On July 18th, the Oceanstone Fund announced that its founding manager James Wang had passed away. I would like to start this article by expressing my deepest condolences to his family, friends, and colleagues during this time. His investment track record running the fund is exceptional, and many will wonder whether with additional time, he could have taken a place among the investing greats.
The announcement also indicated that the fund will be closing and investors in it will receive their money back. This is an unfortunate turn of events for all, as it may be difficult to replace that quality of management.
The fund's last update included the positions in ITT Technical Institute (ESI), JAKKS Pacific (JAKK) and Rite Aid (RAD). I have profiled these positions of the fund previously in my articles here (for JAKKS) and here (for ESI and RAD).
The last update also included positions in CNOOC (CEO), Flextronics (FLEX), and Corinthian Colleges (COCO).
Corinthian Colleges fits with the "very cheap stocks" theme of the fund. Bad news has followed the company, as regulators have cracked down on for-profit education. The company is selling 85 campuses and closing 12 others, and is now essentially a liquidation play. I went through the company's most recent balance sheet, and its value in liquidation is negative under the most conservative assumptions. I took the 196.5 million in current assets and subtracted the 73.8 million in prepaids, which are unlikely to have value in a liquidation. Subtracting off the company's $429.1 million in liabilities, excluding deferred taxes, results in a value of negative $306.1 million. Even if all of the company's property, plant and equipment is worth its book value and it recovers the prepaids, the company would still have a negative value. This company would require positive news flow from the real estate portion of the liquidation to have any value for common stockholders, but it is trading so cheaply, it is a bit of a lottery ticket speculative purchase at these prices. There is certainly no margin of safety here.
The fund's COCO position fits with its ESI position, as ESI is also a for-profit education company, albeit a slightly healthier one. ESI has recently retreated once again, and is now trading at a very low P/E and P/B. However, the company has existential risk from its private student loan guarantees, and has recently sold and leased back real estate to raise money.
Flextronics is a contract manufacturer, and was profiled here by Helix Investment Research. The profile is currently available only to Seeking Alpha Pro subscribers. The company generates huge operating cash flows, so if you are comfortable its capital spending is truly growth based, the company is extremely cheap. Although the company trades at a low multiple of operating cash flows, investors are avoiding it due to the China connection, as well as tough competition in the industry from competitors such as Foxconn. However, Flextronics is an American company which is unlikely to be affected by fraud concerns, and its diversified international manufacturing presence should insulate it from wage increases in China. As a low-multiple company in an out-of-favor industry, it is a perfect example of the type of company the Oceanstone Fund made its reputation buying.
CNOOC is a large Chinese oil and gas company with a sustainable competitive advantage from regulation. The company is allowed to back in to all offshore developments in China, which gives it all the rewards and none of the risks of exploration. The company's stock has been punished, as its acquisition of Canada's Nexen has not turned out as planned, and the company recently fired Nexen's previous chief executive. Additionally, the company's shares have been punished, as the Chinese government has been investigating the company's oil majors. However, the major arrests have been of officials in the other two state-owned petroleum giants, CNPC and PetroChina. While CNOOC shares have declined in sympathy, it has not been affected in the same way as its larger competitors. This should give it an advantage when dealing with the Chinese government in the future, especially if it becomes perceived as the "good" oil company within the countries' halls of power. In any event, the company's P/E of around 8 and greater than 4% dividend yield provides a margin of safety to an investment in CNOOC, as even if it is affected, its valuation already takes that downside into account. That leaves more upside than downside to an investment in its shares, in my opinion, as the market has already priced into the shares the likely extent of any bad news. Seeking Alpha author Stephen Simpson has a profile of CNOOC here.
The Oceanstone fund was a wonderful opportunity both for investors to have James Wang manage their money and to learn from his holdings. His passing is unfortunate, and once again, I wish his family all the best.
Disclosure: The author is long ESI. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.
