We often hear that value investing is dead. The argument is as follows: you can't find bargains in the market anymore because it's so easy to get information nowadays that stock prices fully reflect the intrinsic values of the underlying companies.
From our research, this is not the case. As examples, we've discussed here and here how a diligent investor could have profited from both Melcor in the 90s and Hammond Power in 2005. But you will have to find companies trading at such discounts yourself. You won't hear analysts pushing these stocks, as their market caps are small and their industries aren't hot. But those are the kinds of stocks we like to invest in.
Another great example of a company that flew under the radar is Phoenix Canada Oil of 2005. It traded at a market cap of around $6.3 million as recently as June 2005. Its oil operations were losing a bit of money each year, but that's not really the source of our interest. A closer look at some of the larger balance sheet items reveals the following:
Cash + Marketable Securities..........9,000,000
Investments..............................................83,290
Total Assets.............................9,425,120
Total Liabilities.........................167,757
So this company was already trading at a discount to just its cash on hand! All told, this company was trading at about a 30% discount to its book value, with cash being the bulk of that book value!
But we're not done there. A closer look at the "Investments" line item reveals that 83,290 represents the cost of certain investments. Buried in the notes, the market value of these investments is revealed to be $1.8 million. Allowing for some taxes on the gains (which would occur if they decided to sell these investments), the discount now becomes about 40%.
The benefit of looking at some of these stocks in the past is that we can see what happened after! Well, six months later, the stock jumped to a market cap of more than $30 million, representing almost a 500% gain. It certainly overshot our estimates, but nevertheless an investor would have made a nice gain selling on the way up, had he recognized this disparity between the company's market value and its intrinsic value.
2 comments:
phoenix president don moore should be replaced by a board, so he couldn't hold back the company's growth
I agree exactly. He's not a businessman; he's untrained.
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