(Image: Zen Buddha Silence, by Marilyn Barbone)
October 4, 2020
We continue with examples of Boole’s quantitative investment process in action.
Recently, we looked at the following companies:
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 Micropac Industries, Inc. (MPAD). The company distributes microelectronic circuits and electronic components for military, space, and industrial applications. MPAD has a market cap of $29.7 million, with $15.3 million in cash and no debt.
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First we screen for cheapness based on five metrics. Here are the numbers for Micropac Industries:
- EV/EBITDA = 2.97
- P/E = 7.72
- P/B = 1.02
- P/CF = 15.28
- P/S = 1.12
EPS (earnings per share) for the trailing twelve months is $1.49, while the current stock price is $11.50.
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/
Micropac Industries 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). MPAD has TL/TA of 7.5%, which is outstanding. As noted earlier, the company has $15.3 million in cash and no debt.
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 Microcap Industries, insider ownership is approximately 82.5%. The interests of insiders are well-aligned with the interests of other shareholders. However, one person, Heinz-Werner Hempel, owns over 77% of the shares. This gives him control of the company, which could be a negative. That said, Hempel is 91 years old and likely will want some liquidity fairly soon, which would lead him to sell some shares.
Shareholder yield is the dividend yield plus the buyback yield. At MPAD, dividend yield is 0.83%. The buyback yield is zero. Thus, shareholder yield is 0.83%, which is negligible.
Each component of the ranking has a different weight. The overall combined ranking of MPAD 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 MPAD’s most recent 10-Q (filed on July 13, 2020) for the second quarter of 2020: https://www.micropac.com/writable/investors/micropac10q05302020.pdf
Also, check out the following discussion, which is dated but still relevant: https://valueinvestorsclub.com/idea/MICROPAC_INDUSTRIES_INC/1629739972
(To access the link to valueinvestorsclub.com, you may have to create a guest membership, which is free.)
Intrinsic value scenarios:
- Low case: The company is probably worth at least book value, which is $11.32 per share. That’s 1.6% lower than today’s $11.50.
- Mid case: EPS for the trailing twelve months is $1.49. The P/E should be at least 8. That translates into a stock price of $11.92. Add to that the $5.89 in net cash per share, and you get a stock price of $17.81, which is about 55% higher than today’s $11.50.
- High case: Once the coronavirus is no longer an issue, normalized EPS may be $2.00 (and slowly growing). MPAD may easily be worth a P/E of 10. That translates into a stock price of $20.00. Add to that the $5.89 in net cash per share, and you get a stock price of $25.89, which is 125% higher than today’s $11.50.
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.