Monthly Performance Review - December 2016

by: Jan Svenda

I believe in transparency when doing equity research, therefore every month I publish performance of every ticker that I wrote an article on alongside the initial thesis.

Through this I want to build a strong habit of looking back at my own reasoning. The review will be heavily skewed to stocks where my thesis might be wrong.

Last month of 2016 proved to be a mixed bag for my long positions. LGL continues to hold, but SGMA tanked further after a disappointing quarter and WILC stayed put.

Dear Followers/Readers,

First of all, I would like to thank you for your continued interest in my work and I hope you are getting value of out my research!

In order to increase the latter in August I introduced a monthly review of all of the tickers that I am actively covering alongside my initial thoughts about the stocks. I think this can be beneficial for the following reasons:

  • Learning exercise - I will primarily focus on stocks where my initial thesis was wrong. I will try to understand why, how to prevent this from happening in the future and what should one do about this fact.

  • Increased frequency of thesis updates - This will be beneficial for people that are following specific tickers and might be interested in the latest developments that are not necessarily asking for a full-blown update.

  • Creating a database - It is always fun, to look back and either laugh about failures or cheer about winners.

I am doing so through the following simple table, which I publish at the end of each month.

Notes: The price at the origin is the opening price on the date of the first publication and the current price is the closing price on last trading day of the month. The original thesis that is labeled Neutral (NASDAQ:LONG) is a thesis where I have a positive view on the stock, but for whatever reason I do not believe it the right time to buy. The same goes for Neutral (Short). I do not judge neutral ratings unless the share price movement is significant and I missed an opportunity to be on the right side of the trade. This is slightly subjective. Feel free to address any neutral rating that you believe I got wrong.

I also add two indices that can be used to 'benchmark' the performance of the covered stocks. I chose Russell 2000 due to its small-cap bias and Russell 3000 in order to track the overall market.

During the reviews I will not be talking about every stock, but rather ones that I started to cover in the past month, the ones I am wrong about, or that are undergoing significant developments.

December Highlights

  • Sigmatron (NASDAQ:SGMA)

The biggest negative point last month was the release of 2nd quarter results of this semiconductor and the subsequent management commentary which pressured the stock further. The company again saw revenue declines and will likely be in a loss in the next quarter.

While the management noted that they expect to see increased demand in the second half of FY2017, this is not enough for me to remain as bullish as I was previously. I believe that when I did my initial analysis I did not account enough for the revenue situation of the company. I likely recommended the stock when it was at the top of its short-term 'cycle' and now it will take a significant amount of time until the company will regain some cash flow.

I also did not account properly for the business model which is weak (lacking a solution to the revenue problem) and is unlikely to change anytime soon unless there is going to be a divestment or a M&A event.

That being said I will keep a small position in the stock should the long-term prospects get brighter. You can find a more in-depth take on this stock in my recent update.

  • Amcon Distributing (NYSEMKT:DIT)

This food distributing company has seen a slightly 'surprising' run-up in its share price. I was surprised given the lack of fundamental news. The company did announce the continuation of its share buyback program but on the other hand the business is feeling the drag from the retail segment of health food stores which could face further challenges and possibly even drag the whole company in a loss. This could then offset the buybacks.

The management did get rid of the second class of shares last year which helped the operations a bit, but the CEO's salary issue is still ongoing and given the significant entrenchment of the board the alignment of the management and shareholders is uncertain.

That being said if one ignores the management the recent share price action could be reasonable as a similar distributing company (NASDAQ:CORE) is trading at vastly different multiples but one should question the sustainability of such price action if the underlying operations do not change in the next few quarters.

This OTC legal newspaper/printing business is an interesting niche business with solid real estate value, balance sheet and okay operations. It is trading near NCAV while the management has been known to distribute a significant amount of cash flow to shareholders via dividends.

On the day I published the article for the Microcap Review, the management announced a further $40 special dividend, confirming part of my thesis. While the operations might not be positioned extremely well in the long-term future, the recent results do not suggest that they should face significant losses in the near-term and thus investors could benefit from the previous points.

  • Emerson Radio (NYSEMKT:MSN)

The management of this cash net-net announced an intention of starting a buyback program. While this lifted the share price, the company will actually have to buy back some shares for this to have the fundamental effect. I believe that the management remains disincentivized to redistribute any value to the minor shareholders and therefore the stock should be approached with a dose of skepticism (only a minor statistical position might be warranted).

  • AG&E Holdings (AGNU)

This casino servicing company voluntarily delisted itself in order to save costs. On the 1st of December it successfully consummated a merger with a similar company. It seems that delisting actually had a positive effect on the share price as the stock rebounded from the lows of the public market. I will update the status once the new entity reports its first financial results since delisting.

  • Entertainment Gaming Asia (NYSEMKT:EGT)

This cash net-net is now in an interesting position as it further culled its operations. In December they announced that they sold the remaining operations and will keep on developing a new app and search for other opportunities. The company is now even more of a cash shell than before. It will be interesting to see how this cash will be used.

Last month I also wrote about a Colombian index (NYSEARCA:GXG) which I believe suffers from two distinctive risks that are not necessarily expected in such type of an ETF. Namely, it is an overexposure to a group of interlocking companies that represent half of the index and the under-representation of several other companies due to their ownership structure.

What would normally follow would be a table of stocks that I am not going to cover actively anymore due to the fact that the thesis played out or I was wrong and I failed to catch or understand the investment opportunity that might have been in the stock. I do not have any such stock to 'discontinue'.

Once again, thank you for reading my research!



P.S. Please do let me know if you think that the way I present the review is missing something.

Disclosure: I am/we are long SGMA, WILC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have 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.