Thursday, December 31, 2009

Good Returns

For several months earlier this year and late last year, there was no industry investors hated more than the housing industry. Any stock that relied on growth in housing for growth in sales was severely punished by the market. Goodfellow (GDL), a distributor of flooring and other wood products, was no exception.

When we first discussed the stock, it traded at a sizable discount to its net current assets. Today, it trades near its book value, after more than doubling over the last few months. As such, it moves from the Stock Ideas page to the Value In Action page, as Mr. Market once again offers a reasonable price for this once unfavoured stock.

The lessons to be learned from Goodfellow's rise can be used to find and identify other potential value investments. First, industries with poor short-term outlooks are great places to look for stocks that have been beaten down beyond their intrinsic values. Second, intrinsic value should be calculated as if the purchase were of a private business (e.g. more weight should be placed on the value of assets being purchased over short-term earnings outlooks).

Finally, investors can benefit from studying the investments of other value investors. In the case of Goodfellow, Stephen Jarislowski, a value investor whose book we have summarized here, is a substantial shareholder and the company's chairman.

Companies trading at significant discounts still exist. Investors who apply these and other value investing principles to their future investments put themselves in a position to purchase the next set of stocks that hit intrinsic value.

Disclosure: None

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