David Hurwitz — Hope for Growth vs. Real Assets and earnings

SPECIAL VALUE INVESTING CONGRESS NOTES FOR THE IRREGULARS

David Hurwitz of SC Fundamental presented a thought exercise on valuing a steady and boring company versus a rapid grower that has been steadily losing more money on each new sale.

The key is to look at balance sheet — that’s the bedrock the company sits on, earnings can come and go even for very good companies, but if management allocates resources well they can thrive in a downturn.

Pay attention to whether the balance sheet/assets come from retaining earnings or from selling stock to the public. What is cash worth in the hands of a bad allocator?

Think about how consistent profitability is, and whether the competitors are also consistently profitable — is the competition rational, or is it like the airlines?

Be wary when growth is the one thing going for your company.

He went through a couple blind example of numbers from two companies.

First was a company with a consistent and profitable regional business and a ridiculously expensive company. The cheap one is Kisco, which is cheap and trades at a discount to cash, with a negative enterprise value.

PE of 5, price is 16% of tangible book, threading at 1X peak earnings and insiders bought 22% of the company in 2008 at prices 46% higher. Market cap is $116 million, he says it’s extraordinarily cheap. It’s a Korean company, so can’t easily buy it ourselves.

Second, the “growth” company, is Salesforce, which has never made and won’t make money, taxing at 50X tangible book, and they have a billion in cash that they’ll waste. They’re trading for 320 times PEAK earnings. If they grow the top line at 25% a year for the next seven years, which would make 17 years (extremely rare), and double their record profit margin and trade at a big premium PE of 20, you would get a 0% return over seven years. And it’s not likely to do any of those things.

Kisco is cheap for a reason — complicated holding company, small cap, illiquid, in Korea. Will get better, but the construction outlook is also poor and they lost money in 2011, so it’s not great or easy — but that’s why it’s so cheap.

Are you getting our free Daily Update
"reveal" emails? If not,
just click here...

(function () { var e = document.createElement('script'); e.type = 'text/javascript'; ...

Sign Up for a Premium Membership

To view the rest of this article (and to have full access to the rest of our articles), sign up.
Already a member, log in.

Become a member

This site and Stock Gumshoe publications and authors do not offer individual financial, investment, medical or other advice. Nothing on this site should ever be considered to be personal advice, research or an invitation to buy or sell any securities. We also make mistakes and bad decisions sometimes, and our reasoning or data should be checked against trusted sources before they inform your investing decisions. Choices regarding how to invest your money or otherwise manage your life or finances are yours, we share only our analysis and opinion and all authors or commenters are individually responsible for the words and opinions they share here. Please read our important disclaimers and policies. Stock Gumshoe is supported by subscribers and by sponsors and advertisers. Stock Gumshoe's employee authors will disclose holdings in any stock covered at time of publication and will not trade in any stocks written about for at least three days after publication. Please see below for complete disclosure, disclaimer and policy information.

Connect with Travis

website designed by Gravity Switch