(Image: Zen Buddha Silence, by Marilyn Barbone)
November 8, 2020
We continue with examples of Boole’s quantitative investment process in action.
Recently, we looked at the following companies:
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 Smart Sand Inc. (SND). Smart Sand is a low-cost producer of high-quality Northern White raw frac sand (NWS). Raw frac sand is used as a proppant to keep a hydraulic fracture open, allowing the release and capture of hydrocarbons.
The company has one producing mine in Oakdale, Wisconsin, next to the Canadian Pacific railroad, which allows Smart Sand to deliver its Northern White Sand to any shale producer in North America.
Smart Sand has a market cap of $62 million, with $11 million in cash and $63.6 million in debt. The stock price is $1.50.
First we screen for cheapness based on five metrics. Here are the numbers for Smart Sand:
- EV/EBITDA = 1.89
- P/E = 3.19
- P/B = 0.24
- P/CF = 2.33
- P/S = 0.29
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/
Smart Sand 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). Smart Sand has TL/TA of 33.4%, which is good.
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 Smart Sand, the CEO Charles E. Young owns over 15% of the shares, while officers and directors own about 8%.
Shareholder yield is the dividend yield plus the buyback yield. At Smart Sand, both the dividend yield and the buyback yield are zero. So the shareholder yield is zero.
Each component of the ranking has a different weight. The overall combined ranking of Smart Sand 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 Smart Sand’s investor presentation from September 2020: https://ir.smartsand.com/static-files/6e42337b-21da-4e7c-88fa-cfcdc0efe669
Intrinsic value scenarios:
- Low case: EBITDA may fall to $20 million. With an EV/EBITDA multiple of 4x, the stock would be worth $0.97 a share, which is 35.6% lower than today’s $1.50.
- Mid case: The stock is probably worth at least book value, which is $7.04 a share. That’s about 370% higher than today’s $1.50.
- High case: EBITDA is likely to reach at least $100 million if the market recovers in the next few years. With an EV/EBITDA multiple of 5x, the stock would be worth $11.14 a share, which is over 640% higher than today’s $1.50.
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: email@example.com
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.