Bruce Sherman has his eye cast on a big-bucks deal with Knight Ridder, which has $3 billion in revenue.
MIAMI — Bruce Sherman turned his first stock-market deal on his 21st birthday, when he gained control of the 10 Polaroid shares his dad had given him as a bar mitzvah present eight years earlier.
He had already scoured Polaroid’s annual report, researched the company and concluded the price was overvalued — he’d better sell while the going was good. The shares had cost his father about $20 each. The younger Sherman sold at $180.
“I don’t think it ever saw that price again,” he tells author Peter J. Tanous in “Investment Gurus.”
Sherman is still doing much the same thing as chief executive and chief investment officer of Private Capital Management (PCM), a money-management firm based in Naples, Fla.
The numbers have grown a bit, though. Sherman and his team juggle a whopping $32 billion, buying and selling huge chunks of stock in scores of carefully selected companies, including newspaper publishing giant Knight Ridder.
Money Manager Review and Nelson Information rank him in the top echelon of the country’s money managers, earning a 21 percent annualized return for clients over the past 10 years. That compares with 9.5 percent for the S&P 500.
A few of Sherman’s coups: selling three companies to Warren Buffett’s Berkshire Hathaway at a sizable profit, buying tech company Qualcomm before its stock rose 2,000 percent in 1999, and managing the 2001 sale of his own firm to Legg Mason for $685 million in cash and two earn-out payments that could take the price to $1.38 billion.
He now has his eye cast on a big-bucks deal with Knight Ridder, which has $3 billion in revenue. PCM is its largest stockholder, with an 18.9 percent stake. Knight Ridder owns a 49.5 percent stake in The Seattle Times Co.
Sherman, who declined to be interviewed, two weeks ago sent a letter to the Knight Ridder board requesting it auction off the company to realize the full value of its stock. The shares plummeted by almost 19 percent during the past year until rallying on news of PCM’s letter.
Two days later, Sherman’s firm was joined by the second- and third-largest stockholders.
On Thursday, PCM increased the pressure on Knight Ridder, saying in a regulatory filing that it planned to nominate its own directors and meet with other shareholders because of what it called a “limited response to the serious concerns” raised by large shareholders.
Knight Ridder declined to comment on the filing.
Sherman is not known as a particularly vociferous shareholder, but he’s not afraid to bare-knuckle corporate boards when he deems it necessary.
Example: The board at Albright Financial, a $3 billion bank in which PCM was the largest shareholder, turned down a $35-per-share buyout offer that was $7 over the trading price. Sherman tracked down the directors’ home addresses and fired off letters reminding them of their fiduciary duty to shareholders.
In “Investment Gurus,” Sherman discloses his philosophy of pinpointing stocks that, for some reason, Wall Street does not like and thus are cheap.
Sherman doesn’t pay much attention to Street analysts: “We find most Wall Street research to be short-term and superficial,” he told Money Manager Review in 1995.
A key factor Sherman looks for: a healthy discretionary cash flow, or cash generated by operations less capital expenditures — money to buy back shares, retire debt or acquire new businesses.
“We measure our own personal lives by how much free cash we have in the bank; we should evaluate companies the same way,” he says.
Newspapers are one such business. Although they boast profit margins typically in the 20-percent range, their stocks have been sliding due to Wall Street concerns about accelerating circulation declines and the industry’s future viability.
The contrarian Sherman likes newspapers: He has trebled his newspaper holdings since early 2003 to total some $4.5 billion worth of stock across nine companies, according to Deutsche Bank.
When he targets a company, he meets management and employees and gives the place the once-over. “The company visit is half of it,” he said.
Once Sherman decides to invest, he goes in big. He aims to be one of the three largest shareholders in order to have some say-so over management.
Another key ingredient: passion. This is a man who reads 10-Ks — corporate annual documents — in the Jacuzzi.
“It’s his skill in analyzing balance sheets as a CPA, combined with dogged pursuit of detail and insistence on evaluating management,” said Tanous, president of Lynx Investment Advisory in Washington.
Despite his prodigious and powerful stock positions, few outside the world of big wealth know who Sherman is.
Tanous describes him as “somewhat reclusive.”
From a middle-class home in Queens, N.Y., Sherman earned a degree in accounting and became a CPA.
Working at Arthur Young & Co. by day, he studied for a master’s in business administration in finance from Bernard Baruch College at night.
Sherman attributes that foundation of reading the nitty-gritty of balance sheets as the springboard for success.
In 1979, at age 29, he ventured south to Naples as the steward of the Collier family’s investments. The Colliers, for whom Collier County is named, at one time owned 1.2 million acres of Southwest Florida.
There he got a grounding in newspapers. He sat on the board of the Colliers’ Naples Daily News and later recommended the family sell it to Scripps Howard.
Sherman proved himself such a canny investor that in 1986, the Colliers let him take on other clients, and he founded Private Capital Management with $50 million in assets. Since then, he says he’s consistently met his goal of at least a 15 percent annualized return or doubling his clients’ money in five years.
“The thing that impresses me about Bruce,” Tanous said, “is that he was an accountant that developed an interest and skills in money management and parlayed that to become one of the most successful money managers in the country.”
Information about PCM’s regulatory filing was provided by Reuters.