I’m curious what screener you used to find Piotroski stocks?
Thanks.

You have proven through your comments to be a very thoughtful investor, time in the saddle is not the issue it is skill and commitment. Much of this discussion is really about how we look at the same facts and where our risk tolerances lay. Much of value investing is not instinctive to most people. Buying beaten down companies in the expectation that the market has mispriced their stock. Who does that? Oh, that would be all of us who consider ourselves value investors. I wonder sometimes if I have been self limiting in my approach. Thanks for keeping it honest.

The ironic thing is just after I posted my response about SPCO, it came up on a screener for Piotroski F score companies. I will investigate it over the next few days. Thanks for keeping the conversation going. That is what this blog is for.

Leveraged companies scare me. They are very sensitive to mistakes in asset valuation. For example, if you find out that a leveraged company’s assets are overstated by 20%, then by definition their equity is overstated by more than 20%. In the case of a financial or other very highly leveraged company, a 10% haircut to assets could wipe out the entire equity of the company.

It is for this reason that I tend to avoid leveraged companies, because it is outside my circle of competence to estimate their assets very precisely.

For a similar reason, I love to see cash on the balance sheet. In SPCO’s case, the company was last traded at $12.1 million dollars, and reports $8.4m in cash.

I feel very comfortable with this. Even if I misvalue their other assets, the cash provides kind of an anti-leverage effect, which makes the company much easier to value.

Now on to valuing SPCO. Here are the quick numbers:

I bought SPCO @ 2.48/share in Feb 2010, but let’s take the latest trade of 2.85/share.

Market cap = 12.1m
Cash = 8.4m
Accounts Receivable = 1.2m
Inventory = 5.3m
Obsolete Inventory (under long-term assets) = 3.1m
Total Liabilites (let’s take these at face value) = 2.6m
Earnings (TTM) = 0.9m

OK. Let me look at a few scenarios:
Take the cash, and subtract all liabilities.
This leaves 5.8m cash, and is a very conservative judgement.
Compared to the 12.1m market cap, we still have to account for 12.1m – 5.8m, or 6.3m.

If we ignore all other assets, then we are essentially paying 7 times earnings for SPCO, which is not absurd. If we count receivables as cash (and ignore inventory), then we are getting SPCO at 5.6 times earnings.
If we assign inventories any kind of real value at all (say 50% of face value), then SPCO starts to look very cheap to me.

This is a super-simple valuation, but it was convincing enough to me. Primarily, it looks nicely assymetrical. With the cash and other assets, I think I am unlikely to lose a lot of money. However, there are several paths to making a nice return. These include the company performing better than expected, being bought out or going private (that cash has got to be attractive), distributing a large dividend to shareholders (typically the market rewards cash-rich companies for doing this), or the market could simply draw the same conclusions I have.

I consider SPCO to be a lo-risk, hi-uncertainty investment.

I did a quick check on The Stephen Co. – SPCO. I think I must be missing something that you see. While I like companies that get de-listed, hence my ORXE investment, and low volume does not scare me, I am not sure SPCO would be one of my selects. The total current assets as of Q3 2009 was $15.17 million with total liabilities of $2.62 million leaves a Net Current Asset Value of $12.55 million divided by the current outstanding shares of 4.39 million equals $2.86/share of Net Current Asset value, which is essentially what they traded for the last day they traded shares on Monday 4/12. From my perspective there is no margin of safety. That is just a quick financial take on the company. Perhaps there is more compelling investment opportunity that I am missing from just taking a quick glance at my calculator. The problem with doing a financial screen first, is that you can often miss something that is lurking in the 10k. Thanks for suggesting the idea. I would love to hear your thoughts on it.

As always I respect your caution on IFON. Given that the stock price dropped 20% right after I bought it, the market place may have agreed with you. The acid test ratio for IFON was 1.5, which is what I looked at to guard against the company having a liquidity risk. I respect that this and every investment I make is not right for everyone else. Just as every investment Buffett makes is not right for me. Although I wouldn’t mind his track record.

I have not heard of SPCO, it did not come up on any of the screeners I use. I will check it out and post later, once I get caught up on the investments I have made for the chroma portfolios.

My main concern with IFON is that they have 50 cents per share in net debt.

It is much harder for me to feel confident of a margin of safety on a leveraged company, especially if I’m buying it based on its assets.

What do you think about SPCO? This is a NCAV that I own a few shares in. Of course, it has its own problems (declining industry, pink sheets, illiquid, etc), but you might find it interesting.

Charlie Star