Still Some Deep Value Stocks to Consider

Although Western markets are soaring high and many indexes break their records, bargain hunters should not lose the hope. Recently some Eastern markets have been more suitable for bottom fishing, but every now and then it’s possible to find couple of deep value stocks from US market to consider. Company specific situations often differs from the overall market sentiment. And that’s why bottom up stock picking correctly executed always works. Following some stock ideas for deep value investors:

FreightCar America (RAIL)

FreightCar America is a manufacturer of aluminum-bodied railcars and railcar components in North America. The Company specializes in production of coal cars.

The company has seen some tough times lately, as earnings have disappointed the past couple quarters and orders are not especially strong. Total backlog of firm orders for railcars decreased from 9,840 railcars as of December 31, 2015 to 4,259 railcars as of December 31, 2016.

Last August RAIL announced a cost reduction program whereby approximately 15% of salaried administrative workforce would be eliminated. After this restructuring program is fully implemented annualized cost savings should be approximately $5.0 million.

FreightCar America is known for making coal cars since 1901, but has taken steady steps to diversify its product line. This move into non-coal railcars has strengthened the company’s overall business and has shifted the firm to have a much more customer focused approach to meet railcar needs. Unfortunately, these efforts are partially wasted because cyclical railcar industry entered a downturn.

After strong headwind, there could be also some tailwind in sight. President Trump’s decisions and actions should boost both the rail and coal industries, alongside benefiting FreightCar America. Also industry wide railcar deliveries are expected to fully rebound by 2020. Time may seem long, but positive future news will affect the price of the stock usually without delay.

FreightCar America

Market Cap: 162.21 M

Price: 13.09 (Net Cash 0.84, Net-Net Working Capital 6.32, Net Current Asset 12.83)

Price/NCAV: over 100%

F-Score: 4

Z-Score: 4.32

Debt to Equity: 0.0

Dividend Yield: 2.8%

EV/EBIT: 4.4

FreightCar America is trading near the net-net range. It doesn’t provide Ben Graham’s 2/3 margin of safety, but on the other hand the company has valuable long term assets. Tangible book value per share is $19.

RAIL has solid earnings history, it is profitable and pays dividends. Balance sheet is so strong, that it should carry the company through to better times. Current assets cover all liabilities about 2.5 times over. There are still some losses expected this year and maybe next, but even if the company experiences losses Investors do not have to be much worried because of strong fundamentals.

We should not forget that FreightCar America is one of the smaller railcar manufacturers. It easily may be the subject of a business acquisition. Insiders own just about 3% of the company and no one has the power to block such a transaction. By the way there are insiders buying company’s shares at these depressed levels. It’s a good sign.

Investors can collect a solid dividend and wait for better times, which can come sooner than many believe.

Manning & Napier (MN)

Manning & Napier is an independent investment management firm that provides investment solutions through separately managed accounts, mutual funds and collective investment trust funds.

The company has had a strong history since its founding in 1970 and still manages tens of billions of dollars in assets. Manning & Napier may not be the most famous household name among the investment management companies, but they have had good success with the performance of their portfolios.

When market indices are flourishing, it has been challenging situation for Manning & Napier. During the long bull market a trend toward more passive investment on market indices, especially among institutional investors, has cost them several major customers. It has led to a steady decline in assets under management from the top $50.8 billion in 2013, to $31.7 billion last year.

Also the latest events of a class-action lawsuit against the board of directors has caused further stock price drop near all-time lows.

As said long bull market is going to be bad news for Manning & Napier. When the indices aren’t doing so well, they will come back as a significant player in the more actively managed portfolios.

Manning & Napier

Market Cap: 86.13 M

Price: 5.55 (Net Cash 5.37, Net-Net Working Capital 6.48, Net Current Asset 7.18)

Price/NCAV: 77.3%

F-Score: 5

Z-Score: 3.83

Debt to Equity: 0.0

Dividend Yield: 5.7%

EV/EBIT: -0.92

Institutional and intermediary distribution is likely to remain challenged for Manning & Napier in the near-term. First quarter 2017 ended with net client outflows of $2.0 billion. By contrast, MN is seeing better traction through focusing on high net worth and midsize institutional clients. The company’s revenue is still under the pressure, but their margins are improving.

No one likes to see dividend cut, but a right-sizing of the dividend is inevitable when business shrinks. Despite MN’s recent dividend cut, they continue to yield an attractive 5.7%. MN’s balance sheet causes the most interest because it’s real uncommon for a profitable company. They have a lot of cash and other valuable tangible assets and only a very small amount of goodwill on the books.

MN’s cash, cash equivalents and short-term investments line alone is $127.7 million, which amounts to $5.37 net cash per share. It means that you can nearly buy the company at the level of its net cash. MN is profitable and debt-free net-net company with definite bargain balance sheet.

It’s difficult to predict market reactions and the pessimism can drive the company down in the near term. Class-action lawsuits typically take a very long time to settle, but I believe it’s already largely priced. Although there is no straightforward catalyst for a big rebound one positive earnings report which beats analysts’ expectations could quick rise MN’s stock price. And at the latest when the current market sentiment changed, Manning & Napier gets better times. While waiting for it investor can collect sizable dividends also in this case.

STR Holdings (STRI)

STR Holdings designs, develops and manufactures encapsulants that protect the embedded semiconductor circuits of solar panels for sale to solar module manufacturers.

STR Holdings trades now in the OTC market, because In September 2015 – with shares trading under $1 and a Market Cap under $15 million – the company was delisted from the NYSE and moved into the OTC market. The delisting dropped the price by half.

STR Holdings is an unconventional and extreme case even among the net-nets. The company is in deep trouble and share price has reached a level which could only be justified if bankruptcy was just around the corner – which is not the case.

STR Holdings is extremely undervalued. This extreme undervaluation comes as a result of a number of issues. Five years ago the company was relevant market player in a growing solar industry and the future looked bright. Currently STRI Holdings is struggling to reach one tenth of the best times revenue and having lost many of its most important customers. What really happened?

One important reason was Increased competition, particularly from China. It significantly reduced the average selling price of their products. Also European market seemed to be flat after growth years. Extra capacity on the market drove a severe inventory build. Because of that inventory write downs were recorded. At this point the whole industry focused on cost reductions. Unfortunately, STR Holdings was judged to be underperformer with permanently decreasing revenues in a low margin business of a lagging industry.

After these experiences STR Holdings has been trying to find solutions its perennial stagnating revenues. In 2014 STR Holdings partnered with Chinese developer of solar power stations, Zhenfa Energy Group. The idea was to move production and business away from struggling solar markets in the west to the growing industry in China. The agreement looked quite a promising and Zhenfa agreed to buy a 51% stake of STRI for an aggregate of $21.7 million. This arrangement should bring in the contacts and customers in China. Zhenfa even agreed to provide manufacturing facilities for a period of 5 years.

Sad to say, but business in China, even with a Chinese partner, proved more challenging than expected. Hard competition forced STR Holdings to reduce their prices and desired revenue growth from China was missed. Continued decline of revenues in the US and Europe still worsened the situation.

After the Malaysia facility was closed in 2015, right now STR Holdings are shutting down factory in China. Now they are looking for new ideas and trying to find playing ground in India.

STR Holdings

Market Cap: 4.23 M

Price: 0.21 (Net Cash 0.36, Net-Net Working Capital 0.52, Net Current Asset 0.89)

Price/NCAV: 24%

F-Score: 3

Z-Score: -7.22

Debt to Equity: 0.0

Dividend Yield: 0.0%

EV/EBIT: 0.64

After the losses and the declining revenues, STR Holdings has managed to maintain a healthy balance sheet. The company is trading at 24% of its net current asset value and tangible book value is $1.63 compared to market price $0.21. STR Holdings is a strong cash play and it gives a lot of downside protection. Net cash per share is $0.36, almost twice a share price. Even if nothing particularly positive happens and the company continues burning its assets it would take over 5 years to burn all of its current assets. And even then STR Holdings would still have over $0.50 fixed long term assets (factories, real estates) per share.

CEO Robert Yorgensen has been with STR Holdings for 31 years. Since January 2012 President and Chief Executive Officer and since December 2014 company’s Chairman. He owns about 2 % of the company and other Insiders together own little less than 12 %. In general, STR Holdings has been acting shareholder friendly, open and honestly. Management’s main goal is the cost reduction and find new ideas to use company’s excess cash to create shareholder value with strategic alternatives.

STR Holdings is definitely high risk investment. It is high risk, high reward play. This kind of stock can become a ten bagger (or even more). If the company become profitable again or come even close to turning a profit, it’s needless to say that the price would sky rocketed.

More likely option is that STR Holdings continue to report same kind of results as before while trying to pursue new business alternatives. In this case immediate catalyst is not visible, but it can be worthwhile to wait a little while before appointing the company as a value trap.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s