11/03/2009

Another Margin of Safety , MVC

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<< As another "margin of safety" play, consider MVC Capital , a business development company that specializes in acquisitions and financing of middle market companies. The market cap is $227 million, or $9.35 a share, against stated net asset value of more than $17 a share. In fact, management just this morning issued a release that the aggregate value of the fund's investments increased by $1.33 a share at the end of October.

MVC is not highly levered; its portfolio is nearly two-thirds equity and the shares currently yield 5.3%. Chairman and portfolio manager Michael Tokarz receives no salary and an incentive of 20% for any realized gains. At a nearly 50% discount to net asset value, this stock is trading at one of its largest discounts ever, and you can rest assured management is considering how to fix this discrepancy. MVC invests in old-economy businesses, many that have been around for decades.

The big risk of course, is taking management's assessment of NAV at face value. (If this company were trading at 20% of NAV, I probably wouldn't be writing about it.) Management owns more than 11% of outstanding shares, a small sign of alignment of incentives. The discount in NAV protects you from some unexpected adjustments. The dividend along with the fair pay structure gives management every incentive to grow the value of the business.

All investing entails risk. Focusing on the balance sheet can help eliminate a lot of that risk, but an investor's greatest margin of safety comes when a sound business chugs ahead with a functioning earnings engine >>

I have a position in MVC

4 comments:

Anonymous said...

thanks Shadow, great find!!

ShadowStock said...

good luck,with the idea!

Floris said...

Hey Shadow,

I had a look at this investment. Usually when I invest I want to truly understand what I am investing in. Thats why I love small cap stocks. In this case the proposition looks great because you can buy a diversified group of companies at nearly 50% off. This is also the case if you buy at a 50% discount to book value.

The problem I have with this investment is that I will never be able forecast the future with any degree of certainty. I am dependent on the investment whims of the portfolio manager which is not as quantifiable as the asset base or earnings of say a wholesaler.

I agree with you analysis of the incentives, the track record of the management but what makes this a confident investment for you?

Looking forward to your response and thanks for the flow of info!!

reg,

Floris

ShadowStock said...

Hi Floris

I agree and I have no way to be certain the group of business is equal to the book value of ~17. But having said this, given the large recent insider buying by management, quality institutional micro cap value ownership, solid balance sheet, diversified group of companies in their portfolio, proven management team that have been incentivized so adding the idea to a diversified portfolio of other micro cap value ideas could prove satisfactory. If I decide to gain additional insight my position size may change if warranted. This approach works well for someone like me who can’t spend the required time to create a concentrated portfolio of micro cap stocks. I find it useless to call management as they have an agenda and are seldom useful and often times misleading.
I rather judge management based on statistics such as capital structure, share count reductions, SGA and executive costs to revenue, high historical ROIC relative to industry peers and a diversified group of insiders holding the stock. I will also use the proxy to get a background on management and the board.

Some of the holders of MVC are value investors Michael Price, Royce, John E. Deysher,
check the links
http://www.stockpickr.com/symbol/MVC/

http://www.stockpickr.com/port/Barron-s-Interview-John-E-Deysher/

Barrons MVC question to John Deysher :
“Q: I see you also have the private-equity group MVC Capital. Isn't private equity having trouble accessing capital? A: There is probably no other industry that is less loved. All those stocks are down for a couple of reasons. No. 1, a lot of them have fairly leveraged balance sheets and questionable investments. MVC Capital [MVC], however, has a pristine balance sheet, and most of its investments are holding up fairly well. Second, there is some question as to what the values of these private companies are. Clearly, valuation multiples are coming down, but MVC is very conservative in its valuations. It has a net asset value of $17 a share right now and is trading for 9. They have taken markdowns on a couple of portfolio companies. But we think most of the 40 or so companies they have in the portfolio are still doing OK. Their ability to access capital is not much of an issue since MVC is not dependent on a lot of debt.”
Good luck with all your investments
John