You have to be in the game..

Did you see the meteor shower recently?  Maybe you were aware of it, or had heard about it, but you just weren't outside in the middle of the night.  Meteor showers are tough, they're late, they don't work around our schedules, and they are hit or miss.  You might clear your schedule, stay up late and then the weather is cloudy.  And even after all of that there are no guarantees, meteors shoot by all night, but if you aren't looking in the right spot you miss them.  In many ways investing in small forgotten stocks is very similar to the meteor shower.

There's an expression used to talk about many of these forgotten stocks, they're called "one day" stocks.  The reason for that is the stock might lay dormant for months, years, decades, and then in a single day earn investors a satisfactory return for the entire holding period.

The perverse thing about one day stocks is if you sell the day before the "one day" you have terrible returns.  If you are lucky enough to invest a few days before "one day" you might have a 5x or 10x return on a very short holding period.

These sorts of stocks are radioactive to investors with performance metrics to hit.  The reason is there are no steady gains, and in many cases no movement at all quarter to quarter.  The stock purchased at $37 three years ago is still quoted at $37.  A little secret is a fund manager would prefer a stock that appreciates from $10 to $13 verses one that trades at $37 for years before jumping to $180.  Small and steady gains mean liquidity and numbers to show at quarter end.  Our one day stocks offer none of that.

The trouble with one day stocks is you have no idea when that one day might be.  Trust me, there are plenty of us who have tried to read the tea leaves, interpret signs and guess at the one day.  But guessing doesn't work.  Just like the meteor shower you have to be out and waiting otherwise you'll miss it.

In the past I tried to find the best cheap stocks.  I'd look over a set of stocks trading for a low multiple of earnings or book value and then throw out ones that seemed questionable.  Questionable not because of value, but questionable as to whether I'd ever see that value realized.

I might as well confess my value investing sins.  I've passed over stocks at 1-2x earnings because of bad management.  I've passed over stocks at 4x earnings because it was a boring business in a bad industry.  I've passed over so many stocks at screaming cheap multiples for so many reasons I'm surprised I even have returns!

What I've discovered is this, when a stock is obscenely cheap it will eventually have a "one day".  The thing is you don't know when that's going to happen.  In the past year two cheap stocks, Vulcan International and Randall Bearings both had their one days.  It seemed like Vulcan would be cheap forever.  This was a company with a CEO who required shareholders to pester him and then sign an NDA to receive financials.  How could this stock ever see value realized?

Or how about Randall Bearings?  I discovered them at $2 and they're selling out at $42, quite the win, except for all of the red flags.  The CEO took an excessively large salary.  The largest supplier owned a large block of stock to prevent a sale.  Shareholders had to take them to court before the company was forced to mail out financials.  But with all of that the "one day" still happened.  The CEO and largest shareholder decided they wanted to own 100% of the company and made a bid.  This things eventually happen.

I'm tired of trying to guess what the next one day stock is and have adopted the meteor shower attitude.  It isn't enough to be aware that these stocks exist.  You can't try to read the clouds, you have to stay up late, sit outside and hope and wait that the clouds lift and your patience is rewarded.  It might not work the first time, or the second, but eventually you'll reap those gains.

My new mantra is that whenever I stumble across a cheap "one day" stock I'm going to pick up a small position.  I know that eventually 5-10% of my portfolio might be in dead names that don't move year to year.  But I also know that over time that 5-10% will also provide me with some nice surprises on the upside.  You have to be in the game to score, and the only way to score with these sorts of stocks is to hold your nose, buy a few shares, and then forget about them for the next decade.  Once you do that you'll be pleasantly surprised by what happens next...

6 comments:

  1. The purchase of Randall Bearings by the new owner, (former largest shareholder), must not have been cheap. Company is now private. The shareholders who were bought out probably made out VERY well. Vertical merger?

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  2. The purchase of Randall Bearings by the new owner, (former largest shareholder), must not have been cheap. Company is now private. The shareholders who were bought out probably made out VERY well. Vertical merger?

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  3. $45.00? I'm surprised the shareholders who were bought out didn't drive a harder bargain, considering the amazing profitability of BOTH companies. Added plus - the new owner is no longer hindered by regulatory constraints. Were the other shareholders well informed?

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  4. Bringing together Randall and its main supplier should help to lower prices in this lucrative and highly competitive market.

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  5. There are pretty serious federal regulations governing this type of purchase of a (then) public company (supplier of the other company already owned). How did the buyer circumvent them?

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