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Tuesday Value Overview

Tuesday’s Value Overview edition notes Greenlight Capital’s new position in Huntington Ingalls (HII), a decision from George Soros, a Barron’s piece on the federal debt mentioning ConocoPhillips (COP), Costco (COST), and Intuit (INTU), and a Berkshire Hathaway (BRK.B) throw-in from me, and an earnings release from Charles Brandes-owned SuperValu and its performance relative to Safeway (SWY).

David Einhorn’s Greenlight Capital disclosed a 5.1% ownership interest in Huntington Ingalls today. This is a classic spin-off play. Shares began trading in late March and had fallen about 14% before today’s share price rise. Huntington Ingalls used to be a part of Northrop Grumman. The company is a ship builder for the U.S. military. When I stuck the name in Google News, the first result that popped up was the company’s plans to hire 10,000 to 15,000 workers in the next five years. Spin-offs typically trade off compared to their peers soon after being spun off the parent company. The companies also tend to outperform their peers over their first few years as management can be more nimble and responsive to their customers. The sell-off effect isn’t as great as it used to be because savvy investors recognize the phenomenon, but it still happens. This might be one to take a closer look at.

Investing legend George Soros, who had previously closed his fund to outside investors, is now returning the rest of the investor money he had been managing. Going forward, the fund will manage his own money only and transition into a family office. Only about $1 billion of the $26 billion under management is from outside investors. The move was spurred by new hedge fund regulations that would have required additional disclosures from Soros. According to GuruFocus, Soros’ five largest stock positions are in Adecoagro, Interoil, Motorola Solutions, Monsanto and Dendreon.

Barron’s has an interesting piece today at Some Corporate Bonds Are the New Treasuries? Steven Sears points out that U.S. government has higher CDS prices than 22% of investment-grade corporate bonds. That makes sense. After all, wouldn’t you rather own bonds in Berkshire Hathaway than in the federal government? Berkshire isn’t even one of the 22, which includes names like ConocoPhillips, Costco and Intuit. J.P. Morgan is pitching a “Low Expected Default Risk Basket” options strategy to capitalize on the phenomenon.

Value favorite, SuperValu, jumped nearly 7% today on solid earnings. I expect it to trend higher going forward compared to its peers. Unfortunately today’s price jump only puts shares back to where they were before Safeway’s earnings announcement last Wednesday night. Safeway shares are down about 15% since then. Q2 EPS was $0.35 per share and management reiterated 2011 guidance of $1.20 to $1.40 per share. With shares around $9 and the company continuing to pay down its debt, there appears to be some safety in the stock going forward. Charles Brandes owns about 4.4% of the outstanding shares.

Disclosure: Long SVU, BRK.B

The Purchase Price

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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