Complete Growth Investor

KSW, ePlus Look Like Bargains

Paul,

I was thinking about that yesteday as well, the risk/reward ratio. Indeed if the stock is worth maybe $3.15 in the worst case, the risk reward ratio is still over 3 based on what I really think it's worth. I'm not trying to know the company better than management, I believe it's a fallacy that you can really do so, I want to know everything I can from an outside perspective.

Cash is cash until they starting burning it, which is another risk in an "earnings collapse" scenario. When looking at R/R, the entire downside case must be considered. So if I say to myself "ok, what else?" in the case of an earnings collapse that might be cash burn. See TRID, which I mentioned above, for this scenario.

While these are not "probable" scenarios, they cannot be glossed over, not least of all for a small company without recurring revenues or a wide moat.

Your analysis, for the most part, is right on though. The investment is no doubt a smart one at these prices.

-Jeff

KSW, ePlus Look Like Bargains

Dave,

I figured as much, that's why I mentioned my uncertainty. Thanks for the comment, I appreciate it.


Paul,

Good assessment, and I tend to agree. I am already very impressed based on the numbers and reading I've done so far. I just want to be sure.

I'm not worried about a stoppage of growth, however. What I'm worried about is an earnings collapse. I understand that the next year and a half, maybe two are pretty much covered by the current backlog of projects. I'm also trying to understand what could possibly happen to that backlog. As I said above, if the earnings are stable, not even growing, the margin of safety is a monster. If the earnings are subject to a collapse (very small company, not a recurring revenue business model i.e. they must always be receving new projects)), the margin of saftey is current cash plus future cash on already backlogged items that will be completed in the next few years. If we assume they do generate 2.2mm in cash this year, that leaves them with $20.2mm, or ~$3.35/ share.

My point is, downside risk is there in that if they lose new revenues, prices keep rising without the ability to pass them through, or there is a blip in their operations, there won't be much to add to existing cash for a full valuation.

While I'm not saying this is likely, all risks must be considered to find a true margin of safety.

Any other comments or thoughts I would appreciate.