Monday, May 4

Wide Moat, Historically/Relatively Cheap, Overlooked Opportunity, Discount to Replacement Value

Rand Logistics:

Rand Logistics (RLOG) is a bulk carrier shipping company on the Great Lakes. Construction materials , grain, iron ore, coal,salt, and other products are shipped. They operate a fleet of 16 including the new addition announced on 04/22. This addition is the first new Canadian flagged river class self unloader to be introduced into service on the Great Lakes in over 40 years.  Rand’s current fleet count is 16, 10 Canadian flagged and 6 U.S. flagged vessels. “The new vessel is fully booked with long-term contractual business. It’s expected to be the most efficient river class vessel on the Great Lakes. The introduction of this vessel into service is one of the elements of their strategic plan to improve our return on invested capital.”

The CEO spoke in depth on improving ROIC during the recent earning call.  A project was implemented to identify, modify or eliminate customer contracts that are yielding an unacceptable return on invested capital. “Formalizing return on invested capital parameters for setting contract terms and pricing; continuing to improve the reliability and operating efficiency metrics to increase the percentage of time our vessels are in revenue-loaded condition. Rationalizing costs; increasing our sales efficiency relating to ship repair, maintenance and capital expenditures; and finally, introducing their newest vessel into service in the second half of 2015.”

Wide Moat:
Rand Logistics wide moat /barriers to entry are supported by several. The 1920 U.S. Jones act dictates only ships built, crewed and owned by U.S. citizens can operate between U.S. ports. Further the Canada Marine Act requires Canadian commissioned ships to operate between Canadian ports. Jones act legislation creates additional barrier to entry. Additionally, Rand has long term contacts with clients like Cargill, ADM,Kraft food, Morton Salt  and others. Customer relationships and focus to expand existing great lake region business creates advantages. Controlling the largest shipping fleet provides economies of scale.

Shipping is a capital intensive industry. It’s expensive to build a ship coupled with related costs adding another advantage over potential future competition. Executive management has deep logistics experience. Executive chairman, Laurence Levey served as chairman of of Detroit and Canada Tunnel Corporation, CEO of High Voltage Engineering Corporation, national logistics services company Ozburn-Hessey, director; Derby Industries LLC, and many other investment banking achievements. Lawrence Levey is a Baker Scholar from Harvard University.

Mean reversion attributes:

Stock's price is near its 5 year low coupled with P/B, P/S all near 5 year low. The high F score of 7 is driven by positive scores for NI, great than PY, hence current ROA positive and versus last year, Cash flow greater than NI, current ratio greater than PY, improvement in gross margins, improved efficiency as measured by the asset turnover versus PY. All these attributes contribute to a F score of 7. The F score was dragged down by a 2 tests, YOY increase in share count, increased leverage measuring Long Term Debt / Average Total Assets increased versus PY.RLOG has a history of poor execution with buybacks at attractive prices. Current F score of 7 is a positive sign. The median F score is 5 over the past 10 years. The only other time RLOG had an F score of 7 was 2012.RLOG had a 2012 high stock or price of 8.79 and low of 5.79.  Further, EV/GP is at historically cheap valuations. Current RLOG price is $3.36. Further, 52 price change was -44.10%. Temporary but significant foreign exchange rates challenges over the prior fiscal year. Lastly, anormal Great Lake ice conditions had a negative impact in prior quarterly results.

Summary Financial Statistics:
Price = $3.36
Market Cap: 61.43M , Enterprise Value: 247.90
Price/Sales (ttm):    0.40 , Price/Book (mrq):    1.09
Revenue (ttm):  153.61M , Revenue Per Share (ttm):      8.55
Qtrly Revenue Growth (yoy):     -1.70% , Gross Profit (ttm):     45.81M
EBITDA (ttm):  32.12M

Total Cash (mrq):  7.66M , Total Cash Per Share (mrq):   0.43
Total Debt (mrq):   177.40M , Total Debt/Equity (mrq):  249.35
Current Ratio (mrq):    1.53 , Book Value Per Share (mrq):     3.12
Operating Cash Flow (ttm): 21.27M , Levered Free Cash Flow (ttm):   -23.34M
52-Week Change:   -44.10%
52-Week High (Jun 12, 2014):   6.73 , 52-Week Low (Mar 10, 2015):    2.96
Shares Outstanding:   18.02M , Float:  15.16M
% Held by Insiders:    21.85% , % Held by Institutions:        69.40%
Short % of Float: 3.20%

No  position in RLOG. But, I  believe the stock will achieve market out performing returns over the next 12 months.

Sunday, April 26

WHAT HAPPENS, Blindly Buying Micro Cap Value the Day after Reported Insider Buying?


Alpha is created as an aggregated GROUP.  But can we improve and avoid those stocks that drag down aggregated returns following this method?

Insiders must use public information. Their advantage is interpretation of this public data. However, most insider trading data is noise.

The topic of insider trading has been rigorously studied. Findings published in academia and for profit firms. However, following insider trading activity is not a magic solution, get rick quick scheme. Countless insider trading newsletters have failed to justify their existence. They folded by over relying or simply misinterpreting information and ignoring financial and capital structure red flags. But having said this, studies have shown correctly using insider trading activity does have predictive market outperforming value. 

A summary of key points for using insider trading

    Less efficiently priced small companies with insider activity provide more market outperforming information. There’s a negative correlation (inverse relationship) between companies size and its insider activity forecasting value.
 
      Insiders have a greater understanding of their business economics. Officers (CEO, CFO) have the most accurate record. Large shareholders provide the least predictive value but shouldn’t be ignored.
 
      Purchases contain more information than sales. But multiple insider sales with a high short position can reveal potential company negatives.
 
      Consensus activity increases the predictive information of the insider trades. So a diverse group of buyers has more predictive value than one insider.
 
 
      The size of the transaction is proportionally important. I prefer to use the ratio of shares purchased to shares in the float to measure buying conviction. Further, I give more weight if the percentage of insider ownership is high before the insider activity.
 
      Analyze open market transactions; give less importance to private transactions.
 
      It seems logical insider activity within certain industries such as biotechnology may provide more directional information. The thesis is management understands the science and future possibilities of new drug breakthroughs or ability to pass future FDA hurdles. Other specialized industries should also be given a closer look.
 
 
“Several academic studies have been done over the years exploring the outperformance of insider trades and specifically insider buying. These studies have analyzed data over several decades and have shown that insider buying tends to outperform the overall market by 6% to 10.2% per year depending on which academic study and time period you look at.

According to the Wharton study “Estimating the Returns to Insider Trading” that looked at a comprehensive sample of insider transactions over 22 years from 1975-1996, about one-quarter of these abnormal returns accrue within the first five days after the trade and one-half accrues within the first month. You can read this research paper along with several other related papers below.”  Source  http://www.insidertrade.net/academic-research/



For this post, I will use the micro cap insider buying shared over the past 2 months. One goal is to uncover additional metrics that can improve the directional value of using positive insider activity.  This will require several posts.
I made the following observations.
Dig dipper into stocks listed on OTCBB, OTCPK. These companies are inefficiently priced. They hide in the shadows of Wall Street with little or no institutional coverage. I’m only saying there may be hidden opportunity in this group. It’s also an area with the most garbage, be careful.
Examples of actual shared ideas meeting this criterion over past 2 months are;
Frontier Oilfield Services, Inc. (FOSI) reported insider buying on 03/09/15. The following day’s price .90 versus current price of $2.94 (226% change in price), Further, additional buys reported 03/12/15 and 03/20/12. Buying the day after for would create potential outstanding returns. Furthermore, Spindle, Inc. (SPDL), Patent Properties, Inc. (PPRO), ICTV Brands Inc. (ICTV), Research Solutions, Inc. (RSSS), Cocrystal Pharma, Inc. (COCP), Brekford Corp. (BFDI), Bimini Capital Management, Inc. (BMNM) also created outstanding short term returns.
Certain industries insider knowledge carries more weight like biotechnology. Specific examples shared, Synta Pharmaceuticals Corp. (SNTA), Accelerate Diagnostics, Inc. (AXDX),  Sequenom Inc. (SQNM) ,Conatus Pharmaceuticals Inc. (CNAT) Biotechnology created great returns.
There are many more helpful metrics to consider.


Another "anomaly" I noticed with my small 2 month data set. Combine insider buying and the review ownership, if held by value intuitions your odd may improve. So if it's held by Heartland, Royce, Kennedy Capital, Gabeli, Tenton and others as an example you may have a better chance of outperformance. But when adding to these criteria you should consider relative prior 12 month returns. Consider avoiding stocks that have had relatively large move in its stock price.


That's it for now, more insights and discoveries in future posts.


Daily insider micro cap buying will continue to be shared in the tab labeled.

In conclusion yes buying the day after reported insider purchases for micro cap value as a group appears to generate Alpha short term. But this strategy is not practical. You would have to buy all or at least a random representative sample of the population. So having said that, I would use reported insider purchases as an excellent starting point. Then review industry, size of the purchases to shares  in float,  title of buyer (Office, Director, 5% owner),  number of individual buyers, historical price performance , value ratios, who owns the shares, company size and others.


Click to view details of reported daily activity,

 

Monday, April 13

C- level Recent Positive Insider Buying With Micro Cap Value

I’ve been sharing Form 4 micro cap purchases , from February 25, 2015 to April 10, 2015.  Today’s post takes a closer look.

My first approach focuses on company’s officers. CEO, CFO, COO (officers) activity carry more predictive power. Further, published studies show insider activity from smaller companies (micro cap) is more useful in determining the stock’s direction.
To measure conviction, I ranked shares purchased as a percentage of shares in float. Patience, waiting for your bid, building a position over time is advantageous with tiny companies.
These are a few convincing purchases from C-level executives (Officers) from February 25, 2015 to April 10, 2015.
 

Luby's, Inc. (LUB)

An interesting value attribute of Luby’s,  it’s the cheapest of the Restaurant stocks when comparing the acquisition cost (enterprise value) to owned real estate. Luby’s  was founded in 1947.

Bargain Status: Real Estate Rich Highly Fixable Opportunity










long LUB



PHI Inc. (PHII)
























Taitron Components Inc. (TAIT)







































Gordmans Stores, Inc. (GMAN)

Old post "Cheap and Risky founded 1915: 52 Change -58.40% "





































AeroCentury Corp. (ACY)























Other notable insider buying click to view details on google Docs.

Click to view quotes for all notable ideas.

Monday, April 6

Thoughtless Selling Creates This Opportunity

Dawson Geophysical Company (DWSN) $4.66 on 04/06/15
 
 
Dawson didn’t wait for my planned post. Thursday 04/02/15 DWSN moved up .34 or 8.45% on the day. Today it closed higher. It was thoughtless selling (-74% over 52 weeks) without an equivalent correlated destruction in operations or asset's value. This out sized uncorrelated price action to asset’s replacement value motivated the investigation.

Dawson Geophysical Co provides seismic data acquisition services throughout the United States and Canada. The Company acquires geophysical data using 3-D survey techniques. Seismic crews supply data to companies exploring oil, natural gas. Further, they serve the potash mining industry. The Company currently owns equipment for 16 land-based seismic data acquisition crews and 73 vibration vehicles. Dawson Geophysical was founded in 1952.

Existing assets are available at a deep discount to its history and industry. Enterprise value is 109.42 (MC = 100.20M + Ttl Liab = 52.622M – Cash 43.394M) or 89.70M using excluding current liabilities.  Total Assets for the MRQ are 246.840M, Non cash assets are 203.44M (246.840-43.394 = 203.44M). EV to Non Cash Assets = .44 or 89.70EV/203.44Non Cash Assets.

These assets generated 118.847M 2014 annual revenue. Produced net cash provided by operating activities, $9,255,375 for the year ended December 31, 2014.

Dawson controls a major portion of the domestic onshore seismic market. The seismic industry particularly DWSN has been indiscriminately crushed. But DWSN strong financial position will take it to the other side of this industry depression. Dawson's market share gains coupled with  competitors closing or taking on excessive debt will reward long term shareholders.
October 2014 Dawson smartly agreed to a merger with TGC Industries (TGE). This provides synergies, access to Canada, modest overhead reduction. After the combination, New Dawson has 21.70M shares outstanding. 

Reasons to consider a closer look for longer term investors.
Historical low valuations using EV to sales, EV to GP, EV to non cash assets, P/TB (see table below)
21% of shares outstanding held by insiders.
Institutional ownership from respected value institutions, Royce, Robeco, Perritt and others.
No Wall Street coverage
Mean reversion candidate down -74% prior 52 weeks,
Debt free market leader in land based geophysical services,
Contrarian industry idea with strength to lead industry niche once market improves
No 2015 insider selling
Strategic business combination with TGC Industries, October 2014. TGC has a strong balance sheet, complementary equipment, expanded client base, creates an opportunity for improved utilization rates and overhead reduction.





 
 
 
 



 
 
 
 
Long DWSN

Sunday, March 29

Overlooked Value Outlier Oversold


McCoy Global trades at a discount to its reproduction cost, tangible book value coupled with growing sales, dividend yield, book value and recently announced share buyback. Stocks is down -42.31% over the prior 52 weeks.
 
McCoy Global (MCCRF) $3.00 or (MCB.TO) $3.78CAD 
McCoy Corporation established in 1914 is Canada based provides products and services for the global energy industry. It operates internationally through direct sales and distributors

McCoy is  "an innovator of tubular handling, assembly and measurement equipment used for making up threaded connections in the oil and gas industry. Further, its engaged in the design, manufacture and distribution of capital equipment”. Source Morningstar


McCoy has two primary segments, energy products/ services and mobile solutions.
The Energy Products and Services segment includes the Drilling and Completions division, also Coatings / Hydraulics division. Mobile Solutions is the Trailers division. It manufactures heavy haul, forestry and oilfield trailers along with drilling and well servicing chassis.

Summary Investing points;
McCoy has an unique combination of value attributes making it a value outlier. The price trades  below its tangible book value, growing YOY sales of 8.40%, growing book value per share since 2009,  consistent strong ROIC of 12.62% TTM, multi year low valuation for EV/GP,  growing dividend yield TTM = 5.90%, strong balance sheet and free cash flow, solid Z score with a high F score. 52 change in share price was negative -42.31%.

McCoy Recently announced (03/25/15) an approved large share buyback. Click to read

"approval from the Toronto Stock Exchange to purchase up to 1,384,711 common shares, representing approximately 5% of the issued and outstanding common shares of McCoy.
McCoy's management and board of directors believe that the current market price of its common shares does not represent the underlying value of the Company, and has determined that the repurchase of its common shares is a desirable use of funds and in the best interests of the Company and its shareholders."
 

 
 
 
 
 
 
 
 
 
 
Market Cap: 82.95M , Enterprise:  59.24M
Trailing P/E (ttm): 5.76 , Price/Sales (ttm):  0.80
Price/Book (mrq):  0.93
Enterprise Value/Revenue (ttm):  0.62 , Enterprise Value/EBITDA (ttm): 3.73
Return on Assets (ttm): 7.22% , Return on Equity (ttm): 9.95%
Revenue (ttm):  96.26M , Revenue Per Share (ttm):  3.49
Qtrly Revenue Growth (yoy):  8.40%
52-Week Change:      -42.31%
52-Week High (Jul 7, 2014): 6.18 , 52-Week Low (Feb 3, 2015):    2.78
Shares Outstanding:27.69M , Float:  20.70M
Trailing Annual Dividend Yield:  5.90%     

 No position in MCCRF/MCB.TO

Sunday, March 22

Good Company at a Cheap Price, Micro Cap


Computer Task Group Inc (CTG): “Computer Task Group Inc is an IT solutions and staffing services company with operations in North America and Europe. The Company's services include IT Solutions and IT other Staffing.” Morningstar

IT solutions include planning, developing, implementing, and managing technology requirements. Staffing service involve the recruitment, and management of IT talent. CTG also supports organizations that need flexible IT staff . The company’s market focus includes Healthcare, Technology Service Providers, Financial Services and Energy.

CTG is cheap as measured by their earning yield , EV/EBIT = 5.77. Its a good company with a consistent high ROIC. Current ROIC is 17.30%. The ROIC can be higher or lower depending how you calculate invested capital.
Note the financial statistics below highlighting the historical low valuations and market size.  Enterprise value to tangible book, revenue, EBIT or GP are all at historical lows. Further a solid financial position is demonstrated by the Z score, zero debt, positive cash flow and 3.25% TTM dividend yield. CTG is oversold and cheap.







 
























Value institutions have maintained or increased their positions.  See below; Royce, Heartland,Robeco,TETON Westwood Mighty Mites and other respected value institutions.








 
 
 
 
 















CTG = $7.45
Market Cap: 139.67M , Enterprise Value:98.82M
Price/Book (mrq): 1.25 , Enterprise Value/Revenue (ttm): 0.25
Enterprise Value/EBITDA (ttm): 4.84

Revenue (ttm):393.27M , Qtrly Revenue Growth (yoy):-4.40%
Gross Profit (ttm):  79.34M , EBITDA (ttm):  20.43M
Total Cash (mrq): 40.86M , Total Cash Per Share (mrq): 2.18
Current Ratio (mrq):  2.57 , Book Value Per Share (mrq): 5.99
Operating Cash Flow (ttm): 6.71M ,Free Cash Flow (ttm): 7.32M
52-Week Change: -55.60%

52-Week High :17.47 , 52-Week Low : 7.27
Shares Outstanding: 18.75M  Float: 13.34M
% Held by Insiders: 32.95% , % Held by Institutions:  58.10%
Trailing Annual Dividend Yield:   3.20%








 

The stock's underperformance versus its strong valuation creates a mean reversion candidate . Below, view the stock's performance versus its industry peer group.
 
 
 
 
 
 
 

Sunday, March 15

Deep Neglect Nano Cap Value


Fuel-Tech, Inc. (FTEK): “Fuel Tech Inc is a technology company engaged in the development, commercialization and application of state-of-the-art proprietary technologies for air pollution control, process optimization, combustion efficiency and advanced engineering services.”Morningstar




Market Cap: 72.84M , Enterprise Value: 58.89M
Price/Sales (ttm):0.85, Price/Book (mrq): 0.80
Enterprise Value/Revenue (ttm): 0.70 , EV/EBITDA: 17.85
Qtrly Revenue Growth (yoy): -36.00% ,
Gross Profit (ttm): 46.82M  EBITDA (ttm):3.30M
Total Cash (mrq): 15.58M , Total Cash Per Share (mrq):    0.68
Current Ratio (mrq): 3.09 , Book Value Per Share (mrq):  3.91
Operating Cash Flow (ttm):4.86M ,Free Cash Flow (ttm):-1.00M
52-Week Change: -40.15%
52-Week High: 6.77 , 52-Week Low:  3.08
Shares Outstanding: 22.84M ,Float: 15.95M
% Held by Insiders:28.93% , % Held by Institutions: 25.80%

Short % of Float (as of Feb 27, 2015): 4.10%

Moderate positive insider activity
2014 Insider Activity
Symbol Year Month Type Title Price Paid Shares Value Shares Activity / Shares Outstanding
FTEK 2014 Dec DirectPurchase Officer 3.69 30,000 110,700 0.13%
FTEK 2014 Sep DirectPurchase Officer 4.23 60,400 255,295 0.26%
FTEK Subtotal 2014 4.05 90,400 365,995 0.40%














































 

Sunday, March 8

Institutional Negative Sentiment, Two Contrarian Thoughts


Travelzoo Inc. (TZOO): Price = $9.77

“Travelzoo Inc. is an Internet media company, which informs over 27 million subscribers, as well as millions of Web site users, about the travel and entertainment deals available from thousands of Companies.” Morningstar


Summary Thesis
The annihilated stock price creates a margin of safety with cheap strong valuation versus its industry and history. 

Down -59.16% over the past 52 weeks, Revenue growth for 10 years was 17.20%, Revenue growth for 5 years 11.70%, Book value 5 year growth was 3.60%.

Valuable website properties should entice a strategic buyer. Fly.com (a flight search engine), SuperSearch (travelzoo.com/supersearch/ for flights, hotels, vacations and car rentals. 


Founder Bartel Ralph owns 51%.




















Note the growing tangible book value per share, historically cheap EV/Revenue, current enterprise value of 89.10M versus 639.02M EV(2010),353.28M EV (2011), 253.36M EV (2011). 


Market Cap:  143.91M , Enterprise Value:  89.10M
Price/Sales (ttm): 1.04 , Price/Book (mrq):   3.71
Enterprise Value/EBITDA (ttm): 5.62
Profit Margin (ttm):  11.51% , Operating Margin (ttm): 9.48%
Return on Assets (ttm): 8.20% , Return on Equity (ttm): 45.97%
Revenue (ttm):  142.08M , Revenue Per Share (ttm):     9.62
Qtrly Revenue Growth (yoy):   -15.90%
Gross Profit (ttm):  124.17M , EBITDA (ttm):  15.87M
Total Cash (mrq): 54.81M , Total Cash Per Share (mrq):     3.72
Current Ratio (mrq):2.13 , Book Value Per Share (mrq):2.70
52-Week Change:    -59.16%
52-Week High(Mar 10, 2014):24.11 , 52-Week Low)(02/10/15): 8.45
Shares Outstanding: 14.73M , Float: 6.06M
% Held by Insiders:  52.32% , % Held by Institutions:  38.10%
Short % of Float :5.40%



Five Star Quality Care Inc. (FVE):Price = $3.56

“Five Star Quality Care Inc a healthcare and senior living provider. It is engaged in operating senior living communities, including independent living or congregate care communities, assisted living communities and skilled nursing facilities.” Morningstar

Summary Thesis
Mean reversion candidate within a demographically favorable industry, Long-Term Care Facilities.

60.22% off 5 year high, and 41.54% off 52 week high, 5 year range 2.15 to 8.95.

Price and valuation are near 2 year low.

IMPROVING valuations such as tangible book value per share, revenue per share, EV to revenue per share.

Own or lease 211 senior living communities





















Market Cap:  173.23M , Enterprise Value: 210.31M
Price/Sales (ttm):   0.16 , EV/Revenue (ttm):    0.19,  Price/Book (mrq):  0.59
Enterprise Value/EBITDA (ttm): 10.40
Revenue (ttm):  1.10B , Revenue Per Share (ttm):    22.94
Qtrly Revenue Growth (yoy):   2.80%
Gross Profit (ttm): 1.09B ,EBITDA (ttm):  20.23M
Total Cash (mrq):40.00M , Total Cash Per Share (mrq):     0.82
Total Debt (mrq):77.07M , Total Debt/Equity (mrq):  25.71
Current Ratio (mrq): 0.69 , Book Value Per Share (mrq):6.16
Operating Cash Flow (ttm): 30.32M 
52-Week Change:    -40.27%
52-Week High:6.09 , 52-Week Low: 3.23
% Held by Insiders: 17.16% , % Held by Institutions:  60.80%

Short % of Float : 1.70%