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Does anyone look at a balance sheet?!? Small caps and risk....



December 02, 2008 – Comments (6) | RELATED TICKERS: NGA.DL , FEEDQ

Why is it common wisdom that small companies are a greater risk? As the old saying goes, "it's not the size of the dog in the fight, it's the size of the fight in the dog." 

I think it's more important to look at the overall business structure and financial strength that the market capitalization. Out of seemingly hundreds of balance sheets, I keep coming back to these two... North American Galvanizing (NGA) and AgFeed (FEED).

First off, I get that there are risks in China. AgFeed grows pigs in China. But pork is 65% of the meat consumption, and that's half the business. The other half of the business makes pig formula, which they sell to others for a profit, and to themselves at a discount. They just made record profits, pork prices fell before the quarter, they have no debt, they're buying back stock, management owns a big chunk of the company, and they all have long term experience in the industry, and graduate degrees in pig farming.

NGA keeps big metal things from rusting. Big metal things are expensive and you want to keep them from rusting. The management is seasoned, they're growing, they understand the business, they have no debt, they're buying back stock. 

The keys here are no debt, good management, useful businesses. And you can buy them both for $125 million. ROIC both above 20%. And their stock prices are falling further....

 Help me dear readers... What am I missing?  I've read a lot of balance sheets, and I believe these would make Buffett proud. If you see something I've missed, let me know before I invest every last nickel.

6 Comments – Post Your Own

#1) On December 02, 2008 at 4:23 PM, anchak (99.89) wrote:

I looked at FEED too..... and came away with the same conclusions....... so I have it picked it CAPS ....the problem is I have no information on the ground - so I am assuming I am missing something - hence couldn't muster up the courage to invest in RL.

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#2) On December 04, 2008 at 2:20 PM, Varchild2008 (84.02) wrote:

FEED's problem for us investors (I own 766 shares) is that I do not know where to look to figure out how bad China Hog Prices have fallen.  There's gotta be a reliable ticker symbol or something dealing with Hog Prices.

Unfortunately, the only thing I've run across is CME Pork Global off the following website:

And that's not accurate at all.

A commenter to a Seeking Alpha article on (FEED) was from someone who claimed they rely on China Swine prices... Where that person is getting those prices I don't know.

According to that person Hog prices are $8 instead of $14 and you have to at least be selling a Hog for $14 in order to be profitable.

AgFeed Industries didn't really do much in their quarterly report to clear things up with their situation other than to state that their PIG FOOD business is still growing good margins inspite of the fightening decline in Hog Prices due to Over-supply.

The Over-supply is coming from the following:

1) Chinese Government is dumping Hogs out of their reserves into the market place.

2) Olympics crushed demand for Pork.

3) Hog Farmers are growing more Hogs hand over fist than ever before..... With consumers out of a job due to the falling Chinese Economy, Hogs are selling as quickly as they usually do.

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#3) On December 04, 2008 at 4:03 PM, jeffacril (< 20) wrote:

Below is a post I made on google message boards in early October of this year that gets at why I believe Agfeed appears to be so cheap....:


 I got out of this stock on Monday at $5.90 down about
40% from my average cost.  When I got into the stock I ignored several
red flags that I shouldn't have.  Several years ago I invested in a
company called Aremissoft that has similarly great fundamentals and an
unbelievably low stock price.  Fraud was discovered, trading halted,
the stock became worthless and the CEO was convicted.  Many of the
same things are happening with this company that happened with
Aremissoft.  Companies - even ones traded on major exchanges - can
     Companies just don't put out so many press releases to soothe
investors about the stock price.  When it seems like management is
responding to what people post on message boards that is a bad thing.
Many of the press releases AgFeed has put out seem desigend to bolster
the short term stock price.  The latest release about the buyback is
potentially meaningless - while announcing a buyback they actually are
not bound in any way to by a single share.  Even their website makes
me suspicious - it looks nice and all but it has the feel of a
business that is trying to give the appearance of being a good
business and good investment (it really needs to look like a good
investment because it isn't).  For example how many other companies
have links to research reports by analysts on their homepage touting
how the company is worth $20+ per share?
     If you believe the numbers and what management is saying - that
they will buyback $10 million shares, their earnings projections, the
cost to produce a hog and the cost at which they sell it, their
acquisitions (which they claim are funded by operating cash flows),
their future plans, etc.  then this is a stupendous investment.  So
for someone who is considering investing in this company pretty much
the only question that matters in my opinion is do you trust
management.  I do not.  While I did notice red flags before I invested
I was blinded a bit by greed and got in.  When I read this article
though that precipitated my decision to get out:
Another less credible source that offers some negative views on Feed
is the Timothy Sykes website.
     I do believe that the general market decline is part of the
reason that shares of FEED have gone down but I do not believe that
this is a sound company in the long run and I think some of the red
flags that I am noting hear are the reason that the company appears so
undervalued.  If the market turns this could go up quite a bit as
speculative growth stories like these tend to do well in a bull
market.  Trying to play that possibility would be trading not
investing however and isn't guranteed.  I am trying to become a good
investor - I already know I am a bad trader.

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#4) On December 04, 2008 at 4:18 PM, StockMarketStud (< 20) wrote:

I am holding stock in FEED and am a bit dismayed.  A couple of things come to mind.  One is that Agfeed was holding back pigs in anticipation of higher prices, presumably being pushed up as a result of the Olympics.  I would expect that other farming operations were doing the same thing and thus prices were artificially high. But once the Olympics were over prices started to drop and they all started dumping to get rid of them.

Second thing, and the one that worries me most, is the potential for manipulation.  There has been quite a high level of shorts for some time.  Although the company management claims to be holding ownership in stock and have requested investigation by NYSE (ta da ta da ...) it is conceivable that they are shorting stock in the background.   I believe it can be done quite easily on the German exchange.  I'm not sure how the company management can go from a very positive outlook to mediocre or poor in a matter of a few weeks without some shenanigans going on.  I've seen it many times with OTCs.


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#5) On December 24, 2008 at 12:03 PM, oregonrogue (< 20) wrote:

Jeffacril - Thank you very much for your post and Barrons link!

I just dumped 1325 shares at a 16.25% loss.

As a newby investor, I had patted myself on the back for finding FEED and its great potential.  I had been considering HOGS but got a visit from the Greed Demon and went with FEED.

I had been scratching my a** (where my head is located) and wondering why HOGS kept doing so well, while FEED just languished in its own pooh.

I appreciate Kevinwinter with the blog, and for all opening my eyes to this folly.

I dont have any $ in NGA, but will check back and see how things develope with ObamaRama coming to town.


Temporarily displaced in Baghdad, where there is no Pork!. 







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#6) On January 11, 2009 at 9:34 PM, teamrider (44.68) wrote:

A lot has changed since I picked out this stock at what I believed was the bottom after November 20 2008... my first shares cost $1.30.  I am still grabbing shares while the price seems low in the 1.60's although I regret not selling before the late Dec. CEO news of halting the buyback program and issuing new shares to raise capital.  If the company keeps at it and is not fraudulent I plan on selling my shares at 20 next year.

Who am I kidding, though - I would have reinvested my FEED profit on more shares lol.  I love pork, and the feed side of this business makes it even more appealing.  I am willing, for now, to accept the fact that the market is emo and will come around to  wisely investing shortly.

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