Investing is similar to fashion in many ways. There are trends that are short lived, while other seemingly short lived trends become common place. Some fashion trends will never be fashionable again no matter their usefulness. Something like the Dogs of the Dow could be closely approximated to hip/fanny-packs. In theory they're a great idea, but you don't want to be caught with one, or with that strategy.
Other fashion trends appear and have staying power. The ETF boom is like casual Fridays. At first it was alright to leave the coat at home, then a polo and pants were acceptable. Now we've digressed to the point where people wear hoodies to work and showing up in dress pants or a dress shirt makes co-workers wonder if you're interviewing somewhere else. ETF's were similar. A few simple trackers for important indexes as a way to plug a hole in a portfolio. Like casual Fridays the ETF world has descended into craziness. No one is buying QQQQ anymore, now it's a reverse-inverse levered grain fund portfolio for farms with a ticker IOWA.
Investing fashion is driven by what the largest funds who are on TV and file 13-F reports are doing. When the market is in a trough anyone and everyone can buy assets cheaply and buying cheap assets is in vogue. It's also more of a sure thing. In the midst of 2008 investors were uncertain about how durable company moats and brands would be in the "new normal". But most investors were relatively certain that if you buy $1 for $.75 and throw in a profitable funeral parlor, a few F-150s written down to zero and other assorted assets that it's likely they'd get their money back, and potentially a gain as well.
As the market climbs out of a bottom value investing becomes more challenging and more complex. The great deals of the bottom no longer exist that funds can scale into. This means the funds and investors guiding the value investing fashion cycle move on from traditional asset bargains to companies with moats, companies that can compound at high rates in normal business environments, and companies that generate relatively high cash flow yields.
Investors follow the guiding lights that are in magazines, on TV, and in the blogs. There are few original thinkers or original actors in the investing world. The great news is that one doesn't need to be original to be successful in investing.
Now that the depths of 2008/2009 are far in the rear view mirror the idea that anyone can buy a traditional Graham value stock is almost laughable. There are few stocks trading below book value, and few net-nets. Investors are a fickle bunch. If you asked investors right now most would say book value is meaningless and should be disregarded. In a crisis book value and net current asset value are suddenly meaningful concepts only to be forgotten in the wake of gains.
If an investor is looking for a traditional value stock, not just a company selling for a lower P/FCF multiple compared to peers one needs to move down the size ladder significantly. There are no net-nets with two billion dollar market caps. As far as I know there aren't any net-nets with market caps above $100m in the US. Net-nets are in markets that only the brave enter such as Japan, or Vietnam, or in extremely small stocks.
Titanium Holdings (TTHG) is an example of an extreme undervaluation in a bull market. This is a name I've followed for years. I've owned it off and on as it fluctuated between dramatically undervalued to just undervalued. I don't own it anymore, but the stock is still attractive at current prices.
One thing that's nice about small companies is they're straightforward. Titanium Holdings is simple, they own some cleaning supply stores in Texas as well as marketable securities and cash.
The value proposition is clear, they have $1.7m in cash, $348k in securities and $589k in liabilities. Their net cash position is $1.486m. The company has 9.228m shares outstanding and a last trade of $.20 meaning their market cap is $1.86m. If you back out their cash and securities the market is valuing their cleaning supply stories that have a $2.2m book value for $374k. This is a business that made $72k in the past six months. If their earnings run rate continues the market is valuing them at slightly over 2x earnings.
Maybe a cleaning supply store in Texas is only worth $300k, I don't know, but it seems quite low. What I do know is this. With infrequent trading shares were trading with a quote 50% lower recently. A buyer at those prices would have been buying this business for less than net cash, and would have only needed to wait a few weeks to double their money.
Titanium Holdings isn't a great business. The auditors comment on the financials saying the company only discloses the absolute minimum necessary, and if they disclosed more investors might have a different impression. Maybe there is more than meets the eye here? We know the company has a majority shareholder who has used company resources to make bad investments in the past. But the issue isn't the quality of the company, it's the company's valuation.
A savvy investor who keeps their eye on situations like Titanium Holdings can do well. A question is naturally "How do you even buy shares?" Here's a small secret, when a buyer of size wants to get out the price craters. This serves two purposes for an investor, they get to purchase as much as they want at an attractive price. The lesson is never dump your stake indiscriminately onto the market.
At current prices Titanium is still cheap. In a sale they'd probably be worth 50% more, although I'd caution and say that a sale is extremely unlikely to happen. But the company doesn't need to sell for value to be realized. Value will be realized when stocks like Titanium come into fashion again. Wearing neon was a bad decision for years, but then suddenly it was back like the 80s never stopped.
Looking for value in the overlooked margins of the market.
I have owned this one for a while. I always wondered what that comment by their auditors meant but went ahead and bought it anyway. A while back they used some money to buy a space they were leasing. I would rather they'd bought back stock or paid a dividend but that's the way it goes with these companies where no one is looking and management isn't held accountable for anything.
ReplyDeleteThat statement by the auditor is strange indeed.
ReplyDeleteI've always struggled with Titanium Holdings. It's almost too cheap not to own it and like Nate, I have owned it in the past. There are a few things I dislike so much though that I don't own it currently.
Like matjone, I also did not like the purchase of the building.
But the main thing I don't like is that they keep making these investments in micro-cap biotech type companies that I wouldn't touch with a barge pole. Companies that burn money like crazy and that have to keep issuing stock. Atossa Genetics is one that was mentioned in the 2014 annual report. I just wonder what on earth the majority shareholder is doing? There's a few million sitting there on the balance sheet and they keep making these very speculative "investments".
Why not buy a small stake in a company like SODI? A value approach would work out much better than all this speculative stuff. They just seem like terrible investors and you just have to worry that one day they might bet most of the cash on a couple of other biotech stocks. With Mr. Etra in control there is no one to stop the terrible capital allocation here.