Would you be interested in owning the shares of a company containing a set of unrelated activities, the largest of which is in irreversible decline? Before you answer that, let me add that the corporate structure is complicated, the holding company is heavily indebted and it's controlled by corporate raider and noted shark Ron Perelman.

Most investors would issue an unconditional "no." But if you said "maybe" or "at what price?" you might have the right temperament to earn fat returns on stocks that most investors will never even look at.

I'm referring to M&F Worldwide (NYSE: MFW), a holding company that derives approximately two-thirds of its revenue from Harland Clarke, a check-printing business. (Did someone say "buggy whip?") Harland Solutions provides technology solutions to the financial-services industry. Meanwhile, Mafco Worldwide produces licorice products, mainly for use in the tobacco industry. All told, M&F is an unattractive hodgepodge of businesses with a debt-to-equity ratio approaching 4 to 1.

Less than two times trailing cashflow!
However, at less than four times forward earnings, or two times trailing cash flow, M&F clearly reflects the market's disdain. Let's compare M&F to three market darlings:


Number of Analysts

Forward P/E Multiple*

salesforce.com (Nasdaq: CRM)



Netflix (Nasdaq: NFLX)



Amazon.com (Nasdaq: AMZN)



M&F Worldwide (NYSE: MFW)



Source: Capital IQ, a division of Standard & Poor's.
*Based on next 12 months' earnings. 

Yes, the three tech companies in the table are better businesses than M&F, and their "stories" are clear and well known. Everyone can agree on that -- and that's part of the problem. In the stock market, investors need to look beyond a business's overall quality to examine the price at which it's offered.

Comfort ... at a hefty price
You simply can't determine at a glance which of the companies above makes the better investment. The familiarity of Salesforce, Amazon, and Netflix and the quality of their businesses may provide a measure of psychological comfort, but they do nothing to protect investors from losses – particularly if those very attributes lead investors to overpay for the stocks. In this case, comfort comes with a very high price tag; others may disagree, but personally, I would be very uncomfortable paying these multiples.

Conversely, investors' natural aversion to investing in a messy micro-cap stock like M&F Worldwide can create opportunity. Still, I don't want to minimize the risks here, not least of which is the one that comes from sitting down to the shareholders' table with Ron Perelman. I don't like being a minority shareholder in a business in which insiders or a controlling shareholder have demonstrated a past willingness and ability to skim the cream off the top. That's hardly unusual when the party in question is an aggressive finance type.

These stocks deserve a wide margin of safety
This holds for investment vehicles such as Icahn Enterprises under Carl Icahn, investment banks like Goldman Sachs (NYSE: GS), and investment groups such as Fortress Group (NYSE: FIG). In order to invest in these businesses, I'd require a very substantial margin of safety. The same holds for M&F Worldwide.

In situations in which your investment is susceptible to the whims of a controlling or significant shareholder, it is certainly easier to throw in with a jockey who's working on behalf of all shareholders. The ultimate example of this is, of course, Berkshire Hathaway (NYSE: BRK-B), which represents a bet on Warren Buffett's capital allocation ability. (Ironically, investors may now be overestimating Buffett's worth to business and may have begun to apply a Buffett discount to Berkshire. I'd argue that Buffett's focus is on leaving behind an organization that will continue to prosper mightily without him, negating the need for any discount.)

Betting on a talented jockey
Tom Jacobs has made a "positive jockey bet" by adding a real estate investment company Retail Opportunity Investments to the Motley Fool Special Ops real-money portfolio, based on the real estate investing track record of its CEO. Between 1997 and 2006, Stuart Tanz grew the market value of one shopping-center REIT ninefold – an annualized return of 26.5% -- prior to selling it. At the head of this new company, our jockey simply has to apply the same discipline and flair for value in a favorable commercial real estate environment – more of the same, in an area in which he has already proved his ability. Will he be able to repeat his success? There's no reason to think otherwise.

People and organizations that can compound value over time are irreplaceable, but an experienced special-situations investor also looks for specific catalysts that will tease that value out over time. In the case of this real estate investment company, there is one obvious catalyst: Retail Opportunity's currently obtaining REIT status, which would force it to pay 90% of its net income to shareholders.

Want to know more?
When you can buy shares with a margin of safety and a jockey who deserves a premium, you've discovered a recipe for fantastic returns. If you'd like to see a video explaining three of Tom's favorite opportunities right now, and find out more about Motley Fool Special Ops, simply enter your email address in the box below.

Fool contributor Alex Dumortier, CFA has no beneficial interest in any of the stocks mentioned in this article. You can follow him on Twitter. Berkshire Hathaway is a Motley Fool Inside Value recommendation. Salesforce.com is a Motley Fool Rule Breakers pick. Berkshire Hathaway and Netflix are Motley Fool Stock Advisor choices. The Fool owns shares of Berkshire Hathaway. 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.