Two Small-Cap Value Ideas for the Stealing

If you're a value investor, one of the hardest things to do is to find enough stocks at any given time to make up a full portfolio of stocks that are too cheap not to own.

I look for ideas through a variety of methods, including screening for stocks, reading the news constantly and sorting through various SEC filings and articles.

Sometimes the easy way to get ideas is to simply steal them. Willie Sutton said he robbed banks because that's where the money was. It can be the same when looking for cheap stocks worth owning.

There is a whole cult of people who search for every little move that super-investors such as Warren Buffett make in the marketplace, in hopes of copycatting. Since Warren is now too large to own the type of small, cheap stocks I like to own, I prefer stealing from some of the successful value investors who tend to own the type of stocks I look for.

Chief among these is Seth Klarman of the Baupost Fund. Mr. Klarman is considered one of the legends of value investing, and copies of his out-of-print book Margin of Safety have sold for as much as $1,000 on eBay and other Web sites.

The Shipping News

Klarman has recently filed some 13Gs on a few interesting companies, indicating that he now owns more than 5% of the outstanding shares. He has added to his position in Horizon Lines (HRZ - commentary - Cramer's Take) recently, according to his SEC filings.

Horizon is a container shipping company specializing in ocean and inland shipping through its own trucking lines as well as relationships with third-party contractors. A combination of a weakening economy and higher fuel prices has hurt this stock lately, driving shares down almost 70% over the last year.

At the current level, the shares trade at around four times free cash flow, according to management's lowered estimate for 2008. It is a bit more leveraged than I usually like, but Baupost is a large owner, as are two other highly successful funds, Fairview and Tiger Global. The shares trade at the lowest level since Horizon's initial offering three years ago and are worth further investigation at these prices.

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Please note that due to factors including low market capitalization and/or insufficient public float, we consider Horizon Lines and A.C. Moore to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices. At the time of publication, Melvin was long XXX, although positions may change at any time.

Tim Melvin is a writer from Stevensville, Maryland, who spent 20 years a stockbroker, the last 15 as a Vice President of Investments with a regional firm in the Mid Atlantic area. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Melvin appreciates your feedback; click here to send him an email.