Slow and Steady Wins the Race

Last Thursday was a brutal day for the market, and especially for financial stocks. However, there were a couple of banks that were up on Thursday after reporting earnings for the quarter. Neither of these banks are well known, or covered by analysts, or could care less.

One is a cult bank stock that happens to be located in the fulcrum of foreclosure land - Southern California. The other is located in North Carolina and consists of one branch office. Both are Bulletin Board stocks that trade by "appointment" only.

Farmers & Merchants Bank of Long Beach has been in business for 100 years and operates 22 branches in Southern California. It has been controlled ever since by the Walker Family. It traded 2 shares yesterday at $6,575 per share, up 2.65%. Ninety percent of its loan portfolio is tied to real estate, mostly commercial, but the bank did not report any charge offs during the quarter, nor any losses on its investment portfolio. And in case you are worried about insolvency, you should know that its total capital to risk weighted assets is an astounding 39.22% at the end of 2006. A bank is considered well capitalized if that ratio is in excess of 10%.

The bank web site is here.

Wakeforest Bancshares Inc. is a micro cap Savings and Loan located in Wake Forest, North Carolina. It reported earnings for the quarter that were down year over year from 9/06, and full year earnings were up $0.02 from 9/06. The stock traded up 8.55% to $22 a share. So how did they do it? Very simple - "the Company does not make sub-prime loans," according to the press release. Or to put it a little more colloquially - we don't do stupid things like make bad loans to people just to satisfy Wall Street's insatiable need to grow. We don't care if you laugh at us every year at the annual Bankers convention because who's laughing now. The web site is here.

I don't own either of these stocks. I did look into Wakeforest Bancshares Inc. a few months ago and passed because it wasn't "liquid" enough. It occurred to me that liquidity isn't always a good thing since it allows investors to react emotionally without regard to reason or rationality.

Pink Sheets - Part V

I just realized that I need to come up with a more original title than the ones I have been using in this blog. Whenever I write on the same topic, I usually just put Part II or Part III. If anyone has any suggestions let me know.

Anyway, Part V of my slog through the Pink Sheets – or maybe if I could sub title it “liquidity isn’t everything,” has produced a company called Laaco, Ltd. The symbol is LAACZ. It last traded at $1525 a share, and the current market is $1550-$1610. The company is legally a partnership and has a yield around 3%.

Laaco owns several dozen self-storage facilities out West, but its most interesting assets are the Los Angeles Athletic Club and The California Yacht Club.

This is very much a family run operation. I counted six different people with the name Hathaway in the annual report, and a family controlled entity called Stabilty, LLC owns 70% of Laaco. Clearly the family knows what they are doing and have produced shareholder value. It's hard to see it in the chart below, but the stock has tripled the last 5 years.



The lastest annual report is here and is a fairly easy read. Click on where it says filings.

Pink Sheet Page

Pink Sheets - Part IV

Once again I have been scratching around the OTC bulletin board and Pink Sheet markets and found some outstanding and financially transparent stocks that deserve a deeper look.

The Burke-Parsons-Bowlby Corporation is a producer of wood products for various industries, including railroads and other industrial segments. It is headquartered in West Virginia and trades under the symbol BPAB in the pink sheets. The Yahoo page is here:

Yahoo Finance

but don’t expect much info there, go to the company web site at:


Burke-Parsons-Bowlby

I contacted the company by e-mail and they never responded so I assumed that another non-reporting pink sheet company was blowing me off, but two weeks later, to my surprise, the latest annual report showed up in my mailbox.

BPAB earned $2.93 in the year ending 3/31/06, and $3.34 in the nine months ending 12/31/2006. It looks like it has grown revenues for five straight years. One third of its sales are to four customers in the Railroad business. The chart below shows what a great investment it has been the last 5 years.

Pink Sheets - Part III

Keweenaw Land Association Ltd. (KEWL.PK) is a timberland company in Michigan that owns 158,000 acres of land in the Midwest. It is another very open and transparent Pink Sheet stock with published financials and a web site. It has a very detailed and lengthy report on the value of its timberland assets as of 12/31/06.

I would urge people to read this if only so they can understand better the components of the value of timberland at other more mainstream publicly traded companies. This stock trades at $215 per share and has also been on a tear the last five years as seen below.



It's astounding to me how many quality companies there are that trade in the Pink sheet or bulletin board market. The web site is here:

Keweenaw Land Association

If you use the mid point of the asset value of its timberland, then KEWL is trading at 93% of its NAV. This analysis does not include any value for sub surface or mineral rights.

Pink Sheets - Part II

Another Pink Sheet/Bulletin Board stock I came across recently is the Mills Music Trust (MMTRS.OB). Mills is a trust that owns the rights to a music catalogue dating from the 1960’s. The trust receives the royalties from songs in the catalogue, which is currently paid by EMI Music Publishing Co. It is owned 28% by MPL Communications, Ltd., which is Paul McCartney’s music company.

It sells at $38.50 per share and paid out a $4.48 per unit dividend in 2006. The downside of this company is that the trust has a finite life since the copyrights will eventually expire and the songs will enter the public domain. It is also involved in a legal dispute with EMI that has been ongoing for several years.



http://finance.yahoo.com/q?s=MMTRS.OB

The stock did fairly well for a while but has plateaued the last couple of years, and has had a sharp drop the last week or two as the chart above shows. Mills is also a transparent company. I couldn't find a web site but they do file with the SEC.

Pink Sheets - Part I

The Pink Sheets can be a scary place to invest. They have a terrible and well-founded reputation for illiquidity, lack of financial transparency, fraud and pump and dump scams, and mainstream investors and publications generally scorn stocks that are listed here. However, to completely ignore stocks that trade here is a mistake as there are some wonderful stocks in this part of the market that have provided above average returns to investors for years, even for generations in some cases.

So I have done some poking around in this area and have discovered some real interesting companies that deserve a look by other investors. Now let me qualify what I mean when I say that I “discovered” these stocks. To claim that I discovered the stocks I mention in this post is analogous to Columbus saying that he discovered America, when we all know that there were native people living on this continent for tens of thousands of years. These stocks are well known to people who have been investing here. In fact, I found out about many of these names because I stumbled across another web site while researching a different stock. The web site was for an investment firm called Standard Investment Chartered, Inc., which specialized in these names:

http://www.standardinvestment.com/

I did notice that there is not a lot of chatter about these stocks in the Value Investing blogosphere, but I would be interested to hear from others about them. I am going to write a paragraph or so on some of the names and try to expand on them in future posts. As I have stated before, just because I post on them doesn’t mean that I am recommending that someone run out and buy them right here and now.

Limoneira (LMNR) is a pink sheet company out in California that owns 7,000 acres of farmland that they grow avocados and other produce on. They have another division that has been developing land in its inventory that has been converted to higher uses, i.e. development purposes. They are one of the more accommodating and open pink sheet companies out there. They have a web site, and even agreed to send out the annual shareholder report even though I am not a shareholder. Remember, pink sheet stocks are non-reporting companies so they are under no obligation to provide the standard financials even to shareholders. The stock has been on a tear the last 5 years, possibly coinciding with the rise in value of California real estate.




http://www.limoneira.com/

Calavo Growers, Inc. (CVGW), a NASDAQ listed company, owns a large stake in LMNR, so there is a back door way to own LMNR if one feels that it is a worthy investment.

I am a Moron

Here is a cautionary tale of what happens when you ignore illiquid and micro cap stocks, and your investment philosophy. Two years ago I was researching banks and I stumbled across the Pink Sheets web site at

http://www.pinksheets.com/index.jsp

It was a particularly slow day at where I used to work, so I figured why not? I’ll waste a few hours and have a laugh.

After clicking through the site I found the listings page for all pink sheet listed banks. I was stunned to find that there were so many bank stocks that trade off the main exchanges – there were literally hundreds of banks listed here. So I decided to pick one at random. Well it wasn't really at random, it was one in Atlanta, which is nearby where I live so I figured I would take a look at it. It was the North Atlanta National Bank (NANB). It traded both on the OTC Bulletin Board and the Pink Sheets.

It was selling at $10.00 a share, but there was very little news or financial reports on Bloomberg about it. So I dug some more and I found that they had a web site where they post shareholder reports. The bank had a single branch in Fulton County, Georgia. This is a northern suburb of Atlanta that is growing like a weed. I dug further. The loan and deposit growth was unbelievable – a compound annual growth rate of more than 100% since 2000. They were well capitalized.

And then the bombshell hit – its tangible book value was $9.03. I did a double take – was this a misprint? Fast growing, well-capitalized banks don’t sell at tangible book value. So I checked at the government web site where the banks file their call reports, and it was confirmed. So there it was, a fast growing, safe bank selling at slightly over tangible book value and what did I do? Absolutely nothing. I didn’t buy it. It wasn’t liquid enough I said. Its market capitalization was only $10 million. There wasn’t that warm cuddly feeling of being surrounded by other investors. There wasn’t some sell side analyst around to make me feel safe at night while I owned it.

I kept it on my screen though and watched it the next two years. It only traded twice a month but every time it traded it seemed to go up a buck or two. I lost track of it for a while, and the next time I looked it was at $17, and then $22 a few months later.

Then on June 29th, 2007, my nightmare reached a climax as I saw the headline – Shinhan Bank America to acquire North Atlanta National Bank at $23.44 a share. A South Korean bank looking for a foothold in a fast growing American city had bought it.

So what’s the point of all this? There are hundreds of other Pink Sheet and Bulletin Board Stocks out there in Banking and other industries that are being ignored by most mainstream investors. If you do this you will reduce your opportunity set immensely. There are some great stocks here so don't be a moron like me. They are hard to trade sometimes, but if you are a long term investor that shouldn't be a worry.

A great investor once said that there is a lesson to be learned in every mistake and I think I learned from this one.