I passed on these two, now they're worth considering

Information, investors are starved for information.  What were sales last month?  How many items shipped?  Did costs rise or fall?  The more detail the better, the more granular the better, investors crave as much information as possible.  The biggest hurdle for most investors to investing in small unknown companies is the illiquidity, but that's a false argument for many.  Most investors aren't running millions of dollars, and buying and building a $25,000 position is possible in every stock I've ever written about.  The real hesitation comes from the lack of information, current and frequent information is a security blanket for investors.  It seems unbelievable that anyone could invest in a company that only publishes an annual report once a year.

As a blogger my goal isn't to cover the universe of overlooked stocks with exhaustive write-ups.  While this blog provides a good amount of analysis it also provides something else, something more valuable, detailed information on companies that are so hidden that some don't even have websites.  I view myself as a cross between an analyst and a journalist.  I uncover interesting opportunities and analyze them, yet at the same time I convey a story about the company to readers.  I recognize that maybe 1-5% of my readers might be interested in investing in any given idea, I provide enough for them to get started and hit the main points.  Yet I try to keep the attention of the other 95-99% by explaining why this company is worth looking at, and why certain items are important.

In this post I want to follow up on two companies I wrote about over the past year, both were worth further investigation.  Over the course of the past year the results from both companies are considerably better than expected and each company is probably a better purchase now rather than when I first posted about them.  Without further ado…


Back on January 10th I wrote about Costar, a company that produces security related products such as cameras and surveillance systems.  For this post I re-read my January 10th post and I'll be honest I'm not that proud of it.  In a lot of ways I think I disagree with myself from January.  The essence of the post was why I avoided Costar.  The items in the post are all true, and they probably all make sense, but looking back I realize why I really passed on the company.  In early January my youngest son was in the hospital for a period of time, during that time I read the Costar filings on my iPad while he napped.  Trying to focus on an investment idea while a baby is in a perilous situation is not wise.  I don't think I was in the right frame of mind to truly reflect on Costar as an investment, or think clearly about the situation.  Additionally there was the emotional link of this company to sitting in the ICU.  For inquiring readers my son is a perfectly healthy 10mo old now, for that I'm extremely thankful.

I'm glad I took a look again, their annual report is out and the company looks very interesting.  Here are the highlights:

  • NCAV of $3.89 against a last trade of $2.06.
  • They earned $.41 a share last year
  • P/E of 5
  • FCF of $1.88 p/s in 2012
  • The company used all of their free cash flow to repay debt.
One of the biggest issues I had against the company was their debt, management wisely repaid it and cleaned up the balance sheet.  Additionally sales and earnings are growing.  It appears the company's operating leverage is now working in their favor, sales grew 12% and operating income grew 1459%.

Not much else has changed except that the company is in much better shape financially than they were five months ago.  There is no reason this company should be trading below NCAV, as a stretch they might even be worth book value ($5.55).

Randall Bearings

If there is a poster child for unlisted companies, Randall Bearings is it.  The company is cheap beyond reason, in my post last year I noted that without a LIFO reserve they would have earned $4.04 a share, double the market price at the time.  Over the past year the stock price has also doubled, my $200 position became $400, beer money as some call it, maybe if they're drinking Chimay.

Randall Bearings is a manufacturing company located in Lima Ohio.  They manufacture bronze machined parts.

Here's why they're interesting:
  • Book value of $14.20 p/s vs. $4.60 last trade.
  • EV/EBIT 4.48
  • EPS $2.58 p/s
  • P/E 1.78
I passed for a number of reasons the three biggest being, the debt, their reincorporation, and a shareholder lawsuit.

The company's debt situation has become worse over the past year.  The company added $1.55m in additional debt.  The company invested $1.5m into their facilities to position themselves for future growth.  In theory the new debt should pay for itself with increased earnings.  Unfortunately it appears no matter how much the company earns the market doesn't care.

The second item holding me back was the company's reincorporation from Delaware to Ohio.  As a commenter on the last post noted, Ohio has stringent anti-takeover laws.  I have done further research on this point, and talked to someone with a copy of the shareholder register.  From what I understand now there is no possibility for any merger or corporate action unless the CEO himself initiates it.  The CEO and the largest shareholder, which is also the company's largest supplier own more than 50% of the company.

The last issue pertains to a shareholder lawsuit that entangled the company for years.  A shareholder sued the company with a records request lawsuit in the Delaware courts.  The suit dragged on for years with the resolution being that Randall is required by the court to distribute an annual report to shareholders yearly.  More than anything the lawsuit speaks to the quality of management at the company.  When a CEO is willing to use company resources and fight shareholders, who have a legal right to financials it speaks volumes.  

With all these things considered it's still worth noting how cheap the stock is.  The company has $2-4 p/s of earning power on a conservative basis.  Randall is easily a two pillar stock, one where earnings and book value support each other.  It's conceivable that Randall could be worth $15-20 a share.

It seems that management has no interest in unlocking value for shareholders, but that doesn't mean they aren't focused on growing value.  Management has continued to grow book value, and is focused on growing earnings as well.  If shareholders can get comfortable with managers who are only focused on themselves they might be able to ride along for a wild ride.

Final Thoughts

I want to spend a minute talking about the role stocks of these type play in an investor's portfolio.  I am not a believer in investing concentration unless the investor has a control position at a company.  If they don't I believe it's wise to spread investments across many holdings with similar return profiles.  Companies like Randall and Costar could fit in a portfolio where there are numerous other deep value or net-net type investments.  In a portfolio with 10 such holdings it's reasonable to think that one position might reach full value each year.  It might seem crazy to wait 10 years for full value, but if that means a stock might quintuple, maybe it's worth the wait.

Disclosure: Long Randall, I might buy Costar shares.


  1. Nate, whatever came of the situation on Deaf Talk Interpreting? Did you speak with the advisor or the advisee (or the local authorities!)?

    1. I wrote a letter but never contacted the local authorities. I've debated contacting the SEC, I've contacted them before and it seems like a black hole.

    2. Yeah, if there's anything I've learned from reading about escapades with the SEC (e.g. Ackman, Einhorn, Madoff) is that they either think you're shorting the referenced Company or they're so understaffed that they can't adequately investigate 1/20th (at best) of what they're brought.

      Einhorn has a whole piece on this in his book.

  2. Hi Nate,

    Sorry to hear about your son.

    I had a 5mins cursory look at CSTI.

    When we invest in net-net, we usually don't hope for a liquidation, because liquidation is messy and costly. Instead, we aim for reversion to mean. A company as an ongoing concern only worths its book value if it can earn its cost of capital. CSTI's FCF in 2007-2011 are all negative. You can also see its equity value has been shrinking. I don't see a consistent earning power here. There is no case for reversion to mean here. Without it, the downside risk looks big.