Last Thursday I went to a presentation by Irwin Michael, portfolio manager of ABC Funds.  His flagship fund, the ABC Fundamental Value Fund, has an impressive 15-year 18.76% compounded rate of return.  And the purpose of this meeting was to outline plans for his newest fund - the ABC Dirt-Cheap Stock Fund - launching April 1, 2006.

Mr. Michael stressed the name is not a joke, but rather accurately describes the fund’s mandate to go anywhere in the world looking for dirt-cheap stocks.  Right now, the bulk of the dirt-cheap stocks can be found in the United States, Mr. Michael says.  However, he expects to find opportunities internationally like in China, India, Spain, and Mexico over the next few years.  Already busily managing four other funds, the ABC Dirt-Cheap Stock Fund will most likely be Mr. Michael’s last.  Note the minimum investment: $150,000 CAD.

One of the things I admire most about Mr. Michael is his commitment to deep value investing.  He has his strategy and sticks to it.  No matter what.  Sometimes this causes him to look out of touch with the market, like during the dot-com boom, but over the long-term, the strategy yields superior returns.  (Again see compounded rate of return above.)  So with his new fund, we can expect the same level of deep value dedication.

Near the start of his presentation, Mr. Michael made clear that he looks at Net Asset Value (NAV) more than P/E or anything else.  When opening an annual report, for example, he reads it from right to left hunting for hidden assets in the notes to financials.  Mr. Michael examines the sum of their parts to figure out just what a company is worth.  Thus he always sets a target sell price when buying a stock.  To my delight, Mr. Michael gave numerous examples of individual stocks and their hidden assets:

Noland Company (sold at a significant profit)

• Hidden real estate.
• LIFO inventory worth $28 million more than stated on Balance Sheet.

Foodarama Supermarkets (FSM) (sold at a significant profit)

• Instead of a supermarket chain, Mr. Michael saw valuable parking lots in Jersey.
• $37 million market cap with $1 billion in sales.  Therefore, economies of scale, such as inflation, go to bottom line.

Legacy Hotels REIT (LGY-UN.TO)

• Precious air rights similar to those in Manhattan.
• Hotels have too many rooms to handle, and quite a few go vacant.  But a smart developer like Donald Trump could buy the buildings cheaply and convert the vacant rooms to condos for a large profit.
• Hidden real estate.
• Hotels like the Fairmont Chateau Frontenac are priceless.

Atlas Cold Storage Income Trust (FZR-UN.TO)

• Trading at half multiples comparatively.
• Hidden real estate.

He not only discussed his winners, Mr. Michael was not afraid to talk candidly about his losers as well.  General Motors (GM) was the main example - ABC Funds is down more than 50% on that investment.  Mr. Michael said he never thought he would see GM at $18, but nonetheless still believes in it.  The company just cut its dividend in half, meaning a savings of $500 million a year and, more importantly, it sends a message to the union that shareholders are willing to bare the load.  Finally, billionaire Kirk Kerkorian, who owns over 9% of the stock, now has his point man Jerome York on the board of directors.  Mr. York was instrumental in turning around Chrysler, and should help do the same for GM.

On the subject of entering and exiting positions, Mr. Michael said the key is to get the big move.  Most of the time he is in too early and out too early, but that’s the way he likes it.  He buys when a stock is cheap, and takes his profits when, after re-evaluating the fundamentals, the stock ceases to be cheap.  Consequently, there is always something left on the table.  Although this may seem like throwing away extra gains, Mr. Michael was adamant about sticking to fundamentals and his deep value philosophy.

On diversification, ABC Funds currently holds around 40 stocks.  Mr. Michael believes in being diversified to manage risk.  He is happy being right 7 out of 10 stocks as long as “you don’t get your head handed to you on a platter for those 3 [losers]”.  To read more information about his investment style and philosophies, visit the ABC Ten Commandments and the ABC Value Library.


Conclusion

This was my first time going to Mr. Michael’s presentations and I am glad I took the time off work.  I learned a lot about the mutual fund business, the practicalities of deep value investing, and Mr. Michael himself.  He is a disciplined individual, tough as nails (you have to be to handle the criticism), strong-minded, to the point, and contagiously passionate about stocks.  Even though he admitted that he loves his job and would do it for free, you can tell all that just by talking to him.  

Moreover, he was extremely generous with his knowledge and time as he answered all our questions.  In Part 2, I will go over some notes I took from the questions and answers.


-theo