I was screening and found this microcap. The company’s stock costs $12 and it’s BS shows about $13 cash per stock, the company has been profitable since forever, this company also has almost $0 debt… Could this ever be a wrong buy?
flushdraw Wrote: ------------------------------------------------------- > I was screening and found this microcap. The > company’s stock costs $12 and it’s BS shows about > $13 cash per stock, the company has been > profitable since forever, this company also has > almost $0 debt… Could this ever be a wrong buy? Without more detail, yes.
What is the companies name? And it could be a wrong buy depending on the circumstances.
flushdraw Wrote: ------------------------------------------------------- > I was screening and found this microcap. The > company’s stock costs $12 and it’s BS shows about > $13 cash per stock, the company has been > profitable since forever, this company also has > almost $0 debt… Could this ever be a wrong buy? So the question is why is the stock selling way below book value… or even, how did the stock even get to below book value. Presumably, if the stock went below book value, it can get even further below, which means it would be a wrong buy. Even if there is no reason to be selling below book value (presumably it got there because of a bankruptcy scare or for bad publicity during an IPO), you also need a reason that it would one day get up to at least BV, ie some kind of “catalyst” - some event that will get eligible buyers to start buying it. Since it’s a microcap, that probably means that big investment managers won’t be dealing with it or screening for it, so you need to think of something that will bring the company to the attention of individual investors. A well placed article or blog piece - perhaps written by you, even - might do the trick if the company is small enough.
bchadwick Wrote: ------------------------------------------------------- > Presumably, if the > stock went below book value, it can get even > further below, which means it would be a wrong > buy. bchadwick - I agree with most of your post except for this line. A stock cannot be a “wrong buy” just because it can fall further in value. A stock selling above BV can depreciate in value. That’s equivalent to saying that purchasing an overvalued stock can never be a wrong decision since some greater fool will presumably pay you more to relieve you of your ownership stake. Flushdraw’s situation is a net-net, so BV for all intents and purposes is not the main issue. I don’t feel like speculating as to the cause of the undervaluation so my contribution to this thread is over until more information is disclosed by the initial poster. For all I know the companies CEO could have set it’s sole warehouse on fire. The possibilities are endless.
ValueAddict, I think we agree - I just wasn’t clear. I meant that it would (retrospectively) be a wrong buy if it went further below book value. I agree that the distinction between “right buy” and “wrong buy” ultimately is about the (forward-looking) reward/risk ratio and its fit with both the rest of the portfolio and the investor’s own risk appetite.
if there is a 100% chance that it will be profitable into perpetuity and trades below book value, it is impossible to go wrong. there’s a reason why canadian banks trade above book value. the whole system would have to die before they went bankrupt and until then, they will make 15% ROE into perpetuity. if you company has $13 cash, $12 mkt price and no debt. unless its going to lose $1 in legal fees, make no returns off any assets it can buy etc, and then make the average ROE on the remaining $12 in cash into eternity (while carrying an equity risk premium) or make average Rf rate (if trading on a perpetuitous schedule), then it is IMPOSSIBLE to go wrong. if its trading at $13 and has $12 in cash, it seems like the market is discounting the company in a way that it cannot make any returns from investing that cash, but can only make mediocre returns investing it in non-productive assets.
I think the key part of Matts statement is “if there is a 100% chance”. Obviously there is not. It could be that the company’s management are imbeciles. There may be rumours of litigation - there are many possibilities as to how a company trading below it’s BV may not be able to realise a return for its investors. On bchadwicks comment on bringing the stock to the attention of individual investors; surely it’s more important to thoroughly investigate the firms future profit potential. After all, if the company has the ability to increase shareholder wealth, it will naturally come to the attention of investors.
Matt, wouldn’t you say that a stock trading below book value indicates that at least someone with buying power thinks something can go really wrong? If you analyze it and decide that they’re unrealistically scared, that’s one thing, but if you don’t know why someone would be thinking this, you should be extra cautious. If you’ve thought about it for a while and still have no idea why people would be scared, then maybe put on a small position and watch it. Even the analysis of $1/share in legal fees is presuming a liquidation, or at least a really big lawsuit, no? Soddy, my point was more about looking for a catalyst to realize value and that if it’s a microcap, you’d have to have a slightly different take on what the available catalysts are. I’m not advocating writing a blog piece for a catalyst as your primary investment case.
bchadwick Wrote: ------------------------------------------------------- > Matt, wouldn’t you say that a stock trading below > book value indicates that at least someone with > buying power thinks something can go really wrong? > If you analyze it and decide that they’re > unrealistically scared, that’s one thing, but if > you don’t know why someone would be thinking this, > you should be extra cautious. If you’ve thought > about it for a while and still have no idea why > people would be scared, then maybe put on a small > position and watch it. Even the analysis of > 1/share in legal fees is presuming a liquidation, \> or at least a really big lawsuit, no? yeah i'd like to know what stock this is b/c i've never heard of a profitable stock trading below its free cash balance. i've heard of an unprofitable company trading below its free cash balance but it really doesn't make sense less some litigation issues that it would trade in such a way. soddy's management call might be a good one as investors might believe they will not see a of all that cash. can you tell us the company now…?
MattLikesAnalysis Wrote: ------------------------------------------------------- > > yeah i’d like to know what stock this is b/c i’ve > never heard of a profitable stock trading below > its free cash balance. Only time I ever heard of it was during the Great Depression.
mwvt9 Wrote: ------------------------------------------------------- > MattLikesAnalysis Wrote: > -------------------------------------------------- > ----- > > > > yeah i’d like to know what stock this is b/c > i’ve > > never heard of a profitable stock trading below > > its free cash balance. > > Only time I ever heard of it was during the Great > Depression. yeah when 80% of the 1929 market participants went missing. you guys are still playing the market right?
This is where it helps to be a big deal. Buy enough of the stock to have a controlling interest, and direct management or replace management to improve the company’s position or transparency. There’s your catalyst.
Look at institutional holdings and analyst coverage. Also what industry is the company in? Obama is cooking up all kinds of reforms which could exert pricing pressure on the industry.
You already talked, it’s time for you to give us the name of the company 
If he screened it on google i’d say its got to be ARII (price 10.9, c/ps 13.82)
^except this company does have debt.
Yeah, need D/E of 0 in your screen
It is a microcap in a emerging country, it has zero sellside analyst coverage, not enough liquidity for institutionals… I didn’t do any further research and bought for my pa. In 3 or 4 years I will come back to post the name
^ Jerk