Arohan’s investing life

In this gloomy housing environment and news of subprime implosion it is hard to envision when the housing market will turn around. Investors in this sector are fearful and most issues have seen significant value evaporate. Isn’t this the proverbial ‘blood in the streets’?

When the sector does turn around, who will benefit the most? This is hard to predict. If you consider the home builders, it is likely that there will be some restructuring in the industry, weak players would have disappeared, the strongest may still be around, but in what form?

Then, is it wise to consider home builders as investments today? Possibly, but that would be speculation

But the housing supply chain is not only home builders. Consider this: by the time the new home construction numbers start reversing to the upside, the home builders will be looking at improving revenues in the future. However, the supply chain gets activated much earlier. So building and lumber supply companies would have already started seeing an uptick in the business

One company to consider is Louisiana-Pacific (LPX) based in Nashville TN. The company provides lumber/wood products for the housing markets. The stock has suffered with the other stocks in the industry but the company itself is strong enough to survive and come out of the slump bruised but not battered. With a Market Capitalization of 1.74B (as of Oct 31, 2007), the company has 902 million in cash on the books with about 700 million in debt. The company current trades on a Price to Book ratio of 0.9

The company also pays a healthy dividend yielding around 3.9%. I would consider this a just payment for waiting for the rebound

Disclosure: The author is long in this stock

Here is one for the Benjamin Graham disciples. Concord Camera (LENS)

Before I go into details, I would be first to admit that this stock violates my principal of long term sustainable business model. In fact, the investment thesis partly depends on the company liquidating and distributing its assets to the shareholders

The following data is from Yahoo Financials as of Oct 30, 2007

LENS
Market Capitalization: 20.05 million
Stock Price: $3.6
Book Value per share: $8.732
Cash on hand: $34.33 million or $5.871 per share
Total Debt: $2.76 million

Concord Camera manufactures and sells disposable single use film cameras under the Concord and Polaroid brands. It has some other businesses which are insignificant and not germane to this analysis

It is easy to see that the stock is trading far less than the book value. It is also trading far less than the cash on hand, even after you adjust for debt. So in essence, even if you ascribe zero value to its other assets, if the company is liquidated today in an orderly manner, and all debt is paid off, the cash returned to the shareholders would itself represent a 57% profit from today’s stock price

The stock price is depressed for multiple reasons. The single use disposable camera market is in rapid decline (although the company has shown good growth in the Japanese market for its wares, surprising to say the least). The company also had a disastrous foray in the digital camera market, which has been now shut down. The company seems unable to turn a profit in the recent times and its operational execution ability is suspect. There is very little following on the street. And finally, the CEO, seems to be highly compensated, not in keeping with the company performance, leading one to believe that the company is run solely for the CEO’s benefit.

On the positive side, the CEO has been buying stock aggressively over the last year

It would appear to me that if an enterprising individual or institution decides to turn a quick profit, this would offer a great opportunity to take control of the company, return the cash to the shareholders and liquidate. The company may not survive another 5 years in this business anyway as their products are quickly becoming irrelevant

I would just buy the stock at this price and let the market act

Value investing depends on the investor’s ability to find what is called an intrinsic value of the stock. If the intrinsic value is more than the current stock price, the issue is determined to be undervalued. Different value investors have different thresholds of undervaluation at which they will be willing to invest. This ‘margin of safety’ was made popular by Benjamin Graham and is followed today by some of the great value investors of our time

We use the numbers a bit differently. While the fundamental indicators provide us with assurance that the stock is not overly valued in the market, the actual buy decision also depends on the health of the business and whether it can be sustained over a relatively long period of time. It is this sustainability that allows time for the stock price to reach its full potential. In the end, we are looking for stocks that are reasonably valued by traditional measures but the company’s business is strong and growing. It is this strength and growth that provides us with additional margin of safety.

Is this what is called ‘Growth at a reasonable price’ or GARP? Possibly. But we will not buy companies that are undervalued and growing but we feel have some weakness or vulnerability in their business models that can make the growth disappear in short order. Do we know enough for every investment we make to make this determination? Most likely not. To a certain extent, investing is an art. If it were a pure science, the market would be completely efficient

In the end, the fundamental indicators are just an aid to an investment decision, not a determinant

Syntax-Brillian (nasdaq: BRLC) stock has taken a beating over the last one year. This is in face of extreme growth and steady acquisition of market share. This blogger feels that the stock currently is severely undervalued and offers a very attractive price point for entry

The Market: The company produces lcd televisions which is a fast growing market segment. In North America, the rapid growth coupled with the planned obsolescence of regular television (by 2009 all broadcasts will be HDTV) assures significant demand in the next few years. The company also sells its Olevia brand of TVs in China and South America, both expanding markets. The Chinese market is even more attractive today as the 2008 Olympics will drive significant HDTV sales growth, a vast majority of which will be lcd tvs.

The Company: Syntax-Brillian has put up over 200% annual growth figures over the last year, is profitable and is trading at a ttm PE of below 10. The company also appears to be focusing on international markets including China and South America, as well as Europe with its acquisition of Vivitar that added a valuable distribution channel for the company The company has targetted sales of $1B in the FY 2008 that appears to be achievable. For the record, the current company market capitalization is hovering in the $400 million range

The Stock: Several factors seem to have contributed to the current undervaluation of the stock. Several secondaries in the last one year, a severe short position, troubles collecting receivables from one particular customer in the past, etc. In addition, the management team appeared to have little credibility (despite strong execution) in the past.

However, these problems are being resolved. The company does not plan to conduct any more secondary equity offerings any time soon (vowed to use debt). There has been a recent management overhaul including a change in the CEO and the CFO. There is a renewed focus on re-doing the way company does business in China. All these changes along with their 120 day action plan will help bring the investor confidence back in the stock. In this situation, the large short interest appears to be another attractive feature of the stock as with the improving fundamentals, the short shares need to be bought back and this will make the stock price improvement (to match the fundamental of the business) even more quicker

It would be interesting to watch how the stock performs through the next earnings report. Meanwhile this blogger is long and strong on the stock and may even add more on any further weakness