“Those who have knowledge don’t predict. Those who predict
don’t have knowledge.”
Lao Tzu, Chinese philosopher, 6th century BC
Most times I don’t put much
or any effort forecasting future cash flow or calculating intrinsic value using
a DCF (discounted cash flow) model. Instead I attempt to purchase assets
selling below their current fair market value. Then I wait to hopefully realize
my arbitrage opportunity. Yea I guess you could say a “margin of safety” to be
more direct. The challenge is finding an edge when determining the best way to
measure Margin of Safety, there are so many existing, overlooked and developing
approaches. As we know it’s not just tangible assets free of claims.
At times it seems this blog
can be more of a self service source of value ideas that have been carefully
reviewed without listing and explaining all the evidence. For some posts it may
seem they are just the day’s insider positive purchases for micro caps. But
each symbol was only included if they presented some unique opportunity either
today or to be included on a watch list. Before posting I review from many angles but
rarely discuss my thesis in detail. A small example of items I review would be balance
sheets in the 10q / 10k. On the balance sheet some of the items I look at would
be their capital structure, assets, and liabilities. Assets are reviewed to see
if there is an opportunity to exploit discrepancies with the market value of those
assets versus the reported GAAP’s historical cost. Who has claims against these
assets…preferred share holders, various common stock classes, dilutive options outstanding,
debt, warrants, convertibles or off balance sheet items like excessive future
potential liabilities found in employment contracts? Is the balance sheet
loaded with stale AR or Inventory with a market value less than its reported value?
Who owns the stock? Are they insiders with a positive track record and industry
expertise or value institutions with a long term focus and historical market
beating returns. Are these owners increasing or selling their position. These
are a tiny fraction of the kind of checks I often perform before posting. I
strongly expect posted ideas as a group will outperform. Historically as a
group they have outperformed. It seems my goal is to create a well stocked pond
containing some of the best market beating overlooked value based ideas. Consider
reviewing historical posts then add your own work to find new opportunities.
That is some of what I try to do. Leverage my work with your own investing skills.
Some of the best current ideas may be found in older posts. It’s your
portfolio, investment style, unique capabilities and financial goals.
Several years back this stock
started out as a deep value asset play. Now it’s a growth stock, with value
from the brand, and potential catalyst with capable management. Management has
a proven ability to create shareholder value. This is an example of the various
approaches to help determine the margin of safety at exploiting value
opportunities/arbitrage. As with all stocks they can have temporary market
inefficiencies that can quickly disappear or temporarily widen, hence
justifying creating a watch list along with additional research. So when and if
the opportunity becomes more profound you can react quickly.
Currently this stock doesn’t
have much if any of the traditional value attributes I look for. But it does
fit into the theme on how there are multiple and new ways to find value.
I first
invested in this stock and posted about the idea many years ago during 2009. I
found myself buying most of my position after the Seeking Alpha post on March
2009. It was a play on a company selling far below its net cash value. An
additional important positive/catalyst was it was controlled by an activist with
an excellent track record of creating acquisition value. But it was lying
dormant for some time (years) and was dark listed on the pink sheets.
The company
was Clarus Corporation CLRS.PK. “Ideal Market Environment for ClarusCorporation” was the article’s title posted on Seeking Alpha. The article’s
posting date price was $4.06.
CLRS.PK was a shell company
with no current operating business but instead had about 86 million in cash or
$4.95 per share and 223 million in NOLs. The stock price was only $4.06. But
the price continued to drop and I continued to buy.
The market really didn’t care.
This was an example of a stock selling at a discount to its liquidation value.
I got some nice public HATE
comments for posting this pink sheet idea, ha. For example,
“John, I think you're writing this article
hoping that you get a "pop" in the stock price by getting people to
look at an extremely LOW volatility stock trading on the PINK SHEETS. Come on
man, pump and dump somewhere else! Seeking Alpha has integrity standards!”
“Don't expect huge
gains here. Nobody else is - meaning, if market price efficiently reflects all
available information then the market consensus is that Kanders isn't going to
do a damn thing with CLRS and the current share holders are just bag holders
right now. He doesn't care if he sits on $4.00 per share but I darn well bet
you do.”
“Kanders is buying all the shares. He's the only real buyer. Lots of institutions are selling, he needs to buy the shares to keep an orderly market. CLRS is on the Pink Sheets.”
“Kanders is buying all the shares. He's the only real buyer. Lots of institutions are selling, he needs to buy the shares to keep an orderly market. CLRS is on the Pink Sheets.”
“The way Kanders took over CLRS in the first
place was by buying shares trading at less than cash per share. CLRS is again
in that boat. Someone could come along and take CLRS away from him the way he
took the company away from the original executives. To prevent this, he is
risklessly purchasing shares of the company he controls to thwart any other
"raider" from taking his free cash away from him.”
After the article
was published months later and after dropping below 4 for most of that time the
story had a nice ending. On 05/10/10 CLRS.PK using the cash and NOL acquired
Black Diamond Equipment and Gregory Mountain Products. The stock immediately
jumped to ~8 per share.
"Clarus Corporation
(OTC: CLRS.PK) (“Clarus”) announced today that it has signed definitive merger
agreements to acquire, in two separate transactions, Black Diamond Equipment,
Ltd. (“Black Diamond”), a leading designer and manufacturer of equipment for
rock climbers, ice climbers, alpinists, and freeride skiers, and Gregory
Mountain Products, Inc. (“Gregory”), a premier designer and manufacturer of
technical backpacking and related mountaineering products and accessories. The
aggregate purchase consideration, prior to adjustments, for both acquisitions
is approximately $135 million and the transactions have been unanimously approved
by the Board of Directors.”
I was a bit disappointed
with the acquisition but with most of my shares purchased below 4.00 I was
lucky to sell around 8.00.
The symbol of the new stock was changed to
BDE, Black Diamond.
Now fast forward several years, BDE traded for 8.76 last week. It looks like the stock has inched up to today’s closing price of 9.15. The stock looks expensive with a 12% short position. But with the brand names, high margins, talented management with large insider ownership including Warren Kanders,P Metcalf,R Schiller and others they are unlikely to sit on the stock trading at the current price. Last week, I added a few shares to my “farm team” portfolio recognizing all the value short comings of the stock.
Sorry, but I will
have to continue my thoughts on BDE (Black Diamond) hopefully tomorrow.
