Jan. 26–“Every dog has his day” could be one explanation for why investors are coveting shares of traditional Rust Belt laggards.
Hedge fund manager Jeffrey Gendell offers another explanation: We’re on the brink of what he believes will be the strongest economic recovery in 25 years. Most of the bonanza, Gendell insists, will be centered in the battered industrial sector of the U.S. economy.
Comments the Greenwich, Conn., money manager made to that effect in Barron’s last month got a lot of play, particularly in the good news-starved Rust Belt. Before you get pixilated by the prospects, take a look at what’s in Gendell’s wallet.
His holdings have included two-time bankrupt Wheeling-Pittsburgh Steel [Ticker: WPSC]; AK Steel [AKS], which narrowly averted bankruptcy; and Cleveland-Cliffs [CLF], an iron ore producer that’s has some problems collecting from the bankrupt steelmakers it calls customers.
He also has taken positions in Westmoreland Coal [WLB]; Amcast Industrial [AICO], whose products include copper and brass plumbing fixtures and aluminum wheels; and Columbus McKinnon [CMCO], which makes hoists, cranes and other materials handling equipment.
More recently and closer to home, Gendell has brought some excitement to the normally somnolent shares of L.B. Foster Co. [FSTR] of Green Tree, which makes track and other products for railroads and mass transit systems; piling, bridge decking and other construction products; and tubing used in water lines and the energy industry. Investors have found Foster’s markets so unattractive that its thinly traded shares have breached the $6 only on the rarest of occasions. Gendell’s interest have taken them to heights unseen since 1988.
He began nibbling on the stock in earnest last year, disclosing on June 16 that he owned a 5.6 percent stake in Foster. At the time, Foster was trading for $5.40. Six months later, Gendell owns 1.2 million, or 13 percent, of Foster’s shares. Over that time, the stock climbed 47 percent, closing Friday at $7.92.
Typically, an investor with such a large position gives the chairman a ring and asks for a meeting for what diplomats politely refer to as a frank exchange of ideas. But Gendell has made no such request, leaving Foster’s brass somewhat perplexed about his intentions.
“We haven’t had any discussions with him,” says Chief Financial Officer David J. Russo.
Reached Friday, Gendell declined comment on his investments.
His habits have all the earmarks of a value investor. He searches for companies that are trading for less than what they’re worth. Many times the companies are too small to appear on the radar screens of investment managers.
Foster is a good example. With only 9.4 million shares, most mutual fund managers can’t or won’t give the company the time of day. Neither will Wall Street analysts.
Like many other companies Gendell favors, Foster is trading for close to its book value: the price its plants, equipment and other assets would fetch on the open market. Foster is currently trading at about 1.1 times book value. By comparison, the Standard & Poor’s 500 is trading at about 3 times book while Microsoft trades at over 4 times book.
Like the economy, Foster’s businesses seem to be on the mend. The company earned $3.8 million, or 40 cents per share, in the first nine months of last year compared to a loss of $6.7 million, or 71 cents per share, in the year ago period.
Disregarding a gain from discontinued operations in the 2003 period and a $4.4 million accounting charge in the 2002 period, Foster earned $2.6 million from continuing operations in the first nine months of last year vs. a loss of $1.4 million in the prior year period. Sales increased 5 percent to $211.1 million.
Gendell also invests heavily in small bank stocks, where his recent investments include Northeast Pennsylvania Financial [NEPF] of Hazelton, Ameriana Bancorp [ASBI] of New Castle, Ind., Union Financial Bancshares [UFBS] of Union, S.C., and Capital Bank [CBKN] of Raleigh, N.C.
In Securities and Exchange Commission filings disclosing his bank stock holdings, Gendell indicates he may pursue discussions with management “in an effort to maximize long-term value for shareholders.” The language, which loosely translated frequently means “I strongly suggest you try to find a buyer for the bank,” doesn’t pop up on the similar filings Gendell has made after purchasing industrial stocks.
Jerry Holbrook, chief financial officer for Northeast, says Gendell knows the banking business and has definite ideas of how banks should be run. Northeast officials have met with Gendell, he adds.
There’s no doubt Gendell has made some winning bets. Cleveland-Cliff’s 141 percent rise over the last year has confounded many investors, particularly those who sold it short. AK Steel shares have climbed 63 percent since Gendell disclosed his 6 percent stake Dec. 1, and Wheeling-Pitt is up 318 percent since Nov. 24, when Gendell revealed he owns 7 percent of the steelmaker’s shares.
It’s living proof that doing your homework can pay off. But don’t take Gendell’s success as a green light to ride his coattails. Investors who come to the party late often wake up with the worst hangovers.
Len Boselovic can be reached at [email protected] or 412-263-1941.
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WPSC, AKS, CLF, WLB, AICO, CMCO, FSTR, NEPF, ASBI, UFBS, CBKN,
