked between raindrops in 2008, gaining 3.6% while the S&P lost 37%, but just 27% long exposure to the market this year has the fund lagging by nearly 5%. Three current favorites are Owens-Illinois (OI), Dana Holding (DAN), and Pinnacle Entertainment (PNK).
The world's largest maker of glass containers, Owens is in the sweet spot of being able to raise prices. With the extra cash, it's paying down debt and eventually will begin buying back stock.
Despite nearly doubling in the past 2 years, auto-parts maker Dana still trades at just 4x free cash flow and far below Khoshaba's price target of $38. The company recently announced plans to buy back about 30% of its stock.
A newish holding, Pinnacle was added to the portfolio after agreeing to buy rival casino Ameristar. The cost savings should allow Pinnacle to generate a 15% free-cash-flow yield in 2014 - well above Khoshaba's threshold of 10%. His price target is $40.
While not disclosing whether he's covered successful shorts in Timken (TKR) and Caterpillar (CAT), Khoshaba recently told investors recovery is unlikely for the companies because they depend on commodities where "production far outstrips demand." He's short BHP Billiton (BHP, BBL) for similar reasons.