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.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 44 percentage points in 21 months Learn how!

Lists

The Top 10 States With Fastest Internet Speeds

10 Best Places to Visit in USA in August

Top 10 Cities to Visit Before You Die

Top 10 Genetically Modified Food In the US

15 Highest Grossing Movies Opening Weekend

5 Best Poker Books For Beginners

10 Strategies Hedge Funds Use to Make Huge Returns

Top 10 Fast Food Franchises to Buy

10 Best Places to Visit in Canada

Best Summer Jobs for Teachers

10 Youngest Hedge Fund Billionaires

Top 10 One Hit Wonders of the 90s

Fastest Growing Cities In America

Top 10 U.S. Cities for Freelancers

Top 9 Most Popular Free iPhone Apps

Top 10 Least Expensive Private Business Schools in the US

Top 15 Most Expensive Countries in the World – 2014

Top Businesses to Invest In

Top 5 Things You Might Be Doing Wrong With Your Business

Top 5 Strategic Technology Trends in 2014

Top Rags to Riches Stories

Parenting Behavior That Promotes Future Leaders

Top 5 Mistakes Made by Small Businesses

Top 5 Most Common and Potentially Devastating Financial Blunders

Top 5 Highest Paying Jobs for Web Designers

Top 6 Most Respected Professions that Also Pay Well

Top 5 Pitfalls Investors Should Avoid

Top 6 Lawyers and Policy Makers Under 30

Top 6 New Year’s Resolutions for Entrepreneurs

Top 7 Locations to Check in on Facebook

Top 5 Mistakes made by Rookie eBay Sellers

Top 7 eBook Publishers in 2013

Top 6 Health Industry Trends in 2014

5 Lessons for Entrepreneurs from Seth Godin

Top 5 Success Tips from Jordan Belfort – the Wolf of Wall Street

Best Master’s in Finance Degree Programs

Top 6 Earning Celebrities Over 50

The most expensive sports to play

Top 7 Earning Celebrities Under 25

Best 7 Online Courses to Take: Free Finance MOOCs

Top 6 Bad Habits that Promote Failure

20 Most Valuable Soccer Teams in the World in 2013

12 Most Expensive Countries for Foreign Students

Top 30 Most Influential Women in the World

Top 20 Most Expensive New Year Eve Shows

Top 5 Best Vocational Careers

Top 10 Jobs for 2014 by Salary Gain (Predictions)

Top 5 Digital Trends for 2014

Top 6 Things You Can Do To Increase Your Productivity

Top 9 Trending Smartphones in 2013

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 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!