New Positions
In the interest of full disclosure, yesterday we initiated positions in two NCAV stocks which we've reported on recently:
Discovery Partners(DPII)
Lazare Kaplan Intl(LKI)
We'll update you on their progress.
Thanks to all of you who have requested a PDF of the Bloomberg Personal Magazine article mentioned in our previous post.
Friday, 17 March 2006
Saturday, 11 March 2006
Back Where it All Started
This past week, your Cheap Stocks editor spent some time reminiscing about articles gone by, thinking about the good old days, so to speak. In that process, I came across one of the articles, certainly not the first, that was at the forefront of my interest in companies trading below net current asset value. The magazine in which it was published, Bloomberg Personal Finance Magazine, one of the best on the market at the time, unfortunately bit the dust in early 2003. Hats off to any mainstream publication (this one had circulation of 400,000) willing to induldge a writer by printing a story on this strategy.
This particular article, published in May, 2002, was entitled “Raking Up Live Prospects: A 70-year-old strategy for choosing stocks is green again” and discussed a stock screen utilized to identify NCAV companies. The story ultimately featured seven promising examples of NCAV companies, each of which was either profitable on a trailing 12 month basis, had at least one profitable quarter in the previous year, or was sitting on a relatively significant amount of cash and marketable securities.
The selected NCAV companies from that article are printed below. We thought it would be interesting, nearly four years later, to see how these companies subsequently fared.
The Results
Audiovoxx(VOXX)- Up 81 percent
Blair(BL)- Up 140 percent
National Presto Industries(NPK)- Up 78 percent
Netro (now SR Telecom)- Down 71 percent
Tellium- (Acquired at $3.00/share in September 2003)- Flat
Titanium Metals(TIE)- Up 2130 percent
Valueclick(VCLK)- Up 522 percent
The average cumulative return was +411 percent. Obviously, Titanium Metals 2130 percent rise had a great deal to do with that. But otherwise, outside of Netro’s poor performance, the results were compelling.
What was very pleasing at the time of this articles publication, was to see this piece referenced in a Washington Post article by Jim Glassman (Yes, Dow 36000 Jim Glassman). That piece is still available on line, in the National Review archives: Hook, Line & Winner
The point of this post is to illustrate the fact that the NCAV strategy does have merit. It requires a great deal of patience, and has a high degree of risk, but the rewards can be outstanding: not just in dollar terms, but also in the thrill of successfully identifying an undervalued security that few investors know of, or care about. This is also a great example of an area of the market were small investors can succeed, and the institutions can’t.
If you’d like a PDF of the original Bloomberg Personal article, please e-mail your request to Cheapstocks@verizon.net.
*The author does not have a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.
This past week, your Cheap Stocks editor spent some time reminiscing about articles gone by, thinking about the good old days, so to speak. In that process, I came across one of the articles, certainly not the first, that was at the forefront of my interest in companies trading below net current asset value. The magazine in which it was published, Bloomberg Personal Finance Magazine, one of the best on the market at the time, unfortunately bit the dust in early 2003. Hats off to any mainstream publication (this one had circulation of 400,000) willing to induldge a writer by printing a story on this strategy.
This particular article, published in May, 2002, was entitled “Raking Up Live Prospects: A 70-year-old strategy for choosing stocks is green again” and discussed a stock screen utilized to identify NCAV companies. The story ultimately featured seven promising examples of NCAV companies, each of which was either profitable on a trailing 12 month basis, had at least one profitable quarter in the previous year, or was sitting on a relatively significant amount of cash and marketable securities.
The selected NCAV companies from that article are printed below. We thought it would be interesting, nearly four years later, to see how these companies subsequently fared.
The Results
Audiovoxx(VOXX)- Up 81 percent
Blair(BL)- Up 140 percent
National Presto Industries(NPK)- Up 78 percent
Netro (now SR Telecom)- Down 71 percent
Tellium- (Acquired at $3.00/share in September 2003)- Flat
Titanium Metals(TIE)- Up 2130 percent
Valueclick(VCLK)- Up 522 percent
The average cumulative return was +411 percent. Obviously, Titanium Metals 2130 percent rise had a great deal to do with that. But otherwise, outside of Netro’s poor performance, the results were compelling.
What was very pleasing at the time of this articles publication, was to see this piece referenced in a Washington Post article by Jim Glassman (Yes, Dow 36000 Jim Glassman). That piece is still available on line, in the National Review archives: Hook, Line & Winner
The point of this post is to illustrate the fact that the NCAV strategy does have merit. It requires a great deal of patience, and has a high degree of risk, but the rewards can be outstanding: not just in dollar terms, but also in the thrill of successfully identifying an undervalued security that few investors know of, or care about. This is also a great example of an area of the market were small investors can succeed, and the institutions can’t.
If you’d like a PDF of the original Bloomberg Personal article, please e-mail your request to Cheapstocks@verizon.net.
*The author does not have a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.
Friday, 3 March 2006
Update: Discovery Partners
Discovery Partners
Ticker: DPII
Price: $2.40
P/E: NA
Market Cap: $63.3 million
Net Current Asset Value: $85 million
Since our March 2005 report shares of Discovery Partners are down 25 percent. We don't always get it right here at Cheap Stocks, or maybe our timing is not perfect, but we are not afraid to take our lumps.
As we noted in our initial post, Discovery had a sizable contract with Pfizer, whose renewal was in doubt. Indeed, Pfizer did not renew that contract, which has had a major impact on Discovery.
The company reported a net loss of $14 million for 2005. Revenues decreased 21 percent to 34.8 million. Not a pretty picture. The loss of the Pfizer contract is substantial, and as a result, the company has shut down and/or consolidated some of its facilities. Furthermore, the company is experiencing pricing pressure from outsourcing. That's quite a one-two punch.
Good News?
If there is any good news, its still the company's balance sheet. As of 12/31/05, the company had $83.5 million in cash and no debt to speak of. Thats about $3.20 in cash per share, while the stock trades at $2.40. Hold on, you might be saying, cash may be great, but if you have unprofitable operations, you'll burn through that cash quickly. Good point. In this case, the company is estimating a 2006 loss of from $15-$17 million, and cash burn of $12-$14 million. That would leave Discovery with $70 million (assuming company forecasts are accurate, a big assumption, we know)at year end 2006. Right now, the market is valuing the entire company at about $63 million. That's a fairly significant discount to cash, and a signal that the market has about given up on Discovery Partners.
Call Option?
Lets face it, its difficult to make a case for this company's operating businesses. Howevever, the cash level is interesting. If the company can truly end 2006 with $70 million in cash, purchase at current levels are essentially (ok, a stretch, we know) an in-the-money call, with a 1+ year expiration. The call being the possibility that Discovery turns the business around, even slightly over the next year, or perhaps that someone acquires them. I'd exchange $2.40 for $3.20 anyday, everyday, as often as possible. We know its not that simple. Any puffs left in this cigar butt? We'll see.
*The author does not have a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.
Discovery Partners
Ticker: DPII
Price: $2.40
P/E: NA
Market Cap: $63.3 million
Net Current Asset Value: $85 million
Since our March 2005 report shares of Discovery Partners are down 25 percent. We don't always get it right here at Cheap Stocks, or maybe our timing is not perfect, but we are not afraid to take our lumps.
As we noted in our initial post, Discovery had a sizable contract with Pfizer, whose renewal was in doubt. Indeed, Pfizer did not renew that contract, which has had a major impact on Discovery.
The company reported a net loss of $14 million for 2005. Revenues decreased 21 percent to 34.8 million. Not a pretty picture. The loss of the Pfizer contract is substantial, and as a result, the company has shut down and/or consolidated some of its facilities. Furthermore, the company is experiencing pricing pressure from outsourcing. That's quite a one-two punch.
Good News?
If there is any good news, its still the company's balance sheet. As of 12/31/05, the company had $83.5 million in cash and no debt to speak of. Thats about $3.20 in cash per share, while the stock trades at $2.40. Hold on, you might be saying, cash may be great, but if you have unprofitable operations, you'll burn through that cash quickly. Good point. In this case, the company is estimating a 2006 loss of from $15-$17 million, and cash burn of $12-$14 million. That would leave Discovery with $70 million (assuming company forecasts are accurate, a big assumption, we know)at year end 2006. Right now, the market is valuing the entire company at about $63 million. That's a fairly significant discount to cash, and a signal that the market has about given up on Discovery Partners.
Call Option?
Lets face it, its difficult to make a case for this company's operating businesses. Howevever, the cash level is interesting. If the company can truly end 2006 with $70 million in cash, purchase at current levels are essentially (ok, a stretch, we know) an in-the-money call, with a 1+ year expiration. The call being the possibility that Discovery turns the business around, even slightly over the next year, or perhaps that someone acquires them. I'd exchange $2.40 for $3.20 anyday, everyday, as often as possible. We know its not that simple. Any puffs left in this cigar butt? We'll see.
*The author does not have a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.
Monday, 20 February 2006
CBRL Group
Ticker: CBRL
Mkt Cap: 2.06 billion
Price: $44.23
Enterprise Value: $2.284 billion
Dvd Yield: 1.8 %
Total Restaurants: 661
Owned Restaurants: 447 (includes property)
As I noted a few months back, one area we’ve started to research is retail, or in this case restaurants, that actually own their locations. These days, many lease their stores. In light of the recent Sears-Kmart deal, which was largely real-estate focused, and similar chatter about Toys R Us and even McDonald’s, we’ve got our eyes open for similar situations, albeit on a much smaller, “Cheap Stocks” kind of scale. Our first report on the subject featured Bob Evans Farms. This report focuses on CBRL Group, well-known for its Cracker Barrel Old Country Store Restaurants.
You’ve probably heard of Cracker Barrel, maybe even eaten there a time or two, a casual dining chain and country store that owns and operates 534 Cracker Barrel Restaurants in 40 states, and 127 Logan’s Roadhouse restaurants in 16 states. And like Bob Evans, Cracker Barrel owns many—447 as of September 2005—of its location. Those that I’ve seen have been in very desirable locations as far as commercial real estate is concerned.
Better Late Than Never?
I know this will sound cliché, and hopefully readers know that honesty is important to us here at Cheap Stocks, but when we started this research, CBRL was trading in the $35 range. It gapped up sharply in January a report that suggested the company was stepping up efforts to maximize shareholder value. And yes, I was disappointed. My plan was to perhaps swap out of McDonald’s and into CBRL, or even hang onto MCD, and increase exposure to the restaurant sector, but I was too “late”. Irrational as it may seem, $45 CBRL just is not appealing as $35 CBRL. Anyway……
I’ve been to several Cracker Barrels in 3 or 4 different states. Every meal that I’ve ever had there has been excellent. It’s about as close as you can come to real country food from a chain restaurant. Part of the chains appeal is in the country store associated with each location. They sell a variety of goods, from old fashioned candy, to rocking chairs, to collectibles and some clothing items. I must admit, the stores are fun to wander through, but can’t imagine buying much of anything there (except for candy).
I’ve never been to a Cracker Barrel that was not packed with people, and there are often people waiting to be seated. This undoubtedly gives them the opportunity to shop in the Cracker Barrel store. While information on profitability of the retail side is not available, we do know that in 2005, it represented $494 million, or nearly 25 percent of total sales of $2.565 billion. Evidently, someone is buying merchandise, to the tune of an average $925,000 per store/per year, or $2500 per day.
What we don’t have a good feel for is how profitable the retail segment is., but according to a 1/25/06 research report from JP Morgan analyst Steven Rees, comparable same store sales for retail were down 10 of 12 months in 2005, and are projected negative for the first five months of 2006 ( as far out as projections went). Rees claims that despite the negative same store retail sales data, margins have actually improved due to better inventory management, higher markups, and a new sourcing partner.
Still, we wonder whether Cracker Barrel would be better served by reducing the space allotted to retail, in favor of a larger dining area, or perhaps doing away with retail altogether. While we understand the country store motif is part of the brand recognition, we at least have to raise the issue.
The Real Estate
Of course one of the reasons we are interested in CBRL is because of the company owned real estate. As of September, the company owned 384 Cracker Barrels and 63 Logan’s. Now, we don’t claim to know where each owned restaurant property is located, but do have a sense that they are typically in prime commercial real estate locations, in close proximity to major highways. With a current enterprise value of around $2.3 billion, EV/owned restaurant is about $5 million. We are certainly not suggesting that each owned location is worth $5 million. In fact, Rees puts forth a hypothetical analysis which values a spin-off of Logan’s at $385 million, and a land value of $1 million per owned CBRL location ($384 million). We don’t know if a Logan’s spin-off is in the works, CBRL acquired the company in 1999.
Fundamentals
CBRL has pretty sound fundamentals. The company has cut back on expansion, so cap ex is falling, and the company generates a nice amount of cashflow. 2005 sales grew 7.8 percent to $2.568 billion in 2005, from $2.381 billion in 2004. Net income grew 13 percent from $111.9 million to $126.6 million. Cash from operations jumped 40 percent in 2005 from $200 billion to $280 billion. Free cash flow (Our definition is Cash from operations minus cap ex- dividends) jumped from $40 million in 2004 to $86 million in 2005. Net profit margin was 4.9 percent in 2005, up from 2004s 4.7 percent. While CBRL’s profit margins are not all that impressive compared to some others in the restaurant segment, they certainly aren’t bad either. We wonder whether the retail segment is a drag on these margins?
Conclusions
A great dining concept, good food, real assets, nice cashflow. We like this company, but don’t currently own it. The recent 20+ percent run-up has us on the sidelines, for now.
Still, we wonder, would the company be better off if it were out of the retail business?
*The author does not have a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.
Ticker: CBRL
Mkt Cap: 2.06 billion
Price: $44.23
Enterprise Value: $2.284 billion
Dvd Yield: 1.8 %
Total Restaurants: 661
Owned Restaurants: 447 (includes property)
As I noted a few months back, one area we’ve started to research is retail, or in this case restaurants, that actually own their locations. These days, many lease their stores. In light of the recent Sears-Kmart deal, which was largely real-estate focused, and similar chatter about Toys R Us and even McDonald’s, we’ve got our eyes open for similar situations, albeit on a much smaller, “Cheap Stocks” kind of scale. Our first report on the subject featured Bob Evans Farms. This report focuses on CBRL Group, well-known for its Cracker Barrel Old Country Store Restaurants.
You’ve probably heard of Cracker Barrel, maybe even eaten there a time or two, a casual dining chain and country store that owns and operates 534 Cracker Barrel Restaurants in 40 states, and 127 Logan’s Roadhouse restaurants in 16 states. And like Bob Evans, Cracker Barrel owns many—447 as of September 2005—of its location. Those that I’ve seen have been in very desirable locations as far as commercial real estate is concerned.
Better Late Than Never?
I know this will sound cliché, and hopefully readers know that honesty is important to us here at Cheap Stocks, but when we started this research, CBRL was trading in the $35 range. It gapped up sharply in January a report that suggested the company was stepping up efforts to maximize shareholder value. And yes, I was disappointed. My plan was to perhaps swap out of McDonald’s and into CBRL, or even hang onto MCD, and increase exposure to the restaurant sector, but I was too “late”. Irrational as it may seem, $45 CBRL just is not appealing as $35 CBRL. Anyway……
I’ve been to several Cracker Barrels in 3 or 4 different states. Every meal that I’ve ever had there has been excellent. It’s about as close as you can come to real country food from a chain restaurant. Part of the chains appeal is in the country store associated with each location. They sell a variety of goods, from old fashioned candy, to rocking chairs, to collectibles and some clothing items. I must admit, the stores are fun to wander through, but can’t imagine buying much of anything there (except for candy).
I’ve never been to a Cracker Barrel that was not packed with people, and there are often people waiting to be seated. This undoubtedly gives them the opportunity to shop in the Cracker Barrel store. While information on profitability of the retail side is not available, we do know that in 2005, it represented $494 million, or nearly 25 percent of total sales of $2.565 billion. Evidently, someone is buying merchandise, to the tune of an average $925,000 per store/per year, or $2500 per day.
What we don’t have a good feel for is how profitable the retail segment is., but according to a 1/25/06 research report from JP Morgan analyst Steven Rees, comparable same store sales for retail were down 10 of 12 months in 2005, and are projected negative for the first five months of 2006 ( as far out as projections went). Rees claims that despite the negative same store retail sales data, margins have actually improved due to better inventory management, higher markups, and a new sourcing partner.
Still, we wonder whether Cracker Barrel would be better served by reducing the space allotted to retail, in favor of a larger dining area, or perhaps doing away with retail altogether. While we understand the country store motif is part of the brand recognition, we at least have to raise the issue.
The Real Estate
Of course one of the reasons we are interested in CBRL is because of the company owned real estate. As of September, the company owned 384 Cracker Barrels and 63 Logan’s. Now, we don’t claim to know where each owned restaurant property is located, but do have a sense that they are typically in prime commercial real estate locations, in close proximity to major highways. With a current enterprise value of around $2.3 billion, EV/owned restaurant is about $5 million. We are certainly not suggesting that each owned location is worth $5 million. In fact, Rees puts forth a hypothetical analysis which values a spin-off of Logan’s at $385 million, and a land value of $1 million per owned CBRL location ($384 million). We don’t know if a Logan’s spin-off is in the works, CBRL acquired the company in 1999.
Fundamentals
CBRL has pretty sound fundamentals. The company has cut back on expansion, so cap ex is falling, and the company generates a nice amount of cashflow. 2005 sales grew 7.8 percent to $2.568 billion in 2005, from $2.381 billion in 2004. Net income grew 13 percent from $111.9 million to $126.6 million. Cash from operations jumped 40 percent in 2005 from $200 billion to $280 billion. Free cash flow (Our definition is Cash from operations minus cap ex- dividends) jumped from $40 million in 2004 to $86 million in 2005. Net profit margin was 4.9 percent in 2005, up from 2004s 4.7 percent. While CBRL’s profit margins are not all that impressive compared to some others in the restaurant segment, they certainly aren’t bad either. We wonder whether the retail segment is a drag on these margins?
Conclusions
A great dining concept, good food, real assets, nice cashflow. We like this company, but don’t currently own it. The recent 20+ percent run-up has us on the sidelines, for now.
Still, we wonder, would the company be better off if it were out of the retail business?
*The author does not have a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.
Friday, 3 February 2006
Below Average and Incomplete
Charles Schwab weighs in on your Cheap Stocks Editor’s Portfolio
As some of you may know, a few years ago, Charles Schwab developed a rating system for stocks, appropriately dubbed “Schwab Equity Rating”, which grades stocks as A, B, C, D, F, or NC (not covered). I’ve had a Schwab account for years- its where my stock portfolio resides, and I’ve been very happy with their service, and declining commission structure. There are cheaper discount brokers out there, but I’m sticking with Schwab.
So, it was quite interesting the other day when I viewed my portfolio holdings on a page that also displays Schwab’s rating for each stock. Boy was I in for a surprise. If I were to view each of the ratings as a “grade” reflecting my investment prowess, I am sadly below average. In fact, for the 18 “classes”, I received 2 B’s, 2 C’s, 5 D’s, and 9 “Not Covereds”, or as I view it, “Incomplete”. That averages out to a C-, or even D+!
I didn’t take I personally. My investment style is somewhat off the beaten path, and although there are some household names in the portfolio, many others, such as those we typically profile on this site, just are not on anyone’s radar. But therein lies the beauty. Some companies fall off the radar because they are either too small for the Street to care about, or they just fall out of favor, and languish with little or no coverage. That’s where we come in (We, meaning deep value investors). We have the ability to identify, and analyze these companies, and discover an interesting and potentially profitable story, that no one else has even cared to investigate.
Sure there are pitfalls…you need to be able to distinguish a diamond in the rough from a cigar butt, and that only comes with experience. Some bad experiences, no doubt. How do you know your analysis is accurate, especially given situations where there is little disclosure? You don’t always know, and you need to be careful. Furthermore, you should not concentrate too much of your money in any single name.
In any event, today, your Cheap Stocks editor bares his soul, revealing his report card. (NC=not covered, stocks in bold have been mentioned in previous Cheap Stocks)
Abbot Labs (ABT): C
Avoca Inc (AVOA): NC
BHP Billiton (BHP): NC
JG Boswell (BWEL): NC
Gallery of History (HIST): NC
Maui Land and Pineapple (MLP): C
McDonald’s (MCD): B
Merck (MRK): B
Northern Orion Resources (NTO): NC
PICO Holdings (PICO): NC
Plum Creek Timber (PCL): NC
Southwest Water (SWWC): D
St. Joes (JOE): D
Tejon Ranch (TRC): D
Tempur Pedic Intl (TPX): D
Tootsie Roll (TR): D
Vermont Pure Holdings (VPS): NC
Zapata (ZAP): NC
*The author has a position in all stocks mentioned in this report. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.
Charles Schwab weighs in on your Cheap Stocks Editor’s Portfolio
As some of you may know, a few years ago, Charles Schwab developed a rating system for stocks, appropriately dubbed “Schwab Equity Rating”, which grades stocks as A, B, C, D, F, or NC (not covered). I’ve had a Schwab account for years- its where my stock portfolio resides, and I’ve been very happy with their service, and declining commission structure. There are cheaper discount brokers out there, but I’m sticking with Schwab.
So, it was quite interesting the other day when I viewed my portfolio holdings on a page that also displays Schwab’s rating for each stock. Boy was I in for a surprise. If I were to view each of the ratings as a “grade” reflecting my investment prowess, I am sadly below average. In fact, for the 18 “classes”, I received 2 B’s, 2 C’s, 5 D’s, and 9 “Not Covereds”, or as I view it, “Incomplete”. That averages out to a C-, or even D+!
I didn’t take I personally. My investment style is somewhat off the beaten path, and although there are some household names in the portfolio, many others, such as those we typically profile on this site, just are not on anyone’s radar. But therein lies the beauty. Some companies fall off the radar because they are either too small for the Street to care about, or they just fall out of favor, and languish with little or no coverage. That’s where we come in (We, meaning deep value investors). We have the ability to identify, and analyze these companies, and discover an interesting and potentially profitable story, that no one else has even cared to investigate.
Sure there are pitfalls…you need to be able to distinguish a diamond in the rough from a cigar butt, and that only comes with experience. Some bad experiences, no doubt. How do you know your analysis is accurate, especially given situations where there is little disclosure? You don’t always know, and you need to be careful. Furthermore, you should not concentrate too much of your money in any single name.
In any event, today, your Cheap Stocks editor bares his soul, revealing his report card. (NC=not covered, stocks in bold have been mentioned in previous Cheap Stocks)
Abbot Labs (ABT): C
Avoca Inc (AVOA): NC
BHP Billiton (BHP): NC
JG Boswell (BWEL): NC
Gallery of History (HIST): NC
Maui Land and Pineapple (MLP): C
McDonald’s (MCD): B
Merck (MRK): B
Northern Orion Resources (NTO): NC
PICO Holdings (PICO): NC
Plum Creek Timber (PCL): NC
Southwest Water (SWWC): D
St. Joes (JOE): D
Tejon Ranch (TRC): D
Tempur Pedic Intl (TPX): D
Tootsie Roll (TR): D
Vermont Pure Holdings (VPS): NC
Zapata (ZAP): NC
*The author has a position in all stocks mentioned in this report. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.
Wednesday, 25 January 2006
Top 10 market cap companies trading below NCAV
We last published a similar list a couple months back, and this column proved to be extremely popular with our readers, so here goes again. Unless we have previously published research for any of the listed companies, we have made no judgements as to a given company's merits. This is simply a list of companies trading below their NCAV. Be cautious, as we’ve said in the past, companies are often cheap for good reasons.
Company: Trans World Entertainment
Ticker: TWMC
Price: $4.77
Market Cap: 148
NCAV: 193
Industry: Retail/music & video
Report Available
Company: Dominion Homes
Ticker: DHOM
Price: $10.2
Market Cap: 84
NCAV: 187.8
Industry: Home Building
Company: Lazare Kaplan
Ticker: LKI
Price: $8.64
Market Cap: 72
NCAV: 79
Industry: Diamonds
See last week’s report
Company: Discovery Partners
Ticker: DPII
Price: $2.5
Market Cap: 66
NCAV: 87
Industry: R&D
See Report
Company: Axonyx
Ticker: AXYX
Price: $.94
Market Cap: 50
NCAV: 57
Industry: Biotech
Company: Praecis Pharmaceutical
Ticker: PRCS
Price: $4.32
Market Cap: 45
NCAV: 47
Industry: Medical/Pharma
Company: Pharmos Corp
Ticker: PARS
Price: $2.15
Market Cap: 148
NCAV: 193
Industry: Drug Delivery
Company: Remec Inc
Ticker: REMC
Price: $1.3
Market Cap: 38
NCAV: 121
Industry: Wireless Equipment
Company: Intrabiotics
Ticker: IBPI
Price: $3.65
Market Cap: 49
NCAV: 34
Industry: Medical-Drugs
Company: Peak Intl
Ticker: PEAK
Price: $2.49
Market Cap: 31
NCAV: 36
Industry: Semiconductor Equip
*The author does not have a position in any stocks mentioned in this report. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.
We last published a similar list a couple months back, and this column proved to be extremely popular with our readers, so here goes again. Unless we have previously published research for any of the listed companies, we have made no judgements as to a given company's merits. This is simply a list of companies trading below their NCAV. Be cautious, as we’ve said in the past, companies are often cheap for good reasons.
Company: Trans World Entertainment
Ticker: TWMC
Price: $4.77
Market Cap: 148
NCAV: 193
Industry: Retail/music & video
Report Available
Company: Dominion Homes
Ticker: DHOM
Price: $10.2
Market Cap: 84
NCAV: 187.8
Industry: Home Building
Company: Lazare Kaplan
Ticker: LKI
Price: $8.64
Market Cap: 72
NCAV: 79
Industry: Diamonds
See last week’s report
Company: Discovery Partners
Ticker: DPII
Price: $2.5
Market Cap: 66
NCAV: 87
Industry: R&D
See Report
Company: Axonyx
Ticker: AXYX
Price: $.94
Market Cap: 50
NCAV: 57
Industry: Biotech
Company: Praecis Pharmaceutical
Ticker: PRCS
Price: $4.32
Market Cap: 45
NCAV: 47
Industry: Medical/Pharma
Company: Pharmos Corp
Ticker: PARS
Price: $2.15
Market Cap: 148
NCAV: 193
Industry: Drug Delivery
Company: Remec Inc
Ticker: REMC
Price: $1.3
Market Cap: 38
NCAV: 121
Industry: Wireless Equipment
Company: Intrabiotics
Ticker: IBPI
Price: $3.65
Market Cap: 49
NCAV: 34
Industry: Medical-Drugs
Company: Peak Intl
Ticker: PEAK
Price: $2.49
Market Cap: 31
NCAV: 36
Industry: Semiconductor Equip
*The author does not have a position in any stocks mentioned in this report. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.
Saturday, 7 January 2006
A Diamond in the Rough?
Trading Below Net Current Asset Value
Lazare Kaplan International
Ticker: LKI
Price: $7.85
Share Out: 8.34 million
Market Cap: $65.4 million
Average Daily Volume: 9600
P/E: 13
NCAV: $81.2 million
NCAV/Market Cap: 1.24
Lets face it, the search for companies trading below their net current asset value is the ultimate treasure hunt. Like finding a diamond in the rough, that is assuming its really a diamond and not just an under baked piece of coal. This week’s company may be more of a diamond company in the rough.
New York based Lazare Kaplan is in the diamond business…many facets of it (no pun intended) including cutting, polishing and selling ideally proportioned diamonds worldwide under the Lazare Diamonds brand name.
What initially caught your Cheap Stocks editor’s attention is that this company not only trades below its NCAV, but is also profitable. You may recall the rarity of this from previous Cheap Stocks Research. Furthermore, the companies inventory also caught my attention, but more on that later.
The Fundamentals
Fiscal Year 2005 sales rose 79 percent to $421.4 million from 2004s $235.8. Net income rose 118 percent in the same period, from $2.4 million to $5.2 million. The diamond business is somewhat cyclical based on the company’s prior years numbers (net losses in 1999 and 2002, slumping sales in 2001 and 2002). For the 3 month period ended 8/31/05, sales rose 77 percent to $138.9 million, while net income decreased 64 percent to $.9 million.
The Balance Sheet
Cash stood at $6.7 million as of 8/31/05, while long term debt was $61 million. The company also listed short term debt (curr portion of long term debt) of $43.2 million. Adding in the debt and subtracting the cash from market cap gives Lazare an Enterprise Value of $163 million. Sure would be more attractive without that debt.
On the plus side, and the other thing that caught my eye was the company’s inventory. As you may recall, inventory is a crucial part of the NCAV calculation, because it’s a sizable component of a company’s current assets. Unlike cash, the true value of inventory is not fixed, the value depends on the quality of the inventory, and ability to convert it into cash. For instance a company whose inventory is composed of last years hottest fashions would have trouble converting that inventory into cash at anything near its carrying value. But a company with an inventory composed of dollar bills (as ridiculous as that seems) would have no trouble realizing that inventories listed value.
Lazare Kaplan’s inventory is composed of the following:
Rough Stones: $26.62 million
Polished Stones: $104.2 million
That’s a lot of diamonds, but impressive because those diamonds are carried at the lower of cost or market value. I don’t purport to know the actual markup of diamonds, but do know that it is substantial. I also assume that Lazare could convert its entire inventory into a substantially larger amount than carrying value.
The NCAV calculation:
Current Assets:
Cash: $6.7 million
Accounts Rec: $118.8
Inventories: $130.8
Prepaid/other: $10.7
Def taxes: $1.8
Total: $268.8
Current Liabilities
Accts Payable: $83.4
Curr portion LT Debt: $43.2
Total: $126.7
Long Term Debt: $61
NCAV: $81.2 million
Institutional Ownership
Total Institutional ownership is about 18.5 percent. The top 5 holders”
Dimensional Fund Advisors: 6 %
Royce and Associates: 3%
Fifth Third Asset Management: 2.4%
AXA Rosenberg: 2.2%
Oberweis Asset Management: 1.6%
Conclusion
We are not sure why this company is so cheap. The net profit margins are not outstanding, but for a company trading below its NCAV to be turning a profit at all, is rare. We suspect that the diamond business is susceptible to the whims of the consumer, and if spending were to drop off, Lazare gets hurt. Although we have not yet initiated a position in Lazare, it’s on our watch list.
*The author does not have a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.
Trading Below Net Current Asset Value
Lazare Kaplan International
Ticker: LKI
Price: $7.85
Share Out: 8.34 million
Market Cap: $65.4 million
Average Daily Volume: 9600
P/E: 13
NCAV: $81.2 million
NCAV/Market Cap: 1.24
Lets face it, the search for companies trading below their net current asset value is the ultimate treasure hunt. Like finding a diamond in the rough, that is assuming its really a diamond and not just an under baked piece of coal. This week’s company may be more of a diamond company in the rough.
New York based Lazare Kaplan is in the diamond business…many facets of it (no pun intended) including cutting, polishing and selling ideally proportioned diamonds worldwide under the Lazare Diamonds brand name.
What initially caught your Cheap Stocks editor’s attention is that this company not only trades below its NCAV, but is also profitable. You may recall the rarity of this from previous Cheap Stocks Research. Furthermore, the companies inventory also caught my attention, but more on that later.
The Fundamentals
Fiscal Year 2005 sales rose 79 percent to $421.4 million from 2004s $235.8. Net income rose 118 percent in the same period, from $2.4 million to $5.2 million. The diamond business is somewhat cyclical based on the company’s prior years numbers (net losses in 1999 and 2002, slumping sales in 2001 and 2002). For the 3 month period ended 8/31/05, sales rose 77 percent to $138.9 million, while net income decreased 64 percent to $.9 million.
The Balance Sheet
Cash stood at $6.7 million as of 8/31/05, while long term debt was $61 million. The company also listed short term debt (curr portion of long term debt) of $43.2 million. Adding in the debt and subtracting the cash from market cap gives Lazare an Enterprise Value of $163 million. Sure would be more attractive without that debt.
On the plus side, and the other thing that caught my eye was the company’s inventory. As you may recall, inventory is a crucial part of the NCAV calculation, because it’s a sizable component of a company’s current assets. Unlike cash, the true value of inventory is not fixed, the value depends on the quality of the inventory, and ability to convert it into cash. For instance a company whose inventory is composed of last years hottest fashions would have trouble converting that inventory into cash at anything near its carrying value. But a company with an inventory composed of dollar bills (as ridiculous as that seems) would have no trouble realizing that inventories listed value.
Lazare Kaplan’s inventory is composed of the following:
Rough Stones: $26.62 million
Polished Stones: $104.2 million
That’s a lot of diamonds, but impressive because those diamonds are carried at the lower of cost or market value. I don’t purport to know the actual markup of diamonds, but do know that it is substantial. I also assume that Lazare could convert its entire inventory into a substantially larger amount than carrying value.
The NCAV calculation:
Current Assets:
Cash: $6.7 million
Accounts Rec: $118.8
Inventories: $130.8
Prepaid/other: $10.7
Def taxes: $1.8
Total: $268.8
Current Liabilities
Accts Payable: $83.4
Curr portion LT Debt: $43.2
Total: $126.7
Long Term Debt: $61
NCAV: $81.2 million
Institutional Ownership
Total Institutional ownership is about 18.5 percent. The top 5 holders”
Dimensional Fund Advisors: 6 %
Royce and Associates: 3%
Fifth Third Asset Management: 2.4%
AXA Rosenberg: 2.2%
Oberweis Asset Management: 1.6%
Conclusion
We are not sure why this company is so cheap. The net profit margins are not outstanding, but for a company trading below its NCAV to be turning a profit at all, is rare. We suspect that the diamond business is susceptible to the whims of the consumer, and if spending were to drop off, Lazare gets hurt. Although we have not yet initiated a position in Lazare, it’s on our watch list.
*The author does not have a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.
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