Saturday, December 31, 2011

Predictably Irrational: Chapter 8

Dan Ariely is a behavioural economist who refutes the idea that we are fundamentally rational. Through empirical data, experiments and anecdotes, he illustrates that our irrationality can actually be predicted. He then presents ways in which we can make more rational decisions, both as investors and as people.

Thursday, December 29, 2011

What I'm Looking For

I'm often asked what I look for in a stock. The intention of this post is the answer that question.

Wednesday, December 28, 2011

Parlux...Wow!

Long-time readers of this site are likely sick and tired of hearing about Parlux (PARL), a stock that has been discussed here many times. Fortunately for such readers, however, this may be the last post on this company

Tuesday, December 27, 2011

Lakeland Industries

Lakeland Industries' (LAKE) stock price has been declining for almost two years now. But it is a consistently profitable firm that now trades at a discount to its net current assets.

Monday, December 26, 2011

Predictably Irrational: Chapter 7

Dan Ariely is a behavioural economist who refutes the idea that we are fundamentally rational. Through empirical data, experiments and anecdotes, he illustrates that our irrationality can actually be predicted. He then presents ways in which we can make more rational decisions, both as investors and as people.

Sunday, December 25, 2011

Predictably Irrational: Chapter 6

Dan Ariely is a behavioural economist who refutes the idea that we are fundamentally rational. Through empirical data, experiments and anecdotes, he illustrates that our irrationality can actually be predicted. He then presents ways in which we can make more rational decisions, both as investors and as people.

Saturday, December 24, 2011

Predictably Irrational: Chapter 5

Dan Ariely is a behavioural economist who refutes the idea that we are fundamentally rational. Through empirical data, experiments and anecdotes, he illustrates that our irrationality can actually be predicted. He then presents ways in which we can make more rational decisions, both as investors and as people.

Friday, December 23, 2011

Feeling Negative? Overcome It!

As this site has grown in reach over the last couple of years, the amount of reader feedback I have received has accelerated. Unquestionably, the articles that generate the most feedback are those related to particular securities (as opposed to a general article on investor behaviour...like this one). However, while the majority of sites stick to writing about stocks on which they are bullish, I also tend to write about stocks in which I'm not interested, in order to discuss the reasons that add to an investment's risk or subtract from its return. As a result, I've been in a position to observe some interesting reader behaviour.

Thursday, December 22, 2011

JAKKS Pacific Rockets Downward

This week was a rough one for JAKKS Pacific (JAKK), the toy maker out of California. It issued a profit warning on its all-important Christmas quarter, as its toys haven't picked up traction among consumers. (In keeping with the standard corporate practice of blaming the economy for poor results though, management of course cited a "difficult retail sales environment for toys" as the only cause for the nearly 40% reduction in its estimate for holiday quarter sales.) The stock fell 20% in one day, and appears quite cheap relative to its cash flow.

Wednesday, December 21, 2011

OfficeMax: Worth 75% Less Than It Was 1 Year Ago?

One year ago, OfficeMax (OMX) reported quarterly operating income of $41 million, resulting in a market cap of around $1.5 billion. This year's third quarter was remarkably similar, with the office supplies distributor once again bringing in operating earnings of around $41 million. But today, the market cap sits at just $380 million, despite an improved balance sheet from last year!

Tuesday, December 20, 2011

Sources For Stock Ideas

One of the most common questions I receive from readers is regarding the source of my stock ideas. I seem to always have a heap of potential value stocks on my to-do list, so perhaps I take it for granted that I come across so many ideas worthy of further study. So on the advice of some readers, this post is dedicated to describing and discussing my stock idea sources.

Monday, December 19, 2011

OfficeMax: When Debt Isn't Debt

On this site, countless examples have been discussed where company obligations that aren't on the balance sheet must be uncovered and included in order to achieve an accurate valuation. But on rare occasions, the exact opposite takes place: a balance sheet obligation should be removed from consideration in order to derive a more accurate valuation.

Sunday, December 18, 2011

Predictably Irrational: Chapter 4

Dan Ariely is a behavioural economist who refutes the idea that we are fundamentally rational. Through empirical data, experiments and anecdotes, he illustrates that our irrationality can actually be predicted. He then presents ways in which we can make more rational decisions, both as investors and as people.

Saturday, December 17, 2011

Predictably Irrational: Chapter 3

Dan Ariely is a behavioural economist who refutes the idea that we are fundamentally rational. Through empirical data, experiments and anecdotes, he illustrates that our irrationality can actually be predicted. He then presents ways in which we can make more rational decisions, both as investors and as people.

Friday, December 16, 2011

Mitigating Executive Compensation

Wage disparity between executives and workers has been on the increase for several decades. In 1982, the average CEO of large US firms made 42 times the wage of the average worker. By 2001, that number increased to a staggering 531 times *. Opponents of this disparity will argue that intervention is needed to force companies to have higher parity within their wage structures. Others argue that executives are worth every bit of their salaries or companies would not pay them.

Thursday, December 15, 2011

Champion Gets Battered

Shares of small-cap Champion Industries (CHMP) are dropping fast. The stock is down more than 60% from its April high and as a result it trades for a P/E of just over 3.

Wednesday, December 14, 2011

Best Buy Price vs Value

Shares of Best Buy (BBY) fell more than 15% yesterday after the company reported its 3rd quarter results. It's pretty strange that a company can lose so much of its value on the basis of one quarter, as the company came up 4 cents short on analyst EPS estimates. But it's even more strange for a company like Best Buy, which makes most of its annual profits in the 4th quarter (as per the chart below), which means the 3rd quarter profit result doesn't tell you a whole lot about the business' long-term prospects:

Tuesday, December 13, 2011

Meade Gets Rocked

The market has recently had a number of both euphoric "up" days and pessimistic "down" days, as strong volatility has persisted over the last few months. Whether the market has risen or fallen, however, one stock that has consistently dropped is that of Meade Instruments (MEAD). Meade was already cheap on an asset basis, but has then dropped some 40% since August.

Monday, December 12, 2011

Identifying Insider Buying

There is evidence to believe that insiders do beat the market. But how does one find out what insiders are up to? That's what this post is about.

Sunday, December 11, 2011

Predictably Irrational: Chapter 2

Dan Ariely is a behavioural economist who refutes the idea that we are fundamentally rational. Through empirical data, experiments and anecdotes, he illustrates that our irrationality can actually be predicted. He then presents ways in which we can make more rational decisions, both as investors and as people.

Saturday, December 10, 2011

Predictably Irrational: Chapter 1

Dan Ariely is a behavioural economist who refutes the idea that we are fundamentally rational. Through empirical data, experiments and anecdotes, he illustrates that our irrationality can actually be predicted. He then presents ways in which we can make more rational decisions, both as investors and as people.

Friday, December 9, 2011

Individual Investors Can Make A Difference

Adams Golf (ADGF) has been discussed a few times on this site. Usually this happens when it trades at a large discount to its net current assets, and when it subsequently appreciates. One long-term investor (and by today's standards, a three-year investment would be considered "long-term"), grew increasingly frustrated by the company's compensation practices, and managed to do something about it!

Thursday, December 8, 2011

G. Willi-Food Dropping Fast

G. Willi-Food (WILC) imports, manufactures and distributes hundreds of food items to supermarket chains and grocery stores. Recently, margins have fallen as food inflation has increased costs, while the company is hard-pressed to pass those costs on to customers. The stock price may have overreacted to this news, however, offering long-term investors a potential opportunity.

Wednesday, December 7, 2011

Imation: Is Change Possible?

Greenbackd had a great post on Imation last week. Imation has been discussed a few times on this site; it was once on the Stock Ideas page, and having undergone some price appreciation it found itself off that page and on the Value In Action page in February of this year. Since then, however, its price has fallen by some 50%, putting it in value territory once again.

Tuesday, December 6, 2011

Wealth Depicted

Most citizens will quickly gloss over any financial statistics (however educating they may be) that they encounter, creating a gap between what they understand, and what they could understand. A man by the name of Hans Rosling is looking to change how people interact with statistics by changing how they are visualized and presented. Here's an example of his work:

Monday, December 5, 2011

How Low Can Bidz Go?

Just three months ago, Bidz.com was discussed on this site as a potential value investment, due to its 50% discount to its net assets. Since then, the stock has almost halved, giving the company about a 70% discount to its net current assets. Note that the company has no debt!

Sunday, December 4, 2011

It's Not Rocket Science: Part VIII

Tom Bradley is a founder of Steadyhand, a different kind of mutual fund company that focuses on low-fee, low-turnover portfolios where managers are encouraged to seek value wherever it can be found. Bradley summarizes his thoughts on how to beat the market in his book It's Not Rocket Science, summarized below

Saturday, December 3, 2011

It's Not Rocket Science: Part VII

Tom Bradley is a founder of Steadyhand, a different kind of mutual fund company that focuses on low-fee, low-turnover portfolios where managers are encouraged to seek value wherever it can be found. Bradley summarizes his thoughts on how to beat the market in his book It's Not Rocket Science, summarized below

Friday, December 2, 2011

Global Bubbles

While the real-estate bubble in the US burst a few years ago, in many countries around the world it never did. In countries like Canada, China and Australia, price levels along a number of metrics (compared to incomes, rent levels etc.) have now surpassed those of the US at its peak! The Economist has a great interactive tool that allows you to get a handle on just how bubblicious some housing markets are.

Thursday, December 1, 2011

Whole Foods and SuperValu

Investor sentiment varies considerably between Whole Foods (WFM) and SuperValu (SVU), despite the fact that these two companies operate in the same (or similar) industry. This difference in sentiment is exemplified by the opinion of a one Jim Cramer, who notes that even though SuperValu has a substantially lower P/E, Whole Foods is actually the cheaper stock because of its lower PEG ratio. What's wrong with this surface analysis?

Wednesday, November 30, 2011

Pitfalls and Traps

On this site, the findings of various stock market analysts have at times been called into question. In the book Managing Investor Portfolios: A Dynamic Process, the esteemed authors discuss some of the traps analysts fall into when making their forecasts.

Tuesday, November 29, 2011

EnviroStar Trades Higher

Two years ago, EnviroStar (EVI) was brought up on this site as a potential value play. Since then, it has been further discussed a couple of times due its high ROE when adjusted for cash, and its potential revenue rebound. More recently, however, shares of EnviroStar traded more than 50% higher than they did back then, making it the latest stock to leave the Stock Ideas page for the Value In Action page.

Monday, November 28, 2011

Those Acquisitions Aren't MY Fault!

On this site, corporate managers have been berated for making risky acquisitions, especially at high multiples and especially when buybacks would generate strong returns for shareholders. But perhaps it's not always their fault. In an interesting find from Footnoted (a blog that you should check out if you haven't), we see that a public company was forced to make acquisitions by the mob!

Sunday, November 27, 2011

It's Not Rocket Science: Part VI

Tom Bradley is a founder of Steadyhand, a different kind of mutual fund company that focuses on low-fee, low-turnover portfolios where managers are encouraged to seek value wherever it can be found. Bradley summarizes his thoughts on how to beat the market in his book It's Not Rocket Science, summarized below

Saturday, November 26, 2011

It's Not Rocket Science: Part V

Tom Bradley is a founder of Steadyhand, a different kind of mutual fund company that focuses on low-fee, low-turnover portfolios where managers are encouraged to seek value wherever it can be found. Bradley summarizes his thoughts on how to beat the market in his book It's Not Rocket Science, summarized below

Friday, November 25, 2011

It's Not Rocket Science: Part IV

Tom Bradley is a founder of Steadyhand, a different kind of mutual fund company that focuses on low-fee, low-turnover portfolios where managers are encouraged to seek value wherever it can be found. Bradley summarizes his thoughts on how to beat the market in his book It's Not Rocket Science, summarized below

Thursday, November 24, 2011

It's Not Rocket Science: Part III

Tom Bradley is a founder of Steadyhand, a different kind of mutual fund company that focuses on low-fee, low-turnover portfolios where managers are encouraged to seek value wherever it can be found. Bradley summarizes his thoughts on how to beat the market in his book It's Not Rocket Science, summarized below

Wednesday, November 23, 2011

Buffett and You

Though he studied under Ben Graham and has adopted many of Graham's investing principles, the world's greatest investor is not your typical value investor. He speaks of margins of safety and of buying companies at discounts, but over the years Buffett has shown a willingness to buy businesses for what appears to be full price, at least on a P/E basis. What allows Buffett to do this and still generate excellent returns is his ability to understand economic "moats" better than anyone else.

Tuesday, November 22, 2011

Janus Is Cheap

Janus Capital (JNS) manages and sells mutual funds to both retail and institutional investors. The management and performance fees these funds generate become Janus' revenues, and these revenues have provided the company with a steady stream of cash flow over the years (as seen over at frankvoisin.com).

Monday, November 21, 2011

Odds Required To Time The Market

Many participants in the stock market base their buy and sell decisions on attempts to time the market. The idea is to buy into the market just before prices rise, and sell before they decline. Many studies have shown that it is very difficult to correctly time the market. But assuming you had superior foresight, how often would you have to be right in order to beat a buy and hold investor?

Sunday, November 20, 2011

It's Not Rocket Science: Part II

Tom Bradley is a founder of Steadyhand, a different kind of mutual fund company that focuses on low-fee, low-turnover portfolios where managers are encouraged to seek value wherever it can be found. Bradley summarizes his thoughts on how to beat the market in his book It's Not Rocket Science, summarized below

Saturday, November 19, 2011

It's Not Rocket Science: Part I

Tom Bradley is a founder of Steadyhand, a different kind of mutual fund company that focuses on low-fee, low-turnover portfolios where managers are encouraged to seek value wherever it can be found. Bradley summarizes his thoughts on how to beat the market in his book It's Not Rocket Science, summarized below

Friday, November 18, 2011

Be Aware Of These Biases

Daniel Nevins is a managing director at SEI Investments. Not unlike Charlie Munger (whose discussion of human tendencies we have summarized), Nevins is a student of human biases which cause individuals to underperform as investors. In his paper titled Integrating Traditional and Behavioral Finance, Nevins notes the following biases:

Thursday, November 17, 2011

Cash For Granted

As investors, we often take a company's cash and short-term securities for granted. Accounts receivable may be written down (who knows if all customers will pay, especially that major one!), inventories may not be worth their full value, but cash equivalents are worth their book value, right? Maybe they are most of the time, but that's not necessarily true.

Wednesday, November 16, 2011

Perceptron Management Responds

A few weeks ago, I wrote about the value potential (and risks involved) of investing in Perceptron, a producer of measurement and inspection products. Its CFO, Jack Lowry, has responded to the article.

Tuesday, November 15, 2011

Ambassadors Group: Activism In Action

Ambassadors Group (EPAX) looks like a value stock, but with deteriorating fundamentals. A value investor appears interested in making some changes at the company, which could interest some catalyst investors.

Monday, November 14, 2011

Value Investing And The Groupon IPO

Value investors should stay away from IPOs for a plethora of reasons. Rarely are those reasons so well exemplified as they were in the case of Groupon's IPO, which occurred about two weeks ago.

Sunday, November 13, 2011

Quality of Earnings: Chapter 12

Investors rely heavily on the financials that companies release. But managements have significant leeway when it comes to creating its results. In this book, Thornton O'Glove tells investors how to judge the quality of a company's earnings, in order to both protect against fraud and find value.

Saturday, November 12, 2011

Quality of Earnings: Chapter 11

Investors rely heavily on the financials that companies release. But managements have significant leeway when it comes to creating its results. In this book, Thornton O'Glove tells investors how to judge the quality of a company's earnings, in order to both protect against fraud and find value.

Friday, November 11, 2011

Beyond The Financials

Value investors, myself included, tend to prefer financials to "stories" about why a stock should outperform. But good financials are often the result of policies instituted by management that are not as easy to measure and compare as are financials. Investors who can identify companies on this basis have an opportunity to profit before the financials of said companies betray their success, resulting in extraordinary gains.

Thursday, November 10, 2011

hhgregg: Now A Much Fairer Price

Just over three months ago, hhgregg (HGG) was featured on this site for its ridiculously low price. Recently, it could be sold for 40% higher than its July price, and 70% higher than its low in October! As such, hhgregg is the latest stock to move from the Stock Ideas list to the Value In Action page. There are plenty of lessons to be learned from this value opportunity.

Wednesday, November 9, 2011

Media Worth Your Time

I've poked a lot of fun at the mainstream financial media over the course of this blog's short history, so it seems only fair to give credit to media sources when they deserve it.

Tuesday, November 8, 2011

Value or Not?

Analyst Barry Cooper believes Barrick Gold (ABX), a gold miner, is a value stock. He cites the stock's P/E ratio, which is under 10, and argues that "value investors will either step into the stock or there are no value investors left in the market". But intelligent investing is not just about isolating low multiples; for this reason, Cooper is wrong about his assertion on so many levels.

Monday, November 7, 2011

Startek's Star Customers

Startek makes for an intriguing value play. The company has $20 million worth of cash, but trades for just $38 million. Before the recession, this company was averaging more than $10 million in earnings per year.

Sunday, November 6, 2011

Quality of Earnings: Chapter 10

Investors rely heavily on the financials that companies release. But managements have significant leeway when it comes to creating its results. In this book, Thornton O'Glove tells investors how to judge the quality of a company's earnings, in order to both protect against fraud and find value.

Saturday, November 5, 2011

Quality of Earnings: Chapter 9

Investors rely heavily on the financials that companies release. But managements have significant leeway when it comes to creating its results. In this book, Thornton O'Glove tells investors how to judge the quality of a company's earnings, in order to both protect against fraud and find value.

Friday, November 4, 2011

Competition and Margins

We often talk about profit margins on this site. Analyzing the profit margins of a company can help you determine its profitability relative to its competitors. For example, if two competitors have equal net incomes but one has twice the profit margin of the other, then over time we may see the more efficient company steal market share and grow at a faster rate. (This can happen for several reasons

Thursday, November 3, 2011

Just This Once, I Promise!

Companies are required to release their financial results according to GAAP. Often, however, companies will also release what they call "Pro Forma" statements, where certain "one-time" costs are often removed. These statements, managements say, better reflect the earnings power of the company. However, investors are urged not to take managements word, but rather to consider the "one-time" costs to make their own determinations as to whether these apply in the future.

Wednesday, November 2, 2011

Urbana Management Responds

A few days ago, a group of value investors (which included the authors of sites frankvoisin.com and pettycash.wordpress.com) sent a letter to Urbana's chief executive asking that the company be more aggressive in its share buybacks. Frequent visitors to this site may recall that Urbana has been discussed here as a potential value investment due to the rather large discount at which it trades to its (mostly stock) portfolio. Management's response was rather predictable.

Tuesday, November 1, 2011

MF Global A Buy

MF Global (MF) is a broker that trades for its clients and on its own behalf. Yesterday, MF Global filed for bankruptcy! On the day before its filing, three of the eleven analysts covering the company rated the stock as a "Buy"

Monday, October 31, 2011

Coast Distribution On The Cheap

Sales of RVs and boats fell off a cliff during the recession, causing investor to leave many companies in that industry for dead. But while those companies which had too much debt have gone or will go under, the pessimism in this industry provides some opportunities for value investors. For example, consider The Coast Distribution System (CRV), a wholesaler of RV and boat parts and accessories.

Sunday, October 30, 2011

Quality of Earnings: Chapter 8

Investors rely heavily on the financials that companies release. But managements have significant leeway when it comes to creating its results. In this book, Thornton O'Glove tells investors how to judge the quality of a company's earnings, in order to both protect against fraud and find value.

Saturday, October 29, 2011

Quality of Earnings: Chapter 7

Investors rely heavily on the financials that companies release. But managements have significant leeway when it comes to creating its results. In this book, Thornton O'Glove tells investors how to judge the quality of a company's earnings, in order to both protect against fraud and find value.

Friday, October 28, 2011

No Final Answers Here!

I now receive a ton of requests for my specific valuations and "buy" prices for particular stocks. Because I have declined to divulge such information, I have received many questions as to why I'm not willing to share such info. As such, I thought it best to share my thoughts on the subject with a post.

Thursday, October 27, 2011

Gannett Cash Flow Offers Opportunity

Gannett owns newspapers (such as USA today) and tv stations, mostly in the US. These industries are much hated by investors today, as revenues are generally in decline; advertising dollars are migrating online as circulation and viewership of traditional media continues to decline. But for value investors, this negativity can create an opportunity.

Wednesday, October 26, 2011

The Rise Of Parlux

When the market goes down, correlations seem to increase, pushing the prices of even good businesses down. While this provides opportunities to the value investor, it also tests his patience; even companies that are doing well can get hammered in the market! Bucking this trend of late has been Parlux, which recently saw several thousand shares trade within striking distance of its net current asset value. As such, Parlux is the latest stock to join this site's Value In Action page, providing some lessons in the process:

Tuesday, October 25, 2011

Shorting The Green

I don't short stocks, but every once in a while I am tempted to do so. For those of you value investors who do short, you may want to consider Green Mountain Coffee Roasters (GMCR) as a potential candidate. In a recent presentation, David Einhorn discusses some of the features that make this a great short candidate: a high price, a lack of free cash flow, some serious accounting questions, frequent capital raises (despite accounting profitability), and some interviews of former employees suggesting a lack of transparency. The slides can be found here.

Unfortunately, the stock has already fallen quite a bit since the presentation came out last week. However, the company's P/E of 70 remains at rather elevated levels.

Disclosure: No position

Monday, October 24, 2011

Aastra Dials Up Cash Flows

Considering its financial position, Aastra Technologies (AAH) is an extremely volatile stock. The stock traded above $40 in 2007, below $8 in 2008, above $36 in 2010, and has now come all the way back down to $13 in 2011. One might expect this kind of stock price volatility for a heavily-levered company with a highly-oscillating profit profile. But Aastra is neither of these; it carries negligible debt along with a ton of cash, and has remained profitable throughout the recession of recent years. As such, these excessive price swings in the shares of Aastra are offering investors an excellent opportunity to buy into a good business at a great price.

Sunday, October 23, 2011

Quality of Earnings: Chapter 6

Investors rely heavily on the financials that companies release. But managements have significant leeway when it comes to creating its results. In this book, Thornton O'Glove tells investors how to judge the quality of a company's earnings, in order to both protect against fraud and find value.

Saturday, October 22, 2011

Quality of Earnings: Chapter 5

Investors rely heavily on the financials that companies release. But managements have significant leeway when it comes to creating its results. In this book, Thornton O'Glove tells investors how to judge the quality of a company's earnings, in order to both protect against fraud and find value.

Friday, October 21, 2011

Be Independent

Almost exactly three years ago, Washington Mutual basically declared bankruptcy, resulting in shareholders losing pretty much their entire investments. A day before the bank went down, here's what analyst recommendations looked like

Thursday, October 20, 2011

China Spin

It's incredible how the same set of data can be spun in completely different ways, depending on the writer's bias.

Wednesday, October 19, 2011

Acme Hums Along

One stock that has held up remarkably well through this recent period of market volatility is Acme United, which has been previously discussed on this site as a value idea.

Recently, the company's CEO granted an interview to Smallcaps.us, which can be heard here or read here, for those interested.

The company's earnings are out in two days. A big move up (down) could represent a selling (buying) opportunity!

Tuesday, October 18, 2011

Short Memories And Temporary Conditions

While there are many who believe market prices accurately reflect all available information, value investors believe there are many instances where market prices can be way out of line with reality. In our society, financial memory appears to be extremely short, causing speculators to fall prey to the same situations over and over. Recent happenings in the rare earths market illustrate this phenomenon very well.

Monday, October 17, 2011

Gaming Partners Cashes In

Value investors love companies with lots of cash. At the very least, a net cash position protects a company from going under when times are tough. And during good times, the cash can be doled out to shareholders. But whether a cash distribution (or buyback) will actually occur is worthy of investigation before the investor actually takes a position, for many companies have no interest in actually returning cash to shareholders.

Consider Gaming Partners International (GPIC), a manufacturer and distributor of gaming chips and other casino-related supplies.

Sunday, October 16, 2011

Quality of Earnings: Chapter 4

Investors rely heavily on the financials that companies release. But managements have significant leeway when it comes to creating its results. In this book, Thornton O'Glove tells investors how to judge the quality of a company's earnings, in order to both protect against fraud and find value.

Saturday, October 15, 2011

Quality of Earnings: Chapter 3

Investors rely heavily on the financials that companies release. But managements have significant leeway when it comes to creating its results. In this book, Thornton O'Glove tells investors how to judge the quality of a company's earnings, in order to both protect against fraud and find value.

Friday, October 14, 2011

Betting On Long-Term Growth

Investors with huge amounts of assets under management (e.g. pension funds, sovereign wealth funds etc.) are buying US government debt at an astonishing rate. As a result, the annual return one can expect on a US 10-year Treasury is only around 2%! Keeping in mind that the US central bank attempts to keep inflation between 1% and 3%, the level of this fairly long-term issue appears rather unsustainable.

Thursday, October 13, 2011

Perceptron's Perception

Perceptron (PRCP) sells measurement and inspection products that are used by a range of customers from car manufacturers to plumbers. This is a profitable company with a ton of cash (relative to its market cap) and no debt, making it a stock with strong value potential.

Wednesday, October 12, 2011

Markets Affect The Business

There is an implicit assumption in value investing that market values or changes in market values do not affect business values. This is not entirely true. This occurs not only from a macroeconomic perspective (e.g. some economists believe wealth effects in the market lead to changes in business conditions), but also from a microeconomic perspective. For example, a bank whose price is falling may lose the confidence of lenders with whom it transacts on a frequent basis. This can and has led to deterioration in a bank's value as a result of its price movements.

Banks are not the only example. Market volatility can indeed affect business value. Nowhere is this more clear than in the currency market.

Tuesday, October 11, 2011

From The Mailbag: Evaluating Management-Friendliness

I have recently received a few questions on the order of "How can I tell if management is shareholder friendly? Can you tell me if management at company X passes the smell test?"

The second question is far too difficult for me to answer, for several reasons. First, we all have different standards of just how friendly a manager has to be. Second, "friendliness" can be measured using many different criteria; preferences among investors will vary not only as to which criteria should weigh the most heavily in coming to an overall conclusion, but also as to which criteria should be used at all. Finally, differences of opinion regarding management friendliness will arise between investors even if shown the exact same data; an action one investor may deem friendly may be viewed as unfriendly by another (e.g. a restricted share issue).

As such, rather than state my opinion of company X, it is probably more useful for you (and less time-consuming for me) to discuss what information may be relevant in allowing you to answer the second question for yourself, using your own investment criteria, objectives and opinions.

Monday, October 10, 2011

Universal Volatility

A couple of interesting events have taken place at Universal Security Instruments since they were last discussed on this site as a potential "buy" opportunity.

Sunday, October 9, 2011

Quality of Earnings: Chapter 2

Investors rely heavily on the financials that companies release. But managements have significant leeway when it comes to creating its results. In this book, Thornton O'Glove tells investors how to judge the quality of a company's earnings, in order to both protect against fraud and find value.

Saturday, October 8, 2011

Quality of Earnings: Chapter 1

Investors rely heavily on the financials that companies release. But managements have significant leeway when it comes to creating its results. In this book, Thornton O'Glove tells investors how to judge the quality of a company's earnings, in order to both protect against fraud and find value.

Friday, October 7, 2011

Karsan Value Funds: 2011 Q3 Results

Karsan Value Funds (KVF) is a value-oriented fund, as described here. Due to securities regulations, the fund is not open to the public at this time. Should that change in the future, there will be an announcement on this site.

Thursday, October 6, 2011

Two Million Jobs likely Created In September!

The US private sector likely created approximately two million jobs in the month of September. That appears to be in stark contrast to the paltry number the government will appear to report tomorrow. That's because the media outlets omit the word "net" when they report the latest job numbers. While everyone focuses on the "net" jobs figure, the Bureau of Labor and Statistics (BLS) also issues far-less-followed reports detailing total jobs created and destroyed.

Wednesday, October 5, 2011

Mr. Market Hammers PetMed

PetMed Express (PETS) is an online and over-the-phone retailer of pet medications. Its returns on capital have been strong for over a decade. During the recent market turmoil, however, the stock has taken a dive; the stock is now down over 60% in the last year.

Tuesday, October 4, 2011

Average Earnings Can Be Useless

For various reasons, value investors are encouraged to use an average of several years worth of earnings as an estimate of a company's earnings power. But when a company grows quickly (e.g. through the acquisition of a competitor), average earnings are no longer representative of earnings power. In such cases, other methods of estimating a company's earnings may be more useful.

Monday, October 3, 2011

Versant's Persistency

Versant trades for just $33 million, despite no debt and a cash balance of $23 million. With this kind of profile, one would expect to find a company losing a whole lot of money. But this is not the case: Versant has remained profitable every year throughout this downturn!

Sunday, October 2, 2011

A Short History Of Financial Euphoria: Chapter 8

While there is no doubt that free enterprise gives rise to recurrent episodes of speculation, the features that are common to these episodes are rarely analyzed, according to the author of A Short History of Financial Euphoria, John Kenneth Galbraith. This book from 1990 offers perspectives on bubbles that are still useful today. By paying attention to the signs, "there is a chance - a slim chance, to be sure, given the sweeping power of financial euphoria - that otherwise vulnerable individuals will be warned."

Saturday, October 1, 2011

A Short History Of Financial Euphoria: Chapter 7

While there is no doubt that free enterprise gives rise to recurrent episodes of speculation, the features that are common to these episodes are rarely analyzed, according to the author of A Short History of Financial Euphoria, John Kenneth Galbraith. This book from 1990 offers perspectives on bubbles that are still useful today. By paying attention to the signs, "there is a chance - a slim chance, to be sure, given the sweeping power of financial euphoria - that otherwise vulnerable individuals will be warned."

Friday, September 30, 2011

Shorting Gold "Safely"

When the cost of a commodity is well below its asking price, something is amiss. Such is the case with gold, as major producers are able to dig it out of the ground for around $500, and sell it for $1600. This has encouraged majors like Barrick, Newmont, and Goldcorp to increase production and increase exploration. As a result, they have about 15-20 years (and rising) worth of proven reserves left at current production rates. As the price of gold continues to rise, that process will accelerate, increasing supplies.

Thursday, September 29, 2011

Debt Adjusted For Income

One of the reasons many market observers believe this recession will be a long one is the growth in consumer debt over the years. As consumers now focus on paying down debt levels, they won't be able to spend to the same extent; thus, fewer goods will be produced, acting as a drag on GDP. But what is worth mentioning is that this argument is used in every recession by those who anticipate a depression, so are things really that different this time?

Wednesday, September 28, 2011

The Golden Age Of Investing

A few short years ago, major media outlets would post daily articles reporting the price of oil and how demand is far exceeding supply. Not long before that, these same outlets were saying things like "they're not making any more land" as housing prices rose through the roof. A few years before that, the rising stock prices of technology companies were making daily headlines as the stock market had entered what was claimed to be a "new paradigm shift, where traditional methods of valuation no longer apply". Today, it's the price of gold that is the talk of the town.

Tuesday, September 27, 2011

Benchmark Electronics: Liquid and Discount to NCAV

So many of the net-nets discussed on this site are illiquid, and therefore shunned by you, the investor. But when the market takes a dive like it has over the last couple of months, even some relatively large companies start to trade at discounts to their net current assets. Once such example is Benchmark Electronics.

Monday, September 26, 2011

Take The Hint

In the current climate, there is no shortage of potential value investments. Unfortunately, certain managements are eroding that value, rather than passing it on to shareholders. Recent examples of that appear to be taking place here and here.

At the same time, there are other potential value plays where it's a little less clear as to whether value will be eroded or whether it will eventually accrue to shareholders. In these companies, management may be doing a little bit in order to appease shareholders, but could be doing a heck of a lot more. Examples of this type of company are discussed here and here.

Finally, there are the value plays where management doesn't just talk a big game...they deliver. These managements have a history of making great capital allocation decisions, resulting in a business with strong returns on capital, and a record of returning cash to shareholders when investment opportunities aren't there. Usually, such companies trade at expensive prices, but in an environment such as this one, where fear rules the day, stocks in such companies are available at very attractive prices.

Sunday, September 25, 2011

A Short History Of Financial Euphoria: Chapter 6

While there is no doubt that free enterprise gives rise to recurrent episodes of speculation, the features that are common to these episodes are rarely analyzed, according to the author of A Short History of Financial Euphoria, John Kenneth Galbraith. This book from 1990 offers perspectives on bubbles that are still useful today. By paying attention to the signs, "there is a chance - a slim chance, to be sure, given the sweeping power of financial euphoria - that otherwise vulnerable individuals will be warned."

Saturday, September 24, 2011

A Short History Of Financial Euphoria: Chapter 5

While there is no doubt that free enterprise gives rise to recurrent episodes of speculation, the features that are common to these episodes are rarely analyzed, according to the author of A Short History of Financial Euphoria, John Kenneth Galbraith. This book from 1990 offers perspectives on bubbles that are still useful today. By paying attention to the signs, "there is a chance - a slim chance, to be sure, given the sweeping power of financial euphoria - that otherwise vulnerable individuals will be warned."

Friday, September 23, 2011

HP: Evaluating Meg Whitman's Track Record

Hewlett-Packard's former CEO Leo Apotheker was essentially fired from his position yesterday after only 11 months on the job. He was immediately replaced by Meg Whitman, because (according to HP's press release), she is a "technology visionary" and "a strong communicator who is customer focused with deep leadership capabilities". Clearly, these are rather subjective attributes, and no effort was made to back up these claims.

It strikes me as odd that the board made no effort to justify the hiring on the basis of the metrics that should appeal most to investors: the manager's ability to generate returns on capital. The media's reaction has been no better; the articles discussing Whitman's hiring appear to be focused on HP's languishing stock price and regurgitating the subjective criteria attributed to Whitman in HP's release.

Often, it can be difficult to evaluate a manager. If the manager led a private company or led parts of a public company but in a subordinate role or led a company for only a short period, we may not have enough information to determine the manager's effectiveness. But in Meg Whitman's case, we have a plethora of data at our disposal. This is because she was the CEO of eBay from 1998 to 2008, which can give us great insights as to her effectiveness as a chief executive.

Thursday, September 22, 2011

Netflix's Awful Buybacks

Corporations can be pretty poor allocators of capital. (As an aside, Warren Buffett's ability to allocate capital towards its most efficient use is one of the major reasons his company has risen to the top. While every other company at the top had to invent something brilliant to get there, he got there just by properly allocating capital!) This chart provides an example of just how poor at allocating capital corporations are:

Wednesday, September 21, 2011

L.S. Starrett: Cheap, And Owned And Operated By Employees

For long-term investors, the ideal corporate manager is one whose financial interests are aligned with those of shareholders. This occurs when managers have a substantial portion of their net worth tied up in the company's common stock. But there are cases where it's not just the executives that own shares, but the employees as well.

Tuesday, September 20, 2011

Telltale Signs Of A Lying CEO?

On this site, some time has been spent discussing how investors can tell if management is behaving in a questionable manner. There are some tip-offs based on EPS rounding, as well as some clues based on management candor. But recently, two researchers pored over conference call verbiage and determined that conference call discussions can reveal whether there is a greater likelihood that management is being deceitful.

Monday, September 19, 2011

Tandy Not So Dandy

Tandy Brands (TBAC) appears to trade firmly in value territory. While the company trades for just $11 million, Tandy has net current assets of almost $19 million. But it's very easy to see that management is not being candid with shareholders. As such, investors have no reason to believe that management will stop its destruction of shareholder value.

Sunday, September 18, 2011

A Short History Of Financial Euphoria: Chapter 4

While there is no doubt that free enterprise gives rise to recurrent episodes of speculation, the features that are common to these episodes are rarely analyzed, according to the author of A Short History of Financial Euphoria, John Kenneth Galbraith. This book from 1990 offers perspectives on bubbles that are still useful today. By paying attention to the signs, "there is a chance - a slim chance, to be sure, given the sweeping power of financial euphoria - that otherwise vulnerable individuals will be warned."

Saturday, September 17, 2011

A Short History Of Financial Euphoria: Chapter 3

While there is no doubt that free enterprise gives rise to recurrent episodes of speculation, the features that are common to these episodes are rarely analyzed, according to the author of A Short History of Financial Euphoria, John Kenneth Galbraith. This book from 1990 offers perspectives on bubbles that are still useful today. By paying attention to the signs, "there is a chance - a slim chance, to be sure, given the sweeping power of financial euphoria - that otherwise vulnerable individuals will be warned."

Friday, September 16, 2011

Economic Indicators Brightening

There are many indicators which attempt to gauge the health of the economy. They are broadly divided into three categories: leading (e.g. building permits), coincident (e.g. retail sales) and lagging indicators (e.g. employment data). Focusing on a single indicator, or even a single category, does not give the analyst a good enough gauge of the future of the economy. For this reason, many (including value investor Ken Fisher) consider the ratio between the coincident and lagging indicators to be the single best measure of the direction of the economy.

Thursday, September 15, 2011

Best Buy Should Easily Outperform Amazon

Best Buy (BBY) and Amazon (AMZN) appear to be companies headed in different directions. While Amazon has seen steady revenue and earnings growth over the quarters and over the years, Best Buy's revenue has been flat, with its earnings actually declining.

But what makes a stock attractive is not simply the trajectory of the results of the underlying business. If this were the case, stock prices wouldn't matter, as a growing business would be a "buy" at any price. In the cases of Amazon and Best Buy, the stock price differences between these two companies have become so extreme that it has become highly likely that Best Buy stock will outperform that of Amazon in the coming quarters and years.
Read more...

Wednesday, September 14, 2011

Global Railway's Liquidation

If you're a value investor who likes to buy companies undergoing liquidation, Global Railway Industries (GBI) may be for you!

Tuesday, September 13, 2011

Value Investors and Stops

Stop-loss orders are often recommended to investors of all types, especially when the market is as volatile as it has been lately. For value investors, however, the benefits of stop-loss orders are not as high as they are for other market players

Monday, September 12, 2011

Omnivision: Seeing Value

Omnivision Technologies (OVTI) designs and sells chips that capture digital images. These chips are used in cameras, smartphones, tablets, PCs and a slew of other devices. In just the last two months, the company has lost half of its market value, even though it is well capitalized and trades at a single-digit P/E.

Sunday, September 11, 2011

A Short History Of Financial Euphoria: Chapter 2

While there is no doubt that free enterprise gives rise to recurrent episodes of speculation, the features that are common to these episodes are rarely analyzed, according to the author of A Short History of Financial Euphoria, John Kenneth Galbraith. This book from 1990 offers perspectives on bubbles that are still useful today. By paying attention to the signs, "there is a chance - a slim chance, to be sure, given the sweeping power of financial euphoria - that otherwise vulnerable individuals will be warned."

Saturday, September 10, 2011

A Short History Of Financial Euphoria: Chapter 1

While there is no doubt that free enterprise gives rise to recurrent episodes of speculation, the features that are common to these episodes are rarely analyzed, according to the author of A Short History of Financial Euphoria, John Kenneth Galbraith. This book from 1990 offers perspectives on bubbles that are still useful today. By paying attention to the signs, "there is a chance - a slim chance, to be sure, given the sweeping power of financial euphoria - that otherwise vulnerable individuals will be warned."

Friday, September 9, 2011

Hart Stores: The Value Trap

As value investors, we gravitate towards the most shunned investments around. The most hated stocks often make for the best investments. But no matter how disliked a company may be, if it possesses certain attributes, it may still not make sense as a value investment. Hart Stores (HIS) provides such an example.

Thursday, September 8, 2011

SuperMedia: The Fixed Cost That Won't Go Away

SuperMedia (SPMD) trades for just $35 million despite a cash balance of $180 million! The company has also been cash flow positive for years, having pulled in a total of about $1.25 billion in free cash flow over the last four years.

Wednesday, September 7, 2011

M/I: Whatever You Prefer

It's not often that preferred shares are discussed on this site. For one thing, there aren't as many preferred securities nowadays. Furthermore, this site tends to focus on established, profitable small-caps and/or companies with low debt-levels; preferred shares don't have much use among these kinds of firms, and therefore such shares are not encountered often. There is an exception to this in the form of the publicly traded preferred shares of M/I Homes (MHO-A), a company whose common equity was discussed on this site last week.

Tuesday, September 6, 2011

Manhattan Bridge: Radical Share Issuance

Manhattan Bridge Capital has been discussed on this site because its stock trades at a large discount to its net assets. But while the company has just 3.3 million shares outstanding, this week shareholders will vote to give its CEO, Assaf Ran, 1 million shares. Because Ran owns half of the company's shares already, this looks like outright robbery of minority shareholders!

Monday, September 5, 2011

Boombustology: Chapter 12

Asset bubbles are frequently popping up, and back down. They are easy to spot in hindsight, but we appear to lack the tools to recognize them ahead of time. Vikram Mansharamani aims to rectify that with his book, Boombustology. He applies a multi-lens approach to understanding bubbles with the aim of giving the reader the ability to identify bubbles, and thereby avoid being caught unaware.

Sunday, September 4, 2011

Boombustology: Chapter 11

Asset bubbles are frequently popping up, and back down. They are easy to spot in hindsight, but we appear to lack the tools to recognize them ahead of time. Vikram Mansharamani aims to rectify that with his book, Boombustology. He applies a multi-lens approach to understanding bubbles with the aim of giving the reader the ability to identify bubbles, and thereby avoid being caught unaware.

Saturday, September 3, 2011

Boombustology: Chapter 10

Asset bubbles are frequently popping up, and back down. They are easy to spot in hindsight, but we appear to lack the tools to recognize them ahead of time. Vikram Mansharamani aims to rectify that with his book, Boombustology. He applies a multi-lens approach to understanding bubbles with the aim of giving the reader the ability to identify bubbles, and thereby avoid being caught unaware.

Friday, September 2, 2011

Activism At GTSI

GTSI Corp has been discussed a few times on this site, most recently as a company trading at a discount to its net cash balance! An activist looking to realize this value for shareholders recently contacted me, and agreed to do an interview and share for publication a letter he sent to GTSI's CEO Sterling Philips.

Thursday, September 1, 2011

M/I Homes vs Book

The other day, the idea that home builders should trade near their book values was discussed on this site. Seeing as how sentiment in the industry is such that many builders trade at discounts to their book values, an opportunity for profit may be present for value investors with a long-term outlook. M/I Homes (MHO) is one company that fits this description.

Wednesday, August 31, 2011

Capella No Longer Shines

Capella Education (CPLA) is an online education company that offers undergraduate and graduate degree programs. The stock trades near its five-year lows, but the company's earnings per share are three to four times higher now than they were last time the stock traded at this price!

Tuesday, August 30, 2011

Home Builder Opportunity?

Many US home builders continue to lose money, and sentiment in this sector is decidedly bearish. But it is often among unloved, cyclical companies that value can be found. To that end, a number of home builders trade at discounts to their book values.

Monday, August 29, 2011

BIDZ.com Quite Cheap

Shares of BIDZ.com have fallen off a cliff recently. This was a net-net stock already, but it has still fallen more than 30% in the last month alone. As a result, the company now trades for a discount of almost 50% to its net current assets. Despite this massive discount, however, shareholders should be cognizant of actions on the part of management that could erode the current margin of safety.

Sunday, August 28, 2011

Boombustology: Chapter 9

Asset bubbles are frequently popping up, and back down. They are easy to spot in hindsight, but we appear to lack the tools to recognize them ahead of time. Vikram Mansharamani aims to rectify that with his book, Boombustology. He applies a multi-lens approach to understanding bubbles with the aim of giving the reader the ability to identify bubbles, and thereby avoid being caught unaware.

Saturday, August 27, 2011

Boombustology: Chapter 8

Asset bubbles are frequently popping up, and back down. They are easy to spot in hindsight, but we appear to lack the tools to recognize them ahead of time. Vikram Mansharamani aims to rectify that with his book, Boombustology. He applies a multi-lens approach to understanding bubbles with the aim of giving the reader the ability to identify bubbles, and thereby avoid being caught unaware.

Friday, August 26, 2011

Tweet Tweet!

It has been a year now since I joined Twitter, and in that relatively short amount of time it has become an important part of my investing life! Value investors have a lot to gain from Twitter, which is why I recommend that all readers join Twitter if they haven't already.

Thursday, August 25, 2011

HP Stock Gets Destroyed

Hewlett-Packard (HPQ) has seen better days, but its stock price has likely overreacted to the downside. The last time HP's shares were this low was back in 2005, when its earnings per share were about $1/year. Today, its trailing twelve-month EPS is around $4, giving the stock a P/E of about 6!

Wednesday, August 24, 2011

Bank Of America: Value Stock?

With Bank of America (BAC) trading at just a third of its book value, I frequently receive questions pertaining to its potential as a value investment.

Tuesday, August 23, 2011

My Dell Goes Mmmm

Last Tuesday after the markets closed, Dell reported results from its most recent quarter that caused its stock price to fall 10% the following day. While we can never really know why a stock falls (as it is the result of the choices of tens of thousands of decision-makers that mostly remain anonymous), the media widely reports that the stock fell because of Dell's lowered revenue guidance. The market's infatuation with revenue growth can create excellent opportunities for value investors.

Monday, August 22, 2011

Action At GTSI

Last week was an eventful one for potential value stock GTSI. Because of news the company issued after markets closed on Friday, the stock's price action today will be interesting to watch. Depending on how the stock price moves today, value investors may be interested in either buying or selling!

Sunday, August 21, 2011

Boombustology: Chapter 7

Asset bubbles are frequently popping up, and back down. They are easy to spot in hindsight, but we appear to lack the tools to recognize them ahead of time. Vikram Mansharamani aims to rectify that with his book, Boombustology. He applies a multi-lens approach to understanding bubbles with the aim of giving the reader the ability to identify bubbles, and thereby avoid being caught unaware.

Saturday, August 20, 2011

Boombustology: Chapter 6

Asset bubbles are frequently popping up, and back down. They are easy to spot in hindsight, but we appear to lack the tools to recognize them ahead of time. Vikram Mansharamani aims to rectify that with his book, Boombustology. He applies a multi-lens approach to understanding bubbles with the aim of giving the reader the ability to identify bubbles, and thereby avoid being caught unaware.

No part of the world has proven itself immune to bubbles. Each of the next few chapters examines a bubble from the point of view of the five lenses described in the first five chapters.

The topic of this chapter is Tulipmania, a bubble for tulip bulbs that took place in Holland in the 1630's. Some background is in order so that the context is understood. Holland had just gained independence from Spain through war, and was intercepting some Spanish ships carrying goods from the West Indies. The country found itself newly prosperous as an innovative, trade-friendly country. At the same time, however, scores of its population were dying as a result of bubonic plague.

Tulips were a relatively newly discovered type of flower (brought over from the Mediterranean) with colour schemes that had not yet been seen before. Many bulbs carried unique patterns, and offspring could not be grown quickly. Because bulbs had to be in the ground most of the year, they could only be exchanged in May and October, so futures contracts were created to facilitate sales that did not take place in those months. At one point during the bubble, many elites (including politicians) lost money when prices retreated. As such, the laws were changed so that futures contracts became options contracts, whereby the buyer would get to choose whether to take delivery of the bulbs when the time came to exchange.

Here is how the bubble may be viewed through the five lenses described in the previous five chapters:

1) Microeconomic: Many buyers were hoarding bulbs, signaling a breakdown of equilibrium pricing. Price was affecting, rather than reflecting demand.

2) Macroeconomic: Due to the capital inflows through successful trade and seizure of Spanish ships, there was a dramatic increase in the money supply in Holland. Easy money was undoubtedly making its way into this bubble.

3) Psychology: The massive deaths caused by the plague were giving citizens a short-term mentality. Since death might be near, thoughts of long-term repercussions to actions were at a low.

4) Regulatory: Because futures contracts were changed to options contracts, highly levered speculation ensued. People could buy the upside of bulbs without much downside, resulting in asymmetric risks. Shortly after the regulation was switched back, prices plummeted.

5) Biological: Citizens in all fields took part, from nobles to chimney sweeps. From the epidemic model, we know that this leaves very few people to be "infected", resulting in an eventual pop.

Friday, August 19, 2011

When Intangibles = Cash

As value investors, we are trained to look at the "Goodwill" and "Intangibles" lines on a company's balance sheet with great skepticism. After all, these supposed company assets are not hard assets like equipment or land or receivables and therefore can't be used to generate cash flows and furthermore they have no salvage value. But the future cash flows of companies with large intangible assets listed on their balance sheets can often be underestimated unless those intangibles are taken into account.

Thursday, August 18, 2011

What Imation Says vs What It Means

All companies say they want to add value for shareholders, but not all actually mean it. Sometimes, investors have to read between the lines to figure out what are management's true intentions. This article contains some comments from Imation's management team on its recent conference call, followed by a translation for shareholders of what the comments may actually mean.

Wednesday, August 17, 2011

Vicon's Value Destruction

Usually, a company's stock price changes by more than its business value. This is evident by the price volatility that allows value investors like Warren Buffett to buy low and sell high (or in his case, hold forever). But occasionally, a company's intrinsic value does change drastically over a relatively short period. Vicon provides such an example.

Tuesday, August 16, 2011

Colour That Tongue Blond!

The Q&A sessions during company conference calls are usually filled with the questions of analysts with very short-term mindsets. This is illustrated by the nature of their questions, which can range from "Is your gross margin next quarter likely to be 23.3% or 23.4%?" to "Were sales in the 3rd week of July higher or lower than they were in the 2nd week in July?". But on the most recent conference call for Blonder Tongue (BDR), a shareholder with a different agenda appeared. The price has fallen so low, that the caller wanted to talk liquidation value!

Monday, August 15, 2011

Expenses Ahead Of Revenues

Quarterly results can be very misleading. As value investors, we must think long-term and avoid over-emphasizing recent events. Negative quarters for otherwise healthy companies can occur for a variety of economic reasons, including temporary dips in demand or competitor actions. For growing companies, another cause of seemingly poor quarters is expenses that precede new revenues. This appears to be the case for value stock Parlux Fragrances, which saw a drop in price last week following its quarterly earnings release.

Sunday, August 14, 2011

Boombustology: Chapter 5

Asset bubbles are frequently popping up, and back down. They are easy to spot in hindsight, but we appear to lack the tools to recognize them ahead of time. Vikram Mansharamani aims to rectify that with his book, Boombustology. He applies a multi-lens approach to understanding bubbles with the aim of giving the reader the ability to identify bubbles, and thereby avoid being caught unaware.

The fifth and final lens through which bubbles are considered is the biological lens. The authors describes a couple of frameworks through which this lens can be viewed, namely using epidemic models and emergent behaviour.

Mansharamani references Robert Shiller's work in this regard. The idea is that a tellable story infects the population, eventually leading to an epidemic whereby there is a prevalent belief that results in bubble behaviour.

If the "idea" that results in bubble behaviour is considered a "disease", the epidemic model can be used to ascertain the relative maturity of the bubble. (Note that this does not allow one to time a bubble, it only gives one a rough idea of the stage at which a bubble has reached.) Epidemic models where the infection rate is greater than the removal rate follow a bell curve in terms of a population's infection (assuming the infection rate is greater than the removal, or cure, rate). Trying to ascertain where we are on that curve can help gauge bubble maturity levels.

The emergence framework has to do with how we behave in groups. Various animal groups are discussed whereby seemingly independent individual organisms appear to act as single entities when part of a group. There are a number of signals, both conscious and unconscious, that individual organisms pass on to other individual organisms that result in co-ordinated behaviour.

Humans are not immune from this type of behaviour. One example of this behaviour is an information cascade. For example, if a couple happen upon two empty restaurants and have no information about which is better, they may be indifferent as to which restaurant to choose. The next couple will have no additional information, but will see that there is one couple in one restaurant. Believing that the first couple behaved rationally in choosing their restaurant, they may choose the same one. This can occur many times, resulting in one full restaurant and one empty restaurant, even though the empty restaurant might be better. Mansharamani likens this to investors who purchase what other investors have purchased, believing that other investors must have done their homework.

Saturday, August 13, 2011

Boombustology: Chapter 4

Asset bubbles are frequently popping up, and back down. They are easy to spot in hindsight, but we appear to lack the tools to recognize them ahead of time. Vikram Mansharamani aims to rectify that with his book, Boombustology. He applies a multi-lens approach to understanding bubbles with the aim of giving the reader the ability to identify bubbles, and thereby avoid being caught unaware.

The political environment is a major factor in the culmination of booms and busts. As such, this chapter examines the boom/bust phenomenon through the political lens.

For a boom and bust to exist, property rights must exist. In other words, a particular entity must have exclusive rights to use or sell some asset.

As a result, the author argues that only capitalist countries appear susceptible to booms and busts. In communist countries, the government owns everything so there is no incentive to speculate since there are no profits to be had.

Though many communist countries allow some property rights, often the prices of those assets are fixed. As a result, there is no price volatility. (Although price volatility is avoided, however, there is often volatility in the availability of the assets themselves, since there is no price signal to either encourage or discourage supply and demand.)

Mansharamani then goes on to discuss some political factors that affect the likelihood of booms and busts for countries that fall in between communism and laissez-faire capitalism. When governments place restrictions on property rights, for example, they reduce the incidences of booms and busts. On the other hand, the lifting of restrictions can lead to increases in the chances of booms and busts.

Also, when governments focus on the short-term (as democratic leaders often do, because of their relatively short-term mandates), it can lead to increased distortions that lead to booms and busts. Examples of this are minimum wage laws (which increase unemployment, but which are popular in the short term) and rent controls (which reduce rents in the short-term, to the delight of renters, but cause shortages in the long-term). These distortions increase the likelihood of under/over-investment, which increases the likelihood of booms and busts.

Friday, August 12, 2011

Universal Power Group: Really Cheap Now

Universal Power Group (UPG) is a distributor of batteries and other power-related accessories. While it has been cheap for a while, it just got really cheap as a result of the market turmoil and recent results that the market didn't appear to like.

Thursday, August 11, 2011

LCA-Vision: Another Time To Buy?

LCA-Vision's (LCAV) stock price volatility has helped out many value investors. Many times during the last three years has his stock fallen or risen by 50% or more over the course of just a few months; two such occasions are documented here and here. Now that the stock price has once again dropped to a relatively low level, value investors may want to take yet another stab at this stock.

Though the stock price is volatile, the company's cash flow and cash holdings are remarkably stable. LCA-Vision trades for $80 million, despite positive free cash flow and $50 million of cash, against no debt.

But the problem is, the company just can't cut costs enough to generate a decent return. Seeing as how the company is now facing its fourth consecutive year of negative operating margins, it's clear that LCA-Vision doesn't have the flexible cost structure I once thought it did.

The company has implemented a number of cost reduction programs, including a multitude of store closures. However, even cutting out the weakest stores still hasn't stopped the bleeding, suggesting there wasn't a whole lot of variability in the financial situation of individual stores. There is a fixed cost element to every location, and it seems even the strongest stores aren't able to drive enough revenue to overcome this amount. Marketing spend per person ticked up last quarter as well, as the company desperately tries to lure people in.

But things don't seem to be getting any better. Deferred revenue has fallen significantly in the last six months, suggesting that even the low revenue number the company recently booked is high compared to what it will look like in the future.

Management is taking rational steps to improve the situation. Since cost-cutting hasn't done the trick, the company is looking to generate additional revenue streams by offering services it hasn't offered before. This could work in helping to amortize the fixed costs of the locations across higher revenues, but may not be worth betting on for risk-averse investors.

As humans, we tend to believe our successes are due to skill, and our failures are due to (bad) luck. To avoid falling prey to this bias, we should consciously scrutinize our investment results with a willingness to take responsibility for poor decisions and attribute some of our successes to luck. As LCAV has been unable to pull itself out of its losses now for many years, it may be an example of the latter. Thanks to a volatile Mr. Market that has occasionally become overexcited with respect to this security, LCAV has generated terrific returns for investors who bought low. Though this phenomenon may indeed reoccur, value investors may not want to count on it.

Disclosure: No position

Wednesday, August 10, 2011

Investing For Expected Value?

Last week, a reader brought up an interesting point with respect to investment decisions:

"I disagree with the idea that an investment that has a non-trivial probability of a large loss is necessarily a bad one. I would claim that the key metric is the investment's Expected Value (EV)."

Intuitively, this makes sense. But I would argue that EV should not be the metric by which investors make their decisions.

Tuesday, August 9, 2011

Monday, August 8, 2011

C-Com: Lots of Cash, But Still Issues Debt

If a corporation has a lot of cash, one would think it doesn't need to take on the added costs (through interest payments) associated with debt. But it appears things in practice are a little different from what they are in theory; a simple screen on robotdough.com demonstrates that there are some 1200 public companies in the US in net cash positions that still feel the need to carry debt, paying interest charges that would otherwise be part of shareholder earnings. There can be many legitimate reasons for doing this, but some reasons are more legit than others! C-com (CMI) is actually making currency speculations with its debt!

A logical reason a company may have debt even though it has even more cash has to do with its debt repayment schedule. If debt is due relatively soon, it's only prudent that the company have the cash on hand to pay it off. But this group represents a relatively small subset of the companies who carry debt despite large cash balances.

A major reason many international companies are in this high-cash-some-debt boat has to do with tax laws. For American companies in particular, tax charges for bringing home money that was earned abroad are rather punitive. As such, these companies often borrow at home to fund what they'd rather be doing (e.g. paying out shareholders and/or hiring employees) with cash that is stuck abroad. Cisco (CSCO) and Microsoft (MSFT) are among the companies in this boat.

Another reason a company may have tons of cash and still carry debt may have to do with its being a Chinese RTO. Just because the bank says the cash balance is $100 million (or $200 million, because if you're going to lie, you might as well make it worth your while) doesn't mean you can spend it on salaries. Management of such companies would need debt to grow the operations of the company (however highly exaggerated they may be), despite "cash balances" well in excess of these amounts.

But C-Com doesn't really fit any of the above categories. Though it is an international company, Canadian tax rates and laws are such that repatriation is not such a big deal. And yet despite a cash balance of just under $10 million, management saw fit to take out a $2.8 million loan, bringing the cash balance up to $12.5 million. Here's why:

"Management decided to increase its cash secured line of credit...to meet its Canadian dollar obligations rather than convert its United States dollars into Canadian dollars at unfavourable exchange rate."

In other words, the company is starting to speculate on currency! As the Canadian dollar has strengthened recently against the greenback, the company is betting the opposite will happen. While I may agree with their thinking, I am by no means sure about it, and I don't see how they can be either. Currency markets can stay out of whack for many years at a time, and so this decision increases this company's risk: the company has effectively increased the currency mismatch between its costs and its revenues by increasing its Canadian dollar costs, which have to be paid down with US dollars at some point.

Rather than taking additional currency risks, C-Com would probably have been better served had it hedged its currency mismatch by purchasing forward currency contracts. Since it did not do that ("The Company typically does not enter into foreign currency hedges"), it seems to be trying to recoup currency losses by speculating that currency movements will reverse themselves. The company has enough business risks...why add to the list?

Disclosure: No position

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