tag:blogger.com,1999:blog-2149523431587168680.post993355340253247670..comments2024-01-16T00:12:23.220-05:00Comments on Oddball Stocks: Value momentum, speculating on recovering net-netsNate Tobikhttp://www.blogger.com/profile/05660387777171986124noreply@blogger.comBlogger11125tag:blogger.com,1999:blog-2149523431587168680.post-50273971069681737512013-02-04T23:33:17.331-05:002013-02-04T23:33:17.331-05:00One thing you need to be careful of on NCAV is the...One thing you need to be careful of on NCAV is the actual value of the current assets. <br /><br />An example is bankruptcy, from my experience in bankruptcies, despite the first lien lender only lending on 85% of AR and 65% of inventory, they usually end up under water in a bankruptcy. This is because, the cost of liquidating inventory and collecting AR is time consuming and costly.<br /><br />If a company currently trades for $10/share and has $3/sh in AR and $10/sh in inventory with no liabilities, but only generates $0.10 / share in earnings per year, is it a good buy? Essentially my read would be that selling the inventory is costly and to run the business they are only able to generate a low income and so despite being below NCAV, it is not a good buy. Companies that have very low margins are good examples of this issue.<br /><br /><br /><br />Akhttps://www.blogger.com/profile/09646479250565629294noreply@blogger.comtag:blogger.com,1999:blog-2149523431587168680.post-20183642243308530302013-02-04T17:15:05.439-05:002013-02-04T17:15:05.439-05:00Congrats on HLYS. I looked at HLYS a couple of tim...Congrats on HLYS. I looked at HLYS a couple of times in the past. Couldn't get myself to buy it. <br /><br />Both of my young kids are permanently wearing their shoes though. One thing I can say is their shoes are really well made, surviving my kids' abuse, better than Nike or Adidas. Johnhttps://www.blogger.com/profile/14682393043392310140noreply@blogger.comtag:blogger.com,1999:blog-2149523431587168680.post-10483890742585156472013-02-04T10:02:04.503-05:002013-02-04T10:02:04.503-05:00Hey Nate - I really consider this as a subset of t...Hey Nate - I really consider this as a subset of the usual value investing phenomenon. I often joke that: i) most people will only buy a share AFTER it's up 50-100%, and ii) I'm often thinking of selling when other people are finally thinking of buying! Why the stock begins rallying is often a mystery - maybe more people noticed how cheap it is (probably not), there are takeover rumours, earnings jumped, a catalyst has attracted attention, who knows..!? It's v unpredictable, and you may never figure out why - all good reasons for portfolio diversification.<br /><br />Should you continue to ride stocks like this? Hard to answer - the 'easy' answer is to continue holding with a stop loss, maybe you'll milk another 50%+, while only risking (say) 10%. Yeah, easy in theory, but the smaller/less well-known the stock, the more likely you can wake up in the morning with the stock down 30%, and you kick yourself for being so greedy. You also lose track of what the potential upside might be, so it becomes increasingly difficult to figure out whether it would be better to sell your holding for a new high-potential buy.<br /><br />If you can identify the reason for the stock rally, that will definitely assist in making a decision. Honestly, I usually just sell - I always have 100%+ potential buys on hand, so they generally look more attractive. However, look at my Trinity Biotech $TRIB writeups/comments - it's clearly reached my fair value, but I believe there could be attractive further upside as more & more growth investors pile in.<br /><br />Cheers, Wexboy<br />Wexboyhttp://www.wexboy.wordpress.comnoreply@blogger.comtag:blogger.com,1999:blog-2149523431587168680.post-73794761709333357822013-02-03T18:32:10.404-05:002013-02-03T18:32:10.404-05:00I know someone who does something similar. They no...I know someone who does something similar. They noticed that a lot of cheap stocks will swing wildly around IV in a year. They keep a watch list and when the stock drops 30-40% on no news they buy, then they sell when it shoots past IV. Nate Tobikhttps://www.blogger.com/profile/05660387777171986124noreply@blogger.comtag:blogger.com,1999:blog-2149523431587168680.post-66811428891120465462013-02-03T18:30:40.235-05:002013-02-03T18:30:40.235-05:00I agree, it's really insurance against errors,...I agree, it's really insurance against errors, a smaller discount means less unknowables, and more assurance that the business will mean revert soon.Nate Tobikhttps://www.blogger.com/profile/05660387777171986124noreply@blogger.comtag:blogger.com,1999:blog-2149523431587168680.post-52096997975528456222013-02-03T18:28:18.903-05:002013-02-03T18:28:18.903-05:00How would I do that? I don't have access to a...How would I do that? I don't have access to anything I could backrest with that I know of. If you have the tools I'd love to know the results. Nate Tobikhttps://www.blogger.com/profile/05660387777171986124noreply@blogger.comtag:blogger.com,1999:blog-2149523431587168680.post-24213052070279229532013-02-03T18:23:33.581-05:002013-02-03T18:23:33.581-05:00Have you backtested this? (i.e. can you rule out o...Have you backtested this? (i.e. can you rule out observation bias?)Fabiannoreply@blogger.comtag:blogger.com,1999:blog-2149523431587168680.post-2738934206180473332013-02-03T18:22:12.631-05:002013-02-03T18:22:12.631-05:00Have you backtested this?Have you backtested this?Anonymoushttps://www.blogger.com/profile/17289283859122322119noreply@blogger.comtag:blogger.com,1999:blog-2149523431587168680.post-7272040857012913792013-02-02T14:43:36.284-05:002013-02-02T14:43:36.284-05:00Yes, I have seen some situations like that as well...Yes, I have seen some situations like that as well. A company trading at a small discount to NCAV posts a good quarter and the stock price jumps 20% the next day. I still don't like investing in them though and I think that is mainly because of the opportunity cost involved.<br /><br />If market sentiment sours and all stocks drop like crazy you will be invested in a mediocre net-net that has all of a sudden become a lot cheaper. Chances are that at that moment there are many other, higher quality net-nets available. If you don't have much cash available at that moment you have paid a big price for investing in that stock.<br /><br />I do think that if an investor takes a basket approach and buys a bunch of these he will do well though.<br /><br />What I have also observed and is somewhat related to what you describe is tax loss selling. I have seen some cheap micro caps post a disappointing quarter late in the year and the stock will just get killed because it dropped to a low for the year and tax loss sellers dump it. A recent example might be Servotronics (SVT) in November 2012. I didn't buy it unfortunately.<br /><br />I think it is very profitable to buy in a situation where you suspect tax loss selling plays a role. It is different from the situation you described because with SVT, at the low price there was a decent discount to NCAV. It is similar in the sense that momentum (selling pressure) plays a role. After the new year the situation changes and the selling pressure lessens. There's a good chance that the stock will recover quickly and significantly.<br /><br />This year I will try to make one or two small buys late in the year to try and take advantage of this.Paulhttp://www.valueinvestingblog.netnoreply@blogger.comtag:blogger.com,1999:blog-2149523431587168680.post-64913105255297087612013-02-02T10:41:09.576-05:002013-02-02T10:41:09.576-05:00I just had a pretty decent 30% return on HLYS, a c...I just had a pretty decent 30% return on HLYS, a company that was losing money selling a fad product. Their only thing was they had all of their NCAV in Cash and were burning 10 cents a share per year. In that rate, they had another 20 years to burn all cash unless they did something stupid like buying another company. <br /><br />Interestingly, the stock most of the time would sail close to their NCAV and once an year, it will for no reason go as low as 40% of NCAV. Past year it went that low during the Libya unrest. I just waited for those times and bought some shares. The company finally they got sold very close to NCAV recently. <br /><br />A few things I learnt in this was that Net-Nets can't be bought unless you get at least 20-30% discount. All Net-Nets if they make money or not, will at a random time go 30-40% less than Book Value for reasons most of us can't understand. The less the Margin of Safety on Net-Nets, it is very difficult to make any money on them.Srini Rajahttp://5reds.comnoreply@blogger.comtag:blogger.com,1999:blog-2149523431587168680.post-19040673979003407432013-02-02T06:04:07.408-05:002013-02-02T06:04:07.408-05:00Nate,
Here is my view: a margin of safety isn'...Nate,<br /><br />Here is my view: a margin of safety isn't just a way to give us profit when the business reverses to mean (i.e. Bought at 33% discount of NACV, when the value gap closes, you reap a 50% return). But it is also an insurance against our mistakes, mistakes in the valuation and mistakes in understanding the situation. When a mediocre business is trading close to NACV, it doesn't offer such margin of safety, unless there is something else in the business to compensate for that. It doesn't mean it's not investable. But the speculative component becomes the dominating factor. <br /><br />I suppose it also depends on how concentrate your portfolio is. In my case, I'd rather swing the bat when the odds is overwhelmingly in my favour. If so, the opportunity cost is high for me to accept a net-net trading at NACV.Johnhttps://www.blogger.com/profile/14682393043392310140noreply@blogger.com