(Image: Zen Buddha Silence, by Marilyn Barbone)
December 13, 2020
We continue with examples of Boole’s quantitative investment process in action.
Recently, we looked at the following companies:
Diamond S Shipping Inc. (DSSI): http://boolefund.com/diamond-s-shipping-inc-dssi/
DHI Group, Inc. (DHX): http://boolefund.com/dhi-group-inc-dhx/
Saga Communications Inc. (SGA): http://boolefund.com/saga-communications-inc-sga/
Northwest Pipe Co. (NWPX): http://boolefund.com/northwest-pipe-co-nwpx/
Smart Sand Inc. (SND): http://boolefund.com/smart-sand-inc-snd/
Terravest Industries Inc. (TVK.TO): http://boolefund.com/terravest-industries-inc-tvk/
LGL Group, Inc. (LGL): http://boolefund.com/lgl-group-inc-lgl/
G-III Apparel Group, Ltd. (GIII): http://boolefund.com/g-iii-apparel-group-ltd-giii/
Hummingbird Resources Plc. (HUMRF): http://boolefund.com/hummingbird-resources-plc-humrf/
Micropac Industries, Inc. (MPAD): http://boolefund.com/micropac-industries-inc-mpad/
Barrett Business Services, Inc. (BBSI): http://boolefund.com/barrett-business-services-inc-bbsi/
Delta Apparel, Inc. (DLA): http://boolefund.com/delta-apparel-inc-dla/
AdvanSix, Inc. (ASIX): http://boolefund.com/advansix-inc-asix/
Universal Technical Institute (UTI): http://boolefund.com/universal-technical-institute-uti/
Burnham Holdings Inc (BURCA): http://boolefund.com/burnham-holdings-inc-burca/
Select Interior Concepts (SIC): http://boolefund.com/select-interior-concepts-sic/
Manitowoc (MTW): http://boolefund.com/manitowoc-mtw/
Ciner Resources LP (CINR): http://boolefund.com/ciner-resources-lp-cinr/
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 Karora Resources Inc. (KRRGF). Karora Resources is a multi-asset mineral resource company focused primarily on the acquisition, exploration, evaluation, and development of precious metal properties. The company aims to become the next sustainable high quality mid-tier producer. Its current operations are in Western Australia, while its headquarters are in Toronto, Canada.
KRRGF has a market cap of $380.7 million, with $52.5 million in cash and $30.4 million in debt. The stock price is $2.62. (All values are in U.S. dollars.)
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First we screen for cheapness based on five metrics. Here are the numbers for Karora Resources:
- EV/EBITDA = 4.50
- P/E = 13.04
- P/NAV = 0.29
- P/CF = 5.95
- P/S = 2.12
P/NAV has been used in place of P/B. Normalized EBITDA is $80 million, normalized earnings is $29.2 million, normalized cash flow is $64 million, and normalized sales is $180 million. All of these figures are likely to grow significantly in the coming three to five years, especially given the just-announced outstanding drilling results. See: https://tinyurl.com/yb5aqg3h
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/
Karora Resources has a Piotroski F-Score of 7. (The best score possible is 9, while the worst score is 0.) This is good.
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). Karora Resources has TL/TA of 50.2%, 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 Karora, management owns about 2% of the shares, worth $7.6 million. This is decent.
Shareholder yield is the dividend yield plus the buyback yield. At Korara Resources, the dividend yield is zero while the buyback yield is negative 13.5%. This means the company issued shares rather than buying them back. This is not ideal, but it won’t matter if the company does well in the next few years.
Each component of the ranking has a different weight. The overall combined ranking of Karora Resources places it in the top 50 stocks on our screen, or the top 2% of the more than two thousand companies we ranked.
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.
See Karora Resources’s most recent investor presentation (December 2, 2020): https://filecache.investorroom.com/mr5ircnw_karora/1704/Karora%20Presentation%202-Dec-2020.pdf
See also the company’s most recent quarterly financial statement dated September 30, 2020: https://www.karoraresources.com/financial-reports
Important note: The company just announced a 334% increase in proven and probable mineral reserves to 1.33 million ounces and a 167% increase in measured and indicated mineral resources to 2.52 million ounces. See the press release here: https://tinyurl.com/yb5aqg3h
Intrinsic value scenarios:
- Low case: NAV (net asset value) has at least doubled (from $4.54 per share to $9.08 per share) based on the just-announced drilling results. In the low case, the company may be worth half of the new NAV. That’s $4.54, which is over 70% higher than today’s $2.62.
- Mid case: NAV has at least doubled. Karora is probably worth the new NAV. That’s $9.08, over 245% higher than today’s $2.62.
- High case: NAV may end up more than tripling. If Karora is hitting on all cylinders and if the gold price moves higher, then the new NAV could be 3.5 times higher than the old NAV of $4.54. That’s $15.90, which is over 500% higher than today’s $2.62.
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: firstname.lastname@example.org
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.