Friday, January 15, 2010

Bridging The Value Gap

Manhattan Bridge Capital (LOAN) provides bridge loans to small businesses needing short-term financing. This is a risky sounding business, particularly in a recessionary period. However, many elements of this situation make for an intriguing potential value investment.

First of all, the company's loans are secured and short-term in nature. Usually, real-estate is used as security against the loans, and all payments are due within a year. Throughout every quarter of this downturn, business has (somewhat surprisingly) appeared to run smoothly, with full and timely collections resulting in a growing loan asset pool.

Manhattan Bridge's capital structure is very safe as well, as the company carries minimal debt relative to its loan portfolio. Furthermore, the stock trades for half of its net current assets (with the loan portfolio classified as current due to the short-term nature of the loans).

There are some other interesting items with respect to this stock as well. It is a ridiculously small company, even by the standards of this site! The company's market cap is just over $3 million, and the company had but 3 employees as of its last annual report. Also, as the company's share price has hovered below $1 for extended periods, it has received warnings from the Nasdaq, but so far it has remained compliant with the exchange's requirements.

Whether the company's bridge loans will continue to perform is an open question. However, the market appears to be counting on the fact that half of these loans will fail, offering value investors a margin of safety with potential for price appreciation. In many ways, this company's price/value situation is very similar to that of Quest Capital, another potential value investment previously discussed on this site.

Disclosure: Author has a long position in shares of LOAN

9 comments:

Bart said...

Dear Saj,

how do you approach stocks with such low liquidity? Suppose the business is deteriorating, it may not be easy to sell your shares...

many thanks,

Bart

Anonymous said...

In addition at December 31, 2008, the Company concluded that certain other investments in marketable securities were
other-than-temporarily impaired based on the severity of the declines in the market value ("fair value" pursuant to SFAS 157) of
those securities at December 31, 2008 and, accordingly, the Company recognized a non-cash impairment charge of $627,777 in
the statement of operations for the year then ended.

Saj Karsan said...

Hi Bart,

Even stocks with strong liquidity suffer drops in price when business deteriorates. Value investors look at investing in stocks as similar to buying a piece of a private business: the liquidity of the stock does not dictate whether the business is selling for less than it is worth.

Anonymous said...

Wow, I read the 10-k and 10-qs of this company. It seems extremely speculative, as everything here depends on 1 guy who we don't know anything about and who has no long-term track record except for some rather strange, varied, mostly disastrous investments. Shopila? Yellow pages online or whatever that is?

I have no idea what's going on with it and because of that can't really value it. At this level, given the risk factors and unknown variables I mentioned above it doesn't seem ultra cheap.

Anonymous said...

Dear Saj,

I enjoy your reading your blog and own some of the stocks you have uncovered; RE "LOAN"- Seems like lending is a new business for the CEO; I was not able to find anything about their lending/risk managment policies or expertise in what looks like hard money lending? I think this information would be critical in assesing this opportunity.

T-Bone said...

So its sketchy, yes. All bets are on a CEO who likely isn't fully competent. He owns half the stock, we know where his interests lie.

The loans average almost 14% not including origination fees, and there is over 7 million dollars worth of them. +600,000 dollars in cash.

They have never had a loan fail and this is coming through the worth crisis since the great depression principally involving loans like this. Conditions are much better now, especially in new york, and now the market is still pricing in half of these loans failing.

So if half of the loans do fail within a year, you think they will receive zero dollars from the sale of collateral? thats what the market is implying. And while half these loans fail, this suggests you receive coupons from your other loans outstanding in the mean time, resulting in a cash rich balance sheet, with current assets still hovering around the mkt. cap.

Is the business speculative, yes, but this is not a speculative investment, the risk reward is outstanding. See it for what it is.

Anonymous said...

Hi Saj,

Do you have an update on LOAN? The price has dropped a lot since you last posted.

Arjun

Saj Karsan said...

Hi Arjun,

I definitely like it at this price. Hopefully they can earn a return commensurate with their level of assets.

Anonymous said...

Hi Saj,

Any thoughts on the recent line of credit agreement with Sterling National?

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