Martin Whitman is an influential investor known for his keen insight and in-depth shareholder letters. He is the founder and portfolio manager of the Third Avenue Value Fund (TAVFX) as well as adjunct professor at Yale University. He invests by buying and holding stocks that trade at significant discounts to intrinsic value. Usually, only when a company undergoes a fundamental change in its business or capital structure that significantly alters the security’s inherent value does he sell. Whitman has achieved a 10-year cumulative return of 91.4% compared to the 16.4% return of the S&P 500. In the second quarter of 2011, he sold out of two stocks, Cimarex Energy Co. (XEC) and Brooklyn Federal Bancorp Inc. (BFSB).
Cimarex Energy Co. (XEC)
Cimarex Energy proved a highly profitable investment for Whitman, who bought and sold with excellent timing. He first bought in the second quarter 2007 when the stock traded for an average of $39.81 a share. He added 105,122 share to his position in the third quarter when the price dropped about two dollars, and then in the fourth quarter added 1,528,876 at an average of $39.73 a share. Even though the price went up to about $70 in 2008, Whitman did not sell, and hung on as it fell to the teens in the credit crisis.
Resisting selling worked out well, because the stock shot up and he finally sold about a million shares in the second and third quarter 2010 when the stock traded at about $69. In the quarter ended April 30, 2011, he sold out the remaining 402,306 shares for an average of $105.39 a share. The stock has since fallen back down to about $90.
Cimarex Energy Co. is an independent oil and gas exploration and production company with principal operations in the Mid-Continent, Permian Basin and Gulf Coast areas of the U.S. “Our strategy centers on achieving consistent profitable growth in proved reserves and production through our drilling program and maximizing cash from production operations. Acquisitions may be made from time to time, but our principal strategy is growth through the drill-bit,” the company says.
When Whitman invested in Cimarex in early 2007, it was growing at an expeditious pace. Its net income had grown every year since it went public in 2002 until 2006, and was flat in 2007. Cash flow also increased from 2004 to 2007. This in spite of downward trending oil and gas prices in 2006. The company was maintaining a diversified drilling portfolio in response, investing about two-thirds of its total capital into moderate-risk drilling and a smaller portion into higher-cost, higher-risk projects.
In the third quarter 2007, the quarter before Whitman made his biggest purchase of shares, revenues from oil and gas sales were up to $327.8 million from $309.3 million in the same period 2006, oil and gas production volumes were up, and oil and gas prices were up. Net income and cash flow declined slightly. Other 2007 developments included that the company drilled 452 wells in 2007, total reserves increased 11% since 2006 and debt to capitalization stood at 13%.
In spite of the strong financials and growth, the stock had remained essentially flat from 2005 all the way through the end of 2007.
The reasons for exiting the position are far simpler. Whitman noted in his second quarter shareholder letter, “Fund Management exited its position in Cimarex Common, as it believed the issue to be significantly over-valued after nearly tripling in price since the Fund invested in 2007.”
Brooklyn Federal Bancorp (BFSB)
Brooklyn Federal Bancorp was an almost total loss. The bank has lost money each quarter since the quarter ended Sept. 30, 2009, though revenues have remained stable. The company earned $1.3 million in 2009, decreased from $5.6 million in 2008, which sparked a major sell-off in which the stock plunged roughly 83% over the year.
The Bank’s non-performing loans to total loans also escalated dramatically, which contributed to the sell-off. Its percentage of non-performing loans to total loans in the period ended Sept. 30, 2009 was 5.13%. In the period ended Dec. 31, 2009, the percentage leapt to 14.13%. The latest SEC filing reports that non-performing loans have increased account for 35% of the Bank’s entire loan portfolio, as of March 31, 2011.
Whitman first bought the stock in the first quarter 2007 at an average price of $13.93. In the first quarter 2011, he sold almost his entire holding for an average price of 87 cents. He sold the remaining 131,512 shares in the quarter ended April 30, 2011, when the stock traded around 50 cents.
The bank faced considerable difficulty with NASDAQ in early 2010, which sent it multiple notices that it had not yet filed its 10-K or 10-Q for 2010. The company responded that it cannot send in the forms because its accounting firm resigned on Dec. 20, 2010. The company did eventually send in the forms at the end of June. NASDAQ also sent several notices notifying the company that it was not in compliance with its rule that NADAQ companies’ publicly held shares must have a value of at least $5 million.
When the bank finally released its 10-Ks and 10-Qs, in late June, the stock increased 260%, or about $1.