A Look Back
|Mar 31, 2015|
The other day I realized it's been three years since I started writing OTC Adventures. That's a long time in the life of a blog! When I started, I had no idea that my writings on micro-caps, illiquid stocks and other obscurities would find an audience, let alone eventually allow me to launch my own RIA practice. These days nearly all my time is spent in seeking out great investments for my clients, but I still enjoy writing here when I can.
In recognition of how far this blog has come since those first posts, I'd like to look back at the first companies I've profiled and see what's become of them. I've learned and grown as an investor since I wrote these posts, but I like to think these early analyses hold up well.
Today I'll tackle the first five stocks I wrote about.
I wrote up QEP Company on January 17, 2012, when the company traded at $14.25. In the post, I expressed optimism that the company's strong results would continue and the company would benefit from deleveraging. Well, that's not exactly what happened. The company wound up losing a major contract and with it, much of its future sales and profits. QEP attempted to make up for the loss with a succession of acquisitions, but as yet, all efforts to return to growth and grow profits have been for naught. Margins are under pressure and trailing EBIT has declined to $5.31 million, down 70% since my post. Perhaps somewhat surprisingly, the stock has risen 18% since my post.
Schuff International Company
My post on Schuff went live on January 29, 2012, when shares changed hands at $9.00. At the time, I cited the company's large share repurchase, low multiple of normalized earnings and improving industry conditions as reasons the shares would move higher. Shares soon dipped all the way down to $6.50, but then began a steady march higher. Improved operating conditions provided a tailwind, but the biggest gains came when company management sold their majority stake to Phil Falcone's HC2 Holdings for $31.50 per share. A follow-up tender offer took HC2's stake to over 90% and it seems like the end of the road for Schuff shareholders, even as many believe the company's shares are worth twice as much or more than HC2's purchase price. (Meanwhile, any holders who jumped over to HC2 following the buyout have seen returns of 180% atop the already healthy returns from Schuff shares.) In the end, Schuff shares returned 250%.
Next, I tackled McRae Industries, writing about the company on February 5, 2012 when class A shares went for $12.77. The family-owned bootmaker was attractive due to its strong balance sheet, healthy demand for both its work/military and Western/fashion boots, and a modest valuation of current earnings. Since the post, McRae's revenues and earnings have risen at a healthy pace and the stock has followed, though shares still trade at very low multiples, especially considering the more than $20 million in cash and investments the company has accumulated. McRae shares have provided a total return of 168%.
The Webco Industries post went live on February 14, 2012. (Can you tell I was single at the time?) The stock price at the time was $125. I deemed Webco attractive based on a track record of profitable growth, expansion efforts, and a deep discount to tangible book value. Sadly, it seems that the discount to book value was warranted. Webco finished a major expansion only to find the anticipated demand absent, and profits have been scarce since. Weak steel prices, high leverage and an ever-increasing share count have lead to returns of -48% since my post.
Alaska Power & Telephone
I wrote up APTL on February 23, 2012. At the time, shares went for $17. I was attracted to the company based on its low valuation. By my estimate, the combination of stable telecom and utility assets ought to have merited a much higher valuation. I also appreciated the company's efforts to clean up its balance sheet and restore credibility following some unfortunate efforts to expand into construction. APTL executed its business plan, paying down debt and restarting a dividend. The company now plans to construct a new hydro-electric plant and build out its data offerings. Shares have provided a total return of 32% to date.
On average, the first five stocks I wrote about returned 84%, which holds up well against the return of the iShares Micro-Cap ETF (IWC) which returned 55% since the end of 2012. As usual with any basket of stocks, a few produced dynamite gains, a few gave a respectable return, and a few were duds.
In many ways, 2012 was an ideal time for micro-cap investors. The immediate danger of the financial crisis had passed, but the market still priced many of these companies for failure, or at least as if they would never grow again. The virtuous cycle of increasing earnings and expanding multiples has provided many investors with excellent gains, but it has also left the ranks of obviously cheap stocks looking very thin. Finding the remaining bargains requires investors to search more broadly, perhaps in foreign markets and unusual securities, and more deeply, picking apart financial statements and industry news to find the value beneath.
In a few days I'll take a look at how the next set of stocks I wrote about way back when has performed, before returning to "regular programming."
On another note, I'll be in Toronto on April 14-16 for the Fairfax Financial shareholders meeting and associated festivities. I'd enjoy meeting blog readers and fellow value investors of any stripe. Let me know if you'll be in town.
Alluvial Capital Management, LLC holds shares of McRae Industries, Inc. for client accounts.
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Alluvial Capital Management, LLC may buy or sell securities mentioned on this blog for client accounts or for the accounts of principals. For a full accounting of Alluvial’s and Alluvial personnel’s holdings in any securities mentioned, contact Alluvial Capital Management, LLC at email@example.com.