Wednesday, September 5, 2012

Where's Polly?




It is no secret that the best bargains are currently to be found in Western Europe. However, whereas some markets – France, Italy, Spain – are behaving as one would expect, that is, cheap across the board, the smaller the business, the cheaper its equity, others -- the UK market, in particular – are behaving rather eccentrically.

In the UK market, the manic-depressive Basil has charged himself with pricing the small dividend-paying stocks like James Halstead, Castings, James Halstead, Judges Scientific, M Winkworth, and so on.

Microcaps that don’t pay a dividend, however, have been assigned to Manuel, with some strange and funny outcomes.

Take Volvere, for example. It’s a small business. It buys not-so great businesses, turns them around, and sells them. Yes, there’s some uncertainty involved in forecasting the timing of future cash flows, but it’s not a particularly difficult business model to grasp and not a particularly risky one.

Volvere has 4.3 million in cash, 12 million in tradable securities, and 6.3 million in total liabilities, for a net non-operating asset value of 10 million.

Separately, it owns actual operating businesses whose tangible asset value, made up of property and equipment, is ~6.5 million. Volvere has earned an annual average 1.5 million in the years since it became public, in 2004. Its trailing earnings are 1.17 million.

The company doesn’t pay a dividend and Manuel is in charge of pricing its stock.

What would you guess? 

An investor requiring a 15% yield would expect a 20.5m market cap: [10 + (1.5/15%) = 20.5 million]. A super-skittish investor may ask for a 25% yield and expect a market cap of 14m.

What one wouldn’t expect is its current market cap, 10 million. That is odd. It’s saying the business has no value at all.

That may be why management is buying back shares on a weekly basis. 

Disclosure: No position

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