When we left
, a private hedge fund in Stamford, Conn., last week, he was
singing the praises of
, an out-of-favor, $13 billion engineering and construction firm that was loaded with assets but was trading at a sharp discount to its revenues. Here's a guy who spends much of his day aggressively trading stocks, yet he saddles himself with a dud like Fluor and, as it turns out, a whole list of what he likes to call "extreme value" stocks.
These are stocks that have assets or cash and a trigger, such as a restructuring or the possibility of a takeover, that can cause the stock price to rise. But not immediately. For these investments, momentum and growth are irrelevant.
"We will readily buy a company with a heavy debt load if that company has assets sufficient to pay off the debt and gives stockholders a premium, even on a complete liquidation," Marquez says.
He adds, "For this type of investment it doesn't matter if the market is at 10,000 or 2000."
Examples of his long positions include:
: You gotta be kidding? No, he isn't. This company can't seem to be able to get out of its own way thanks to a series of missteps and losses. Its stock closed at 12 1/2 on Friday but rose as high as the mid-40s in 1995. However, Marquez is attracted by $3 per share in gross cash.
The company also owns roughly 85% of
, a former division, part of which was spun off last June. Silicon Graphics has said it plans to sell the rest by September of 2000. In addition, privately-held
, another subsidiary, is valued by some analysts at roughly $3 per share. "Even with capital gains tax taken out, the
workstation manufacturing business is valued at zero by the stock market, so I'll take my chances it will be worth something more than nothing soon."
He adds that the company's new products have been getting good reviews. But what about execution?
took the company to task last week for not being able to execute. Maybe, but that's what they said about
, Marquez says, "and
bought it at twice the price it was trading for. And in its worse days Digital never got as cheap as this.
"You're paid to wait, because when a balance sheet is as rich as this you can't get in any more trouble."
: The same Cabletron that has never quite been able to get out from under ever since stuffing the channel with way too much merchandise a year or so ago? One in the same. It trades at one-times revenues, "which is unusually cheap for a tech stock," Marquez says. What's more, it has no debt, $500 million in cash "which should rise to $600 million in the next six months." That translates to $3.50 per share, or 43% of its market value; the stock closed Friday at 7 15/16. Not bad, Marquez says, for a stock whose new product line has been getting good reviews. A new alliance with
, announced Friday, can't hurt, either.
Network Equipment Technologies
: Can we get any closer to the bottom of the barrel among tech stocks? (Sure, but Marquez doesn't want to go there!) "This is another tarnished tech company," he says. It specializes in wide-area networking. The stock is down more than 80% from its all-time high. Its international business fell off a cliff last fall but is starting to recover. And it's on the radar of Joseph Harrosh, a private investor known for agitating companies to maximize shareholder value. He recently picked up a 6% stake.
The stock trades at around 8, but has $5 per share of working capital. "This stock is selling like it's at the bottom of a long bear market," Marquez says. "It'll probably be taken over sooner rather than later if its stock stays low."
: This oil services company recently raised cash through a debt offering. "Turns out they have ample liquidity to get through the next 12 to 18 months," Marquez says. "And even with issuing high coupon debt, they'll have positive cash flow and earnings per share in 1999 and 2000.
"The point I want to make is that high debt levels, while not desirable, are okay if the assets underlying the debt are sound. In this case, they most certainly are. And if the stock remains under 10 for very long
it closed Friday at 8 1/16 it will attract a takeover offer of at least $14 per share." He hopes!
Pioneer Natural Resources
: "This is
biggest company goof in his whole illustrious career." The stock, at 8 7/16, is down 85% from its high. "They overleveraged the balance sheet at exactly the wrong point in the cycle, and now their bankers are breathing heavy down their corporate neck to reduce bank loans outstanding by the end of the year.
"Again, debt is only a problem if your assets aren't good and therefore are not readily salable. In this case, their core assets have some of the finest long-lived natural gas reserves in the United States. The company has a goal of reducing debt by $500 million to $600 million this year, which should be attainable. And they have interesting drilling prospects offshore in the Gulf of Mexico, off West Africa and in South Africa."
: Marquez and I were talking about this very company Friday when a headline popped up that an investment group headed by value investor
had bought more than 5% of the company, which was the exploration and production side of the old
before Pennzoil merged with
Quaker State Oil
a year ago to form
Pennzoil Quaker State Oil
Even before Gabelli showed up, Marquez told me he believed Pennz was "a cheap energy stock" that trades at a steep discount to its underlying reserve net asset value. Prior to its split-up, the company received a takeover offer from
Union Pacific Resources
"at three times over its present price" of 10 9/16. Last week, it so happens, Union Pacific closed a debt deal that bolsters its cash coffers to $1.3 billion. Will it make another run for Pennz Energy? If not, Marquez believes somebody eventually will -- unless the stock rises.
Finally, Ingram Micro
, the world's largest electronics distributor: "Its stock was a rocket the last two years, rising from the 20s to the 50s."
Then an earnings warning several months ago caused the stock to collapse to a recent low of 16; it closed Friday at 21 5/16.
"Even on the reduced EPS estimates, it sells for only 15-times 1999 earnings estimates of $1.30. It was never as good as the price indicated when it was 50, but it's not nearly as bad as the market assesses its value at 16.
"It's another casualty of the growth stock vigilantes who can be counted upon to punish unmercifully any stock or company that dares to disappoint."
Thanks, Jim. We'll check back in a year.
In the wake of Compaq's earnings warning Friday:
Wish I followed up on a very good tip I received last week that Compaq had offered extremely attractive incentives during the last week of the last quarter to get distributors to take extra product. (Also known as channel-stuffing.) If it's true, the incentives must not have been good enough!
Sticking with the theme: Heard from
, who runs
, an Emeryville, Calif. market-research firm that has been tracking PC purchasing data for 14 years. He says Compaq isn't alone with sluggish sales. His data, from business purchasers, shows that sales of
PCs and low-end servers are also down. Ditto for
. "It looks to me like
Gateway should have preannounced a shortfall, unless they made it up on the consumer side." (The results of Techtel's consumer data should be available in about a week.)
Herb Greenberg writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at
firstname.lastname@example.org. Greenberg writes a monthly column for Fortune and provides commentary for CNBC.
As originally published, this column contained an error. Please see
Corrections and Clarifications.