Excerpt From How To Value Invest: My Investment Philosophy

Excerpt From How To Value Invest: My Investment Philosophy

“Nothing in the world can take the place of Persistence. Talent will not; nothing is more common than unsuccessful men with talent. Genius will not; unrewarded genius is almost a proverb. Education will not; the world is full of educated derelicts. Persistence and determination alone are omnipotent. The slogan ‘Press On’ has solved and always will solve the problems of the human race.” Calvin Coolidge

Throughout the rest of the book you will be seeing my actual analysis and evaluation articles where that will show you the valuations and analysis that I have done on real world companies.  You will be shown how to value companies using various valuation techniques and how to adjust the numbers for yourself, and what those numbers and valuations mean for the overall investment thesis.  You will also be shown my reasoning’s and thought processes for why I decided what I did and why the particular company was a buy or sell decision for me at that particular point.  Before we get to that though I need to state my investing philosophy so that everyone knows what frame of mind I am approaching the analysis with.

I look for companies that have some combination of the following criteria: Some kind of long-term sustainable competitive advantage, or moat as it is also called, companies that produce and sell products in niche markets, companies that I find to be substantially undervalued, have very good management, high insider ownership, are fantastically profitable, have a lot of cash and/or hidden assets, etc.

I only take into consideration in the valuations and analysis what I can see now, and pay almost no attention to rumoured future possibilities or estimates of revenues and margins into the future.  The only time future possibilities play even a small role in my articles are in situations where there is a clear catalyst: Activist/value investing firm or individual involved, the company is undergoing a strategic review and is owned and controlled by a few people as in the case with Dole (DOLE) that you will see later in the book, or the company’s management is trying to figure out ways to unlock the companies undervaluation by asset sales or spin offs as in the situation with Vivendi (VIVHY.PK) that you will see later in the book.  Even with the above mentioned companies I only valued and analyzed the company as it stood then, and treated future potential as icing on the cake that played almost a zero role in the evaluations.

My number one rule when I buy into a company is preserving capital and making sure that I do not lose money.  The fewer losses I have, the more money that is kept and is able to compound faster when I do find winners so I am a very strict, disciplined, and conservative value investor.  I generally only buy into companies that are selling at a substantial discount, or margin of safety, to my estimate of value for the company so that this way if I do make a mistake in the analysis or valuations then I will still have a chance to make some money.  I usually look for a catalyst that could help unlock the undervaluation of a company such as: Potential for spin-off or asset sale, land or buildings that are not being used that could be sold, activist funds/investment firms that own stock in the company and could push for changes to be made, etc.  I try to find areas of the market where a lot of investors do not or cannot invest and I generally only research companies that have market caps of less than $100 million or special situations like spin offs.  Now that I am more confident in my abilities to value and evaluate companies I do not hesitate to put 20+ percent of my portfolio into one or more companies.  The fewer companies I own the better I know each company.  I am also a very contrarian investor and try to find companies that are either unknown, unloved, or are having problems for potential investments as well.  The less competition there is the better when looking for investments so I try to steer clear of the herd who generally concentrate on bigger companies.  I do not forecast numbers years or even months in advance at all and only value and analyze what I see in the company now so you will not see any DCF valuations in this book.  There are a lot of books out there that explain how to do DCF valuations and I would highly recommend Aswath Damodaran’s free online course on valuation where he teaches how to do DCF valuations if you are interested in those kinds of valuation techniques.

I generally plan to hold the companies I buy for years, decades, or hopefully forever if it turns out to be an exceptionally good company and generally only plan to sell if the companies if their share price rises to the high-end of my valuation range quickly or far above what I think its intrinsic value is after I have bought into it, or if I can find another company that I think is a better investment.

Having stated all of this you now have a frame-work for my thought process going forward and how I manage my personal portfolio and the other portfolios that I manage. If you come across any terms that you do not know refer to investopedia.com as it is the best site I have found that explains investing terms and it is still a site I use to this day when coming across things I do not know or understand.  If you do not find a definition that you find satisfactory or just want to study something further you should search for the term, person, book, etc on my blog or through Google.

I would also like to mention that I have received no formal training in evaluating companies and some of the ratios that will be talked about throughout the book I came up with on my own and have never seen used anywhere else such as the total obligations, commitments, and debt/EBIT ratio which will be talked about later.  I am sure that some professional investors and college professors out there will say that I am technically probably not doing some of the things in this book properly or “How they should be done” but since I had to learn on my own, I have learned to do things that make sense to me, help me to understand the inner workings of a company, and help me to make an informed decision about whether or not a company is a good investment.  In my opinion understanding these things in your own particular way, which makes sense to you, is more important than doing things just because someone else says they are proper.  If something in this book doesn’t make sense to you, don’t use it, find your own way to make sense of things, and come back to it later.  This book is meant to be a practical guide of learning how to evaluate and decide if a company is a good investment without having to spend potentially hundreds of thousands of dollars on a college degree.  Use what makes sense to you, skip the rest, and come back to it later when it does make sense to you and you want to learn how to use it.

Updates For How To Value Invest, My Immediate Plans, And A Question About Becoming An RIA

Getting Ready For Our Second Child

My wife is due with our second child any day so I will most likely not be posting as much on the blog for a while.  I will probably still post links and other things that I am learning from on Twitter but the blog will probably be quiet for a little while, at least until I get my next article written, as I will continue to research companies during this time.

Found An Undervalued Company

After going through roughly 500 companies in the past several weeks, a lot of annual reports, and valuing some companies I have finally found a nano cap that is both profitable and undervalued for the first time since March.  I hope to have the article up as soon as possible but again with my wife being due any day I do not know when it will be posted.

On this note I also plan to release another excerpt from How To Value Invest in the coming days about how I systematically go through searching and researching companies for possible investment.

How To Value Invest Update And Questions For Those Who Have Bought It

Now that the book has been out for a while and has started to sell a bit better I was wondering what those have bought the book think about it.  Why did you buy it, did it help, did you like it, would your recommend it to others, etc?  I would love to hear from all of you who have bought and read the book and hear your thoughts and thank you so much to everyone who has bought it.

A Question For Any Registered Investment Advisor’s Out There

I posted the following question on Twitter yesterday as I am looking for some guidance on the following.

Would really appreciate any help anyone can offer out there on the subject and like I said I do manage some money now (that I do not get paid for).  I have done a lot of research on what specifically is and is not allowed in my state when it comes to RIA and non RIA and what the two entail.  I am mainly just wondering at this point if it would be worth it for me to put in the time to become an RIA now without having a fund or if I should just wait until I get more money to manage and have a firm or work at a firm.  Any help would be greatly appreciated.

Winter Storm Atlas, Storm That Hit My Area, Updates With Lots Of Pictures

Winter Storm Atlas, Storm That Hit My Area, Updates

If you follow me on Twitter you know that there was a massive winter storm that came through the area where I live and that I was without power for a while.  I just wanted to share some updates from the crazy storm to show what we have dealt with here.

My House

Luckily my parents live less than 1/2 mile away from my wife and I and we have been at their house since Friday since they have had power most of that time.  Our house still does not have power (Almost 5 days straight without power now.)  Until I get power back at my house, updates will probably be minimal due to shoveling of snow, more family around, and overall less time to work.

Research

Before the blizzard hit I had started research on another company that looks like it could be undervalued.  I brought my notebook so I can value them and if they are undervalued then I hope to have an article up before next week when my wife and I have our baby.

BOBS Shareholder Issue

To all of you who have contacted me about joining against the BOBS taken private offer, thank you.  I still have no update about anything official that is going on and I will try to email you all individually when I get some time.

Storm Totals and Pictures

The following info was taken from The Weather Channel’s site.

South Dakota

  • According to The Associated Press, first responders in Rapid City were overwhelmed with calls for stuck vehicles and downed trees and power lines making some roads impassable. Police spokeswoman Tarah Heupel said snow and ice was accumulating on traffic signals, making the lights difficult to see.
  • A report submitted to the National Weather Service Friday night said that there was widespread tree damage on the north side of Rapid City along with widespread power outages.
  • The National Weather Service confirmed blizzard conditions occurred in Rapid City, with visibility of 1/8 mile for over three hours.
  • Sustained winds reached 44 mph with gusts to 55 mph at the Rapid City airport before the sensor was knocked out of commission late Friday afternoon. As of Sunday morning the airport was still not reporting any weather data.
  • All Rapid City schools were closed Friday due to impacts from Atlas.
  • Interstate 90 was closed between Murdo and the Wyoming state line as of Friday night.
  • Wind gusts up to 70 mph accompanied the heavy snow in western South Dakota.
  • MORE: South Dakota road conditions

Snowfall Totals:

A Monday update from the National Weather Service he top total was 3 miles southeast of Beulah, Wyo., just over the state line in northwest Lawrence County, S.D. At this location, an incredible 58 inches of snow fell. The liquid equivalent there was 6.78 inches of water, over 20% of the average annual precipitation in this area. Other totals included:

Lead – 55″ – about 45 minutes away.
Deadwood – 48″ on the west side of town
Sturgis – 35″ on the east side of town
Piedmont – 35″
Rapid City – up to 31″ on the city’s southwest side – about 10 minutes away.
Spearfish – 26″ downtown

The official total of 23.1 inches in Rapid City makes this the second heaviest snowstorm on record in the city. Nearly six months ago they recorded their now third heaviest snowstorm on record with 22.4 inches from April 8-10, 2013. It is also by far the biggest October snowstorm in Rapid City; in fact, the 23.1 inches from this one storm dwarfs the city’s previous record for the entire month of October, which was 15.1 inches in 1919.

Most of the snow we received was in a one day period with 50 MPH wind and 70 MPH gusts during the entire storm.

I took the following pictures when I walked to my house from my parents house. All of the drifts, except for the picture at the bottom, are 5-10 feet high:20131006_075044 20131006_075052 20131006_075112

My backyard.

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This is my buddies house a few houses down from me.20131006_081954 20131006_082046

The next two pictures I took from the entrance to my street directly down the road.20131006_082420 20131006_082434 20131006_082946 20131006_083511 20131006_083518 20131006_083520 20131006_101150 20131006_101201 20131006_101211 20131006_101237

This picture and the next one I took at the top of the drift in the previous picture to show how thick the drift is and how long it goes for.

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This picture is a roadway up to Lead-Deadwood which got more than 5 feet of snow.  Shows you what feet of snow mixed with high winds can do in this area.IMG_52386864464389

This link is to the local newspaper which has pictures from downtown Rapid City which is only about a 10 minute drive from where I live.

This is the worst storm I have experienced in living here for almost 17 years now and is the worst single storm on record in this area (since 1890).

While I am getting things back in order please view these links for some excellent content.

Guest Post From @SilvioDixon: First Aviation Services, A Greatly Improved Company Selling Below NCAV

Introduction 

This is a guest post from a good up and coming value investor Silvio Dixon who runs the blog Instant Genius while working through college.  I highly recommend visiting his blog and following him on Twitter @SilvioDixon if you like his work.  He has requested constructive criticism because he wants to learn and become a better investor faster so please give him some suggestions on things to work on.

If you would like to write a guest post for Value Investing Journey please contact me as I would love to have more quality content on the site.  Now on to his write-up.

First Aviation Services, A Greatly Improved Company Selling Below NCAV

I first learned about First Aviation Services (ticker symbol FAVS, OTC:Pink) by reading about the company at Nate Tobik’s great blog, Oddball Stocks.

His report can be read here: http://www.oddballstocks.com/2013/03/first-aviation-catalyst-wrapped-in.html

His report discusses FAVS’ Book Value, which he believes is perhaps double its current share price of $9.49, or more.  (BV is conservatively around $20.)  In this report I am emphasizing FAVS’ improved earning power as the primary metric of showing how undervalued the stock is.

What does it do?

FAVS primarily serves the corporate and regional airline industry, performing maintenance, repair and overhaul of landing gear, propellers, wheels, brakes and hose assemblies, electrical, hydraulic and electromechanical components, and oxygen and fire suppression systems.  They do this through their two operating subsidiaries, Aerospace Turbine Rotables, Inc. and Piedmont Propulsion Systems.

The Catalyst

On March 18th, 2013, FAVS sold one of its subsidiaries, Aerospace Products International, Inc. to Resilience Capital.  It retained a 3% equity interest in the API business.

“Aaron Hollander, Chairman and CEO of FAVS, said, ‘The sale of a majority interest in API will allow First Aviation to focus on its core Maintenance, Repair and Overhaul businesses.  We have a significantly improved balance sheet that will permit us to pursue both organic growth and acquisitions.  We have invested in both Piedmont Propulsion Systems LLC and Aerospace Turbine Rotables, Inc. during 2012 expanding the quality of our facilities and engineering development that will position us well for future growth.’” — from an FAVS News Release

“As part of the sales transaction, First Aviation’s total debt was reduced from $25.2 million to $6.8 million and all obligations relating to a third party guarantee of the term loan were extinguished.” — from an FAVS News Release

“With our improved balance sheet we are reviewing a number of significant organic growth opportunities as well as acquisitions in the MRO space.” — from an FAVS News Release

The 2nd quarter results of this year (2013) were significant as they marked the first full quarter of post-sale operations for FAVS.

“Sales from continuing operations for the first quarter increased 21% to $6.8m compared with $5.6m in the prior year.”

“Gross profit increased to $3.1m compared with $2.4m in the prior year.”

As of June 30th, 2013, the Company had:

$9.92 of net current assets per share  (the current share price is $9.49)

And a current ratio of 1.8

For the 3 months ended June 30th, 2013,

the Company reported earnings of 51 cents per share (excluding non-continuing operations)

and generated 42 cents of free cash flow per share

These are vastly improved results compared to the losses from continuing operations in the 2nd quarter of 2012.

First Aviation occupies a firm position in the regional airline parts and service industry, and should have no problem continuing to produce good results.  Its CEO and Board of Directors are highly qualified and capable and have a considerable personal stake in the success of the Company.

Aaron Hollander, Chairman and CEO of First Aviation, owns 45.5% of total equity and 64.5% of voting Common A.  Mr. Hollander holds warrants for a total of 233,135 shares of Common A at a strike price of $7.00 per share which must be exercised within a ten year period.  He is also custodian for 650 shares owned by his children.

Stanley J. Hill, an Independent Director, owns 1.8% of common equity.

Joseph J. Lhota, an Independent Director, also owns 1.8% of common equity.

Itsik Maaravi, an Independent Director, does not own any common equity personally, but is the designee of Piedmont Aviation Component Services, LLC, which owns 29.5% of common equity.

These men together comprise First Aviation’s current Board of Directors.

First Aviation has achieved an incredible turn around in profitability and has a greatly improved balance sheet.  If earnings can remain close to these levels, it would mean that FAVS is currently selling at less than 5 times earnings.  FAVS is also seeking to grow, either through acquisition of a similar type of company/facility or through the expansion of its existing operating subsidiaries, Aerospace Turbine Rotables, Inc. and Piedmont Propulsion Systems.

Advantages as a Type of Investment

–deep value

–nanocap

–obscure

–growth opportunities

Disadvantage

–liquidity issues if trying to invest large amounts of capital

 

Disclosure: Long FAVS

Quick Update About The Brazil Fast Food Going Private Offer

I have been in contact with several other BOBS investors thus far. Not including some people who have at this point not wanted to disclose how many of its shares they own, the people I have been in contact with own around $10 million in total worth of BOBS shares at the $15.50 offer price.  At this point nothing is concrete as far as I know but I will keep you all in the loop about the plans to push for a better offer if and when we get to that point.

Again, if you are a BOBS shareholder I would love to hear from you and maybe if we get enough capital together we can push for a much higher and more realistic offer price for the company.

For why I think the going private offer is ridiculously low, please read my post here.