Markman: Contrary Picks from Sherman

09/12/2003 12:00 am EST

Focus:

Jon Markman

Editor, Trader's Advantage

Jon D. Markman is senior investment strategist and portfolio manager at Pinnacle Investment Advisors. He is an expert in online investing as well as stock-screening systems. He is also a contributing editor of CNBC on MSN Money. In a recent column, he discusses some top picks from Bruce Sherman,  a noted contrarian money manager.

"One of my favorite pros--and someone who rarely offers his views to any but his own clients--is the reclusive and largely uncelebrated Bruce Sherman, head of Private Capital Management in Naples, Fla. When I first wrote about Sherman last November, I noted that he was the top institutional shareholder of several dozen small- to medium-sized companies, many of them much-hated. The one he felt most strongly about at the time was Computer Associates. It's up 81%. Another was Apple, which is up 45% since. A third was Scientific Atlanta, which is up 160% since.

"I called Sherman last week to see if he would identify his latest contrarian stock ideas. His answer was predictably unpredictable: newspapers. He says they're trading at the same valuations as six years ago, are prodigious cash cows, and will be tremendous beneficiaries if an economic upturn generates an upturn in advertising since all new revenues will fall directly to the bottom line. He particularly likes newspaper companies that also own local broadcasting affiliates. Favorites are Belo (BLC NYSE), of which he owns 9%; Dow Jones (DJ  NYSE), of which he owns 5%; and The New York Times (NYT NYSE), of which he owns 4.4%.

"He dramatically raised his stake in each of them this year, according to SEC records. 'I love these businesses,' he says. 'The market thinks that there is no top-line growth, and newspapers are pretty boring, and we read them but our kids don't. But it's just like unfounded fears of the death of the movie business when cable came out. These are tremendous gatherers of content and world-class franchises. If you can buy them at low multiples, why not do it?" He believes that Dow Jones, whose earnings are in the tank and fetches about the same price as 10 years ago, will likely ultimately be sold at a premium by its controlling family. He doesn't care if it takes a while; he's patient.

"Sherman also offered three other ideas for contrarians who aren't in a hurry: Sherman owns 27% of Topps (TOPP NASDAQ), the marketer of the premium candy products that kids love and parents hate, as well as collectible trading cards and Bazooka bubble gum. With no debt and an efficient plant, the company mints money when it develops a new card or candy that's a massive hit. Sherman says he buys the company at times like these when there are no hits on the horizon and shares fall into disfavor. He notes it's the kind of company that Warren Buffett likes to buy whole for its annuity-like cash flow. (He ought to know, since he's sold four companies to Buffett in the past two decades.)

"Sherman owns 32% of Oppenheimer Holdings (OPY NYSE), the mutual-fund complex and broker-dealer formerly known as Fahnestock Viner Holdings. The market seems to believe that the brokerage business is dead, but he thinks there will always be value in advice. The company's valuation is much lower than Merrill Lynch, he says, 'but that doesn't mean it's not a good place to invest capital for the public.'

"Sherman owns 24% of Marcus (MCS NYSE), an oddball conglomeration of motels, movie theaters and resorts. 'This is a waiting-for-Godot play,' he says with a laugh. The assets are run adequately and they would be worth a lot more to a larger entity. The only question is when founder Stephen Marcus will decide to sell it. 'We've owned it a long time and it's gone nowhere,' he said. 'But a good value investor will suffer dead-money risk, and we're not afraid to have lines in the water.'"

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