Boole Microcap Fund

(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): https://boolefund.com/tidewater-tdw/

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

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

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

Macro Enterprises (Canada: MCR.V): https://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: https://boolefund.com/piotroski-f-score/

SEACOR Marine 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 (https://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: https://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 approachesintrinsic 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: [email protected]

 

 

 

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.

(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): https://boolefund.com/travelcenters-america-ta/

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

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

Before that, we looked at Macro Enterprises (Canada: MCR.V): https://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: https://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://s25.q4cdn.com/923634175/files/doc_presentations/2020/Replacements/Tidewater-IR-Presentation-111120-(1).pdf

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: https://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 approachesintrinsic 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: [email protected]

 

 

 

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.

(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): https://boolefund.com/teekay-tankers-tnk/

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

Before that, we looked at Macro Enterprises (Canada: MCR.V): https://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: https://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 Q3 2020 earnings presentation: http://s22.q4cdn.com/786577010/files/doc_presentations/2020/11/TA_Investor_Presentation_Q320_FINAL.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.

Also check out: https://valueinvestorsclub.com/idea/TRAVELCENTERS_OF_AMERICA_INC/7802838651

(You may have to start a guest membership at www.valueinvestorsclub.com, but it is free to do so.)

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: https://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 approachesintrinsic 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: [email protected]

 

 

 

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.

(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): https://boolefund.com/ranger-energy-services-rngr/

Before that, we looked at Macro Enterprises (Canada: MCR.V): https://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: https://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: https://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 approachesintrinsic 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: [email protected]

 

 

 

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.

(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 month–or a year–from 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 highs–both 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: https://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 approachesintrinsic 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: [email protected]

 

 

 

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.

(Image: Zen Buddha Silence, by Marilyn Barbone)

April 12, 2020

Given how much uncertainty there is about the future, both in terms of the coronavirus and in terms of the economy, it can be helpful to consider the positive case and the negative case. Howard Marks writes that whether you favor the positives or the negatives depends on your innate psychological biases. Some people tend to be optimistic, while others tend to be pessimistic. See: https://www.oaktreecapital.com/docs/default-source/memos/calibrating.pdf

Marks admits to being somewhat pessimistic. I admit that I tend to be optimistic. But regardless of whether you’re an optimist or a pessimist, an investor must consider both the positives and the negatives. Sometimes things work out better than expected, while other times things can get much worse than expected.

 

THE POSITIVE CASE

The countries where the coronovirus first appeared have made progress. China has ended the lockdown in Wuhan. The numbers continue to improve in places such as Italy, Germany, Austria, and Spain.

The United States appears to have just passed peak resource usage and peak daily deaths, while the total number of deaths forecast to occur by August 4, 2020, is 68,841, which is much less than originally forecast. Each death is a tragedy. But it’s important to see the overall deaths in context. In the 2017-2018 flu season, there were 61,000 deaths in the United States, and that’s something for which we DO have a vaccine.

See: https://www.cdc.gov/flu/about/burden/2017-2018.htm

See: https://covid19.healthdata.org/united-states-of-america

It seems that the coronavirus can be nearly stamped out within three months or so, assuming widespread testing, contact tracing, and quarantining.

The R0, the rate of contagiousness–which measures the average number of people who will catch the disease from one contagious person–appears to be far higher than previously thought. Early on, researchers believed the R0 of the coronavirus was 2.2 to 2.7. A more recent study–which is probably more accurate, because it’s based on more and better data–estimates the R0 to be 5.7. This means there are many people who have the coronavirus, but are asymptomatic. This increases the probability of herd immunity and lowers the risk of reopening the global economy. See this Forbes article: https://tinyurl.com/t5xcdmd

Never have there been more doctors and scientists focused on one problem: developing treatments that aid recovery from the coronavirus and developing a vaccine.

Howard Marks summarizes the positive case for the economy:

The negative impact of the disease on the economy will be sharp but brief. The term “V-shaped” dominates most forecasts, both between Q2 and H2 and between 2020 and 2021. Thus, for example, one forecaster who has the earnings of the S&P 500 companies down 120% in Q2 thinks they may rise roughly 80+% in Q3 on a quarter-over-quarter basis… and then rise by a further 50% in Q4. And after a decline of 33% in 2020, earnings will rise by 55% in 2021 and exceed what they were in 2019.

See: https://www.oaktreecapital.com/docs/default-source/memos/which-way-now.pdf?sfvrsn=8

The Fed and the Treasury have both announced massive stimulus plans which should shore up the economy until the coronavirus has been brought under control.

The banks have only a third of the leverage they had during the Global Financial Crisis. The financial system is much stronger.

The U.S. private sector will produce huge amounts of supplies and equipment, and will develop testing, contact tracing methods, treatments, and vaccines.

 

THE NEGATIVE CASE

Howard Marks does an excellent job highlighting the negative case here: https://www.oaktreecapital.com/docs/default-source/memos/which-way-now.pdf?sfvrsn=8

Since Marks wrote his memo on March 31, the United States appears to have passed its peak in terms of resource usage and daily deaths. So I will summarize the negative case as it seems today.

The United States lags behind many other countries in terms of widespread testing, contact tracing, and quarantining.

Without the government stimulus, the economy was set to decline at a record rate.

Even with near-record government stimulus, is a V-shaped recovery realistic?

There are companies with revenues down and there are other companies with revenues that are gone entirely. But some costs are fixed and thus cannot be eliminated.

Many companies were highly leveraged going into the pandemic. There will be rising defaults until the economy rebounds, which could take months or longer.

The collapse in oil prices, which reached a level almost as low as 1973, is a negative. There will be large losses for oil-producing companies and countries. There will be job losses, as more than 5% of American jobs are in oil and gas.

 

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: https://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 approachesintrinsic 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: [email protected]

 

 

 

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.

(Image: Zen Buddha Silence, by Marilyn Barbone)

April 5, 2020

Here’s an excellent article by Rida Morwa on Seeking Alpha entitled, “Market Recovery: Sooner Than Most Expect”: https://tinyurl.com/w2wb9hn

Some points from Morwa’s article are worth highlighting:

The IHME (Institute of Health Metrics and Evaluation) currently predicts the peak number of daily deaths in the United States as occurring on April 12, 2020. The IHME also predicts peak resource usage by hospitals as happening on April 11, 2020. You can find the charts for both predictions here: https://covid19.healthdata.org/projections

The next question is: When can people start returning to work? If a treatment is developed that prevents moderate symptoms from becoming worse, or if there is much more widespread testing, then people may be able to start returning to work sooner than expected. There are many promising tests being developed, such as one by BD Integrated Diagnostic Solutions: https://tinyurl.com/uv2lp6b

Morwa notes:

These tests could identify who possibly has had a sub-clinical infection and developed immunity to the virus.

It’s likely that some people have already developed immunity. If this could be shown through much more widespread testing, some people could begin returning to a more normal life, including work.

Here’s a question and answer on the IHME website:

Will we need social distancing until there is a vaccine?

Our model suggests that, with social distancing, the end of the first wave of the epidemic could occur by early June. The question of whether there will be a second wave of the epidemic will depend on what we do to avoid reintroducing COVID-19 into the population. By the end of the first wave of the epidemic, an estimated 97% of the population of the United States will still be susceptible to the disease and thus measures to avoid a second wave of the pandemic prior to vaccine availability will be necessary. Maintaining some of the social distancing measures could be supplemented or replaced by nation-wide efforts such as mass screening, contact tracing, and selective quarantine.

Widespread testing, contact tracing, and selective quarantine could replace social distancing.

 

THE STOCK MARKET

Morwa quotes Bob Farrell:

When all the experts and forecasts agree–something else is going to happen.

Value investor Howard Marks has made a similar point:

The thing I find most interesting about investing is how paradoxical it is: how often the things that seem most obvious–on which everyone agrees–turn out not to be true.

The vast majority of investors are bearish right now, and expect things to get worse. But if IHME is correct that the peak number of daily deaths in the U.S. will approximately be on April 12, 2020, and if much more widespread testing allows many people to begin returning to work, then the stock market recovery could indeed occur sooner than most investors currently expect. (Another catalyst for people resuming a more normal life would be the development of a treatment that keeps moderate symptoms from becoming worse.)

Stock market declines during the first quarter are rare because money is usually being invested during that time. However, when the stock market has declined during the first quarter, it has almost always recovered during the rest of the year. Morwa includes the following chart:

Source:Ryan Dettrick

Furthermore, insiders have been buying heavily. Morwa shows the following graph:

The last time insider buying outpaced selling by as large a ratio was 2009, which turned out to be a major stock market bottom. Morwa comments:

Insiders can be early, and if we examine the spikes in buying activity, they have often coincided with the initial bottom and not the retest. But they know the impact on their company’s activity and clearly they are not seeing cause for alarm that everyone else is. They also have a better gauge on the pulse of the economy and possible changes to lockdown scenarios by the administration. Their unbridled bullishness is possibly one indicator that suggests the bottom might be in or we won’t go much lower than the March lows.

Morwa points out that a spike in insider buying is usually quite close to the stock market bottom in terms of price, but is usually 3-4 months early in terms of timing. If that pattern holds, then now is an excellent time to buy, but it’s possible that there will be new lows by June or July.

 

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: https://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 approachesintrinsic 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: [email protected]

 

 

 

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.

(Image: Zen Buddha Silence, by Marilyn Barbone)

March 29, 2020

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

A few weeks ago, we looked at Valaris (VAL), the cheapest stock I’ve ever seen: https://boolefund.com/valaris-val/

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

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

This week, we are going to look at Diamond Offshore (DO)–which has very low debt compared to the other offshore oil drillers. The company has $250 million in debt due in November 2023, $500 million due in August 2025, $500 million due in 2039, and $750 million due in 2043. Diamond Offshore has $156 million in cash, plus a $950 million undrawn credit facility. (Also, DO has no secured or guaranteed debt.) If there is a global recession, or if the oil war launched by Saudi Arabia lasts for at least a few years, then Diamond Offshore will still be a survivor, whereas many other offshore oil drillers may not be.

Step One

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

• • EV/EBITDA = 2.77
  • P/E = 0.45
  • P/B = 0.08
  • P/CF = 0.50
  • P/S = 0.09

These figures–especially EV/EBITDA, P/E, and P/B–make Diamond Offshore one of the top ten cheapest companies out of over two thousand that we ranked. (Note: This assumes a medium-case recovery with EBITDA at $801 million and net income at $549 million. The current market capitalization is $247 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: https://boolefund.com/piotroski-f-score/

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

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). Diamond has TL/TA of 44.6%, which is decent. It’s important to note that most of the company’s debt is due in 2039 or later.

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 Diamond, insider ownership is approximately 53%.

Shareholder yield is the dividend yield plus the buyback yield. The company has no dividend and is not buying back shares. Thus, shareholder yield is practically zero.

Each component of the ranking has a different weight. The overall combined ranking of Diamond Offshore 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.

See the company presentation: http://investor.diamondoffshore.com/static-files/6dd72109-658b-455a-ad9b-1dd3814a44ce

Diamond Offshore has 4 drillships and 11 semisubmersibles. All the drillships are contracted at above market rates through 2022. Diamond uses unique, innovative technologies that deliver superior performance and improved economics to the company and its customers.

The moored market is underserved. The highest expected growth is in moored semisubmersibles. Also, from 2013 to 2019, the overall number of moored semis declined from 83 to 42. Moreover, Diamond Offshore has the largest backlog in moored semis, 2x larger than the next competitor.

Intrinsic value scenarios:

• • Low case: If oil prices languish below $55 (WTI) for the next 3 to 5 years, Diamond Offshore will be a survivor because it has significantly lower debt than most of its competitors. ($250 million in debt is due in November 2023, $500 million is due in August 2025, $500 million is due in 2039, and $750 million is due in 2043.) In this scenario, Diamond is likely worth at least half of current book value (which is depressed) of $23.47. That’s $11.74, over 550% higher than today’s $1.79.
  • Mid case: If oil prices are in a range of $55 to $75 over the next 3 to 5 years–which is likely based on long-term supply and demand–then Diamond Offshore is probably worth at least current book value (which is depressed) of $23.47 a share, roughly 1,210% higher than today’s $1.79.
  • High case: Under a full market recovery, Diamond Offshore is probably worth 2x current book value (which is depressed) of $23.47 a share. That works out to $46.94 a share, over 2,500% higher than today’s $1.79.

Bottom Line

Diamond Offshore (DO) is a very cheap stock. Assuming the return of normal circumstances within the next 3 to 5 years, the potential upside is between 1,200% and 2,500%. Even in the worst case scenario, DO will survive (unlike many other offshore drillers) and likely have over 550% upside.

 

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: https://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 approachesintrinsic 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: [email protected]

 

 

 

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.

(Image: Zen Buddha Silence, by Marilyn Barbone)

March 8, 2020

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

A few weeks ago, we looked at Ranger Energy Services (RNGR): https://boolefund.com/ranger-energy-services-rngr/

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

This week, we are going to look at Valaris (VAL)–the largest offshore oil driller in the world and the cheapest stock I’ve ever seen–which comes out near the top of the quantitative screen employed by the Boole Microcap Fund. This results from four steps.

Step One

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

• • EV/EBITDA = 4.01
  • P/E = 0.14
  • P/B = 0.01
  • P/CF = 0.07
  • P/S = 0.03

These figures–especially P/E and P/B–make Valaris one of the top ten cheapest companies out of over two thousand that we ranked. (Note: This assumes a medium-case recovery with EBITDA at $1,510 million and net income at $700 million. The current market capitalization is $99 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: https://boolefund.com/piotroski-f-score/

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

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). Valaris has TL/TA of 45.0%, which is reasonable.

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 Valaris, insider ownership is approximately 5%. This isn’t a high percentage, but it does represent a total insider ownership of $5 million.

Shareholder yield is the dividend yield plus the buyback yield. The company has no dividend and is not buying back shares. Thus, shareholder yield is practically zero.

Each component of the ranking has a different weight. The overall combined ranking of Valaris places it in the top 5 stocks on our screen, or the top 0.2% 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.

See the company presentation (dated February, 2020): https://s23.q4cdn.com/956522167/files/doc_presentations/2020/02/02212020-Valaris-Investor-Presentation.pdf

Valaris is the largest offshore oil driller in the world, with presence in six continents and nearly all major offshore markets. The company has a large and diverse customer base including major, national, and independent E&P companies.

Valaris has 16 drillships, 10 semisubmersibles, and 50 jackups. Valaris has one of the highest-quality fleets: 11 of its 16 drillships are the highest-specification. 13 of its 50 jackups are heavy duty ultra harsh and harsh environment jackups. High-spec assets are preferred by customers.

Valaris is also one of the best capitalized drillers. Valaris has a market capitalization of $99 million. The company has $2.5 billion in contracted revenue backlog (excluding bonus opportunities). It has $1.7 billion in liquidity, including $100 million in cash and $1.6 billion in credit available. And it has only $858 million in debt maturities to 2024. Valaris is one of two public offshore drillers with no guaranteed or secured debt in the capital structure. With the asset value of its fleet at $9.1 billion (according to third party estimates), Valaris has ample flexibility to raise additional capital if needed.

In April 2019, Ensco plc (ESV) and Rowan Companies plc (RDC) merged in an all-stock transaction. The combination (renamed Valaris) has brought together two world-class operators with common cultures. Both companies have strong track records of safety and operational excellence. And both companies have a strategic focus on innovative technologies that increase efficiencies and lower costs. Ensco was rated #1 in customer satisfaction for nine straight years according to a leading independent survey.

As a result of the merger, Valaris has already achieved cost savings of $135 million pre-tax per year. The company expects to achieve additional savings of $130 million a year. The full savings will be $265 million a year, which is $100 million more a year than the company initially projected.

Intrinsic value scenarios:

• • Low case: If oil prices languish below $55 (WTI) for the next 3 to 5 years, Valaris will be a survivor, due to its large fleet, globally diverse customer base, industry leading performance, low cost structure, and well-capitalized position. In this scenario, Valaris is likely worth at least 10 percent of current book value (which is depressed) of $48.15. That’s $4.82, about 860% higher than today’s $0.50.
  • Mid case: If oil prices are in a range of $55 to $75 over the next 3 to 5 years–which is likely based on long-term supply and demand–then Valaris is probably worth at least current book value (which is depressed) of $48.15 a share, roughly 9,530% higher than today’s $0.50.
  • High case: EBITDA under a full recovery is approximately $4 billion. Fair value can be conservatively estimated at 6x EV/EBITDA. That would be EV (enterprise value) of $24 billion, which implies a market cap of $17.6 billion. That works out to $88.94 a share, over 17,685% higher than today’s $0.50.

Bottom Line

Valaris (VAL) is the cheapest stock I’ve ever encountered. Assuming the return of normal circumstances within the next 3 to 5 years, the potential upside is roughly 9,530%. We are “trembling with greed” to buy VAL for the Boole Microcap Fund.

 

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: https://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 approachesintrinsic 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: [email protected]

 

 

 

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.

(Image: Zen Buddha Silence, by Marilyn Barbone)

March 1, 2020

No one can predict what the stock market will do, even if a recession appears to be unfolding. That said, 2009 to 2019 was a bull market for U.S. stocks. It wouldn’t be surprising if the S&P 500 Index experienced a bear market. Covid-19, the disease associated with the novel virus SARS-COV-2, may cause a U.S. recession–even if mild–which could in turn cause a bear market for U.S. stocks. In fact, a bear market for stocks may already have begun.

Periodically there are bear markets. The important thing for a long-term value investor is to be prepared to buy the most undervalued stocks in the event of a bear market. It’s important to be able to buy when everybody else is selling.

Let’s now look at an article by The Economist, “Covid-19 is now in 50 countries, and things will get worse.” Link: https://www.economist.com/briefing/2020/02/29/covid-19-is-now-in-50-countries-and-things-will-get-worse

The article states:

Studies suggest that the number of people who have left China carrying the disease is significantly higher than would be inferred from the cases so far reported to have cropped up elsewhere, strongly suggesting that the virus’s spread has been underestimated. Some public-health officials still talk in terms of the window for containment coming closer and closer to closing. In reality, it seems to have slammed shut.

The article continues:

As of the morning of February 27th, stock markets had fallen by 8% in America, 7.4% in Europe and 6.2% in Asia over the past seven days. The industries, commodities and securities that are most sensitive to global growth, cross-border commerce and densely packed public spaces got whacked particularly hard, with the prices of oil and shares in airlines, cruise-ship owners, casinos and hotel companies all tumbling. Investors have taken refuge in assets that are perceived to be safe: yields on ten-year Treasury bonds reached an all-time low of 1.3%. The place least hit was China, where a huge sell-off took place some time ago. Investors, like some public-health officials, are starting to think that the epidemic there is, for now, under control… But if economic models developed for other diseases hold good, the rich world stands a distinct chance of slipping into recession as the epidemic continues. That will bring China, and everyone else, a fresh set of problems.

The article adds:

How the virus will spread in the weeks and months to come is impossible to tell. Diseases can take peculiar routes, and dally in unlikely reservoirs, as they hitchhike around the world. Two cases in Lebanon lead to worries about the camps in which millions of people displaced from Syria are now crowded together and exposed to the winter weather. But regardless of exactly how the virus spreads, spread it will. The World Health Organisation (WHO) has not yet pronounced covid-19 a pandemic–which is to say, a large outbreak of disease affecting the whole world. But that is what it now is.

Part of the WHO’s reticence is that the P-word frightens people, paralyses decision making and suggests that there is no further possibility of containment. It is indeed scary–not least because, ever since news of the disease first emerged from Wuhan, the overwhelming focus of attention outside China has been the need for a pandemic to be avoided. That many thousands of deaths now seem likely, and millions possible, is a terrible thing. But covid-19 is the kind of disease with which, in principle, the world knows how to deal.

The course of an epidemic is shaped by a variable called the reproductive rate, orR. It represents, in effect, the number of further cases each new case will give rise to. If R is high, the number of newly infected people climbs quickly to a peak before, for want of new people to infect, starting to fall back again… If R is low the curve rises and falls more slowly, never reaching the same heights. With SARS-COV-2 now spread around the world, the aim of public-health policy, whether at the city, national or global scale, is to flatten the curve, spreading the infections out over time.

If R is low and fewer people are infected, that gives health-care systems more time to develop better treatments, which would mean a lower death rate.

The virus seems to be transmitted mainly through droplets that infected people cough or sneeze into the air. So transmission can be reduced through good hygiene, physical barriers, and reducing the various ways that people mingle. These measures are routinely used to lessen the spread of the influenza virus, which kills hundreds of thousands of people a year. The article continues:

Influenza, like many other respiratory diseases, thrives in cold and humid air. If covid-19 behaves the same way, spreading less as the weather gets warmer and drier, flattening the curve will bring an extra benefit. As winter turns to spring then summer, the reproductive rate will drop of its own accord. Dragging out the early stage of the pandemic means fewer deaths before the summer hiatus and provides time to stockpile treatments and develop new drugs and vaccines–efforts towards both of which are already under way.

Ben Cowling, an epidemiologist at the University of Hong Kong, says that the intensity of the measures countries employ to flatten the curve will depend on how deadly SARS-COV-2 turns out to be. It is already clear that, for the majority of people who get sick, covid-19 is not too bad, especially among the young: a cough and a fever. In older people and those with chronic health problems such as heart disease or diabetes, the infection risks becoming severe and sometimes fatal. How often it will do so, though, is not known.

Epidemiologists estimate the fatality rate of covid-19 in the range of 0.5-1%. This is higher than the fatality rate of 0.1% of the seasonal flu in America. But it’s lower than the 10% fatality rate for SARS, a disease caused by another coronavirus that broke out in 2003.

However, the fatality rate depends not only on the disease itself, but also on the quality of care received. This means that poorer countries are at more risk than richer countries. Moroever, the economic effects of covid-19 will be worse in poorer countries. The article says:

As the pandemic unfolds, the reproductive rate in different parts of the world will differ according both to the policies put in place and the public’s willingness to follow them. Few countries will be able to impose controls as strict as China’s. In South Korea the government has invoked the power to forcibly stop any public activities, such as mass protests; schools, airports and military bases are closed. Japan is urging companies to introduce staggered working hours and virtual meetings, limiting both crowding on public transport and mingling at work. Other developed countries are mostly not going that far, as yet. Something that is acceptable in one country might result in barely any compliance, or even mass protests in another.

The article again:

Some hints of what may be to come can be gleaned from an economic model of an influenza pandemic created by Warwick McKibbin and Alexandra Sidorenko, both then at Australian National University, in 2006. Covid-19 is not flu: it seems to hit people in the prime of their working life less often, which is good, but to take longer to recover from, which isn’t. But the calculations in their model–which were being updated for covid-19 as The Economist went to press–give some sense of what may be to come…

Mr McKibbin says the moderate scenario in that paper looks closest to covid-19, which suggests a 2% hit to global growth. That corresponds to calculations by Oxford Economics, a consultancy, which put the possible costs of covid-19 at 1.3% of GDP. Such a burden would not be evenly spread. Oxford Economics sees America and Europe both being tipped into recession–particularly worrying for Europe, which has little room to cut interest rates in response, and where the country currently most exposed, Italy, is already a cause for economic concern. But poor countries would bear the biggest losses from a pandemic, relative to their economies’ size.

The article concludes:

As the world climbs the epidemic curve, biomedical researchers and public-health experts will rush to understand covid-19 better. Their achievements are already impressive; there is realistic talk of evidence on new drugs within months and some sort of vaccine within a year. Techniques of social distancing are already being applied. But they will need help from populations that neither dismiss the risks nor panic.

 

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: https://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 approachesintrinsic 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: [email protected]

 

 

 

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.