Monthly Performance Review - June 2017

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 is not working.

This month, in general, was not overly negative as several long ideas continued to perform well while short ideas were largely unchanged.

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 labelled Neutral (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.

June Highlights;

Not much has changed since last month regarding this pet insurer apart from the slightly increased share price. The valuation continues to be dubious (investors are paying 14x book value for an insurer which is yet to prove its capability in creating free cash flow). This is especially true given the lack of fundamental news. They are still nowhere nearer their targets than they were last quarter yet the share price continues to climb. The CEO is certainly happy as he can continue to sell his stock on a daily basis at higher prices.

  • World Acceptance (WRLD)

WRLD did not move much since the breakout after the quarterly results. This is despite the news that they filed their 10-K late due to the following reason.

‘World Acceptance Corporation (the “Company”) is currently unable to file, without unreasonable effort and expense, its Annual Report on Form 10-K for the fiscal year ended March 31, 2017 (the “Form 10-K”). The Company is conducting an internal investigation of its operations in Mexico, focusing on the legality under the U.S. Foreign Corrupt Practices Act (OTCPK:FCPA) and certain local laws of certain payments related to loans, the maintenance of the Company’s books and records associated with such payments, and the treatment of compensation matters for certain employees.’

They did end up filing their 10K on the 29th of June with new risk factor regarding FCPA. The company is now ‘exposed’ to a possible violation of the Act and thus could face fines or lawsuits. This is certainly an interesting development and could bring forward risks that were previously unforeseen.

On the fundamental side, the 10K changed little given the fact that the company already filed the results in May. The most important piece of information was the fact that the banks expanded WRLD’s credit line which might have been seen as a move on the back of increased trust in a business that could still potentially face a challenge from CFPB, but as that does not seem to be closer the banks might be more comfortable.

Other than WRLD and TRUP, PROS and SPKE are also not moving significantly as there is little new fundamental information.

The share price of this rare ‘growth story that makes sense’ are back up where they were after the initial positive fundamental developments in April/May. The return to these highs might have been prompted by the extension of the military contract which is aimed at porting ADSSS to Aegis class of ships. This is just another confirmation that the thesis remains intact. Although given the current valuation one should be cautious about entering into a position, investors though will still most likely benefit from holding the shares as the improved cash flow should be visible soon.

  • ADDvantage Technologies (AEY)

While the shares of AEY kept on sliding downward throughout most of June, I believe the thesis remains intact. The last quarter was nothing that would show any new challenge for the business. This makes the investment more long-term than I thought as there is probably need for a powerful trigger to break through the usual trading range. While the waiting might be challenging, the downside protection is still reasonable. Thus I don’t believe that the share price action alone can affect the thesis.

This micro-cap semiconductor has had a great month as the shares are now up 38.14% since my initial article in which I argued that while the downside is limited, the upside is unclear given the weak business model relying on several customers and uncertain future. The market was agreeing with me until the Q2 results which prompted the shares to trade higher and which have been on the ascent since then.

I believe that the results were positive as they recorded a profit (due to higher revenue) as opposed to a loss last year and did showcase a significant increase in account receivables (a sign of further revenue increases), but I would be cautious regarding the current valuation as the management’s history (mainly CFO’s) and the overall business environment could quickly negatively impact TAIT.

Thus I believe that the downside protection is now a bit weaker (given increased valuation) while the upside picture did not change much in my point of view (ARs increased to $1 million, not necessarily a sign of significant transformation and the management did not mention anything new regarding the future in the 10Q). The only thing that can potentially change one’s opinion is the dividend yield (6%) which is still significant and could be attractive for some.

WILC had a nice month on the back of news regarding the corporate governance but I would not say that all of these were positive. The most important piece of information is that Willigers (brothers that used run the company before 2014) have been able to gather enough support to elect themselves as directors of BSD Crown. This, therefore, gives them also power over WILC and as stated in the previous update they changed the board and also fired the president of the company.

The situation regarding Ta’aman is not entirely clear as they did have a MoU and might be able to try to change the developments, but so far they have not made anything public. If the whole saga ends with Willigers being back in control of WILC (which is now highly likely) I would say that the thesis certainly changes as the unlocking of the value could become uncertain (they made WILC a perennial net-net) even despite the consistent results. Thus I would recommend taking most of the profits now.

  • Technical Communications (TCCO)

This defense company focused mainly on military radios and encryption has had a great run in June and the shares are now at double the price from when I started to follow the company. My initial thesis was revolving around the possibility of a new contract that could increase the cash flow of this faltering business. The results so far were not that attractive and the management did not mention anything that would change the thesis. Yet the market thinks the company is likely to substantially increase its operating cash flow. Due to the lack of information (let me know if I missed something) I believe the current valuation is dubious and that investors should be cautious regarding TCCO.

This month, I am discontinuing Entertainment Asia (EGT) due to a tender offer by majority shareholders connected to the larger company, Melco, which is an Asian gaming business and the subsequent buyout of the rest of the minority shareholders. The tender offer price was $2.30 per share which does not represent much of an upside in terms of my initial article. Although investors could have snapped EGT’s shares on the cheap at around $1.20 per share before the tender offer I would understand why people would not buy the shares given the nature of the investment (cash shell with major shareholders). The main takeaway from EGT is that cash shells are an interesting entity and many times there are more catalyst than one might think, especially if the business was winding down (as was the case of EGT).

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 HMG, AEY, 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.