Irwin Michael's sense of a bargain in U.S. stocks has produced better-than-average performance.
His $50-million ABC American-Value Fund returned 51.6 per cent for the 12 months ended Feb. 29, compared with the 48.2-per-cent rise of the Russell 2000 index in Canadian dollars and the 35.3-per-cent average gain of U.S. equity funds. The performance of the fund -- which Mr. Michael, president of ABC Group of Funds in Toronto, has run since its inception in 1996 -- is even stronger over the five years ended Feb. 29. In that period, the fund produced a 17.4-per-cent average annual compound return, compared with a 7.2-per-cent average annual rise of the benchmark and the 3.9-per-cent average annual gain of peers.
"I poke for stocks that have been mispriced by other investors who do not see the values that I do," Mr. Michael said. "I look for managers who can make risk-reward ratios work for their shareholders. I may find cash on a balance sheet that others have not seen. On income statements, I look for anything that can add value to the portfolio."
The following three stocks are currently in Mr. Michael's portfolio:
Prime Hospitality Corp. (PDQ-NYSE) is a Fairfield, N.J.-based owner and manager of limited-service, mid-priced hotels operating under such flags as AmeriSuites, and Wellesley Inns and Suites. Mr. Michael holds shares with an average cost of $9.20 (U.S.). There is unrecognized value in Prime's real estate, Mr. Michael said. Its rooms are valued by the stock market at $30,000 each, half of what many other chains' rooms are worth, he explained. That shows in the company's book value of $15.25 a share, which is above its $11.28 recent share price. The stock could rise to $25 if travel returns to pre-9/11 levels, Mr. Michael predicted.
The shares closed yesterday at $11.16 on the New York Stock Exchange.
Loews Corp. (LTR-NYSE) is a New York-based conglomerate that has a majority stake in property and casualty insurer CNA Financial Corp. Loews also owns Lorillard, the largest distributor of menthol cigarettes in the United States, 54 per cent of Diamond Offshore Drilling Inc., some hotels, and Bulova, the clock maker. Mr. Michael bought shares at an average cost of $41.75. They have recently traded at $60.17, below Loews net asset value of $80 a share.
Mr. Michael said the undervalued and unrelated businesses constitute a "poor man's Berkshire Hathaway," a reference to Warren Buffett's outstandingly successful conglomerate. Loews profit for the year ended Dec. 31, 2005, should rise to $6.50 a share from $5.75 a year earlier and $2.76 for 2003, he added. Loews share price should rise if the family of its late founder, Lawrence Tisch, sells control of the business or some of its many pieces, Mr. Michael said.
The shares closed yesterday at $60.90 on the NYSE.
American National Insurance Co. (ANAT-Nasdaq) is a Galveston, Tex.-based life, property and casualty insurer. With 3.4 million policy holders and assets of $12-billion, it's one of the largest but least-followed insurers in the United States. The company is controlled by the founding Moody family, which has never diluted the stock, Mr. Michael explained.
Debt-free and unleveraged, American National's 2.2-per-cent return on equity is quite low compared with the 12- to 15-per-cent ROE of most insurers. Nevertheless, profit for the year ended Dec. 31, 2005, should rise to $7.50 a share from $7 a year earlier and $6.87 for 2003, he noted. Mr. Michael holds shares with an average cost of $82 that have recently traded at $91.32. If the family sells its controlling interest, the shares could rise to $120, he said.
The shares closed yesterday at $93.27 on the Nasdaq Stock Market.
This column first appeared on GlobeinvestorGOLD.com.