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Make Money On Value Stocks Like Richard Perry

By Michael Carr   |   Monday, 13 Oct 2008 09:28 AM

Little known hedge fund manager Richard Perry has been making money for more than 20 years without making headlines. Unlike many hedgies who seem to always be in the limelight, Perry finally sat down for his first magazine profile this month, with Fortune.

Perry's investment vehicle, Perry Capital, manages more than $14 billion in assets and has never had a down year. His average annual return has been more than 15 percent, compared with about 10 percent for the S&P 500 over the same timeframe.

The result is that Perry has attained a personal fortune of more than $1 billion, just shy of the level needed to be on the Forbes 400 list of the richest Americans, but good enough to place him on the top 1,000 global rich list.

Reviewing Perry's regulatory filings, we discover that he is a strict value investor. He also engages in takeover arbitrage, buying the shares of companies being bought out and possibly shorting shares of the acquirer.

Takeover arbitrage is a favorite tactic of Warren Buffett, but it is difficult for small investors to duplicate. It requires investing large amounts of money to make relatively small gains in a short period of time. Usually, for individuals, the risks exceed potential rewards.

However, Perry's value methodology can be followed by individual investors.

One highlight of his recent purchases is the iShares Russell 2000 Index Exchange Traded Fund. A long-term investor, this shows us that Perry is likely looking for small cap stocks to outperform when the market recovers.

Perry told Fortune that he is still buying. "We're looking forward to taking advantage of a long-lasting distressed cycle," he said.

To help us find value in a beaten-down stock market, I looked for:

• Small cap stocks with above-average liquidity. But we excluded foreign stocks and financials because too much uncertainty exists in how the dollar will perform over coming months as the bailout details are worked out.

• The company must have positive cash flow over the past five years, indicating the company has the potential to operate in a manner capable of generating shareholder returns.

• The stock price should be less than twice the book value, which allows us to identify value stocks.

The Perry screen found nine potential long-term winners:

Concurrent Computer (CCUR) provides the technology behind video-on-demand. With projected earnings of $1 per share next fiscal year, CCUR trades at a P/E ratio of less than 5 at the recent price of 4.50.

CryptoLogic (CRYP) is an online gaming software developer and supplier to the rapidly growing Internet gaming industry. CRYP recently developed a partnership that allows it to offer online Mahjong throughout China. The company is expected to earn 0.58 a share next year and grow earnings by 15 percent a year after that. Recent price: 4.35.

Famous Dave's of America (DAVE) operates almost 150 barbecue restaurants and has grown earnings per share by an average rate of more than 50 percent a year for the past five years. Its return on equity of more than 15 percent is among the best in the industry. DAVE was recently trading near 5.

Friedman Industries (FRD) makes steel pipe. At a recent price of 5.65, FRD offered patient investors a dividend yield of 8.2 percent. The company recently raised its dividend, a sign that management is confident in the future. Earnings are more than twice the payout ratio, another indicator that the yield is safe.

Gencor Industries (GENC) makes heavy equipment used in highway construction and the synthetic fuel industry. Management delivers a net profit margin near 20 percent, almost three times the industry average, and the company is debt-free. Earnings have grown an average of almost 25 percent a year for the past five years, yet the company was priced at 5.59 recently, giving it a P/E ratio of 3.

Miller Industries (MLR) is a manufacturer of vehicle towing and recovery equipment, namely wreckers and car carriers. Trading near 6 a share, MLR is valued at less than half its book value and is in the personal portfolio of famed value investor Michael Price.

Rick's Cabaret (RICK) owns and operates adult nightclubs and adult Web sites. RICK is very profitable and is expected to see earnings increase nearly 75 percent in the next year. All valuation metrics significantly exceed the restaurant industry average. Recently trading at 6.71.

Taylor Devices (TAYD) is involved in making and developing seismic monitoring equipment and devices that make wind generation facilities more efficient. Earnings and sales have been steadily rising, but no analysts cover the stock which creates opportunities for aggressive investors. TAYD was recently priced at 4.90.

UFP Technologies (UFPT) makes packing material for sensitive equipment. The company recently announced a significant contract win from the US Army, offering a potential growth area with high profit margins. Trading near 5, UFPT has a P/E ratio of 6.

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MichaelCarr
Little known hedge fund manager Richard Perry has been making money for more than 20 years without making headlines. Unlike many hedgies who seem to always be in the limelight, Perry finally sat down for his first magazine profile this month, with Fortune.Perry's investment...
hedge,funds
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2008-28-13
 

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