Friday, June 22, 2012

Some sentimental investment ramblings and Boss Holdings

If there's one thing I'm really bad at in investing it's going back to see how old holdings I've sold are doing or revisiting stocks I'd researched in the past but passed on.  A company I owned for a while and sold about two years ago is the subject of this post Boss Holdings.  So why did I suddenly decide to revisit Boss?  I was emailing with an investor and I mentioned I was curious to see how some companies that had gone dark recently were doing.  The first company that came to mind was Boss Holdings, I took a look and saw enough to inspire a post.

My guess is many of my readers are familiar with Boss, they were one of the few net-nets back in the bull market of 2006 and 2007.  I remember Boss stood nearly alone with just a handful of other net-nets such as Concord Camera (LENS).  Just as a fascinating aside in the linked Concord Camera post there was a commenter who posted that it was pointless to invest in a net-net because these things never liquidated.  As a postscript Concord did liquidate in 2008 not even a year after that post, they eventually distributed $4.81 p/s to shareholders.  So while the poster's NCAV estimate of $6.81 was never realized purchasing with a margin of safety at $3.19 still resulted in a 50% gain.

Back to Boss Holdings (BSHI).  The company was a net-net when I first purchased them for the an odd lot tender.  I actually looked at them for an investment back in 2007 but ironically decided against it because the shares rarely traded.  I was worried I'd be "stuck" in the position without a way to sell.  My views on this have obviously changed and if I had invested in them back in 2007 and held on I would have had a gain similar to Concord Camera about 50%.

I apologize for the rambling, but there is value to looking at how things from the past have transpired.  One last thought before I actually look at Boss.  Sometimes I get the feeling investors are worried that a net-net strategy only works in certain markets.  When the market is high and net-nets are rare it's better to be in cash and wait things out.  Boss and Concord show that even buying two dumpy net-nets gave satisfying market beating returns through a market crash.  This isn't an endorsement to go buy up any and all the crappy net-nets out there, but there are good values in all markets.

Background

Boss Holdings is a very simple company, they make work gloves and protective gear (rain boots etc) that they classify into two categories, tagged and untagged products.  Tagged products are gloves made for retail sales, these gloves are destined for hardware stores and shopping centers.  Untagged products are targeted towards bulk sales, so a company might make a large purchase of untagged gloves for their employees.  Just browsing the company's catalog there are probably hundreds of glove models along with a few boot models of boots and raincoats.  Gloves appear to be the biggest product Boss produces.

Gloves are not a glamorous business, they're not high margin either, Boss earns just 2.48% on each dollar of sales.  What the company doesn't have in earnings or cash flow they do have in their balance sheet, here's a look:


Boss currently trades at about $8.50 against a NCAV of $13.67 and a tangible book value of $15.29.  On the face of things Boss seems like an incredible bargain; buy at a 50% discount to book value and a 40% discount to NCAV.  While the balance sheet looks great, I'm not sure this is such a great bargain.

Why not?

I've mentioned in the past that I group net-nets into two categories, operating net-nets, and balance sheet net-nets.  The first category contains decent companies hiding behind a pile of assets such as PC Connection, or George Risk.  With an operating net-net the composition of the assets doesn't matter to me as much because the business is halfway decent.

The other category are piles of assets with a business attached to them.  When I look at a net-net in this group I want high quality assets such as cash or marketable securities that have a realizable value.  I want to avoid net-nets that are mostly inventory with a crappy business attached, unfortunately that's what Boss Holdings is.  Why do I want to avoid this?  Think about the balance sheet for a minute, presume Boss had a big going out of business sale.  They have $23m in gloves they need to get rid of quickly, do you think if they did a 50% or 75% off sale they'd move the gloves?  I doubt it, if I go into my local hardware store and see that garden gloves are 75% off I'm not enticed to buy them, heck they're only a few bucks to start with.  When I start to think about clearing out Boss' inventory quickly I start to get the feeling there really isn't all that much value there.  Sure maybe it's worth $23m to an accountant, but try to sell it.

So if that isn't bad enough there was something else nagging me when I was looking at their latest annual report.  Not only is this a junky little business attached to some questionable assets, the business is making an accounting profit but losing money on a cash basis.  So where did the cash go?  It seems Boss just can't stop accumulating more inventory, $3m was spent on adding more gloves to the stash in 2011.  The second source of cash leakage is accounts receivable, $1.5m was billed and went uncollected as of the annual report.

Neither of these items are bad, but they're concerning.  When I want to see the quality of a company's earnings I like to run an accruals check, here it is for Boss:


It's good to see both the balance sheet and cash flow based accruals are the same, that's a good sign.  The actual accrual number isn't terrible either 7% is pretty common for most companies, so this isn't really the red flag I was expecting.

The item I just can't overcome is the lack of cash flow.  Here are the reported numbers for income and cash from operations for the past three years:


The difference between the two consists entirely of working capital changes.  In 2009 Boss spent down their inventory, and in 2010 and 2011 they rebuilt it.  I don't know what the future looks like but I wonder why they spent $3m on additional inventory when they already had $20m in gloves sitting around the warehouse.  It seems it would have been more prudent to work off those older models (as if anyone could tell a difference) rather than spend cash on keeping inventory levels high.  

None of the items I really highlighted are bad on their own, but the combination of all of them together make Boss a pass for me.  

Conclusions

There are a few things I find interesting about Boss Holdings as an investment.  The company hasn't appeared to actually trade above NCAV over the past five years or so, but that doesn't mean investors haven't been able to make money.  Just buying in 2007 and holding has resulted in about a 50% gain or 10% a year.

The second interesting aspect is the company took action to get their share price moving.  In 2010 the company went private at a price far higher than the last trade, and it seems the stock has moved up since then.  This is a good place to mention that they company has begun to execute a $1.5m share buyback, so maybe this is another catalyst that will continue to move it higher.

Boss Holdings isn't the worst investment in the world, but I feel there are many better net-nets to choose from so at this point I'm putting their dusty file back into my cabinet to be forgotten about for another two or three years.

Talk to Nate

Disclosure: None

2 comments:

  1. I am long BSHI. I agree with most of your observations. I would point out a couple of things. One they have been trying to grow and diversify by buying other businesses the most recent being a cell phone accessories business. Second they have significant NOL's that they have slowly utilizing which has allowed them to not have to pay any income taxes and won't have to for a few years. My hunch is that there won't be any takeover until they use these up as a change in control would invalidate them. My biggest fear is that management will try and take the company private for a lowball price once the tax benefits of the losses are fully utilized.

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  2. Dear Nate,

    They had positive FCF in Q2, page 5:

    http://www.bossgloves.com/2012%20-%202nd%20Qtr%20v2.pdf

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