Dec 6, 2008
Ken Heebner is Bullish on Financials
Diya Gullapalli at the WSJ is running a good story today on Ken Heebner and his bullish stance of financials:
This fall, Mr. Heebner built a more than $1 billion combined position in Citigroup Inc. and Bank of America Corp. He has put $780 million in two Brazilian banks, Banco Bradesco SA and Banco Itau Holding Financiera SA, counting on U.S. actions to help lending abroad. CGM Focus’s biggest holding through September was $552 million in Wells Fargo & Co.
About 40% of his $4.3 billion CGM Focus was in financial stocks as of Sept. 30, according to its portfolio report.
In determining which ones to buy, Mr. Heebner is leery of certain traditional earnings multiples that don’t always best gauge affordability. So for banks he uses two other measures, which suggest they are at historically cheap levels and, because he feels strong rebounds are assured, are ripe for plucking.
One such metric is “price-to-tangible book value.” For 20 big lenders, including Citigroup, Bank of America and Wells Fargo, this runs about 1.1 times, compared with 2.7 on average since 1990, according to a Goldman Sachs report. Tangible book value is the net worth of a company after stripping out intangible assets such as goodwill and patents. A lower ratio suggests a bank’s stock is undervalued but can also suggest assets are overstated…
His second measure is the “price-to-preprovision earnings” ratio. For these 20 banks, it is 5.4 times compared with 12.2 times on average. Preprovision earnings exclude provision expenses for loan losses and measure banks’ earnings power. A relatively low ratio can mean the market is underestimating the value of a bank’s potential for profits. But a low ratio also can be warranted if the market believes a company hasn’t provisioned enough for such losses.
Heebner is an interesting investor to look at, at the end of 2007 he was routinely awarded as fund manager of the year. I think that the main issue with Heebner, which Gullapalli does indeed address, is the fact that he’s largely a momentum player. His fund has a pretty high turnover rate, basically from my perspective it looks like this – he takes a number of concentrated positions in a particular macro-investment theme and looks to see if they play out over the course of that quarter. If they don’t, he sells.
Most amateur investors like to look at 13F-HR filings to see what a particular fund manager is doing, but with a guy like Heebner this can be a recipe for disaster. The quarterly filings are always for what was bought last quarter. If you have a fund manager who has a turnover rate of 4 times a year, like Heebner does, you risk purchasing securities that he’s already sold. So I don’t really see Heebner as a guy you can study in this sense, or piggyback off of. If you’d like to invest alongside him, your best bet would be through his CGM Focus Fund.
You can still learn from an investor like Heebner in other ways. Try reading some of the past articles that include interviews with him, so you can figure out what his thought process is like when he’s looking at the market. That could be helpful with finding which trends you might want to pick up on when looking for cheap stocks.
Here’s a few good articles:
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