Value Investing

Interesting article on a value investor/value investing.....


Look for something cheap, load up and never look back

By James Altucher, courtesy FT.com

>Published: May 22 2006 15:58 | Last updated: May 22 2006 15:58
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I know many people in the industry but I only know one person who is completely self-made from investing (and not from the fees generated from investing $1bn and compounding 6 per cent a year). In addition, he has not only preserved his new wealth but continued to build by investing on his own. “Ralph” (not his real name) waits for the cheapest possible stocks and then he backs up the truck.

He started in 1996, borrowing money on his credit card (“it was one of those 2.9 per cent introductory interest rates”) to make his first stock trade (“I shorted Netscape. It was the first overvalued internet stock. It went against me immediately and I eventually got out at break-even.”). He then loaded up on Intel warrants in 1997 when it was trading below a market multiple and has never looked back. He compounded at triple digits through the 1990s and then continued with high double digits in the early 2000s. For a year he worked for a multibillion-dollar hedge fund but it didn’t suit his lifestyle. “I hated anything that smelled like work,” he says. And so he decided to “retire” in his early 30s and just invest.

Every time I log on to the internet, day or night, Ralph is logged on, usually looking at stocks, and I occasionally throw some symbols his way. The other day I showed him a stock that had 70 per cent of its market cap in cash, no debt, and was profitable and growing. “Not cheap enough,” he messaged back.


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So what is cheap?

“I like steel. There’s a commodity boom going on but steel is the only major commodity where there are no futures on it, hence no speculative activity that could cause a bubble or bust. I like NS Group and Ipsco, because they are dirt cheap plays on steel. They are in the absolutely healthiest part of the steel sector. They make steel and alloy drilling tubes. So whether oil is $70, $60, or $50, it is extremely economic to drill for natural gas and oil. When oil is $20, the only thing economic is Saudi Arabia. But now you can do Gulf drilling, you can do oil sands, you can do all the high-cost marginal wells. But that’s not all. Both of these companies are sitting on excess cash, too much cash in fact, so when you look at ev/ebitda, they are at four times, which is quite incredible for what they are. The best thing for both companies would be if Ipsco bought NS, using both of their excess cash to help fund the acquisition. By taking on a little debt this would fix their capital structures and be very earnings accretive.”

OK, give me another one.

“RYI is another play on steel. They don’t make it, they distribute and process it, and make like 15-20 per cent gross margin. With steel prices twice what they were two and a half years ago, they have twice as much gross profit dollars to spread over relatively the same fixed costs. The shortsellers have RYI completely confused. RYI uses LIFO (Last In First Out) accounting, which means their earnings are depressed when prices for steel go up, and when prices soared in 2004, short sellers misinterpreted their low accounting profitability as low economic profitability. They have been intransigent ever since, as the company continues to demonstrate the dynamic I mentioned, of more gross profit to spread over same fixed costs. They should make well over 3$ per share this year, which means they are a comfortable single-digit multiple. Most importantly, the company has a $300m LIFO reserve, which means their stockholder’s equity hugely understates the true, economic value of the company’s assets. So the company is trading way below liquidation value.”

What about something that is not steel-related?

“I like Movie Gallery. It got into a bidding war with Blockbuster for Hollywood Video, which Blockbuster had to concede because of antitrust issues. Almost immediately, things turned bad: integration issues, too much debt and a disastrous box office led to huge volume declines in the rental market. The debt used to finance the acquisition had to be renegotiated, and will need to be renegotiated again in the future. So no wonder everybody thought it was going bankrupt.

“After three quarters of dreck, it finally printed up a wonderful first quarter last week. Ebitda in 2006 was thought to be $200m, which probably means bankruptcy, but first quarter ebitda was $116m, and it has a good shot at more than $300m this year

“All this assumes: better box office and rental comps; that it finally squeezes out some of those promised merger savings and synergies; and that its back is against the wall, so if it does not execute, it goes bankrupt. The CEO was founder of the company and still owns more than 10 per cent. If I am right, the stock is probably a triple or quadruple from here.”

Finally, after all this stock talk I asked him how he spends his day? He took a few minutes before he responded via AOL IM.

Ralph: I dunno how to answer that question

jaltucher: thats sort of funny in itself

Ralph: I look at stocks and trade them like I always do, but if I feel sick of it or bored of it, or whatever, I do something else

jaltucher: like what?

Ralph: watch tv?

Ralph: nap?

Ralph: I dunno

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