Monday, March 1, 2021

Bye, Orem

I am struggling to find good investment opportunities. As such, my cash levels have been rising, as I have continued to sell companies that have risen to levels that are near my estimates of their fair values. One recent example is Biorem, a stock I discussed as a potential value investment five years ago.

Shares remained range-bound for years while the company continued to deliver reasonable returns on its capital, and very good returns on its share price. But in the last few months, the share price basically doubled. I still like the company, but it's at a point now where I'd rather have the cash in hand than the stock when it trades at these levels.

My one disappointment with the company has been the lack of return (i.e. opportunity cost) of its cash holdings. Biorem has built up a lot of cash over the last few years. The company would be worth much more if they had done something productive with it. They could have repurchased shares when they were cheap, made a strategic acquistion, or even paid some out to shareholders. The cash balance is still there though, so it will probably play a big role in what happens to the stock in the future.

Disclosure: No position



Hey Barel ,
Check out ticker AFCC
Recently made a substantial issuer bid for 33% of shares in 1.6-1.65 range(iCEO voted in favour without rendering his shares)
Cash balance post repurchase 33 mn
Insider just upped his stake in December from 7 to 17%
Did I mention an eligible dividend for 17 cents?

Amit said...

Your views on this align with mine with respect to cash. Most companies have a liquidity runway which is a combination of the cash on hand, their available credit under their credit facility, and the potential for further credit based on assets or business prospects. At all times, businesses can make elections about how long this runway should be by either expanding their credit facility, growing their assets, or improving their business prospects. Another way businesses can expand their liquidity prospects is by stopping the return of free cash flows to shareholders, e.g., dividend reduction/elimination or stoppages to share buybacks.

My mind wanders to January 2020. Say you're a restaurant, cinema, hotel, or gym. Your revenue is about to go to 0 for months, yet you have vendor bills, utility bills, rent, payroll, and all other varieties of obligations. If you'd spent the prior 5-6 years taking every dollar of free cash flow and returning it to shareholders via dividend or buyback, you'd be at the lender's mercy in every way. This is precisely what happened to company after company. Thankfully, the banking system extended credit to folks, the government acted rationally, and so on.

But some companies were swimming in cash way beyond their business growth needs. And they would be fairly subject to criticism for behaving suboptimally.

At the end of the day, retaining excess cash and not returning it to the owners is, in effect, like purchasing a business interruption insurance policy. The premium paid for that policy is, in essence, the opportunity cost of the company's decision to hoard the cash, i.e., the shareholders would forfeit any return on those hypothetical dividends they never received.

This is a very tricky problem. A company like Berkshire hoards cash for different reasons than a company like Apple.

All that said, one can't go around living life in fear of once-in-a-century pandemics.

Saj Karsan said...

Thanks, Spaced. AFCC is definitely paying out at a good clip, but I don't see a discount there that excites me enough to get involved. Operations are practically nil, so I don't see these payout events as sustainable either.