Howard Weil

So I’m heading down to the Howard Weil conference in New Orleans. I’m passing Laurel, MS right now. This will be the first time I am attending as a hedge fund manager rather than a stodgy old long only investor. Do I think there are any bargains in energy? Not really. The OSX just broke through 200 recently, still below its high of 240 but no bargain either, especially after one company after another misses guidance – with HAL and NBR being the latest. They certainly aren’t value stocks.

So why am I going then? Well aside from the sumptuous food and drink, I feel like I am getting a little out of touch with the market and what is going on. Now this might come as a shock since I do despise the sell side but they are good at providing information and getting clues as to professional investor psychology. This may be of limited use as most of the positions in my hedge fund are too small or esoteric to be covered by Wall Street.

Another first for me is that I don’t have any one on ones set up at the conference. These are meetings with management that are the true purpose of the conference, as the presentations are just holding pens for institutional investors in between meetings.

I also tried to no avail to set up a meeting with the Biloxi Marsh Land Company (BLMC). I emailed them several times and called once but was ignored. It’s too bad because the company continues to fascinate me. Aside from its acreage position in Louisiana, the company has several cryptic entries on its balance sheet, i.e. short term and long term investments that may be carried at historical cost.

They also have some relationship with the Lake Eugenie Land Company (LKEU), another pink sheet company that is even more obscure than BLMC if such a thing is possible. I can find nothing on the Lake Eugenie Land Company, not even a market cap.

Biloxi Marsh Land Company (BLMC)

This is a very interesting company. It trades on the pink sheets under the symbol BLMC. Biloxi Marsh Lands Corporation was founded during the 1930s to acquire and own approximately 90,000 acres of wetlands in St. Bernard Parish, Louisiana.

The land they own is not buildable since it is essentially marshland, but the value in the company is the minerals (natural gas) that lie under its land. It has formed a subsidiary to partner with some operators to start development of this mineral potential. The company has no debt on its books and paid out a nearly 10% dividend last year.

I am attending a conference in New Orleans next week and I have been trying to arrange a meeting with the President but so far they have been a little squirrely about the entire thing. Hopefully, some things will come through in the next few days and I will have a meeting with management and post what I learned.

What is a Hedge Fund?

So what is a Hedge Fund and why does everyone hate them? A Hedge Fund, in its simplest form, is just a limited partnership. A legal document drafted by an attorney sets up the legal structure into which accredited investors invest money. The media and the non investment world loves to use various terms to describe Hedge Funds. The definition in the American Heritage Dictionary is this:

"An investment company that uses high-risk techniques, such as borrowing money and selling short, in an effort to make extraordinary capital gains."

Well, actually no. In theory if you sell short along with going long equities, then you have less risk and there is no law that says you have to borrow money when you run a hedge fund.

So here is my definition of a "hedge fund." I will give the characteristics of a Hedge Fund and then an explanation of why I am including it. A Hedge Fund is a:

Lightly Regulated - Most Hedge Funds offerings are exempt from registration under the appropriate U.S. Securities Laws. I use the word "lightly" because some Hedge Funds do register as investment advisers

Private Pool of Capital - An obvious one that is simply descriptive. It is private because it is only available to accredited investors and not the general public.

Focused on Absolute Returns - I don't care who you are or what your strategy is, but you damn well better be up every year. I don't give a rats ass what "the market" does. If I want a closet indexer I'll go to a mutual fund company and invest in a fund with an R squared of .99 that holds 400 positions.

Performance Based Compensation - Hedge Fund Managers earn most of their compensation from a percentage of the excess gains above a hurdle rate, and subject to a high water mark. This percentage is usually 20% but can go as high as 50%.

So there it is then - a Hedge Fund is a lightly regulated, private pool of capital that is focused on achieving absolute positive returns in any market where the manager is compensated mostly on performance.

Stock of the Day

Every now and then when doing research you come across an unusual stock that is completely unknown. The stock that fits the bill today is called Pittsburgh & West Virginia Railroad. Pittsburgh & West Virginia Railroad is a $ 14 million market cap company that trades on the curb under the symbol PW. Now before I tell you about it, just because I mention a stock as Stock of the Day does not mean I am recommending that it be bought. It is more something that caught my eye, a relief from the mediocrity of relative performance induced boredom where everyone owns and buys and talks about the same stocks.

PW is essentially a captive company associated with Norfolk Southern Corporation (NSC). PW owns a 112 mile track that runs through Pennsylvania, West Virginia and Ohio, that it leases to NSC under a 99 year lease that was signed in 1964. This lease is renewable for a unlimited number of 99 year periods. NSC pays PW annual rent of $915,000 essentially in perpetuity. Please note there is no escalation clause in the lease. They paid $915,000 in 1964 and they paid $915,000 in 2006 and they will pay $915,000 in 2064!!!

The company has very little in expenses as you can imagine, and it pays out a steady dividend that has varied from $0.12 - 0.14 per quarter for as long as I can get data (back to 1980 on Bloomberg.) The yield is nearly 6%.

So of course the first thing that comes to mind is that this stock is a purchasing power death spiral as eventually your dividend will be eaten up by inflation and even get to the point where there will be nothing to payout. After all, how much will it cost to rent an office and buy supplies in 2064? Maybe more than $915,000 a year?

However if you look at the performance of this stock, including reinvesting dividends, which I don't know if the company actually has a dividend reinvestment plan, it has returned an total return of 128.50% since 2/28/97 (through the end of february 2007.) This comes to an annual return of 8.61%, beating the S & P 500 return in the same period of 7.62%.

If anyone has any experience with this stock or comments, feel free to contact me.

Interesting Web Sites

I found a few interesting web sites that I thought I would pass on. These are fairly hard core value sites, and they should be good for idea generation:

http://www.vinvesting.com

http://www.valueinvestigator.com/

Eddie Lampert = Warren Buffett?

Sears Holdings filed an 8K on March 1 that detailed Chairman Eddie Lampert's annual shareholder letter. It was a fairly interesting read as Lampert tries to disprove the stereotype that all Hedge Fund managers are short term pigs who are only interested in jacking up the price of the stock that they are invested in. A copy of it is here on the SEC web site:

http://www.sec.gov/Archives/edgar/data/1310067/000119312507043471/dex992.htm

Lampert makes the case that he is a long term champion of Sears and retailing in general. He opines on everything from cash flow to spending cuts to earning management. Here are a few interesting excerpts:

"While we like to think of ourselves as a start-up, we are different from most start-ups in our cash flow generation. Since the merger closed in 2005, we have demonstrated a consistent ability to generate cash flow. This strong source of cash provides us the flexibility to deploy capital in the manner that we believe is best calculated to create long-term shareholder value."

"As we look ahead, I want there to be no doubt about one thing: It is certainly our intention to grow Sears Holdings. Some commentators have asserted that we want to shrink the Company, but that is simply not so. No great company would aspire to become smaller, and we certainly do not. But before embarking on a growth plan, it is critical to provide a sound base from which to grow. To this end, we have set out to improve the profitability of our business model. Our objective is disciplined growth. We do not want to grow simply for the sake of becoming bigger. Rather, our aim is to become more profitable, and as such we need to ensure that any revenue growth occurs at an appropriate level of profitability."

"In charting a path toward disciplined growth, it is worth exploring the role of spending cuts. The expression “You can’t cut your way to success” often surfaces when someone suggests cutting spending for one resource or another. But this maxim, like so many others, can be more or less true depending on context. If the context is a company like IBM in the early 1990s—where cuts had previously never been a way of life and where far too many resources were dedicated to far too many projects producing far too little benefit—then it is hard to dispute that spending cuts were a prerequisite for success.
Healthy companies stay that way by constantly reevaluating their resources and their decisions and pruning spending that doesn’t make sense. Just as it is important to prune a tree or a garden or even a wardrobe, it is critically important to prune a company, not as a one-time event, but on an ongoing basis. Words carry meaning, and the idea of “cutting” carries a lot of baggage; but in reality the best companies in the world are ones that constantly reallocate resources in order to deploy them in other, more productive areas."

"I believe one of the causes of the many well-known accounting abuses was this myopic focus on moving share price by driving short-term earnings. As we have explained, we do not attempt to manage earnings or expectations, we generally do not meet with Wall Street analysts, and, except in a few select cases, we have not provided options to our associates. Stock options can play an important role in compensation arrangements if handled correctly, and many companies have used them to motivate and compensate their executives and employees appropriately. The requirement that companies account for stock options as an expense is helpful in highlighting to investors and directors the cost of these programs."