The Johnny Depp of Closed-End Funds Talks CUBA (part 3)
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Closed-end fund guru Tom Herzfeld discusses Cuba and his most popular fund, the Herzfeld Caribbean Basin Fund (NASDAQ: CUBA).
[Continued from part 2]
Nick Slepko: How did you end up a boat person – which is to say, how did you end up in Florida?
Tom Herzfeld: I went to a textile engineering school because my family was in apparel manufacturing, and since I was an only child my parents said I had a choice of which textile school I wanted to go to. [laughs]
We had two companies: The Liberty Pajama Company down in Tennessee, and Liberty-Tomlen Manufacturing which made medical garments. My grandfather ran the factories and my father, a lawyer, ran the business side of it in New York. I was supposed to take over the manufacturing.
Slepko: Did you have any idea that you would be doing what you are doing now?
Herzfeld: No, I switched over. I didn’t like the engineering courses and I found I liked the business ones. I had one instructor at Philadelphia Textile [now Philadelphia University] that had quite an influence on me, Robert Parry. He was a PhD candidate at the University of Pennsylvania at the time and went on to become president of the Federal Reserve Bank of San Francisco. I still remember his money and banking courses – they were much more interesting than ones about weaving fabrics. I still rely on Bob for advice.
After college, I enlisted in the army reserve. After my active duty I went straight to Wall Street as a trainee and found a buyer for the family business. (I sort of helped my father retire early.)
Slepko: It sounds like you were quicker to discern trends in the American textile industry before Buffett or Romney.
Herzfeld: Apparel manufacturing was a very tough business. Even paying the minimum wage, we were not competitive with Asian imports. And yet, I understand apparel manufacturing and would like to put that to use one day for the fund in the Caribbean, perhaps in Haiti, maybe even in Cuba. By the 1970s, I had formed a [New York Stock Exchange] member firm with two partners, and I think at 25 or 26 I might have been the youngest managing partner on the exchange at the time. However, my two partners were much more interested in trading go-go glamor stocks like Motorola and IBM. I wanted to trade closed-end funds, so eventually sold my interest in the company, and moved to Miami where I ultimately formed my current company.
Slepko: Well, you’ve been in Florida now for over three decades and have gotten to know the business and social community. Quite a few of the Fund’s holdings are Florida-based public companies. Some have done well, others not so much – especially in the shipping and freighting category.
Herzfeld: Our largest position in the early years of the Fund was the Florida East Coast Railway, which got bought out resulting in a very large profit for Herzfeld Caribbean. I still wanted to have railroad opportunities connected to Cuba, so we added Rail America (NYSE: RA), which is also being taken over and we’ll have a large profit from that too. They are in their final phases of acquisition. Although, Rail America wasn’t the strongest of the Cuba plays and frankly I’m glad to take a profit and move on. Florida East Coast was a great Cuba play because they ran the railroad from Jacksonville south along the coast of Florida and they were going to operate a rail-barge from the United States to Cuba.
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Norfolk Southern is in a very strong position – though their stock is down today on bad earnings (five points today). But I like the company, and when people sell off on bad earnings I have often found that is a buying opportunity. We aren’t buying them for their earnings for the next quarter, we are buying them for their strategic position.
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TECO Energy (NYSE: TE), the Tampa electric company, is similarly in a good position to be involved in Cuba by simply extending their already existing network. They already have ships operating around the Caribbean Basin and an operation in Guatemala – they would be a natural for Cuba.
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Grupo TMM (NASDAQOTH: GTMAY.PK) is a shipping company that has not done well – and I’m not sure they will. The company’s financial results for the past few years have been mainly impacted by the high volatility of the exchange rate between Mexican pesos and US dollars and the global economic slowdown, calling into question the continued viability of their NYSE listing. I think Seacor , which is based in South Florida and concentrates in offshore oil and gas, should see some opportunities in Cuba, which is currently drilling for offshore oil.
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Our largest holding, which we continue to be very optimistic about, is Seaboard (NYSEMKT: SEB) which has an extensive route structure in the Caribbean. We started buying that stock when it was about $200 a share, it’s changing hands at $2,200 a share now.
Unlike Seaboard, we had a pretty big loss a while back when Trailer Bridge went broke. I was so optimistic about Trailer Bridge. They were such a natural for our portfolio. They operated a fleet of ships and trucks between the US, Puerto Rico, and the Dominican Republic.
As a yachtsman, I’m always worried about a vessel’s draft [how many feet a hull goes under the water]. A lot of the waters in the Caribbean – especially Cuba – have shallow water ports. Only three or four ports in Cuba can accommodate deep draft vessels. Indeed, you can’t get a cruise ship into the Havana Harbor – they’ll have to operate with tenders or go to Mariel and bus people in.
What I liked about Trailer Bridge is that they had shallow draft vessels and could have operated in any port in Cuba. Seaboard is mostly large vessels with deep drafts so it won’t be as easy for them, but they’ll do fine. Trailer Bridge was always a leveraged, speculative company, but if the embargo would have been lifted a three or four years ago, we would have made a large profit with them. We would have been heroes with that one.
[Continued in part 4]
Nick Slepko has no position in any company mentioned here at the time of publication. The Motley Fool owns shares of RailAmerica. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
