Analyzing Bargain Stocks

RMR Group Inc. (Company) owns a 52.1% economic interest in RMR LLC (RMR), which provides services to various REITS and real-estate businesses. It services assets of $32bn across 2,100 properties. The non-controlling interest is held by ABP Trust – controlled by Adam D. Portnoy. RMR provides management services to four publicly listed REITs – ILPT, OPI, SNH, and SVC – in the industrial, office, senior housing, and hospitality sectors. It also provides services to three real-estate related operating companies, one real estate securities mutual fund, and one firm specializing in commercial real estate finance. It earns fees in the form of base management fees (ranging from 0.6% to 1.7% of asset values), incentive business management fees (for beating the REIT benchmarks), and advisory fees. These are incorporated in 20-year agreements with the REITs. The company has generated average underlying pre-tax earnings, excluding incentive management fees, of $100-120m. Incentive ...

Coal, the energy source that’s the bane of climate activists everywhere, is still one of the cheapest sources of electricity. Natural gas-powered plants are the closest cost substitutes; otherwise, the key risk to this industry comes from government mandates on sourcing renewable energy. Consol Coal Resources (CCR) is a master limited partnership listed on the NYSE that holds a 25% interest in the Pennsylvania mining complex that includes three coal mines: Bailey, Enlow Fork, and Harvey, along with a centralized coal processing facility. The balance 75% is owned by Consol Energy (CE). CE is also the parent of CCR - owning 60.8%. The public float is 17.6% and doesn’t have much say in governance matters. This situation will also prevent the manifestation of any takeover premium for this stock. The three mines have coal reserves of 767m tons with a life of 23.5 years at current production rates. CCR sells 66% of coal to US electricity generators, 1% to other domestic pur...

Here’s another company that does most of its business in China and is relatively unloved by the market. Hollysys Automation Technologies is headquartered in Singapore and manufactures integrated automation systems for the a) Industrial b) Railway Transport and c) Mechanical and Electrical solutions segments. It generated 85% of its revenues from China with the balance from other markets in South East Asia and the Middle East. It reported sales of $575m in 2019, ebitda (a proxy for cash earnings) of $107m , and net income of $117m. Other income comprised interest income from cash balances, rental income from certain properties in Beijing with 10 to 15-year leases, and dividends from an investee company (disposed during the year and gains of $5.8m recorded). Normal ebitda has ranged between $100-140m in the recent past. Capital expenditures have been relatively negligible at less than $10m per year. Good free cash flow generation has enabled the company to virtually wipe out i...

China-based companies listed in the US via reverse mergers don’t get much love from investors – particularly when they don’t pay any dividends. Ever-Glory is one such company engaged in the wholesaling and retailing of branded fashionwear. In its wholesale business, it manufactures on contract for various prominent global clothing brands. It also retails clothing under its own brands in 1,100 stores across China. The sales mix for wholesale and retail is approximately 50/50. 51% of its sales are in China, 19% in the UK, 18% in the US, 10% in Japan, and 2% in Germany. The company generated $383m of sales in 2019 and generated EBITDA (a proxy for cash earnings) of $12m (down from $449m and $23m in 2018). It borrows regularly to finance purchase of capital equipment and ended up with bank borrowings of $30m offset by cash of $49m. Net current asset value (a proxy for liquidation value) as at December 31 st  2019 is $28m. Considering these facts, it’s extraordinary that t...

Practically all stocks featured on this website face a significant headwind, which can knock some of them out. Quite a few of them face multiple such headwinds that have beaten their stocks to a pulp. Mammoth Energy is primarily involved in the provision of oilfield services and electrical infrastructure and is listed on the NASDAQ. Revenues have tumbled continuously every quarter from $262m in March 2019 to $67m in December 2019 and cash flows have turned negative. The company was hit severely by the decline in demand for oil services and the run-off of electrical infrastructure work it executed for the Puerto Rico Electrical Power Authority (PREPA) following Hurricane Maria in 2017, which contributed 61% of revenues in 2018. In addition to the decline in oil demand, the company faces multiple lawsuits in the manner it obtained the PREPA contract. The allegations are that the management of its ‘Cobra’ subsidiary obtained contracts from the US Federal Emergency Manage...

It’s generally unprofitable to join a multi-level marketing company - far better to own one. Natural Health Trends Corp is a US-listed direct seller of personal care products. The vast majority of its sales (81%) are generated in Hong Kong, who sell to members in China via e-commerce through various importers. The company applied for a direct selling license in China in January 2019 but was advised by a “Chinese governmental authority” later in the year to withdraw its application, which the company did so. The company suffered a double whammy in 2019 as the Chinese authorities began an intensive review of general direct selling practices in China – and the company received a lot of negative social media coverage. The pro-democracy protests in Hong Kong also curtailed activities that added to its woes. As a result, 2019 saw a decline in its sales from $192m to $78m and its net profit of $31m turned into losses of $6m. And now, Covid-19 has further postponed meeting events...

The ‘China Hustle’ was a 2017 documentary that showcased the frauds perpetrated by Chinese companies taking over publicly listed US ‘shell’ companies and raising money from the public. Their financials were exposed as fraudulent when compared with videos of factory activity and filings with Chinese regulators (SAIC). Shineco wasn’t named specifically in the documentary and is listed on the NASDAQ. It processes Chinese herbal products. It listed in 2016 and is currently selling at under $12m or $0.43 per share. It appears to be extremely cheap based on the financials – selling at just 24% of net current asset value (a proxy for liquidation value) and less than 2x average earnings. The current assets are primarily comprised of cash of $42m, supposedly entirely in Chinese banks. Despite having $42m in liquid cash deposits (and supposedly generating net cash flows of $6.1m in the last six months), the company has embarked on three equity raises since September 2018 aggregatin...

Active investment managers have taken severe beatings over the last few years as money piles into passive index funds. Manning & Napier  (MN), Inc. is a US-based registered investment advisor. It earns fees serving wealthy individuals and institutions via separately managed accounts, mutual funds, and collective investment trusts. The company has suffered declines in assets under management (AUM) from $25.1 billion two years ago to under $19.5 billion as at December 31 st , 2019. Almost all its funds have underperformed their benchmarks (though not by a lot) over five and ten-year periods. Revenues have declined from $314m in 2015 to $138m in 2019. In such a backdrop of continually declining revenues, the bargain hunter would hang his/her hat on liquidation value. Examination of the balance sheet reveals net liquid assets i.e. cash, short-term investments, and short-term receivables net of all liabilities of $81m. The company's common stock is selling for under $49m ...

How do you value the stub of a business that sold off its consistent earnings generator? Galliford Try Holdings plc (formerly known as Galliford Try plc) is a UK-focused construction company that sold a large chunk of its business (Linden Homes and Partnerships & Regeneration divisions), which accounted for about half of its revenues before disposal and over 100% of its profits. What remains is a business with ‘Buildings’, ‘Infrastructure’, and ‘PPP Investments’ segments that generated revenues of GBP 1.311 billion and pre-tax losses of GBP 28.6 million in the last twelve months (before “exceptional” items comprising several one-off items). The company has an order book of GBP 3.2 billion and management are targeting a 2% profit margin. The net debt as at December 31 st 2019 was GBP 225m. After the disposal on January 3 rd  2020 and receipt of consideration, however, management assert that the group operates with a net cash position of GBP 225m. The adjusted bala...

Oil is currently trading at multi-decade lows. Seplat Petroleum owns stakes in eight oil blocks in the Niger delta region. It owns 40-45% of each of them, operates four, and is a non-operating partner in the remaining four blocks. Seplat is listed on the London stock exchange and in Nigeria. It owns proved and probable oil reserves of 509 million barrels, which will last it till 2042 at current production levels of 47 to 57,000 barrels per day. Its production costs are a mere $6.20 per barrel giving it enormous staying power even in the current oil slump (with WTI crude at $20 today). This doesn’t factor in the hedging of all its sales to the third quarter of 2020 at $45 per barrel. The company generated pre-tax profits over GBP 260m in the last two years though it wasn’t immune from losses during previous oil slumps (and exacerbated by militancy in the region). Net cash flows, even after acquisitions have enabled fairly consistent dividends at just under GBP 50m a year. ...

Most investors have low tolerance for deficiencies in corporate governance. Ferrexpo is a classic case of an excellent business soiled by corporate governance issues. The company is the world’s third largest iron ore pellet manufacturer and supplier to the steel industry with an 8% market share. Its assets are in Ukraine and listed on the main board of the LSE. Its iron ore reserves would last another 55 years at the current rate of production. The controlling shareholder appeared to be close to the previous political regime in Ukraine. He is now subject to several investigations into his businesses even resulting in a Ukrainian court ordered freeze of the company’s 50.3% stake in a subsidiary. This only prohibits transfer of the shares and doesn’t affect the operations of the business. Such are the political risks associated with Ferrexpo.   Prior to this, the company’s troubles began with the discovery of questionable donations of $120m to a Ukrainian charity name...

The opioid crisis in the US claimed many lives and the US government went after pharmaceutical companies manufacturing drugs for opioid recovery with a vengeance. Indivior, an LSE listed company, was one of them. It manufactures buprenorphine-based prescription drugs for opioid dependency and related mental disorders. The US Department of Justice (DoJ) is suing the company for $3bn in damages, which would more than wipe out the equity of the company. Its current net worth, adding back provisions of $438m for the case, stands under a mere $650m as at December 31 st , 2019. Further, its blockbuster drug ‘SUBOXONE’ went off patent in February 2019, which spawned generics competition, and was the main reason for decline in revenues from US$ 1bn to $785m in 2019. Operating profits before taxes fell from $292m to $178m. Management has indicated further revenue losses in 2020 to US$ 525-585m with losses of $20m to $50m – primarily to grow market share for its two recently approv...

The UK construction industry has taken several blows in the recent past – once Brexit uncertainties were beginning to lift, it has to deal with a pandemic. Costain plc is a UK-focused technology-based construction company serving the transportation and natural resources segments. It has an illustrious history of UK construction and serves primarily large customers. 2019 was a sub-normal year for the company owing to contract delays, cancellations, adverse arbitration judgments and other one-off factors. Previous to that, it generated pre-tax profits of around GBP 40m. Operating cash flows were adversely affected recently due to prompt payments to suppliers required by UK regulations. Other cash flow squeezes by customers requiring greater financial strength from their contractors - partly as a result of recent failures of other large contracting firms (e.g. Carillion) – has prompted the company to propose a rights issue of GBP 100m, which is fully underwritten by bankers and ...

The House always Wins. Plus500 offers online trading services for ‘Contracts for Difference’, which are essentially bets between two parties on the value of an underlying. It’s listed on the main board of the London Stock Exchange. They offer contracts on 2,800 underlying financial instruments (including cryptocurrencies) across eight developed market regulatory jurisdictions excluding the US. As the broker, high trading volumes and high volatility (that attracts speculators) are good for business. It appears to hold a strong competitive position in transparent regulatory regimes, which bodes well for the stability of future earnings. It’s a rare business that thrives in a pandemic, and all indications are that Plus500 is having a better year in 2020 than 2019. The company’s revenues declined substantially from 2018 to 2019 as a result of EU regulations crimping its operations. It lost 34% of its active customers and 25% of average revenue per user (ARPU). 2019 was th...

Hydrocarbon assets in a geo-political warzone isn’t high on desirability – especially one that doesn’t pay dividends. Regal Petroleum plc owns licenses to operate in three gas fields in eastern Ukraine – the MEX-GOL, SV, and VAS fields. Together there are over 60m barrels of oil equivalent (MMboe) in proven and probable (2p) reserves lasting until 2038 at least. The company is AIM listed and there’s less than 10% public float. It generated profits before taxes of GBP 17m in the recent past (with equivalent cash flows) and sells for a paltry valuation of GBP 49m at recent prices of 15.3p per share. This amounts to less than the net current asset value per share (a proxy for liquidation value) – mostly comprised of cash of GBP 53m. Half of the substantial cash balance is held in Ukraine currency, which is subject to substantial devaluation. The balance, however, is held in US$ in British banks. The current valuation doesn’t count the substantial oil and gas production asset...

Gold is certainly glittering. The shiny metal hasn’t seen as much speculative interest since 2011. Trans Siberian Gold digs out the gold (along with silver - though it accounts for only 3% of revenues) from the Asacha deposit in Eastern Russia with a license to operate to 2024 (extendable). In 2019, it obtained a 20-year license to mine the nearby Rodnikova deposit for $3m. Measured, incurred, and inferred gold reserves for the Asacha deposit are over 553,000 ounces. Estimated reserves for the Rodnikova deposit are over 1m ounces. Current production runs at about 45,000 ounces (with cash costs of $672 per ounce per the latest interim report). If the estimates prove out, there’s over 30 years of gold to be mined. The real value to investors, however, would come from management’s ability to acquire further mines at reasonable (or cheap) prices. The company is listed on the London AIM exchange at sells for GBP 53.6m or 60.5p per share. The current market capitalization is back...