8) 50 Cents on the Dollar Stock! with Evan Bleker

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Evan Bleker

On today’s podcast, I am back (once again!) with net net stock expert Evan Bleker. This week he brings you another great stock pick from the portfolio he manages for his own clients and more insights into how you can get started investing in net net…

On today’s podcast, I am back (once again!) with net net stock expert Evan Bleker.

This week he brings you another great stock pick from the portfolio he manages for his own clients and more insights into how you can get started investing in net net stocks like:

  • How many stocks to have in your portfolio…
  • How these companies fall below the radar of the big investors (and why that’s an opportunity for you!)…
  • What ratios you need to pay attention to…
  • and the major questions he asks when looking into a company’s background.

8) Buy stock a 50% discount with Evan Bleker

Ney Torres:        [00:00:00] Hey, Evan. We’re back with The Stock of the Week. The idea is to talk to you guys about, what other people see in different areas of finances, like the stock market so real estate people can take a look across the fence, to put it that way. There are also people that invest in stocks, but they normally don’t do the small stuff that we like here. Right, Evan?

Evan Bleker:      [00:00:30] Oh, yeah. Yeah. They’re normally in the Mega Caps.

Ney Torres:        [00:00:34] Yeah, and this is an advantage. Actually, we think this is an advantage when you have little amounts of money. And by little we mean less than a couple of million. And so, that’s pretty good for most of the people out there. And you find amazing obvious jewels. Today, you wanted to talk about a stock called…

Evan Bleker:       [00:00:56] GigaMedia. This one is listed on the NASDAQ under the ticker, G-I-G-M. They’re actually operating out of Taiwan.

Ney Torres:         [00:01:09] Taiwan. Let me put it in. Perfect. GiGaMedia. All right. How did you find Giga Media?

Evan Bleker:       [00:01:14] Basically, I just found it on our Net Net Hunter shortlist or… Certainly not the shortlists, our raw list, big bulk list of Net Net stocks that I like to comb through. And this one came up. Before, I guess, we talk about the company, I think it’s probably worthwhile going over the same background assumptions, or background basis that we discussed in the last call, just briefly anyways. So, yeah.

[00:01:44] In the last call, I mentioned that, again, this is just one stock pick. I’m pretty agnostic about how it’s going to work out as a pick. I said last time, you know, it’s kind of strange. How can you really like this stock but be agnostic as to whether it’s going to work out or not?

[00:02:05] It’s a bit of a contradiction. And so, I like to think about this in terms of flipping coins. Let’s say that you have 30 coins on your desk. They’re evenly weighted. They’re quarters or whatever. If you flip one, if it lands heads, you win. If it lands tails, you lose.

Let’s say that if it lands heads, you won a hundred bucks or something like that. But instead of flipping regular coins, what we’re doing is we’re flipping weighted coins. So, these have a propensity to land heads. More of them are going to land heads than won’t, right?

[00:02:41] So if you look at, say, your 30 coins, you would expect that over all those flips, you’ll come out a head, right? And then, if you take that same set of 30 coins, and you do that on another set, and then another set, and then another set, after all those coins, you should come heads.

So GigaMedia is a weighted coin that’s stacked in the investor’s favor. That’s how I like to look at this type of company.

Ney Torres:        [00:03:16] That’s a very good explanation to a concept that we call position sizing, which is, please don’t put all your eggs in one basket. Well, there’s very few people that do that and are successful like that, but you really, really need to have an advantage versus everybody else in the market and does very… Sometimes that’s even illegal if you’re not working for the company. So, the best thing to do as an investor, as an outsider, is just to ponder, you know, diversify, but not too much. What’s a good portfolio from your point of view?

Evan Bleker:      [00:03:53] Wow.

Ney Torres:        [00:03:53] Many stocks do you have?

Evan Bleker:      [00:03:54] Me in my personal portfolio, I would try to hold about 10 stocks and that’s very concentrated for Net Net investor. The reason is because I’m doing deep qualitative research. So, I want to find companies that have a very good chance of working out as a business.

[00:04:14] And if they do work out, I want them to have very large upside potential. So, that’s my preference. For somebody who is not used to Net Net stocks or just starting out, maybe they have some background with investing, but just not Net Net or Deep Value, you will really want to go diverse because you want to minimize the mistakes you make, and you want to be able to capitalize on the statistical returns of the type of strategy that you’re using. You do that better when you have more stocks,

Ney Torres:        [00:04:48] I also want to mention the strategy that you use. It’s robust. We have talked about it in different podcast episodes. It’s been working for almost a hundred years or more, and it makes complete sense because you’re buying a dollar for 50 cents, but you have to wait. Normally, this take three years or something like that. This is not stock trading day one, day two, you know.

[00:05:16] We’ll interview other people in trading but my experience in trading is that people gain a dollar one day to give it back the next one. And it’s a race. It’s a job. It’s another job. But this strategy gives you a lot of space to just sit down and make your money on waiting.

Evan Bleker:      [00:05:37] Yeah, there’s a lot of people that come to Net Net Hunter from a trading background. And what I hear, I’ve never been a trader. I just haven’t been a trader. I just haven’t been in that world and, and they tell me that they’re always on. They always have to be buying something, selling something else. It’s one of those activities. I just don’t want to devote that amount of time to investing.

Ney Torres:         [00:06:00] Exactly. That’s important because in next week we’re going to have the best coach in the world on trading. I think you’re going to love that episode. Yeah. His name is Van Tharp.

[00:06:13] I’m going to interview him about trading. Of course, he knows everything about trading, but I come from trading and I can tell you, if you’re starting in stocks, stay away from trading.

[00:06:25] It looks awesome. It looks fancy. Yeah, yeah. I can make $1000, $5000, $10,000 on them in a month, and then I’ll be financially free, whatever. But it doesn’t really work that way and it’s very very hard emotionally.

[00:06:40] But what you do is still hard but because you need a longer time frame, it’s safe and secure. Does that make sense?

Evan Bleker:      [00:06:51] Yeah. And I would say that the activity isn’t the diff difficult part. The strategy isn’t the difficult part. Crunching the numbers isn’t the difficult part. I mean, you don’t need high school mathematics for this. This is elementary school mathematics.

[00:07:05] The difficult part is having the emotional temperament to first of all, buy the company. And second of all, hang on to the company because are failing firms or firms that are in deep trouble as businesses.

Ney Torres:         [00:07:23] And that’s where you’re seeing the opportunities, right?

Evan Bleker:      [00:07:26] Exactly. Exactly.

Ney Torres:        [00:07:28] So that’s why… Yeah.

Evan Bleker:      [00:07:30] I think… Sorry, you broke up a little bit.

Ney Torres:        [00:07:35] Sorry. Must be the internet. So, can you hear me now?

Evan Bleker:      [00:07:40] Yeah, I can hear you.

Ney Torres:        [00:07:41] Perfect. So why don’t you talk… Well, position sizing is super important. Measure your risk, and be patient. That’s what it’s all about. Right?

Evan Bleker:      [00:07:51] Exactly. And so, we’ve talked about diversifying fairly well. We haven’t really talked about time horizon. Joel Greenblatt, who is a phenomenal world-class investor, one of the best — he said that a systematic strategy such as Net Net, or he uses magic formula stocks, he calls them, worst name for investment strategy ever.

[00:08:17] He says that the reason why it’s viable over the long term is because it doesn’t work in every single year. You can go through two or three years or it’s not working. And a lot of people abandon the strategy to say, “Oh, this is crap. This doesn’t work.” But what you really have to do is you have to have a long-term time horizon, about five to 10 years. That’s really the only way that you can guarantee any sort of success.

Ney Torres:        [00:08:46] Yeah. And Joel Greenblatt, for people that don’t know, is somebody that started a fund. He was a Dean in Columbia.

Evan Bleker:      [00:08:55] Yeah. That was after the fund, actually. I’m not sure where he graduated university from, but he did a thesis on Net Nets.

[00:09:04] So he did a report and it was in the, I think, The Sternal or something. Then he started a hedge fund. His hedge fund returns something like 50% over 10 years. Like 50% is compounded.

Ney Torres:        [00:09:20] Compounded, yup.

Evan Bleker:      [00:09:22] Ten years. Enormous, enormous stuff.

Ney Torres:        [00:09:25] I think it’s the best one I’ve seen.

Evan Bleker:      [00:09:27] Yeah. It’s…

Ney Torres:        [00:09:28] Warren Buffett. Yeah.

Evan Bleker:      [00:09:30] Yeah, definitely. Definitely.

Ney Torres:        [00:09:31] Yeah. I’m mentioning that for listeners because that will set perspective into this whole investing thing. If you can make 50% a year compounded, just take your calculator and start adding those numbers. It’s huge. It’s huge. But there’s a lot of people coming into stocks thinking they’re going to make 10% a day. Forex is the same thing. It doesn’t work that way.

[00:09:57] Take your little calculator and say, “If I was doing great for 30 days in a row, how much your $10,000 will return?” And it’s just not realistic. So, we’re giving you the best in class. It’s 50% a year. That’s the best in class.

Evan Bleker:      [00:10:14] And if you can master 50% a year, call me. I don’t know anyone. I don’t think I would, you know. Well, for sure, I’m not going to be able to come close to 50% per year. I mean, that’s… That’s really crazy. Just the amount of, you know, just how well he did is just mind blowing.

Ney Torres:        [00:10:37] I heard a couple of people could do it but you have to aim for companies that are trading for some reason at 30 cents on the dollar, and you have a reasonable expectation, they’re going to go to fair value in like three or four years.

[00:10:37] I do have a couple of those in my pocket, but you will have to be super concentrated. That way, maybe you can make 50%, but if it’s in such a small amount of money. I couldn’t do that with a million or more. I just couldn’t.

Evan Bleker:      [00:11:12] Yeah. It’s impossible. I mean, I’m not sure how much he had. I think he had in the millions. Well, obviously, in the millions if he’s running a hedge fund, but one of the things that he said in one of his lectures is that he had to close the fund because he just had too much money. You know, return to capital. And he knew that he wasn’t going to be able to keep it up with more amounts of money.

[00:11:35] Warren Buffett’s another one who said that he could do 50% a year with small amounts of money. I’m not exactly sure what his compound return was before he started his hedge fund, but it was pretty good. But even, you know, he ran his hedge fund and Buffet’s widely regarded as one of the best investors of all time, I think he did 31% or 32% compounded over 10 to 13-year period or something like that. And that was pretty outstanding.

Ney Torres:        [00:12:10] I think that was over 33%.

Evan Bleker:      [00:12:12] Was it? Okay. Yeah. I think the individual investors, I think might’ve got 29%. I don’t know. I’m just going off my head here but…

Ney Torres:        [00:12:26] Yeah. So, this strategy, basically what Evan’s going to talk about, it’s pretty close to the best in the world, and you don’t have to be a genius to implement it, but you do need character.

Evan Bleker:      [00:12:41] Yeah.

Ney Torres:        [00:12:41] That’s the message we’re going to give you before telling you about this great stock.

Evan Bleker:      [00:12:46] Yeah, definitely. And one thing I recommend to anybody who’s thinking about, you know, starting off in stocks and likes the value approach is don’t go by what any one person says they’re able to do with their record.

[00:13:02] Don’t go off of any one professional’s record. What you want to do is you want to look at the body of knowledge behind the strategy. And then, you want to see if people have been able to apply it in practice.

[00:13:13] There is tons of studies on Net Net. If you just surf the internet and you look up Net Net stock study or NCAV stock study, you’ll find stuff and you can just read it and find out for yourself.

Ney Torres:        [00:13:31] Yeah. Because somebody can be lucky for even a couple of years if you have, I don’t know, you and I could be lucky with 10 stocks and one explodes three or five or 10 times. We have a great track record for the next five years for that. And it was really one lucky pick. Yup. You have to look into that first, not just results. Right?

Evan Bleker:      [00:13:51] Yeah.

Ney Torres:        [00:13:51] Completely right. Perfect. What do you got for us today?

Evan Bleker:      [00:13:55] All right, so GigaMedia is a company, it’s a game development company based in Taiwan. They make mobile games. So, for distribution on mobile devices throughout East Asia. Primarily, their market is in Taiwan.

[00:14:11] So what I want to do is I want to walk through the valuation, just give you a sense of the type of positions that I’m looking for, for my own portfolio.

[00:14:23] In terms of valuation, we have a market cap. So, market capitalization. The total value of the company in the market is. 28 million. So that’s the total value of the company’s shares traded in the market.

[00:14:39] So 28 million, it’s a small company. It’s definitely a nano cap. It’s not your multi tens of billion dollars Apple or anything like that. It’s really only for small investors.

[00:14:55] Net current asset value comes in at $55 million. That means that’s the discounts, the price to value discount is something like 49%. So, you take your market cap, you divided by your net current asset value, and that tells you… that gives you a rough idea of valuation.

Ney Torres:        [00:15:19] So I see here $4.99 versus $2.50. That means, for the people listening, you’re buying $5 for two and a half.

[00:15:31] Every dollar for 50 cents. You’re investing. $1 to get two. Does that make sense?

Evan Bleker:      [00:15:36] Yeah.

Ney Torres:        [00:15:37] As a minimum.

Evan Bleker:      [00:15:39] Exactly. You’re walking into a store and you’re buying stuff for half off, so it’s, it’s pretty good.

[00:15:46] With most companies, they have, the net current assets tied up and things like inventory receivables, prepaid expenses, that sort of thing. But this company has most of its net current asset value in cash. So, its current assets are mostly made of cash. Yeah, it actually has a net cash position of just over $53 million.

[00:16:15] And so, what this means is that you take the company’s cash in the bank, you add any sort of term deposits that they have, anything that’s close to cash, like almost cash. And then you subtract the total liabilities of the company. And that gives you a net amount. In this case, it’s $53 million.

[00:16:37] If you look at the stock price or the market cap, we’re looking at $28 million, will buy you $53 million in cash. So, in effect, what this means is that if you bought the company outright for this price, that you would get an immediate 100% refund on your purchase price plus extra cash bonus.

[00:17:05] Yeah. So, I guess at that point, it doesn’t even matter if the business would work out or not. You’d still profit. But you know, rings attached to that as a private investor, I’m probably not getting direct access or direct control of the cash. So, what you’re doing is you’re buying into a situation where there’s kind of a trust official who’s in charge of this cash for you. His title is the CEO.

[00:17:36] He makes the decisions about what the company is going to do with the cash on your behalf. So that’s the string, that’s the big string that’s attached to that cash figure.

[00:17:48] In this case, we’re looking at a situation where your discount… So, you’re almost getting 100% more cash than the cost of the shares.

Ney Torres:        [00:18:04] And most people, when you talk about these, they tell you, you cannot find this kind of stocks. And maybe in the US you cannot, right? That is true. But around the world in Taiwan, you can find this beautiful stuff that used to be able to find, back in the day, in the U S.

Evan Bleker:      [00:18:22] Yup. You can find them in the US now. It’s just very tough. You know, obviously if you’re buying a company for half the cash that it has in the bank, and you know, no liabilities, that’s a hell of a bargain. And so, it’s not offered every day. You’re not going to find it with your typical investment situation. This is quite unique.

Ney Torres:        [00:18:45] Why can’t you find them? Can you explain us why people can’t?

Evan Bleker:      [00:18:51] Yeah. I mean it’s tough to find. If you found a situation like this, say it’s a bigger company, what you’re going to find is that activist investors will start buying the company, will start buying up shares, and they’ll start pressuring management to distribute the cash. And so, that happens in some situations. The company is a prime takeover target.

[00:19:13] If you look back and, I believe it was in the 1980s, you had a giant leverage buy out boom. A lot of investors were boring money at say, 5%, and then they were going out and they were buying all these cheap assets. So that’s a leveraged buyout.

[00:19:32] In this case, if you could get access to, I don’t know, 40 million, for example, and you could offer shareholders 40 million for their shares, it might be able to buy the entire company and then distribute 53 million in cash. So, you get the free company plus 13 million.

[00:19:49] So, yeah. That’s the type of thing that would happen. These types of bargains are basically competed away by value hungry activists clamoring to get their hands on the cash.

Ney Torres:        [00:20:04] And the reason we are seeing this is because, you know, or is it too little or there’s something wrong with the company, right?

Evan Bleker:      [00:20:13] I mean there’s always something wrong with the company. The company is in some sort of trouble. But one of the main reasons is I believe that they’re located in Taiwan. And so, that might be a problem for some people who are running hedge funds. They have a market cap of 28 million. So, they’re not exactly the biggest. They’re not on a lot of people’s radars.

Ney Torres:        [00:20:38] Just to clarify this. What do you think is the volume? I mean the reason people don’t go and just start buying this stock is because it’s only a couple of thousand stock per day are available, right?

Evan Bleker:      [00:20:53] Yeah. I mean right now, I looked at the average daily volume over the last three months and we’re sitting at about 68,000. So, you know, if you were to buy all of the company for 28 million and you had to spend $68,000 a day to do it, it would take you years.

[00:21:12] So what you would have to do, in this case, you have to make a tender offer for stock. And so, a tender offer is basically when you approach, you know, the shareholders of the company and say, “Hey, I’m going to buy…” or “I would like to buy your shares for, you know, X amount.” Maybe it’s 15% – 50%. Somewhere in there above the current market price, and that will entice them to sell.

[00:21:38] Say, “Look, your company has been dying over the last seven years. The stock price hasn’t been over, you know, $3 in six years. I’m willing to pay you $7 or something.” You know, or $4.

Ney Torres:        [00:21:54] Normally, activists or people that can do that, they start buying shares until they have over 5%. When they have 5% of the company, they have to declare. I don’t know if that’s the case here in the stock market in Taiwan but in the US, you have to declare. Raise your hand to the government and say, “I owe more than 5%. These are my intentions. Right?

Evan Bleker:      [00:22:16] Yeah.

Ney Torres:        [00:22:17] And then you get a seat on the board. And then you have influence and you can see closer what’s going on.

Evan Bleker:      [00:22:24] I’m not 100% sure on GigaMedia situation, but I don’t think that they have to go through the same. They’re not subject to the same rules as a regular company that’s operated in the US and traded on the NASDAQ.

[00:22:40] So, yeah. You’ll notice that on their investor relations page of their website they publish different sorts of reports. So, they’re not your regular 10K or 10Q that you get with a regular company. So that’s the annual and quarterly financial statements and financial reports. 

Ney Torres:        [00:23:02] Good. Perfect. Sorry to cut you off. So that’s why we’re seeing this opportunity because it’s tiny, basically.

Evan Bleker:      [00:23:10] Any base company traded in the US, so that’s basically what we put it down to. Now, looking at the company’s balance sheet. You know, obviously if the company has a ton of net cash, then their ratios, their balance sheet is going to be very very solid so that we see exactly that. And we see a current ratio of 16 times. And so, your current ratio measures the liquidity of the… I’m trying to talk here. It’s been a long day.

[00:23:41] The liquidity of the balance sheets. So basically, a company has short term obligations it has to pay, and it has a certain amount of liquid assets that it can use to pay those obligations.

[00:23:55] And so, in this case, it’s mostly cash. There’s a lot of it. And the current ratio comes out to 16 times. So current ratio, current assets divided by current liabilities. And then we have the quick ratio. And the quick ratio is basically your current ratio but we’re excluding inventory from that. And so, things like prepaid. So, it’s mostly cash, cash equivalent, securities, short term securities, receivables.

Ney Torres:        [00:24:33] That’s important because the quality of the cash it have… cash in a company can come in different forms. As you mentioned, it can come as inventory. It can come as pieces of paper of IOUs or people owe me. But what we’re seeing here is that they have cash that’s supposed to convert really fast. And that’s good because that’s exactly what we want to see.

Evan Bleker:      [00:24:58] Exactly. So, what we talked about last time is that sometimes a company will have inventories, and those inventories can be worth more or less than the stated values. They can be quite different.

[00:25:12] The example I used last time I think was Alanis Morrissette cassette tapes. Those aren’t going to be worth a lot. It might be tough to move. And so, if you’re looking at a liquidity situation where the company’s foreign assets are made up almost entirely of Alanis Morrissette cassette tapes.

[00:25:32] It might be really tough to cover your short-term obligations. So, the fact that this is mostly in cash, these assets are mostly in cash, make liquidity a nonissue. So, the quick ratio comes in at 16 times identical to the current ratio. It’s a non-factor.

[00:25:54] In terms of debt to equity, we’re really looking at a no debt company. So it has, you know, minimal long-term liabilities, tons of cash. This is basically a cash bank account that’s traded on the NASDAQ. That’s essentially what this company is.

[00:26:12] Well, what about their operations? Yes, they have operations but the only amount over the last 12 months, trailing 12 months, we’re looking at $6.8 million in revenue. And when you compare 6.8 million to net cash of 53 million, I’m not sure off the top of my head, was that 15% or something like that, or 30%. I don’t know. Like I said, it’s been a long day.

[00:26:44] But you know, operations are tiny compared to the amount of net cash it has. So, it does have operations. Something to keep in mind. The other thing to keep in mind is that the company has no net profits so the company is losing money. They’re losing about 2 million a year. That effectively means that that net cash pile is decreasing by roughly 2 million per year.

[00:27:13] So as the company loses, it has to pay people and it doesn’t have the cash coming in, so they have to take it out of the bank accounts to do that. So there’s a slow cash burn, I’ll call it. Again, this is a really really tiny business and they’re trying to turn it around. I guess that’s where we can talk about the company’s actual business now that we’ve laid out the numbers.

Ney Torres:        [00:27:45] The interesting part.

Evan Bleker:      [00:27:47] Yeah, the interesting part. So, the question when you’re buying a company below net cash that you always have to ask is, what’s the company going to do with the cash. You know, is it going to waste the money on stupid acquisitions? Are they going to be, you know, throwing parties with champagne and imported elephants? Right? Are they just going to be paying directors insane amounts of money?

[00:28:17] In this case, the firm does have a history of making some pretty stupid acquisitions. They’ve made a number of them and they haven’t really panned out. And so, you know, over the last six years it destroyed a lot of value. And I think that that’s caused investors to kind of be pessimistic on the stock.

[00:28:40] But in 2017 we had a management change. So, the head guy changed and we have a new guy, new CEO. I think he’s also the CFO. I can’t remember quite correctly but I think he took over a CEO, CFO, and president positions. So he is the de facto emperor of GigaMedia.

[00:29:04] He seems to have a tighter acquisition discipline. So, what he’s been trying to do, again, this is a gaming company. They develop mobile games. He’s been trying to get the company back into a profitable position by focusing on higher margin games and that sort of thing.

[00:29:30] I’ll just read a little bit of his background here. So, one of the notes I put down is he graduated from MIT with a master’s in management. So right away, you know, he’s not a clown. He’s not somebody that came from…

Ney Torres:        [00:29:42] Smart guy.

Evan Bleker:      [00:29:43] Yeah, he didn’t come from the forestry industry as a logger or something that then decided to manage a gaming company. MIT is, you know, widely regarded. He has 30 years in finance, investments, and in direct marketing. So yeah, he has a lot of experience, a lot of skills, at least with the numbers and, and direct marketing. And he was presidents of an investment company for eight years before joining GigaMedia.

[00:30:17] Now, I looked and I couldn’t find his investment record. I couldn’t find what the company’s record was, but that’s at least his background information. He has good experience but we don’t know how well he’s done in the past. So that’s an unknown factor.

[00:30:36] Right now, you know, the company has been trying to been trying to put more money and more development effort into their legacy games and also develop games for women because, you know, one of the I think more recent phenomenon that you’ll notice in the gaming world is that women are really, really starting to take to gaming, especially with mobile devices. We’ve noticed that more and more.

[00:31:07] Gaming used to be primarily male dominated. You know, with your Nintendo 64 and Ataris and all that, and PC games. Definitely that is changing. And so, do you think that there is an untapped market or a market that’s underserved in the female gaming community, or for female gamers. And so, that’s really what they’ve been targeting there.

[00:31:35] Now, all of this is great but what their main project that they’d been working on over the last year is a platform for their current following, I will say, their current customers. So GigaMedia has, from looking at it, trying to get the exact number for you here.

[00:32:01] I believe they have. Eight million active buyers. So, these are people that are… I’m sorry. I shouldn’t say emailing. I think they have 40 million active customers. So, these are people that are buying from the company on a regular basis. It’s not a lot. Forty thousand is not a lot of people to be buying from those companies, especially if they’re small purchases.

[00:32:32] I believe they have roughly eight million recorded customers who are non-buyers. So, these are maybe people that signed up for their platform or signed into something. They haven’t really been buying anything. They haven’t bought anything in the past, that sort of thing. So, there’s a large amount of people that they could possibly market to. However, they have their current contact information.

[00:33:01] Maybe it’s through push notifications or an email or whatever. But what they’ve wanted to do is they wanted to monetize this by creating a new platform. The platform, I talked to the investor relation department and they said, “Well, it’s really a website.”

[00:33:18] I said, “Okay. Well, what type of website?” I said, “What are you going to do?” They’re like, “Well, yeah. We’re going to offer games but we’re also going to sell merchandise.”

[00:33:29] If they find a way to reactivate, first of all, sell more to the 40,000 that they do have and then rea–. Or to get some of those 8 million on board as paying customers, you know, that could go somewhere.

[00:33:46] I also talked to the IRR department about possible dividends and buybacks, and it was a no go. So, they’re absolutely not interested in returning the cash to investors. At least that’s what the IRR department told me. And, it’s often really difficult for a CEO or a management team to want to return cash to shareholders because that means shrinking their empire, right?

[00:34:15] Right now they’re looking at the balance sheet and they have $53 million in net cash, and they are going through their minds. They’re thinking, “Oh, we could do this. We could do that.” Generally, the company, as I mentioned, has tried acquisitions in the past and burned shareholders money. So that’s always the risk.

[00:34:39] But, you know, share buy backs and recapitalization or distribution to shareholders is pretty much out of the question at this point. That may change in the future. One thing that we do notice with this company is that the CEO has been buying a lot of shares over the past two years.

[00:35:04] I think he owns roughly 8% of the outstanding shares now. And that amounts to $2.2 million US. So, you know, he’s dumped a lot of his own personal money into buying shares on the open market. So at least the new CEO thinks that he has something. That the company is going to, you know, do pretty well going forward. So, a strong voter confidence, at least $2.2 million worth.

[00:35:32] One thing that could happen, and this is pure speculation, is at some point in the future, if he’s done buying shares for himself, he could return capital to shareholders, you know, half the cash. And in doing so, that would essentially give him free ownership in the company. So, you know, he bought all these shares. I’m not sure how many. I think it’s about 900,000 shares. If he returned half of the cash to shareholders, then effectively he would have $900,000 in free shares.

[00:36:07] So, from a personal incentive point of view, it could change in the future. But what they have said, or at least what I can remember them saying is that they expect to do some acquisitions in the future. And so, what they want to do is probably build out this platform and then acquire offerings to offer it to people through the website. So, that’s basically how I see things unfolding.

Ney Torres:        [00:36:40] Do we know how much he’s paying himself?

Evan Bleker:      [00:36:44] I believe… Let’s see. Not off the top of my head.

Ney Torres:        [00:36:51] Mr. Huang Cheng-Ming.

Evan Bleker:      [00:36:54] Yes, that’s him. And I didn’t say his name because I didn’t want to mispronounce it by accident.

Ney Torres:        [00:37:01] Oh, okay. I thought I made a legal mistake. No, I’m sorry. By the way, Mr. But I pronounce everybody’s name wrong. It happens to me all the time.

Evan Bleker:      [00:37:13] So, one of the notes that I put down here is that the directors… Total amount of management and director compensation for, I think this was 2008, came to about half a million dollars. So, very small. So, it doesn’t seem like he’s paying himself a huge amount of money. He’s not screwing shareholders that way.

Ney Torres:        [00:37:39] Hold on. But he’s making half a million dollars, right?

Evan Bleker:      [00:37:42] Pardon me?

Ney Torres:        [00:37:43] He’s making half a million dollars now?

Evan Bleker:      [00:37:45] No, that’s… So, I don’t have the numbers for 2019 but for 2018 I saw that total management and director compensation amounts to about $500,000.

Ney Torres:        [00:37:59] Oh, total management. Okay.

Evan Bleker:      [00:38:04] Yeah. So that’s quite low, which is a positive sign. Generally, what you want is you want a company that is majority owned by the top management. Or not majority owned, but they have a large chunk of their own personal money tied into the company.

[00:38:25] That sets their incentives more in line with shareholders. Alternatively, having spot, you know, stock options that reward the company getting back to good operating results, also great to see.

Ney Torres:        [00:38:41] Awesome. Is this in your personal portfolio or something you really like?

Evan Bleker:      [00:38:46] This is in a portfolio that I manage for clients. It’s not in my own personal portfolio though.

Ney Torres:        [00:38:53] What’s the difference?

Evan Bleker:      [00:38:54] Pardon me?

Ney Torres:        [00:38:55] What’s the difference between the two portfolios?

Evan Bleker:      [00:38:57] Size, basically. So, my portfolio is smaller so I can buy smaller companies. That is unfortunately true. But, yeah. That is the case.

[00:39:08] Generally speaking, I like buying small companies as I possibly can for my own personal portfolio just because smaller companies, especially when you’re dealing with cigar butts, they tend to have more explosive upside. And so, you know, if you get a company that has a market cap of two and a half million dollars, which is incredibly tiny, and then you come across a contract where maybe they got a government contract or they got a new deal selling through Walmart or something like that, and that contract’s good for 5 million in sales, that stock’s going to climb really quickly.

[00:39:47] But it’s not, it’s not the case for much larger stocks. So typical large company’s stock, you know, say if it’s priced at $1,000. $1,000 stock is not going to go up five times that easily. Whereas if you have a stock that’s, let’s say, you know, 5 cents, five times is nothing. It happens all the time. So yeah, that’s basically what I like.

Ney Torres:        [00:40:15] Okay. Very good. Interesting. Interesting. Thank you very much, Evan. I hope our listeners are taking notes because this is a strategy that I’ve studied.

[00:40:26] I think you’ve studied this for seven years, right?

Evan Bleker:      [00:40:29] Since 2010. Yeah. And I started going really really deep in 2011, 2012, you know, trying to learn as much as I could about it.

Ney Torres:        [00:40:39] Yup, yup. Yup. Me too. I’m actually talking to you. I’m actually thinking about going back to Net Net because it’s very interesting.

Evan Bleker:      [00:40:48] That would be awesome.

Ney Torres:        [00:40:50] Yeah, yeah. We will. We will. Well, thank you so much. That’s everything for today. I want to, again, thank you so much for your time, Evan. I know it’s like Sunday, 10:00 PM back where you are. Thank you for your time, brother. I always appreciate it.

Evan Bleker:      [00:41:06] I wouldn’t be anywhere else.

Ney Torres:        [00:41:07] No thanks. You’re home. By the way, where can people find you?

Evan Bleker:      [00:41:12] Go to Net Net Hunter, and so that’s NetNetHunter.com. We have a lot of free articles. If you’re interested in Net Net or cigar-butt investing or value investing, definitely read through a lot of the free content that we have there.

[00:41:28] And then, if you want to go deeper down the rabbit hole, I recommend signing up for our free newsletter. You can find that on any article. But that would be the best way just to learn as much as you can before deciding whether this strategy is right for you or not.

Ney Torres:        [00:41:44] All right. And by the way, people, this is the way the best investor in the world started in the 50s, right?

Evan Bleker:      [00:41:52] Yeah.

Ney Torres:        [00:41:52] Warren Buffett used to do this day in and day out, and now you can do it with a subscription through the internet while he watches turning pages, 10,000 pages, you know, all day long. Now you could have it with a couple of clicks. Thank you so much, Evan. Have a great day.

Evan Bleker:      [00:42:10] You’re welcome. Have a great night.

Ney Torres:        [00:42:12] You too. Bye bye.

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Financially Free Podcast with Ney Torres
Episode 6