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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