Wall Street West—Value Investor Breathes Life Into Wall Street’s Orphans

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Mark Siegel, former managing director of the Burbank-based Disney family’s Shamrock Holdings, and chairman since 1992 of Century City-based Remy Capital Partners, likes to give orphans a home his home.

Siegel, 49, strolls down Wall Street looking for lonely companies that have no analyst coverage or are otherwise out of favor. When he comes across one with good prospects and management, he buys in sometimes amassing a controlling stake, and often the chairmanship.

Like others of his stripe, Siegel tends to buy on fundamentals, and is willing to wait. “When I buy, I think in terms of five or 10 years,” he said.

Siegel’s big hit came in 1995. Energy was a dodgy investment sector in the mid-1990s, and the Houston-based oil and gas drilling outfit UTI Energy Corp. had a tiny market capitalization of $10 million. Siegel bought a 53 percent block of stock from brokerage Bear Stearns & Co., which at that time did not like the energy business. Siegel took the title of chairman.

Siegel sold some UTI assets to concentrate primarily on oil and gas drilling, and began acquiring other drillers, mostly with rigs in Texas, Oklahoma, New Mexico and Canada 18 transactions in all in an industry roll-up. The number of drilling rigs that UTI owned jumped from 27 to 150. Of course, oil prices about tripled in the same time frame. Today, UTI has a market capitalization of more than $1.2 billion, and Siegel stills owns 12.5 percent of it, or about $150 million worth. Not a bad return on his original $5 million stake.

Siegel likes oil, but the real play is in natural gas, he said. Oil is a commodity. Higher prices usually translate into less demand and more supply and a price drop. But natural gas is essentially a domestic market, limited only by the amount of domestic drilling and pipelines.

“That creates interesting issues,” he said. “Gas is really a regional commodity. And there is no strategic reserve of gas. There still needs to be a lot more drilling for it,” he said. Natural gas prices may not come down soon, he believes.

Siegel also has assumed a major stake in Moorpark-based Variflex Inc., which designs consumer goods including inline skates, mini-scooters, portable instant canopies and spring-less trampolines, for manufacture in Asia. The goods are distributed through the huge U.S. retailing chains, such as WalMart, Home Depot, Kmart, Target and Toys “R” Us. Siegel has more than a 40 percent stake in the $80-million-a-year wholesaler, acquired in 1997, and is also its chairman.

In its latest reported quarter, Variflex became profitable again, after several years of doldrums. “We just turned,” is how Siegel describes the situation. The stock has rallied a bit of late, from the $6-a-share range to the $8-a-share range. But Siegel believes further upside is ahead. “There’s no analyst coverage,” said Siegel.

That’s the one drawback of buying an orphan even after a fix-up job Wall Street may be slow to notice.

Bill Mason, the Bear

William “Bill” Mason has been managing money since even before the “first tech rally,” in computer stocks in the late 1960s. “Any stock that had an “x” in the name was hot,” joked Mason last week. In addition to running $100 million or so for Woodland Hills-based Cullen Fortier Asset Management, Mason tries to teach students about the way to profits at Pepperdine University, where he is a finance professor.

Mason thinks the domestic stock market has one paw into a long-term hibernation. “We are setting ourselves up for another period like the one that followed the 1960s,” he said. “Stocks have just gotten so far in front of themselves that they have to go down or sideways for a long time to make the correction.” From 1967 to 1982, the Dow Jones Industrial Average undulated sideways, hitting 1,000 in both years.

The Standard & Poor’s 500 index is trading at 25 times earnings, well above a historical norm in the mid-teens, Mason noted. The Nasdaq Composite even after getting cut in half trades at near 100 times earnings.

“There is more room on the downside,” said Mason. Also, things could snowball. As investors leave Wall Street, returns will be soft. That will reduce some of the “exuberance” of market players, leading to more softness.

Any good news?

“Well, everything seems to happen faster today,” said Mason. “Maybe this correction will only take five years this time, not 15 years. Maybe 2004 will be a good year. Or maybe not.”

Smell the Coffee

Investors are looking again at the tealeaves, trying to ascertain the future of Torrance-based Farmer Bros. Inc., the coffee wholesaler whose stock is traded on the Nasdaq.

Farmer Bros. hews tightly to a company policy from a different era: No one at the company talks to the press, and it has no corporate or investor relations department. For generations, it has been the suzerainty of Roy F. Farmer, the 84-year-old chairman. His son, Roy E. Farmer, is the president and chief operating officer. The Farmers control nearly 60 percent of Farmer Bros. stock.

But shareholders, at least those with no questions, can’t complain too much. The stock recently ran up to $224 a share (before trailing off a bit), an all-time high, and about double where it was five years ago. Still, the company’s no-talk policy may be hurting shareholders looking to increase value. The company has a market cap of about $418 million, no debt and cash in the bank of nearly $250 million. In a sense, the company minus its cash is valued at just $168 million by the Street, despite posting $40 million in black ink in the last four quarters. In a sense, Farmers is selling for four times earnings.

No wonder there’s a rumor that a move is afoot to take the company private.

Contributing columnist Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal. He can be reached at [email protected].

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