idea #23 cybx

I found this from AAII's "Fundamental Rule of Thumb Screen".  This one only screened so well because they posted a one time tax benefit that boosted EPS by $1/share.  Despite that, they are still cheap looking given their guidance to double revenue in 5 years.  They are growing into Japan.  They have a focused, simple, and easy to understand business model.

They have neat technology with a significant competitive advantage; they make a pacemaker device to control epilepsy.  It is recognized as an effective treatment when drugs and surgery don't work.  It is less recognized for it's positive "side effect," increases in awareness and improved mood.

Trading at 17x sustainable earnings, 17x operating cashflow.  Buying back convertible debt.  It looks like a great growth stock.  I doubt it will ever get too cheap... if it does it will be for some scientific reason that I likely won't figure out until I've lost all my money.

idea #22 PC Mall, MALL

I was toying around with a concept for screen to find a company that has "managers with guts."  What companies got off their butts and bought back bucketloads of their own shares at just the right time when the market collapsed in March of 2009?  At the time most every stock was absurdly cheap but most investors were scared stocks would just keep getting cheaper... cheap, cheaper, cheaper, cheaper still was the way it went.  Mr. Market was screaming that the end of the world was near.  Any company that stepped up to the plate and "eliminated partners" was doing something massively accretive to the remaining shareholders, even though the remaining shareholders might not feel the effects for years to come.  So, it turns out that out of 8000+ companies, PC Mall was one of the gutsiest.  They bought back over 400k shares near the market low, and near their 52-week low of $3.70.  They eliminated 3.2% of the shares in one single quarter.

As with anything I see problems with owning this stock:  The CEO owns 17% of the company.  He gets paid too much.  $1 million dollar/year salary & bonus is too much for a company with a $60 millioin market cap.  Expressed another way, his compensation works out to be 8 cents a share, every year.  The most recent quarter, the operating cashflow was negative and inventory ticked up, as did shares outstanding.  Insiders are selling.  Earnings' history is not stable.

The stock is cheap relative to history, trading at .7x book value when it normally trades at 1.5x. 1.5x book value is expensive for the below average return on assets (low 2-3%).  A big discount to book value is appropriate for these assets.  A longtime VIC favorite, ePlus, is kind of a pc supplier and it is cheap.  It has stayed cheap for a very long time, which doesn't bode well for PCMall. 

On the bullish side, supposedly we're in the midst of a PC upgrade cycle... a big positive trend for the computer industry.  Windows 7 is acceptable to the market and people are upgrading.  Intel, Western Digital and numberous PC suppliers are doing well.

In a nutshell, I don't know what kind of catalyst will make this stock go up but they are producing cash and they are buying back shares so there's probably a lot worse places to be sitting right now than on some mall shares.  I have shopped at PcMall and see no sustainable competitive advantage in their business.

My PC Upgrade cycle
Discount to book value (what is BS?)
Lot of buybacks in 3/31/09 quarter
earnings discount

idea #21, LIFE PARTNERS, LPHI

Life Partners would be a screaming Magic Formula buy with it's high ROA and low P/E ratio, except for the fatal flaw that it's a financial stock.   It's growing fast and paying a big dividend. LPHI popped up on an AAII screen.  They are "life insurance policy dealers."  If you want to sell your life insurance, they will find a buyer.  Everybody wins.  The buyer is uncertain of the end return on the policy, the seller takes a discount to the potential final value in exchange for cash now (and to not have to keep paying on the policy).  Life Partners makes money putting the 2 together.  It's arguably a very necessary service for our society.  Baby boomers want their money now, not when they die.

A quick look reveals that the CEO (age 66) owns over 50% of the company and gets a very high salary for such a small company.  The company is involved in numerous lawsuits and subject to bad publicity from unsatisfied investors...  afterall, people are living longer now.  They are the only publicly traded company in this "highly fragmented" space.  Interestingly, they finance their operations by direct investment so they sailed through the financial crisis without a hitch.  Investor demand went up, people wanting to cash in policies went up.  It was a beautiful thing.
 
Government regulation is a risk.  There is a licensing process to deal these insurance policies, i.e. Consumer Protection Licensing  .  "The consumer protection-type regulations arose largely from the draft of a model law and regulations promulgated by the National Association of Insurance Commissioners (NAIC).  At least 40 states have now adopted some version of this model law or another form of regulation governing life settlement companies in some way.  These laws generally require the licensing of providers and brokers, require the filing and approval of settlement agreements and disclosure statements, describe the content of disclosures that must be made to insureds and sellers, describe various periodic reporting requirements for settlement companies and prohibit certain business practices deemed to be abusive."   I wonder if this organization could shed light on other, non-life insurance settlements.

Of particular interest in their standard "risks" disclosure in their 10k is something that is conspicuously absent.  Insurance companies have to make good on the payment when the insured person dies.  AIG could default, major insurers default, etc.  That is a real risk and it is not mentioned.  Is the risk so inconceivable that it doesn't have to be disclosed?   I called their investor relations number and spoke to Andrea.  She said that if major insurance companies default then you will have a lot more to worry about than your investment in a life insurance policy.  So it appears that to them, that risk is inconceivable.

 

Interesting, high roa biz
Listen to conference call to learn about default risks associated with insurance companies.

Listen to how it holds policies on balance sheet

Life Partners looks cheap, and like the last idea, some of the discount is likely because of the controlling interest (& very high salary) of the CEO, Pardo. 

idea #20 Broadview Institute BVII

This came up on some screens for it's high ROA and low p/e.  It's in the "private education" sector, and lots of these businesses have been coming up on screens.  Same old story, valuation is attractive because of their uncertainty over student loans.  I decided to give this particular name a closer look.  I hoped it might have some competitive advantage that the bigger, more established players do not have, or that it's focus was on a higher growth area.  It's historical revenue growth has been higher than the big players because it focuses on nursing/medical.  It's "cohort default rates" are very low.  It sounds like a winner.

While all that is attractive, the valuation doesn't seem to justify that it trades only a few hundred shares a day and insiders own 60% of the shares.  There are plenty of insider interdealings noted on their proxy.  Maybe they will sell to Coco or Devry but otherwise it will be hard to let market forces make this stock more expensive if good corporate governance is absent.
 

idea #19 Tidewater (TDW)

Tidewater came up on a "defensive Graham" AAII screen.  Someone wrote it up on VIC in late 2006 as a short.  On the surface, I like that it's shown 3 years of disappointing shareholder returns, all the while posting nice earnings.  It has a moderately high ROA and low P/E.  It's trading at around $45 and the lowest it hit during the financial crisis was only $33. 

The VIC writeup's thesis was that earnings were temporarily too high and that the share price should fall to $30ish, 12x normalized earnings of $2.50 per share.   I think the writer's perspective is wrong on a couple of fronts;  It's hard to find stuff, even if it is cyclical, with attractive balance sheets and reasonable earnings multiple.  12x unleveraged earnings is cheap. And 2nd, his perspective on normalized earnings has proved to be too low.  Even given the fact that their shipping contracts are for 18+ months (which the original author might have missed), I still think they can earn $4 over the long term.

The company is in promotional mode.  They just did an investor presentation that argued "vessel retirements are higher than replacements" so prices will likely stay high.  This is the exact same issue the short thesis was focused on in 2006.  The thing that impresses is me is that prices stayed high throughout recession and commodity collapse, thus I'm understanding the $4 normalized earnings.  This company has low fixed costs, and high variable costs.  It would be nice to own if you could get it really, really cheap.  I think it's current price is a little cheap.  Based on the screens, I think it's likely to get a little more expensive.  Global warming is a farce, drill baby drill?

Buy this type of strong balance sheet & good asset investment when OSV dayrates collapse.  Right now, they are strong. 

idea #18 World Acceptance Corp (WRLD)

World Acceptance Corporation came up on multiple screens.  It has high roa, buying back shares, too.  The share price is at a 52 week high.  I know statistically all these things likely mean the price will only go higher in the near term but their business makes me queasy... 84% of their loans outstanding are repaid with additional loans, i.e.  "payment in kind" type of refinance.  They charge the poor suckers who borrow from them anywhere from 25% to 215%, whatever the state maximum will allow.  The loans are unsecured.  The borrowers are repeat customers who borrow the most during the holiday season.  Rumor is that the new administration is going to crack down on consumer finance providers.  I guess these factors explain the valuation (it appears attractive, even though it trades at a 52-week high).  Credit card companies are having to lower their max rate, maybe WRLD will, too.

The more I read the more I actually like their business.  They're marketing all sorts of other things to their core customers; tax prep, insurance, and even electronics good.  They are near their customers (thus they pay low rent and have low fixed costs).  I don't know how to value their ongoing business but a valuation of their assets are easy: for $40/share you are buying $20 worth of loans to poor people.  You are getting an established business that lends to poor people, and up to now has thrown off quite a bit of cash to buy back shares.  They have low overhead.  I like this business and management appears to be smart so I will wait for it to go back down to $10 (half of all the loans) or $20, just the value of the loans.  I won't hold my breath but $40 is too much of a premium.

idea# 17 synt

AAII Muhlenkamp screen, T.Rowe Screen
High ROA
reasonable valuattion

Syntel has some very attractive attributes when you look at it's history as a company:  The return on assets is consistently 20-30%.  Right now, you don't pay much of a premium for them.  Their profit margins are increasing and they have a strong balance sheet.  The stock pops up on multiple screens for value, magic formula and even growth.  There appears to be an imminent let down that is discussed, a loss of 17% of revenue from a joint venture, and soft guidance of only a low $2ish.  Management is selling their positions down.  They filed an S3 in September to sell 5 million shares.  That, and the fact their business is unpopular anti-American offshore call-centers, explains the attractive valuation.

Another concern is that this company could be making the nasty transition from "growth darling" to "you're not so special/value" stock.  They don't buy back shares.  They pay an inconsistent and small dividend.  It's hard to see upside.  Will call centers in India trade at the premium they may deserve?  Short interest is around 800k shares, which is down significantly from 3+ million.   There was obviously a strong bear case a year ago.  One source said it had to do with key employees leaving the company.

idea #16 the Pantry (PTRY)

I was attracted to this idea because it came up on some screens:
John Neff and Earnings upgrade -AAII screen
CHEAP multiples
earning's surprise in most recent quarter
Investor exhaustion - 3 years of disappointing returns for equity holders.

The Pantry is a chain of c-stores in S.E. US.  They acquired many properties during peak real estate bubble years.  Acquisitions were expensive.  They didn't issue many shares to pay for the acquisitions, instead they did issue bonds and convertible debt.   According to my analysis, they'll need $122 million a year for 2010 and 2011 to meet their debt obligations.  They'll need $247 in 2012 (or likely just $122 million and they issue a lot of shares for the convertibles).  They'll need $122 million in 2013 and $272 in 2014.   It's an aggressive payback schedule giving this idea significant downside.  Operating cashflows have averaged $160 million per year for the last 7 years.  Their most recent quarter's cash flow from operations won't be good enough to make their debt repayment schedule work, as it was only $21 million. 

Analysts don't seem to talk about a default as even a possibility. I guess because they are sitting on $179 million in cash as a buffer (no near term liquidity issues) for bad quarters, and the debt is secured by hard assets, they'll likely be able to refinance if they need to.  I think their debt is manageable but it is close to being too much. 

Assets that they acquired might be at the end of their life.  They recently shut down gas stations that needed their tanks replaced because it was not economical.

This is the opposite of what I want to see. I want a company that acquired cheap assets with expensive shares, now holding expensive assets with cheap shares. These guys acquired expensive assets with debt and now have cheap shares... because of the debt overhang.

idea #15 hallmark financial

This was an excellent VIC writeup about an insurance company in Dallas/Ft.Worth area that was, until recently, 70% held by a Texas hedge fund, NewCastle.  The hedge fund faced redemptions during the financial crisis.  It distributed the shares to their partners.  The writer assumes the stock is weak because the partners in the hedge fund sold their shares as they received them.  That is a good explanation for a stock being weak for non-fundamental reasons.

HALL's 7 year average p/book ratio is 1.25x, now it's .8x.  The writer makes the case that their assets are really safe, no mortgage debts, etc.  It compares them to 30 or so other insurance agencies, and by all accounts it is cheaper.

I read more about the CEO's style.  He was trying to build the insurance business for the same reason Buffett did so, to have access to more capital to invest.   He is a value oriented manager.  He doesn't mind owning small, thinly traded stocks... which was one of the reasons his fund suffered.  He is a low profile fund manager.  He has a long term track record in the high teens. 

Looking at a financial history of HALL, He has doubled the book value per share over the last 7 years.

I'm seeing a lot of cheap insurance companies.  The general bear argument against owning insurance is that the low cost of capital has made insurers less risk averse and their pricing power, which used to come in cycles, is not coming back as strong, for as long of periods.

What I like most about this idea is that there is a fund manager who runs the company and eats his own cooking.  Yes, he's said he's trying to grow it but for a "value" oriented manager to destroy capital for the sake of growth would be sacrilegious.