(Image: Zen Buddha Silence, by Marilyn Barbone)
August 16, 2020
We continue with examples of Boole’s quantitative investment process in action.
Recently, we looked at the following companies:
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 Universal Technical Institute (UTI). The company is the nation’s leading provider of technical training for automotive, diesel, collision repair, motorcycle, and marine technicians. UTI has a market cap of $266 million, with $92 million in cash and $147 million in debt.
First we screen for cheapness based on five metrics. Here are the numbers for Universal Technical Institute:
- EV/EBITDA = 4.28
- P/E = 8.86
- P/B = 1.55
- P/CF = 3.54
- P/S = 0.73
(These figures are based on normalized EBITDA of $75 million and normalized earnings of $30 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/
UTI 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). UTI has TL/TA of 59%, 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 UTI, insider ownership is approximately 17%.
Shareholder yield is the dividend yield plus the buyback yield. At Universal Technical Institute, dividend yield is zero. Also, buyback yield is usually zero. Thus, shareholder yield is usually zero. (Some preferred shares were converted to common shares recently. That’s a one-time event.)
Each component of the ranking has a different weight. The overall combined ranking of Universal Technical Institute 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 August, 2020 can be downloaded here by clicking on Q4 FY2020 Investor Presentation (near the bottom of the page): https://investor.uti.edu/
(To access the link to valueinvestorsclub.com, you may have to create a guest membership, which is free.)
Intrinsic value scenarios:
- Low case: EBITDA may only be $50 million. Fair value for EV/EBITDA is probably at least 9x. That translates to a share price of $12.10, which is over 45% higher than today’s $8.15.
- Mid case: Normalized EBITDA is approximately $75 million. UTI is likely worth at least 9x EV/EBITDA. That translates to $19 per share, over 130% higher than today’s $8.15.
- High case: UTI may be worth 12x EV/EBITDA. That’s $25.90, which is over 215% higher than today’s $8.15.
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.