Tuesday, July 1, 2014

It Was The Comments That LICT

Less than 5 months ago, LICT Corp (LICT) was discussed on this site as a potential value investment. It was extraordinarily cheap on a multiples basis, and was (and still is) run by a renowned capital allocator, Mario Gabelli.

Most of you didn't buy it though, and you're poorer for it, as the stock has risen 70% since that article. If you didn't buy it because of some risk that didn't come to fruition (e.g. regulatory, which was a very real risk here), I respect that. You could very well have made the smarter decision, despite how it turned out, due to the role of luck.

But I know from the comments section of that article that many of you didn't buy it for some highly irrelevant factors. I highlight some examples below:

"It had zero volume today!"

Stocks also have zero volume on Saturdays and Sundays...do you sell your whole portfolio on Friday afternoon? If you're buying into a business, it's the fundamentals of the business that matter, not how often its share ownership changes hands on a given day.

"Anyone know if any stock splits are on the horizon? I wouldn't buy this simply because 1 share costs almost $2500."

If you don't have $2,500 to invest in any one stock, I can understand this view. But I suspect many of you think having more shares at a lower price is better, and that's absolutely wrong. A stock split doesn't change the percentage of the business that you own, and that's what's relevant.

"really...u kddin???"

I never joke about capital allocation.

"First of all it is over $200 a share. There is no dividend. The company is near a 52 week high. It might be a "cash cow" but for whom? Not the investor at this point in time. Wake me when they reward the share holder."

This comment is of hall-of-fame caliber, because it covers so many irrelevant factors at once. First, on the share price, I've already shared my thoughts on this above. Second, whether there is a dividend is not relevant. What's relevant is whether the company is better off keeping its earnings because it can earn a good return. Third, the price history is also not relevant. Would you turn down $100 because someone once paid $50 for it? Finally, it's a cash cow for shareholders, that's who. Consider yourself awake!

I've now sold my shares in LICT Corp. While I still think the company has a bright future, the best risk-adjusted returns have already been made here in my opinion. The company's EV/EBIT trades at a much more reasonable 12, suggesting the market has become significantly more optimistic on the company. At the previous single-digit EV/EBIT, the downside in the stock was much more limited, but as the price has risen, so has the potential downside. I'd rather employ my capital in other situations where the downside is limited.

Good luck!


Anonymous said...

Well done Saj!


Phil K said...

Haha, Saj I think this is my favorite post of yours in all the years I've been reading.

Well said!

Adrian said...

that site is for fund managers only:(....or very rich people.

Anonymous said...

Great post. Very amusing.