Orient Paper: Why Boring Stocks Beat Hot IPOs

To those investors who were lucky enough to have been allocated shares in the A123 Systems (AONE) IPO at $13.50, congratulations. For those who bought the stock over $20 in the aftermarket, my condolences. The stock peaked at almost $21 and is now trading at $18.76. Thanks to the many readers who sent in their comments on my A123 article. Many readers agree with my investment approach, and of course may others do not.

To clarify once again what I look for in a good investment: I look for high gross margins, growing revenue, low debt, positive cash flow and an attractive valuation (low P/E ratio). Needless to say, I focus on profitable companies only. I focus on industries that are easy to understand, and I deliberately avoid speculating on volatile IPOs or the next potential boom-or-bust technological miracle.

Jim Cramer correctly points out that investors can trade IPOs even if they don't like the company or the fundamentals. As Cramer put it, "they gave away money today." However, this is a very risky game where you really need someone willing to overpay for the stock more than you overpaid for it. If you are fast, sophisticated and experienced, you may do well at this type of trading. Less-sophisticated investors were the ones giving the money away if they strayed into the IPO of Shanda Games (GAME) , which fell 14% Friday, the day of its IPO -- despite being priced at the top of the indicated pricing range.

Some readers suggested that I do not fully understand A123's future potential, its "game-changing technology" or its big contracts. I don't. I also never understood how Sirius XM (SIRI) was going to make money off of its business model. Despite the fact that Sirius XM has had huge contracts, game-changing technology and a lack of true competition, the numbers just never added up. Sirius XM has customer contracts with Budget, Avis, Audi, Aston Martin and others. They also have had talent contracts with Oprah Winfrey, the NFL and Howard Stern. None of these contracts matter if the company doesn't turn a profit, and Sirius is now fighting off bankruptcy.

For companies like Sirius and A123, I ask myself the question: How much revenue does this company need to make before it covers its expenses and generates a profit? The answer is in the billions, and that revenue oftentimes do not materialize.

I continue to believe that there are much safer ways to invest, focusing instead on stocks with a solid track record and strong fundamentals, which happen to be overlooked and underpriced. Orient Paper (OPAI.OB) is not an eye-catching IPO or even in a flashy high tech business, but the company is profitable, growing revenue at double-digit rates, cash flow positive and trades on a P/E of less than 5.

To illustrate the contrast, I picked the most boring stock I could find, which also happens to be one of the best potential overlooked investments. Orient Paper is in the boring business of producing corrugated paper and writing paper. The company has a proven track record for revenue growth, growing by double digits in the last three years, and is on track to continue with double-digit growth this year. The company has only $10 million of debt and has been cash flow positive for the past four years. OPAI recently presented at the Rodman & Renshaw China conference in New York and has hired CCG to handle its investor relations, both of which indicate a focus on attracting institutional investors.

Despite all of this, the company trades at only four times trailing 12 month earnings --- for now. This is a company that does not have any game- changing technology and will not grab headlines like a hot IPO. But it is a stock you can buy cheaply and easily understand its business and fundamentals and sleep well at night owning.

Disclosure: The author holds no position in any of the stocks mentioned above

Comments

[Joseph L. S...:]

There's nothing wrong with snagging the occasional hot IPO, but I call the foundation 2/3 of our portfolios (and have done so ever since I coined the phrase in my first book 20 years ago) BBDP: Basic, Boring, Dull and Profitable...

Sep 29 11:37 AM

[Scooterpod:]

Can you back up your false statements about "Siri going bankrupt"?

You are yet another "insider" who makes almost a slanderous claim with no backup stats. What direct proof and research gives you this outlook? You can claim your knowledge is through "experience" or some other source but it is still opinion if you can't show us why you think that.

Once again trying to lead people in with misleading statements that serve nothing other than to prove your inability to look at the facts and not rely on what you heard or read from some other trashbag blog or "poll".

Sep 29 04:24 PM

[Scooterpod:]

Oh, and if you look to Cramer for any kind of wisdom, you automatically show me that you have little regard for truth in reporting, only manipulation.

Sep 29 04:26 PM

[dead elvis:]

you quote cramer? that all you got isnt it?

is that because he is standing to your left-(as your image is far from centred-) cropped out of the picture putting money in your pocket Rick?

better to quote george kastanza- i am sure he has a better track record or perhaps you would like to ask john stewart his opinon on the matter?

Happy yom kippur

Sep 29 08:06 PM

[dead elvis:]

whats with people today -cant you just leave a comment without tooting your horn-with all your medals exposed? oops excuse me i have to go to Geneva they calling me again about that pesky million dollar prize with that ugly noble peace prize again....................


Since I coined the phrase in my first book 20 years ago

you made mama very very happy son


On Sep 29 11:37 AM Joseph L. Shaefer wrote:

> There's nothing wrong with snagging the occasional hot IPO, but I
> call the foundation 2/3 of our portfolios (and have done so ever
> since I coined the phrase in my first book 20 years ago) BBDP: Basic,
> Boring, Dull and Profitable...

Sep 29 08:11 PM

[ewr:]

An interesting suggestion. As some famous CEO of General Motors ( I think ) once said: " if there are no arguments against (any proposal ), there are no arguments for ". My cursory review produced the following:

net working capital is negative
the stock is already up almost 2000 % ( yes two thousand ) YTD
cash is less than current liabilities ( in other words close to one definition of insolvency )
cash flow per the MRQ cash flow statement is negative
i.e. the company is burning its cash - mostly on capital expenditures

Still the stock may very well go up several times.

Sep 30 07:36 AM

[R A F:]

What a ridiculous comment..."Sirius is now fighting off bankruptcy". Yet another hyped story totally void of any factual data to back up an inflammatory allegation planted with one purpose in mind - to continue the types of short selling attacks and manipulation so often seen by the usual conspirators over the last year. To the author of this piece - Rick Pearson - If you ever want to be viewed as a serous journalist - make a practice of backing up your assertions with substance and material factual data, instead of merely regurgitating the false assumptions of others.

Sep 30 08:11 AM

[butchita:]

This is a weird article. The title seems to lead the reader to believe that he will be talking about hot IPO's and the contrast with a so-calledly "boring" stock like OPAI.OB, yet he incorporates negative discussion of SIRI in the mix. Why is the author singling out SIRI's business model in an article where it doesn't even fit? The comparison to AONE doesn't even make sense. It's like saying banana's and oranges don't taste the same, so buy apples instead. Rick Pearson says that he doesn't understand AONE, and OH, by the way, let him throw in a jab at SIRI while he's at it, even though he has no legitimate data to back the bk claims ( even as duly noted by others in the blog here). The entire article is centered around discussion of IPO's and out of the clear blue sky, a SIRI bash comes creeping in...sounds like an attempted manipulation to me. For all SIRI stock holders who read this, CONSIDER: This guy Rick Pearson is much more of a follower than a leader, (I don't see anyone important following Rick) He sides with Cramer who is a SIRI stock hater. A little dicussion of the obvious (what makes for a good investment) doesn't lend enough credibilty to this author in my view.

Sep 30 09:40 AM

[Joe Synic:]

On Sep 29 11:37 AM Joseph L. Shaefer wrote:

> There's nothing wrong with snagging the occasional hot IPO, but I
> call the foundation 2/3 of our portfolios (and have done so ever
> since I coined the phrase in my first book 20 years ago) BBDP: Basic,
> Boring, Dull and Profitable...

Regarding the article's "writer" and the "Commentator's" yak-yak....I hereby "coin" this phrase - BBDP: Basic, Boring, Dull, and Pathetic!!

Sep 30 10:13 AM

[Sherwyn:]

Rick,

It is obvious that you have an agenda but you're showing your ignorance when you talk about SIRIUS XM "fighting off bankruptcy." You haven't done your homework and really don't deserve to be posting on this blog. People like you are perpetrating a fraud on the investing public.

Sep 30 12:20 PM

[BRUCE E. W.:]

The purpose of this article is deeply in question and has raised some very intelligent counter reactions from investors who are upset with what they perceive as misinformation and misappropriation of media content: see...
seekingalpha.com/artic...
The balance of market forces are impersonal...but not entirely indifferent to persistent insults. The slam wagon was over worked yesterday and your turkey call gobble gobble bankruptcy alarm doesn't have any credibility. I suppose that your form of media capture seizes on every formula opportunity to gain points with your master, but geeze fella...do you really believe that your Turkey will bounce one more time? (Hint: the saying is about dead cats bouncing; not live Turkeys....Turkey!)

Sep 30 01:35 PM

[BRUCE E. W.:]

You must have some kind of contract to fulfill. Why else would you continue to push this misnformation on an unsuspecting public as a headline for days on end. Is it soemthing you ate that keeps repeating on you. Did you hear the one about the SIRI space shuttle that was secretly launched in August. That's right! Sirius radio had a contract with NASA, or so I heard it was them...but it was from an offshore secret location and funded, I am told, by a major conglomerate of aligned superpowers. That's right; it is actually going to go into operation sometime next month and will dominate the entire coordinted grid if intercontinental communications. Everything will be free! That's why, I was told by a reliable source, the powers that BE on the markets want to try to undermine SIRI stock and keep it from the general public. They are gradually buying it all up while scaring potential investors away. They simpl,y wish to domonate it all and turn the entire program into a pay per unit time share. That's right! Time and Communications were mathematically proven to be the same thing by an advanced team of Chicago University Economics programers who are slated to win the Nobel Prize for their work in 2012 for their work (but that's a secret...it's already paid for though, so you can trust me on that...). yIp! Once they had it all quatified and pronounced it in total equilibrium, they showed the Hedge Fund guys in a big secret meeting (well it one of those public secret meetings...) how to slice and dice it into derivitives and sell ownership certificates to all their friends. After that they will be able to basicall own the rights for you to even breath into an iPhone but they will also be able to charge "per unit capitaliztion charges" on every decimal that gets produced on global airways,,,totally patent agreed upon (yesterday by two guys in Washington..just a handshake, but its legally binding...) Well Anyway, the whole space thing and all will be revealed in the next couple of months...and you can all say you heard it here first....on Cramer's Friendly Trading AFFILIATES. I know its hard to believe, but trust me...you better buy up ALL of the stocks you can get your hands on while the gettin is good! Sell the Farm: Mortgage the House (...no; on second thought stay away from the mortgages...) sell everything you own and buy SIRI stock NOW!!!!! TRUST ME...I WOULDN'T LIE TO YOU ALL!

Sep 30 03:04 PM

[WhiteTiger:]

Hello,
Please explain. You mention that "cash flow per the MRQ cash flow statement is negative."

I see a positive cashflow figure of $5.08 million.

I also see your point regarding OPAI cash position, but don't necessarily agree with your assessment of insolvency. There current assets are still more than current liabilities.

Here is a statement right out of the 10Q:

"We had net working capital of $5,387,582 at June 30, 2009, an increase of $6,553,377 over a net working capital deficit of ($1,165,795) at December 31, 2008"

Can you please provide me with your net-working calculation formula? Perhaps you are reading an old filing?

Thanks.
On Sep 30 07:36 AM ewr wrote:

> An interesting suggestion. As some famous CEO of General Motors (
> I think ) once said: " if there are no arguments against (any proposal
> ), there are no arguments for ". My cursory review produced the following:
>
>
> net working capital is negative
> the stock is already up almost 2000 % ( yes two thousand ) YTD<br/>cash
> is less than current liabilities ( in other words close to one definition
> of insolvency )
> cash flow per the MRQ cash flow statement is negative
> i.e. the company is burning its cash - mostly on capital expenditures
>
>
> Still the stock may very well go up several times.

Sep 30 04:25 PM

[Hawk180:]

I suppose my method is working after all. I read the articles, ignore them for the most part, check the facts and put my dollars where they will make the most.

I also make decisions on whether I will sell short or hold long on factual data. It's not time to sell SIRI yet and may not be for another 18 months or longer.

Sep 30 07:42 PM

[ewr:]

good question - it is very easy to misread information on-line.
With great trepidation I have tried to recreate the path from where I found this info.

if you go to opai.ob under yahoo finance and check the cash flow statement, quarterly data, I see a change in cash of (721), meaning a decrease in cash, which I have called "negative".

re net working capital: in order for net working capital to be positive, current assets must be greater than total liabilities.
i.e. current asset - total liabilities = net working capital
This is a rather conservative approach but provides the margin of safety that B. Graham was suggesting. Again, same source as above, balance sheet, quarterly data, 30-june -09 column.

the real problem I have with this investment is that it seems too late. I am exploring ways of buying chinese small caps otc. before they have some huge run up.

On Sep 30 04:25 PM WhiteTiger wrote:

> Hello,
> Please explain. You mention that "cash flow per the MRQ cash flow
> statement is negative."
>
> I see a positive cashflow figure of $5.08 million.
>
> I also see your point regarding OPAI cash position, but don't necessarily
> agree with your assessment of insolvency. There current assets are
> still more than current liabilities.
>
> Here is a statement right out of the 10Q:
>
> "We had net working capital of $5,387,582 at June 30, 2009, an increase
> of $6,553,377 over a net working capital deficit of ($1,165,795)
> at December 31, 2008"
>
> Can you please provide me with your net-working calculation formula?
> Perhaps you are reading an old filing?
>
> Thanks.
> On Sep 30 07:36 AM ewr wrote:

Oct 01 11:19 PM

[SouthernBea...:]

This article is is a case of totally irresponsible journalism....looks like you just make this stuff up off the top of your head. More and more companies are starting to Sue you people that write untrue, misleading, slanderous articles..........keep this up and I'm sure you'll be included, as you should.

Oct 03 04:45 PM

[SouthernBea...:]

Great Blog Bruce, FYI...I have also heard that news and that Siri is close to taking over all Communications for Earth and Mars. Readers, keep reading Blogs by Bruce......he is Way more accurate in his reporting than Pearson, Cramer, The Street (that are doing so bad they were dropped from the Russel 2000) and The M. Fool. Possibly, these SO CALLED Journalist may someday go back to Journalism School and learn the meaning of Truthful Journalism.


On Sep 30 03:04 PM BRUCE E. W. wrote:

> You must have some kind of contract to fulfill. Why else would you
> continue to push this misnformation on an unsuspecting public as
> a headline for days on end. Is it soemthing you ate that keeps repeating
> on you. Did you hear the one about the SIRI space shuttle that was
> secretly launched in August. That's right! Sirius radio had a contract
> with NASA, or so I heard it was them...but it was from an offshore
> secret location and funded, I am told, by a major conglomerate of
> aligned superpowers. That's right; it is actually going to go into
> operation sometime next month and will dominate the entire coordinted
> grid if intercontinental communications. Everything will be free!
> That's why, I was told by a reliable source, the powers that BE on
> the markets want to try to undermine SIRI stock and keep it from
> the general public. They are gradually buying it all up while scaring
> potential investors away. They simpl,y wish to domonate it all and
> turn the entire program into a pay per unit time share. That's right!
> Time and Communications were mathematically proven to be the same
> thing by an advanced team of Chicago University Economics programers
> who are slated to win the Nobel Prize for their work in 2012 for
> their work (but that's a secret...it's already paid for though, so
> you can trust me on that...). yIp! Once they had it all quatified
> and pronounced it in total equilibrium, they showed the Hedge Fund
> guys in a big secret meeting (well it one of those public secret
> meetings...) how to slice and dice it into derivitives and sell ownership
> certificates to all their friends. After that they will be able to
> basicall own the rights for you to even breath into an iPhone but
> they will also be able to charge "per unit capitaliztion charges"
> on every decimal that gets produced on global airways,,,totally patent
> agreed upon (yesterday by two guys in Washington..just a handshake,
> but its legally binding...) Well Anyway, the whole space thing and
> all will be revealed in the next couple of months...and you can all
> say you heard it here first....on Cramer's Friendly Trading AFFILIATES.
> I know its hard to believe, but trust me...you better buy up ALL
> of the stocks you can get your hands on while the gettin is good!
> Sell the Farm: Mortgage the House (...no; on second thought stay
> away from the mortgages...) sell everything you own and buy SIRI
> stock NOW!!!!! TRUST ME...I WOULDN'T LIE TO YOU ALL!

Oct 03 05:05 PM

[JPearce:]

Bruce
Where are you getting this information. I read two week ago from a blog where Sirius was attempting to get in the Chineese Automobile market. Is this all Hogwash or is this true facts. Im long on Siri.
Im just looking for the truth. I wouldnt trust Cramer as far as I could throw the "Jerk ". I tend to listen RAF he seems to have his facts strait.
Thanks Jim

Oct 03 11:55 PM