Monday, August 23, 2010

Undervalued and Underfollowed

Smith-Midland Corporation (SMID) manufacturers and sells concrete products (e.g. highway safety barriers, exterior wall panels etc.) for the construction and other industries. The stock has spent a good part of the last year trading above $2/share, but despite weathering the recession fairly well, it now trades at $1.40.

The company is not going to wow you with a steady earnings profile, as a couple of factors combine to make this a rather cyclical business. First, on the revenue side it relies on purchases from some industries that are rather cyclical. When the economy operates at overcapacity (as it does during a recession), construction projects get shelved. Second, the cost side of this business is rather fixed. In heavy manufacturing, certain amounts of fixed assets are needed to produce the finished goods, so cutting costs when revenue dries up is not an easy thing to do.

But for investors who can stomach the volatile earnings, the stock appears to trade at a discount to its potential earnings. While the company trades for just $6.5 million, it has pulled in net income of over $3 million in just the last 3 years. The company also trades at a 33%+ discount to its book value. Of course, as discussed above, if the economy remains weak, it would not be surprising to see net losses occur, but that's why the company trades at such a low price point; for those who think long term, this could be an excellent entry point.

One other point should be mentioned. This is one of the few Over-The-Counter (OTC) stocks discussed on this site. These stocks do not offer the same protections for investors as stocks traded on exchanges such as the NYSE or Nasdaq. Investors not familiar with these protections may wish to learn about them or stay away for now.

Disclosure: None


Paul said...

Interesting post. Why did you decide not to purchase this one, Saj?

Anonymous said...

I have owned this for a few months. Assuming that the A/R is largely recoverable,it is trading at 20% below excess cash and at a 70% discount to its normalized EPV.

Saj Karsan said...

Hi Paul,

If I invested in every stock I wrote about, I would be over-diversified. Based on price, I often just have to pick and choose what goes in and what must get cheaper to go in. But I'm not necessarily better than anyone else at doing that, so following me in that regard may be unwise.

Paul said...


Thanks for the feedback. I know you're busy, but I really do appreciate the time you take to reply to our posts. That's very rare, so I'd like to thank you for that. I think you're quite a bit smarter than I am, so I do give more confidence to the ones you decide to buy too.