Issue 9: Small/Midcap

And I return briefly to the Value Line issues.  I decided to take a break on my research of insurance the past few weeks.  This issue didn’t have a whole lot to offer.  The biggest industry in this issue, machinery, is one plagued by low returns on capital, cyclical demand, and high working capital needs.  Needless to say, there weren’t any great businesses hiding in there.  Here are the list of interesting companies, whether for price/value or the business itself:

  • Alliance One International- it looks statistically cheap, but is most likely a value trap with the huge debt load and hardly any shareholder value created the last decade
  • Cherokee Inc- pure dividend play on licensing & marketing of their brands, not a great price for me but looks like an interesting case study
  • Reliv International- pretty solid nutritional supplement business & looks like a good value based on today’s prices.  I’ll add to my watchlist
  • Overhill Farms- processed frozen food business that looks decent and at a pretty interesting price today, adding to my watchlist

There were very few good businesses in this issue, considering the industries (shoes, machinery, food processing, apparel, and small beverage or drug companies).  Small drug companies tend not to be profitable because they’re awaiting FDA approval and small beverage companies have little hope against Coke/Pepsi.  Here were the two great businesses for this issue:

  • Darling International Inc- provides various food services (recycling, rendering, recovery) to food industry, has good returns on capital, is growing, and looks pretty solid
  • Medifast Inc.- weight & disease management products; has extremely high returns on capital, and although they chew up all earnings (as well as some additional equity capital at the expense of shareholders), looks like it has solid economics in its favor while growing very quickly

I’m sorry this isn’t a post about my next research project, Seabright Holdings (SBX).  I just finished finals week at school and all the insurance reading has become pretty heavy- I decided to take two days off with Value Line.  I’m getting back to the S-1 filing now to see management’s initial thoughts on the future prospects of the company.  I’ll have a post ready by next week.

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About Andrew Schneck

I am a value investor focused on misunderstood securities and industries, with an eye for long-term stock ownership.
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