Value Investing Congress 2012: Mick McGuire’s Top Picks

Yesterday Mick McGuire, founder of Marcato Capital Management announced three mid-cap stocks that he likes for long positions. Marcato focuses on value investments across various sectors. McGuire was a former analyst for Bill Ackman and Pershing Square Capital.

Marcato is a two-year old firm managing $750 million. The firm’s sweet spot is $1 billion – $5 billion market cap companies. McGuire’s Value Investing Congress presentation focused on three hidden real estate value plays—see all of Marcato’s holdings.

Mick McGuire

Alexander & Baldwin Inc. (NYSE:ALEX) is a real estate and agricultural company that focuses on real estate development and commercial housing in Hawaii. Overall, Marcato believes that the land on Alexander’s books is held at a value much lower than its potential market value. Most of the plots are farmland, but Alexander believes the value could be unlocked through residential or industrial development.

Alexander represented over 20% of Marcato’s 2Q 13F portfolio and was the firm’s second largest holding. This included a 33% increase from the first quarter. However, Marcato was topped by mentor Bill Ackman in share ownership amongst the funds we track, with Marcato owning 1.3 million shares and Ackman 3.6 million. Another big name investor owning half a million shares was Chuck Royce.

McGuire noted in his presentation that the net asset value on Alexander’s commercial real estate should total just over $900 million, versus the book value of around $800 million. Marcato also completed a DCF on each of Alexander’s development properties, calculating the aggregate of all properties to be around $300 million. Including a net asset value on joint-venture assets with the other values, puts the net asset value around $30 a share, while the company currently trades around $29.

McGuire then took his analysis a step further by accounting for Alexander’s current cash flow from operations, adding another $17 to the valuation. This puts the fair value of Alexander’s shares at $47, compared to the company’s current sub-$30 trading price.

Gencorp Inc (NYSE:GY) is Marcato’s second pick. The company is a manufacturer of aerospace and defense products and systems, as well as focused on re-zoning, entitlement, sale and leasing of excess real estate assets. Marcato believes the key to GenCorp’s land value is in a California region that once acted as a buffer between residential areas and test sites for devices. GenCorp has permits to develop around 6,000 acres, with most estimates putting the land value at $50,000-$60,000 per acre. In addition to its California assets, McGuire also places the value of the company’s excess office space at a $66 million based on net operating income of $5 million.

For 2Q, the company reported that cash from operating activities was $29.3 million compared to $14.6 million in the second quarter of fiscal 2011. Also worth noting is the company’s trailing P/E of 101 and its forward P/E of 25. However, McGuire believes that earnings are understated due to non-cash accounting treatments, and so he believes the company trades at P/E of 8x true economic earnings.

This is probably the most hidden real estate play—having less evident ties to the real estate market when compared to McGuire’s other two picks. GenCorp competes with a couple other key defense product manufacturers that trade above the company on a P/S basis. GenCorp trades at a 0.6, while American Science & Engineering, Inc. (NASDAQ:ASEI) trades at 2.9x and GeoEye Inc. (NASDAQ:GEOY) 1.9x.

GeoEye received two letters from the National Geospatial Intelligence Agency. The first letter advised that, due to funding shortfalls, the NGA would not exercise a full-year Enhanced View Service Level Agreement option the upcoming contract year, and a second letter formally notified the company that the NGA was electing not to obligate additional funding under its OTFPP Cost Share agreement for the development and launch of GeoEye-2. Raymond James downgraded on the news. The company is up over 20% on rumors of a possible merger with Digital Globe Inc.

American Science is losing its CEO in 2013, and for 2Q posted $0.47 EPS versus $0.61 estimates. Prior to this news, the company received a $34 million service and maintenance order from the U.S. government, and received an upgrade by Benchmark. The company trades at a beta less than 0.5 and pays a 3% dividend yield.

Marcato was the largest shareholder of GenCorp at the end of 2Q, owning over 5.7 million shares, which was over 11% of Marcato’s 2Q 13F portfolio. Chuck Royce was also an investor in GenCorp—see all funds owning GenCorp.

Brookfield Residential Properties Inc (TSE:BRP) is McGuire’s final pick. McGuire believes the majority of the company’s value is in its real estate holdings, and like Alexander, values it on a net asset and book value basis. McGuire notes that over 62% of the company’s balance sheet is made up of raw land and that an improvement in U.S. housing will be driven by a backlog and a bounce back in orders.

McGuire believes that the current market value should be somewhere around 50% more than Brookfield’s stated value. As well, if Brookfield traded at the same book values as its peers, the share price should be $44-$55, versus the current share price of around $10.

In closing, McGuire has been on the lookout for hidden real estate assets, that may have been buried on the books of non-real estate focused companies. He and Marcato believe in real estate being local, and so they focus on understanding the local marketplace.

Biotech Insider Alert - $6 Stock To Hit $40

$200 Million Dollar Healthcare Hedge Fund's #1 Best Idea Right Now

The best healthcare hedge fund out there right now is one of the largest shareholders in this biotech stock. The fund returned more than 20% in each of the last 2 years with a virtually fully hedged portfolio, and it's sending out a BUY signal on this biotech stock. Get your FREE REPORT today (retail value of $300)

This is a FREE report from Insider Monkey. Credit Card is NOT required.
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The Oldest Money Managers

The Greatest Directors in the World

Largest Animals in the World

World’s Most Expensive Desserts

Best Selling Comic Books of All Time

A-list Actors who Sabotaged Their Career

Rappers With a College Degree

The Best Jazz Albums of all Time

The Most Influential Jazz Musicians

The World’s Most Famous Photographers

The Best Oscar-Winning Songs

Most Influential Choreographers Ever

Most Expensive Department Stores in the World

The Most Expensive Stolen Paintings in the World

The World’s Most Expensive Teas

Top Oscar Record Holders

The Most Expensive Flowers in the World

Countries With a Booming Film Industry

Most Expensive Cupcakes in the World

Uncommon European Escapes

The Most Stolen Artists in History

Best Travel Destinations in Australia

World’s Most Expensive Musical Instruments

World’s Most Famous Animals

Most Expensive Cakes in the World

Most Expensive Kosher Champagne in the World

Most Expensive Kosher Wine in the World

The Most Surprisingly Dark Fairy Tales

Most Popular Travel Destinations in Asia

The 10 Most Expensive Dresses Ever Worn to the Oscars

World’s Most Visited Art Museums

Best Countries for Photographers to Work in

Best Paid Jobs in the Film Industry

The Most Renowned Recovered Paintings Ever

Child Stars That Turned out Just Fine

Books That Were Banned in the Past Century

World’s Richest Dancers

Best Remedies against Bad Breath

Foods That Improve Your Skin Texture

Best-Selling Children’s Books of all Time

Foods That Boost Your Libido

Best-Selling Books of all Time

The Most Expensive Academy Awards Jewelry in History

Most Expensive Japanese Restaurant In New York City

The Best B-Boy Movies

Most Awesome Hip Hop Documentaries

Foods That Stain Your Teeth

Richest Doctors in the World

The Best Movie Sountracks Ever

The Highest Grossing Musicals on Broadway

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 129% in 2.5 years!! Wondering How?

Download a complete edition of our newsletter for free!