Thursday, May 24, 2007
So I worked on the buy side for nine years and like all buy side people, I read my fair share of sell side research reports. After a while, they all began to blur together into an unending mass of paper. I noticed that there was a common set of terms or cliches that all the analysts used. Here is my list and my spin on them
“Management gave an upbeat presentation.”
Well, what the hell else are they going to say?
“The session was well attended.”
The herd is stampeding into the room so what are you waiting for.
“The meeting was constructive.”
Another confidence boosting cliché designed to whet our appetite for the stock.
“We are cautiously optimistic.”
This is used when something bad is about to happen but the analyst can't do anything about it except watch.
“Valuation is compelling.”
This cliché is for classic value traps that are cheap because they should be cheap, or for highflying stocks that are selling at ridiculous valuations, but look cheap compared to their peers or history. (i.e. a technology stock trading at only 40 times earnings)
“The company is hitting on all cylinders.”
A vehicle hitting on all cylinders means it is going pretty much close to its fastest speed. If you apply this to a stock, doesn’t that mean it’s time to sell?
“We view the deal as positive.”
Is there ever a deal that is not positive to them?
“We still like the company.”
A disaster has just occurred but I can’t change my opinion in writing because the company will kill me.
“Long-term fundamentals are still intact.”
Used primarily for companies where it is so obvious that fundamentals are declining, along with the stock price, but the analyst must still say something positive about it so the company will still talk to him.
“At the margin.”
I’m not sure where to put this because I don’t even know what the hell it means. It seems to signal that whatever follows is really not all that important but is incremental news. Well, if that’s the case, then why mention it at all.
“We believe the company is at an inflection point.”
An inflection point is a point on a graph at which the sign changes concavity or curvature. That means the stock can go either way.
“The company has reached the sweet spot of the cycle.”
Just the time to sell, so change your rating before the stock goes down 60%.
“No new news”
Terrible news has just come out on a stock and it is selling off but the analyst is trying to convince anyone who is listening that the market already knew this.
“Our thesis is still intact”
Ninety-five percent of sell side analysts don’t have a thesis so stop pretending, you’re not fooling anyone.
Monday, May 21, 2007
This is a very interesting name that trades under net current asset value, and the kind of stock that gives me goose bumps. KGHI is the successor company to Kaiser Group International, a engineering and construction company that went into Chapter 11 bankruptcy at the beginning of the decade and then emerged fresh.
The company now has two businesses, a 50% ownership in Kaiser-Hill Company, LLC; which currently serves as the general contractor performing closure activities at the U.S. Department of Energy’s Rocky Flats site near Denver, Colorado.. Kaiser-Hill is working to clean up and close the Rocky Flats site. This contract is in the closeout phase and is ending shortly. The revenue that has been received to date ($510.8 million) is also subject to audit by the government.
KGHI also has a 100% ownership in the Monument Select Insurance Company (MSIC). MSIC is a wholly owned captive insurance firm that is not issuing new policies. However, a new subsidiary of MSIC, MS Builders Insurance Company, has been formed to enable MSIC to offer derivative captive insurance services to third party clients.
The company has current assets of $69.06 million (most of this is cash) and total liabilities of $9.59 million, giving us a Net Current Asset Value of $59.46 million, with a market capitalization of $46.5 million, according to Google finance. All this data is as of March 31, 2007.
There are several major holders of KGHI, and by the names involved, they seem to be all connected together. They are:
Mark S. Tennenbaum Investment Trust 11.2%
Andrew R. Tennenbaum Investment Trust 11.2%
Michael E. Tennenbaum 19.7%
James D. Bennett 11.2%
Kasier Group has decided to do a 1 for 20 reverse split of the shares. The effect and the purpose of this will be to reduce the number of shareholders to fewer than 300, and thus Kaiser will no longer be a reporting company under securities laws and will not have to file 10 K, etc.
The company has little or no revenues and has not identified any opportunities as of yet. When the shareholders approve the reverse split, and believe me they will, the company will sink deeper into the Pink Sheets as a non-reporting company.
So is it a buy? Stocks selling at below NCAV are instinctually attractive to value investors. However, the company has no operating businesses right now and not a lot of incentive to find one considering that it is sitting on a pile of cash (Golf anyone?) Also, the level of disclosure may plummet when it becomes a non reporting company. This will be another source of frustration to investors. Here is the company web site:
Wednesday, May 16, 2007
Bexil reported a small loss in its first quarter results. They are still in the hunt for a business to buy. Some things stand out in the press release.
"At March 31, 2007, we had positive working capital of $37,937,663, total assets of $38,377,973, no long term debt, and shareholders equity of $38,011,275. Our book value per share at March 31, 2007, (886,592 shares issued and outstanding) increased to $42.87. "
Solid book value $10 above the market price.
"We have no plans to dissolve and liquidate the Company."
Are they feeling any pressure to step up the search for a company to buy? It has been a year since they sold York and paid themselves a bonus, and the Winmills have effective control over the company, so it appears unlikely.
"Approximately 25% of Bexil's shares are owned by Winmill & Co. (WNMLA)"
This is correct, but according to the proxy for this years annual meeting, the Winmill family indirectly or directly own 41.1%.
"We are currently engaged in the business of evaluating opportunities to develop and acquire long-term acute care hospitals and other enterprises."
Is this the best way to grow book value long term as the company says on its web site? Time will solve that mystery I guess.
Tuesday, May 15, 2007
This is another interesting company that does not get a lot of press or attention from Wall Street. It is even rare to see an article on them. Here is a link to one that I saw yesterday:
Monday, May 14, 2007
I have decided to go one by one through every stock I can find that is selling at or under its net current asset value (NCAV). This is the Holy Grail of Value Investing as everyone knows, but things have changed from the time of Benjamin Graham. It seems that many NCAV plays are not for the feint of heart. Here is the first:
Inhibitex is a biotechnology company out of Atlanta. Last year the company had a product called Veronate, which failed a Phase III trial, and the company discontinued development of the drug. INHX is now focused on Aurexis, which is for the treatment of serious Staphylococcal aureus infections. Aurexis is in the Phase II stage of development. The company recently acquired another pharmaceutical company for $19.0 million in stock.
INHK has $59.6 million in cash at March 30, 2007, with various other current assets bringing the total to $63.3 million. Total liabilities are $12.5 million giving the company a net current asset value of around $51 million. The market capitalization is $45.5 million according to google finance.
Conclusion – INHX has no significant revenues since its drug is still in clinical trials. The company it is buying has no significant revenues due to the same reason. This investment is known as a binary decision. If the drugs under development are approved then things may work out for investors. The problem is that in can take years for the trials to conclude and the results are uncertain. Meanwhile, the company burns cash, as it has to pay research and salaries in the interim.
Now, to its credit, INHX is being prudent in its spending and is not throwing money around. Last quarter, the cash burn was only $1.7 million. The estimate for 2007 is a cash burn of $11 million, but a higher burn rate when the acquisition is completed. My opinion on this one is that the risk/reward is too great for me. If I was a scientist or Doctor and I could understand more of the science of the drugs they are working on then I might think differently.
Saturday, May 12, 2007
I did a Net Current Asset Value search on the market and came up with a company called Bexil (BXL) which I posted on earlier. This led me to to a company associated with Bexil, called Winmill & Co.
Winmill has large stakes in four other publicly traded entities and those stakes are worth $10.1 million, while WNMLA has a market capitalization of around $6.9 million. Please understand that I am not saying run out and buy any of these but I thought I would post it for everyone to look at.
Winmill & Co. (WNMLA)
Oustanding Shares as of 9/30/06
Closing Price as of 4/30/07
Market Capitalization - $6,925,869
Winmill owns large pieces of four other publicly traded companies as follows:
A company with no operating businesses that has $37 million in net assets with a market cap of $29 million. Winmill owns 25%. They are looking for an operating business to buy. (See my previous post on Bexil)
Tuxis Corp (TUXS)
A real estate company that just deregistered from the listed market and moved to the pink sheets. Winmill owns 24%.
The main asset is a 215 acre parcel of undeveloped land located in Clinton Corners and Millbrook, New York. It was bought in 2005 for $1,951,700 in cash.
The market capitalization is $5.4 million.
Foxby Corp (FXX)
A closed end fund that trades on the AMEX. Winmill owns 24%. The market capitalization is $6.37 million.
The sum total of Winmill's share of these three is:
There is even a fourth company that Winmill owns a piece of. It is called the Global Income Fund (GIF) but it is immaterial to this analysis.
The $10,167,917.02 value is actually understated because I was using the market cap of $28 million for Bexil, not the net asset value which is considerably higher.
Here are all the web sites associated with Winmill & Co.
Winmill & Co. is a family controlled company, where the Winmills or associated entities control more than 50% of the vote. I believe all the companies above have the same type of control by the Winmill family.
Stocks like this fascinate me but more research must be done before leaping into this name.
Tuesday, May 8, 2007
The phone rings yesterday afternoon and it is Mr. Rudolf, the CEO and President from the Biloxi Marshlands Company (BLMC). Apparently someone had forwarded my blog post to him and he felt there were some misinterpretations on my part based on the reading of the press release from the first quarter earnings release. I didn't ask him who sent him the blog since I figured he would keep it confidential.
I made three points in my post. I will put the company's clarifications in italics.
1) Production was down year over year, and the reason given did not on the surface make sense.
BLMC reported the daily production as of the last day of the quarter, it is not an average daily production.
This explains why the reason given (well shut ins) did not make sense. I should have read the press release more carefully.
2) Delay in the start of the drilling package, and no explanation is given.
Manti was delayed drilling a previous well somewhere else and couldn't start the BLMC package on time.
This is believable as delays in drilling occur all the time.
3) The dividend was omitted this quarter.
The company has no set dividend policy according to Mr. Rudolf, so technically no dividend could be "omitted." The company decided that they would retain the earnings this quarter instead.
I'll let the market judge number 3.
I can tell by speaking to Mr. Rudolf that he has a great passion for the company, and I can't imagine BLMC being in better hands than a descendant of some of the original shareholders from the 1920's, and whose family still owns 8% of the stock.
Monday, May 7, 2007
I just had a 30 minute phone call with Will Rudolf, the CEO and President of the Biloxi Marsh Lands Company. He clarified some of the items in the latest quarter that I posted on and explained the issues that impacted my earlier attempts at communication.
I will post an entry a little later on the conversation.
Saturday, May 5, 2007
Everyone knows Benjamin Graham and his Net Current Asset Value (NCAV) model, which states, in part, that one of his criteria to buy is that the market captalization must be less than 2/3rds of the Current Assets less total liabilities.
Now these were fairly easy to find in his day, due to market inefficiency and poor disclosure by publicly traded companies, but they are rare now. When we find one, it stands out. I found a company that is close to this measure, trading at .76 of its Net Current Asset Value.
Current Assets $38,071,710
Total Liabilities $206,829
Net Current Asset Value $37,864,881
Market Cap $28,700,000
The company web site is here:
Now before you start salivating at the prospect of buying a dollars worth of assets at 76 cents on the dollar, read on.
1) Bexil has $38 million in cash sitting on its balance sheet. Where did this cash come from? Last year it sold its 50% interest in an insurance services company, and paid out a dividend to shareholders for a fraction of that sale.
2) Management seems intent on creating value. They actually have a web site, which is not required so this I view as a positive. Thomas B. Winmill, the President of Bexil, states in his letter posted on the web site:
"Our objective is simple, straightforward, and sharply focused: to increase book value per share over time. We believe that long term stockholders will benefit from a rising book value as market recognition builds and investors come to appreciate Bexil’s intrinsic value as well."
Could this be Berkshire, vintage the 1970's?
The President even has his personal e-mail on the site. Does he read them? We will find out because I will send him an e-mail later today.
3) The company has invested the cash wisely in the interim, it has virtually all of it in a U.S. Treasury Note.
1) The company is taking its sweet time looking for an operating business to buy. They sold the 50% stake in the insurance services company last May. The criteria they are looking for are (from the web site)
*A proven track record with demonstrated earning power.
*Sales between $10 million and $50 million.
*A seasoned business with solid customer relations.
*Good return (at least 15%) on equity, little or no debt.
*Solid management must remain. Audited financials required.
*Particularly interested in a “spin-off” from a larger company.
Mr Winmill, in the last year, there have been something like $500 billion in private equity purchases. Is it really that hard to find a business to buy?
3) The company has a shareholder rights plan that would activate if an entity owns more than 10% of the company stock or makes an offer for the company. This plan is almost a waste of time, because more than 50% of the stock is controlled by the Winmill Family or entities that they control.
4) Bexil is nosing around looking for Hospitals to buy in Mississippi. They formed a subsidiary to work on locating assets here. I'm not sure that this is the best business to own to grow book value over time, but I will reserve judgment on that until later.
Later this week I will post on the parent company of Bexil, another intriguing play that is not for the feint of heart.
Wednesday, May 2, 2007
I don't want you to think I am obsessed with the company, but they released earnings and I wanted to review them since so few people pay attention to the stock and it is severely underanalyzed. The good thing about obscure stocks is that there are no expectations or guidance so it is impossible to miss expectations or guidance. The report was a little on the bearish side.
Here is a link to the news release on the company web site.
First Quarter 2007
Three items stand out in particular
1) Declining Production
The company reported that the combined gross daily production from 12 wells including those operated by TMR and Manti Jambi, Inc. was approximately 12.5 mmcf with net daily production accruing to the Company of approximately 1.6 mmcf. This was down from 21 mmcf with net daily production accruing to the Company of approximately 2.5 mmcf in the first quarter of 2006. The press release said that several wells run by Meridian Resources were shut in on March 31, 2007, which affected the quarters production. This is odd since the quarter ended on March 31, 2007, so it is hard to understand how a shut in of several wells on the last day of the quarter would hurt things so much. We would expect a normal decline rate on gas wells.
2) Drilling Delay
BLMC's new drilling subsidiary was to spud the first of five wells by March 31, 2007. This has been delayed to May 15, 2007 - 45 days. There was no explanation given for the delay. Maybe it was rig availability or they needed more time to study logs. Decline rates on existing wells are relentless and operators need to drill to keep production even with previous years.
3) No dividend
The company omitted its dividend for the quarter. It had hinted at it last year, and the shut ins and delays in drilling impacted cash flows enough that the company didn't make a payout. The dividend is one of the major attractions of the stock and I hope that it can resume a payout in the second quarter.
The good news is that the stock didn't budge from it perch at $34.00 per share.
It has ocurred to me that the day the wells were shut in was the around the same day I was pestering them with e-mails about setting up a meeting. That could explain why they did not respond.