OBN 9 - Bank of Utica - Iss... by on Scribd
Looking for value in the overlooked margins of the market.
Act Now! Bargins disappearing quickly...or maybe not?
When the market starts to slide financial news starts to read like heated fans in a close sporting match. Suddenly every little flinch and flick is of utter importance and vital to the final outcome. As an investor it's really easy to get drawn into that mentality. If we're honest with ourselves we'd admit that it's fun, there activity, there's news, there are big gains and big losses. I think humans crave activity verses boredom. There is also a mentality that if you don't buy quickly then you'll miss out on opportunities until the next bear market. And given how quick bear markets seem to be these days you definitely don't want to miss out. Or do you?
Before I go any further I want to dangle out a little maxim that is useful in investing as well as in real life: If someone is pressuring you to buy something quickly it is not a deal for you, but a deal for them.
I want to break down this argument that you must buy now to find deals with a few simple scenarios:
1) Stocks climb from here (you missed the dip) - Let's imagine there are deals laying around everywhere, and people who want you to buy stocks would agree with that. You need to be buying with both hands they say so you don't miss opportunities.
If you are just buying and selling the index then this line of thinking could apply. If you mis-time the bottom you'll never have another opportunity as stocks rise to infinity (I jest, but just slightly).
But most investors aren't purchasing the index. When a consumer loses confidence in an appliance, or a person they don't earn all of that confidence back immediately. It takes time, the same is true with stocks. If the market worries that a company won't make earnings and the stock drops 30% it won't rise a corresponding 43% instantly, it will be spread over time, the time it takes to rebuild confidence. You will have this period of time to take advantage of individual opportunities.
Let's image that stocks do rise quickly with no confidence rebuilding period. What do you do now? Maybe it doesn't matter, if stocks do grow to the sky, and the market is always up and to the right then any time is the best time to buy. This is the lesson of the US, that markets always recover and always go up. If you like it at $50 buy at $60 because it'll be at $70 tomorrow. There is never a bad time to buy, and dips just boost your gains.
As they say in financial advertising, the past is no prediction of the future, and we don't know if the US market experience will hold forever. But investors also invest based on financial advertising and past results, even though we know they are meaningless for the future. I selfishly hope that US stocks just go up forever as well, I live in the US and I have a family here, I don't want to spend 10/20/30/50 years treading water.
2) Stocks continue to fall - If you loved it at $80 you'll love it even more at $60, or imagine $30, or when you sell at $15...
Investors either view a downturn as an opportunity to "buy on sale", or as a reason to panic and dump holdings they previously liked.
The longer markets fall the more confidence is lost in specific businesses. I don't know why this is true, a stock price doesn't reflect the economic reality of the underlying company. It's supposed to be a rough proxy, but it's susceptible to swings, over valuation and under-valuation. But people act as if when a stock falls, even if the business is doing alright that the business has suffered harm. What's even crazier is that company management eventually acts like this as well. It's a self-fulfilling prophecy.
It always takes a while to rebuild confidence, and the more that confidence has been destroyed the longer it will take to rebuild. It's during this rebuilding period that you can continue to find stocks to purchase at attractive valuations. Sometimes a stock will drift and fall during the rebuilding phase giving even better opportunities.
The best part of investing during the rebuilding phase, verses the initial fall is that investors should have an indication as to how the business will continue going forward.
When the market fell in late 2008 and early 2009 the index had some initial quick gains. But confidence was lost for a number of companies. I was able to find companies trading for less than net current assets and half of book value in 2010, and in 2011, and again in 2012, then in 2013, and 2014, and even a few in 2015. The benefit was that for most of those companies they'd published a few years of financial statements showing that trading for such a low valuation was absurd.
So what's an investor to do? First off, don't be the consumer rushed into a sale because a salesperson says you have to buy right now. In the markets the salesperson consists of brokers and managers whose year end bonuses are only paid if the market has a gain. That's why it's imperative that they convince the world to buy, buy, buy. If everything is a buy they earn a tidy commission. If you're a broker or manager trying to earn that bonus I don't blame you at all, keep pounding the table! For the rest of us it's worth taking a step back and making thoughtful purchases verses a snap purchase.
Before I go any further I want to dangle out a little maxim that is useful in investing as well as in real life: If someone is pressuring you to buy something quickly it is not a deal for you, but a deal for them.
I want to break down this argument that you must buy now to find deals with a few simple scenarios:
1) Stocks climb from here (you missed the dip) - Let's imagine there are deals laying around everywhere, and people who want you to buy stocks would agree with that. You need to be buying with both hands they say so you don't miss opportunities.
If you are just buying and selling the index then this line of thinking could apply. If you mis-time the bottom you'll never have another opportunity as stocks rise to infinity (I jest, but just slightly).
But most investors aren't purchasing the index. When a consumer loses confidence in an appliance, or a person they don't earn all of that confidence back immediately. It takes time, the same is true with stocks. If the market worries that a company won't make earnings and the stock drops 30% it won't rise a corresponding 43% instantly, it will be spread over time, the time it takes to rebuild confidence. You will have this period of time to take advantage of individual opportunities.
Let's image that stocks do rise quickly with no confidence rebuilding period. What do you do now? Maybe it doesn't matter, if stocks do grow to the sky, and the market is always up and to the right then any time is the best time to buy. This is the lesson of the US, that markets always recover and always go up. If you like it at $50 buy at $60 because it'll be at $70 tomorrow. There is never a bad time to buy, and dips just boost your gains.
As they say in financial advertising, the past is no prediction of the future, and we don't know if the US market experience will hold forever. But investors also invest based on financial advertising and past results, even though we know they are meaningless for the future. I selfishly hope that US stocks just go up forever as well, I live in the US and I have a family here, I don't want to spend 10/20/30/50 years treading water.
2) Stocks continue to fall - If you loved it at $80 you'll love it even more at $60, or imagine $30, or when you sell at $15...
Investors either view a downturn as an opportunity to "buy on sale", or as a reason to panic and dump holdings they previously liked.
The longer markets fall the more confidence is lost in specific businesses. I don't know why this is true, a stock price doesn't reflect the economic reality of the underlying company. It's supposed to be a rough proxy, but it's susceptible to swings, over valuation and under-valuation. But people act as if when a stock falls, even if the business is doing alright that the business has suffered harm. What's even crazier is that company management eventually acts like this as well. It's a self-fulfilling prophecy.
It always takes a while to rebuild confidence, and the more that confidence has been destroyed the longer it will take to rebuild. It's during this rebuilding period that you can continue to find stocks to purchase at attractive valuations. Sometimes a stock will drift and fall during the rebuilding phase giving even better opportunities.
The best part of investing during the rebuilding phase, verses the initial fall is that investors should have an indication as to how the business will continue going forward.
When the market fell in late 2008 and early 2009 the index had some initial quick gains. But confidence was lost for a number of companies. I was able to find companies trading for less than net current assets and half of book value in 2010, and in 2011, and again in 2012, then in 2013, and 2014, and even a few in 2015. The benefit was that for most of those companies they'd published a few years of financial statements showing that trading for such a low valuation was absurd.
So what's an investor to do? First off, don't be the consumer rushed into a sale because a salesperson says you have to buy right now. In the markets the salesperson consists of brokers and managers whose year end bonuses are only paid if the market has a gain. That's why it's imperative that they convince the world to buy, buy, buy. If everything is a buy they earn a tidy commission. If you're a broker or manager trying to earn that bonus I don't blame you at all, keep pounding the table! For the rest of us it's worth taking a step back and making thoughtful purchases verses a snap purchase.
You have to be in the game..
Did you see the meteor shower recently? Maybe you were aware of it, or had heard about it, but you just weren't outside in the middle of the night. Meteor showers are tough, they're late, they don't work around our schedules, and they are hit or miss. You might clear your schedule, stay up late and then the weather is cloudy. And even after all of that there are no guarantees, meteors shoot by all night, but if you aren't looking in the right spot you miss them. In many ways investing in small forgotten stocks is very similar to the meteor shower.
There's an expression used to talk about many of these forgotten stocks, they're called "one day" stocks. The reason for that is the stock might lay dormant for months, years, decades, and then in a single day earn investors a satisfactory return for the entire holding period.
The perverse thing about one day stocks is if you sell the day before the "one day" you have terrible returns. If you are lucky enough to invest a few days before "one day" you might have a 5x or 10x return on a very short holding period.
These sorts of stocks are radioactive to investors with performance metrics to hit. The reason is there are no steady gains, and in many cases no movement at all quarter to quarter. The stock purchased at $37 three years ago is still quoted at $37. A little secret is a fund manager would prefer a stock that appreciates from $10 to $13 verses one that trades at $37 for years before jumping to $180. Small and steady gains mean liquidity and numbers to show at quarter end. Our one day stocks offer none of that.
The trouble with one day stocks is you have no idea when that one day might be. Trust me, there are plenty of us who have tried to read the tea leaves, interpret signs and guess at the one day. But guessing doesn't work. Just like the meteor shower you have to be out and waiting otherwise you'll miss it.
In the past I tried to find the best cheap stocks. I'd look over a set of stocks trading for a low multiple of earnings or book value and then throw out ones that seemed questionable. Questionable not because of value, but questionable as to whether I'd ever see that value realized.
I might as well confess my value investing sins. I've passed over stocks at 1-2x earnings because of bad management. I've passed over stocks at 4x earnings because it was a boring business in a bad industry. I've passed over so many stocks at screaming cheap multiples for so many reasons I'm surprised I even have returns!
What I've discovered is this, when a stock is obscenely cheap it will eventually have a "one day". The thing is you don't know when that's going to happen. In the past year two cheap stocks, Vulcan International and Randall Bearings both had their one days. It seemed like Vulcan would be cheap forever. This was a company with a CEO who required shareholders to pester him and then sign an NDA to receive financials. How could this stock ever see value realized?
Or how about Randall Bearings? I discovered them at $2 and they're selling out at $42, quite the win, except for all of the red flags. The CEO took an excessively large salary. The largest supplier owned a large block of stock to prevent a sale. Shareholders had to take them to court before the company was forced to mail out financials. But with all of that the "one day" still happened. The CEO and largest shareholder decided they wanted to own 100% of the company and made a bid. This things eventually happen.
I'm tired of trying to guess what the next one day stock is and have adopted the meteor shower attitude. It isn't enough to be aware that these stocks exist. You can't try to read the clouds, you have to stay up late, sit outside and hope and wait that the clouds lift and your patience is rewarded. It might not work the first time, or the second, but eventually you'll reap those gains.
My new mantra is that whenever I stumble across a cheap "one day" stock I'm going to pick up a small position. I know that eventually 5-10% of my portfolio might be in dead names that don't move year to year. But I also know that over time that 5-10% will also provide me with some nice surprises on the upside. You have to be in the game to score, and the only way to score with these sorts of stocks is to hold your nose, buy a few shares, and then forget about them for the next decade. Once you do that you'll be pleasantly surprised by what happens next...
There's an expression used to talk about many of these forgotten stocks, they're called "one day" stocks. The reason for that is the stock might lay dormant for months, years, decades, and then in a single day earn investors a satisfactory return for the entire holding period.
The perverse thing about one day stocks is if you sell the day before the "one day" you have terrible returns. If you are lucky enough to invest a few days before "one day" you might have a 5x or 10x return on a very short holding period.
These sorts of stocks are radioactive to investors with performance metrics to hit. The reason is there are no steady gains, and in many cases no movement at all quarter to quarter. The stock purchased at $37 three years ago is still quoted at $37. A little secret is a fund manager would prefer a stock that appreciates from $10 to $13 verses one that trades at $37 for years before jumping to $180. Small and steady gains mean liquidity and numbers to show at quarter end. Our one day stocks offer none of that.
The trouble with one day stocks is you have no idea when that one day might be. Trust me, there are plenty of us who have tried to read the tea leaves, interpret signs and guess at the one day. But guessing doesn't work. Just like the meteor shower you have to be out and waiting otherwise you'll miss it.
In the past I tried to find the best cheap stocks. I'd look over a set of stocks trading for a low multiple of earnings or book value and then throw out ones that seemed questionable. Questionable not because of value, but questionable as to whether I'd ever see that value realized.
I might as well confess my value investing sins. I've passed over stocks at 1-2x earnings because of bad management. I've passed over stocks at 4x earnings because it was a boring business in a bad industry. I've passed over so many stocks at screaming cheap multiples for so many reasons I'm surprised I even have returns!
What I've discovered is this, when a stock is obscenely cheap it will eventually have a "one day". The thing is you don't know when that's going to happen. In the past year two cheap stocks, Vulcan International and Randall Bearings both had their one days. It seemed like Vulcan would be cheap forever. This was a company with a CEO who required shareholders to pester him and then sign an NDA to receive financials. How could this stock ever see value realized?
Or how about Randall Bearings? I discovered them at $2 and they're selling out at $42, quite the win, except for all of the red flags. The CEO took an excessively large salary. The largest supplier owned a large block of stock to prevent a sale. Shareholders had to take them to court before the company was forced to mail out financials. But with all of that the "one day" still happened. The CEO and largest shareholder decided they wanted to own 100% of the company and made a bid. This things eventually happen.
I'm tired of trying to guess what the next one day stock is and have adopted the meteor shower attitude. It isn't enough to be aware that these stocks exist. You can't try to read the clouds, you have to stay up late, sit outside and hope and wait that the clouds lift and your patience is rewarded. It might not work the first time, or the second, but eventually you'll reap those gains.
My new mantra is that whenever I stumble across a cheap "one day" stock I'm going to pick up a small position. I know that eventually 5-10% of my portfolio might be in dead names that don't move year to year. But I also know that over time that 5-10% will also provide me with some nice surprises on the upside. You have to be in the game to score, and the only way to score with these sorts of stocks is to hold your nose, buy a few shares, and then forget about them for the next decade. Once you do that you'll be pleasantly surprised by what happens next...
Avalon Holdings
We're posting another "greatest hit" from the Oddball Stocks Newsletter. I present Avalon Holdings, a tiny conglomerate located near Youngstown, Ohio. The company has a waste management group along with a resort and golf courses. All of that is covered in the write-up below. The stock offers the same, or better value now compared to when it was originally profiled.
One item worth calling out is that you never know how or when value might be realized in a name like this. Avalon Holdings was caught up in a strange third party Bahama pump and dump scheme. Shareholders saw shares rise from $2.60 to as high as $10.25 intraday before falling back. It wasn't just a single share sold high, shareholders had about a week to liquidate shares at a multiple of their prior price.
The company has sued the pumper and is attempting to seize their gains for the illegal manipulation. We have been covering that in an on-going basis in the newsletter. You can find the original thesis below.
One item worth calling out is that you never know how or when value might be realized in a name like this. Avalon Holdings was caught up in a strange third party Bahama pump and dump scheme. Shareholders saw shares rise from $2.60 to as high as $10.25 intraday before falling back. It wasn't just a single share sold high, shareholders had about a week to liquidate shares at a multiple of their prior price.
The company has sued the pumper and is attempting to seize their gains for the illegal manipulation. We have been covering that in an on-going basis in the newsletter. You can find the original thesis below.
OBN 2 - Avalon Holdings - Issue 17 by Nate Tobik on Scribd
Pinelawn: Forgotten but not Gone
For most people, their recollection of a cemetery is like my recent experience. It was cold and overcast with a somber cloud hanging over everyone. We weren't thinking of the real estate, but the deceased loved on, and making sure we could escape the maze of roads as we left.
Death, like real estate is a transaction most take part in a few times during their life. When a parent or sibling passes we're confronted with the transactional details. Where do they go, who pays for what, and possibly the consideration of whether the chosen cemetery is a worthy eternal resting place.
But cast in a different light a cemetery is a business with a limited and wasting asset. It shouldn't come as a surprise to many that the cemetery business is sleepy and dated. A friend of mine has a relative with a cemetery software start-up, and their business is booming. These little cemeteries are dying to move off Windows 95 and Access to something more modern for their property management. The level of outdatedness is hard to understand until you brush up against it.
Which in a way brings us to Pinelawn (PLWN), a mostly forgotten stretch of land on Long Island that's been paying owners for a century.
Have you ever considered the economics of a cemetery? It fits Buffett's businesses-that-will-be-around-in-a-decade filter because the organization has to purchase land, and then as people die slowly fill the land with residents. The residents pay a one time admittance fee, but no recurring rental. And while we can be a barbaric culture we do still have enough sense to honor the dignity of the dead, and because of that we don't re-use cemetery land. Once a cemetery, always a cemetery.
At the end of the 19th century it was popular to be a founder of a startup cemetery. You'd raise capital from future residents and then make a land purchase and live off the proceeds. And just like the vaporware startups there were plenty of vaporware cemeteries with grand visions that were simply a vehicle to raise capital before disappearing into the Victorian crowd.
Pine Lawn raised their initial capital and purchased a plot of land in what eventually became Farmingdale, NY. The way the cemetery was organized eventual residents pre-purchased shares for their plots and in return were promised that they'd receive 50% of the plot sale proceeds as dividends until the cemetery was full.
Initial management wasn't the most honest bunch, and refused to pay out dividends to plot-holders. Plot holders sued and the court forced the cemetery to honor their initial obligation, and they've been doing so for the past 116 years.
In the past year the cemetery has paid out dividends that come out to around a 10% yield on the stock. But I should note, it isn't really a stock, it's more of an association, or a royalty trust with proceeds from the land sales.
Shares were passed down from owners to heirs, and eventually found their way onto the OTC Markets. From there it's anyone's guess.
Potential shareholders need to ask how many plots are left. An exhaustion of plots means the revenue spigot is stopped. One has to wonder if crematory services count towards plot sales as well. A little Google Maps sleuthing shows that the cemetery isn't entirely full, but it's impossible to know how many empty plots have been pre-sold.
While the 10% dividend might be attractive the stock could still be overvalued if the land is close to exhaustion. It's in cases like this where a discounted cash flow (DCF) valuation fits. There is a terminal value of zero, and a finite period of time until that terminal value. All one needs to do is determine the plots available, annual sale rate, and plug in the numbers to build out the rest.
The yield might seem great, but if the plots are completely sold in less than ten years then this is overvalued. And in a case where information is impossible to find it's probably that retail investors are buying for the dividend and could be caught off guard if the trust stops paying. Which brings up an interesting footnote. The trust was sued 100 years ago for failing to pay the correct amount to shareholders. Without audited financials, or any financial information from the cemetery how are shareholders to know if they're paying the correct amount not? Or whether they've been paying the correct amount for the last 100 years?
Without any special insight into the cemetery's capacity I will hold off on determining a valuation for now. But without a doubt this is something worth looking into, and if you're on Long Island maybe take a drive past and consider whether you'd like to share in the profits as the cemetery fills up.
Pinelawn first appeared in the Oddball Stocks Newsletter. The best information is available there before it ever appears here. If you don't want to miss out subscribe today.
Disclosure: No position
Death, like real estate is a transaction most take part in a few times during their life. When a parent or sibling passes we're confronted with the transactional details. Where do they go, who pays for what, and possibly the consideration of whether the chosen cemetery is a worthy eternal resting place.
But cast in a different light a cemetery is a business with a limited and wasting asset. It shouldn't come as a surprise to many that the cemetery business is sleepy and dated. A friend of mine has a relative with a cemetery software start-up, and their business is booming. These little cemeteries are dying to move off Windows 95 and Access to something more modern for their property management. The level of outdatedness is hard to understand until you brush up against it.
Which in a way brings us to Pinelawn (PLWN), a mostly forgotten stretch of land on Long Island that's been paying owners for a century.
Have you ever considered the economics of a cemetery? It fits Buffett's businesses-that-will-be-around-in-a-decade filter because the organization has to purchase land, and then as people die slowly fill the land with residents. The residents pay a one time admittance fee, but no recurring rental. And while we can be a barbaric culture we do still have enough sense to honor the dignity of the dead, and because of that we don't re-use cemetery land. Once a cemetery, always a cemetery.
At the end of the 19th century it was popular to be a founder of a startup cemetery. You'd raise capital from future residents and then make a land purchase and live off the proceeds. And just like the vaporware startups there were plenty of vaporware cemeteries with grand visions that were simply a vehicle to raise capital before disappearing into the Victorian crowd.
Pine Lawn raised their initial capital and purchased a plot of land in what eventually became Farmingdale, NY. The way the cemetery was organized eventual residents pre-purchased shares for their plots and in return were promised that they'd receive 50% of the plot sale proceeds as dividends until the cemetery was full.
Initial management wasn't the most honest bunch, and refused to pay out dividends to plot-holders. Plot holders sued and the court forced the cemetery to honor their initial obligation, and they've been doing so for the past 116 years.
In the past year the cemetery has paid out dividends that come out to around a 10% yield on the stock. But I should note, it isn't really a stock, it's more of an association, or a royalty trust with proceeds from the land sales.
Shares were passed down from owners to heirs, and eventually found their way onto the OTC Markets. From there it's anyone's guess.
Potential shareholders need to ask how many plots are left. An exhaustion of plots means the revenue spigot is stopped. One has to wonder if crematory services count towards plot sales as well. A little Google Maps sleuthing shows that the cemetery isn't entirely full, but it's impossible to know how many empty plots have been pre-sold.
While the 10% dividend might be attractive the stock could still be overvalued if the land is close to exhaustion. It's in cases like this where a discounted cash flow (DCF) valuation fits. There is a terminal value of zero, and a finite period of time until that terminal value. All one needs to do is determine the plots available, annual sale rate, and plug in the numbers to build out the rest.
The yield might seem great, but if the plots are completely sold in less than ten years then this is overvalued. And in a case where information is impossible to find it's probably that retail investors are buying for the dividend and could be caught off guard if the trust stops paying. Which brings up an interesting footnote. The trust was sued 100 years ago for failing to pay the correct amount to shareholders. Without audited financials, or any financial information from the cemetery how are shareholders to know if they're paying the correct amount not? Or whether they've been paying the correct amount for the last 100 years?
Without any special insight into the cemetery's capacity I will hold off on determining a valuation for now. But without a doubt this is something worth looking into, and if you're on Long Island maybe take a drive past and consider whether you'd like to share in the profits as the cemetery fills up.
Pinelawn first appeared in the Oddball Stocks Newsletter. The best information is available there before it ever appears here. If you don't want to miss out subscribe today.
Disclosure: No position
Subscribe to:
Posts (Atom)