Alan Brochstein

23 Stocks to Consider During Global Deleveraging

Reviewing the comments, I want to clarify the exact risk to AVT from KEM (and maybe down the road VSH, but let's not go there right now). In the article, I pointed out that they have a lot of inventory on the books. I am not sure how much of it is KEM, but they are a significant customer. The inventory could be difficult to move in a weak economy in and of itself, but perhaps even more challenging if KEM falters. The warranty becomes rather worthless, for instance.

When I mentioned the A/R, this had nothing to do with KEM. As a distributor, AVT has extended significant credit throughout its customer base. In a deep recession, the collectability will be challenging.

I mention these points because AVT made the list but doesn't deserve consideration in my opinion. The balance sheet is tainted, again in my view.

23 Stocks to Consider During Global Deleveraging

William, thanks for catching that. The stock in the table is actually PSA, Class A. It is redeemable at 24.50 in 2010. There are some other features as well. Sorry I missed that!

23 Stocks to Consider During Global Deleveraging

You raise some great points and have obviously done a lot of work on this. I hope that it turns out well for you and the company. There are so many crazy valuations now, and perhaps KEM is one.

On the AVT connection, I think that I did err in the way I approached KEM from the AR angle. Thanks for pointing that out. Giving it further thought, I would suggest still to approach AVT cautiously. It has extended a lot of credit with respect to its total equity value (perhaps not so much relative to sales). In a slowdown such as we are experiencing now and in conjunction with a severe credit crunch, it could be vulnerable to collection issues. Historically, I believe that suppliers have price-protected their distributors, and this is where I believe that the exposure to KEM (and VSH) could bite AVT. In any event, AVT has a high amount of inventory relative to equity as well. The point I was trying to make is that there are strong balance sheets and there are bullet-proof balance sheets. While AVT seems to have a strong balance sheet (as represented by making my screen's cut), I tend to think that the metrics don't capture the reality. Thanks again for your comments.

23 Stocks to Consider During Global Deleveraging

After replying to you, I went back and reviewed the transcript (including your line of questioning). I ask you this: What happens if Unicredito fails to deliver by April of 2009? How likely is the market to worry about it (you should check out the chart for that Italian bank). I am not "calling for bankruptcy", just highlighting a serious situation. Recall, I said "possibly", and it wasn't my thesis in writing the original article. The point of this article was to identify systematically companies that were appropriate to consider during a very tough economic challenge. My awareness of some of the balance sheet risks to one of the companies that made the cut forced me to assess the exposure to KEM (and VSH). I don't know if KEM will actually go bankrupt or VSH eventually, but I do believe that the market will be very concerned. Maybe KEM is a fantastic investment now - who knows. I wouldn't "bank" on it, though, as the company is likely toast if Unicredito doesn't deliver on its commitment to refinance the remaining short-term debt. Look up the definition of bankruptcy - being able to meet your liabilities and taking a legal action to remedy the situation. On paper, the company may have a lot of value, it's just a question of who ends up with it if they are unable to meet their short-term obligations in 2009. In this environment, you would be foolish not to consider an investment in KEM as very high risk (though possibly extremely high reward).

23 Stocks to Consider During Global Deleveraging

Babysamalot, that's a lot of interesting information, but here is my question: Did they address their short-term debt? Do they have the ability to refinance it? Anytime I see a company with negative cashflow from operations, low margins, short-term debt and a stock price below $1, I assume that it is a bankruptcy candidate. I could be wrong...

23 Stocks to Consider During Global Deleveraging

Tom, I erred in lumping them together when I didn't mean to equate them at all. KEM sure does look like an imminent candidate. I expect that if this downturn persists into 2010, VSH will face tremendous pressures. I believe that AVX is much cheaper and safer. Note the pre-announcement - sales are now in decline year-over-year. I don't know how well you know this company, but I know them fairly well and don't trust them. There are too many cheaper and better companies out there in my opinion.

23 Stocks to Consider During Global Deleveraging

Thanks, Neil. I appreciate your words of encouragement. I would love to always be right, but I know that goal isn't attainable. I aspire to hopefully provoke a meaningful discussion by sharing my ideas. I often hear back from people directly by phone or email who have a lot more insight into a situation than I do. I should remember the adage "if you can't stand the heat, stay out of the kitchen", as I do often get a bit frustrated with the way people can jump on me with so little provocation.

23 Stocks to Consider During Global Deleveraging

Before you call someone incompetent or fraudulent and purporting to know something different than the way I present it, again, I suggest that you take a more civil approach. You aren't incompetent or fraudulent in my opinion, but wrong. I love your point-to-point analysis. Oh, by the way, what happens when sales plunge, you have a lot of inventory (even if less than you used to have relative to sales) and the capital markets aren't there for you but you have to roll over your debt?

Frankly, it is irrelevant what their position was in 2005 as sales were growing rapidly. Do you even know this company? Have you ever heard them explain away issues? Are you aware how opaque they have historically been? I used to have to beat on Grubb to get information that shareholders deserved to have at the time of an earnings release: Cashflow and balance sheet metrics.

I am not sure why you have such a bug up your posterior. I made a point that AVT is at risk due to big exposure to KEM and to VSH. I have no position in VSH, but I certainly don't want to throw ideas out there (AVT) and not share my deep concerns about their customers. Perhaps you and I don't look at things the same way, but I am neither fraudulent nor incompetent. I continue to believe that in a sustained downturn (which is kind of what my article is addressing - risks), VSH could end up in bankruptcy (1 or 2 years out). Again, who expected KEM to be in these dire straits? Just two years ago, that company had $500mm in equity ($400mm tangible) and $100mm in debt (but $168mm in cash). In any event, I believe that VSH could actually lose money in the coming quarters as they face extremely sharp pricing declines. I believe that the market won't allow them to issue debt or equity. They recently paid off their convert. If I were going to suggest that someone invest or to invest myself in betting on their failure (which I am not), I would make sure that I am comfortable with the covenants.

So, if my use of the word "possibly" falls outside reasonable interpretation of what could happen to a company with high inventory, high AR, limited financial resources during a credit crunch and earnings that could head south quickly, I apologize. I do stand by my view that AVT is likely to be viewed negatively for its exposure certainly to KEM and most probably to VSH. AVX on the passives side and so many other semi companies on the Siliconix business have far superior capital structures that whether or not VSH survives this crisis, it is going to be very painful for the company's results.

23 Stocks to Consider During Global Deleveraging

NVDA has way too much inventory, but I have observed over time that when it peaks, that is the time to buy it, even if it is quite high. It appears that they got caught off-guard last quarter, when sales fell year-over-year by 5% and very sharply sequentially. Inventory increased sequentially by $12mm and by 56% compared to a year ago. It will be interesting in a few weeks to see if DSI are at a peak level. Thanks for your product comments - I plan to keep my eye on this one...

23 Stocks to Consider During Global Deleveraging

I should clarify what the word possibly means as well I guess. Perhaps I should have said KEM almost certainly and VSH "possibly", which means that there is a chance (10-30% let's say). I stand by my comments that AVX could benefit and to be careful with AVT (and ARW) with respect to their large exposure to KEM and VSH.

23 Stocks to Consider During Global Deleveraging

I do review my articles and never have claimed perfection. I truly regret not the article but rather my views from May. I gave up being a bear at the exact wrong time. I get it right more often than not, but I get it wrong too. You have the easy job of being the Monday morning quarterback, and, reviewing your comments, you do it well.

I recently pegged gold as a major sell, suggested healthcare reits might get pummelled, and pointed out a major pricing discrepancy for a bond ETF. It's not necessarily the conclusions, but the thought that goes into them that count. Rather than focusing so much time on criticizing, as you seem to do, why don't you add something to the discussion.

Basehitz, sorry to waste your time. While you are correct that KEM is clearly headed for bankruptcy, it is less clear for VSH. I suggest that you dig a little deeper and not be so quick to jump on others. You might have rather asked me to justify my position. Then, I would have told you that I have followed this industry closely for 8 years and I never would have expected KEM, which had a pristine balance sheet but a flawed manufacturing strategy, to ever go bankrupt. Then, I would tell you that VSH has gargantuan inventory and AR. Yes they have cash, and they aren't in imminent danger, but they have a lot of debt and will have problems rolling it over. The company lacks future leadership as well.