"value investing"

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praetorian2

This is a multipart question, so please answer any parts that you are knowlegable of:
1. Can one of you recommend an indepth book that discusses valuations. I want the boring gritty stuff like how to value debt, assets, reading government filings etc.
2. Why do you often see stocks that trade at 80c a share but have 5 dollars a share in cash and 9 dollar book value. How can it trade so much lower than it's assets? Assume that the stock is expected to loose 50c this year. That still leaves it almost a decade to return to profitability. How can this be possible.
3. Finally, what is the difference between shares outstanding and float. How do shares outstanding become part of the float. What is the process involved in this. I have read yahoo's definitions, and they don't seem adequate.
 
Regarding question 2, I think it is useful to make a few assumptions. One, the markets are very efficient. There are loads of very smart people looking to capitalize on mispricing. Two, as a private investor, it's very hard to know the inside story at these companies. Your ability to do fundamental research is probably somewhat inferior to say, Goldman Sachs or Fidelity. Three, accounting numbers hide as much as they reveal. Book value is pretty meaningless, unless it is cash in the bank net of liabilities. How many large, respected companies come out with massive writedowns of assets, typically aquisitions or R&D? Answer, plenty, so you can imagine what's hiding on the books of small fry.

I think these net cash plays tend to be situations where the market has given up on the company as a business. The assumption is that the cash gets burned eventually, as management typically is not eager to just wind things up, their own jobs with it unless they are big shareholders. The only way to get your hands on the cash is if someone takes it over and liquidates. How many times does that happen, short of bankruptcy?
 
1. Can one of you recommend an indepth book that discusses valuations. I want the boring gritty stuff like how to value debt, assets, reading government filings etc.
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I would suggest Graham and Dodd's Security Analysis. The original classic was 1934 but the latest 5th ed should be dated around 1988. I'd like to see an update for tech stocks but many of the tried and true gritty formulas and practical models still apply today. I don't follow the Graham & Dodd model 100% but it is helpful in understanding how to discover some shenanigans in the books that aren't readily apparent.

2. Why do you often see stocks that trade at 80c a share but have 5 dollars a share in cash and 9 dollar book value. How can it trade so much lower than it's assets? Assume that the stock is expected to loose 50c this year. That still leaves it almost a decade to return to profitability. How can this be possible.
More...

Many of these companies are either debt laden or have a high burn rate. Others are cashflow positive yet continue to finance operations through debt instruments. You really have to dig deep to get the real picture. I would say 80% of the time, the publicly available financials will tell the story sufficient to understand why things look upside down. Aside from that, you need to dig into the business model, look at the margins relative to competitors and over time, throw out any goodwill they are claiming (that's where the writedowns will come - especially now that FASB is forcing goodwill to be means tested) and then run the numbers again for yourself. I have a number of long term short positions in companies that have massive goodwill amounts on their books.

A $2 stock is $2 for a reason. By buying it, you're betting it's a temporary condition, but there are plenty out there today that will see $10 again.

Good Luck
 
Lets go over an example. I hate to use one of my "ideas" as a guinnea pig, but I doubt it's that good. The stock is amcv. On yahoo finance, I show that the book value is 7.33, and cash at 5.33. I show it lost .36 last quarter, and 1.21 for the trailing year. At a consistent rate of losses, the company should still be around for at least 4-5 years (during which time they could (?) improve their operations). Why is the stock only valued at 73c by the market. I have personal seperate reasons as to why I think this company may return to profitability which is what interested me in this company. What other things should I look at in valuing this company and it's liklihood of averting bankruptcy in the future.

As per the question on float. That article is useful, but what types of things allow a share to become part of the float besides just a lockup.
 
The first thing that jumps out at me about AMCV is that insiders collectively dumped about 9 million shares on August 13th. At first glance, I would call that the last lifeboat to leave as that's 4 times the float.

According to Yahoo, the float is 2.5 Million shares and the short interest for Sept is 1.94 Million...another monster red flag.

That sums up what the insiders and most investors think about the company, but let's look at the balance sheet and SEC filings.

This looks bad. Revenue per passenger (apparently a significant benchmark in this industry) is down significantly in every consecutive period. From 6/30/00 to 6/30/01, long term debt tripled to 350Mil while gross revenue stayed the same or shrank. The most core function of the business, top line revenue minus cost of revenue and "Selling General and Admin" (SGA) was an average of -13 Mil over the past 3 Qs, not counting the 50-60 Mil in additional long term debt per Q. The core business alone is not profitable. The LT Debt to Equity ratio is over 3.

From the latest 10-Q:

"Effective January 1, 2001, we reclassified certain items within our Statement of Operations from reductions of revenue to increases in operating costs. Specifically, the cost of override commissions paid to travel agents, which pertain to incentive-based commissions paid incremental to the standard commission, as well as the cost of port charges, cancellation insurance premiums and bad debt expense, are currently reflected within the Cost of Operations section of the Statement of Operations."

This is a monster bogey. This is like saying that you are now going to start calling your credit card debt "actual money you owe" instead of "money you didn't make".

A few paragraphs down: "On June 25, 2001 the Company consented to the entry of an order by the SEC, in which the Company, without admitting or denying the SEC's findings, agreed to cease and desist from any further alleged violations of Section 13(a) and 13(b)(2)(A) of the Securities Exchange Act of 1934 and Rules 13a-13 and 12b-20 thereunder. "

In my opinion, the business needs to become profitable and the CFO needs to be fired.

I don't know much about their business as I only took about 15 mins to check them out. You may know something that makes this a worthwhile stock to buy, but if they get back to $2, I'm shorting them myself!!!

just my opinion....

Good Luck!!!!
 
Losses from an accounting sense are not the same as cash burn. A company can be accruing rev's that have not been paid, it can be capitalizing expenses that it is laying out cash for, it can have contingent liabilities, etc. You cannot take the available cash, divide by annual losses and assume it can continue for that long.
 
interesting posts ktm and aaainthebeltway.
I guess that there's a lot to learn about fundamental analysis. I thought that the insider selling seemed pretty extreme. It feels bottomed on a chart sense at least to me, but I'm not gonna take any positions. The one question I still have is on the insider selling. If they sold so many shares, why are there only 2.5 million shares in the float. How did the insiders sell stock and not have it become part of the float.
 
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