Here are the three largest positions in my new, cross-sector portfolio

Author: Andy Schornack

Covestor model: Market Maven

Disclosure: Long MS, SVU, NYB

The Market Maven Value model is my second model on the Covestor platform – it was started on August 9, 2011. The Market Maven model focuses on undervalued opportunities across industries and sectors. It currently is fairly leveraged, but it will not always be leveraged at the existing levels.

The portfolio’s largest positions are currently Morgan Stanley (MS), SuperValue (SVU), and New York Community Bank (NYB).

MS is a global investment bank that has seen a significant decline over the past two months due to its operations and exposure to European financial institutions and sovereign debt. It is my position that management has taken appropriate steps since 2008 to provide the firm with one of the strongest capital ratios in the industry, a stronger balance sheet, reduced risk, and ultimately will better position the company for long-term profits.  With the June 30, 2011 tangible book value of $26.61, the firm is trading at a significant discount to book. French bank exposure has been overhyped by short focused bloggers, and not rooted in fundamental analysis. The $39 billion figure referenced in the 2010 10-K needs to be clarified on the upcoming conference call is the collateral securing the cross-border outstandings.  The number above is a gross figure and as noted in the 10-K it doesn’t include a reduction for related securities collateral held.  This is an extremely important point and I look forward to further clarification.

SVU is one of the nation’s leading grocery chains. According to its February 2011 factbook, it has over 1100 retail stores, 1200 discount stores, and 2700 independent locations serviced by its independent business segment. It is currently in the middle of a transformation phase as it is repositioning its balance sheet to reduce debt and reduce and exit non-core business segments. The stock as of September 30, 2011 provides for a 5.40% dividend yield and is building tangible book value every quarter. Furthermore, trailing 12 month EBITDA is $1.9 billion for a firm trading at low EV/EBITDA multiple and below book value. As a Twin Cities Metro Area resident, I feel close to the brand and the business since it is based in Twin Cities. This provides additional insight into their business and operations.

NYB is the 38th largest bank holding company in the United States according to the FFIEC as of June 30, 2011. The bank prides itself on providing multi-family loans in New York City, with an emphasis on apartment buildings that feature below-market rents. These are also known as rent-regulated apartment buildings. While these are not the only loans the bank makes, it is the largest concentration in their book, and their loss history has been excellent in this marketplace. It would not surprise me to see NYB take the opportunity in the current marketplace to prepay some of its wholesale funding, thereby locking in some long-term, lower rate funding. A penalty would be incurred, but given the existing borrowing rates the bank lower ongoing costs and see a relatively positive pay back/IRR on the prepayment. In the meantime, CEO Joseph Ficalora has stayed committed to the $0.25 quarterly dividend, indicating a yield of 8.40% as of close of trading on September 30, 2011.  The pipeline remains positive for new loans, although rates leave much to be desired. Long-term I am very bullish on this stock at the current trading levels.

Over the next few months, I will continue to revisit positions in the portfolio and may add/subtract investments with the total investments remaining ideally in the 10-20 range. Currently we are slightly outside this range on the low side, which I don’t see as a negative at the current time.

Andrew Schornack

Andrew Schornack

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