Marty Whitman is a vulture of a value investor. Whitman, manager of the Third Avenue Value Fund TAVFX, can usually be found rummaging through the rubble of distressed stocks--those of beaten-down companies, some on the brink of insolvency. But most of Whitman's depressed stock plays eventually turn around for the better. The key to Whitmanesque stock-picking: Buy companies that are cheap (presumably because of some temporary issue) and safe, and hold on to them.
Whitman is a value investor after Benjamin Graham's own heart. Like Graham, Whitman looks for stocks that are dirt cheap, but the two investors use different measuring sticks. Graham used a company's price/book ratio to determine whether its stock was cheap. He generally wouldn't buy a company unless its stock was trading for less than 1.2 times book value per share.
Whitman takes a different approach. He focuses on a company's takeover value, or how much he thinks a buyer would pay to buy the whole company. Whitman doesn't like to use book value because he says it overlooks too many intangibles. For instance, a money-management firm can use its reputation and relationships to gain additional business. Its reputation and relationships are assets, so to speak, but they don't appear as such on a company's balance sheet. According to Whitman, takeover value accounts for such intangibles.
Whitman combs through a company's financial statements to figure out what he thinks the business is worth. He then checks to see whether the company's balance sheet has remained strong in spite of setbacks in the business. He will generally pay no more than 50% of what he thinks a buyer would pay to acquire the whole firm.
It can take a long time to unlock the value of a beaten-up stock. As long as a company is safe and cheap, Whitman is willing to wait.
Bill Nygren >>