Founded in 1999 by Randall and Herbert Abramson, Trapeze Asset Management is a medium-sized hedge fund based in Toronto, Ontario. Like most of its peers in the hedge fund industry, Trapeze invests in both equities and fixed income assets and regarding the former, it employs quite a bit of contrarianism within its walls. Trapeze is currently bullish on Canadian small-cap stocks, but it also invests in large-caps trading in the United States.
One of the nice aspects of Randall and Herbert Abramson’s fund is that it discloses its most important trades in quarterly letters to investors, the latest of which we’ve been lucky enough to get our hands on. Written in mid-November, Trapeze’s Q3 letter gives a succinct look at the fund’s contrarian ideals, likening value investing to a “Lonely Hearts Club.”
On this strategy, the Abramsons discuss how “staying lonely and avoiding crowds” is the best way to trade undervalued assets with promising firm or industry-specific growth prospects. On the subject of equities, the letter cites a point made by San Diego-based Brandes Investment Partners (via Barron‘s), that mentions the spread between overvalued and undervalued stocks is wider than historical averages, making now a superb time to buy cheap. It discusses that “‘In the past, when the spread between pricey stocks and cheap ones has been wide it has tended to be an excellent time to buy the latter.”‘
While Trapeze does mention some of its top picks trading on the Toronto Stock Exchange, we’re going to take a look at the fund’s investments that do most of their trading within U.S. borders. We’ll start with two NYSE-listed stocks that were included in Trapeze’s “Top Holdings—Beautiful Wallflowers” section: OfficeMax Incorporated (NYSE:OMX) and Metlife Inc (NYSE:MET).
Looking at OfficeMax first, we can see a stock that has hurt long-term investors (down 26.9% over the past three years), but those who have bought in more recently have been rewarded. Shares of the office supply store have nearly doubled since June 1st, and Trapeze thinks more gains could be in store. Here’s what co-founders Randall and Herb had to say about the company:
“OfficeMax, although known to consumers and with sizeable sales, has been overlooked by investors because of the negative sentiment toward anything smaller cap and also perceived as being under threat from the Internet providers [...] the company is employing its own levers to advance earnings, including operating efficiencies and cost cutting. And it’s working. The company just reported a stellar quarter with slightly lower top line but about a 40% profit lift. The company’s market cap is now about $700 million. Non-operating assets, on and off balance sheet items, are at least $180 million [...] including net cash of $125 million. We are essentially paying just $520 million for the current free-cash-stream of $60 million annually, or about 8.5x free cash flow.”