Archive for the 'Investment Ideas' Category

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Summary

After global merchandise trade dropped ~20% in the wake of the Covid-19 policy response, shares of shipping companies collapsed, underperforming even the airline ETF. The industry now trades cheaper than at any time on this side of the millennium - less than 25% of liquidation value for some companies. Braxton believes this is unwarranted. Even during the seasonally weakest month of year, tanker earnings are still covering operating costs. In spite of analyst downgrades and widespread panic, tanker companies have used hefty profits from storing excess oil to rapidly deleverage.
 

Structural Balance

Although ULCV containerships are currently garnering far better rates than tankers, Braxton feels that this masks a precarious structural balance between supply and demand. Containership demand has actually plummeted, and rates are only being propped up by an ad hoc cartel of dubious legality. Whereas ample tanker demolition candidates provide a cushion, a young fleet severely limits scrapping potential for ULCVs. Worse, new capacity to the tune of 24% of the existing ULCV fleet is set to hit the water over the coming years.
 

International Seaways

Braxton discusses corporate governance in the industry and shares a favorite current tanker pick - International Seaways. INSW trades at half of liquidation value, with its strong balance sheet further fortified by an FSO joint venture with Euronav that generates consistent contracted cash flow. The company is repurchasing shares.
 

Distressed Mortgage Notes

Braxton outlines his investment in the Navios Maritime Acquisition Corporation First Priority Ship Mortgage Notes due 2021. The bonds trade at a highly distressed valuation, despite solid covenants and a short time to maturity. Braxton says that the value of the underlying fleet and NWC fully covers the bonds and implies a positive value for the equity.
 
NMAC is now aggressively repurchasing bonds out of cash flow (most of which is contracted). While the embezzlement ratio is on the high side even for the shipping industry, Braxton feels that management incentives are likely to favor noteholders.
 

Show Links

 

Staying In Touch With Braxton Gann

 

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#117: Mariusz Skonieczny

To watch this episode on YouTube, click here.

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Summary

In this episode of The Intelligent Investing Podcast, Eric Schleien sits down with Mariusz Skonieczny. We discuss the shipping industry, COVID recovery stocks, value investing in general, Oroco Resources, and Mitcham Industries. We also discuss his new website, Microcap Explosions.

 

About Mariusz Skonieczny

Mariusz Skonieczny is the founder of Microcap Explosions and Classic Value Investors and the creator of Value Investing University. He is also the author of several books on the subject of investing.

He is a professional investor meaning and has written books and videos. He also, teach ballroom dancing.

Mariusz graduated from Indiana University in 2003 with a Finance degree. From 2003 to 2008, he was in the commercial real estate industry as an appraiser and broker. During the 2008/2009 financial crisis, he left the industry to start Classic Value Investors.

 

Staying In Touch With Mariusz Skonieczny

 

Staying In Touch With Eric Schleien

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Summary

 
Today's interview guest is Trey Henninger. 
 
Trey Henninger runs the blog and podcast, DIY Investing. Trey is a private value investor focused on microcap and dark stocks in the United States. His focus is on high-quality companies with predictable durable earnings where management has skin-in-the-game. Trey runs a concentrated portfolio of 5 stocks with a 20% weighting each. By focusing on small companies, Trey hopes to find overlooked compounders at value prices. His favorite opportunities have a market cap below $50 million. 
 

 

Focus Stock: Northfield Precision Instruments Corporation
 
Basic Company Information:
 
Name: Northfield Precision Instruments Corporation
Stock Ticker: $NFPC
Location: New York, United States
Industry: Industrial Manufacturing
Market Cap: $5.3 million
TTM Earnings: $668k
 
Shares Outstanding: 234,237 (constant, no change in the last 5 years)
Stock Price: $23.00
TTM EPS: $2.85 (based on 2019 FY results)
 
P/B: 1.09
P/E: 8.07
Earnings Yield: 12%
Dividend Yield: 2.6% (based on 2019 dividends)
3-year Earnings CAGR from 2015 to 2018: 100.4% (EPS was $0.53 per share in 2015) - dropped a bit in 2019. 
 

Investment Thesis

 
Northfield Precision Instruments Corporation is a niche manufacturer of precision air chucks. Precision is a keyword because very careful machining is required in the manufacturing process to meet the required specifications. Northfield is a leading manufacturer in the air chuck industry although the market is quite small. Northfield manufacturers for a worldwide customer base out of a single manufacturing location in New York State, United States. This single manufacturing facility has room for production expansion without adding additional space. The combination of being a small manufacturing concern with room to grow is that Northfield is a huge current and future beneficiary of expanding operating leverage. They have a fixed cost base and are able to sell their goods at a consistent and sustainably competitive gross margin. Gross profit margins are consistently in the 45-50% range over the last 6 years. 
 
Northfield is undervalued significantly as they trade for a single-digit P/E while in the process of rapidly growing their earnings. They have been able to sustain a high growth rate because incremental returns on capital clearly exceed 50%. It is my view that Northfield has remained undervalued for two key reasons: They are a small nano-cap company with a market cap below $5 million and they are dark. Northfield doesn't report to the SEC and the only way to receive financial statements is to email their accountant and request physical copies sent by mail. 
 

Earnings History

2015 = $0.53 per share
2016 = $1.05 per share
2017 = $2.46 per share
2018 = $4.27 per share
2019 = $2.85 per share
3-yr avg = $3.19 per share
 
As Northfield grows earnings above $1m per year over the next few years and starts to earn multiple millions of dollars per year, they will be able to justify spending money to include their financial reports on OTC Markets. This will grow their potential investing audience and likely broaden their appeal. 
 

Potential Risks

  • Northfield is an industrial manufacturer which means it is not immune to cyclicality in the economy. With the current recession, we should expect earnings in 2020 to be lower than in 2018 and 2019. They are likely considered an essential business, so I doubt they would be drastically affected. However, a dip in earnings is both foreseeable and expected. Yet, I expect that earnings will grow again after this recession ends to exceed the 2018 high in earnings. 
  • They are highly illiquid. It is difficult to buy shares in the market. It took several months for me to acquire my full position. I think liquidity is largely constrained because current large shareholders are unwilling to sell at such a low price while the profitability of the company continues to improve. 
 
In summary, Northfield Precision is a dark company with a low single-digit P/E and a high earnings growth rate. They are able to profitability reinvest their earnings into growth at a high ROIC. While a 2020 recession will slow their progress, Northfield is on the way to becoming a much larger and more profitable company. Simply trading from the current P/E of 8 to a market multiple of 16 would double the stock price. The earnings growth and ROIIC should justify an even higher multiple though. The biggest downside is simply that the company is small and overlooked. It is hard to predict which a company of this size will begin to get a bid in the market. Yet, the low liquidity in shares should ensure that once interest grows the stock price will jump quickly. 
 

Connect With Trey Henninger

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Disclosure: Eric Schleien and some SMA clients of Eric Schleien through GSCM own shares of NFPC. Nothing here is investment advice. Do your own due diligence. 

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Background

David found this stock by screening for the smallest listed companies in the United States. He doesn't bother screening on any value metrics, just lowest market cap company he can find. No mining, financials, crypto or cannabis. 

Summary

Founded back in 1952. HQ in Duluth, MN. Make emulsions and films in printing. Make different types of glass and etching equipment. Sound deadening equipment. Chemicals and materials.

7m market cap. 1m shares floated. Management owns 30%. 17m Revenue. Loss of 800k. A few bad years, then good thing happens. Sell off legacy business, start a new business. Ebbs and flows over time.

Insiders Buying

CEO, COO, and Directors have all been buying

 

Valuation

Trades at half of book value. At some point there could be good news and a stock pop. Part of David Flood's basket of these low market cap stocks that have been left for dead.

 

About David Flood

David runs the blog, Elementary Value, and is a private value investor based in the UK. His investing approach is grounded in the fundamental precepts of value investing based upon Ben Graham’s core concepts of ‘Intrinsic Value’ and ‘Margin of Safety’. His investment strategy involves looking at both ‘Deep Value and ‘Franchise Value’ situations and using the value investing framework to analyze the financial and corporate facets of a given prospective investment.

 

Staying In Touch With David Flood

 

Staying In Touch With Eric Schleien

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Video Display (VIDE)

The company does video simulation products and video displays. Simulations for military and aerospace. They’ll also do huge video display units that can be installed in huge rooms like NASA.

5.9m Market Cap

Lots of hair on this company. Lots of liabilities. Made 67,000 last year. And loss-making previous 3 years.

Why does David like it?

 

2 reasons:

  1. Price chart hit support and volume dropped off. Accumulation period. People picking up shares in the stock.
  2. CEO owns 49% of the company. He doesn't want to see the company go under. VIDEO has been around since 1975 which indicates that it has managed to struggle along for all these years. They have divested a lot of their old legacy businesses in 2014. Had expanded over the decades and "diworsified."

 

Potential Catalysts

Started to move into a new sector - cybersecurity for defense industry. VIDE has a unit that can test computer systems with homeland security - this could potentially be a lucrative business in the future. just finally turned a profit. the future could be better than in the past.

 

History

VIDE has gone on and off doing well to poor again. The stock goes up a lot when things are good. nobody is paying attention to the company, left for dead. nobody talking about the company on stock boards. Those are the kinds of businesses David likes the most: No sign of life and nobody cares about the company.

 

Stock Buybacks

VIDE was buying back stock last year in mid-2019.

 

Other Catalysts

Potential for some kind of change due to a very old board of directors.

 

About David Flood

David runs the blog, Elementary Value, and is a private value investor based in the UK. His investing approach is grounded in the fundamental precepts of value investing based upon Ben Graham’s core concepts of ‘Intrinsic Value’ and ‘Margin of Safety’. His investment strategy involves looking at both ‘Deep Value and ‘Franchise Value’ situations and using the value investing framework to analyze the financial and corporate facets of a given prospective investment.

 

Staying In Touch With David Flood

 

Staying In Touch With Eric Schleien

 

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Summary

 
Micron (MICR) is a medical device company founded in 1978. 
 
MICR has a heavy debt load and negative working capital. It is sat at an all-time low and has recently announced it is going to de-list. Upon the announcement, the share price got cut in half. >10% owner has been buying more.
 
 
Insiders own 26% of the common.
 

About David Flood

David runs the blog, Elementary Value, and is a private value investor based in the UK. His investing approach is grounded in the fundamental precepts of value investing based upon Ben Graham’s core concepts of ‘Intrinsic Value’ and ‘Margin of Safety’. His investment strategy involves looking at both ‘Deep Value and ‘Franchise Value’ situations and using the value investing framework to analyze the financial and corporate facets of a given prospective investment.

 

Staying In Touch With David Flood

 

Staying In Touch With Eric Schleien

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OTC Stock Manual

 
If you’d like to purchase Jan Svenda’s Manual Of Stock (like an updated online Walker’s Manual)…click, here.
 
You can see samples to Jan’s manual, here.
 

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Summary

Calloway's Nursery was first discussed in Episode #22.

In this episode of The Intelligent Investing Podcast, Eric Schleien sits down with Jan Svenda to discuss Calloway's Nursery, Inc. (CLWY).

This may possibly be the least obscure stock that Jan has ever discussed on the show.

The company runs a small chain of garden centers in Texas. There is an activist investor in the management who has been a good steward of capital. The original pitch was that the company was trading below liquidation while business was solid. New management came in and realized value. There’s been about an extra 10% return with special dividends. The company currently spits out $3,000,000 a year in free cash flow which is backed up by real estate and a healthy balance sheet. The company is opening up new stores. There’s also the possibility of future improvements in free cash flow. The company is currently valued at about a 10% free cash flow yield. The coronavirus should not hurt them too badly.

 

About Jan Svenda

Jan is a “deep value” investor/analyst mainly focused on the US small-cap and micro-cap universe. He started out with a long-only bias (stocks trading close to NCAV etc.) which led to his interest in the OTC world.

Jan now covers this space through his exclusive newsletter service where he shares his latest long ideas and a watchlist of OTC stocks which should help subscribers generate material returns and allow them to “monitor” the OTC space more efficiently.

The service also acts as a community of engaged members who share the same focus. On top of this, he is interested in short-focused research especially in the thesis revolving around accountancy or earnings manipulation.

From time to time he also contributes to Safety in Value’s marketplace ‘Microcap Review’.

 

STAYING IN TOUCH WITH JAN SVENDA

To learn more about Jan and his manual of OTC stocks, you can visit his website.

He can also be reached via LinkedIn.

 

Staying In Touch With Eric Schleien

 

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For the full video interview on YouTube, click here.

 

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Overview

Endor AG is a Munich-listed holding company whose sole asset is Fanatec, the premium provider of racing wheels and other accessories for sim racing games played on consoles and PCs

Despite being a German-listed small-cap, the company has ~80% market share in the premium wheel/accessories segment and has essentially locked up exclusive branding rights for all the major OEMs and racing organizations (F1/Nascar/WRC) to produce branded replica racing wheels.
 

Growth

 
Endor AG grew 70-80% last year and has compounded revenues at 40% over the last 10yrs, as iRacing/simulated racing has grown organically in popularity at very high rates

COVID-19 Impact

Current growth is exploding due to COVID-19 and the mainstream recognition sim racing has garnered with normal sports closed for the last three months.
 
The current business is growing 100-200% per annum, so much so that the company can barely keep up with demand.
 
 
The company has already leaked they are targeting 150-200mm in revenues at 25-30% EBIT margins in the next couple of years (versus 40mm revenues last year and 80mm this year).
 

Going Forward

The stock currently trades at ~11x 2021 earnings, and ~2x 2021E sales, despite a multi-year runway where the business could grow 30% for a very long time.
 
Fair value on a 'normal' exchange with English disclosures/investor relations would probably be 4-5x the current price. Jeremy believes that even on the minor German exchange, it's hard to see how the stock doesn't double or triple again.
 
 

Staying In Touch With Jeremy Raper

 

Staying In Touch With Eric Schleien

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OTC Stock Manual

 
If you’d like to purchase Jan Svenda’s Manual Of Stock (like an updated online Walker’s Manual)…click, here.
 
You can see samples to Jan’s manual, here.
 

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Summary

In this episode of The Intelligent Investing Podcast, Eric Schleien sits down with Jan Svenda to discuss Altair (ATCD), a dark OTC stock.

 

Articles

 

About Jan Svenda

Jan is a “deep value” investor/analyst mainly focused on the US small-cap and micro-cap universe. He started out with a long-only bias (stocks trading close to NCAV etc.) which led to his interest in the OTC world.

Jan now covers this space through his exclusive newsletter service where he shares his latest long ideas and a watchlist of OTC stocks which should help subscribers generate material returns and allow them to “monitor” the OTC space more efficiently.

The service also acts as a community of engaged members who share the same focus. On top of this, he is interested in short-focused research especially in the thesis revolving around accountancy or earnings manipulation.

From time to time he also contributes to Safety in Value’s marketplace ‘Microcap Review’.

 

STAYING IN TOUCH WITH JAN SVENDA

To learn more about Jan and his manual of OTC stocks, you can visit his website.

He can also be reached via LinkedIn.

 

Staying In Touch With Eric Schleien

 

Disclosure

Eric Schleien and clients of his company Granite State Capital Management have no position in Altair. I, Eric Schleien, recorded this podcast myself, and it expresses my own opinions. This episode should not be considered investment advice. Please do your own due diligence.

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Summary

In this episode of The Intelligent Investing Podcast, I sit down with David J Flood to discuss TSR, Inc (TSRI).

 

 

About David Flood

David runs the blog, Elementary Value, and is a private value investor based in the UK. His investing approach is grounded in the fundamental precepts of value investing based upon Ben Graham’s core concepts of ‘Intrinsic Value’ and ‘Margin of Safety’. His investment strategy involves looking at both ‘Deep Value and ‘Franchise Value’ situations and using the value investing framework to analyze the financial and corporate facets of a given prospective investment.

 

Staying In Touch With David Flood

 

Staying In Touch With Eric Schleien

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