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Identifying Winning Value Stocks

Identifying Winning Value Stocks

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Identifying Winning Value Stocks

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  1. Identifying Winning Value Stocks How to Find Companies that are Trading Well Belowtheir Intrinsic Value World Money Show – February, 2006

  2. Company Introduction • Financial Newsletter Publisher • Founded in 2001 • Independent, Unbiased Research • Five Different Newsletters • Over 100,000 Subscribers • Paul Tracy – Co-Founder World Money Show – February, 2006

  3. Today’s Topic: • Edited by John DiStanislao • Degrees in Investment Finance and Accounting • Two Decades of Experience • Uses advanced screening methods to uncover companies that are trading at a significant discount Identifying Winning Value Stocks World Money Show – February, 2006

  4. Where to Search for Undervalued Companies • Ignore the mainstream financial press • Widely-followed firms tend to be efficiently priced • Look at small-caps and select micro-caps World Money Show – February, 2006

  5. Reasons to Look Primarily at Small-Cap and Micro-Cap Value Stocks • Less Coverage on Wall Street • More Likely to be Undervalued • More Likely to have Hidden Assets that Wall Street isn’t fully aware of World Money Show – February, 2006

  6. Example: American Intl. Industries (AMIN) • Diversified Holding Company • Majority owner of Delta Seaboard – a well servicing contractor • Full ownership of Brenham Oil & Gas • Majority stake in Intl. American Technologies • Full ownership of Northeastern Plastics • Owns a variety of real estate World Money Show – February, 2006

  7. AMIN Price Chart on June 20th, 2005 World Money Show – February, 2006

  8. What really caught our attention about AMIN • Selling a piece of waterfront property at an asking price of $16.3 million • At that point in time last summer, investors were valuing the ENTIRE COMPANY at just $12 million • What this meant is that Wall Street was valuing the entire company at far less than the value of its real estate assets alone World Money Show – February, 2006

  9. Enterprise Value vs. Market Cap. • Market Cap. = Shares outstanding * Share Price • Problem: Market cap. just measures equity value and ignores the impact of debt and cash. • Enterprise Value = Market Cap. + Total Debt – Cash • Enterprise value better represents the TOTAL value that all investors – both equity holders and bondholders – have placed on a firm World Money Show – February, 2006

  10. AMIN Land Sale was available for all Investors to See World Money Show – February, 2006

  11. An Important Note aboutCorporate Balance Sheets • Real estate assets are listed at their HISTORICAL COST • This cost is often far different than the real estate’s current market value. • In the case of AMIN, the firm’s waterfront property was recorded at its historical cost of only $225,000, yet its current market value was around $16 million World Money Show – February, 2006

  12. Shares of AMIN Soar +100% After the Firm Receives Two Cash Offers for its Valuable Real Estate World Money Show – February, 2006

  13. Low levels of institutional ownership • Little or no brokerage research available • Quality earnings • Strong cash flows • Experienced management teams • Shareholder-friendly firms • Low debt • Substantial liquid net assets • Enterprise value of less than 3X gross profits • Reasonably valued relative to annual sales • Strong profit margins • Avoid common pitfalls What to Look for in an Undervalued Stock World Money Show – February, 2006

  14. Time-Tested Methods to use when Searching for Companies with Hidden Value • High levels of property, plant and equipment relative to current share prices • Rising net tangible assets • Large cash balances • Low enterprise values • Insider buying by several key executives • Promising new products • In-depth industry analysis World Money Show – February, 2006

  15. Staffing and Outsourcing Industry(Relative valuation comparison) World Money Show – February, 2006

  16. Adjusted Enterprise Value (EV) Adjusted EV = Share Price – Cash – Accounts Receivable + Debt World Money Show – February, 2006

  17. Staffing and Outsourcing Industry(Including adjusted enterprise value) World Money Show – February, 2006

  18. Share Price of $1.20 in June 2005 • $0.91 per share in Cash • $0.36 per share in Accounts Receivable • $0.44 per share in Liabilities • Adjusted Enterprise Value = $1.20 - $0.91 - $0.36 + $0.44 = $0.37 per share • Book value of $1.00 per share • Free Cash Flow of $1.00 per share • Annual sales of $4.00 per share General Employment (JOB)Data as of June, 2005 World Money Show – February, 2006

  19. Shares of JOB Soar +70% World Money Show – February, 2006

  20. Important Catalysts • Positive earnings • Important press releases • Acquisition by a larger competitor • Other investors finally discover the stock World Money Show – February, 2006

  21. A few examples of winning value stocks we’ve uncovered since May 2005: World Money Show – February, 2006

  22. Maker of traditional and IP-based phone systems • Growing demand for computer-based phones • Enterprise value of $17 million • $6 million cash + $11 million in A/R and inventory = $17 million in current assets • Trading at half of industry average P/E and P/FCF ratios • $50 million in annual sales (EV/Sales = 0.3) • $15 million in gross profits Vodavi Technology (VTEK) World Money Show – February, 2006

  23. Oil & gas company with primary operations in Venezuela • Shares of HNR have declined -50% in the past year • Operating cash flows surge +65% • P/E of 7 – well below industry norms • Enterprise value (EV) of $200 million • EV / Gross Profit ratio of 1.3 • Profit margin -- 25% • $71 million in free cash flow Harvest Natural Resources (HNR) World Money Show – February, 2006

  24. Collectors Universe (CLCT) • Grades and assigns value to collectibles • Undisputed market leader • $70 million in cash and no debt • Enterprise value -- $60 million • $34 million in annual sales • $7 million in annual EBITDA • 20% operating margins • Expanding into new markets World Money Show – February, 2006

  25. General Employment (JOB) • Professional staffing company • Enterprise value -- $3 million • $20 million in annual revenues • $12 million in gross profits • Clean balance sheet • One of the best values in the Staffing & Outsourcing industry World Money Show – February, 2006

  26. Diversified holding company • Strong cash flows • Substantial real estate holdings • Enterprise value -- $6 million • Annual sales -- $35 million • Annual free cash flow (FCF) -- $2 million • Strong balance sheet with $11 million in cash Avalon Holdings (AWX) World Money Show – February, 2006

  27. “Burger Time” fast food chains • Market cap -- $10 million • Strong balance sheet -- $4 million in cash • Significant real estate holdings • Price/Sales of around 1.0 • Share buybacks and insider purchases provide positive signals from management Sten Corp. (STEN) World Money Show – February, 2006

  28. X-Rite (XRIT) • Manufactures optical & electronic sensing instruments • Double-digit sales growth • $20 million in cash, zero long-term debt • ROE of greater than 20% • Stock now trading near 52-week low • Recent round of insider purchases World Money Show – February, 2006

  29. Thanks for Attending World Money Show – February, 2006