He makes money on bankrupt, dog-eared companies

By , Special to The Christian Science Monitor

You might call him the Evel Knievel of the investment world.

Max Heine, white-haired co-founder and chairman of Mutual Shares Corporation, may not look like a daredevil, but few Wall Street investment advisers have the courage to invest where Mr. Heine puts a substantial portion of his fund's

50 million in assets.

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Mutual Shares invests in bankrupt companies, firms going through reorganization for a variety of reasons, and an assortment of low-price, dog-eared firms. Among them: W. T. Grant; Food Fair (now reorganized as Pantry Pride); Vista Resources and Amdisco (essentially assetless shells); and Duplan, a bankrupt textile company now being reorganized as Panex.

In addition Mutual Shares holds bonds in a host of railroads that hit the skids and were taken over by the government in the mid-l970s to be incorporated in that strange hodgepodge of railroads that twine through the Eastern United States - Conrail.

Mr. Heine got his start on Wall Street in the l930s, after escaping from Nazi Germany in l934. He went to work back then, he says, for a private individual investor who ran a few brokerage houses.

''He was a great boss,'' he reminisces, ''he let me run wild.'' Running wild in the early '40s meant investing in the bonds of a group of then-bankrupt railroads like the Missouri Pacific Railroad and the Milwaukee Road. ''We had a series of bankruptcies in the l930s,'' says Mr. Heine. ''Practically every one of the Western roads except the Southern Pacific, Union Pacific, and Santa Fe went bankrupt along with a number of Eastern Roads. In fact, the Erie, which went bankrupt in the 1970s, had been bankrupt in the '30s.''

History repeated itself in the mid-l970s, as the government took over the faltering railroads in the East. This time, Mr. Heine used the small fund he had co-founded in l949 to buy up bonds in the Reading, Penn Central, Erie Lackawanna , Lehigh Valley, and the Boston & Maine Railroads. ''The situation in the l970s was really unique,'' says Mr. Heine, ''About half a dozen very large railroads went bankrupt.'' But many still had assets, particularly property.

''At one time in the mid-l970s, the Penn Central went bankrupt, but had a billion in cash lying around,'' he notes. ''I don't remember how many securities were outstanding, but their market value was nothing. Perhaps in early l976 we found out that the reorganization plan provided for l0 percent of the claims to be paid in cash; 30 percent in bonds; 30 percent in preferred stock and 30 percent in stock.

''The bonds were selling at between

0 and $25.So we knew that with the cash settlement we would get most of our investment back. It seemed to be a lead-pipe cinch.''

In fact, the settlement was even better. Mutual Shares got back the full par or face value of the bonds plus eight years of interest. Similar settlements were reached with the Boston & Maine, the Lehigh Valley, and the Erie Lackawanna.Only the Reading bonds disappointed Heine, returning a mere 80 percent of par.

Such ''lead-pipe cinches'' are what has made Mr. Heine's fund one of the winners of the last decade. Had an investor put $10,000 into the fund in 1970, he would have an investment worth $59,310 at the end of 1980, including dividends and capital reinvestment.

But any individual who thinks investing in reorganization firms regularly yields profits like these - some l,000 percent on some of Mr. Heine's original purchases of Penn Central - should reconsider. He admits to disappointments and failures.For instance, Mr. Heine bought some Food Fair after it went into reorganization, and so far it has disappointed him - although he says it hasn't been an expensive disappointment. Mr. Heine wound up with over 10 percent of the firm's issues in reorganized Pantry Pride. He is now waiting for the firm to become profitable, and he believes it is making a ''reasonable beginning.'' But it may take years before he can get his money out.Such situations are hard to predict, and Mr. Heine doesn't commit himself willy-nilly to reorganizations. Conspicuously absent from his portfolio are recent bankruptcy reorganizations like Itel, the computer-leasing giant; White Motors, the truck manufacturer, and Sealand, the trucking firm.''They were too complicated for me to understand,'' he insists, despite the hundreds of thousands a year the firm spends on its own research to ensure that down-and-under firms he picks will not stay dogs forever. ''Only one of the three, Itel, would have made a good investment,'' Mr. Heine explains. ''But by the time I realized it, there wasn't much opportunity.''Such firms are not purchased immediately after they go under. ''There is a time when they clear out the garbage,'' he says. ''And that takes time. Then you see what is left.'' And today he must see that faster than ever. ''We were privileged to be the first in our field, '' he comments, ''but now other firms on Wall Street look at them. It is very competitive. That is why you have to buy reorganization companies with your eyes closed to buy them cheap.''But reorganization doesn't necessarily mean a bankruptcy reorganization, muses this stock market expert. For instance, on Jan. 9, l982, he bought his first 5,000 shares of AT&T. ''After all,'' he jokes, ''isn't it a reorganization?''Mergers, liquidations, and spinoffs are other forms of reorganization, and Mr. Heine invests in all of them. Mutual Shares owns stock in U. V. Industries, a liquidation, as well as Conoco, Newmont Mining, and Arcata, all recent merger targets.But if ''safe'' companies like AT&T and Conoco are not predominant in his portfolio, neither are bankruptcy reorganizations. ''They are just part of the principle of buying something where the market value appears to be less than the intrinsic value of the company. The railroad securities are only one application. Today we have a severe break in the market and some stocks are getting terribly cheap.''For instance, Mr. Heine likes Freedom Savings & Loan - a type of stock few Wall Street investors want to touch these days. But Freedom, a Tampa-based company, sells for $10 a share. ''They have $30 in cash,' no debt, and so much capitalization that they can't fail because of low-interest mortgages, he explains.''Another of his current favorites is Orion Capital, an insurance holding company listed on the New York Stock Exchange at about

3. ''The book value is $24.45,'' he says ''it is debt-free and has a substantial amount of excess cash. They recently bought a substantial amount of their stock at 16. This intrigues us. We have 200,000 shares.''Mr. Heine has the patience to wait 10 years, if necessary, for some of his investments to pay off. And patience like that is a virtue he appreciates in his investor as well. In its 31 years in existence Mutual Shares has never advertised or actively sought investors. He prefers to buy something ''terribly cheap'' and wait for 10 years. He doesn't want investors who buy shares to make a quick buck and then get out of his fund.

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