Wednesday, March 18, 2020

Bees, her

So you people have started buying guns and ammo. Maybe it's a good idea. If the virus gets really big, you might be able to shoot it. I took advantage of the short-term spike to exit my position in Smith & Wesson maker American Outdoor, a lonely green shoot in an otherwise burning sea of red that is my portfolio.

I haven't been discussing investing ideas much lately on this site. It's not because I haven't been buying into this steep sell-off. On the contrary, I have put what was previously a significant cash position to work over the last couple of weeks.

I don't have any special insight into how this pandemic is going to play out. But when uncertainty and panic reign, that is when you get the best prices. I know it's scary. I'm scared. I have sick family members, I have trouble acquiring items at the grocery store, I just watched Contagion (2011) with my wife and it doesn't inspire confidence. But the mortality rate on this is low and so eventually we will get through this. A few years from now (which is on the short end of the time-frame over which I invest), I suspect some of today's prices will look very good.

I haven't discussed those investment ideas here because most of my favourite stocks at present continue to be of the smaller variety. I don't want to compete with you on price in case you like one of my ideas. With large caps it doesn't really matter, because the pathetic following of this site (no offense) isn't enough to move the price.

One stock that's liquid enough to discuss, however, is Beazer Homes (BZH). Beazer is a home builder that I've owned a couple of times in the past (discussed here and here). It just seems to be one of those stocks that is way more volatile than the underlying business, offering a margin of safety when Mr. Market's depressed, and a good exit price when Mr. Market's hot and bothered.

Book value five years ago was about $19 per share, and today it's just over $17, with not a lot of wild gyrations in between. The stock price on the other hand, has fluctuated between $6 and $20 a couple of times in this period! Today, the shares trade for just $5 and change, having dropped almost 70% in just the last five months!

The assets are made up mostly of land and homes, which are pretty steady in how much they are worth. The business model is pretty flexible. If sales are terrible, the company can turn inventory into cash (even if it's at a discount) and cut down on new land purchases, generating a cash surplus.

Of course, what can kill you in any "steady" business is an over-reliance on leverage. When a recession hits, you're not flexible at all if you have fixed obligations you can't meet. (This used to lead to a stage called bankruptcy, but now it leads to talks with the government for a bailout, apparently.)

At first glance, Beazer looks quite levered, with debt of $1.2 billion against equity of $539 million. But I think these guys got lucky. They just refinanced their debt over the last year, and as a result they don't have a large payment due until 2025! With a recession on the horizon, The Fed is likely to keep interest rates low, which I suspect would lead to a normal housing market once the worst of this pandemic has passed. But even if it doesn't, this debt structure gives the company ample time to liquidate their inventory in an orderly fashion if need be.

Note that a good chunk of book value is in the form of tax assets due to losses during the Great Financial Crisis. Those turn into cash only over time and only as the company makes a profit, so you may want to discount those in your valuation. Also note that the company was intent on paying down debt even before this pandemic hit, so a lot of their cash flow is already probably going towards making the company safer.

Stay healthy!

Disclosure: Author has a long position in shares of BZH

1 comment:

juan said...

"...the pathetic following of this site (no offense)..." LOL!

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