When Overstock.com ( OSTK - Get Report) shares collapsed two years ago and the CEO responded by railing against Wall Street conspiracies, most fund managers bailed out. That's when Glenn Surowiec started buying. Surowiec is co-manager at Alsin Capital's ( TURNX Turnaround Fund (TURNX), a tiny mutual fund that looks for scary situations and goes all in. "The basic strategy is to find companies that we think are being plagued by temporary, or cyclical, factors," Surowiec says. "It's an all-cap fund, and it's concentrated," he says. I'll say. Surowiec routinely has most of the money invested in a handful of names. "The fund's performance is driven by five or six positions," he says. Right now just over 10% of the money is in Overstock.com, his second-biggest stake. "It's obviously a controversial name," Surowiec acknowledges. Don't just look at the online retailer's spectacular plunge from grace. Look too at the unnerving behavior of the founding CEO Patrick Byrne, the "Oliver Stone" of the stock market. His conspiracy theory about market speculators has at times encompassed The Wall Street Journal, the Securities and Exchange Commission, organized crime on two continents, as well as TheStreet.com, publisher of this Web site (see note at end of this article). No wonder everyone fled. The shareholder register shows that Turnaround is the only fund holding a significant stake. Yet Surowiec believes the company's problems are nowhere near as bad as Wall Street believes. Management simply lost control of basic stuff such as technology and inventory during the company's meteoric growth, he says. They're now fixing those same problems, and he believes the turnaround is already happening. "The company is in much, much better shape than it was 12 months ago," Surowiec says.
Bottom line: At $15.82, Overstock is valued at just $374 million, or less than half its annual sales. If the company returns to "normalized profitability," which Surowiec pegs at around 4% operating margins, that should turn out to be cheap. (The fund's founder, Arne Alsin, is a RealMoney contributor who's also extolled the virtues of Overstock on this site. Please click here for a piece Alsin wrote in March 2006.) Not every position is quite so dramatic. Turnaround Fund's biggest holding, New Jersey's Commerce Bancorp ( CBH, is a well-run regional bank. "Banking has been a really good long-term business, and no one has done it better than Commerce in their regional markets," he says. The shares are out of favor on the Street right now because of interest rates. Banks usually make money by borrowing at short-term rates and lending at long-term rates, but for that to work, the two rates have to be different. Right now, unusually, they're not very far apart. Surowiec thinks that that situation will go back to normal sooner or later and that when that happens, you'll see Commerce Bancorp's profits boom. He's prepared to wait. "We're thinking about this company five, six or seven years from now," he says. A big position he's building right now: IDT ( IDT - Get Report). The telecom company is in the prepaid calling cards business along with voice over Internet and wholesale telecos. It's also one of those weird miniconglomerates with a couple of bizarre sidelines: ethnic foods and energy retailing. The stock has been under pressure because of a slump in calling card revenue. But at about $11 a share, IDT is valued at little over $1 billion, or half of sales. "It's not well-known, but it has a tremendous amount of cash on the balance sheet," Surowiec says. "Net cash covers a large share of the market capitalization, so basically we're getting a cheap option on the business."
He argues that Chairman Howard Jonas has a strong track record of realizing shareholder value. The company is buying back stock and paying high dividends. Jonas also has a good record of building businesses and then selling them profitably. Recent examples include Internet business Net2Phone, which IDT took public during the bubble back in 1999 and recently bought back on the cheap, and animated movie business IDT Entertainment, which he just sold to John Malone's Liberty Media ( LINTA for $186 million cash plus debt and stock. The Turnaround Fund is tiny. It only has $8 million in assets. Alsin Capital also runs private accounts with a similar strategy, but even so it is only managing another $50 million or so. Alsin is based in Eugene, Ore., though Surowiec operates out of Philly. The fund's expense ratio weighs in at 1.75%, which is on the high side but not as high as you might expect for a fund this tiny. One of the risks of the fund's strategy is that returns are going to be pretty lumpy. You'll have some great years and some bad ones, as you wait on bets that you hope will pay off. So far it hasn't set the world on fire. Since it was launched in early 2003, according to Lipper, the Turnaround Fund has returned 39.5% while the S&P 500 is up nearly 60%. "There are some periods when we look a lot smarter than we should, and other periods when a look a lot dumber than we should," Surowiec concedes. "I think it's just a function of the style." The flip side is that this mutual fund's returns are not going to be closely correlated with the rest of the market. It may have an up year while Wall Street is tanking, and vice versa. It's up nearly 10% so far this year, while the S&P is ahead just 3%. It's all about a handful of big bets. TheStreet.com and James J. Cramer, its co-founder and major shareholder, were subpoenaed in February 2006 in connection with an SEC investigation into allegations by Overstock that a research firm, Gradient Analytics, engaged in a conspiracy with short-sellers (including Rocker Partners, which at the time owned a small stake in TheStreet.com, the publisher of this Web site) to manipulate Overstock's share price. The SEC agreed that it would not, at that time, seek to enforce the portions of the subpoenas issued to the company and other media firms, including Dow Jones (DJ, that concern communications between journalists and their sources.