(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.
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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.)
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.
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.
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: 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.