Arohan’s investing life

To find some of the best value opportunities, it becomes necessary to look at the small and micro capitalization companies. It is then important to note that the following two conditions will be present for most of your time of investment in these positions

1. The stock remains mis-valued for a long period of time
2. The more illiquid the stock is, the more the prices will move in either direction over short periods of time, often without any apparent reason

This is certainly true for one of the micro-cap stocks we own and have highlighted here before. Express 1 (XPO) released earnings about a week ago, and in this investor’s view, they were great. The company is able to maintain its 20-25% growth rate in sales. The company PE ratio is still around 9. And the fact remains that starting in Q1 2008, the company will start accumulating cash at a good clip once the management earn-out payments no longer need to be made

So what happened after the earnings release?
1. The stock was undervalued before. After the earnings the stock price declined further (10% or so on average)
2. The number of shares traded every day were quite high compared to a typical day for this stock
3. The stock prices have been very volatile even within one day of trading

Does this mean anything?
Not really if your investment thesis is still intact and you have a long term horizon.

But how can the market bear the price to go down so much? And the volatility?
If the markets were efficient, there would be no value investing

All this means is that Mr Market, for whatever reason, keeps providing these opportunities for a shrewd investor to buy $1 for less than $1. These opportunities are more frequent and more amplified in stocks of small/micro capitalization companies since their shares are likely to be less liquid and more volatile.

The shrewd investor generally does well to take advantage of these opportunities. Please note that this calls for the investor to be confident in his or her investment thesis and buy when the general market sentiment on this stock seems to be negative (and similarly sell when the market is euphoric).

Yours truly did add to his position in the example stock mentioned above. It remains to be seen if he was a shrewd investor. Please check back in 6 months or so

Express 1 Expedited Solutions (XPO) provides transportation and logistics services all across North America. The company is small (about 35 million in market cap) with solid balance sheet and trades at a PE less than 10 and a P/S of 0.76. The P/B ratio is quite high for a value stock but this is not necessarily bad. The company operates an ‘asset light’ model where they own very few of their own trucks and use contracted drivers for the most part, this will almost guarantee a high P/B value

This is a company that was formed several years ago with the merger of Express 1 and Segmentz, to a disastrous result. The merger added several new markets and businesses (aircraft charter services) that the new company had a difficult time managing. As a result the company floundered for a while. A restructuring effort saw the company slowly getting rid of the non-core and unprofitable enterprises and the company is back on a growth path. It is now growing at a nice clip of 20-25% on the revenues and has been profitable for a while

For a small and growing company like this it is important to find out if the management is committed to the company. In this case, about 25% of the stock is owned by the insiders, which is a good sign. In addition, Peter Lynch’s foundation is rumored to own about 3% of the stock

The management is also veterans of the industry, seem to be quietly building the company up. You will not find too many press releases coming out of the company. The management seems to care a lot about the shareholders too. This is the only company that I have owned that has ever sent out a note in the mail to remind me to vote on the shareholder’s proposals sent earlier

And lastly, I see their branded trucks on the roads very often in Michigan. The business seems to be good