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Monday Value Overview

The week started out poorly, other than an end of the day rally that brought the markets off their lows of the day. Bank of America (BAC), Goldman Sachs (GS) and Morgan Stanley (MS) all played a part in the carnage. For a step back, I link to Gyrodyne (GYRO), which doesn’t have a thing to do with the day to day markets. I also have a note about Sears Holdings (SHLD). Finally, my firm released its Q2 letter mentioning Barnes & Noble (BKS), and Berskhire Hathaway (BRK.B).

Banks led the way down today, especially Bank of America, Goldman Sachs, and Morgan Stanley, each of which hit two year lows. All three of these banks were in an article I wrote on Saturday: 8 Guru-Held Financials Near 52 Week Lows. At some point the market has to understand that the world isn’t going to end. With no certainty on a whole host of issues, investors are baking in worst case scenarios. It will be interesting to see how these stocks react when their earnings are announced. I think this is a buying opportunity.

Gyrodyne is a stock that I’ve held a small take in for quite some time. It’s a special situation play where the value of the stock is dependent on a court case. To be more precise, an appeal of a court case that Gyrodyne won at the trial level. If the verdict is upheld, we’re looking at a $120 stock. If it’s overturned we have more uncertainty and potentially a stock as temporarily low as $30. Anyway, I hadn’t thought of the company in awhile since it’s basically a waiting game, but Elie Rosenberg has some good information on his ValueSlant blog if this investment sounds appealing to you. I think it offers an excellent risk/reward profile. By the way, the stock is currently at $67.97 and is in the process of raising $10 million in a rights offering.

Moody's cut the bond ratings of Edward Lampert's Sears Holding even further today to Ba3, which is three notches below investment grade. Moody's attributed the drop to reduced market share and lowe revenue.

My firm released its Q2 letter today and I even mention our Bank of America holding. I also walk investors through our Barnes & Noble holding, from $14.89 all the way down to $8.45 and then back up to $19.98, which was the high point of where we sold. It was a pretty wild six months for a holding I considered to be a special situation. We’ve also increased our Berkshire Hathaway holdings for two reasons: The stock is so cheap right now we could be in for tremendous gains going forward, and there isn’t a better partner to get us through all the uncertainty about the debt ceiling. I read something recently saying that the actuarial tables have a man of Buffett’s age living to 88. That should give us plenty of time for some sort of valuation normalization.

Disclosure: Long BAC, BRK.B, GYRO

About the author:

Steven Kiel
Steven Kiel is the president and chief investment officer for Arquitos Capital Management, a Virginia-based investment management firm. He is a graduate of George Mason School of Law and a captain in the Army Reserves. He manages two spoke funds, The Freedom Fund, a value-oriented portfolio, and The Hayek Fund, a portfolio dedicated to free market principles. He can be contacted at steven.kiel@arquitos.com or through the firm's website at www.arquitos.com.

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