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The Martin Whitman Stock Screen - Nov. 6 2012
Posted by: Mark Lin (IP Logged)
Date: November 8, 2012 10:07AM

Martin Whitman and Third Avenue's Investment Philosophy is rooted in the concept of "safe and cheap."

Safe stocks have strong financial position - a relative absence of liabilities (no debt) and high quality assets (cash). Also management should be OPMI-centric (significant insider ownership is more likely to align management interests with that of shareholders). The company should be profitable over the mid-to-long term.

Cheap stocks should trade at a significant discount to intrinsic value (Third Avenue is essentially a asset/book value investor although they do their own revalued net asset values calculations especially property stocks).

Martin Whitman "Safe and Cheap" Screen

I have done a "Martin Whitman Screen" based on the following criteria using closing stock prices as at Nov. 6, 2012.

- No debt
- Cash as a percentage of market capitalization greater or equal to 20%
- Price to tangible book less than 1.5
- Positive return on equity (trailing 12 months) and return on equity (five-year average)
- Insider ownership greater than 10%

The following stocks passed the test:

Air T Inc. (AIRT)

Air T Inc. operates wholly owned subsidiaries in three industry segments. The overnight air cargo segment consists of its Mountain Air Cargo Inc. (MAC) and CSA Air Inc. (CSA) subsidiaries, operates in the air express delivery services industry. The ground equipment sales segment consists of its Global Ground Support LLC (GGS) subsidiary, manufactures and provides mobile deicers and other specialized equipment products to passenger and cargo airlines, airports, the military and industrial customers. The ground support services segment consists of its Global Aviation Services LLC (GAS) subsidiary, provides ground support equipment maintenance and facilities maintenance services to domestic airlines and aviation service providers. The Company's overnight air cargo services are provided primarily to one customer, FedEx Corporation (FedEx).

- Cash as a percentage of market capitalization = 27.7%
- Price to Tangible Book = 0.77
- Positive Return on Equity (Trailing Twelve Months) = 4.6%
- Return on Equity (5 Year Average) = 13.4%
- Insider Ownership = 13.3%

Peerless Systems Corp. (PRLS)

Peerless Systems Corporation (Peerless) licenses imaging and networking technologies and components to the digital document markets, which include original equipment manufacturers (OEMs) of color and monochrome printers and multifunction office products. The company licenses software-based imaging and networking technology for controllers in embedded, attached and digital documents products, such as printers, copiers and multifunction products (MFPs) of OEMs. The company's embedded application solution offerings also incorporate imaging and networking technologies developed internally or licensed from third parties. Licensing revenues were 100% of total revenues, during fiscal 2012. The company derives all of its revenues from direct sales to digital document product OEMs.

- Cash as a percentage of market capitalization = 79.1%
- Price to Tangible Book = 0.91
- Positive Return on Equity (trailing 12 months) = 10.3%
- Return on Equity (five-year average) = 26.6%
- Insider Ownership = 27.1%

Superior Industries International Inc. (SUP)

Superior Industries International Inc. is engaged in the designing and manufacturing of aluminum road wheels for sale to original equipment manufacturers (OEMs). The company is a supplier of cast aluminum wheels to the automobile and light truck manufacturers, with wheel manufacturing operations in the United States and Mexico. The company operates five manufacturing facilities in the U.S. and Mexico. Products made in its North American facilities are delivered to automotive assembly operations in North America, both for domestic and internationally branded customers. Its OEM aluminum road wheels are sold for factory installation, as either optional or standard equipment, on many vehicle models manufactured by Ford, General Motors (GM), Chrysler Group LLC (Chrysler), BMW, Mitsubishi, Nissan, Subaru, Toyota and Volkswagen.

- Cash as a percentage of market capitalization = 44.2%
- Price to Tangible Book = 1.01
- Positive Return on Equity (
trailing 12 months) = 15.1%
- Return on Equity (
five-year average) = 0.3%
- Insider Ownership = 10.8%

In Closing

I will appreciate suggestions from readers on how to improve the Martin Whitman screen. Also a screen is the first step in narrowing down the list of potential candidates and a precursor to in-depth research and due diligence.

Guru Discussed: Martin Whitman: Current Portfolio, Stock Picks
Stocks Discussed: AIRT, PRLS, SUP,
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Rating: 3.4/5 (5 votes)

Re The Martin Whitman Stock Screen - Nov 6 2012
Posted by: mohmand (IP Logged)
Date: November 8, 2012 08:15PM

Interesting idea with the screen, and it should be noted that Third Avenue does own SUP. If you do want to continue on with the screen, in an article from last year Michael Lehmann a PM a Third Avenue noted:

"Lehmann first looks at debt. The company has to be able to roll with a short-term setback. He likes to see the ratio of debt to total capitalization (debt divided by shareholders’ equity plus debt) under 50%. He then looks for an above-average return on equity and a high percentage of the management’s own net worth invested in the company. When calculating the price-to-book ratio, Lehmann removes goodwill—a price put on intangible assets, like a strong brand name—in order to get a company’s tangible book value. As with P/E, the lower the ratio, the cheaper the stock. He also looks for companies that trade for under 10 times normalized earnings, under five to six times EBITA, and free cash flow yields should be in the 7% to 10% range. "

But in all honestly and from studying Third Avenue, I think it is pretty difficult through screens to uncover the companies and situations they run into. For instance, Amit Wadhwaney noted they bought companies that owned zinc mines when the prices were in a trough and companies had to significantly write down the value of mines, so if you used a screen for TBV for would of never found it.

Guru Discussed: Martin Whitman: Current Portfolio, Stock Picks
Stocks Discussed: AIRT, PRLS, SUP,
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Rating: 5.0/5 (1 vote)

Re The Martin Whitman Stock Screen - Nov 6 2012
Posted by: marklin (IP Logged)
Date: November 9, 2012 06:33AM

Hi Mohmand, thanks for your comments.

I have not read the article on Michael Lehmann previously, and it does sound interesting, given that Martin Whitman typically does not mention quantitative criteria in his writings. The current Martin Whitman screen already incorporates low P/NTA (Net tangible assets), positive ROE, a strong financial position and insider ownership. I will look into incorporating some of Lehmann's thoughts such as P/E, EV/EBITDA and free cash flow yields into future versions of the Martin Whitman screens.

I agree with you that it is impossible to run screens to uncover all of Martin Whitman/Third Avenue investments (unlike say Benjamin Graham) because of Whitman's mesh of quantitative and qualitative criteria, in-depth research and how he views investments through the lens of credit analysts, investment bankers, distressed workout investors.

That said, I have never encountered a Martin Whitman screen in my years reading online. It was a pleasant challenge and I was glad that Superior Industries, an existing Third Avenue Holding was "uncovered".

Guru Discussed: Martin Whitman: Current Portfolio, Stock Picks
Stocks Discussed: AIRT, PRLS, SUP,
Rate this post:

Rating: 3.0/5 (1 vote)

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