Issue 10: Small/Midcap

This was a very interesting ValueLine issue for me.  What I found in this issue was the Petroleum Producing industry is one characterized by low working capital needs, high returns on assets (in general), and a constant need to overspend their income on capital expenditures each year.  I’m curious about what they’re spending all that money on and the “institutional imperative” that has most managements growing with almost no regard for capital structure or shareholder dilution.  Reminds me somewhat of the drybulk shipping industry, only with better inherent economics (there is still some value creation). Also, and this shouldn’t come as a surprise, the Hotel & Casino industry is terrible.  Too many assets for too little a payoff- not to mention the debt!  I’ll pass on that industry for most of my life.

For this issue, I am listing interesting companies, which are not at good prices but for some reason or another, look abnormally interesting to me:

  • Arden Group- a grocery chain with abnormal profits for the industry, especially considering the success of Wal-Mart & Kroger in crushing most of the competition.  Has 18 locations in Southern California; I’m guessing they’re protected my gov’t in some way or another.
  • Books-A-Million- never heard of them before, profitable in spite of Amazon; even when Borders & B&N are quickly dying
  • Harvest Natural Resources- previous Mohnish Pabrai investment; curious what drove him into & out of stock, may check out in future as case study
  • Sandridge Energy- current Prem Watsa holding; may be interesting study
  • Sunoco Logistics- interesting business; very consistent year over year with pipelines

Companies at potential discount:

  • Conn’s Inc- if profitability returns to “normal” levels
  • Alon USA- again, if profitability returns to “normal” levels
  • Barnwell Industries- missed out on large upswing since issue, could still be somewhat undervalued based on 2004-08 earning power… not as attractive as in November
  • W&T Offshore- if ONLY I had read this issue sooner! My biggest regret for 2010… not that I would have predicted the rally in November, but clearly was at a discount based on my valuation method at time of VL issue (not hindsight bias at all).  Still may be at slight discount, even with 70% rise since this issue’s publishing.  I’m curious to see if I would have invested back in 2010 or if today looks promising

Great Businesses in the Issue:

  • Panhandle Oil & Gas
  • SM Energy Co.
  • Apco Oil & Gas- best in class for small cap petroleum producing industry

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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