- XIN pays a solid, steady dividend that is great if you believe the company is sound.
- CTCM pays a healthy 6.5% dividend and could be a good play for investors with Russian expertise.
- ZA is unproven but is also trading at a heavy discount.
When I shop for clothes, I usually follow the same procedure: I drive to a Banana Republic store at an outlet mall, head straight to the sales rack, thumb through the offerings in my size, and ask myself, "Could I rock this item and get away with it?" I'm looking for articles of clothing that meet some basic criteria (i.e. they're inexpensive, fit me, and have a high chance of being tailored the way I like). I'm also looking for clothes that I am excited to own and wear for as long as they hold up in the wash. In other words, when I go clothes shopping, I'm thinking like a value investor. This shopping strategy has served me well over the years but it does require a critical eye. I need to inspect each item of clothing to ensure there are no strange stitching mistakes, discoloration, or stretch marks. I try on every item I am considering and am completely fine with walking out of the store empty-handed should no item appeal to me in the dressing room. My favorite item to discover is one that I believe has found its way to the sales rack as a result of being unfashionable. What better way to be fashion-forward than to be considering styles that haven't caught on yet? Sometimes when I am hunting for new stock ideas, I head to the stock equivalent of the Banana Republic sales rack: Google's (NASDAQ:GOOG) stock screener.
Using Google Finance's stock screener, I create a list of around a hundred or so stocks that fit a set of fairly stringent criteria I set for my filters. Most of these filters are based on financial measurements that Warren Buffett has historically considered important metrics for a company's performance, although I add a few of my own into the mix as well. Most of what turns up are companies that I simple do not care to own (to keep the analogy going, they are sized XXXL or feature multiple cargo pockets). Every once in a while though, a company holds my attention for some reason and I find myself digging into details. The following three companies landed on my radar using this stock-screening method. I thought you might be interested to read about each one of these.
Xinyuan Real Estate (NYSE:XIN) is a Chinese company that develops real estate projects primarily in China. If XIN's financial figures are to be believed, the company is seriously undervalued. As of the writing of this article, the company sports a P/E ratio that is just over 2 (yeah, you read that right) and is trading for roughly a third of book value (yeah, you read that right too). Over the last year and a half, XIN has paid a 5 cent dividend per ADR, which, at current prices, equates to a yield of almost 5%. If I had found this stock on the sales rack of my preferred clothier, I would certainly be trying it on in the dressing room. Meeting the standard of my critical eye is just the first test - understanding why the stock is on the sales rack is the real challenge. Two theories that seem to be sticking around relate to 1) the possibility that the stock is a fraud, and 2) worries about a China housing bubble that will burst at any moment. Other articles have addressed these concerns at length so I won't waste time reiterating too much of what is already written about XIN. Instead, I would like to provide two unique thoughts about the company. During earnings calls, when investors ask Xinyuan management questions related to an unusually deflated stock price, the CFO tends to answer in a way that I find to be direct and honest. While it is easier to get a sense for earnestness by listening to a recording, you can read a transcript of the question-and-answer session of the most recent XIN earnings call to try and decide for yourself how forthright the CFO is. The second thing I wanted to point out is just that it seems likely that part of what might be keeping the stock price down is an intense fear that the company is fraudulent, and that this fear may be providing brave investors an opportunity. I will leave it to you to come to your own conclusion about the company's legitimacy but I will say that when I suspect a stock is trading down because of what I perceive to be undue fear, I think of this as an article of clothing being relegated to the sales rack as a function of being unfashionable. Warren Buffett said, "Be fearful when others are greedy and greedy when others are fearful." To modify that slightly, I might say, "When others are fearful, think about whether or not you should be greedy."
One company that I recently found on the sales rack is a Russian company called CTC Media (NASDAQ:CTCM). Featuring a P/E of around 10, the stock price might be held back by fears related to Russia's current political climate. I have not yet done enough research on this company to have formed a solid opinion about whether or not I would bring it home from the store and put it in my dresser (I find companies from other countries to be difficult to get a feel for), but because I teach piano lessons on YouTube I thought I might be able to provide an interesting perspective about the company, which, in addition to their traditional broadcast model, also maintains an active YouTube channel. When I research companies that have a YouTube presence, the first place I go is to a website called vidstatsx. On this site you can find the CTC Media YouTube channel statistics. YouTube doesn't run ads on every view and, with extensions like AdBlock, the effective return on advertising associated with a YouTube channel is not as high as some people might think. Larger companies may have special deals in place (perhaps they are somehow able to sell custom advertising solutions on their content) but for my own channel, the number I use to calculate ad revenue is about $1.5 per thousand views. Using this number, we can guess that CTC Media's YouTube channel has fetched roughly $150,000 in advertising revenue over its existence. It is important to remember that companies find alternative ways to monetize content and I'm sure that traditional media earnings far outweigh this number but if you decide to dig into this company further, I hope you find the YouTube ad revenue estimate to be helpful. At the time of this writing, the company pays a healthy 6.5% dividend.
Perhaps the cheapest and riskiest of the three dividend payers discussed in this article is a Chinese casual menswear company called Zuoan Fashion (NYSE:ZA). At a P/E around 1.3 and a price to book of 0.2, this company is trading for less than the plain white XXXL t-shirt on its own sales rack. This seems like the type of stock that could fall into the same category as XIN: a Chinese stock which may have been oversold due to fear of fraud. I will leave it to you to determine for yourself if you think Zuoan Fashion is a fraudulent company, but I wanted to point out that ZA recently announced a special dividend of 20 cents per ADR share. Given that the stock price at the time of this writing is just $1.77 per share, a 20 cent dividend amounts to a yield of more than 11%. While the stock is trading ex-dividend at this point, the dividend is worth thinking about for two main reasons. 1) When the company pays out this dividend, I believe the chance that the company is fraudulent decreases. 2) In a year, investors will expect another dividend or other company action to return value to shareholders. Although not stated explicitly, it was implied in the last earnings call that future dividends would be considered. In other words, the dividend could serve to both validate the company (and for that matter, the other companies listed in this article) and pad future return.
I hope this article gives you a few stock ideas and provides an interesting starting point for your own research. In case you were wondering, Banana Republic is owned by The Gap (NYSE:GPS), which isn't on the stock sales rack at this time. Maybe if the price comes down, I'll try it on in its own dressing room.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.