Tougher Ideas Don’t Get You Bonus Points
Let’s talk a little about Automodular, which will lead to a bigger point about value investing in general.
The company came out with preliminary 4th quarter numbers on Thursday, and they were terrific. It earned $0.32 per share in the quarter, which was nearly double what it did last year. Actual financials are going to come out this week sometime, but my back of the envelope math indicates the shares are worth about $2.60 each. When I first bought in late 2013, my thought was they’d be worth about $2.70 at this point, including the dividend.
It was a pretty easy analysis, I basically just took 2013’s cash flow and extrapolated into 2014, while putting aside some reserves for shutting down plants. The reserves were very plainly disclosed.
At the time I thought it was a pretty easy opportunity. I even went as far as calling it “virtually guaranteed,” because hey, qualifiers mean I don’t get sued. I probably bought a little early, but keep in mind I also collected a dividend worth $0.18 per share in the meantime. That means my cost is nearly $2, while shares are currently worth about $2.60.
(Keep in mind that I bought this stock personally before I “bought” it for the fund. Think of the different prices as just an accounting entry)
Automodular was a really simple play. All I needed to do was spend an hour or two on it, crunch the numbers, and just hold it until liquidation. Yes, there’s a risk of management acquiring something stupid, but I was buying at a nice discount to assets. I got the company cheap enough I didn’t really care about the risks.
That’s pretty much the whole thesis explained in about 150 words. It’s an incredibly simple idea. And yet, I follow dozens of other value investors and didn’t see any of them mention the company once.
Fiat is a favorite of the value investing community. Compared to other automakers, the company trades at a discount when looking at almost every metric. I don’t want to discount this call, because it’s been successful. But when analyzing a company, which is easier, Automodular or Fiat? It would take me far longer to understand Fiat than it did Automodular.
Which leads me to the point of this. You do not get bonus points if an idea is hard.
Most micro and small-caps are simple businesses. They do one thing, they sell a few models, or whatever. There are a few exceptions like MRRM, but even that business was easy to analyze.
Even Hudson’s Bay Company was easy to analyze. To be honest, I spent probably a fifth of the time on the retail side of the business that I spent analyzing the real estate. HBC’s retail operations aren’t the story, it’s all about spinning out that real estate. It’s a simple thesis I can explain to my girlfriend in just a few minutes.
Picking stocks is hard. Think about analyzing Apple. You have to worry about the tech market in general; about laptops and desktops and phones and tablets and now even watches. And then, you have to worry about the valuation you’re paying for the company, and then the market’s sentiment surrounding it. And then, you have to identify the catalyst that’ll take it higher, even though that’s a crapshoot even for micro-caps.
Meanwhile, all I worry about with my motley group of forgotten companies is buying $1 worth of assets for 50¢. I care about the business, but that’s almost secondary. All I’m looking for is a catalyst that will return the shares to the level of the assets. Sometimes, I don’t even know what the catalyst will be. Reitmans? I have no idea. Winnipeg Free Press? Nope. Village Farms? Same thing. And so on.
Buying at a big enough discount erases a lot of sins. So does having a simple investment thesis. It lessens your chances of making a mistake. Just look at me and Extendicare. That’s about as complicated as you’re going to see around here.
When you’re investing in the dregs of the market, there’s this desire to prove people who told you that Winnipeg Free Press is a trash business wrong. Some value investors respond to this by trying to find obscure opportunities, either in size or complexity. There’s probably some desire to be seen as a smarter guy by their peers as well.
After more than a decade of investing, I think I’ve gotten pretty good at identifying values. The more I do it, the more I desire to keep things simple. It’s easy to talk yourself out of an opportunity because it was warts on it, without realizing that every company trading at 50% of book value will have warts. And ironically, if it doesn’t, that’s probably the biggest wart of all.
Buffett said “I don’t look to jump over 7-foot bars: I look around for 1-foot bars that I can step over.” I think some of us forget that from time to time, including me. Buying simple opportunities isn’t sexy, but the results are pretty good.