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Purpose

The purpose of this website is to analyze "deep value" stocks that meet quantitative criteria for cheapness as measured by basic elements of earning power and balance sheet position. In general, this would constitute the quantitatively cheapest 1% - 2% of stocks on the planet.

As a group, this portfolio is likely to outperform the market significantly. We will, however, evaluate each stock to determine investment value - with the aim of continually improving investment performance, and business analysis.

There is likely to be good cause for fear in each stock we analyze. We will seek to prioritize inherent stability as the key qualitative factor in our analysis. This could be trumped if the risk/reward equation is skewed in our favor (as it usually is with such cheap stocks, though not always).

We are aware of the multiple biases that creep into a selective approach and the pitfalls in investment performance to those who attempt this. In any case, we press forward towards th…

PDL Biopharma, Inc.

We employ the use of net working capital as a proxy for liquidation value in our analysis – as a minimum valuation to judge whether a stock is selling for considerably less than its worth to a private owner.
Sometimes a company goes into self-liquidation.
PDL Biopharma (PDL) is one of those companies where management decided that the best course of action for stockholders is to liquidate itself. This stock is what Ben Graham called a ‘Special Situation’.
PDL, formerly known as Protein Design Labs, was founded in 1986. Its recent business strategy was to finance commercial stage and late clinical stage pharmaceutical assets via royalty monetizations, debt structures, or a combination of both. Later on, it pivoted to receiving equity in under-commercialized products.
Management estimates liquidation of PDL to fetch between $350m to $700m ($2.98 to $5.97/share) for the stockholders. The equity sells for $368m or $3.18/share at the close on May 15th.
Book value as on March 31st amounted…

Hawaiian Holdings, Inc.

Ever since Covid-19 wrecked financial markets, the eminent investor Warren Buffett made one prominent move: He sold all his airline stocks.
Our job is to evaluate whether the value of the equity is worth far more than the current price.
Hawaiian Holdings (HA) is the sole owner of Hawaiian Airlines, which operates flights throughout the Hawaiian Islands, to several cities in mainland USA, South Pacific, Australia, and Asia. Its operations have been fully halted after Covid-19 struck.
It generated revenues of $2.8bn and ebitda of $481m in 2019, its last full year of normal operations. Net debt as at March 31st 2020 was $737m before participation in the government loan programs (below).
The equity is selling for $527m or $11.47/share.
HA availed the US government’s payroll support program (PSP) that provided $292m in loans, with a further option for $364m in secured loans. HA received $146m of the PSP in April 2020 with the balance due between May and July. Management is evaluating part…

Steel Dynamics, Inc.

The steel industry is a prime example of a notoriously cyclical industry. There are, however, examples of quality operations within the industry.
Steel Dynamics (SD) is one of the larger and higher quality steel operators in the US. It generates revenues from steel production, metals recycling, and steel fabrication. Steel production is the largest contributor to revenues (75%). It has 13m ton capacity for steel production and metals recycling. 95% of sales are in the US and SD’s products are used primarily for construction, auto, and other manufacturing activities.
Its competitive advantages lie in a diversified value-added product offering, control of secure supplies of recycled ferrous metals (65% from own source), and importantly a highly variable cost structure. Management has taken efforts to control the fixed overhead/ton of production over the years.
SD is part of the ‘critical infrastructure industry’ designated by the US government, which allows it to operate uninterrupted …

Waddell & Reed Financial, Inc.

Waddell and Reed Financial (WRF) is a holding company that is one of the oldest mutual fund complexes in the US established in 1940. It earns its fees via Investment Management, Underwriting/Distribution, and Shareholder services.
It has assets under management (AUM) of $60bn as at April 30th 2020 and assets under administration of $52bn, which include advisory and non-advisory accounts held in brokerage or fee-based asset allocation programs.
Its revenues are from the Institutional, Unaffiliated, and Wealth Management segments – with investments in equity, fixed income, and money market funds – employing a wide variety of strategies.
As an active manager, it has seen relentless redemptions – with AUM falling from $80.5bn three years ago. Performance has been poor with only 37% of its funds and assets in the top half of mutual fund performance over a five-year period.
Revenues have declined from $1.52bn five years ago to $1.08bn in the last twelve months. Net income fell from $246m …

GAMCO Investors, Inc.

‘Value’ investing strategies have experienced their longest period of underperformance vs the S&P 500 index since 2006. Gamco Investors Inc (GAM), controlled by the celebrity investor Mario Gabelli, earns fees running several value-oriented funds including 24 mutual funds, 16 closed end funds, and 1,700 institutional and private wealth management accounts.
Although the funds have beaten the S&P500 since inception in 1977, 14.7% net of fees vs 11.8% according to management, recent performance has lagged – 21.3% in 2019 vs 31.5% for the index.
This, along with the relentless competition on fees from index funds has driven assets under management (AUM) down to $27.5bn on March 31st 2020 from $43bn just over two years ago. Large declines in AUM in Q1 2020 were due to stock market declines as a result of Covid-19 but client redemptions have been significant over the recent past.
GAM earns investment advisory fees (as a % of AUM), performance/conditional fees (on outperforming be…

Warrior Met Coal, Inc.

Mining is deemed a ‘critical infrastructure’ industry by the US Department of Homeland Security, which confers participants with certain benefits during the Covid-19 pandemic. Warrior Met Coal (WMC) is an NYSE-listed company that mines metallurgical coal in Alabama, which is converted to coking coal that is critical for steel production.
WMC ships supplies via rail to the Port of Mobile, Alabama – and sells to Europe (54% of sales), South America (26%), and Asia (20%).
It has proven and probable reserves of over 200m tons with production of under 8m tons a year. It also has access to the ‘Blue Creek’ facility that can boost its production by 54% after investing $25m – expected to take place in July 2020.
Average selling prices in Q1 2020 fell to $134.47/ton compared to $194.47/ton in Q1 2019, a decline of over 31%. (Selling prices were $194 and $190/ton in the previous two years.) Fortunes are dependent on the notoriously cyclical steel industry.
It generated revenues of $1.12b and…

Flexsteel Industries, Inc.

US tariffs against China - starting with 10% tariffs in September 2018 and followed by 25% tariffs in May 2019 - has several US victims. One of them is Flexsteel Industries, Inc. (FI), a manufacturer of residential, contract upholstered, and wooden furniture products. They import 42% of their sales from China, and were hit badly.
FI is a long-established company - and one of a multitude of relatively small furniture manufacturers serving the US and Canada. There are few dominant players in this industry.
The dominance of online purchasing trends has also impacted profit margins. FI announced a restructuring exercise in June 2019 expected to last two years. Management budgeted $48-53m in restructuring costs, of which $31.4m have been incurred to March 31st 2020.
FI generated $402m in sales and net losses of $21m in the last twelve months. Average net income over the last five years can be pegged at between $12m-$15m.
A closer examination of the restructuring costs reveals non-cash it…