Ciner Resources LP (CINR)

(Image: Zen Buddha Silence, by Marilyn Barbone)

June 28, 2020

We continue with examples of Boole’s quantitative investment process in action.

Recently, we looked at the following companies:

Global Ship Lease (GSL): http://boolefund.com/global-ship-lease-gsl/

Alico, Inc. (ALCO): http://boolefund.com/alico-inc-alco/

Genco Shipping (GNK): http://boolefund.com/genco-shipping-gnk/

SEACOR Marine (SMHI): http://boolefund.com/seacor-marine-smhi/

Tidewater (TDW): http://boolefund.com/tidewater-tdw/

TravelCenters of America (TA): http://boolefund.com/travelcenters-america-ta/

Teekay Tankers (TNK): http://boolefund.com/teekay-tankers-tnk/

Ranger Energy Services (RNGR): http://boolefund.com/ranger-energy-services-rngr/

Macro Enterprises (Canada: MCR.V): http://boolefund.com/macro-enterprises-mcr-v/

This week, we are going to look at Ciner Resources LP (CINR).  Ciner Resources is structured as a fixed-distribution master limited partnership.  Ciner is one of the largest and lowest cost producers of soda ash in the world.  CINR has a market cap of $255 million, with $51 million in cash and $178 million in debt.  The current stock price is $12.90.  The current dividend yield is 10.54%.

 

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First we screen for cheapness based on five metrics.  Here are the numbers for Ciner Resources LP:

    • EV/EBITDA = 4.73
    • P/E = 9.07
    • P/B = 1.49
    • P/CF = 3.41
    • P/S = 0.80

(These figures reflect Ciner Resources’s 51% ownership stake in its soda ash business.  Also, the ratio’s are based on normalized numbers—using a 30% increase in production, which will happen in the next couple of years.)

Step Two

Next we calculate the Piotroski F-Score, which is a measure of the fundamental strength of the company.  For more on the Piostroski F-Score, see my blog post here: http://boolefund.com/piotroski-f-score/

CINR has a Piotroski F-Score of 8.  (The best score possible is 9, while the worst score is 0.)  This is very good.

Step Three

Then we rank the company based on low debt, high insider ownership, and shareholder yield.

We measure debt levels by looking at total liabilities (TL) to total assets (TA).  Ciner Resources has TL/TA of 45%, which is good.

Insider ownership is important because that means that the people running the company have interests that are aligned with the interests of other shareholders.  At Ciner Resources, insider ownership is approximately 25.5%.  This is good.

Shareholder yield is the dividend yield plus the buyback yield.  At CINR, dividend yield is 10.54% and buyback yield is zero, so shareholder yield is 10.54%.  This is very good.

Each component of the ranking has a different weight.  The overall combined ranking of Ciner Resources places it in the top 30 stocks on our screen, or the top 1.2% of the more than two thousand companies we ranked.

Step Four

The final step is to study the company’s financial statements, presentations, and quarterly conference calls to (i) check for non-recurring items,  hidden liabilities, and bad accounting; (ii) estimate intrinsic value—how much the business is worth—using scenarios for low, mid, and high cases.

Here is the company’s investor presentation from August, 2019: https://www.ciner.us.com/wp-content/uploads/2019/08/Investor-Presentation-Q2-2019.pdf

Ciner Resources has a structural cost advantage because it is a natural soda ash producer (from trona) rather than a synthetic soda ash producer.  Ciner’s costs are about 50 percent lower than those of many international competitors.

Moreover, Ciner recently reduced its cash distribution by 40%.  Its current cash distribution is $1.36 per share annually.  That’s a yield of 10.54%.  The company is using the extra cash to boost its production by 30% over the next couple of years.  After production has been boosted, Ciner Resources will increase its cash distribution to roughly $2.60 per share annually.  Assuming an 8-9% dividend yield, the stock would be worth $29 to $32.50.  See: https://www.valueinvestorsclub.com/idea/CINER_RESOURCES_LP/1895980459

(To access the link to valueinvestorsclub.com, you may have to create a guest membership, which is free.)

Intrinsic value scenarios:

    • Low case: Even if prices were to drop, Ciner Resources  could likely pay over $1.00 per share in annual dividends.  In this case, the stock would be worth $10.  That’s 22.5% lower than today’s $12.90.
    • Mid case: Ciner Resources is likely worth at least a dividend yield of 9% based on a dividend of $2.60 per share annually.  That would mean the stock is worth roughly $29, which is 125% higher than today’s $12.90.
    • High case: Ciner Resources may end up paying $4.00 in annual dividends.  Assuming a dividend yield of 8%, the stock would be worth $50, which is over 285% higher than today’s $12.90.

 

BOOLE MICROCAP FUND

An equal weighted group of micro caps generally far outperforms an equal weighted (or cap-weighted) group of larger stocks over time.  See the historical chart here:  http://boolefund.com/best-performers-microcap-stocks/

This outperformance increases significantly by focusing on cheap micro caps.  Performance can be further boosted by isolating cheap microcap companies that show improving fundamentals.  We rank microcap stocks based on these and similar criteria.

There are roughly 10-20 positions in the portfolio.  The size of each position is determined by its rank.  Typically the largest position is 15-20% (at cost), while the average position is 8-10% (at cost).  Positions are held for 3 to 5 years unless a stock approaches intrinsic value sooner or an error has been discovered.

The mission of the Boole Fund is to outperform the S&P 500 Index by at least 5% per year (net of fees) over 5-year periods.  We also aim to outpace the Russell Microcap Index by at least 2% per year (net).  The Boole Fund has low fees.

 

If you are interested in finding out more, please e-mail me or leave a comment.

My e-mail: jb@boolefund.com

 

 

 

Disclosures: Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Boole Capital, LLC.

Global Ship Lease (GSL)

(Image: Zen Buddha Silence, by Marilyn Barbone)

June 21, 2020

We continue with examples of Boole’s quantitative investment process in action.

Recently, we looked at the following companies:

Alico, Inc. (ALCO): http://boolefund.com/alico-inc-alco/

Genco Shipping (GNK): http://boolefund.com/genco-shipping-gnk/

SEACOR Marine (SMHI): http://boolefund.com/seacor-marine-smhi/

Tidewater (TDW): http://boolefund.com/tidewater-tdw/

TravelCenters of America (TA): http://boolefund.com/travelcenters-america-ta/

Teekay Tankers (TNK): http://boolefund.com/teekay-tankers-tnk/

Ranger Energy Services (RNGR): http://boolefund.com/ranger-energy-services-rngr/

Macro Enterprises (Canada: MCR.V): http://boolefund.com/macro-enterprises-mcr-v/

This week, we are going to look at Global Ship Lease (GSL).  Global Ship Lease is a containership lessor.  GSL has a market cap of $81 million, with $87 million in cash and $850 million in debt.  (No debt is due until late-2022.  Roughly half is due in 2024 and 2025.)  The current stock price is $4.62.

 

Step One

First we screen for cheapness based on five metrics.  Here are the numbers for Global Ship Lease:

    • EV/EBITDA = 5.28
    • P/E = 1.93
    • P/B = 0.20
    • P/CF = 0.81
    • P/S = 0.29

Step Two

Next we calculate the Piotroski F-Score, which is a measure of the fundamental strength of the company.  For more on the Piostroski F-Score, see my blog post here: http://boolefund.com/piotroski-f-score/

GSL has a Piotroski F-Score of 6.  (The best score possible is 9, while the worst score is 0.)  This is decent.

Step Three

Then we rank the company based on low debt, high insider ownership, and shareholder yield.

We measure debt levels by looking at total liabilities (TL) to total assets (TA).  Global Ship Lease has TL/TA of 69%, which is OK.

Insider ownership is important because that means that the people running the company have interests that are aligned with the interests of other shareholders.  At Global Ship Lease, insider ownership is approximately 35.7%.  This is good.

Shareholder yield is the dividend yield plus the buyback yield.  At GSL, dividend yield is zero and buyback yield is zero, so shareholder yield is zero.

Each component of the ranking has a different weight.  The overall combined ranking of Global Ship Lease places it in the top 10 stocks on our screen, or the top 0.4% of the more than two thousand companies we ranked.

Step Four

The final step is to study the company’s financial statements, presentations, and quarterly conference calls to (i) check for non-recurring items,  hidden liabilities, and bad accounting; (ii) estimate intrinsic value—how much the business is worth—using scenarios for low, mid, and high cases.

Here is the company’s investor presentation from May, 2020: https://www.globalshiplease.com/static-files/5a012a2c-bd35-4882-95f4-fccd60690399

Global Ship Lease focuses on mid-sized and smaller containerships, which service the majority of global trade routes.  The company has $696 million in contracted revenue and a TEU-weighted average remaining charter term of 2.3 years.

Intrinsic value scenarios:

    • Low case: Global Ship Lease may be worth 10% of book value.  Book value is $23.10 a share, so 10% of that is $2.31 a share.  That’s 50% lower than today’s $4.62.
    • Mid case: Global Ship Lease is likely worth at least book value of $23.10 a share.  That’s 400% higher than today’s $4.62.
    • High case: Global Ship Lease may be worth 150% of book value.  That’s $34.65, which is 650% higher than today’s $4.62.

 

BOOLE MICROCAP FUND

An equal weighted group of micro caps generally far outperforms an equal weighted (or cap-weighted) group of larger stocks over time.  See the historical chart here:  http://boolefund.com/best-performers-microcap-stocks/

This outperformance increases significantly by focusing on cheap micro caps.  Performance can be further boosted by isolating cheap microcap companies that show improving fundamentals.  We rank microcap stocks based on these and similar criteria.

There are roughly 10-20 positions in the portfolio.  The size of each position is determined by its rank.  Typically the largest position is 15-20% (at cost), while the average position is 8-10% (at cost).  Positions are held for 3 to 5 years unless a stock approaches intrinsic value sooner or an error has been discovered.

The mission of the Boole Fund is to outperform the S&P 500 Index by at least 5% per year (net of fees) over 5-year periods.  We also aim to outpace the Russell Microcap Index by at least 2% per year (net).  The Boole Fund has low fees.

 

If you are interested in finding out more, please e-mail me or leave a comment.

My e-mail: jb@boolefund.com

 

 

 

Disclosures: Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Boole Capital, LLC.

Alico, Inc. (ALCO)

(Image: Zen Buddha Silence, by Marilyn Barbone)

June 14, 2020

We continue with examples of Boole’s quantitative investment process in action.

Recently, we looked at the following companies:

Genco Shipping (GNK): http://boolefund.com/genco-shipping-gnk/

SEACOR Marine (SMHI): http://boolefund.com/seacor-marine-smhi/

Tidewater (TDW): http://boolefund.com/tidewater-tdw/

TravelCenters of America (TA): http://boolefund.com/travelcenters-america-ta/

Teekay Tankers (TNK): http://boolefund.com/teekay-tankers-tnk/

Ranger Energy Services (RNGR): http://boolefund.com/ranger-energy-services-rngr/

Macro Enterprises (Canada: MCR.V): http://boolefund.com/macro-enterprises-mcr-v/

This week, we are going to look at Alico, Inc. (ALCO).  Alico is one of Florida’s largest citrus growers, with over 45,000 prime citrus acres.  Alico is the lowest-cost citrus producer in Florida.  The company has an additional 65,000 acres of land, 25,000 acres of which is being marketed for sale.  Alico has a market cap of $226 million, with $220 million of debt and $80 million of cash.  The current stock price is $30.13.

 

Step One

First we screen for cheapness based on five metrics.  Here are the numbers for Alico:

    • EV/EBITDA = 6.90
    • P/E = 6.30
    • P/B = 0.52
    • P/CF = 3.10
    • P/S = 1.95

P/B is based on liquidation value, which has been estimated at $58.07 a share.  See: www.valueinvestorsclub.com – get a free guest membership, then look up “ALCO.”  The company itself has estimated liquidation value at $47 to $68 per share.  See slide 5 in Alico’s most recent investor presentation: https://tinyurl.com/ydxz9ab3

Step Two

Next we calculate the Piotroski F-Score, which is a measure of the fundamental strength of the company.  For more on the Piostroski F-Score, see my blog post here: http://boolefund.com/piotroski-f-score/

Alico has a Piotroski F-Score of 7.  (The best score possible is 9, while the worst score is 0.)  This is good.

Step Three

Then we rank the company based on low debt, high insider ownership, and shareholder yield.

We measure debt levels by looking at total liabilities (TL) to total assets (TA).  Alico has TL/TA of 57%, which is decent.

Insider ownership is important because that means that the people running the company have interests that are aligned with the interests of other shareholders.  At Alico, insider ownership is approximately 15.3%.  This is pretty good.

Shareholder yield is the dividend yield plus the buyback yield.  At Alico, dividend yield is about 1%.  Buyback yield is negligible, so shareholder yield is about 1%.

Each component of the ranking has a different weight.  The overall combined ranking of Alico places it in the top 20 stocks on our screen, or the top 0.8% of the more than two thousand companies we ranked.

Step Four

The final step is to study the company’s financial statements, presentations, and quarterly conference calls to (i) check for non-recurring items,  hidden liabilities, and bad accounting; (ii) estimate intrinsic value—how much the business is worth—using scenarios for low, mid, and high cases.

Here is the company’s investor presentation from May, 2020: https://tinyurl.com/ydxz9ab3

Intrinsic value scenarios:

    • Low case: Alico may be worth 50% of liquidation value of $58.07 a share.   That’s $29.04, which is 4% lower than today’s $30.13.
    • Mid case: Alico is likely worth at least liquidation value of $58.07 a share.  That’s 92% higher than today’s $30.13.
    • High case: Not only has Alico made itself the lowest-cost citrus producer; but it has also increased its plantings over the past several years, which will increase their annual harvest.  Normalized earnings are about $40 million.  At a P/E of 18, Alico would be worth $96.13 a share.  That’s about 220% higher than today’s $30.13.

 

BOOLE MICROCAP FUND

An equal weighted group of micro caps generally far outperforms an equal weighted (or cap-weighted) group of larger stocks over time.  See the historical chart here:  http://boolefund.com/best-performers-microcap-stocks/

This outperformance increases significantly by focusing on cheap micro caps.  Performance can be further boosted by isolating cheap microcap companies that show improving fundamentals.  We rank microcap stocks based on these and similar criteria.

There are roughly 10-20 positions in the portfolio.  The size of each position is determined by its rank.  Typically the largest position is 15-20% (at cost), while the average position is 8-10% (at cost).  Positions are held for 3 to 5 years unless a stock approaches intrinsic value sooner or an error has been discovered.

The mission of the Boole Fund is to outperform the S&P 500 Index by at least 5% per year (net of fees) over 5-year periods.  We also aim to outpace the Russell Microcap Index by at least 2% per year (net).  The Boole Fund has low fees.

 

If you are interested in finding out more, please e-mail me or leave a comment.

My e-mail: jb@boolefund.com

 

 

 

Disclosures: Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Boole Capital, LLC.

Genco Shipping (GNK)

(Image: Zen Buddha Silence, by Marilyn Barbone)

June 7, 2020

We continue with examples of Boole’s quantitative investment process in action.

Recently, we looked at the following companies:

SEACOR Marine (SMHI): http://boolefund.com/seacor-marine-smhi/

Tidewater (TDW): http://boolefund.com/tidewater-tdw/

TravelCenters of America (TA): http://boolefund.com/travelcenters-america-ta/

Teekay Tankers (TNK): http://boolefund.com/teekay-tankers-tnk/

Ranger Energy Services (RNGR): http://boolefund.com/ranger-energy-services-rngr/

Macro Enterprises (Canada: MCR.V): http://boolefund.com/macro-enterprises-mcr-v/

This week, we are going to look at Genco Shipping (GNK).  Genco Shipping is  a leading provider of international seaborne drybulk transportation services.  The company has a market cap of $290 million.

 

Step One

First we screen for cheapness based on five metrics.  Here are the numbers for Genco Shipping:

    • EV/EBITDA = 4.60
    • P/E = 6.52
    • P/B = 0.34
    • P/CF = 2.07
    • P/S = 0.70

(Normalized EBITDA is about $140 million, while normalized earnings is approximately $45 million.)

Step Two

Next we calculate the Piotroski F-Score, which is a measure of the fundamental strength of the company.  For more on the Piostroski F-Score, see my blog post here: http://boolefund.com/piotroski-f-score/

Genco Shipping has a Piotroski F-Score of 6.  (The best score possible is 9, while the worst score is 0.)  This is decent.

Step Three

Then we rank the company based on low debt, high insider ownership, and shareholder yield.

We measure debt levels by looking at total liabilities (TL) to total assets (TA).  Genco Shipping has TL/TA of 38.4%, which is pretty good.

Insider ownership is important because that means that the people running the company have interests that are aligned with the interests of other shareholders.  At Genco Shipping, insider ownership is approximately 1%.  This is low.

Shareholder yield is the dividend yield plus the buyback yield.  The company has not bought back shares, but the dividend yield is 1.2%.  So the shareholder yield is 1.2%.

Each component of the ranking has a different weight.  The overall combined ranking of Genco Shipping places it in the top 50 stocks on our screen, or the top 2% of the more than two thousand companies we ranked.

Step Four

The final step is to study the company’s financial statements, presentations, and quarterly conference calls to (i) check for non-recurring items,  hidden liabilities, and bad accounting; (ii) estimate intrinsic value—how much the business is worth—using scenarios for low, mid, and high cases.

Here is the company’s investor presentation from May, 2020: http://s21.q4cdn.com/456963137/files/doc_financials/2020/q1/Genco-Q1-2020-Earnings-Presentation.pdf

Intrinsic value scenarios:

    • Low case: Genco Shipping may be worth 50% of current book value (which is understated) of $20.36 a share.   That’s $10.18, which is over 45% higher than today’s $6.94.
    • Mid case: Genco Shipping is likely worth at least book value (which is understated) of $20.36 a share.  That’s over 190% higher than today’s $6.94.
    • High case: Genco Shipping may be worth 150% of book value (which is understated) of $20.36.  That’s $30.54, which is about 340% higher than today’s $6.94.

 

BOOLE MICROCAP FUND

An equal weighted group of micro caps generally far outperforms an equal weighted (or cap-weighted) group of larger stocks over time.  See the historical chart here:  http://boolefund.com/best-performers-microcap-stocks/

This outperformance increases significantly by focusing on cheap micro caps.  Performance can be further boosted by isolating cheap microcap companies that show improving fundamentals.  We rank microcap stocks based on these and similar criteria.

There are roughly 10-20 positions in the portfolio.  The size of each position is determined by its rank.  Typically the largest position is 15-20% (at cost), while the average position is 8-10% (at cost).  Positions are held for 3 to 5 years unless a stock approaches intrinsic value sooner or an error has been discovered.

The mission of the Boole Fund is to outperform the S&P 500 Index by at least 5% per year (net of fees) over 5-year periods.  We also aim to outpace the Russell Microcap Index by at least 2% per year (net).  The Boole Fund has low fees.

 

If you are interested in finding out more, please e-mail me or leave a comment.

My e-mail: jb@boolefund.com

 

 

 

Disclosures: Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Boole Capital, LLC.

SEACOR Marine (SMHI)

(Image: Zen Buddha Silence, by Marilyn Barbone)

May 31, 2020

We continue with examples of Boole’s quantitative investment process in action.

Recently, we looked at the following companies:

Tidewater (TDW): http://boolefund.com/tidewater-tdw/

TravelCenters of America (TA): http://boolefund.com/travelcenters-america-ta/

Teekay Tankers (TNK): http://boolefund.com/teekay-tankers-tnk/

Ranger Energy Services (RNGR): http://boolefund.com/ranger-energy-services-rngr/

Macro Enterprises (Canada: MCR.V): http://boolefund.com/macro-enterprises-mcr-v/

This week, we are going to look at SEACOR Marine (SMHI), which was spun off from SEACOR Holdings (CKH) in June 2017.  SEACOR Marine is a provider of global marine and support transportation services to the offshore oil and gas industry.  The company also provides its services to offshore wind farms.  SEACOR Marine has a market cap of $36 million.

 

Step One

First we screen for cheapness based on five metrics.  Here are the numbers for SEACOR Marine:

    • EV/EBITDA = 5.60
    • P/E = 1.19
    • P/B = 0.08
    • P/CF = 0.52
    • P/S = 0.07

These figures make SEACOR Marine one of the top ten cheapest companies out of over two thousand that we ranked.  (Normalized earnings is approximately $30 million.)

Step Two

Next we calculate the Piotroski F-Score, which is a measure of the fundamental strength of the company.  For more on the Piostroski F-Score, see my blog post here: http://boolefund.com/piotroski-f-score/

Tidewater has a Piotroski F-Score of 6.  (The best score possible is 9, while the worst score is 0.)  This is decent.

Step Three

Then we rank the company based on low debt, high insider ownership, and shareholder yield.

We measure debt levels by looking at total liabilities (TL) to total assets (TA).  SEACOR Marine has TL/TA of 52.9%, which is OK.

Insider ownership is important because that means that the people running the company have interests that are aligned with the interests of other shareholders.  At SEACOR Marine, insider ownership is approximately 10%.

Shareholder yield is the dividend yield plus the buyback yield.  The company has not bought back shares, but has instead issued shares.  The company pays no dividend.  Thus, shareholder yield is close to zero.

Each component of the ranking has a different weight.  The overall combined ranking of SEACOR Marine places it in the top 20 stocks on our screen, or the top 0.8% of the more than two thousand companies we ranked.

Step Four

The final step is to study the company’s financial statements, presentations, and quarterly conference calls to (i) check for non-recurring items,  hidden liabilities, and bad accounting; (ii) estimate intrinsic value—how much the business is worth—using scenarios for low, mid, and high cases.

Here is the company’s investor presentation from September, 2019: https://ir.seacormarine.com/static-files/111f9bd0-64bb-42c4-adbe-3b9239c3f817

Offshore oil drilling—which is what SEACOR Marine primarily supports—has slowed significantly due to a drop in oil demand caused by stay-at-home orders to deal with the coronavirus.  In response, OPEC+ has cut oil production by a record amount.  Eventually, a vaccine for the coronavirus will be found.  In the meantime, widespread testing plus contact tracing will allow the world economy to gradually return to a more normal existence.

OPEC+ will maintain supply cuts until oil is at least $50 to $60, if not higher.  Countries including Saudi Arabia and Russia (the two largest producers in OPEC+) need oil to be at least $50 to $60 to fund their states.

In brief, oil should return to at least $50 to $60, if not higher, within a few years.  Offshore oil drilling will gradually recover.  Offshore service vessel operations will be needed more and more.

SEACOR Marine is very well managed and appears to have greater upside than Tidewater—which we looked at last week (http://boolefund.com/tidewater-tdw/).  However, SEACOR Marine could run into liquidity issues, which makes it somewhat riskier than Tidewater as an investment.  SEACOR Marine has $69 million in cash and $420 million in debt.  $309 million of that debt is due in 2023 or later.  Thus, the company’s balance sheet is decent, but could still present problems as the offshore oil drilling recovery becomes more protracted.

Intrinsic value scenarios:

    • Low case: In a distressed scenario, SEACOR Marine may be worth 10% of current book value of $19.76 a share.   That’s $1.98, which is over 25% higher than today’s $1.55.
    • Mid case: SEACOR Marine is likely worth at least book value of $19.76 a share.  That’s over 1,170% higher than today’s $1.55.
    • High case: SEACOR Marine may be worth 150% of book value of $19.76.  That’s $29.64, which is over 1,810% higher than today’s $1.55.

 

BOOLE MICROCAP FUND

An equal weighted group of micro caps generally far outperforms an equal weighted (or cap-weighted) group of larger stocks over time.  See the historical chart here:  http://boolefund.com/best-performers-microcap-stocks/

This outperformance increases significantly by focusing on cheap micro caps.  Performance can be further boosted by isolating cheap microcap companies that show improving fundamentals.  We rank microcap stocks based on these and similar criteria.

There are roughly 10-20 positions in the portfolio.  The size of each position is determined by its rank.  Typically the largest position is 15-20% (at cost), while the average position is 8-10% (at cost).  Positions are held for 3 to 5 years unless a stock approaches intrinsic value sooner or an error has been discovered.

The mission of the Boole Fund is to outperform the S&P 500 Index by at least 5% per year (net of fees) over 5-year periods.  We also aim to outpace the Russell Microcap Index by at least 2% per year (net).  The Boole Fund has low fees.

 

If you are interested in finding out more, please e-mail me or leave a comment.

My e-mail: jb@boolefund.com

 

 

 

Disclosures: Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Boole Capital, LLC.

Tidewater (TDW)

(Image: Zen Buddha Silence, by Marilyn Barbone)

May 24, 2020

We continue with examples of Boole’s quantitative investment process in action.

Last week, we looked at TravelCenters of America (TA): http://boolefund.com/travelcenters-america-ta/

The week before last, we looked at Teekay Tankers (TNK): http://boolefund.com/teekay-tankers-tnk/

Previously, we looked at Ranger Energy Services (RNGR): http://boolefund.com/ranger-energy-services-rngr/

Before that, we looked at Macro Enterprises (Canada: MCR.V): http://boolefund.com/macro-enterprises-mcr-v/

This week, we are going to look at Tidewater (TDW), the largest OSV (offshore service vessel) owner globally.  Tidewater has 198 OSVs and is the most geographically diverse OSV operator.  Also, the company has become the most cost efficient OSV operator.  Tidewater has a young, modern fleet with high-specification tonnage.  Moreover, the company has a strong balance sheet, with $188 million in cash and $282 million in debt.

 

Step One

First we screen for cheapness based on five metrics.  Here are the numbers for Tidewater:

    • EV/EBITDA = 3.85
    • P/E = 2.95
    • P/B = 0.21
    • P/CF = 2.06
    • P/S = 0.43

These figures make Tidewater one of the top twenty cheapest companies out of over two thousand that we ranked.  (The current market cap is $206 million, while current enterprise value is $308 million.  Normalized earnings is approximately $70 million.)

Step Two

Next we calculate the Piotroski F-Score, which is a measure of the fundamental strength of the company.  For more on the Piostroski F-Score, see my blog post here: http://boolefund.com/piotroski-f-score/

Tidewater has a Piotroski F-Score of 7.  (The best score possible is 9, while the worst score is 0.)  This is very good.

Step Three

Then we rank the company based on low debt, high insider ownership, and shareholder yield.

We measure debt levels by looking at total liabilities (TL) to total assets (TA).  Tidewater has TL/TA of 23.4%, which is excellent.

Insider ownership is important because that means that the people running the company have interests that are aligned with the interests of other shareholders.  At Tidewater, insider ownership is approximately 3%.

Shareholder yield is the dividend yield plus the buyback yield.  The company has not bought back shares, but has instead issued shares.  The company pays no dividend.  Thus, shareholder yield is close to zero.

Each component of the ranking has a different weight.  The overall combined ranking of Tidewater places it in the top 20 stocks on our screen, or the top 0.8% of the more than two thousand companies we ranked.

Step Four

The final step is to study the company’s financial statements, presentations, and quarterly conference calls to (i) check for non-recurring items,  hidden liabilities, and bad accounting; (ii) estimate intrinsic value—how much the business is worth—using scenarios for low, mid, and high cases.

Here is the company’s investor presentation: https://investor.tdw.com/static-files/7165abb8-c732-424b-a90c-09998c6e8f83

Offshore oil drilling—which is what Tidewater supports—has slowed significantly due to a drop in oil demand caused by stay-at-home orders to deal with the coronavirus.  In response, OPEC+ has cut oil production by a record amount.  Eventually, a vaccine for the coronavirus will be found.  In the meantime, widespread testing plus contact tracing will allow the world economy to gradually return to a more normal existence.

OPEC+ will maintain supply cuts until oil is at least $50 to $60, if not higher.  Countries including Saudi Arabia and Russia (the two largest producers in OPEC+) need oil to be at least $50 to $60 to fund their states.

In sum, oil should return to at least $50 to $60, if not higher, within a few years.  Offshore oil drilling will gradually recover.  Offshore service vessel operations will be needed more and more.  Tidewater will be a survivor due to its high cash balance and low debt, whereas some other OSV operators may go bankrupt (like Hornbeck Offshore).  Also, as noted earlier, Tidewater is the lowest cost OSV operator.

Intrinsic value scenarios:

    • Low case: Tidewater is probably worth at least 50% of current book value (which is understated) of $24.77 a share.   That’s $12.39, which is over 140% higher than today’s $5.12.
    • Mid case: Tidewater is likely worth at least book value (which is understated) of $24.77 a share.  That’s over 380% higher than today’s $5.12.
    • High case: Tidewater may be worth 150% of book value (which is understated) of $24.77.  That’s $37.16, which is 625% higher than today’s $5.12.

 

BOOLE MICROCAP FUND

An equal weighted group of micro caps generally far outperforms an equal weighted (or cap-weighted) group of larger stocks over time.  See the historical chart here:  http://boolefund.com/best-performers-microcap-stocks/

This outperformance increases significantly by focusing on cheap micro caps.  Performance can be further boosted by isolating cheap microcap companies that show improving fundamentals.  We rank microcap stocks based on these and similar criteria.

There are roughly 10-20 positions in the portfolio.  The size of each position is determined by its rank.  Typically the largest position is 15-20% (at cost), while the average position is 8-10% (at cost).  Positions are held for 3 to 5 years unless a stock approaches intrinsic value sooner or an error has been discovered.

The mission of the Boole Fund is to outperform the S&P 500 Index by at least 5% per year (net of fees) over 5-year periods.  We also aim to outpace the Russell Microcap Index by at least 2% per year (net).  The Boole Fund has low fees.

 

If you are interested in finding out more, please e-mail me or leave a comment.

My e-mail: jb@boolefund.com

 

 

 

Disclosures: Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Boole Capital, LLC.

TravelCenters of America (TA)

(Image: Zen Buddha Silence, by Marilyn Barbone)

May 17, 2020

We continue with examples of Boole’s quantitative investment process in action.

Last week, we looked at Teekay Tankers (TNK): http://boolefund.com/teekay-tankers-tnk/

Previously, we looked at Ranger Energy Services (RNGR): http://boolefund.com/ranger-energy-services-rngr/

Before that, we looked at Macro Enterprises (Canada: MCR.V): http://boolefund.com/macro-enterprises-mcr-v/

This week, we are going to look at TravelCenters of America (TA), which operates 232 travel centers in the United States.  (Franchisees operate an additional 29 travel centers.)  TA is in 44 states.

 

Step One

First we screen for cheapness based on five metrics.  Here are the numbers for TravelCenters of America:

    • EV/EBITDA = 2.55
    • P/E = 2.90
    • P/B = 0.14
    • P/CF = 1.40
    • P/S = 0.01

These figures make TravelCenters of America one of the top ten cheapest companies out of over two thousand that we ranked.  (The current market cap is $77 million, while current enterprise value is $319 million.)

Step Two

Next we calculate the Piotroski F-Score, which is a measure of the fundamental strength of the company.  For more on the Piostroski F-Score, see my blog post here: http://boolefund.com/piotroski-f-score/

TravelCenters of America has a Piotroski F-Score of 8.  (The best score possible is 9, while the worst score is 0.)  This is excellent.

Step Three

Then we rank the company based on low debt, high insider ownership, and shareholder yield.

We measure debt levels by looking at total liabilities (TL) to total assets (TA).  TravelCenters of America has TL/TA of 59.8%, which is decent.

Insider ownership is important because that means that the people running the company have interests that are aligned with the interests of other shareholders.  At TravelCenters of America, insider ownership is approximately 9%.

Shareholder yield is the dividend yield plus the buyback yield.  The company has not bought back shares, but has instead issued a small amount of shares.  But the company pays no dividend.  Thus, shareholder yield is close to zero.

Each component of the ranking has a different weight.  The overall combined ranking of TravelCenters of America places it in the top 10 stocks on our screen, or the top 0.4% of the more than two thousand companies we ranked.

Step Four

The final step is to study the company’s financial statements, presentations, and quarterly conference calls to (i) check for non-recurring items,  hidden liabilities, and bad accounting; (ii) estimate intrinsic value—how much the business is worth—using scenarios for low, mid, and high cases.

Here is the company’s Q120 earnings presentation: http://s22.q4cdn.com/786577010/files/doc_financials/2020/q1/TA_Investor_Presentation_Q120_V3.pdf

Jonathan Pertchik was hired as the new CEO in December, 2019.  Pertchik has a track record of successfully turning around companies, including most recently InTown Suites, where he doubled EBITDA.

Intrinsic value scenarios:

    • Low case: Normalized EBITDA is at least $125 million.  TravelCenters of America is probably worth an EV/EBITDA of at least 4x, which works out to $31.01 a share.   That’s over 230% higher than today’s $9.29.
    • Mid case: If the new CEO Jonathan Pertchik is successful in cutting costs and turning around TravelCenters of America, then the stock is probably worth at least book value of $66.54 a share.  That’s about 615% higher than today’s $9.29.
    • High case: If the new CEO Jonathan Pertchik exceeds expectations, then normalized EBITDA may be $150 million and TravelCenters of America is probably worth an EV/EBITDA of at least 7x.  That works out to $97.12 a share, over 940% higher than today’s $9.29.

 

BOOLE MICROCAP FUND

An equal weighted group of micro caps generally far outperforms an equal weighted (or cap-weighted) group of larger stocks over time.  See the historical chart here:  http://boolefund.com/best-performers-microcap-stocks/

This outperformance increases significantly by focusing on cheap micro caps.  Performance can be further boosted by isolating cheap microcap companies that show improving fundamentals.  We rank microcap stocks based on these and similar criteria.

There are roughly 10-20 positions in the portfolio.  The size of each position is determined by its rank.  Typically the largest position is 15-20% (at cost), while the average position is 8-10% (at cost).  Positions are held for 3 to 5 years unless a stock approaches intrinsic value sooner or an error has been discovered.

The mission of the Boole Fund is to outperform the S&P 500 Index by at least 5% per year (net of fees) over 5-year periods.  We also aim to outpace the Russell Microcap Index by at least 2% per year (net).  The Boole Fund has low fees.

 

If you are interested in finding out more, please e-mail me or leave a comment.

My e-mail: jb@boolefund.com

 

 

 

Disclosures: Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Boole Capital, LLC.

Teekay Tankers (TNK)

(Image: Zen Buddha Silence, by Marilyn Barbone)

May 10, 2020

We continue with examples of Boole’s quantitative investment process in action.

Previously, we looked at Ranger Energy Services (RNGR): http://boolefund.com/ranger-energy-services-rngr/

Before that, we looked at Macro Enterprises (Canada: MCR.V): http://boolefund.com/macro-enterprises-mcr-v/

This week, we are going to look at Teekay Tankers (TNK), which is the largest public mid-size oil tanker company in the world.  TNK has high quality assets.

 

Step One

First we screen for cheapness based on five metrics.  Here are the numbers for Teekay Tankers:

    • EV/EBITDA = 4.35
    • P/E = 2.44
    • P/B = 0.62
    • P/CF = 1.31
    • P/S = 0.54

These figures—especially EV/EBITDA, P/E, and P/CF—make Teekay Tankers one of the top twenty cheapest companies out of over two thousand that we ranked.  (Note: This assumes that Q419 revenues, EBITDA, earnings, and cash flows are maintained, which has more than been the case thus far in 2020.  The current market capitalization is $616 million.)

Step Two

Next we calculate the Piotroski F-Score, which is a measure of the fundamental strength of the company.  For more on the Piostroski F-Score, see my blog post here: http://boolefund.com/piotroski-f-score/

Teekay Tankers has a Piotroski F-Score of 8.  (The best score possible is 9, while the worst score is 0.)  This is excellent.

Step Three

Then we rank the company based on low debt, high insider ownership, and shareholder yield.

We measure debt levels by looking at total liabilities (TL) to total assets (TA).  Teekay Tankers has TL/TA of 55.8%, which is decent.

Insider ownership is important because that means that the people running the company have interests that are aligned with the interests of other shareholders.  At Teekay Tankers, insider ownership is approximately 17%.

Shareholder yield is the dividend yield plus the buyback yield.  The company has not bought back shares, but has instead issued a small amount of shares.  However, the dividend yield is 0.17%, which mostly offsets the newly issued shares.  Thus, shareholder yield is practically zero.

Each component of the ranking has a different weight.  The overall combined ranking of Teekay Tankers places it in the top 10 stocks on our screen, or the top 0.4% of the more than two thousand companies we ranked.

Step Four

The final step is to study the company’s financial statements, presentations, and quarterly conference calls to (i) check for non-recurring items,  hidden liabilities, and bad accounting; (ii) estimate intrinsic value—how much the business is worth—using scenarios for low, mid, and high cases.

Here is the company’s Q419 Earnings Release: https://www.teekay.com/wp-content/uploads/2020/02/TNK-Q4-19-Earnings-Release.pdf

Oil tanker rates have been much higher on average during the past couple of months.  This is largely due to floating storage demand as the crude oil futures curve moved into a contango pricing structure, meaning that it has been profitable to buy oil now, store it on oil tankers, and sell it at the higher prices a few months in the future.

Note that the fundamentals for oil shipping were already firm before the recent spikes in oil tanker rates.  These fundamentals—based on the supply and demand for oil tankers—should be strong in 2021 and 2022.

It may take at least 6 months for oil demand to recover, given the impact of the coronavirus.  But in the near term at least, demand for floating storage will continue as long as the crude oil futures curve is in contango.

Intrinsic value scenarios:

    • Low case: If the recovery in tanker rates is interrupted, then Teekay Tankers is probably worth book value of $29.41 a share, which is about 60% higher than today’s $18.30.
    • Mid case: If tanker rates continue to recover—which is likely based on the supply and demand for oil tankers—then Teekay Tankers is probably worth at least 150% of book value.  That’s $44.12, which is over 140% higher than today’s $18.30.
    • High case: Under a full market recovery, Teekay Tankers is probably worth a P/E of 10.  That works out to $74.88 a share, roughly 310% higher than today’s $18.30.

 

BOOLE MICROCAP FUND

An equal weighted group of micro caps generally far outperforms an equal weighted (or cap-weighted) group of larger stocks over time.  See the historical chart here:  http://boolefund.com/best-performers-microcap-stocks/

This outperformance increases significantly by focusing on cheap micro caps.  Performance can be further boosted by isolating cheap microcap companies that show improving fundamentals.  We rank microcap stocks based on these and similar criteria.

There are roughly 10-20 positions in the portfolio.  The size of each position is determined by its rank.  Typically the largest position is 15-20% (at cost), while the average position is 8-10% (at cost).  Positions are held for 3 to 5 years unless a stock approaches intrinsic value sooner or an error has been discovered.

The mission of the Boole Fund is to outperform the S&P 500 Index by at least 5% per year (net of fees) over 5-year periods.  We also aim to outpace the Russell Microcap Index by at least 2% per year (net).  The Boole Fund has low fees.

 

If you are interested in finding out more, please e-mail me or leave a comment.

My e-mail: jb@boolefund.com

 

 

 

Disclosures: Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Boole Capital, LLC.

The Intelligent Investor

(Image: Zen Buddha Silence, by Marilyn Barbone)

May 3, 2020

Warren Buffett, arguably the greatest investor of all time, was the only student to whom professor Ben Graham gave an A+ for the course he taught on security analysis at Columbia University.  Buffett later worked for Graham for a couple of years.  Graham was a teacher, a mentor, and a friend to Buffett.  Buffett said about Ben Graham’s The Intelligent Investor:

Chapters 8 and 20 have been the bedrock of my investing activities for more than 60 years.  I suggest that all investors read those chapters and reread them every time the market has been especially strong or weak.

(Ben Graham, by Equim43 via Wikimedia Commons)

 

CHAPTER 8: THE INVESTOR AND MARKET FLUCTUATIONS

Graham notes that stock prices fluctuate widely, and the intelligent investor should be interested in profiting from these swings.  Graham says there are two ways to do this: timing and pricing.  Timing is an attempt to predict stock prices.  Graham:

By pricing we mean the endeavor to buy stocks when they are quoted below their fair value and to sell them when they rise above such value.

Note that fair value, also called intrinsic value, is how much a knowledgeable buyer would pay for a business, based either upon how much the business can earn or based upon the balance sheet of the business.

Graham continues by noting that trying to time the market is speculation, and will not result in profits over the long term.  Many investors feel compelled to listen to stock market forecasts.  But, says Graham:

There is no basis either in logic or in experience for assuming that any typical or average investor can anticipate market movements more successfully than the general public, of which he is himself a part.

This is understating the case.  There is no evidence that any individual forecaster has been able to consistently predict the short-term movements of the stock market.

Illustration by Maxim Popov

Graham points out that one factor that leads the speculator to rely on shorter-term stock market predictions is that the speculator is in a hurry to make money.  An investor, by contrast, does not mind waiting one year or several years for a sound investment to pay off.

Furthermore, timing formulas based on the past tend not to work as well in the future, as Graham explains:

Those formulas that gain adherents and importance do so because they have worked well over a period, or sometimes merely because they have been plausibly adapted to the statistical record of the past.  But as their acceptance increases, their reliability tends to diminish.  This happens for two reasons: First, the passage of time brings new conditions which the old formula no longer fits.  Second, in stock-market affairs the popularity of a trading theory has itself an influence on the market’s behavior which detracts in the long run from its profit-making possibilities.

Graham writes of several theories that tried to identify buying conditions and selling conditions in the market.  Even Graham himself developed a “central value method.”  However, says Graham:

The moral seems to be that any approach to moneymaking in the stock market which can be easily described and followed by a lot of people is by its terms too simple and too easy to last.

An an investor, one should expect wide fluctuations in stock prices.  But what do you do after stock prices have advanced a great deal?  Graham:

But has the price risen too high, and should you think of selling?  Or should you kick yourself for not having bought more shares when the level was lower?  Orworst thought of allshould you now give way to the bull-market atmosphere, become infected with the enthusiasm, the overconfidence and the greed of the great public (of which, after all, you are a part), and make larger and dangerous commitments?  Presented thus in print, the answer to the last question is a self-evident no, but even the intelligent investor is likely to need considerable will power to keep from following the crowd.

Graham continues:

It is for these reasons of human nature, even more than by calculation of financial gain or loss, that we favor some kind of mechanical method for varying the proportion of bonds to stocks in the investor’s portfolio.  The chief advantage, perhaps, is that such a formula will give him something to do.  As the market advances he will from time to time make sales out of his stockholdings, putting the proceeds into bonds; as it declines he will reverse the procedure.  These activities will provide him some outlet for his otherwise too-pent-up energies.  If he is the right kind of investor he will take added satisfaction from the thought that his operations are exactly opposite from those of the crowd.

Business Valuations versus Stock-Market Valuations

Graham writes:

The impact of market fluctuations upon the investor’s true situation may be considered also from the standpoint of the shareholder as the part owner of various businesses.  The holder of marketable shares actually has a double status, and with it the privilege of taking advantage of either at his choice.  On the one hand his position is analogous to that of a minority shareholder or silent partner in a private business.  Here his results are entirely dependent on the profits of the enterprise or on a change in the underlying value of its assets.  He would usually determine the value of such a private-business interest by calculating his share of the net worth as shown in the most recent balance sheet.  On the other hand, the common-stock investor holds a piece of paper, an engraved stock certificate, which can be sold in a matter of minutes at a price which varies from moment to momentwhen the market is open, that isand often is far removed from the balance-sheet value.

Graham goes on to note that many successful businesses sell above their net worth.  (Note that net worth is also called book value, balance-sheet value, asset value, net asset value, and tangible book value.)  In this sense, Graham considers such businesses speculative as compared to unspectacular businesses selling at book value or below.  (It should be noted that businesses with a sustainably high ROICreturn on invested capitalshould sell above book value.  Some successful technology companies fall into this category.)

Graham:

The previous discussion leads us to a conclusion of practical importance to the conservative investor in common stocks.  If he is to pay some special attention to the selection of his portfolio, it might be best for him to concentrate on issues selling at a reasonably close approximation to their tangible-asset valuesay, at not more than one-third above that figure.  Purchases made at such levels, or lower, may with logic be regarded as related to the company’s balance sheet, and as having a justification or support independent of the fluctuating market prices….

(Illustration by Teguh Jati Prasetyo)

Graham adds:

A caution is needed here.  A stock does not become a sound investment merely because it can be bought at close to its asset value.  The investor should demand, in addition, a satisfactory ratio of earnings to price, a sufficiently strong financial position, and the prospect that its earnings will at least be maintained over the years.  This may appear like demanding a lot from a modestly priced stock, but the prescription is not hard to fill under all but dangerously high market conditions.  Once the investor is willing to forgo brilliant prospectsi.e., better than average expected growthhe will have no difficulty in finding a wide selection of issues meeting these criteria.

Graham then makes a central point:

The investor with a stock portfolio having such book values behind it can take a much more independent and detached view of stock-market fluctuations than those who have paid high multiples of both earnings and tangible assets.  As long as the earning power of his holdings remains satisfactory, he can give as little attention as he pleases to the vagaries of the stock market.  More than that, at times he can use these vagaries to play the master game of buying low and selling high.

The A. & P. Example

Graham gives the example of the Great Atlantic & Pacific Tea Co.  The shares sold as high as $494 in 1929, and ended up declining to a new low of $36 in 1938.  At that price, the company had a market capitalization of  of $126 million, which was lower than its net current assets of $134 million.  Essentially, the company was selling below net cash, which is cash minus all liabilities.  So its value as a going concern was lower than its value in a liquidation would be.  Graham explains:

Why?  First, because there were threats of special taxes on chain stores; second, because net profits had fallen off in the previous year; and, third, because the general market was depressed.  The first of these reasons was an exaggerated and eventually groundless fear; the other two were typical of temporary influences.

What about the investor who bought at $80 in 1937?  Graham says the investor should carefully have studied the situation, but should have concluded that the market price was a temporary vagary.  In fact, the investor should have bought more if he had the funds and the courage to do so.

By 1939, A. & P. was selling at $117.5.  In the years following 1949, A. & P. continued to advance, eventually reaching a split-adjusted price of $705.  At that price, the stock had a price-to-earnings ratio of 30, which implied that holders of the stock expected brilliant growth.  Such expectations were not justified.  The stock fell to an equivalent of $340, but even then was still not a bargain.  Eventually if fell to the equivalent of $215 in 1970 and then $180 in 1972, when the company reported its first quarterly loss in its history.

Graham comments:

We see in this history how wide can be the vicissitudes of a major American enterprise in little more than a single generation, and also with what miscalculations and excesses of optimism and pessimism the public has valued its shares.

Graham concludes:

There are two chief morals to this story.  The first is that the stock market often goes far wrong, and sometimes an alert and courageous investor can take advantage of its patent errors.  The other is that most businesses change in character and quality over the years, sometimes for the better, perhaps more often for the worst.  The investor need not watch his companies’ performance like a hawk; but he should give it a good, hard look from time to time.

Graham returns to the idea that a holder of marketable shares is like someone who owns a private business:

The true investor scarcely ever is forced to sell his shares, and at all other times he is free to disregard the current price quotation.  He need pay attention to it and act upon it only to the extent that it suits his book, and no more.  Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage.  That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons’ mistakes of judgment.

Graham then introduces the concept of “Mr. Market.”  Imagine you own a share in a private business:

One of your partners, named Mr. Market, is very obliging indeed.  Every day he tells you what he thinks your interest is worth and furthermore offers either to buy you out or to sell you an additional interest on that basis.  Sometimes his idea of value appears plausible and justified by business developments and prospects as you know them.  Often, on the other hand, Mr. Market lets his enthusiasm or his fears run away with him, and the value he proposes seems to you a little short of silly.

Graham makes the point that you do not form your opinion about the value of the business based on Mr. Market’s daily communication:

Only in case you agree with him, or in case you want to trade with him.  You may be happy to sell out to him when he quotes you a ridiculously high price, and equally happy to buy from him when his price is low.  But the rest of the time you will be wiser to form your own ideas of the value of your holdings, based on full reports from the company about its operations and financial position.

Graham argues that owning a share of stock is similar to the Mr. Market analogy:

Basically, price fluctuations have only one significant meaning for the true investor.  They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal.  At other times he will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies.

(Illustration by Andrii Vinnikov)

Graham concludes:

The investor with a portfolio of sound stocks should expect the prices to fluctuate and should neither be concerned by sizable declines nor become excited by sizable advances.  He should always remember that market quotations are there for his convenience, either to be taken advantage of or to be ignored.  He should never buy a stock because it has gone up or sell one because it has gone down.

Graham makes one final point:

Good managements produce a good average market price, and bad managements produce bad market prices.

 

CHAPTER 20: “MARGIN OF SAFETY” AS THE CENTRAL CONCEPT OF INVESTMENT

Graham writes:

In the old legend the wise men finally boiled down the history of mortal affairs into the single phrase, “This too will pass.”  Confronted with a like challenge to distill the secret of sound investment into three words, we venture the motto, MARGIN OF SAFETY.

Graham comments:

Here the function of the margin of safety is, in essence, that of rendering unnecessary an accurate estimate of the future.  If the margin is a large one, then it is enough to assume that future earnings will not fall far below those of the past in order for an investor to feel sufficiently protected against the  vicissitudes of time.

Graham again:

The margin of safety is always dependent on the price paid.  It will be large at one price, small at some higher price, nonexistent at some still higher price.

(Photo by Chuahtc8)

Graham explains margin of safety:

The margin-of-safety idea becomes much more evident when we apply it to the field of undervalued or bargain securities.  We have here, by definition, a favorable difference between price on the one hand and indicated or appraised value on the other.  That difference is the margin of safety.  It is available for absorbing the effect of miscalculations or worse than average luck.  The buyer of bargain issues places particular emphasis on the ability of the investment to withstand adverse developments.  For in most such cases he has no real enthusiasm about the company’s prospects.

Graham goes on to note that a moderate decline in earnings power will not necessarily prevent a cheaply bought stock from producing a satisfactory investment result.

A Criterion of Investment versus Speculation

Graham writes:

Probably most speculators believe they have the odds in their favor when they take their chances, and therefore they may lay claim to a safety margin in their proceedings… But such claims are unconvincing.  They rest on subjective judgment, unsupported by any body of favorable evidence or any conclusive line of reasoning.  We greatly doubt whether the man who stakes money on his view that the market is heading up or down can ever be said to be protected by a margin of safety in any useful sense of the phrase.

Graham observes that, by contrast, buying stocks below a conservative appraisal of intrinsic value does imply a margin of safety and therefore does classify as investment rather than speculation.

To Sum Up

Graham sums up the chapter:

Investment is most intelligent when it is most businesslike.  It is amazing to see how many capable businessmen try to operate in Wall Street with complete disregard of all the sound principles through which they have gained success in their own undertakings.  Yet every corporate security may best be viewed, in the first instance, as an ownership interest in, or a claim against, a specific business enterprise.  And if a person sets out to make profits from security purchases and sales, he is embarking on a business venture of his own, which must be run in accordance with accepted business principles if it is to have a chance of success.

Graham says the investor should know as much about the intrinsic values of the businesses in which he invests as he would need to know about the value of merchandise that he proposed to manufacture and sell.

Graham adds that the investor should be able to supervise adequately the running of the business in which he invests, and the investor should have confidence in the integrity and ability of the managers running the business.

Moreover, the investor should have a reasonable chance of profit, while possible losses should be minimal by comparison.

Furthermore, notes Graham, have the courage of your knowledge and experience, regardless of how many others agree or disagree.

You are neither right nor wrong because the crowd disagrees with you.  You are right because your data and reasoning are right… in the world of securities, courage becomes the supreme virtue after adequate knowledge and a tested judgment are at hand.

 

BOOLE MICROCAP FUND

An equal weighted group of micro caps generally far outperforms an equal weighted (or cap-weighted) group of larger stocks over time.  See the historical chart here:  http://boolefund.com/best-performers-microcap-stocks/

This outperformance increases significantly by focusing on cheap micro caps.  Performance can be further boosted by isolating cheap microcap companies that show improving fundamentals.  We rank microcap stocks based on these and similar criteria.

There are roughly 10-20 positions in the portfolio.  The size of each position is determined by its rank.  Typically the largest position is 15-20% (at cost), while the average position is 8-10% (at cost).  Positions are held for 3 to 5 years unless a stock approaches intrinsic value sooner or an error has been discovered.

The mission of the Boole Fund is to outperform the S&P 500 Index by at least 5% per year (net of fees) over 5-year periods.  We also aim to outpace the Russell Microcap Index by at least 2% per year (net).  The Boole Fund has low fees.

 

If you are interested in finding out more, please e-mail me or leave a comment.

My e-mail: jb@boolefund.com

 

 

 

Disclosures: Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Boole Capital, LLC.

No One Can Predict the Stock Market in the Short Term

(Image: Zen Buddha Silence, by Marilyn Barbone)

April 19, 2020

The great value investor Seth Klarman has remarked:

In reality, no one knows what the market will do; trying to predict it is a waste of time, and investing based upon that prediction is a speculative undertaking.

Legendary value investors Warren Buffett and Charlie Munger also believe that no one can predict the stock market in the short term.  Here’s Buffett in the fall of 2008, during the Great Financial Crisis:

Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a monthor a yearfrom now.  What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.

Link: https://www.nytimes.com/2008/10/17/opinion/17buffett.html

Buffett has said repeatedly that the only thing he’s sure of is that the United States will move forward over time.  Buffett again, in the same New York Times Op-Ed from October 16, 2008:

Over the long term, the stock market news will be good.  In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president.  Yet the Dow rose from 66 to 11,497.

You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain.  But some investors did.  The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.

Buffett’s point is that the United States will always encounter big challenges, but that the country has overcome every challenge it has faced in its history.  If you’re a long-term investor, then whenever the stock market declines significantly, it’s a wonderful opportunity to buy more stocks.

Many individual countries are already on track to gradually reopen their economies in a phased manner.  At the same time, the fiscal stimulus and the monetary stimulus in the United States are at record levels.  Moreover, scientists and researchers around the world are focused on developing a cure and also a vaccine for covid-19.

We don’t know precisely when the U.S. economy and the world economy will fully recover from the challenges associated with covid-19.  But we do know that the United States and the world will beat covid-19 eventually and will proceed to new highsboth for economic output and for the stock market.  If an investor waits until the world economy has fully recovered, which could be in 2021, then there’s a good chance they will have missed this year’s buying opportunity.  Buffett again:

What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up.  So if you wait for the robins, spring will be over.

 

BOOLE MICROCAP FUND

An equal weighted group of micro caps generally far outperforms an equal weighted (or cap-weighted) group of larger stocks over time.  See the historical chart here:  http://boolefund.com/best-performers-microcap-stocks/

This outperformance increases significantly by focusing on cheap micro caps.  Performance can be further boosted by isolating cheap microcap companies that show improving fundamentals.  We rank microcap stocks based on these and similar criteria.

There are roughly 10-20 positions in the portfolio.  The size of each position is determined by its rank.  Typically the largest position is 15-20% (at cost), while the average position is 8-10% (at cost).  Positions are held for 3 to 5 years unless a stock approaches intrinsic value sooner or an error has been discovered.

The mission of the Boole Fund is to outperform the S&P 500 Index by at least 5% per year (net of fees) over 5-year periods.  We also aim to outpace the Russell Microcap Index by at least 2% per year (net).  The Boole Fund has low fees.

 

If you are interested in finding out more, please e-mail me or leave a comment.

My e-mail: jb@boolefund.com

 

 

 

Disclosures: Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Boole Capital, LLC.