Beating the Street (33 page)

Table 13-1. MUTUAL THRIFT AND SAVINGS BANK IPOs COMPLETED IN 1991†

Table 13-2. THE 10 BEST AND 10 WORST RESULTS: MUTUAL THRIFT AND SAVINGS BANK IPOs COMPLETED IN 1992

Table 13-3. THE 10 BEST AND 10 WORST PERFORMING MUTUAL THRIFT AND SAVINGS BANK IPOs COMPLETED IN 1993 THROUGH 9/30/93

There are two quadruples in the group—Mutual Savings Bank of Bay City, Michigan, and United Postal Bancorp in St. Louis. A portfolio of the five top performers taken together has produced a 285 percent return. Even a person who was unlucky enough to have chosen the five worst-performing thrifts that came public in 1992 has made 31 percent on his money through September 1993. Investing in the five worst has beaten the S&P 500 and most of the equity mutual funds.

Through the first nine months of 1993, another 34 mutual thrifts have come public, and in this shorter period the worst is up 5 percent, 26 are up 30 percent or better, 20 are up 40 percent or better, and 9 are up 50 percent or better. (All the above numbers were provided by the skillful crunchers at SNL Securities.)

From Asheboro, North Carolina, to Ipswich, Massachusetts, on the East Coast; from Pasadena, California, to Everett, Washington, on the West; from Stillwater, Oklahoma, to Kankakee, Illinois, to Rosenberg, Texas, in the middle, neighborhood S&Ls have been the best investments that hundreds of thousands of people have ever made. This is the ultimate example of how individual investors can succeed by ignoring companies that are widely held by institutions and by investigating what's close to home. What could be closer to home than the local thrift where you keep your safety deposit box and your checking account?

An account in any one of these thrifts or savings banks entitles you to participate in the IPO if and when it happens, but you certainly aren't required to do so. You can go to the meeting where the deal is explained to potential shareholders, see whether the insiders are buying the shares, read the prospectus to find out the book value, the p/e ratio, what the earnings are, the percentage of nonperforming assets, the quality of the loan portfolio, etc., and thus get all the information you need to make an informed decision. It's an opportunity to take a close look at a local company—and it's free. If you don't like the deal, the organization, or the management, you simply don't invest.

There are still 1,372 mutual savings banks that have not yet come public. Check to see whether any of these are located in your area. By opening a savings account in any of them, you'll have the right to participate in the IPO when it happens. Sit back and await developments.

A Deal with a Yield

Here's another group of companies whose benefits are being ignored by Wall Street. The very name “limited partnership” brings back memories of the suffering of thousands of investors who were lured into heavily promoted tax-shelter boondoggles—oil and gas partnerships, real-estate partnerships, movie partnerships, farming partnerships, and gravesite partnerships—in which the losses far exceeded the amount of taxes they had hoped to avoid.

As a result of bad publicity from the boondoggle partnerships, the good ones that are publicly traded (the so-called master limited partnerships) continue to suffer from guilt by association. These are ongoing enterprises whose purpose is to make money, not to lose it in order to outsmart the IRS. More than 100 MLPs trade on the various stock exchanges. Every year, I find a bargain or two in this group.

The shareholder in an MLP has to do some extra paperwork. Special tax forms have to be prepared. This is less of a nuisance than it used to be, because the investor relations department of the partnership fills in all the blanks. Once a year, you get a letter asking you to confirm how many shares you own and whether or not you bought additional shares.

But this is nuisance enough to dissuade many investors, particularly
fund managers, from investing in these stocks. I'd answer questionnaires that were written in Sanskrit if I thought it would help master limited partnerships become less popular than they already are, because this lack of popularity keeps the prices down and helps create the bargains that are often found in this group of companies.

Another appealing feature of the MLP group is that these companies tend to be involved in down-to-earth activities, like playing basketball (the Boston Celtics is an MLP) or pumping oil and gas. ServiceMaster runs a janitorial and cleaning service, Sun Distributors sells auto parts, Cedar Fair runs an amusement park, and EQK Green Acres owns a shopping center on Long Island.

Even the names of the master limited partnerships seem antiquated and out of sync with our high-tech culture.
Cedar Fair
could easily have been written by William Makepeace Thackeray and
Green Acres
by Jane Austen, and I wouldn't be surprised to see Tenera show up on Dartmoor with the other characters from Thomas Hardy.

This all adds up to a bunch of companies with strangely romantic names, engaged in mundane activities, and organized in a complicated manner that requires extra paperwork. It takes an imaginative person to be attracted to the idea of owning shares in a limited partnership, and then he or she runs into the paperwork requirement, which most imaginative people can't stand. A small minority of imaginative people with retentive tendencies is left to reap the rewards.

The biggest difference between an MLP and a regular corporation is that the MLP distributes all its earnings to the shareholders, either as dividends or as a return of capital. The dividends, as a rule, are unusually high. The return of capital feature allows a certain percentage of the annual distribution to be exempt from federal tax.

The first of these publicly traded partnerships came onto the scene in 1981. The majority appeared in 1986, after changes in the tax laws made this form of organization even more advantageous than before. Whereas the real estate and natural resource partnerships can continue to exist indefinitely, all the others must be closed out in 1997–98. They lose their tax benefits at that time. An MLP that's earning $1.80 today might only be earning $1.20 in 1998. This is something to worry about in three or four years, but not today.

Most of my favorite MLPs are listed on the New York Stock Exchange. At the 1991
Barron's
panel I recommended EQK Green Acres and Cedar Fair, and a year later I chose Sun Distributors and Tenera. What follows is a rundown on why I was attracted to each of these.

EQK Green Acres got my attention after the Saddam Sell-off. (The EQ comes from the Equitable Life Assurance Society, a partner in this enterprise. K stands for Kravco.) The company came public at $10 four years earlier and once had hit a high of $13.75, but in the summer of 1990, when investors were fretting about the demise of shopping centers along with the rest of retailing, the price dropped to $9.75. At that price, EQK Green Acres had a 13.5 percent yield, as good as the yield on some junk bonds, and I thought it was more secure than some junk bonds. The company's principal asset was its huge enclosed mall on Long Island.

Not only did the stock have a chance to appreciate in value, but the management owned a bundle of the shares, and the dividend had been raised every quarter since the company went public.

I remembered some of these details because of course I'd bought some EQK Green Acres for Magellan. Originally, I heard about it from a fund manager at Fidelity, Stuart Williams, but 750,000 insiders on Long Island got essentially the same tip. That's how many people live within five miles of the Green Acres mall, situated in the middle of densely populated Nassau County.

This is the kind of story I've always favored, the kind that can be reviewed at the mall. I visited Green Acres and bought a pair of shoes there—this is a popular place. There are only 450 such enclosed malls in the entire country, and contrary to popular impression, not many new ones are being built. If you wanted to put up a rival mall of similar magnitude, you'd have zoning problems and it wouldn't be easy to find 92 empty acres to pave over for a parking lot.

Strip malls are going up in every neighborhood, but enclosed malls have what amounts to a niche. If you believe in the value of this niche and you want to invest in a mall, Green Acres is the only public company I know that's devoted exclusively to running one.

The bugaboo of any mall owner is vacancies. That was the first thing I checked when I read the annual report. Malls in general had a 4 percent average vacancy rate at the time; Green Acres' was lower. A true insider (that is, a resident of Nassau County who shops at Green Acres) has the advantage of checking for vacancies every week, but I was satisfied that vacancies were no problem.

Moreover, a Waldbaum's supermarket and a Pergament Home Center were moving into the mall, and both of these together were certain to increase the revenues from rent. One third of the stores
in the mall were subject to large rent increases in 1992–93. This augured well for the future earnings.

The worrisome elements were a highly leveraged balance sheet (the company must pay back all its debts in 1997), a high p/e ratio, and the vulnerability of any mall to a recession. These were overridden, in the short term at least, by the excellent dividend and the fact that the stock price already was depressed. A high p/e ratio is a common characteristic of master limited partnerships.

When I got around to making my 1992 selections, Green Acres stock was $11. When you added in the yield, the total return for 1991 exceeded 20 percent. This was a nice gain, but in rechecking the story I found more cause for concern. A lousy holiday season for retailers had depressed the rents, which are based in part on a percentage of sales. If a store does poorly, the mall gets less.

Presumably, all malls and all retailers were facing the same predicament, so it wasn't as if Green Acres was doing any worse than the rest. I find general gloom in an industry far less bothersome than if a specific company struggles while its competitors thrive. Nonetheless, in a telling paragraph in its third-quarter report for 1991, Green Acres admitted it might forgo a penny a year increase in its dividends.

This apparently innocuous action was an attention-getter, as I mentioned in
Chapter 2
. If a company has raised its dividend 13 quarters in a row, as Green Acres had, it has powerful built-in incentive to continue the string. To break it for the sake of a penny, or a grand total of $100,000, I suspected was symptomatic of deeper troubles.

Another factor in my decision not to recommend Green Acres a second time was the terrific news on the horizon. The company had announced it was negotiating with two large potential tenants, Sears and J. C. Penney, to lease space in the expansion of the second floor of the mall. This wasn't the same as a signature on a contract. If the company had announced a signed agreement with Sears and J. C. Penney, I would have bought as many shares as I could get my hands on. A potential agreement was too iffy.