Thursday, July 29, 2010

For The Smaller Portfolios Out There

Warren Buffett has said many times that his annual returns would be higher (and they have been in the past) with a smaller portfolio. The universe of stocks in which he can invest is tiny, forcing him to accept returns that beat the market but are lower than his historical standard. Some of the most outrageously priced securities, however, are in the small-cap realm, allowing investors with smaller portfolios the ability to generate strong returns.

One stock that is too tiny for even a small-timer like myself (though it would have interested me a few years ago) is Xentel DM (XDM), a telemarketing company. The stock's P/E of 3 is likely so low because the company trades less than $1,000 worth of stock in an average day. For readers with decent-sized portfolios, this stock is of no use. For young, up-start readers with long-term outlooks and still budding portfolios, however, this company could offer long-term value.

The company operates off of 3-5 year contracts with its customers, and charges fees based on the hours spent telemarketing client products to consumers. This model makes for stable earnings, as the company can adjust costs easily such that they line up well with expected revenues. Indeed, despite the recession that has reduced the number of marketing dollars companies will spend, Xentel has been able to reduce costs at a faster rate than revenues declined and in the end actually increase profits.

The company does not come without risks, however. The company recently acquired another telemarketing company using Xentel's own shares; but if one is to share stock with a P/E of 3 in an acquisition, one better receive an outstanding valuation in return! At least shareholders can rest easy knowing management's interests are aligned with theirs, as both the company's chairman and its president each own 20% of the company. As such, the target company was likely another company that is trading at a low multiple of its earnings.

Xentel DM is cheap and has a flexible business model that should keep earnings relatively stable. Those with portfolios of a small enough size may benefit from this stock over the long term.

Disclosure: None

9 comments:

Paul said...

saj,

How did you find out executive ownership? I tried morningstar and msn, the ones i usually use to find it, and neither have any information.

I'm sure this one will fit my small little portfolio. Thanks again! :)

Ankit Gupta said...

http://www.xentel.com/xentel/investor.htm

http://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0001097240&owner=exclude&count=40

If you haven't used SEC's Edgar database yet, start with this page: http://www.sec.gov/edgar/searchedgar/companysearch.html

After a while, that will really become a second home for you.

Paul said...

Ankit,

Thank you so much. However, I've looked through those and there doesn't seem to be much information on ownership. The SEC filing came out in 2004. It said some of the executives, at the time, were beneficial owners, but I couldn't find any percentages. Is it because it's a candian firm? Is there an SEC equivalent in Canada?

Saj Karsan said...

Hi Paul,

Canada's equivalent is called Sedar. Once there, you can search for Xentel and you are looking for a form called "Management Information Circular" (the latest one being from Nov 2009) which contains info similar to the DEF 14A form for the SEC.

Let me know if that works for you.

Paul said...

Saj,

Wow! That is really awesome! Thank you so much again! I know you're busy, so it shows quite a bit about your character to take your time to help a small investor like me. Thanks again!

Santosh Nair said...

I would avoid this one. They have been sued by the State of Iowa in the past for misleading telemarketing practices. Lots of complaints about them on the web. Just google Xentel scam.

Regards,
Santosh

Canadian Dollars said...

I think the low price valuation is reflected in the controversial news (re: sued and controversial telemarking practices) The truth is most telemarketers have questionable practices to begin with. I'm going to have a real hard look at this one as it looks compelling at this level.

Hester said...

Good article

Saj Karsan said...

Thanks, Hester!

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