Wednesday, February 1, 2012

LS Starrett Shows Jump

Almost two years ago, LS Starrett (SCX) was discussed on this site as a potential value investment. Having appreciated some 50% since that time, the stock now trades much closer to its intrinsic value than it did before. In so doing, it becomes the latest stock to join the Value In Action page, providing the following lessons along the way:

1) You've got to dig deeper than the financial statements. SCX was a net-net but you wouldn't know it from a surface glance. That's because the company has a significant amount of inventory classified as LIFO, whereas most financial statements (and a more accurate current view of inventory) is FIFO. This inventory difference was worth $30 million, whereas the company's market cap was only $60 million!

2) It can take time to realize value. Investors are obsessed with quarterly and sometimes even monthly performance, but that's what allows long-term investors to profit. Sometimes, there is no catalyst in sight, and no reason to believe shares will appreciate any time soon. But buying something for less than its worth, and applying a little patience can go a long way.

3) Don't worry about short-term price fluctuations. SCX shares fell more than 20% before they started moving higher. Prices may change frequently, but business values probably do not. Investors who don't just ignore Mr. Market's emotions, but also capitalize on them by buying more when even cheaper prices are offered would have done even better with this stock.

SCX may still be undervalued, as it continues to trade at a discount to book value. But returns on capital have been low, suggesting some discount is justified. As such, it might be a good time to pull capital out of this stock and apply it towards stocks trading at bigger discounts to intrinsic value.

Disclosure: No position

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