(Image: Zen Buddha Silence, by Marilyn Barbone)
August 30, 2020
We continue with examples of Boole’s quantitative investment process in action.
Recently, we looked at the following companies:
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 AdvanSix, Inc. (ASIX). AdvanSix is a leading manufacturer of Nylon 6, a polymer resin used to produce engineered plastics, fibers, filaments, and films. These products are used in a wide range of applications, including automotive, food and industrial packaging, carpeting, wire and cable, building and construction, and sports apparel. (AdvanSix is also an integrated manufacturer of caprolactam, ammonium sulfate fertilizers, phenol, acetone, and more.) ASIX has a market cap of $389 million, with $73 million in cash and $509 million in debt.
Note: AdvanSix is the low-cost producer of Nylon 6.
First we screen for cheapness based on five metrics. Here are the numbers for AdvanSix:
- EV/EBITDA = 6.71
- P/E = 8.46
- P/B = 0.87
- P/CF = 11.04
- P/S = 0.42
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/
ASIX has a Piotroski F-Score of 6. (The best score possible is 9, while the worst score is 0.) This is decent.
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). ASIX has TL/TA of 67%, 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 ASIX, insider ownership is approximately 1%. This is low.
Shareholder yield is the dividend yield plus the buyback yield. At AdvanSix, dividend yield is zero. The buyback yield is 3%. Thus, shareholder yield is 3%.
Each component of the ranking has a different weight. The overall combined ranking of AdvanSix 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.
The company’s investor presentation from June 9, 2020 can be downloaded here: https://investors.advansix.com/~/media/Files/A/AdvanSix-IR/reports-and-presentations/stifel-virtual-cross-sector-insight-conference-presentation.pdf
(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 may be worth book value of $15.01. That’s 8% higher than today’s $13.87.
- Mid case: Normalized EBITDA is approximately $250 million. ASIX is likely worth at least 8x EV/EBITDA. That translates to $55.81 per share, over 300% higher than today’s $13.87.
- High case: Normalized EBITDA may be $300 million. ASIX may be worth 10x EV/EBITDA. That’s $91.49 per share, about 560% higher than today’s $13.87.
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.