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Top 10 Companies to buy based on liquidation value. Wickedation Test.

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July 22, 2009 – Comments (24) | RELATED TICKERS: GSIG , XING , ACAS

A few days ago I asked about the best way to calcualte liquiation values for a firm.  Based on the comments I got, and my own assumptions I came up with the equation:

Liquidation=(Total Assets-Intangibles-Total Liabilites - 0.5*PPE- 0.5*INV-0.15*Accounts Receivable)/Shares outstanding

I ran this on my favorite 4,200 stock US non-finance traded stocks and found a few winners.  The following are the top 10 undervalued stocks based on that liquidation equation.

AIG, MAD, GSIG, BWTR, CABL, CTHR, XING, CRC, ACAS, AHC

AIG is at the top mostly because substantially all their assets are "other long term assets".  Which is generally not a substantial portion of the balance sheet......  Ooops...   (Several seem to have this problem, I will let you do a little work and find out which.)

However, I took UltraContrarian's advice and combined the liquidation value with my own earnings based valuation and came up with a seperate top 10 that I actually kind of like.

For kicks and giggles I will create a new profile just to test these guys out.  I will put in the top 200, and we will see what happens.  I will call the new profile Wickedation.  

(For all you naysayers, this is not an attempt at a stealthy profile switch, but an actual experiment.)

 

24 Comments – Post Your Own

#1) On July 22, 2009 at 12:33 AM, Wickedation (< 20) wrote:

I ought to mention that a lot of the top picks I had were not "pickable tickers".  Here is the top bunch I would have picked in an ideal world for this test:

SONO, CFK, ESV, IKNX, CAW, ICA, PTEN, SMTS, CRY, LINTA, ELNK, NATH, HNT, RIMG, BOLT, KND, BOOT, FRX, SIGM, VLCM, GIGM, IIIN, PDE, TLF, TGE, DIVX, ALOT, WEL, GHM, LINE, RAIL, MDTH, EZPW, COLM, OICO, ACU, WTSLA, VLCCF, MOH, SYNL, HUM, HOTT, DBTK, DCM, MKTAY, GASS, VISN, ANIK, ELP, KOSS, MTRX, BEAT, EGY, CRNT, WIRE, SEB, STV, LUFK, AHCI, SLI, PLPC, GRMN, VRTU, ESP, GPIC, NAT, CSKI, CMTL, UBP, UNT, OMG, TCLP, PSEM, SCR, NHC, AMCN, PW, SYKE, LNDC, BEBE, CPBY, MOCO, PLCE, HCKT, NSH, ISYS, MATK, DECK, ALKS, MGLN, LTC, GVA, MLNX, TRA, TBL, UBA, TGA, MDF, CORE, ITRN, TSYS, ALOY, AMN, AMRI, BIDZ, FSTR, WNI, PPDI, MTSC, NE, POWR, FTO, PHIIK, BGCP, CRMT, PVSW, DSX, TDW, TUNE, KBR, PCCC, ORB, FORR, BBND, EXFO, ERF, INT, GIFI, INFN, HSII, AIZ, OIS, NPD, WEYS, TWLL, HIMX, SDTH, PTI, DDMX, ASTE, RC, AVX, CAJ, SMCI, WEDC, UG, UEIC, GPS, HDIX, IIVI, ITWO, NGA, OMCL, AEO, TIE, KTII, IPGP, YZC, GCOM, MW, ZOLL, JEC, WRLS, CVX, SEPR, WSTG, CSGP, NPK, DSW, APOG, SCMP, BABY, FRM, KSWS, RSTI, WDC, NWPX, FIX, CAV, CHBT, WMCO, EXAC, AMSWA, ABAT, COGO, GYMB, TECD, AOB, BBG, ANF, NTRI, TACT, WFR, AACC, CNC, SYNO, CF, TC, MLI, CRR, DTLK, KNM

They are in order from potentially best to potentially worst.

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#2) On July 22, 2009 at 1:02 AM, awallejr (79.33) wrote:

This is the beauty of CAPS, making profiles to test "theories" and not trying to just impress anyone with unhelpful cap picking.  I will be interested in seeing how your profile turns out so will "favorite" it.

 

Rec to you.

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#3) On July 22, 2009 at 1:37 AM, JakilaTheHun (99.93) wrote:

I'll have to look into some of these. 

Amazing how many of the tickers you have listed that I have already green thumbed at some point.  I recognize ESV, GHM, VLCCF, HOTT, MTRX, NAT, OMG, LNDC, ISYS, ITRN, TIE, TC ... probably a few others that I'm missing.  

I would say that looking at leverage would also be useful.  How was that factored in?  A company with a Liability to (Adjusted) Equity ratio of 9 to 1 could possibly be worth 0 in bankruptcy.  

 

On ACU, I find it incredibly awesome that there's actually an "Acme Corporation."  If only they made anvils, this would be the greatest thing ever!

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#4) On July 22, 2009 at 1:54 AM, JakilaTheHun (99.93) wrote:

I'm randomly browsing some of these companies.  AH Belo (AHC) is kinda interesting.  CAPS mistakenly lists them as being in "oil and natural gas", but they are actually a newspaper publisher.  When Warren Buffett said there was no price he would pay for a newspaper publisher --- that seems to be the sentiment on the market on AH Belo.

However, here's the interesting thing --- they have a lot of equity and a good chunk of property holdings.  One of the most famous "liquidation value" cases ever involved bankrupt NYC department chain, Alexander's (ALX), which is now a REIT.  Even thought they couldn't continue operating as a department store, their property holdings were worth so much that shareholders who bought in around the time of bankruptcy made out like bandits.  

The only major stumbling block on AHC is that they have a very huge amount of publishing equipment and it's completely unclear how much that would fetch in the event of a liquidation.  I'm sure it would have some value, but how much?  

Even if they could recover 50-60% of the value, the stock would probably be worth $5.  Of course, the question is --- how long will they operate unprofitably? And will that wipe out enough equity so that they have no value before going bankrupt?

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#5) On July 22, 2009 at 5:18 AM, kaskoosek (99.76) wrote:

I second the leverage ratio issue.

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#6) On July 22, 2009 at 9:11 AM, anticitrade (99.48) wrote:

Leverage.....  I have justified ignoring leverage in the past for the following reasons:

1)  Leverage is VERY industry dependant (utilities vs online retail).

2)  I assume that if they can afford their interest payments that is 90% of the game.

3)  Some companies have acquired incredibly cheap debt, and I would like them to use that instead of issueing more shares.

However, enough CAPS players, who I respect, consider this a significant issue that I should reconsider my position on it.  The difficulty is developing a universal rule that I can apply.  I could make this a red flag issue.....  But what amount of leverage is too high?  80% leverage?  Any thoughts on that?

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#7) On July 22, 2009 at 9:46 AM, robstuck (< 20) wrote:

maybe make it industry dependent, and have different levels for different industries, if thats possible. I think making it a red flag issue is a great idea. 

Anticitrade is a great platform, and i've registered. I've got a question though..  While your program suggests TBSI as the 2nd best pick overall, you haven't picked it on caps. I was curious as to why, and any additional insight you might have. thanks.

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#8) On July 22, 2009 at 9:58 AM, portefeuille (99.96) wrote:

Hi,

some of those are on my list of calls. I have added recent quotes.

---------------------

#430) On April 08, 2009 at 6:23 PM, portefeuille (99.98) wrote: ALKS - 8.44 - outperform

10.81

#427) On April 06, 2009 at 11:46 PM, portefeuille (99.98) wrote: OMCL - 7.79 - outperform

10.70

#449) On April 21, 2009 at 3:46 PM, portefeuille (99.98) wrote: FRX - 21.55 - outperform

25.39

#442) On April 20, 2009 at 3:17 AM, portefeuille (99.98) wrote: VISN - 5.86 - outperform

6.48

#568) On July 13, 2009 at 7:57 AM, portefeuille (99.98) wrote: CRNT - end outperform - 6.56 - no new rating

7.31

#238) On March 17, 2009 at 3:59 PM, portefeuille (99.98) wrote: BEBE - 5.34 - outperform

6.44

#187) On March 13, 2009 at 3:35 PM, portefeuille (99.98) wrote: AMRI - 8.62 - outperform

9.61

#240) On March 17, 2009 at 4:06 PM, portefeuille (99.98) wrote: BIDZ - 3.48 - outperform

3.29

#417) On April 04, 2009 at 5:19 PM, portefeuille (99.98) wrote: NE - 26.00 - outperform

31.92

#208) On March 15, 2009 at 3:57 AM, portefeuille (99.98) wrote: DSX - 12.83 - outperform

14.26

#218) On March 15, 2009 at 10:03 PM, portefeuille (99.98) wrote: HSII - 14.74 - outperform

18.23

#295) On March 23, 2009 at 8:31 AM, portefeuille (99.98) wrote: RSTI - 14.70 - outperform

20.09

#351) On March 26, 2009 at 1:35 PM, portefeuille (99.98) wrote: AOB - 4.16 - outperform

5.07

#62) On March 05, 2009 at 9:34 AM, hdgf1 (99.92) wrote: ANF - 19.03 - outperform

26.81

--------------------- 

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#9) On July 22, 2009 at 10:08 AM, anticitrade (99.48) wrote:

I actually picked TBSI on May 26th 2009 on Caps and still hold it.  In fact, I bought it with real money on June 18th as detailed in this post.  It seems I bought it (real money) a little early and have lost about 6% on it so far, but I never claimed to be good at market timing.

I am glad you are getting some value from the website.  My basic approach to the model has been limit the number of assumptions.  This way, every company is evaluated exactly the same and the user knows that the same set of assumptions were used for everything.  To add industry specific assumptions would add more of my personal bias and decrease the transparency to the user.

However, I do seriously consider it.

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#10) On July 22, 2009 at 1:00 PM, darroj (99.26) wrote:

Nice idea.  Several in there I've been eyeing... especially BOLT, LINE, NE, FTO, WFR, CF.  I saw you picked up WFR in this portfolio just a few days ago - Is that one going to get one of your pitches? I'm still on the fence with refiners... outside of basic crack spread, I know very little.  Thanks for your sharing your ideas! It will be interesting to see how that plays out.

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#11) On July 22, 2009 at 2:31 PM, JakilaTheHun (99.93) wrote:

Anticitrade,

I'd agree that an appropriate level of leverage is industry specific, but I believe it's universally true that when you are looking at "liquidation values", companies with virtually no equity are going to be much riskier and have a much greater chance of being worth 0 in bankruptcy (which is essentially what a "liquidation value" is testing).  

I don't know that you have to apply a black-line rule, but it might be useful to categorize based on leverage. 

If you company A has a 12 to 1 debt to equity ratio and the formula calculates a liquidation value of $10 and the stock is selling at $5, it's probably a very risky proposition based on the "liquidation value" concept.  Which isn't to say it would be a bad investment, but that would dependent on future cash flows more than the "liquidation value" (which could very well be $0 when all was said and done).  

On the other hand, if company B has debt to equity of 0.5 and has the same metrics, it's probably has a much safer cushion on the "liquidation value" front.  

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#12) On July 22, 2009 at 2:58 PM, anticitrade (99.48) wrote:

Lets consider your two examples:

Assets for both are 100 (lets assume all cash for ease)

Liquidation then is simply Assets - Liabilites = Equity

Company A: Leverage of 12:1 Debt to equity so 92.3$ in Debt and 7.7$ in equity.  Liquidation value is then 100-92.3 = 7.7. 

Company B: Leverage of 1:1 Debt to equity so 50$ in Debt and 50$ in equity.  Liquidation value is 100-50 = 50.

If these companies both earned 10$ Their ROEs would be A 130%, and B 20%.

It appears to me that calculating the liquidation value necessarily addresses the leverage issues.  So I must be misunderstanding.

Maybe you mean that an investor should pay a discount for the ROE of a highly leveraged firm because of the increased risk he is taking in the event of a bankruptcy.  I would agree with this, and I think it may be roughly accounted for in my wickedation portfolio. 

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#13) On July 22, 2009 at 3:59 PM, JakilaTheHun (99.93) wrote:

Anticitrade,

Note that in my example the "liquidation values" were the same.  That was probably a bit ambiguous now that I think about it, so think about it this way:

(1) Company A, $95 million liabilities, $5 million net tangible assets [NTA]

(2) Company B, $5 million liabilities, $5 million NTA

Both companies have the same NTA.  For simplicity sake, we'll say neither company has goodwill or intangibles, so that NTA = equity.  Now, let's consider the company's balance sheets:

 

- COMPANY A - 

Cash $5 M

A/R $10 M

Inventory $20 M

PP&E $50 M

Other $15 M

Liabilities $95 M

Equity $5 M

 

- COMPANY B -

Cash $1 M

A/R $2 M

Inventory $2 M

PP&E $5 M

Other $1 M

Liabilities $5 M

Equity $5 M

 

These numbers are not completely analogous, but they are close.  So imagine that Company B's PP&E fetches 80% of its book value on the market upon liquidiation.  Now imagine the same thing with Company A.  What are your new equity figures?

Company A = (-$5 million)

Company B = $4 million

In other words, the highly levered company is much more suspectible to slight changes from the book value of their assets.

In fact, we could make an extremely strong argument that Company A has $0 liquidation value because in the event of bankruptcy, its leverage would simply wipe out all equity in most cases (since bankruptcy normally means forced selling of assets at discount prices).  This is not universally true; for instance, maybe Company A's PP&E account consisted mostly of real estate properties purchased two decades ago; in which case, that PP&E account could be dramatically understated. 

Still, my main point here is to simply point out the differences between highly levered firms and low- to moderate- levered firms.  Highly levered firms are much more likely to see their equity wiped clean in the event of liquidation. 

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#14) On July 22, 2009 at 4:13 PM, anticitrade (99.48) wrote:

Aaaah........   So if I valued these companies equally from a P/E standpoint I would be overlooking the significant increased risk of a bankruptcy.  In truth, if you used a simple P/E method for valuating companies you should find yourself surrounded by highly leveraged bankruptcy candidates (for the record, I do NOT just value companies based off of P/E).  Very interesting....  For my antiictrade model I have taken some steps to protect users from this sort of problem, but maybe I haven't gone far enough... 

Thanks for taking the time to walk through that with me.

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#15) On July 22, 2009 at 7:24 PM, UltraContrarian (99.81) wrote:

Cool.  How do you combine the two values, just 50/50?

It seems like your liquidation value already addresses Jakila's point about debt, since you're removing significant percentages of assets before subtracting liabilities.  It's possible that debt should be a bigger negative factor in both operating value and liquidation value, but your model seems to have a reasonable bias against high debt already.

Any idea what exactly pushes SONO and CFK to the top of your second list?  I've never seen those as significantly better than any company in their industry.  Just looking at fundamentals, the pickable stocks I can make a case for being most underpriced are QXM, TSO, MAD, ESEA, and a few others.

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#16) On July 22, 2009 at 8:14 PM, GeneralDemon (91.47) wrote:

Be careful of XING - horrible management - horrible major stakeholders - horrible, horrible, horrible. Did I say horrible enough?

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#17) On July 22, 2009 at 9:26 PM, fmahnke (97.41) wrote:

Anticitrade,

Thanks for the post.  As you may remember, I am a big fan of LV, and I see the broader list includes WRLS, which we dicussed (and continues to move higher).  

I owned LZB at .70 which I sold way too early,  One company which is similiar to LZB is NTZ.  trading around half of my LV and around 10% of 2008 sales, Surprised not to see this listed

I'll be intersted to go through your list.  Thanks again

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#18) On July 22, 2009 at 9:46 PM, anticitrade (99.48) wrote:

I wasn't sure what the best way to combine the two would be so I use:

=(%Undervalued according to Anticitrade*%Undervalued according to my liquidation calculation)^0.5-1

Basically, this garunteed that they both had to be positive, and if one was just barely undervalued it would be low on the listing.  The results were:

So GSIG (the most undervalued) is (11.59*3.31)^.5 -1 for 520% undervalued.  Sounds pretty good doesnt it?

GRO is a little more resonable at (1.96*1.90)^.5 -1 for 93% undervalued.

BJS is (.226 * 1.122)^.5 -1 for -50% undervalued (or overvalued by 50%).

CFK has been at the top of my list for a long time.  Looking at my analysis I am impressed with CFKs margin growth, and steady sales.  However, the liquidation value is about 30% of their current value.

SONO is a new one to me.  But looking at the trends in their various line items is pretty impressive.  However their liquidation value is also only about 60% of their total value.

There are only about 300 companies that are undervalued based on liquidation, but anticitrade doesnt like a lot of these.  The only ones that are FULLY undervalued by both valuations are:

GSIG, MAD, XING, ACAS, SIMO, GRO, FRD, MPAA, KTCC, JCTCF, and GU.

Although as GeneralDemon suggests, at least one of these has some serious soft issues that should be considered.

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#19) On July 22, 2009 at 9:53 PM, anticitrade (99.48) wrote:

fmahnke,

I value NTZ at about 4.32 from liquidation..  But I am not a fan of their earnings history...  Their SG&A expense makes me want to slap their management (basically for the last 4 years it is greater than their gross profit).

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#20) On July 22, 2009 at 10:53 PM, fmahnke (97.41) wrote:

Yeah,

They have been a train wreck just like LZB.  They say they are cutting costs, but what I like about companies like NTZ is:

With terrible performance, they are still solvent, and still should hold up pretty well,

But if they cut some costs and show medicore sales improvement and smaller losses, a double from here is a potential understatement.

Just like what happened to LZB, which went up over 900 pct from 03.09 to yesterday,

PS. I shorted LZB in CAPS and real life yesterday (10 pct down in one day)  And am long NTZ.

At some point if you're interested, I'd like to discuss using your programming database resources to model banks/insurance companies (be careful with ACAS) which is where I come from.

Tonight however, is finding out more shorts for what I predict is next big bad leg down,  Thanks again and keep up the good work

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#21) On July 23, 2009 at 3:28 PM, ChrisGraley (99.67) wrote:

I'd be wary of calculating the liquidation level of AIG due to the lack of transparency of their financials.

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#22) On July 23, 2009 at 3:34 PM, TigerPack (99.97) wrote:

I bought TBSI around $6.50 a few weeks ago.  Great long-term potential as the economy recovers.

I think ESV, TDW, CVX, DSW, GPS, AEO, OMG, GRMN, MATK are the most credible picks on this list, in my opinion.

At different times, I believe I may have picked all the above stocks to "outpeform" on CAPS.

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#23) On July 23, 2009 at 7:15 PM, streetflame (99.81) wrote:

anticitrade - On CFK, SONO and what stands out about the cheapest stocks -

That's interesting that margin growth is so important to your model.  I have never really applied much weight to that, beyond a general idea that margins should be healthy and not faltering (I often screen for things like ROI>~8% and earnings growth >0%).  Partly because CAPS (and other screeners/data sources) doesn't make it very easy to search for. Partly because I figure the change over time in margins is pretty constrained compared to growth in revenue.  There's only so much fat you can cut to grow earnings - in the long run, top line growth will be required for a company to continue posting superior returns.  But it's possible that margin growth is more useful than it appears on the face, because it is generally underfollowed.

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#24) On July 24, 2009 at 2:27 AM, SuperCharge (98.39) wrote:

GIGM!!!!

How about Wickedationicitrade for tickers on both lists?

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