Cheap Graham Stock Ideas

April 2, 2009 | Comments (33)

A reader and I briefly discussed an idea over Twitter, one which looked promising by the numbers, but reading the 10-K brought up many questions. It ended up in the pass pile even though the valuation shows that it is trading at 61% to its liquidation price. That company is XO Holdings (XOHO).

With net nets, and any other long holding, I prefer an easy to understand business. A business that can make money and produce free cash flow. I feel these two points are important if the company is to ever come out of net net territory. Catalysts are definitely welcome, but no catalyst is 100% certain and if it fails then what? You’re only left with the business.

Xo Holdings (XOHO)

XOHO is a telecommunications services provider that delivers an array of telecommunications services to the telecommunications provider, business and government markets. XOHO operates their business in two reportable segments through XO Communications, LLC, a wireline business and Nextlink, the wireless business.

First of all, telecom is a difficult business to understand. Unless you are directly related to the telecommunications industry with plenty of experience, it will leave most people scratching their heads. I graduated from Telecommunications Engineering and work in the industry but admit that I definitely don’t fully understand the different techniques, standards and technology that is being used today. So in terms of an easy to understand business, XOHO is defintely a no.

Below are some points I came up with quickly regarding XOHO

Good

  • FCC licenses currently prevent overcrowding of a single market. (Also limits growth if the market is saturated)
  • Fiber optic network attracts new customers.

Bad

  • Heavy capital expenditure. Constantly need to maintain and upgrade networks. High fixed costs + extra for growth.
  • Need to pay leases on wireline (including fiber) and wireless networks
  • Extremely competitive industry
  • In the past 10 years, it has only had one positive FCF year.
  • Substantial amount of preferred stock needs to be redeemed in the next year. Redemption has recently been delayed to next year.

Click image to enlarge

xoho-netnet

The snapshot of the company at the time it filed it’s 10-K report looks pretty good, but if the value of a business is the sum of its future cash flows, I don’t much value in the future.

Trident Microsystems (TRID)

I’ve been meaning to write up on TRID for a while, but ValueHuntr has done a good job at valuing the business. You can check and compare the numbers yourself with the free net net investing spreadsheet available.

Aehr Test Systems (AEHR)

I haven’t been able to analyze or valuate the business yet, but it looks cheap on paper. Currently trading at 55% to its liquidation price.

aehr-netnet

Asta Funding (ASFI)

ASFI is an interesting business. It buys receivables from companies such as Visa and Mastercard at 20c to 50c on the dollar and then goes about collecting payment. It has gone up around 40+% from when I first noticed it and it still looks cheap.

ASFI liquidation value consists mainly of receivables which is valued at $407.3 million, but the important point is that the receivables were bought at less than 50c to the dollar and has been written down considerably. With the numbers that I have, if ASFI manages to collect more than 58% of it receivables, the current stock price is very cheap. Anything less than 58% and we have a problem.

The risk with the company is that it has to collect money from consumers who are currently struggling with their payments. The economy isn’t helping and if it gets worse, ASFI will find it harder to collect payment.

If the company can receive 75% of receivables its net net or liquidation price jumps to $7.66 while a 60% of receivables yields $3.38.

In the meantime, I’ll be trying to learn more about the business as an ongoing concern.

asfi-netnet

Disclosure

I hold no shares of any stocks mentioned at the time of writing.

About Jae Jun


Jae Jun is the founder of Old School Value. He is on a mission to provide practical and actionable value investing tools, tutorials and educational material to help empower the individual investor. Keep in touch with Jae via any of the methods linked below.

  • http://www.stockpursuit.com Mark

    I took a loss chasing AEHR last year before it was a net. It looked cheap then based on PE and their forcasted growth. I hate these semi companies bc their so cyclical predicting EPS is like a coin flip. Any value in these is a value trap a lot

    XOHO yeah I noticed a bunch of telecom’s are suddenly appearing as net’s. I think when a whole sector has a ton of net’s it is like the ultimate contrarian indicator. There were a dozen housing stocks that were net-nets last year now way less. those stocks are all up since i guess! So maybe no would be a good time to buy the best telecom net’s….

    Mark’s last blog post..Cheap Stock Ideas

  • http://www.stockpursuit.com Mark

    check out PIR they had some good news about not seeing bankruptcy and the market is coming back to a sensible valuation on it. was net-net

    Mark’s last blog post..Cheap Stock Ideas

  • Jim

    I’ve never seen where PIR was ever a net-net stock. They are weighted down in liabilities and they’re negative cash flow. Although I love their products and its one of my favorite stores to shop at, they’re not even relatively close to being a value business in my opinion. With so many companies presenting a value opportunity, Pier 1 Imports is an easy pass for me.

  • http://www.oldschoolvalue.com Jae Jun

    You may be right. But I’d rather keep it safe and try to select the quality ones. I’m still trying to gather around 5-10 net nets for my portfolio but only have 1 true one at the moment and that is IGOI. Can’t consider VVTV as a net net.

  • Byron

    Jae-
    You might find this interesting about RHIE and Klarman’s position. This discussion is more qualitative than quantitative due to the fact that I don’t have any numbers in front of me (nor the time for a detailed write up), but it’s interesting as an intellectual exercise; prima facie, it’s hard to understand what the hell Klarman saw in it, but once you start digging a bit it looks especially smart. http://valueplays.blogspot.com/2009/04/case-for-rhi-entertainment.html

  • http://www.oldschoolvalue.com Jae Jun

    AEHR beaten down 30% today. Lost its biggest customer but may be oversold.

  • Jim

    Good idea about RHIE. Cash Flow is great. According to the Bruce Greenwald valuation formula that I most often use I get a valuation of $32.00 per share for RHIE. I still think there are better opportunities available for the investor that has smaller funds to work with than Seth does. Seth has a big portfolio and can’t invest in micro caps like the rest of us because he’d have to buy the entire company just to receive a small change of his total managed portfolio. So, I see why he’s investing in RHIE. It would make sense for him to do so but anyone that has less then say $50 Million in assets should be looking elsewhere.

  • http://www.stockpursuit.com Mark

    ‘”I’ve never seen where PIR was ever a net-net stock. They are weighted down in liabilities and they’re negative cash flow. Although I love their products and its one of my favorite stores to shop at, they’re not even relatively close to being a value business in my opinion. With so many companies presenting a value opportunity, Pier 1 Imports is an easy pass for me.”

    PIR last 10Q

    $36.9 mil net current assets take net current assets and net tot liabilities

    according to their last filing they had 89,265,194 shares outstanding

    at .64 it is valued at $56 mil but this stock was as low as $.10 so there was an $8 million market cap priced for bankruptcy

    yes this stock was at a HUGE discount to ncav and is cheap if you figure future cash generated by the business is worth more than around its hard assets

    classic deep value

    Mark’s last blog post..Net-Nets Sector Rotation, Pier One ImportsPIR , PXG, & Technical Analysis

  • http://www.stockpursuit.com Mark

    “Can’t consider VVTV as a net net.”

    doesn’t it have 87 mil in NCAV? Did they blow all their cash? I think it would still be a net-net even then

    Mark’s last blog post..Net-Nets Sector Rotation, Pier One ImportsPIR , PXG, & Technical Analysis

  • http://www.stockpursuit.com Mark

    I actually called that PIR was bottoming when it was at NCAV

    “Pier One PIR is desperately trying to bottom. Lot of buyers at $.12. Stock is about 30% of NCAV mostly inventory. Long-term debt is stable but it’s a crap shot. I say if it gets delisted it could be a good pickup on the post delisted bounce like ARTC”

    http://www.stockpursuit.com/2009/03/stock-analysis-cbou-penny-stocks_16.html

    That lower indicator on that chart ROC was telling me it was bottoming and the volume but I wasnt thinking like a contrarian or i could have been up over 1,000%

    Mark’s last blog post..Net-Nets Sector Rotation, Pier One ImportsPIR , PXG, & Technical Analysis

  • Jim

    MARK Wrote:

    “PIR last 10Q

    $36.9 mil net current assets take net current assets and net tot liabilities

    according to their last filing they had 89,265,194 shares outstanding

    at .64 it is valued at $56 mil but this stock was as low as $.10 so there was an $8 million market cap priced for bankruptcy

    yes this stock was at a HUGE discount to ncav and is cheap if you figure future cash generated by the business is worth more than around its hard assets

    classic deep value”

    And that’s where I and you apparently differ. According to my calculations, they didn’t have $36.9 Million in net asset value after discounting total liabilities. That number would be their book value. When determining net asset value you don’t include receivables and inventory at full value. You also don’t include prepaid expenses or other current assets at all. So, as I said earlier. PIR has never been a Net-Net stock.

  • Jim

    Mark, concerning VVTV. They are not a net-net either. They have off balance sheet obligations which you won’t find on the balance sheet hence they call them “off-balance sheet” liabilities. Regardless if they are off balance or on balance, they have to be paid and the company owes that money. To the tune of $180 Million.

  • http://www.stockpursuit.com Mark

    at $.10 a share it was at 22% of NCAV . I thought Graham would take NCAV and give himself a margin of safety by buying at less than 2/3rds of NCAV to allow for rec and inv like you said.

    Anyway, I’m not going to actually take over any of these companies, rather, I’m just looking for what the market has given up on and try and play contrarian. I wouldn’t let prepaid expenses be the dealbreaker when other things tell me go. SPAR Spartan Motors was around approx NCAV and was a good buy at those times over the past year. You can analyze margins, return on investment, cash flows, insider buying, the moon…

    “You don’t need a scale to tell if someone is overweight”

    -Ben Graham

    Mark’s last blog post..Net-Nets Sector Rotation, Pier One ImportsPIR , PXG, & Technical Analysis

  • http://www.stockpursuit.com Mark

    on the off balance sheet. oh, ok thanks. Another reason not to invest in VVTV. I remember when Jae mentioned it months back in that article on Div-net. It’s been a perennial for awhile.

    Mark’s last blog post..Net-Nets Sector Rotation, Pier One ImportsPIR , PXG, & Technical Analysis

  • http://www.oldschoolvalue.com Jae Jun

    As always, valuation of a business is more of an art. The science is in how we do it but the art is how we interpret it.

    I’m on the very conservative side which causes me to miss out on many good opportunities. The problem is while I miss so many good things, I also miss out on my targets because I’m not always in tune with the market and miss out.

    VVTV has some off balance sheet obligations so its no good being liquidated but when I think about it’s worth as a business, I still think its cheap. I’ve mentioned before that a price below 50c was pricing in bankruptcy which I never believed after looking at the numbers from operations.

    It’s struggling to break 70c but it’s become a long term hold for me. I don’t like the home shopping business at all but if they improve margins to where their competitors are, they surely can’t stay where they are.

  • http://www.oldschoolvalue.com Jae Jun

    @ Byron

    I did notice Klarman building up his stake in RHIE as I try to follow his moves but I’m sure you know that Klarman is one hard nut to figure out.

    I look at his portfolio and don’t understand more than half the things he buys. Just shows how much I’ve got to learn.

    I would also prefer RHIE to have a longer history so I’ll be passing this. It’s actually very similar to what I read a while back with Lions Gate Entertainment (LGF). Ichan is also a big holder trying to exert his influence.

  • http://www.stockpursuit.com Mark

    “It’s struggling to break 70c but it’s become a long term hold for me.”

    good idea. I think you’ll bank surely if the market keeps this up. I’ve been incredibly bearish but maybe I’m wrong and the market is actually discounting the turn of the economy. Housing has been in recession so may years

    Mark’s last blog post..Net-Nets Sector Rotation, Pier One ImportsPIR , PXG, & Technical Analysis

  • Jim

    VVTV is a bargain, but not because its a net-net (which it isn’t). Like Jae said, value investing is an art and can’t be determined by a simple mathematical equation. If you could figure it out that way, then the markets would truly be efficient which they are far from being. I hold VVTV.

  • Mark

    hey Jae, are you holding any other interesting small caps or net’s right now?

  • http://www.oldschoolvalue.com Jae Jun

    Mark,

    I’m holding KSWS, AEO, KTII, ATW, CRDN, VVTV as long holds.
    GGP, IGOI as net net plays and not much else.

    Looking for more good net nets.

  • http://stockpursuit.com Mark

    i looked at IGOI it had an amazing year I’m guessing operations wise in 2003 bc is went from like $.70 to $9 . every other year since 2000 hasn’t been good for the stock at least. It might be worth it to see what the heck happened in late 2002 that rocketed the stock.

  • http://www.stockpursuit.com Mark

    that was me

    Mark’s last blog post..Some Really Cool Momentum Charts

  • MKL
  • Jim

    Jae, have you researched any more on Asta Funding. I find it an very simple business to understand and the type of business I would like to be involved in. My main concern is, they’ve never had a history of keeping larges amounts of cash on the balance sheet and they have high unusual expenses. My question is, if they are showing any success ratio of closing these transactions, where is the money going? I don’t see it on the balance sheet and that concerns me.

  • piyfulfo

    The Law Firm of Klayman & Toskes is also investigating Citigroup’s management of its ASTA Fund (Palisades Collections). The ASTA Fund was managed in similar fashion to that of MAT Five. Many retirees have also been burned by the ASTA Fund, as it too is down about 90%.
    If you are an investor of Citigroup’s MAT or ASTA Funds and wish to explore your legal options, please contact Steven D. Toskes, Esquire or Jahan K. Manasseh, Esquire of Klayman & Toskes, P.A., at 888-997-9956. You may also visit us on the web at http://www.nasd-law.com .

    (deleted the text as it looked like spam)

  • http://www.oldschoolvalue.com Jae Jun

    Jim,

    I haven’t done any further deep analysis on ASFI yet. It’s harder for me since it is a “financial” business but I do like their business model. However the risk I see is they are trying to collect payments in a recession.

    Have you gone through the reports? Any thoughts?

  • http://www.oldschoolvalue.com Jae Jun

    @ piyfulfo,

    Do you have a link to the article? It is rather long….

  • Jim

    @ piyfulfo,

    Agree with Jae. You’re posting was much too long and a link to reference what you are talking about would be appreciated. I’ve been reading their latest 10K and don’t see any reference in regards to what you are talking about.

    @Jae

    All I can say thus far is that the more I read their 10K, the more I like the company and how they are doing things. They are very open in their 10K which makes it really easy to place a value on the business. I’m just concerned why they don’t have a cash balance on the books. I did find out allot about their unusual expenses and I’ll share some of that info with you via email. I don’t want to disclose too much of my findings until I decide if I want to take up a position or not.

  • Jim

    piyfulfo,

    Citigroup’s ASTA fund has nothing to do with Asta Funding, Inc. (ASFI). Two entirely separate things.

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