Bertolet Capital on Deep Discount Value Investing

by: The Wall Street Transcript

On July 14, The Wall Street Transcript interviewed John E. Deysher, President of Bertolet Capital LLC, on deep discount value investing. Key excerpts, including his stock picks, follow: 

TWST: What are some of the bargains that you purchased over the last year that fit your criteria and the reasons why you were attracted to them?

Mr. Deysher:
Most recently we've been active in two Southern California ethnic banks, both Korean-American banks. Both have trade exposure to the Far East which continues to grow. One is Center Financial (NASDAQ:CLFC) with a market cap of about $140 million and the other is Hanmi Financial Corporation (NASDAQ:HAFC) with a $230 million market cap. We like them for a few reasons. They have maintained very strong balance sheets and have historically strong returns on assets and returns on equity. Both yield just over 2%, have strong insider ownership and are down in price. Center Financial is down from about $29 a share to $9, Hanmi is down from about $23 a share to $6. They're down because of concerns about their exposure to commercial real estate and construction loans in Southern California. This concerns us also, but the selling appears overdone and while nonperforming assets and charge-offs may continue to rise, their balance sheets should be strong enough to absorb the losses.

TWST: Were they relatively untouched by the subprime class and so on?

Mr. Deysher:
They are relatively untouched by the subprime. They are being touched by bad construction loans and perhaps bad commercial real estate loans, there's no doubt about that. Their nonperformers are creeping up and clearly we are not through that issue yet, but we took a partial position in each of these and if they get cheaper, we may add to our position. These are clearly contrarian names but I think both represent good values.

TWST: Consumer stocks have been going down with the consumer confidence level dropping. Have you found anything attractive in that area?

Mr. Deysher: Yes, we are doing some work in a couple of areas, one of which is furniture retailers. As you know, housing activity has fallen and as a consequence people are not furnishing either existing homes or newly purchased homes as before. As a consequence, the furniture chains have come down and we're doing some work on two firms, Haverty Furniture (NYSE:HVT) and Ethan Allen (NYSE:ETH) with market caps of $220 million and $680 million respectively. Both have come down in price but are profitable and have strong brand names, big stores with wide assortments, and attractive dividend yields. This is one way to play the ultimate rebound in housing without the risk of owning a homebuilder or furniture maker which is vulnerable to imports.

TWST: What other areas of the economy are bringing up bargains?

Mr. Deysher: There are two other areas which represent value at this point in the cycle. The first is manufactured housing. As you know, Warren Buffett's Berkshire Hathaway (NYSE:BRK.A) bought Clayton Homes a couple of years back. They are one of the leaders in manufactured housing. We like Nobility Homes (NASDAQ:NOBH), which is Florida based and has a market cap of about $60 million, a dividend yield of about 3% and is solidly profitable. The stock is down from $30 to $15. We like manufactured housing because the number of units sold in 2007 was 96,000 units, down 75% from the 372,000 units sold a decade ago in 1998. Why did that happen? Because mortgage rates were so low that people could afford to buy conventional site-built homes instead of manufactured homes.

We think that's going to change going forward because lenders are pulling back, requiring bigger down payments and stricter terms. As a consequence, we think a lot of people are going to be shut out of the traditional site-built homes and a manufactured home will become a viable alternative. You can buy a manufactured home for about half the price per square foot of a traditional site-built home. For the right buyer they can be attractive. The quality has risen sharply in recent years, it's almost the equivalent of conventional homes. They must meet all the building codes that conventional homes do. We're at the right point in the cycle where manufactured homes are going to do quite well and Nobility is a good way to play that.

TWST: What about cyclical companies if there's a downturn in the cycle? Is that an area of interest?

Mr. Deysher: Yes, although we don't have many cyclical companies in the portfolio right now. One stock we're analyzing now that could be considered a cyclical stock is Winnebago (NYSE:WGO). As you know, they make RVs, which are fairly cyclical. They're high priced discretionary items subject to consumer confidence, availability of financing and gasoline prices, which are up. All of these factors are going against the RV makers right now and as a consequence, Winnebago which has one of the strongest brands in the industry has come down substantially in price. It's down from about $40 a share to $10 and has a $240 million market cap. It's a market leader, is still profitable, and pays a 4% dividend yield. They've been around since 1958 and survived 50 years of cycles and I think they will be around when the cycle turns. Winnebago is a good way to have exposure to a cyclical rebound in the economy and you're paid while you wait.


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