I am still in catch up mode from my brief hiatus in posting. While I stopped posting , I did not stop investing.  Last Thursday April 8th I purchased 35 shares of DUCK – Duckwall – Alco Stores at $13.75/share  for the Chroma Investing Small Investor Portfolio. Including the ChoiceTrade commission of $5.00 this was a total investment of $486.25.  As usual this was a NCAV purchase. This was a stock that I first noticed back in February when it was trading around $12.25/share. As I did my research the price continued to climb and I let it slip into watchlist status. Recently, it dropped back onto my radar. While I purchased this stock for the Small Investor Portfolio I am not currently recommending you buy DUCK, as you will see. I made a  mistake in calculation that does not allow me my usual Margin of safety. Since they release their earnings later this week, I recommend waiting to see what the results are before investing.

What is Duckwall – Alco? They are, what was originally called, a “dime” store. The first store was established in 1901 in Abilene, Kansas by A.L. Duckwall. The Alco stores began in 1968. From their fiscal 2009 10K, ” The Company’s overall business strategy involves identifying and opening stores in towns that will provide the Company with the highest return on investment.  This strategy includes opening ALCO stores. As of February 1, 2009, the Company operates 258 stores located in the central United States, consisting of 208 ALCO stores and 50 Duckwall stores.”

As always lets start with the risks of purchasing DUCK. This is NOT a list of all possible risks, just a list that struck me as significant. If you see risks that I have not mentioned, please post a comment.

1. Broad macro economic risk. This is really a risk for most businesses right now. I think it goes without saying, unless you are a firm believer we are already climbing out of a “V” shaped recession the economy faces some serious headwinds. I do not subscribe to the “V” shaped view. Another downturn could have adverse effects on the companies bottom line. I do not think we are out of the woods with regards to the housing crisis and unemployment is still very high and unlikely to drop significantly very soon. If you agree, then you should make sure you have an overall hedging strategy. But that is the subject of another posting.

2. The bulk of DUCK’s current assets are Inventory and the Inventory’s have been increasing while Sales have been stagnant for the past couple of years. While this does not mean they are in trouble it is certainly worth watching.

3. While the stock is a NCAV stock it does not have my usual 33% margin of safety. At my purchase price there is only  approximately a 25% discount to intrinsic net current asset value. This was my fault. When I filled out my initial spreadsheet for DUCK I used data from Morningstar. I always check the data and correct based on the latest 10k and 10Q before I buy a stock, because Morningstar’s data is so often wrong. I have posted about this problem previously. I thought I had taken this step. But I did not. So my calculation was based on the morningstar data of 3 million shares not the 3.798 million shares they actually have. Quite a rounding error on their part. But the ultimate responsibility of my mistake was mine. Now that I own the stock, I do not think the mistake was signigicant enough to warrant selling the stock immediately. But I will need to keep a close eye on the results they post on 4/16/10.

4. Liquidity. The average daily volume is only 3000 shares. I don’t consider this a great risk for small investors because the share price will keep the number of shares low enough to not move the price needle.

5. Management- Duckwall – Alco has recently hired a new CEO. I do not yet know if that is good, bad, or neutral.

Why invest in Duckwall – Alco?

1. Net Net stock. So with my mistake out in the open, let me run through the real numbers. I am estimating that their Net Current Asset Value is about $18.18/share. I purchased at $13.75/share which is about a 24.4% discount to intrinsic value.

2. No value is given to the company apart from its assets. But Duckwall – Alco  is a profitable, 100 year old business.

3. Growth Strategy. They plan  on opening new stores in smaller towns where there is no competition seems sound given the size of their average store which is approximately 26,000 square feet. It seems like niche without competition. Eventually this could translate to better margins.

4. Year over year increase in sales- This is not a very strong positive given that the comparison of last March was of a country jumping off a cliff. It would have been scary had they not posted better results.

5. Investing guru Michael Price owns 6.97% of the company. At least I am going against him in a short position.

What is my strategy?

This will depend. If Earnings have declined or their asset position has deteriorated I will sell and take my loss. If the company’s position is neutral or positive, I will hold to see if the company appreciates in value.

Disclosures: I am long DUCK. As with any investment decision you should do your own homework. I am not an investment advisor, but a film business Producer.

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