Tuesday, October 30, 2012

Japan, the ultimate contrarian trade

Japan, the mere mention of the country for investors elicits disregard and apathy.  Mention a company in the UK trading for less than net cash and growing earnings and interest explodes.  Mention a company in Japan with the same metrics, and investors come up with reasons to not invest.  Japan is a fascinating place, a first world country, ultra modern, yet for investors something less than a third world market.

In 1939 John Templeton called his broker and asked him to buy $100 worth of every stock trading for less than $1, bankrupt or not.  His broker obliged, grudgingly and purchased 104 stocks for him.  That initial $10400 turned into $40,000 four years later, and got John started on his investment career.

In retrospect John Templeton's trade seems obvious, yet at the time is was something only an investor a few slices short of a loaf would undertake.  I think we see the same dynamics with Japan today.

For most investors Japan is a place where money goes to die.  Japanese bonds are famous for their widow maker trade, and Japanese equities have destroyed a few legacies themselves.  No self respecting investor takes a chance on Japanese equities, which have been in a bear market for the past 20 years.  A mention of a purchase in Japanese equities is usually met with a response that Japan is about to enter hyper-inflation, or the Yen is going to be destroyed, or the country is about to default on their debt.  I don't want to minimize the finances of the Japanese government, but these characterizations have been going on for the past decade or more.  That's not to say they won't come to pass eventually, but a lot of people have lost a lot of money trying to guess the timing.  Eventually Japan will have to deal with their debt problem, but so will the US, and so will Europe, so Japan is not unique in that regard.

So with all this I want to introduce what I call the greatest Japanese trade ever.

Long time readers know that I've toyed with the Japanese net-net market.  I've done numerous posts on Japanese equities, and even bought a few Japanese net-nets.  Each time though I keep coming back to the same problem, there are so many Japanese net-nets, how do I choose the ones to invest in?  I've translated financial statements in an effort to pick the "best" cheapest companies.  I've built out spreadsheets of various metrics, yet I've never had the feeling that I'm fully capturing the cheapest companies.  Do I purchase the ones at the lowest P/NCAV, or the ones with the highest ROE, or the ones with the best dividend yield?  I really don't know what will work the best in the future.

In thinking about Japan I've started to think about the John Templeton approach.  I've often thought that if I could buy ALL of the Japanese net-net's I'd be happy.  Sure, some would go bankrupt, but who cares, some would also quadruple.  I've told a number of investors that I'm convinced that someone buying the cheapest Japanese companies could not go wrong.  The trade might not work out over the next four to six months, but over the next four to six years it would for sure.  Why do I think this?  Because it's absurd that profitable companies are selling for less than net cash, or less than net current assets.

I've thought about this trade a lot, buying all the net-nets, the problem is one of both capital and commissions.  As of today there are 448 companies selling for less than NCAV, and with the funky Japanese rules regarding lot sizes, I estimate it would take close to $4.4m to buy every single one of these companies.  I don't have anywhere near $4.4m in capital, and at my broker the commission to enter an exit each trade would be a serious hamper to results.

Recently I found out that Schwab created a new Global Trading product as part of their brokerage account.  As a promotion for this new account they're offering free trades until March 2013.  Free trades on international equities got my attention, I started to think that maybe the ultimate Japan trade might be possible.

While Schwab trades all Japanese exchanges (Tokyo, Osaka, JASDAQ), they only trade securities where they offer an equity rating, which is 882 equities.

Using the Schwab platform I'm hoping to pull my own mini-Templeton trade.  I'm looking to buy 20-30 Japanese net-nets, in addition to the four I already own.  Doing this will more than double my exposure to Japanese net-nets.

So here is the plan: I am going to open a Schwab account and purchase 20-30 Japanese net-nets.  I'd like to purchase more, but my capital is already tied up in other great opportunities, and this is the most I can spare at this time.  I'm going to also hedge my exposure to Yen with a future or options in case of a Yen explosion.  This way I'll still get the market return these net-nets provide, but won't have to worry about the Japanese debt problems.  My hope is that I can forget about this account for three or four years, and at that point I'll have at least 2x my money if not more.

Some readers might wonder exactly how I'll pick 20-30 companies out of 448.  I'm going to approach this in a similar fashion as John Templeton.  I'm going to start with the lowest priced equities first before layering on any other criteria.  My second criteria will be discount to NCAV, my third criteria, discount to BV, and my fourth criteria ROE ex-cash.  I also want each of my holdings to pay a dividend, so I'm paid to wait this out.

Talk to Nate about the ultimate Japan trade

Disclosure: no equities mentioned


Friday, October 26, 2012

Certainty in investing

I will occasionally get an email from a reader saying they love my blog, then proceed to tell me about some great stock that's selling at 2x book, that's a "good earner", and has great potential.  I sometimes wonder how much these people have actually read what I write about.  I haven't received any emails like that recently, but I've been thinking about the role certainty plays in investment decisions.

I prefer certainty over uncertainty when making analyzing an investment.  It's such a simple thing to say, I doubt any readers would disagree, but the investment style exhibited by most market participants disagrees with this statement. When more certainty exists assumptions are minimized and minimizing assumptions leads to less errors.  I believe this is the reason I enjoy investing in net-nets, and companies on an asset basis.  On a balance sheet, cash is cash, no assumptions are presumed, the book value of cash and market value of cash are one in the same.  At the opposite end of the spectrum future earnings are at best a guess, maybe they fit a trend, but the truth is no one knows the future and what it holds.  For everyone projecting earnings five and ten years out I want to see your earnings models from 2006, and 2007, were they accurate?

For an asset based investment uncertainty starts to creep in the further we move down the balance sheet.  This is why when looking at net-net's Graham added a discount factor for receivables, and inventory, and finally property plant and equipment.  The uncertainty is the highest with fixed assets, so the discount is the greatest.

The same is true with earnings, there is little uncertainty (usually) with revenue, but by the time we get to earnings all sorts of assumptions are incorporated adding an uncertain factor.  This is also a reason that cash flow is preferable to earnings, cash is more certain and less prone to manipulation.

When I profile a cashbox, I get a lot of negative comments.  A cash box is a company where the cash is a significant component of the market cap, and in some cases exceeds it.  Usually the value of the actual business is small.  Most of the comments I receive discuss how terrible the business is, and question why I'd want to invest in something so bad.  I view it differently, a cash box minimizes uncertainty.  When I buy a cash box I know for certain what I'm buying, maybe it's a $1 for $.75, or even $1 for $.50.  The only uncertain thing is what the business might do, but my investment is protected against failure, because I purchased the certain thing cheap.

If I could buy a good company selling at a cheap price with the same amount of certainty as a cash box I would prefer the better company.  The problem is these situations don't exist.  There are no blue chip companies selling for NCAV, or a deeply discounted book value.  Even the cheapest blue chips have a high uncertainty factor.  Will earnings continue to be stable?  What if margins shrink?  What if demand for the product drops?  What if the internet changes the business model?  I do own some large caps, two actually, with high degrees of certainty.  Both of my large cap holdings have virtual monopolies, or duopolies in their respective market, the certainty level is high.

There is a trade-off though, a company with certainty's returns are usually limited.  A cashbox is never going to return 400%.  A net-net isn't going to become the next Apple, at most they might return 50-100%.  Occasionally a cheap certain stock will triple or quadruple, and very rarely more.  The opposite is true for uncertain stocks, Apple fell to the $70s when it was announced Steve Jobs had cancer.  That was the ultimate uncertainty, the market felt the company's future was cloudy, uncertainty was at a high, and the stock sold cheap.  Uncertainty lifted and the stock has almost gone up 10x since then.

I believe Graham tried to encapsulate this idea in his discussion of investment return, and speculative return.  An investment return is a certain thing, whereas a speculative return isn't certain, but it could be substantial.

I believe certainty is inversely correlated with a margin of safety.  If a cash box is liquidating dollars for $.95 I don't need a margin of safety, my return, and the value of the assets are almost guaranteed.  If I need to predict what car sales will look like in five years for an investment to work, I need to buy at a bigger discount to incorporate the chance that my prediction is wrong.

Sometimes investors fool themselves with the margin of safety concept.  I will read writeups on Seeking Alpha that go something like this: earnings will grow from $.95 to $3.25 in 10 years, and discounted back at 15% (to be conservative) means the stock is worth $85, but it's only selling or $65, so I have a strong margin of safety. Note to all math nerds, I have no clue if the numbers work, I just made them, and the discount rate up.

When I read something like that I don't see anything safe, unless the company has a contract for ten years of earnings, growth is a gamble.  And just because the current price is sitting below something a formula spit out doesn't make it "safe" even if there's a large discrepancy.  I don't mind buying companies for their earning power, but I like to do it in what I consider a more certain way.  As an example, a company has consistently earned $3-5 per share for years, even in down markets, and is selling for $15, would be considered "safe" to me.  It would be even safer if book value was $13 per share, something close to the current price.

In summary, I want to look for investments where assumptions I need to make are minimized, and my downside is certain.  I much prefer an investment where the absolute maximum loss is small to non-existant verses one where I have the potential to make 30x my money, or lose it all.  I'm not a 20 punch Warren Buffett investor, but I have found it's worthwhile to be patient and wait for the right types of investments.  And to anyone who thinks cheap companies aren't out there right now, there are over 60,000 public companies worldwide, some proportion of those are certain, and cheap.  In Japan alone there are over 300 companies selling for less than cash.  It always pays to be patient!

Talk to Nate

Disclosure: No positions mentioned

Tuesday, October 23, 2012

Automodular's pretty cheap eh?

Except for the bottom of a bear market, it always seems like there aren't many cheap stocks to be found.  Some cheap stocks (like most of the current net-nets) are full of warts, with one food in the grave, and the other on a banana peel.  In every market there's always someone who things stocks are overvalued and is willing to sit on their hands clutching cash waiting or the next crash, waiting, and waiting.  A preferable strategy is to find safe and cheap stocks in any market, buy, and be patient.  The stock I want to discuss today is a good classic cheap stock.  There is unfortunately no sexy story, full of mystery and intrigue surrounding it.

Automodular (AM.Canada) is a Canadian manufacturing company based in Ontario.  The company did have a small amount of operations in Ohio, but those have mostly been wound down.  Sales are now predominantly in Canada.  The company is an integral part of the car supply chain, they, supply assembled sub-modules for cars.  The modules are things such as an instrument panel, or powerpack.  The company receives orders every forty seconds, and ships the completed components within two hours.  The car assembly process at the destination plant cannot continue without Audomodular's components, so timing is critical.  Because of this the company is locates their facilities within 12 miles (20km) of the final assembly facilities.

The company relies on contracts with auto manufacturers, mainly Ford and GM.  Ford and GM use third party modular assemblers because historically it's been cheaper to outsource component production.  Automodular states that the price advantage gap has been closing over the past few years, and if the difference becomes inconsequential it's possible that Ford or GM might insource their work.  In an effort to diversify the company has sought new lines of business that might use some of the expertise they already employ.  Out of this initiative they have started to manufacture windmill components.

There are a few things that make Audomodular really interesting as a potential investment.  The company is trading slightly below book value, and has a P/E of 2.7x.  With a P/E this low ROE last year came in at 36%.  What makes the numbers even more impressive is that the company has continued to grow into 2012.  The 2011 annual report looked great, but the 2012 half year results are even better.  Sales are running 36% higher than last year, with earnings coming in 31% higher.  The company's sales weren't artificially high in 2011 due to a one time gain, they've been consistently strong coming out of the recession.

The large gain in year over year results come from the company's windmill fabrication efforts.  Unfortunately is the windmill production program is only a year long.  There's the possibility of extending it, if successful, but windmill demand relies on government subsidies, and renewable energy demand, two unknowns.

The company has the ability to generate strong cash flows, in 2011 they had free cash flow of $15,768k, and in 2011 free cash flow was $22,578k.  Free cash flow for the first half of 2012 was significantly lower at $2,920k.  The company attributes their strong free cash flow over the past few years to a significant rebound in orders from Ford and GM.

The company has been a responsible steward of cash, they have accumulated a sizable cash hoard, recently amounting to $15m.  Management has been shareholder friendly, paying a sizable dividend last year, and buying back shares, when appropriate.

Naturally for a company this cheap, with a history of sizable earnings the first question asked is: "what's wrong?"  There are two major forces working against Automodular, and they're the primary cause for cheapness.  The first was touched on briefly above, the current extraordinary results are from the temporary production of windmills.  It's possible this production could be extended, but as of now there isn't any visibility into that decision.  When windmill production ends, results will drop back down to where they had been in the past.

The second cause for the cheapness is that Automodular works on a contract basis for Ford.  They're currently contracted to produce subassemblies for a few different car models, but the contracts are set to expire in the next couple years.  The company is working hard to secure a future contract, but if they're unable to, Automodular will be a company with a lot of expenses and no revenue.

I believe it's the fear over the visibility into the company's future that's holding the price down.  While it would be nice to lock up 10 years of revenue in a long term contract it's aldo very rare for a company to do that.  Most companies are in the opposite position of Automodular, they don't know who will be making purchases tomorrow, and how many purchases will be made, there is no visibility.

A third and more minor concern is that management is looking for ways to diversify their lines of business.  This diversification effort led to the windmill project, but in the future it could lead to projects of dubious value.  Management has been a good steward of shareholder capital in the past, but that doesn't mean they can't make an ill-timed acquisition, or make a mistake in the future.

With all the potential negatives it's worth discussing a potential positive as well.  The company has a lawsuit pending against GM for breach of contract for the amount of $25m.  The lawsuit is pending in the Ontario courts, with an uncertain resolution date.  If Automodular wins the case the settlement amount would be material, and could be used to pay a dividend, or buyback more shares.

If an investor believes Automodular will be able to extend their contracts with Ford, or diversify into profitable side businesses this could be a very nice investment.  This could also be a great first international investment for an American.  The company has shares that trade on the pink sheets, as well as their Toronto listed shares.  All of the reports are in English, and Canada isn't that far away for most Americans for a quick visit to company facilities, if desired.  For American investors afraid of the shark infested international markets, Canada is a great baby step.  Not only do both countries share hockey, and baseball leagues, we also call our money the same thing.

Talk to Nate about Automodular

Disclosure: No position

Saturday, October 20, 2012

Is EnviroStar worth a speculation?

Investors are often encouraged to seek out safe and boring investments.  While I'm sure industry insiders are excited about technological advancements, for the rest of us the industrial dry cleaning equipment business qualifies as both sleepy and boring.  If a dry cleaning machine had a competitive advantage would an investor have any way of knowing?  This post is unique in that usually I'm looking at the downside for a stock, in EnviroStar's case I want to look at what this company is potentially worth.

I came across this idea in the comments section of the Whopper Investment blog.  I mention this because I think some readers believe I have a super natural ability to find great bargains in unknown stocks.  I don't, I'm out scrounging for ideas like everyone else.  The commenter stated an activist hedge fund had purchased a large stake in EnviroStar, and had been successful at unlocking value in the past. This is essentially the thesis, an activist hedge fund has taken a stake, and there is the potential for a substantial gain, if they're successful.

What is EnviroStar?

When I first saw that the ticker EVI (what was mentioned in the comment) went with a company named EnviroStar, my first thought was that this was a penny stock company with high hopes, little revenue, and a fanatical message board.  The company is nothing like this, they are a dry cleaning equipment distributor, and the franchisor for Dryclean USA stores.

Most of the company's revenue comes from the sale of commercial and industrial dry cleaning equipment.  These are items ranging from washers, dryers, and entire systems, to small components.  The company states that prices range from $5,000 to $1,000,000.  The company additionally services the machines they sell, and sells replacement parts.

In addition to being a distributor, they are also a franchisee for the Dryclean USA brand.  The brand has stores in four states, as well as locations internationally, mostly in Latin America.

Valuing EnviroStar

The first thing I wanted to consider is the hedge fund that acquired a stake in the company. Have they been successful, and will they repeat that success with this company?  Zeff Capital is the name of the fund, they purchased a 5.9% stake in the company, which was reported recently.  I did some Googling and found press releases related to acquisitions Zeff Capital had done in the past.  I also found some of their holdings from back in 2005/2006, and most of those companies appear to be private now as well.  My goal wasn't to dig into Zeff's past exhaustively, but just to confirm that this fund has in fact made whole company purchases, and unlocked value for shareholders.

What makes EnviroStar interesting from a valuation point of view is that nothing stands out right away. I pulled up the stock, and saw a P/E of 20x, and a P/B of 1.25x.  I thought maybe they were really growing revenue or earnings, but both of those have been flat the past five years.  I couldn't quickly identify what Zeff sees in EnviroStar.  After reading through the 10-K I was able to identify three areas of potential hidden value.

Understated book value

An argument could be made that EnviroStar's book value is understated.  The first area of understatement is an overstatement of liabilities.  Almost 50% of the company's liabilities consist of customer deposits.  These are deposits from customers for equipment not yet delivered.  According to accounting rules a deposit is a liability because the revenue hasn't been earned yet, and the company might have to give the deposit back if they can't fulfill the order.  While deposits are technically a liability they're also a cash advance to the company, money the company uses to buy the equipment, essentially a cheap form of financing.

The second aspect of the understated book value is hidden in the value of intangibles.  Most investors consider goodwill, or intangibles to be worthless, and disregard them.  This might be the case for a serial acquirer that continually writes downs goodwill, but EnviroStar is a bit different.  The company's intangibles consist of their franchise brand, and related franchise items.  This is the intellectual property that goes with a franchise operation.  A franchisee buys in with EnviroStar so they can market their dry cleaning retail outlet as Dryclean USA, a known brand with a good reputation.  The intangibles are held on the books for $65,890.  Yet these intangibles are responsible for $381k in franchise licensing revenue, and $44,193k in operating profit.

Deep in the notes the company has identified $594k in assets related to the franchise operations, presumably the offices and equipment used by employees to managing the franchising.  This division has a lot of operating leverage, it's doubtful that they'd need to increase their tangible assets much to expand the franchising.  If so intangible assets are surely worth more than $65k, considering those intangibles produced almost $45k in operating profit.

Potential for earnings growth

As mentioned above earnings have been flat for the past few years, but this doesn't mean that they couldn't jump under new ownership.  The easiest way to boost earnings would be to cut the CEO's pay.  The CEO currently makes $552k, which if reduced to a more modest $250k would increase earnings 50%.  I also find it curious that the Chairman of the Board makes $180k, yet the other Board members only make $5,000 or $10,000.  Reduce the CEO's salary, and eliminate the outrageous Chairman compensation and earnings are close to doubling.

The second way earnings might start to grow at EnviroStar is if they can increase their franchising.  Franchising is an asset-lite business, where expansion requires almost no additional assets, or employees, yet results in substantial cash flows.

Hidden business value

The two items I mentioned already are areas of potential, but I think the reason Zeff is attracted to EnviroStar is for their hidden business performance.  If you take out the $6.5m in cash, the company's equity drops from $8.2m to $1.76m.  With earnings of $511k, the company's ROE ex-cash is 28.8%, pretty incredible.  The company's book value has grown at 4.7% annually over the last five years.  My guess is Zeff would take out the excess cash as a dividend, and let the business grow off the small capital base.

Is it worth a buy?

The short answer for me is no.  The reason for this is there are too many assumptions and things that would need to go right for this investment to work out.  I try to find investments that minimize assumptions needed for a return.  When buying a profitable cash box for 50% off not many assumptions are needed for the investment to work.  As long as the company survives, and the cash isn't squandered investors will do ok.  EnviroStar is different, for this investment to work the hedge fund has to either convince the company to pay a large dividend to expose their true business value, or fire the CEO and convince the Chairman to lower his salary.  I doubt either with agree with that plan unless they're getting a sizable payday in return.  While EnviroStar might have some hidden value, I don't think they have enough hidden value, coupled with certainty to make this a good investment, at least at this price.

Talk to Nate about EnviroStar

Disclosure: No position

Monday, October 15, 2012

Solitron Followup: Even small investors have a voice!

In June I wrote a letter to the Board of Directors of Solitron Devices (SODI) urging them to buyback shares, and to hold an annual meeting.  Since my post I've received a number of emails asking if I'd received a response from the company.  I had received a short letter, but it wasn't worth a post, it was a very simple acknowledgment that the company received what I sent, and they'd consider my proposals.

In my initial letter I proposed two things: first to show that the company is committed to returning cash to shareholders, and secondly to open a formal channel of communication between management and shareholders.

I'm excited to announce that the company responded to both proposals in their latest 10-Q filed tonight. In the latest quarter, Solitron bought back 99,943 shares of stock in a privately negotiated sale at $2.75 a share.  It's easy to be greedy and wish they would have bought back more, I'm happy to see any movement in a shareholder friendly direction.  The buyback was sizable in that it equals roughly 5% of the total shares, and about 10% of the float.

The second announcement was buried at the bottom of the notes, the 10-Q states:

"On October 15, 2012, the Board of Directors of the Company approved a resolution to hold annual meetings of the Company's shareholders approximately six weeks following the filing of the Company's Annual Report on Form 10-K each year."

The company usually files their 10-K around May, meaning the annual meeting will take place sometime in July.  I'm looking forward to meeting up with other shareholders at the first annual meeting in Palm Beach.

What this action signals to me is that the CEO of Solitron can hear us as shareholders, and when our cries finally became loud enough he acted.  We made reasonable demands, and they were met with a reasonable response.

There were a few other things I noticed in the filing that were welcome signs.  The first is that Solitron mentioned their largest clients, and their largest suppliers.  They also cleaned up a lot of the language making it easier to read, and introducing more transparency.

While I'd love to take credit for these results, I can only take credit for getting the ball rolling.  After I posted about taking action, and posted my letter, I heard from a number of shareholders.  I know that many readers contacted the company and urged them to consider my proposals.  I think the chorus of shareholders was loud enough that Solitron realized they couldn't continue to ignore us any longer.  I'd especially like to thank Tony (who's letter to TSRI was posted recently) for sending a letter to Solitron recently that I think finally pushed them to act.  A big thank you also goes out to Ragnar is a Pirate and Valueprax for their efforts to contact shareholders and raise support as well.

The lesson to me in this whole episode is that things have changed with the shareholder management relationship.  In the past shareholders were nebulous, with few ways to contact each other, and even less interest in doing so.  Larger shareholders like institutions would get special treatment by virtue of their size.  Small shareholders were ignored, and didn't have a voice.  The Internet has changed all of this.  I will post about a company and the next day I'll have a few emails from shareholders.  With an effort like the one for Solitron word spread amongst blogs and shareholders and we were able to become a unified voice for action.  I don't know if a term exists for this, so I'll invent one, we're entering the age of socialized-shareholding.  With blogs, Twitter, and Facebook it's easier than ever to connect with people who share an interest and share common goals.

I don't believe the journey with Solitron is done, we're just beginning, but progress is being made, I'm excited and hopeful that as shareholders we can have our voice heard a little louder, and a little clearer.

Talk to Nate

Disclosure: Long Solitron

Sunday, October 14, 2012

Illiquid, a thing to fear, or a benefit?

A modern portfolio disaster, a stock is purchased instantly online, but when it comes time to sell no buyers are available.

Illiquid - An asset that cannot be sold quickly because of a lack of ready and willing buyers.

"The value in travel - as in investing - is rarely found in the clogged main thoroughfares but in quiet side streets where few travelers care to go" - Richard Morals (Barrons, 10/13/12)

I am no stranger to illiquid stocks, my portfolio is full of them, I frequently dig through them for bargains, and many of the ones I find appear on this blog.  Illiquidity seems to be a modern, and in my opinion irrational fear born out of electronic markets, and instant decisions.  Investors have always been worried about getting into trades that they can't get out of, but the fear seems to be the greatest now, at a time when market volume is lower than ever, and some markets, like the pink sheets are the most illiquid.

I watched a video on Greatinvestors.tv where investor Paul Sonkin was interviewed on his view of the micro and nano-cap markets.  Paul's view is that ever since the financial crisis liquidity has disappeared, and investors are afraid to touch any stock which they can't quickly liquidate.  Paul's points are very valid, and a concern for portfolio managers, and professional investors who might need daily liquidity for redemptions if the market turns.

I want to approach the issue of illiquidity differently, I want to talk about why I don't think an illiquid stock is to be feared, and how many opportunities lie in illiquid assets.  The key is prudent portfolio management, which I discuss at the end.

Benjamin Graham in Security Analysis discusses that investors should approach investing with the attitude of a businessman.  The idea is to analyze companies as they are, real businesses, and not pieces of paper that are traded.  The decision to invest should be made as a business decision, not as a trading decision.  I think the same approach and attitude should be taken with regard to illiquid assets.

Let's forget about the stock market, and buying stocks with a mouse click for a few minutes.  Imagine an opportunity is presented to buy a stake in a local business.  The local business has been growing at 10% a year, is profitable, and has a good reputation.  The owner needs the money now and is willing to sell a stake in the business for half of book value, and an effective P/E of 5x.  As an outside investor you wouldn't get a salary, but the company pays out a portion of their profits as dividends.  After some due diligence, and a discussion with the owner you decide to purchase a stake and write a check.  This process was a business decision, approached like a business person.  When the stake is purchase most likely the thought of liquidating the stake quickly isn't considered, because it doesn't make sense.  People who buy stakes in brick and mortar businesses don't wake up one day and decide to dump everything they own because they're scared.  Most private business investors thoughtfully consider each investment, and realize they can't undo a mistake quickly, so they are extra careful before investing that their decision is the right one.

I think as investors we need to approach holdings in a similar manner.  From buying 1 share to buying 100,000 shares, a share is an ownership interest in a company, no matter what the size.  Unfortunately we often lose sight of that and look to flip it quickly.  If we're honest with ourselves, I'd guess that every reader would ideally like their holdings to appreciate 50-100% the day after they buy them.  I know I'd prefer that to holding patiently for years, who wouldn't?

I think patience in the market has been lost with the electronicization of markets.  Utilizing online brokers, investors are able to buy and sell stocks and bonds instantly.  If an order is placed to sell a stock and it takes a few hours to execute investors become impatient.  In the past stock ownership meant having physical certificates of companies; buying and selling wasn't as quick of a process.  When an investor decided to sell they would have to call their broker, notify them of their intention to sell, then mail the broker the physical certificate.  This whole process could take a few days to a week.  If it took three or four days to execute the trade it wasn't a big deal.  Patience was built into the system, unfortunately now we have a system that is built around instant decisions.

If I had to guess, I would say most readers will read this post and agree, yet will continue to disregard illiquid assets.  Because of this some incredible bargains exist in illiquid assets.  My example above isn't fabricated out of nowhere, companies like this exist.  I've written about Hanover Foods in the past, they're illiquid, and trading at a P/B of .38x with a P/E of 5.5x.  Or what about RCW Manufacturing, with a P/E of 5.21x.  Of course we can't forget about Randall Bearings, P/E of 1.55, P/B of .19x.  Deals like this will never exist on the NASDAQ or NYSE except in a period of extreme pessimism.  If any of these situations were approached as a private business buyer instead of as an outside investor would your reaction be any different?

Maybe this post has been somewhat convincing in that you feel it's worth considering illiquid assets.  The question remains, how do you approach this from a portfolio perspective?  First I think an investor in illiquid assets needs to demand one of two things, either a dividend, or an absolute cheapness.  When I say absolute cheapness I mean stocks that have $100 in assets selling for $30.  These aren't Barron's companies selling at $33 that have the potential to move to $35 in the next year.  These are stocks that own a coal mine worth billions selling for a few million, like Central Natural Resources.

The other criteria I mentioned is a dividend.  My experience has been that many if not most illiquid companies pay some sort of dividend.  Some companies pay generous dividends not found in listed markets, with yields north of 10%.  A dividend gives the outside investor back a portion of profits every year.  I personally prefer a dividend over absolute cheapness for illiquid stocks, but if the price is low enough I'll go for an insanely cheap asset.

The last thing to consider his how much of a portfolio should consists of illiquid stocks?  My own personal target is anywhere between 15-25% of my portfolio.  I would potentially go as high as 50%, but so far I've found enough liquid opportunities that illiquid stocks only make up about 10% of my total portfolio.

If an investor decides to devote their whole portfolio to illiquid stocks I would recommend they make sure most of their holdings pay dividends.  While they wait for value to be realized they'll at least realize cash flow out of the holding's profits.

One parting thought, for most investors, who aren't wealthy hedge fund managers, their house is their largest asset.  For the most part houses aren't liquid assets, but most investors aren't panicking that they can't sell their house at the click of a mouse.  Maybe we should approach our investments as we do our house, realize they have value, but that we don't need to sell it instantly.

Talk to Nate about illiquid stocks.

Disclosure: Long Hanover, RWC, Randall Bearings

Thursday, October 11, 2012

Schuff, a potential 10 bagger, or bankrupt?

One great thing about recessions and downturns is they clear out a lot of marginal businesses.  The marginal companies either die at the hands of their bankers, liquidate, or manage to get bought out by a competitor in a stronger financial position.  The strong companies not only survive, but thrive.   From the bottom of the recession many companies that taunted death and survived returned 2x,5x,10x for shareholders with guts, and confidence enough to buy at the bottom.  The common consensus is that those opportunities are gone from the current market.  While there might not be as many as there once were, these sorts of opportunities do still exist, one example is Schuff International (SHFK).

Schuff International is a steel fabrication company.  According to their website they're the largest steel fabricator in the US.  When I first heard of Schuff over at OTCAdventures, I thought they were a smallish regional fabrication company.  After visiting their website I learned I was wrong, the company employs 1600 people and has completed many impressive projects like the Cardinals Stadium, the Bronco's Stadium, Bank One Ballpark, Sprint Arena, the Sacramento Airport, and other large projects such as hospitals, shopping centers, and casinos.  If a building requires structural steel, and is located in the Southwest, there's a good chance Schuff is supplying beams or joists.

The bull case for Schuff is very simple.  The company current trades for around $9 a share with a market cap of $36,314k.  Back in 2009 the company's net income was $18m, and in 2007 it was $59m.  The thesis is simple, Schuff is cyclical, and if their earnings can even come within 50% of peak earnings this stock has the potential to be a 10 bagger.  If they fall short maybe it's only a 5 bagger, or a measly three bagger.  For context here are the results over the last nine years:



Schuff isn't attractive just on peak earning power alone, management is shareholder friendly as well.  Last year they went on a binge and purchased back more than 50% of the outstanding shares at once.  The shares were purchased from two large holders, D.E. Shaw and Plainfield Direct LLC at $13.25 a share.  D.E. Shaw and Plainfield owned 58% of the company before the repurchase with the Schuff family owning 25%.  After the purchase the Schuff family now owns 60% of the company with outside shareholder interest increasing from 15% to 36%.  The repurchase was clearly a way for the Schuff family to regain control of the namesake company, but it also created value for outside shareholders.  Management stated they believe they are at the bottom of the cycle and they wanted to take advantage of the opportunity.

The big effect the buyback had was changing the bogie for earnings.  When the company earns $10m instead of that being $1.02 a share it now results in EPS of $2.41 per share.  I think it's useful to consider what past earnings looked like with the new share count:


If earnings recovered to the 2009 level with a market multiple of 10x, Schuff could be worth $45 per share.  If earnings recovered to the 2007/2008 level, which I feel is unlikely at a 10x multiple, shares could be worth $130.  I don't think Schuff will ever recover to the $13-14 per share level, because at that point in time a lot of their projects were coming through from the housing boom in the Southwest. With that said I don't think it's unreasonable to think that Schuff could earn anywhere between $4 and $8 per share in the next few years as the economy recovers.

Margin of Safety

The bull case is simple, but that doesn't mean this is a simple stock to look at.  If this was a sure fire ten bagger I wouldn't be writing it up, I'd be out mortgaging my house to buy Schuff stock, and telling everyone else to do the same.  When I look at Schuff the question I ask is "can this company survive long enough for the market to turn?"  My biggest question with Schuff is how can they survive, and at this level is there enough protection for me an outside investor against losing my money?

Unlike a lot of companies I look at, Schuff isn't debt free, they're actually the opposite of debt free, they recently accumulated a lot more debt.  The company has ~$30m in long term debt, and an additional $26m of long term debt coming due in 2012.  The buyback was financed by cash on hand, an unsecured loan by Mr. Schuff, and a hit to the Wells Fargo credit line.  The result of this is that Schuff has some incredibly high borrowing costs, almost at credit card levels.  The company has $30m of debt due in 2015 with a rate of 14%.  They have an additional $24m at LIBOR plus 4.25%, and the loan from Mr. Schuff is at 13% a year.  Typically rates at the level Schuff is paying are an indication by the lender that they're concerned about the possibility of getting their money back.

With Schuff facing a debt bill of $26m in 2012 it's worth considering how they're going to pay the bill. This is even more concerning after realizing the company had a negative $3.7m cash from operations in 2011.  In the sheet above I pulled out cash from operations over multiple years, and you can see it's lumpy, very lumpy.  This is because Schuff isn't paid by clients in a straight line basis, they're paid a portion of the cost (sometimes just materials) at different checkpoints of a project, with a final payment coming once the project is complete.  In 2009 the company had $91m in cash from operations, $18m in capex and $73m in FCF.  That's something to consider for a moment, two years ago Schuff generated enough free cash to take their company private..twice.

If one were to only look at the latest annual report and speculate on the debt repayment the obvious conclusion would be that Schuff is bankrupt, unless they can either roll or extend their loan.  This was my initial reaction when reading the latest annual report.  But then I sat and thought about Schuff a bit more and came to a different conclusion eventually.  As outside investors we can only see what the company gives us, yet management can see everything, projected cash flow schedules, project completions etc.  Why would the company management take on onerous short term debt that might imperil the company to buy back shares if they had no way to pay back the debt?  I think Schuff management knew that there would be some projects completing in 2012 with associated cash flows.  The cash flow would provide way to pay back some or most of the short term debt related to the share buyback.  After 2012 the company will owe $4m in 2013, $5m in 2014, $19m in 2015 and $1.4m in 2016.  The payback schedule seems odd, but it also seems to line up with the volatile nature of cash payments the company receives.  It wouldn't surprise me if the loans were tailored to have balloon payments that coincide with the completion of some of the company's larger projects.

Although we can't be quantitatively confident that the debt will be paid off, there is a strong inference that this won't be a major problem in 2012.  While we expect the company to make their payments this year it's always helpful to look at what might happen if the company doesn't pay and ends up in bankruptcy.

Schuff has $258m in assets against $164m in liabilities, for a book value of $92m, or $22.43 per share.  Book value consists of mainly of current assets and PP&E.  The company does have $10m in Goodwill, but even if we remove that from book value the investment is pretty well protected.  Most of the company's assets consist of inventory and receivables, two items that could take a haircut in a bankruptcy situation.

Maybe book value is overstated, or receivables or inventory aren't worth stated book value.  The good news is if any of those things, or something else is the case a buyer at today's price is protected by buying at 40% of book value.  There's room for a lot of error before an investment is at risk.

Conclusion

While I have been looking at Schuff the biggest question has been "can they survive?"  I don't have solid evidence that they can survive until the construction market turns around, and the results are reflected in the financial statements.  But I do have signs, management is bullish on the company, both with buying back shares, and reopening an idled plant in Florida.  I take comfort in the fact that project billings are lumpy, and associated cash flows are irregular as well.  Maybe this year's cash flow will pay the debt and then some.

The bottom line is I really don't know, but I'm not sure how much I need to quantify to invest in Schuff.  At 40% of book value, and at a very low multiple of mid-cycle earnings it's worth taking the speculation.

Talk to Nate about Schuff International

Disclosure: I have an order placed for shares.  I could be long when you read this, or have no position.

Monday, October 8, 2012

Goodheart-Willcox, a cyclical, who's finally turned?

Companies change during ownership, sometimes a growth company slows down and becomes a mature company.  Other times a mature, stogy company gets a breath of fresh air and experiences new growth.  A cyclical company gets to experience all of these dynamics in the period of a business cycle, growth, to maturation, to decline, and back again.  Goodheart-Willcox (GWOX), the subject of this post is most definitely a cyclical, but they've also experienced some change since I first purchased them.

I ran across Goodheart-Willcox in the Walkers Manual, the numbers in the manual intrigued me, from 1998-2001 the company had earned anywhere between a 24% and 32% return on equity, and EPS had grown at 25% annually.  I was even more impressed with the ROE when I noticed the company was debt free.  I was curious about how they were doing now, so I picked up some shares and contacted the company for an annual report.  I received a few years worth of reports and liked what I saw.  In the years between 2001 and 2011 the company had continued to throw off excess cash, but with reinvestment opportunities limited cash just piled up on the balance sheet.  The company had become what value investors affectionately call a "cash box".  A cash heavy company with a business bolted on.

So what is the business of G-W you ask?  They're a textbook publisher.  Most readers will see the last line and think "no wonder they're a cash box, dying business, dying industry, and relies on government funding."  That's the bear case in a nutshell, a bit more information might change some perceptions, but my guess is for 99% of my readers this stock is untouchable because of some preconceived negative bias.  I understand that, I've wrote about this stock to a number of investor friends, and all of them came back with some variation of my above sentence.  I've heard it said that courage of conviction, and patience are two skills investors need to succeed.  Both of these traits are required in double doses for G-W.

I want to try to respond to the bear case as best as possible, but I understand most who grab onto it won't ever be persuaded.  Even though text books in paper form might be going the way of the dodo bird, G-W is ready, they already publish digital formats of each book.  My guess is everyone who believes paper books are going away imminently doesn't have any close friends, or relatives who work within the education system.  My wife was a teacher before our kids came along, and for better or worse it's safe to say that American schools aren't exactly the type of institution that implements change quickly.  Some could make an argument, a good one, that the system is almost setup to avoid any change.  Change does happen, but it's slowly, and even more slowly in rural districts.  One more in favor of G-W is that they don't actually print the books, they're strictly a publisher, all printing is sub-contracted out.  This means if paper textbooks were to disappear G-W wouldn't be saddled with factories full of idled printing presses.

The biggest argument against G-W is that they're beholden to school districts and education budgets at the state level.  The company's revenue comes from two sources, technical schools, and statewide textbook adoption.  If a state doesn't renew their books G-W's results take a large hit. This can be clearly seen in their 2012 results, a year where no states renewed any textbooks.  Sales dropped from $21m (2011) to $16.9m (2012), furthering the pain, net earnings dropped from $3.27 p/s to $1.11 p/s.

The school book adoption cycle and renewal phase is what makes G-W cyclical.  Their business cycle closely matches the economic cycle in the US.  In the late 1990s the company was very profitable and thriving only to be hit in the 2002 downturn.  Coming out of that sales and profits picked back up peaking at $10.79 in 2006.  The latest downturn has hit G-W the hardest with EPS dropping close to 90% as sales bottomed out at $16.9m in 2011.

My thesis on G-W has been that schools can't put off textbook adoption forever.  When I first came across the company I spent a lot of time reading about textbook purchases, as well as interrogating my wife on her experiences.  Some books like math don't change much, but five years without an update to a history book is an eternity.  Even a relatively static book like an English textbook needs to be updated to keep pace with the constantly evolving language.  I read a few articles which mentioned parents who were so upset that they purchased their own textbooks for their children.  I'm glad to see this level of investment on the parents part, but it's sad that it takes years of underinvestment on the school's part before the parents get involved.  All of this is a long way to say that while the current trend is depressing I felt it couldn't go on forever.

The reason I'm writing this post now is because I just received G-W's first quarter results in the mail on Saturday.  It's an old fashioned letter from the CEO explaining the state of the business concisely, without any legalese.  More is expressed in this letter, which is only two pages, than in some 10-Qs that are multiple times as long.

What's important isn't the actual letter, but the content, and the sign that the market is finally turning.  G-W's first quarter results were a 31% increase over last year, and a 5.4% increase over two years ago.  The company is also making significant progress in their digital sales, an encouraging sign for a world going digital.  Operating profit in the first quarter alone is double what the company did in fiscal 2012.  The company earned $3.06 per share in the first quarter.

I mentioned in the beginning that the company was a cashbox when I purchased them.  During the time I've held the shares the company has changed undergone a change.  Management determined that instead of holding tons and tons of cash, they should only hold tons, and use the other ton to buy back shares.  Over the past year share count has been reduced 20%.  The shares were purchased at or below book value, when the outlook has been the worst.  I'd say management did a pretty good job at timing the market with their repurchase.  It's also encouraging to see that management is shareholder friendly, and willing to return cash when reinvestment opportunities don't exist.  The share buyback should supercharge earnings as results improve.

For a cyclical the big question to ask is how much could they ultimately be worth at the top of the cycle?  The company still has $48.94 p/s in cash, and could potentially earn $10-12 p/s in earnings again once the economy eventually recovers.  I don't think it's a stretch to say G-W is potentially worth double where they trade now.

For those interested I've included the financials that I have for the company below.  Before anyone asks where the following is from, it's from a project on unlisted stocks I've been working on, and I'm hoping to unveil shortly.  I believe the dividend data below is incorrect.



Talk to Nate about Goodheart-Willcox

Disclosure: Long GWOX

Friday, October 5, 2012

Biotech net-nets, a value mirage

What looks like a net-net, walks like a net-net, yet quacks like a speculative penny stock. It's a net cash biotech stock. Deep value screeners are littered with these companies. They're small, selling for cash or less, have an incomprehensible annual report to all non-doctors, and are usually in possession of a drug patent or a "game changing" invention. The story in all these stocks is the same, all that stands between them and untold billions of dollars is FDA approval.

I should mention up front that my knowledge of this sector comes from first hand experience. You could say that I paid for my education with biotechs, I'm glad I lost my money early and learned my lessons quickly.

The value mirage

What attracts investors to small biotechs is that often these companies sell for cash or less, and sometimes even below net cash. These companies fall within Graham's definition of a net-net, a company who's net current assets minus all liabilities exceeds the current market cap. The idea is a net-net is irrationally priced, there is no reason a business should sell for less than net working capital. In theory an investor could buy the entire business, liquidate it and receive an investment return. I've discussed this many times previously on the blog but I wanted to highlight it again because biotech net-nets are just a little bit different. The difference between the two is significant, and is the difference between a good investment and a value trap.

It's important to understand where these biotech companies come from. Often they start their existance as a spinoff from a larger biotech or pharmacutical company. The larger company might have some intellectual property that they believe has potential but it's so different from their main line of work that it doesn't make sense to invest. Other times a new idea might not get enough support inside a larger institution, whereas in a dedicated company the idea would be the sole focus. Lastly some of these companies come about when a doctor with an idea does an IPO to raise funds to develop their idea.

The key difference between a biotech net-net and a normal net-net is the purpose of the company. A biotech will be seeded with cash to spend down as they develop their invention (either a drug, or a device) that will eventually be submitted to the FDA for approval. A net-net is focused on delivering a product or service to customers and turn a profit while doing so. Very few net-nets state their purpose is to spend down their assets to zero in the hope of hitting a jackpot with a new product. The problem is this is exactly the mission of these little biotechs. It is fair to say that some net-net's do operate in this fashion, they are affectionatly called melting ice cubes.

But what about the revolutionary drug?

I think most investors understand the premise of these companies, spend down assets in search of gold. What I think most investors miss is how rare it is that one of these companies actually hits gold.

Biotech firms need to be complimented for their marketing hires. In every piece of literature I read I walk away with the thought that the company I'm looking at is on the verge of a breakthrough. Maybe it's my lack of biological understanding, or the companies really are convincing, either way it's easy to be sucked into the reality distortion field.

As I stated in the intro most of these companies have products in some stage of FDA testing, and as soon as the drug is approved the cash rolls in. The problem is what FDA approval actually consists of. There are three stages to FDA trials, stage I, stage II and stage III. After these three stages a drug is ready to be tested on humans. The problem with FDA approvals is that the FDA receives a large number of applications and few are approved.  Out of every 5000 drug submissions for approval only 5 are progressed onto human trials.  And of those five only one is actually approved for sale and distribution.  So a drug has a 1 in 5000 chance of being approved, those odds are higher than the Powerball, but much lower than what company literature would have you believe.

Should anyone invest?
I'm not a big fan of the value investing cliche "circle of competence", but I can't think of a better way to describe investing in cash rich biotech firms. There are investors out there who understand the biology, the approval process, and are able to handicap the odds of a drug's approval.  For investors who have that ability they will most likely be richly rewarded when a few of these companies have products that are approved.  For the rest of us investing in cash rich, or net cash biotech firms is a way lose our money slowly as the company burns down their cash pile on salaries and research.

I'm sure some readers have biotech horror stories, I'd love to hear them, leave them in the comments.

Tuesday, October 2, 2012

Like wine? Then maybe you'll like Oeneo

I don't know if Europe will survive, or if it'll fail.  One thing remains true, the people who live on the European continent will continue to drink wine just like they have for the past nine thousand years.  As long as people are drinking wine they're going to need barrels for the wine to age in, and stoppers to keep the bottles closed, Oeneo (SBT.France) provides both.

Before I dig into the guts of the company here are a few items about Oeneo that caught my eye, and encouraged me to look deeper:

  • The company sold a slow growing division last year for a €12m gain and reduced outstanding net debt by 80%.
  • The company is showing signs of strong growth, net income increased 50% YoY adjusted for the division sale.  Revenue increased 7.8%, and operating income 10%.
  • EV/EBIT of 5.4x
  • P/B of .96x
  • EV/FCF of 6.8x
  • 10% ROE (adjusted for the Radoux sale)

Oeneo is company that plays a vital role in wine production.  The company has two main divisions, wine stoppers, and wine barrels.  The stoppers account for 60% of sales, and the barrels account for 40% of sales.  I originally stumbled across Oeneo when I was looking for competitors to Corticeira Amorim.  Oeneo is similar to Corticeira Amorim in some ways, but also very different.  Corticeira Amorim focuses on cork, and cork products, one product being cork stoppers.  Corticeira Amorim also manufactures other cork products such as cork flooring and cork insulation.  Oeneo is a material agnostic, supplying the wine industry synthetic stoppers, twist off caps, cork stoppers and wine barrels.

Oeneo was an industry leader tackling the cork taint problem a decade ago by inventing a special wash for cork stoppers.  As the industry has slowly moved away from cork Oeneo has changed as well.  The company has expanded their stopper division into synthetic and technical (screw-on) tops.

Oeneo is headquartered and listed in France, but they don't sell the majority of their products in Frane alone.  About two thirds of the company's sales are in non-French Europe.  The sales breakdown is as follows:

  • 35% France
  • 31% Europe
  • 22% US
  • 12% other


The first thing that stood out to me when I looked at Oeneo's past year's results was that I really liked the management's conservatism.  The company sold off a slow growing division this past year and used the proceeds to pay down debt.  The result is that book value jumped €26m and net debt dropped 80%.  As long as a company without debt can pay their fixed expenses they can last forever.  Oeneo is heading this direction, as debt is paid down their fixed obligations decrease.

Here is a look at the past five years worth of results for Oeneo:


The company's results have been fairly consistent over the past five years, the company's net income has bounced between €10m and €22m over the past five years with it spending 3/5 of the time in the €14-15m range.  The company's operating margin has been increasing over the past five years while the net margin has fallen.

The biggest number that stood out to me when putting together my overview spreadsheet wasn't a margin, or profit, but book value growth.  Oeneo's book value stood at €50.8m in 2008 and grew to €126m in 2012, a 19% compounded annual rate for the past five years.  Book value has grown as a results of asset purchases and debt reduction, but most significantly from debt reduction.  The company has reduced net debt by 90% over the last 10 years.

The company's balance sheet is solid with €18m in cash and only €13m in goodwill.  Debt stands at €30m down from €80m.

Why is it cheap?

For a company as consistent as Oeneo I would expect them to trade at a much higher multiple.  Trading for less than book value is usually a sign that a company is destroying shareholder value instead of growing it.  This is not the case for Oeneo which has grown book value by 19% annually over the past five years.

While ROE has shrunk over the past five years as leverage has come down, both the operating and net margins have remained stable.  Even though the return on equity has dropped Oeneo is still producing the same consistent operating results, and as a result of debt reduction is a much safer company than five years ago.

The question "why is the company cheap?" is the one question I can't answer from Oeneo.  The problem is I'm not really sure the company is cheap.  When I look at a long term chart they're trading at close to a five year high.  The shares are trading with a low EV/EBIT multiple, but they're roughly in line with the overall French market.  If any readers have insight on this point I'd appreciate it.

Can they sustain their current results?

After asking if the company's cheap I want to know if the company's results are sustainable.  The worst investment is buying into a cyclical company at the top of the cyclical when profits are at their highest and the multiple is at its lowest.  A fear of mine is buying a cyclical at the top, fortunately Oeneo doesn't appear to be very cyclical.  Over the past five years the company's results are fairly consistent.  Readers might wonder why I'm only focusing on the last five years and not the last ten or fifteen years.  The reason is the company underwent a substantial change about six years ago.  They went from losing money to making a significant amount of money, which in turn resulted in book value growth.

The switch from losses to gains came from a number of factors including a divesture of a wood plant in Iowa, a new CEO, and a change from cork stoppers to synthetic and technical stoppers.  What encouraged me was that the company didn't hesitate to dump underperforming divisions.  This attitude is visible most recently with the Radoux divesture.

Worth an investment?

I haven't decided whether I should invest in Oeneo or not.  The company's book value growth is impressive along with the how relatively stable earnings.  I'm also encouraged with the Radoux divesture, and how management has firmed up the balance sheet.  The problem is I'm not really sure if Oeneo is cheap at this point, or if there are much better opportunities in France.  I'm still poking around the French small cap space and if nothing better catches my eye I will probably consider an investment in Oeneo.

Talk to Nate about Oeneo

Disclosure: Long Corticeira Amorim, no position in Oeneo