Whitman Finding Bargains through Graham & Dodd, with a Twist

The Financial Post of Canada takes an interesting look today at the Benjamin-Graham-esque approach that longtime market-beater Marty Whitman uses to pick value stocks.

According to The Post’s Levi Folk, Whitman’s strategy is based on the “net-net” approach that Graham and David Dodd laid out in their 1934 classic Security Analysis. (Net-nets are firms whose liquidation values are significantly greater than their market capitalizations, after all liabilities are factored in.) Whitman — who “is finding bigger discounts in the market than at any time in his 50-plus year career”, according to Folk — makes four alterations to the net-net method.

While Whitman, like many top value investors, was hit hard last year, he’s been a strong performer over a lengthy period, so these alterations are certainly worth considering:

  • While Graham and Dodd focused only on “current assets”, Whitman and Third Avenue also include long-term assets that are easily liquidated. An example could be proven oil reserves that an energy company has found, but which are not included on its balance sheet.
  • Whitman includes off-balance-sheet liabilities, like structured investment vehicles.
  • He also includes “some property, plant and equipment” for their liquidated cash value and associated tax losses that often produce cash savings.
  • Companies must be “well-financed in keeping with the core tenet of Third Avenue’s ‘safe and cheap’ method of value investing”, according to Folk.

Folk writes that Sycamore Networks Inc. (SCMR) is “the most compelling example” of a U.S. net-net firm cited by Third Avenue portfolio manager Ian Lapey.

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