What are you 3 investment ideas or thoughts for 2012.

Mine are 

1. ELSE 
2. SMIT
3. CECO

 2013 I mean.

they can earn ~$750k per year in operating income. Valuing that a 10x (a bit generous, but allows for fast math) gives us $7.5m in value for the op biz. I think that makes sense, given the company is growing (5%-ish per year, it looks like) but both COGS and SG&A are actually growing faster.

Add in $4.6m for the Rudolph investment and $5.8 for the cash and you come out with a value of $17.8m. Compare that to a market cap of $13.8m and it's cheap

However, all that said, Swenson has filed a 13-D on them. And he's pretty damn good in the micro cap space. I say this because he's involved in both AIRT and SODI. So if he's in there, there's probably something interesting going on.

This looks interesting plano80.

Some thoughts before I jump into the calculations:

1) Use of EBIT multiples - this is widely used for valuations but I tend to avoid it. Simple reasons are that (by using EBIT) we omit other operating expenses such as working capital, non operating expenses (which of course is real) such as interest (obligation to creditors) and taxes (govt. want their share), and finally capital expenditure as it is an inevitable component of (any) growth.

2) Growth - assuming the 5% growth refers to operating income (ignore if you meant revenue as operating income return can differ, of course) and using your required rate of return of 10% - there will be a deterioration in value in the long term. As an example, let's say if you paid $7.5m outright for ELSE you would expect to receive ~$750K each year - this is approximately 10% return. Then suppose you decided to reinvest all of it ($750k) to grow the firm. If that incremental investment earns you only $37.5 in operating income (which is 5%) then the value of your original investment has deteriorated - as the return on your incremental capital is less than your required return. In order to increase value we'd like to see return on capital being equal to or greater than the required rate of return.

Quick back-of-the-envelope calculation for ELSE
Years used: 2008 - 2012 (note: last quarter of 2012 is an estimate - exception is the B/S which uses last recent quarter Sep 2012)
 
Total value: ~$14.1m
Value per share: ~$4.15
Current market price: $3.90

Debt size and cash return looks good - however a few concerns:
Revenue is stable to decreasing (about negative CAGR of 2% per annum) 
Discount from value to the current price is about 6% - I would like to see about 20%.

Above is just an initial filter to engage an interest for further research. Before recommending we would want to do a full fledge analysis, i.e. ELSE's business dynamics (industry landscape and corporate strategy), management leadership and so on.

Usual disclaimer: above is not a recommendation to buy or sell - written for educational purposes only.

-JB
 

 I'm new to this. I.e. reading 10k/q and understanding the book. But thanks for your follow up. Interesting disection of the scenarios! Any pick you have for 13?

ELSE-illiquid...only chance is a buyout or when volume picks up and I really doubt it , there are days when the stock hasn't traded at all ...

SMIT- same thing ..no volume

my personal opinion...you could find hundreds of companies with the same financial characteristics as above(undervalued), but when the market thinks this particular stock is not worth trading...then i guess its not worth putting money into

CECO has decent volume, kinda looks like a reversal is going on iff 50 MA holds

my opinions only

Good points from a viewpoint of a  trader tyrannyoflogic.

However, for a long term fundamental investor there are subtle explanations:

Illiquidity - this depends on the amount of total capital available for investment in relation to trading volume - for instance, volume of 1 million shares trading daily (with a price of $10) might qualify the stock as illiquid if you have $1b to invest (given that stock is the only suitable investment at the time) whereas someone with $10K, liquidity isn't of concern. One of the leading factors of illiquidity is when greater percentage of shares are closely held and the float is only a tiny fraction of it. There are exceptions, of course, if the firm is not trading at all - the best course of action in this case would be to buy / sell via private placements.

Market - fundamental investors almost always disregard the market sentiment. The simple reason is that market price does not always value the firm accurately - within the economic cycle gyrations there are times of over and under valuations (there are many reasons for this but I wont' go into them here as they are too lengthy for our discussion). Most astute investors find that going long the undervalued firms and short the overvalued ones have more inclination to beat the market over the long term (and this is obviously not possible if the investor buys the market, i.e. long an index - on the flipside, 80% of mutual fund mgrs weren't able to beat the market last year - some of this is due to hindrance around mutual fund regulation and most of it due to the manager's stock picking skills).

Most fundamental investor's holding period varies from 3-4 yrs with 2 to 6 yrs at the extreme ends. A few technical indicators, such as moving averages, can be used before deciding to invest but they are not a deal-breaker or a required necessity - as long as the fundamentals have been checked off with a longer term investment outlook.

-JB

just brainstorming here ......


The one thing that I'd like to claw on  here in the case of ELSE and SMIT is , they are hardly trading at all...ELSE has a market cap of around 13 million and SMIT has a market cap of around 9 million ....BUT their daily trading volume is less than 20000 shares/day(even lesser in the case of ELSE,100/day).

intstituitional ownership aint that great either on both ,

simple reasoning, supply of shares outstanding is ginormous for the price to climb , compared to the demand (trading volume) which is basically nonexistent....
unless the company does something outstanding that would change the world or a buyout at a premium happens......decent earnings and decent growth doesn't quite cut it
The scenario changes when volume picks up indicating that the market is interested in the stock , this absolutely begs the question, there are millions of investors in the market(retail and instituitional)... why aren't they interested in these stocks ?

My take on liquidity is that you should be able to sell the stock with much difference between the bid and ask price , if you hold a chunk of shares that you would like to get rid of without crashing the price

Your points are noted tyrannyoflogic – however, they do not necessarily apply to fundamental investors. Allow me to qualify these in a bit more detail:

Fundamentalists vs. Traders – the points you mention are clearly a trader’s dilemma – fundamental investors almost always ignore them (given the dollar allocation size is right for their portfolio). I understand that daily fluctuations in price, momentum and high volume are important for traders as volatility is part of their tools of the trade. This is not true for fundamentalists. The only time I take a peek at the market is to check the price after I’ve finished valuing a company (to see whether it is currently trading above or below the intrinsic value).

A good way to think about this is private equity (i.e. venture capital and LBOs). The world of private equity do not have traded volumes nor daily prices – yet portfolio managers make asset allocation decisions for accredited investors after a bona fide valuation exercise all day. Public equity is no different – that is, from a perspective of a fundamental investor. What ultimately matters though is the value we get for the price we pay.

Fundamentalist’s point of view – I’m a contrarian - so random walk down Wall Street and EMH do not really impressive me much. I am quite happy to take the opposite bet to the market if I am thoroughly convinced that my valuation has taken on a conservative form with conviction.  Buying the market will give you market return (and I believe 99% of investors are better this way who are not professional money managers) but of course, we can’t truly beat the market until we have formulated a (winning) strategy to bet against it.

Just a few more words on illiquidity – I find stocks (sometimes with no growth) with somewhat relative illiquidity most always at discounted prices – sometimes huge. There is a reason for this. Big institutional investors with huge AUM can’t fully participate in them – this means for a small investor these neglected illiquid stocks are one of the best ways to exploit market anomalies. An important aspect lies in how we value these companies however,  where we need to be able to factor in a reasonably large discount for illiquidity (the range of discount to apply comes with experience). Let’s say I manage a hedge fund or an endowment with huge amount of capital that allows me to deploy it with discretion – in this instance I would be happy to own a no growth firm (with illiquid float) outright given a reasonable valuation. As an example, if I were to invest  $10m to buy this firm which returns me at least $1m a year annually (similar to a perpetuity)  – I would keep it forever – no need to sell. Similarly, if I am a small retail investor and have only $10k to invest in the same firm I would just as well get my share of the 10% per annum return on capital.

So, illiquid firms shouldn’t scare investors away – but rather treat them as any other firm to seek out value and then decide whether they fit in to your investment paradigm. Our holding period might also scare you – as we don’t sell our equities until we think they has reached their full potential (usually 2-4 yrs) – whereas, as a trader, you might flip on daily / weekly / monthly basis (given your technical indicators). Clearly, your style of investing and ours are completely different, 180 degrees to be exact. All said and told, I will gladly invest in ugly and downtrodden firms with little or no volume which no investor wants (as opposed to glamour stocks) - as long as I’m getting value for what I pay – but I’ve never invested on a stock simply because of price, volume, momentum or market sentiment and I’ll probably never will.

-JB

I'm a bit lost plan080 with your (maybe a bit verbose?) thoughts. But I'll try and see if I understand.

So, I take it that you are trying to find business and investment opportunities - where you are able to maximise your expertise and capital - correct? If so, then I am really lost. The reason for this is quite simple - no one can admittedly provide you with the *right* type of investment or business opportunities you might have some success with. This all goes back to your skills, experience and education - let's start with those first. And then if you come back by pinpointing deeper (and specific) areas where you are likely to invest we would be happy to reply (if we are knowledgeable enough). I'm sure you are aware that there are also myriads of forums available elsewhere in the net for these kinds of ventures (just a suggestion). 

Generally though, as cliche as it sounds - making money isn't about going after things that you think will make money - but rather all about your interest, passion, intelligence on the matters that seem most important to you (in any profession) - and money will inevitably follow. 

And if you are interested in capital markets (equities) which you seem to indicate by your first post then the only advice I can give is to first truly understand how capitalism works. In its concise and broad form, it is nothing more than an engine that produces cash. The metric to use is cash production - the correct word is inflection point (and not catalyst) where the assets become more productive, new products are launched, etc. - as a way to gauge value. The amount of cash invested in an asset, how much cash that asset produces and the outlook for the cash generating ability of that asset - that's all really what capitalism is and the market prices of firms reflect this over time. So, take any of your business / investment ventures that you have mentioned above and apply this definition of capitalism to it - if it fails, then that venture is very *unlikely* to survive in the long run.

-JB

my thoughts on 2013. BE very CAREFUL...

S&P500 has had a strong rally since 2009 lows.. I think we are now getting close to the top and will be due for a bigger correction. I think the top will come in a few months... most likely around March - April 2013. 

 By the way, anyone see EminiTrader ?  havent seen him for years now... 

According to the famous contrarian investor Marc Faber(Dr Doom)

2013 will not be a favorable year for holders of assets. Investors’ expectations about future returns on their assets are far too optimistic. In a world that currently hardly grows investors will need to reduce their future return expectations.

Source: Marc Faber blog

Here are my stock picks for next 4 weeks. I would buy with 10% stop loss. Im looking for them to buy and sell within next 4 weeks.

SKX
TLK
CTCM
VIP 
RRC
AGNC
CRNT

More importantly though - what is the basis for these recommendations, including the (factual) support for that basis. Is there an opinion you've developed on these companies that you'd like to share.

 JB- I came up with that list based on technical analysis and my overall assesment of the markets.

I think we can have a nice rally short term but in Feb, Mar I think we see a correction in most stocks, so thats why Im looking to sell within 4 weeks.

Alright, then how about sharing your technical analysis for each stock and the macro view of the economy in two time slots - now and in 4 weeks time. This way, the readers can understand the articulation of the possible catalysts you are  proposing. I'm sure you understand that an investment recommendation isn't worthy of an advice if it has no sound reasoning and logic - and facts must be all legally and ethically obtained - behind the recommendation.

Arbritage and special situations aside, speculation and market timing are very challenging - even for the most experienced institutional traders. And retail investors get squeezed once too often - all from my own experience.

But I'm sure you have experience in your own right, of course, and if so - how about giving us some pointers by briefly expanding on your idea of rally now and capitulation in 4 weeks time.

 JB- I dont think there will be capitulation as we saw in 2008 -2009 but it could still be a fair correction. I could be wrong but I'll give you 3 reasons for my views, Technical indicators are showing nearing resistance and overbought conditions.. 2nd Debt ceiling coming up... 3rd Im bit concerned about corporate earnings.

right now im only trading short term.. The only thing Im comfortable holding is G O L D. 

What about your views on stocks ? any opinions and are u fundamentals type investor or technical ?

you cant really talk about stocks in sajha because there will be some jackass, who has all the book knowledge but never ventured into stock market with real money, with deep insights how everyone else is wrong.

My views are purely fundamental nagan. I am neither intelligent enough to truly understand how technical and macro investing works nor can I make any future predictions.

Some background on why that is so - there was a fair bit learning curve I had to go through to have been able come up with that conclusion. During the tech boom of the late 90's my admiration for chartists and tech analysts were sky high. They had us going on how right they were until, of course, the subsequent bust in early part of the millennium. Many macro and tech analysts didn't realize that it could be so short lived and failed to call out the warning signs. There were many factors to blame for the bust obviously - among them irrational exuberance for example (which I am also guilty of - I invested with a herd in mind most of the time) - but my point is that I have learned over the years that I tend to stick with market dynamics I really understand and let go of others I don't. And there will be occasional black swans where no one can really do anything about (due to systematic forces). During that period, the analysts who kept invested in companies with sound fundamental characteristics were rewarded up until the real estate bust. And then came the GFC with which most investors are still struggling with. Any chartist or a macro analyst who may claim to have pointed out a selling opportunity at Mar 2002 or a buying opportunity at Mar of 2009 is no doubt a kin of Nostradamus - it just can't be done. There have been lots of studies done in the past to promulgate the negative impacts on one's overall return due to market timing.

A few comments on your views:

Technical indicators - since I've never used any of these for my investment decisions I am unable to say much on the subject - but it seems to me that all tech analysts and chartists have similar type of information in front of them whether it's resistance, support, candlestick chart or moving averages - these of course are the product of volume and price volatility. No matter how one slices and dices the data the end result should be same - thus, any investment idea born out of technical analysis becomes futile to the detriment of one's ability to be the 'first' to execute an order - this has now become 'you will succeed if you have the right trading tools' motto as opposed to being rewarded for a unique idea that has a direct link to company's assets or earning power. This is why you will see a few successes at trading desks of bulge brackets and large hedge funds - primarily due to deployment of huge trading capital on narrow spreads. Retail investor's chances are close to nil. In a few instances where a unique view from a technical analysis do arise - it may or may not be realized by the market in the short term as technicals tend to be time driven.

Debt ceiling and macro views - These are overwhelming concerns on the public debt but can I really tie that in to make an investment decision? Probably not. My belief is that there are too many factors and stakeholders that come into play to be able to come up with somewhat reasonable analysis of the debt. For example, if I make a prediction that the debt ceiling won't be raised in Mar due to political structure of the Senate (Republican controlled and in opposition of any more raises) and let's say I short the treasury - but what are the chances that Congress won't come up with a budget reform bill to reduce spending in Mar? I can't assess that properly. And thus, I can't do it. There was a publication from Economist a while back which outlined a prediction conundrum - surveys from leading international banks whose head economist's predictions were wrong 95% of the time for a two year prediction. More than half were wrong for one year predictions. For example, in the middle of 2007 economists predicted 2.5% GDP growth (taken as a consensus) up to next year - but in reality the actual growth for the year up to middle of 2008 was -1.6%. Their clients would have been better off flipping a coin - a probability of 50% in being right. Predicting the economy or the macro trend is a dangerous game in my opinion. 

Corporate earnings - this is fair game if an analyst has a good knowledge of a sector or industry and thus the individual companies which can sink or swim within that eco system. There are many variations of corporate earnings at different times due to cyclicality and business cycles. So it would be reasonable to assume that corporate earnings are worrisome for this particular sector in the coming quarter (as industries are much easier to follow than an overall economy) - but almost redundant if you mean any and all businesses in the economy as a whole.

I know of investors who like gold as investments particularly due to eroding value of currency in relation to inflation. My views are similar except that the investment should be made towards a productive asset - and gold, to me, is not a productive asset - therefore, I don't see a reason to invest in it. I think most gold investors tend not to pay attention to the 1% per annum return for gold in the past 50 years leading up to the beginning of the millennium - the point after which most gold investors have made gold investing a recent phenomenon. I see its use mostly as jewellry (although it has a few good applications such as in technological equipments).