Posts In: Gannon on Investing

Andrew Kuhn August 8, 2019 Gannon on Investing 0 Comments

How to Judge a Business’s Durability

Originally written by Geoff Gannon on June 13, 2015

 

My last post listed examples of threats to a company’s durability. This post will be about how we assess those threats. You can always imagine a threat. Is it a realistic threat? How do you judge that?

There are some industries where durability is pretty much perfect. The business doesn’t change much. Barriers to entry are high. The future development of substitutes is unlikely. Location advantages are big.

A good example is lime. Lime is reactive and has a short shelf life. You don’t store it speculatively. You don’t import it and export it. Customers need to get their lime from a deposit being worked somewhere within a few hundred miles of them. Over the last 100 or so years, the real price of lime hasn’t changed that much (real price volatility compared to other commodities is quite low). The price right now is perfectly in line with the real average price per ton since 1900. Lime consumption in the U.S. was no higher last year than it was in 1998. The industry is more consolidated and perhaps less competitive than it was in 1998. I don’t think capacity is being fully utilized now. And I do think inflation will always be passed on to customers (as it was over the last 100 years). So, if Quan and I were to research a company like United States Lime & Minerals (USLM), we could probably start by assuming that last year’s EBIT would – in real terms – represent that company’s durable earning power. That could be our starting point for a buy and hold analysis.

That’s usually not the case. Even when we find a company that has a long history of being the leader in its field – say Strattec in car locks and keys, H&R Block in assisted tax preparation, etc. – there is a risk of change. In these two cases, we know there will be change in the product. For example, more people will prepare and file their taxes online in the future than they do now. And more drivers will enter and start their cars with the use of electronics instead of physical locks and keys. What we don’t know is how that will affect the companies.

Take H&R Block. The company competes in assisted tax preparation. In the 1990s and 2000s, many people switched to using software and then online products to prepare their taxes. But who were these people?

Most were people who had always prepared their taxes themselves. I use TurboTax and know a lot of people who use TurboTax as well. But, I actually don’t know anyone who used H&R Block even once in their lifetime and now uses TurboTax. Everyone I know who uses TurboTax used to – decades ago – prepare their taxes themselves using a pen and paper and a calculator. They didn’t use a CPA. And they didn’t use H&R Block.

Now, this is anecdotal. But, …

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Andrew Kuhn August 8, 2019 Gannon on Investing 0 Comments

Should We Care Why the Stocks We Buy are Cheap?

SEPTEMBER 2, 2015

by Geoff Gannon


One of my favorite blogs, Value and Opportunity, recently did a post about how the best value stocks are often those that are not cheap by the most obvious numbers (P/E, P/B, etc.).

The post is entitled “Value Investing Strategy: Cheap for a Reason”. The basic argument of the post is that:

“…Especially in a market environment like now, cheap stocks are cheap for a reason.It is very unlikely that ‘you’ are the first and only one who knows how to run a screener and by chance you are the only one who can buy this great company at 3 times earnings which will quadruple within 6 months…The most important thing is to be really awarewhat the real problem is. If you don’t find the problem, then the chance is very high that you are missing something.”

This is not at all how I look at stocks.

I usually don’t know why a stock I’m buying is cheap. And I’m not sure I spend much time trying to figure out why someone else would or would not like the stock. I tend to just focus on whether I like the business and how much I’d “appraise” that business for.

I can sometimes come up with possible reasons for why a stock I like is cheap. But, I’m never sure those are the real reasons other people aren’t willing to buy the stock.

I don’t think Quan sees himself – and I know I don’t see myself – as a contrarian investor.

So, I assumed looking to see if a stock was “cheap for a reason” is something I simply don’t do.

At least that’s what I thought before looking through the textual record of what I actually said about each stock I picked.

In my last post, I mentioned 6 stocks that Quan and I picked for Singular Diligence which are now trading at a discount of 34% or greater to our original appraisal value. So, these are the 6 cheapest stocks we know of in intrinsic value – rather than traditional value metric – terms.

I decided to go through the record and check for two things.

One, how cheap are these stocks on the traditional value metrics. I will use Morningstar’s measures of P/E, P/B, and Dividend Yield for this.

Two, what reason did I give (in the issue where I picked the stock) for why that stock might be cheap.

Here are the 6 stocks.

 

Hunter Douglas

Discount to Appraisal Value: 58%

 

Forward P/E: 9.6x

P/B: 1.4x

Dividend Yield: 3.6%

 

Why I Said it Might Be Cheap:

“Hunter Douglas is an obscure stock. The Hunter Douglas brand is American. So, the company’s name is American. However, the stock trades in Europe. The company reports its results in U.S. dollars. But, the stock trades in Euros. The stock is 81% owned by the Sonnenberg family.”

(Note: Quan and I appraised this company –

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Geoff Gannon July 15, 2019 Gannon on Investing, Stock Ideas

Truxton (TRUX): A One-Branch Nashville Private Bank and Wealth Manager Growing 10% a Year and Trading at a P/E of 14

by GEOFF GANNON Truxton (TRUX) is an illiquid, micro-cap bank stock. TRUX is not listed on any stock exchange. It trades “over-the-counter”. And it does not file with the SEC. The bank has two locations (one in Nashville, Tennessee and one in Athens, Georgia). However, only one location (the Nashville HQ) is actually a bank branch. So, I’m going to be calling Truxton a “one branch” bank despite it having two wealth management locations. The company doesn’t file with the SEC. But, it is not...

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Geoff Gannon April 25, 2019 Gannon on Investing, Stock Ideas

Bonal (BONL): An Extremely Tiny, Extremely Illiquid Stock that Earns a Lot But Doesn’t Grow at All

Bonal isn’t worth my time. It might be worth your time. It depends on the size of your brokerage account and the extent of your patience. So, why isn’t Bonal worth my time? I manage accounts that invest in “overlooked” stocks. Bonal is certainly an overlooked stock. It has a market cap under $3 million and a float under $1 million (insiders own the rest of the company). It often trades no shares in a given day. When it does trade, the amounts bought and...

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Geoff Gannon March 30, 2019 Gannon on Investing, Premium Articles-01, Stock Ideas

Revisiting Keweenaw Land Association (KEWL): The Annual Report and the Once Every 3-Year Appraisal of its Timberland Are Out

Accounts I manage hold shares of Keweenaw Land Association (KEWL). I’ve written about it twice before: Keweenaw Land Association: Buy Timberland at Appraisal Value – Get a Proxy Battle for Free And Why I’ve Passed on Keweenaw Land Association – So Far I didn’t continue to pass on Keweenaw Land Association. Like I said, the stock is now in accounts I manage. There are really two things worth updating you on. One is the annual report. The other is the appraisal. The appraisal is something...

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Geoff Gannon March 21, 2019 Gannon on Investing, Premium Articles-01, Stock Ideas

IEH Corporation (IEHC): May Be a Good, Cheap Stock – But, Definitely in the “Too Hard” Pile for Now

As this is an initial interest post, it’ll follow my usual approach of talking you through what I saw in this stock that caught my eye and earned it a spot near the top of my research watch list – and then what problems I saw that earned it a low initial interest score. I’ll spoil it for you here. IEH Corporation (IEHC) is a stock I’m unlikely to follow up on because of the difficulty of digging up the kind of info that would...

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BWX Technologies (BWXT): A Leveraged, Speculative, and Expensive Growth Stock that Might be Worth It

BWX Technologies (BWXT) has been at the top of my research pipeline for a while now. I wrote about the company – when it was the combined company that is now split into BWXT and Babcock & Wilcox Enterprises (BW) – a few years back. You can read my report on the combined Babcock & Wilcox in the Singular Diligence archives. Today, I’m not going to talk about the business – which is described in great detail in that report (see the “Stocks A-Z” tab)....

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Resideo Technologies (REZI): A Somewhat Cheap, But Also Somewhat Unsafe Spin-off from Honeywell

This is a revisit of Resideo Technologies (REZI). My initial write-up of Resideo was done before the stock was spun off from Honeywell. Three things have changed since that initial interest post. One: Honeywell spun-off Resideo. So, we now have a price on Resideo. Two: I’ve created a five part scoring system – a checklist of sorts – for the stocks I write up here at Focused Compounding. This helps me more systematically order what stocks I should be writing up for the first time,...

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Vertu Motors: A Cheap and Safe U.K. Car Dealer

Vertu Motors owns more than a hundred car dealerships in the United Kingdom. About half of the time – so, at 50+ locations – Vertu Motors also owns the land on which the dealership is built. They lease the other half of their locations. The stock trades on the London Stock Exchange (the AIM market, specifically) under the ticker “VTU”. Back on November 14th, 2017 Focused Compounding member Kevin Wilde sort of wrote up Vertu Motors. He did an idea exchange post on U.K. car...

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Green Brick Partners (GRBK): A Cheap, Complicated Homebuilder Focused on Dallas and Atlanta

I chose to write-up Green Brick Partners (GRBK) this week for a couple reasons. The first is the company’s headquarters: Plano, Texas. I live in Plano. And the company gets about half of its value from its Dallas-Fort Worth homebuilding operations. My “initial interest post” checklist goes something like this: Do I understand the business? Is it safe? Is it good? Is it cheap? The single most important questions is number zero: “Do I understand the business?” Since I’ve lived for about seven years right...

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