How to Chase Value During a Bull Market

Some value investors have held their own by updating their strategies in this upbeat market.

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That's a slightly different bet than the one made by Pershing Square Capital Management's William Ackman, who purchased the stock at $25 a share three years ago and has watched it drop to half that level amidst steepening losses and the firing of a once-promising CEO. More recently, the stock recovered to over $18 as investing guru George Soros took a large stake.

Since he holds debt, Roumell says his position in J.C. Penney is "not as dependent on a highly successful turnaround" as it is for stock buyers. The bonds, in theory, are backed up by the value of the company's large real estate holdings and protected by lending covenants that put bond holders ahead of others in any restructuring and also require the debt to be paid off in full if there is a change of control.

Roumell's fund also holds a less-known but similar investment in a large legacy technology name, Compuware, that sells enterprise software and services. Roumell bought it when it slipped below $7, calling it, at one point, the "one stock to buy if you only own one." Compuware has continued to generate cash as it tries to convert to a cloud-based software company. The stock surged when private equity investors took aim at the company. It was a smaller version of this year's Dell deal, Roumell says. "Cheap money is moving things along right now," making even large, corporate prey affordable, he says.

Value still means digging deep. Roumell hasn't stopped drilling deep for unloved and undervalued companies that are overlooked by the market. Historically, he says he considers every investment based on the kind of criteria private equity investors use, looking for cash flow and asset value that justifies an investment. "We really try to just look at every company we invest in and ask whether this is a business we would take private," he says. "In that sense, you could say this is a public mutual fund with a bit of private-equity orientation." He says his firm's long-term strategy of finding hidden value will continue to uncover returns that can double or triple.

[See: Meet the White Hat Stock Market Activists: Not Just Corporate Raiders Anymore.]

Those values can still be found because "everyone is investing in the same stories and the same stocks," he says. "The Internet has led to a commoditization of that information. You absolutely have to get out of your office and do direct work to find value."

Roumell cites "digs" that have led him to companies like Nashville-based American Safety Insurance. "When I went out and saw the chief financial officer, he said he not had an analyst visit in three years," Roumell says. The stock trades at 65 percent of book value, and managers are big owners of shares, which he considers a positive. Two of his other favorite investments have virtually no analyst coverage.

He likes Denver-based Sandstorm Metals & Energy, which finances mining and energy companies in exchange for agreements to buy their output at favorable costs. Sandstorm's shale oil deals potentially give it the upside of oil exploration without all the risks, Roumell says. Tecumseh Products is in the midst of a turnaround in which Roumell has played a role has an activist investor. He has visited plants in Brazil and India to monitor is progress.

It's not as easy as looking up a stock on the Internet, Roumell says. But there are value plays out there. "You have to dig hard to find them now. But you can find them," he says.

Corrected on 06/05/2013: A previous version of this story referenced the single “fund” performance in the ninth paragraph, and should have referred to all of the firm’s funds. In subsequent references performance totals refer to Roumell’s overall firm.