7) Stock of the Week with Evan Bleker

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Evan Bleker netnethunter.com

On today’s podcast, net net stock expert Evan Bleker returns to teach you more about his favorite investment strategy and give you a specific stock pick to help you get started with net net investing. In this episode we’ll discuss… How to approach…

On today’s podcast, net net stock expert Evan Bleker returns to teach you more about his favorite investment strategy and give you a specific stock pick to help you get started with net net investing.

In this episode we’ll discuss…

  • How to approach creating a portfolio of net net stocks
  • Why this is a long term strategy and not about day trading
  • Net net historical returns and studies
  • The difference between penny stocks and net net stocks
  • How to start building your portfolio today (and the strategy you should use over the next year)
  • Evan’s in depth analysis of a specific stock he recommends

7 – How to start building your portfolio today with Evan Bleker

Ney Torres:        [00:00:00] Hello everybody and welcome. Thank you so much. We are today with Evan Bleker again. He’s going to talk to us about action level stocks that we can see today. For the listeners, I thought it will be a great idea to just take theory to practical matter. And today, we’re going to talk about your special or favorite stock of the day. How are you, Evan?

Evan Bleker:      [00:00:26] Pretty good. How about yourself?

Ney Torres:        [00:00:28] Thank you. I’m doing great. Thank you for asking. I just woke up. It’s 11:00 AM because I have jet lag. I’m in the Netherlands now. Sorry for the delay.

Evan Bleker:      [00:00:39] It’s around 8PM here so it’s almost time for a warm glass of milk in bed.

Ney Torres:        [00:00:45] Really? Well, yeah. Yeah. Yeah. So, what’s your favorite stock of the day?

Evan Bleker:      [00:00:51] Well, I got one. That’s a net-net that I’ve had in my portfolio for, I’d say a year and a half now. But I think that really, it’s important to set the stage before I give the stock pick, just to kind of… You know, five things to keep in mind. Just so your listeners have a good idea of what I’m doing and why I’m picking this sort of stocks.

[00:01:17] So the first thing I guess you should keep in mind is that I’m pretty agnostic about how this stock will perform going forward. And that sounds kind of strange. Like, how can this be a stock that I really like but I’m agnostic about how it’s going to work out? Those things don’t seem to go together, but it’s really important how you understand the strategy. And I kind of explains my agnosticism both his company.

[00:01:44] So, what I’m trying to do when I’m picking these companies, I’m trying to pick companies that first and foremost, they have a criterion that fit the overall strategy. So, I’m picking net-net stocks and they have to meet the criteria of being a net-nets. They can’t be a bankruptcy candidate. All the rest of it. So, just basic criteria.

[00:02:07] And then on top of that, what I’m doing is I’m looking for factors that are generally associated with outperformance. So, that’s one thing to keep in mind. The second thing to keep in mind is diversity. While this stock may fit the criteria, I may have a number of factors in place that suggest better than average performance. We don’t know how it’s going to work out.

[00:02:36] What a net-net investor would do is try and fit maybe 20 of these stocks into a portfolio because ultimately some are going to produce good results, some are going to disappoint, some are going to lose money, some are going to skyrocket. And really what you’re looking at is you’re looking at putting together that basket and then focusing on the basket return.

[00:03:00] An important thing to remember is that this is not what I would call a Warren Buffet one shot, one kill strategy. Warren Buffet likes to go out and he finds great company and he really believes that the company’s going to have an exceptional future. That’s not what we’re doing. What we’re doing is we’re just looking for companies that fit the criteria. And then on balance, statistically, they should produce good returns as a group. That’s the second one.

[00:03:33] I think the third one that investors really have to keep in mind is that just like you’re going to have a range of outcomes with these companies in your portfolio, you’re also going to have a range of returns from year to year. That portfolio return is going to vary from year to year. Maybe next year is 5% and then the year after that could be 40%. But in order to get the statistical returns that are associated with net-nets, you really have to be in it for the long-term. And I’m talking, a minimum of five years. But ideally, you’d be looking at closer to 10. So, this is a long-term strategy. It’s not a trading strategy. It’s not something that you just want to be in and out of and looking for quick money. I’m very much against that.

[00:04:22] The fourth thing that you should keep in mind if you decide to buy these companies, you need to be using limit orders. One of the big problems with these tiny companies, net-nets, they tend to be very tiny. Very liquid. They have a very large bid ask spread. Bid ask spread is basically the price that the buyer is trying to buy for and the seller is trying to sell for. So, the seller is always trying to get more. The buyer is always trying to buy for less. There is a gap there. That gap is the bid ask spread.

[00:05:01] So, if you don’t use a limit order, you run the risk of buying for the seller’s price, and that could be 25% above the quoted price on somewhere like Google Finance or Yahoo Finance. So, limit orders are incredibly important. Do not forget that.

[00:05:20] The fifth thing that I want to mention is that I do own this stock. This is a company that I bought for my own portfolio, for a family’s portfolio, and portfolios that I manage. So that’s something that you should keep in mind when you’re listening to this.

Ney Torres:        [00:05:37] You mentioned a couple of things there. I don’t see them as a bad thing. It’s actually super good if you want/love inactivity. Does that make sense? You do too. So not being in front of a computer 24/7, it’s amazing. Especially for the kind of returns that historically, this net-net strategy has done. Can you mention to us how long has this strategy been around? Is it a robust strategy?

Evan Bleker:      [00:06:11] It’s very robust. It’s been around… It was popularized, I would say, by Benjamin Graham in the 1930s when he wrote a number of articles during the 1930 stock market crash. I believe the title is, “Are American companies worth more dead than alive?” But it’s unclear whether he was touching on a much older tradition of buying companies for less than their networking capital or net current asset value, or if he was looking at a new strategy that he had just stumbled on. So that’s unclear. But at any rate, he popularized it in the 1930s. It’s been running now for 90 years. I think it’s 90 years. Yeah.

Ney Torres:        [00:07:00] Perfect. So, one of the things you also mentioned is that some of them are not going to work. What percentage of the time do they not work?

Evan Bleker:      [00:07:08] I would say that you’re going to run into disappointing results if you’re doing a statistical mechanical strategy. So, you’re just going by the numbers. You’re putting together a portfolio of 20 to 30 companies. You’re going to find that roughly 40-45% of them won’t work or they’ll disappoint.

[00:07:29] That doesn’t necessarily mean large losses, but it could mean that they just stay flat or they’re down 10%. A small number will be up, you know, maybe 10%, but what I’ve found in researching the strategy since 2013 is that what you have in your portfolio is a number of companies that really really excel. They really push up returns.

[00:07:56] So, if the average portfolio return is, say, 25%, just for instance, you’ll have most of the companies in your portfolio. During an average year, might return in less than 25%, but you’ll have a group of say, 10% and they’ll be up, you know, 100%, 200%, something like that.

[00:08:21] And so, they’re really pulling the performance of the portfolio up. So, yeah that’s the type of distribution you’re looking at. I should also say that while Graham popularized the strategy in the 1930s, he popularized it in the 1930s, it has been tested by academics going back at least until, say the 1930s, 1940s.

[00:08:48] I’ve only found one study by academics that was not supportive of the approach. I’ve specifically tried to seek out studies looking to disconfirm the strategy. I’ve only found one that was not supportive. And that was way back in the 1930s. Everything up from the 1950s, up until I would say the early 2010s, it’s all been overwhelmingly supportive. It’s all shown really really high returns.

Ney Torres:        [00:09:24] Okay. Well, what’s the argument of that study, by the way?

Evan Bleker:      [00:09:28] They looked at the end of the portfolio performance in net-nets and they found that it didn’t really beat the market. That was back in the 1930s. I’m sure that probably the standards were a little bit different back then. It was different market conditions. So, I can’t really explain why they didn’t beat the market, but every study that I’ve looked at since then has been overwhelmingly supportive.

Ney Torres:        [00:10:00] One of the things I can add there is that when you back test a net-net portfolio, it can be… Two different people looking at the same market are going to have different results because when you back test the portfolio like this, there’s a lot of theory too. You can buy a stock that’s not really liquid in your back test and sell it just at the right moment. As you mentioned, limit orders not always are fulfilled. And so, very different results. We just have to mention that.

[00:10:36] How will you start a portfolio from zero? Will you start adding… I hear people that say, I will start adding a stock every week, every month. Or do you just buy a portfolio right away?

Evan Bleker:      [00:10:48] If I was starting again today, what I would be doing is I’d be looking at two buys a month, and I would run that strategy for a full year. And then in month 13, I’d be looking at reassessing my picks. If there’s still a buy, then I would leave it in my portfolio. But if the value eroded or the stock went way up, then I would be looking to sell it.

[00:11:15] So that’s, I think, how I would start today. Now, obviously your listeners range in sophistication when it comes to investing. People who are more sophisticated investors, I would say, “Okay. Well, what you really want to do is study the strategy first and foremost, and then study what factors can help returns and which ones are responsible for decreasing returns.”

[00:11:48] And then you can use your best judgment when it comes to catalysts and that sort of thing. You can be a little bit more concentrated in that case.

Ney Torres:        [00:11:57] Perfect. et’s jump into the stock. What stuock are we talking about today?

Evan Bleker:      [00:12:01] Today, we’re looking at TLV Holdings. It’s on the Singapore stock exchange, and the ticker is 42L. L as in love. Love the net-nets.

Ney Torres:        [00:12:18] Do they name it in Singapore like a number?

Evan Bleker:      [00:12:20] Pardon me? Can you say that again?

Ney Torres:        [00:12:23] How do they name their stocks in Singapore?

Evan Bleker:      [00:12:26] That’s a really good question. I know that the tickers there have a mixture of letters and numbers. I’m not an expert on how they craft their tickers but it’s a little bit different than what you’re going to find in US, Canada, that sort of thing.

Ney Torres:        [00:12:41] Okay. I can tell. Yes, very good. So, the stock is trading right now at seven. Two days ago, it was six. What’s going on with this one? Seven cents, by the way.

Evan Bleker:      [00:12:52] Yeah, seven cents, not $7. Right away, your listeners are going to get their backups. They are going to be like, “Whoa, wait a minute. This guy is pedaling penny stocks.” That’s what this is all about. Technically, it does qualify as a penny stock. It’s below a buck. So that is a penny stock territory. My books, anyways.

[00:13:16] Generally, the problem with penny stocks are that they’re nearly bankrupt companies, they’re fly by night companies so they’re likely to just evaporate into thin air. They are subjects of pump and dump scams. There’s a lot of crooks running them. Those are all good reasons to stay away from penny stocks but the flip side of that is that if everybody believes something, usually if you dig deeper and you look at the actual facts, you can find pockets of opportunity.

[00:13:53] And so right now, penny stocks are generally avoided by, I would say, most “respectable investors”. And so, if everybody’s avoiding the situation, then that’s where the opportunity arises from. So, looking at TLV Holdings, specifically, what factors are in place that suggest that this is not your typical problematic penny stock.

[00:14:20] Well, first of all, the company was founded in 1997. There’s a 23-year history of operations, so it’s not a new technology company that’s created a robot butcher or something, if you watch Seinfeld, right? No. It’s been around. It’s respectable company. They are actually a retail fit and they’re in the jewelry space.

[00:14:45] If you look at the operating performance of the company, they’re profitable. They have significant net assets. And so, the net assets actually dwarfed the market cap. There’s real significant value behind the price of the company.

[00:15:05] Now, retail is, I would call it a more stable kind of business. Some retail is more stable than the other, but you know, broadly speaking, retail can be pretty stable. We’re not looking at a company that’s just going to disappear overnight.

[00:15:23] You look at the board of directors. Most of the companies that people are afraid of when they’re talking about penny stocks is management’s conning people. Director is stealing money or whatever. But with TLV Holdings, one director was awarded the public service star and appointed justice of peace in 2015 by the president of Singapore. One director is a chartered accountant and that’s a designation with very high ethical standards.

[00:15:59] And I found another director who was a Supreme court lawyer. So these are not crooks unless you think lawyers are crooks. Some people do. But these are some of Singapore’s best people, most respected people. These are people that you’d want to introduce to your family. You’d be fine if your daughter married one.

Ney Torres:        [00:16:26] Sorry. I had to laugh. That’s a very good metric. Yeah. And Singapore is well known for being super right and very correct and stuff like that. Yeah. Yeah. That’s amazing. Okay.

Evan Bleker:      [00:16:40] So, if you look at the company as well, what you see as along… I wouldn’t call it stable but it’s definitely and not a highly erratic stock price. It doesn’t seem something that’s typically subject to pumped up scams where, somebody’s touting the stock and hoping it goes up and somebody’s going to unload it. It’s a very stable company.

[00:17:09] For all those reasons, I wouldn’t put it into a sketchy penny stock category. I would say this is a least something that we have to look deeper at. Diving into it, we look at the valuation. Again, I said that it has net assets that dwarf the market cap. Market cap right now is 36 million. That’s not billion, that’s million. So, it’s an absolutely tiny company.

[00:17:38] Generally, the smaller the companies that you’re looking at, the less efficient the stock market’s going to be. All the big pros, the people that know better, the skilled investors are typically not looking at these tiny companies.

[00:17:51] And so if you study up and you get a good amount of skill or a decent amount of skill or follow a good strategy, there’s some significant opportunities there, at least more than the mega cap stocks. So, you look at the net current asset value. Net current asset value comes in at 78 million. That means that the company is trading at a discount of 54%. It’s a very large discount.

[00:18:19] Now, I should specify net current asset value. What is net current asset value? The easiest way to conceptualize net current asset value is you take your book value and then you strip out all long-term assets. That’s net current asset value. It’s book value, less long-term assets.

Ney Torres:        [00:18:40] Basically, what you’re saying is if this company dies today and everybody gets paid their money, you’re going to double your investment. That’s if they die.

Evan Bleker:      [00:18:52] Yeah. If the company closes its doors, sells off or liquidates all its assets and then pays out the money to shareholders, you’re going to get 100% more than you paid for the stock. It’s trading below liquidation value.

[00:19:08] Graham thought that net current asset value was a good proxy for liquidation value generally. So whenever we’re talking about net-net stocks, we’re talking about stocks that are trading below a very conservative assessment of liquidation value.

Ney Torres:         [00:19:24] I want to point to that. That’s very conservative. Why is this conservative?

Evan Bleker:      [00:19:31] Well, because when you’re looking at liquidation value… Well, we’ll take book value for example. We’re looking at book value. That book value can be wide from the mark when it comes to an actual liquidation value.

[00:19:45] And the reason is that long-term assets tends to fluctuate to a very significant degree from their stated book values. You can have say, a piece of property on the balance sheet and in many accounting systems, the company’s supposed to mark down the value of that property in depreciation. But what everybody knows… I mean your listeners are a bunch of property investors, right? So, they automatically know that the value of property rises over time, generally speaking. And that’s where we’re looking at in 2009.

[00:20:28] While the company is marking down this property, the value is rising. In this specific case, the value as stated on the balance sheet can be much different than the real-world value. Now, what we tend to find is if you exclude the long-term assets and you’re just looking at net current asset value, then when it comes to the liquidation scenario, some of the current assets we’ll see some shrinkage in value during the liquidation process. But on the flip side, those long-term assets step in on average to fill in the gap. And so, your net current asset value becomes a much more accurate rough assessment. It’s an accurate rough assessment of liquidation value.

[00:21:21] Now, if you want to get really technical, you can get much more accurate by actually being an insider in the industry and valuating the actual real-world liquidation value of these assets. But as an outside investor, you don’t necessarily have that knowledge so you have to use rough rules of thumb. And Graham found this one very practical.

Ney Torres:        [00:21:46] So, one of the problems you may find when liquidating a company is that you have inventory. And the inventory didn’t sell as well as you thought it was going to sell. Right? So, does the net current asset value has some adjustments or not.

Evan Bleker:      [00:22:05] Well, it really depends on what you do. You’re definitely correct that some inventory will see significant shrinkage. If are in the business of selling Alanis Morrissette cassette tapes, then probably you’re not going to get full resale value for those. You’re probably going to be liquidating at quite a steep loss. But if your inventory is gold bars, that’s quite different. Right? There’s a real-world market for that type of stuff. It’s highly liquid. You’re going to be able to pinpoint the value of that with extreme accuracy.

[00:22:45] So, the situation kind of informs the approach you should look at taking when calculating liquidation value. Also, the strategy informs it. So if you’re just a mechanical stock investor and you’re saying, “I just want to invest in net-nets, just give me a basket of 30 and I’ll let the probabilities take care of itself.” That’s fine. Just calculate net current asset value and go from there.

[00:23:13] If you’re running a more concentrated portfolio of say 10 stocks and you’re basing your decisions on liquidation value, you really got to start digging into the numbers here. You got to see what the company has. You have to see what discounts you should give the company.

[00:23:31] There is an approach called net-net working capital, which is kind of a cousin of net current asset value. This approach discounts the various current asset accounts by specified amounts. Usually, there’s a range. Most investors today use a certain number. For example, receivables will receive 25% discounts, inventory a 50% discount.

[00:24:03] But again this is a very rough figure that you’re applying to the current accounts. And you really have to be an expert to say how much you should discount those accounts. In my own investing, what I tend to do is I tend to look at just net current asset value. I don’t really do much in the way of discounting.

[00:24:30] I’m trying to pick companies that have really strong catalyst behind them. On average, I’m hoping to be roughly right on the liquidation value but I’m hoping to be more right about my picks and to make sure that my companies have a bright future and are actually going to do better going forward.

Ney Torres:        [00:24:52] Yeah. Basically, all that we are saying is that you’re going to be flying if you have a basket of this. Right? And especially in this situation, the reason we are seeing this and why the big fish are not just scooping this out of our hands is because Evan has done his homework and has seen, “Hey, wait. This is not as bad as it looks. Computers are never going to catch this.” Yep. Exactly. Perfect. So, you were talking about net current asset value. What else?

Evan Bleker:      [00:25:22] Okay. So, that is it for the valuation. Well, I’m not going to touch anything else. The thesis is very simple. You have a company that’s trading below liquidation value, below net current asset value. It’s a very conservative number. The discount is large. It’s 54%. That’s the type of discount I like to look at.

[00:25:43] Next, I like to look at the balance sheet. I like to see if there’s any problems there. Sometimes you’re going to find that a company has very small current ratio or has way too much debt. That can really put the investment thesis into question, even though a net-net by definition will have more current asset value than all liabilities put together. Total liabilities. You can still run into a situation where debt can sink the company. I’ve seen this in at least one situation. I like to stay away from it because I don’t like to lose money on my stock. So, surprise, surprise.

[00:26:28] We’re looking at TLV Holding’s balance sheet, and right now I see a current ratio of roughly 2.4 times, and the current ratio is… Sorry, go ahead.

Ney Torres:        [00:26:40] No. I was going to ask you, what is net current ratio?

Evan Bleker:      [00:26:43] Yeah, sure. The company uses its current assets basically to fund its current liabilities. Current assets or assets that it wants to turn into cash within a year. Current liabilities are liabilities that the company has to cover within the course of the year. Generally speaking, the company uses its current liabilities and other liabilities to fund the current assets.

[00:27:14] But a quick and dirty way of seeing whether the company will have enough cash to survive over the next 12 months is to look at the current ratio. That’s the ratio of current assets divided by current liabilities. And so, in this case, the company has about 2.4 times the current assets. So, they do have the current liabilities. In other words, it does not look like they’re going to run into a liquidity problem. It looks like they’re going to have enough cash to survive for the next year. No problems.

[00:27:49] Another varying to that is the quick ratio. And this is essentially the current ratio but you’re excluding your inventories. Inventories are harder to move. Who knows how the company is valuing their Alanis Morrissette tapes? So, we exclude the inventories just to get… They call it the acid test or the quick ratio. This is a more strict measure of a company’s ability to raise cash to fund those current liabilities.

[00:28:23] In this case, the company has a quick ratio of just over one, which I consider decent. I don’t think that this company is going to have any problems with liquidity. Now, debt is a little bit higher than I would like. Debt is at 35% of equity. When I’m talking about debt, I’m talking about interest rate bearing debt. This is bank loans, bonds, [unclear] loans, you know, stuff like that. In this case, those loans makeup a value that’s equals 35% of the company’s equity value or it’s full value.

Ney Torres:        [00:29:05] Which is still very good. I mean maybe not for your standards but in real estate we use sometimes 100% of that. Of course, different business. But still I want to mention that’s very conservative. Like one third of your equity is tied up. That’s it.

Evan Bleker:      [00:29:26] Yeah. I mean, I definitely agree with that. I fall into the Walter Schloss camp though. Walter Schloss was a worker for Graham. He basically did stock analysis for Benjamin Graham when Benjamin Graham was running his partnership. And he worked alongside Warren Buffet actually, but he hates debt. He wants to find companies that have zero debt.

[00:29:53] I lean more in that direction, but I’m not as strict. When I see 35% debt to equity. Most people think that’s fine. For me, it starts to feel a little bit queasy. I like to see debt to equity ratios below 20, 25%. Ultimately, the lower the better. Tweedy Brown actually did a study and they found that net-nets tend to work out better when they have less debt.

[00:30:24] Yeah. I mean another thing you should keep in mind is that finance schools will say that there’s a certain amount of debt that you should have for your company because it makes your company…

Ney Torres:        [00:30:36] More efficient.

Evan Bleker:      [00:30:37] Yeah. It’s more efficient.

Ney Torres:        [00:30:40] Especially in this environment. It’s a low interest rate. That makes sense to get some of that. Yeah, I guess what matters is the tendency of the debt, right?

Evan Bleker:      [00:30:50] Well, I would say that it’s not even that. What it comes down to is you have these net-nets. They’re selling below net current asset value. That means that they’re selling below conservative estimate of liquidation value.

[00:31:06] You’re only going to find bargains like that if there’s serious business problems. If your company lost 50% of its revenue or 75% of its revenue. it’s bleeding a lot of red. It’s losing a lot of money every single year. There’s been 90% stock price drop.

[00:31:27] How much debt do you want your company to have? Right? The answer is clearly zero. You don’t want it to have any debt because debt means that management has to come up with cash in order to satisfy debt holders who can put the company into bankruptcy. That’s not exactly what you want. It also kind of, in a way, handcuffs management’s ability to deal with the situation because they have to use cash for debts. They can’t take on as much debt, a fun short-term problem. It also disrupts… These are obvious takeover acquisition candidates but if you can’t fund the acquisition with debt, well, it’s less attractive. So, you know, for all those reasons, you really don’t want to have a lot of debt there. If it’s 35%, I’ll give it a pass. I’m hoping it doesn’t increase that much from here. I’ll be watching it but it’s something to keep an eye on.

Ney Torres:        [00:32:28] Got it. So, just as a reference, I guess if you were in real estate, you will look this as a house that were turning to bad neighborhood. Most people wouldn’t touch it with a stick. But if it’s selling at 50 cents on the dollar, some people like you and I are willing to take a look to it.

Evan Bleker:      [00:32:49] Definitely. I mean if you look at that bad neighborhood and you assume, say that houses on average go for 100,000 US in that neighborhood, and then for some reason, I don’t know, maybe it needs a new roof, something, this one house is selling for 50,000 well, you’re going to take a look at that. It doesn’t matter what the neighborhood is, right? Because you can, I don’t know, you can buy it. If you assess the problem and the problem’s fairly minor and your cousin who’s a carpenter can fix it for five grand, you can flip the house. Right? And that’s basically what we’re doing. That’s what we’re doing with net-nets.

Ney Torres:        [00:33:25] Perfect. I like that comparison. Very good. We stated at the beginning that this company is worth twice as much debt as it is today. In worst case scenario, we doubled our money today, right?

Evan Bleker:      [00:33:38] Yeah, exactly. I guess I should get to the stock information. We mentioned that this falls into other facts. So, we’ve covered now the main facts. We know that it’s selling at a large discount to net current asset value. We know that the balance sheet is solid apart from the debt, which we’re going to have to keep our eye on. But now, going to additional factors that could influence the attractiveness of the investment.

[00:34:12] Looking at the stock information, stock price is six and a half cents. Singapore dollars. So very very small. Now, Ney, you might know the answer but for somebody listening to this, what do you think they would think about that stock price? Is it a plus or is it a negative when it comes to the investment?

Ney Torres:        [00:34:34] I think that will be a negative.

Evan Bleker:      [00:34:36] Negative. Okay. That’s actually a huge plus. And the reason why is that a small stock price can increase or decrease by a larger percentage much easier than a large stock price can. So, this company, just based on the stock price, and this isn’t my theory, I’ve heard this from Peter Lynch who is a master investor way way better than I am.

[00:35:07] He said that small stock prices, small market caps, generally can increase in price much more rapidly and to a much greater degree than a large stock price or a large market cap. So, it’s actually a big plus. Looking at the stock volume now, this is getting a little bit dicey.

[00:35:31] On average over the last three months, on an average day, there would only be $1,600 worth of stock traded. So, $1,600. So, Ney, same question. Plus, or minus?

Ney Torres:        [00:35:46] For me, that’s a… Well, for listeners, that will be a minus because if somebody just walks in and starts buying the stuff without a limit order, that is going to jump to the roof. Unless you already have a position which you do.

Evan Bleker:      [00:36:00] Yeah, that’s true. That’s true. It can be. It can be a plus or minus. It depends on the size of your portfolio. I know, Ney, with your hundreds of millions of dollars, you’re not going to be able to buy this. Sorry, Ney but…

Ney Torres:        [00:36:13] I wish. Just making an offer to the board of directors.

Evan Bleker:      [00:36:20] If you’re a small investor, and so you want to put $15 to $30,000 into it or something, you can build up a position over time using limit orders and just being patient. Eventually, when somebody who doesn’t know necessarily as much as you tries to buy a position, and they don’t use the limit order like Ney was saying, then you know, the stock can really shoot up.

[00:36:48] There is another situation that is very similar. When something positive happens to the company, like say for example, a new product line, works out for the company and they start increasing in revenue rapidly. The company turns profitable and profits are really increasing. Suddenly more people want to own it. But if there’s only $1,600 worth of stock being bought you start to have to bid up the price of the company just to get a block of stock.

[00:37:20] What you’re going to find is that good events trigger explosive upside with illiquid competencies. Again, if you can buy shares, it’s another significant positive. Shares outstanding are about 560 million. Insiders own about 60% of the company, which is very large. Yeah. So, the float is about 230 million. So public investors, anybody who wants to buy shares, that’s not an insider, you have 230 million shares to buy.

Ney Torres:        [00:37:56] That is, that is actually super good. Sixty percent of the company is owned by these people that you mentioned right now. That means they’re going to treat it like their baby.

Evan Bleker:      [00:38:07] Oh yeah, for sure. Especially if they know that they can’t sell it, because look at the volume. The only way for them to safeguard their money and really grow that cash or that value over time is to do what’s best for creating shareholder value. And so, that’s huge. That’s really big.

[00:38:31] Now, turning to the income statement. You notice that this isn’t part of the core criteria that I used, or the main criteria that I used. This is additional bonus criteria because what we find with net-nets is that a company that’s losing money, on average, if you put together a basket of those, those can work out really well. The portfolio can work out really well. Companies that are profitable, if you put together a basket of those stocks, those net-net stocks, those can work out well but they don’t quite work out as well as the money losing stocks. This is not what I would consider a major criterion for selection, but it is something to take note of.

[00:39:23] The company has $112 million in revenue. We’re looking at 36 million for a market cap, 112 million for revenue. The price to sales ratio is about 30%. In other words, if you’re spending a dollar, you’re getting $3 in sales back. Why is that valuable? Well, if you’re an acquirer, if you’re somebody who’s managing the business and you can buy it for 36 million, and then you can increase the operational efficiency of the company, you’re going to get a significant boost in profits.

Ney Torres:        [00:40:04] Cut cost, basically.

Evan Bleker:      [00:40:05] Exactly. Your profit can rise quite substantially. If we’re looking now at the company’s net profit, it is pretty small even for a retail company. Retail companies, the last I looked, and you know I’m not an expert on retail, but last I looked they tended to have a net profit margin around 5%, maybe around 8%. Somewhere in there. Good company will have obviously it a little bit larger net profit margin, but in this case, the company is only making $3.4 million in net profit. I haven’t run the numbers, Ney. I know that you’re a mathematical savant, so what does that for a percentage? 3.4 divided by 112. 

Ney Torres:        [00:40:59] Well, that’s pretty easy because I have a button here that just turns into the 2% that just want… Wait. 3.03% net margin.

Evan Bleker:      [00:41:10] Okay. So, yeah, so about 3% of a guess.

Ney Torres:        [00:40:14] Net margin, yeah. But that’s 2.7% of the sales. It was in 2015 at 6.49%. And that’s the reason we’re seeing this, right, is because they’re going through a not so good patch. If not, this will completely have a different price.

Evan Bleker:      [00:41:35] I mean that’s exactly it. I mean, you look at the company and they were doing fine, you know, 2015, 2016. And then, the Singapore consumer confidence hit an air pocket. And so, the numbers dove. The consumers in Singapore were not as loose with their purse strings. I’ll put it that way. And so, the company’s sales dropped.

[00:42:01] I’m just looking at some numbers here. In 2016, it had sales of 127 million. Now, this dropped, I don’t know what percentage it is, maybe 15% to 112 now. So, 112 million now. So, you know, a significant amount of sales decrease. Also, in 2016… So, this is one year after your… 6.4 million you said, or?

Ney Torres:        [00:42:29] Yeah, that was a drop of 22%.

Evan Bleker:      [00:42:32] Oh, okay. Okay. So, 2016 the company was making 5.5 million. That’s decreased to 3.4. It’s quite a big drop on percentage terms. So, yeah. Obviously, investors are not that happy. They’ve sold off the stock. That’s our opportunity. You obviously have to buy when the blood’s running on the street, that’s what they say.

[00:42:58] In this case, you’re looking at a very stable company that is trading at less than half of liquidation value. Still profitable. It’s going through a rough patch. The upside possibilities around a hundred percent if it trades back up to net current asset value. If we’re looking at the 2016 numbers, so 5.5 million, and we slap a PE multiple of 15 times on there. This is the company’s trade based on a multiple of their net earnings. Fifteen or 16 being the historic average over the last hundred years.

[00:43:41] If we apply 15 times PE multiple, we’re looking at about $83 million for the value of the company in that situation. My thesis here is that eventually, I don’t know when but eventually, consumer confidence is going to get back on track in Singapore. And the company is going to be selling more product, and the net profit is going to rise and people are going to pile back in the stock. When that happens, hopefully it can trade up to 83 million or whatever based on a much larger net profit. Yeah, so that’s basically what it comes down to.

[00:44:24] I will say also that there is some catalyst or there was a weak catalyst in the past, and the catalyst really comes down to coming out with some joint ventures in China. This is before the Chinese economy kind of took a bit of a hit. TLV had a joint venture with a Chinese company and they were helping to build out stores in China, and then they would sell their jewelry through those stores.

[00:44:57] So, you know, obviously if you can increase your sales channels, then you can increase the number of products you can sell and the revenue you can sell. And so, that just helps cover your fixed cost and increases your net profit. Since I came out with that thesis, almost immediately the Chinese economy started slipping, you know, which tends to be a trend with my decisions.

Ney Torres:        [00:45:28] Everybody says that. There was a time I remember doing a trading school 15 years ago, and the guy stood up and said, “I’m sure somebody is watching me on this camera on the computer because every time I put an order, it start just falling.”

Evan Bleker:      [00:45:47] Story of my life. I would say that almost every single stock that I bought has dropped after I bought it. And you know, that’s whether they’ve worked out or not. Most of them will worked out but, yeah. It’s the curse of being a value investor. You’re often early.

Ney Torres:        [00:46:06] Yeah. Yeah. You have a logic behind of all these decisions that is very solid, that does make sense. I want to just mention that to the listeners. It’s part of being financially free really. You start with a business. You put that money into real estate. You know, you can even skip the business part because if you’re good at raising money, you can find deals and raise the money for the real estate, then you treat it like a business. But what do you do with those rent dollars? You put it to this kind of strategy to compound it, to make it bigger.

[00:46:39] You know, sometimes I have arguments with people I really care about because they’re like, “I want to buy X company.” say Tesla, which is right now at $700-$900 in like week or something. It used to be at a hundred like six months ago. And I’m like, “Yeah, but how much is it worth?” And nobody can answer the question. They look at me and they’re like. What they don’t realize is they’re buying a piece of a business when you buy a stock.

Evan Bleker:      [00:47:03] Exactly.

Ney Torres:        [00:47:05] I can underperform with this strategy, but you know what? We’ll be fine. We’ll survived 50 years. The guy that was tapping into Tesla right now, I don’t know how he can justify those prices. He can’t. Nobody can.

Evan Bleker:      [00:47:20] If you think about it, this is the exact opposite investment of Tesla, or of, you know, Facebook, right? I bought an old-world jewelry business with physical stores that’s going through a significant rough patch, and it’s trading well below liquidation value. So, if you look at, say, a Tesla, that has… I don’t know what their earnings are, but it doesn’t justify the stock price currently. It’s trading on hope and prayers. It’s in a high-tech fast growth industry just like dotcom in the late nineties. It’s quite a bit different.

[00:48:03] Now, why would want to own this instead of Tesla? The people who can relate to this are really my kind of people, because you either get value investing or you don’t. And if you don’t get it, you just don’t get it. But if you do get it, then it all makes sense to you.

[00:48:21] The reason I would go with this is because the company is stable. They’re selling for less than a conservative assessment of liquidation value. And so, my investment is safe long-term, and it has a good chance of working out. Now, by safe I mean after you put a number of these into a portfolio. So, any one of these could slip and produce a loss. But on average at least your principal is pretty safe.

Ney Torres:        [00:48:54] Yup. And I want to leave the listeners with that. Thank you very much Evan for your time. Where can people find more about you? How’s your book doing?

Evan Bleker:      [00:49:05] Book is good. Actually, I’ve submitted it and the editors are now hard at work at it. I tell you that is a big weight off my shoulders. It was a huge huge task or a huge amount of work to produce that.

[00:49:22] Now, if you want to learn more about net-net stocks, go to NetNetHunter.com. We have a lot of free resources. You could just read a lot of articles. I think I have 150 or 200 articles on there.

[00:49:35] If you are really keen about learning more about net-nets, then you can sign up for a free newsletter. I think that’s probably the best way to go.

Ney Torres:        [00:49:43] Well, thank you very much for your time. See you next time.

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Financially Free Podcast with Ney Torres
Episode 5