Seeking Alpha
Special situations, contrarian, hedge fund manager
Profile| Send Message|
( followers)  
Anyone who actively and soundly invests (or even speculates) to build wealth has heard in passing: “The stock market is just like gambling.” Initially, it is easy to defensively respond to statements with some resentment, but the reality is, there are many similarities. Anything can happen, as we can see. Unexpected buyouts, miracle turnarounds, indictments of fraud coming out of nowhere – and those all play into the gambling game of the stock market. Conversely, some sports gamblers or casino gamblers will actually claim that they can research the field and find hidden value the same way that investors claim they can do the same.

I have found, however, that what separates an investor from a gambler – whether it be the stock market or a sports game – is that the investor not only makes educated decisions with sound rationale, but also has an above average success rate in coming out on top (whether it be finding a winner, cutting losers before they become total wipe outs, etc.). More importantly, the investor will take the proceeds from a win and then promptly re-invest in another position, rather than spending the money. Sports and financial ‘gamblers’ alike will brag about their wins, take all of the money from the wins and spend it. Short and simple, no wealth is built as all gains are disbursed out and losses, which do happen, way hard on the total performance.

My point is that I consider myself an investor and on the heels of the $4.25 buy out offer on Inforte (INFT), I am taking my gains and re-investing. With the markets at all time highs, everything seems expensive, and it is hard to find value. I hate to sound fearful or bearish, but the comments from Alan Greenspan about a strong chance of us hitting recession, the recent housing data announcement making an interest rate cut unlikely, and seeing margin debt rise to levels higher than just before the 2001 market down-turn have me a little concerned about lofty valuations. Regardless, rather than sacrificing my gains to consumerism, here is the hand I will be playing next.

First, oldies but goodies:

1. Seaboard Corporation (NYSEMKT:SEB)

Seaboard has had an amazing run the past several months, doubling from its Fall, 2006 lows. Back then, this one was a no-brainer, but now take a little more resolve. Seaboard has seen strong growth in its containerized cargo shipping division the past couple of years and there is no doubt that this sector has been hot. Seaboard continues to make strong capital investments in this unit and continues to maintain the efficacy of its other business lines. Off nearly 18% from its all-time high, I felt this was a good entry point to add to my position. At the close of trading on May 24, 2007, Seaboard was trading at less than 11x trailing earnings, 2.1x book value, and at less than 1.9x forward 12 months book value. An owner-friendly investment that retains much of their cash flow to fund their 20% return on equity business. I added to my position at $2,235 and I have a price target of $2,700-$2,900 per share.

2. Ash Grove Cement (OTCPK:ASHG)

Yes, this company trades on the Pink Sheets, which I know nobody really likes, but they are the 5th largest cement company in the USA and the largest American owned cement company in the country. Ash Grove Cement has committed $190M to increase capacity in its Arkansas cement plant by 70% and $250M to build only the 2nd cement plant in the state of Nevada. Ash Grove will also commit another $60M or so in 2007 to expand their cement capacity. I feel strongly that being the largest American owned cement plant will be critical in the future as cement demand increases not only domestically, but worldwide. With the growth of cement internationally expected to outpace growth in the USA over the coming years, I believe many of the international players will invest in foreign production and capacity. Of course, I would, too, but this puts the largest American player in a good position, and with the capacity, to become a more important supplier to meet the USA’s substantial domestic need. Granted, I am not the cement company expert, but I do believe that the domestic vs. foreign demand issue has been somewhat overlooked. I first started my position in the Summer, 2005 at $160 per share and since then, have seen the stock rise $47% and seen the annual dividend increase by 10%. Going back further, the stock has done even better in terms of raising the dividend and providing appreciation to its owners. With the spread at $235 x $269, I have an order in to buy at $236. However, with the stock so thinly traded, I am not expecting a quick fill. Historically, I have watched the spread widen around dividend time – next ex-date is June 6, 2007 – and do expect offer price to come down post-dividend. Unfortunately, I have found on this one that if you want in, sometimes you just have to buy at the ask. It’s no fun, but historically, I am glad I have done so. I do believe that upside exists to the $300-$320 range, but especially since the company does not announce financial results and is so thinly traded, patience is certainly a virtue.

3. Wabash National (NYSE:WNC)

One of my losers thus far, but there is value here. It will likely take several months for Wabash to see results show up in the stock price, but I believe it will happen. The stock is likely trading towards the lower end of its range and should be buoyed by the company’s buy back program and some big purchases by 14% holder and heralded value/contrarian/cyclical investor, Tontine Capital Partners. The limited downside from here inclines me to add more to my position - but I will wait a little longer as the stock is up 2.8% today to $14.58 in relatively light volume. I have a target of $19-$23 and I expect Wabash to hit that in the next 12-18 months as the market for their products turns around in late 2007/early 2008, they show stronger margins in the face of growth due to their new ERP system, and see the nearly 4M shares short be forced to cover. In the meantime, this might be a long ride as the general sentiment about the industry is overwhelming negative.

New finds include:

1. Sycamore Networks (OTCQB:SCMR)

This has been a storied stock its entire life on the NASDAQ. Unfortunately, it has not been a good story for most investors. The company makes networking hardware and equipment, which certainly is not very exciting and has much negativity surrounding it. Sycamore is currently delinquent in its SEC filings due to the notorious options back-dating situation. Such scandal is never a good thing from the appearance of things, but will have no cash impacts on their books. Sycamore currently has about $915M in cash, or about $3.28 per share. That is about 90% of their current market cap of just over $1B. More importantly, Sycamore has shown signs of life and reported a nearly 100% increase in sales, primarily due to an acquisition. I like the cash protecting from downside risk, signs of sales growth, and one of their core products serving the MSO/Cable companies, especially as it pertains to the new digital voice/digital phone service that runs over your cable infrastructure. Comcast, Charter, Cablevision, and Time Warner have all reported strong growth in the digital telephony arena and will need hardware to handle the traffic. Granted, Sycamore competes in a competitive landscape with companies like Cisco in the mix, but I am in at $3.68 with a price target of $4.75-$5.75 in the next 9-12 months – perhaps on an acquisition.

2. Gencor Industries, Inc. (GNCI.OB)

A small manufacturer of construction equipment and machinery, particularly that serves the highway-construction industry. Gencor also makes equipment that has exposure to the environmental control and synthetic fuel arenas. Gencor is a partner in a joint-venture and receives royalty payments, albeit not material, but growing, for production of synthetic fuels. Gencor is trading near its 52-week low as it enters the historically slower 3rd and 4th quarters. The company is small with only $73M in sales. Gencor has no debt, $52M of cash and cash equivalents, which is about 60% of its market cap, and EV/EBITDA is 1.7. Compare the latter ratio to competitors, such as Astec Industries and its 10.8 EV/EBITDA, and there appears to be some value. Individual investor Lloyd Miller III has bought 72,500 shares since March 22, 2007 and now owns nearly 907,000 shares, which is roughly 10% of the company. A strange ownership structure with Class B shares, small float, and thinly traded status makes it hard to determine where this one could go. $9.05 is a good entry point and I think that Gencor should be trading closer to $16-$18, but its market dynamics may not allow that.

3. Thomas Group, Inc. (TGIS)

Thomas Group is a very reputable consulting firm that has no debt, pays a dividend yield of nearly 4%, and is cash flow positive. Ratios, for the most part, show that Thomas Group is not cheap: 2x sales, 6x book value, 11x levered free cash flow. However, this company has a strong track record of success and its P/E is far lower than its peer companies. Only 3M of its 10.8M shares are in the public float, so the stock has the tendency to be volatile – in either direction, of course. The stock is trading a little under $11.00 which I feel is a good entry point. It recently traded as low as $9 in early May, 2007 and traded there in June, 2006 and August, 2006 – and bounced quickly up each time. We have seen a double-top at around $16 twice in 2006, but could we have the triple bottom at $9? Stock stands to get back to $16 and perhaps higher if they continue to show good numbers, but first will need to break through the $12 resistance. This one is more of a technical play than a fundamentals play, but it is likely not going any lower than $9-$10 and has a very strong chance, with a lot of rationale behind it, to move up to $15-$16. Enter under $11 and price target is $15.

Simplistically, I am looking for value to hedge against the lofty valuations we are currently seeing, and I am strengthening my positions in those for which the fundamental reasons why I bought in the first place have not changed.

Disclosure: Author holds position in the above-mentioned securities.

Source: The Next Step After Taking Profits: Six Stocks For Reinvesting