Rex Stores Corp (RSC)

Did TMFEldrehad and his following turn a 3 star stock into a 1 star stock by shouting ethanol like a prankster yells fire in a crowded (or in the case of a REX store, not so crowded) place?

First TMFEldrehad has great ideas and I'm a huge fan of Eldrehad picks, but it's his following which has a tendency to shoot first and not ask any questions later.

In June of 07 there were 2 thumbs up picks and 1 thumb down pick. TMFEldrehad made a thumbs down pick and since then there are 12 thumb down followers and 1 thumbs up pick.

Has anyone else other than Eldrehad taken even more than 5 minutes to give this company a once over?

Here's my take:

The risks or bearish points of view are pretty obvious: We have retail which is a tough business to begin with, and now sprinkle on some recession, and it's only going to get tougher. Then there's the big box store competitors that are squeezing themselves into the smaller markets where REX stores have done well. Then there's the ethanol business. I know know, ethanol doesn't make sense because it requires more energy than it generates not to mention all of the other problems in using food sources for fuel. BUT, it isn't the first bad policy move, won't be the last, and just because it doesn't make sense doesn't mean it's going to stop, it probably won't.

As for the bullish, there is nothing that screams scam or accounting irregularities like many other 1 star Caps picks. But, of course you need more than just, 'not a scam' to make a thumbs up pick. It's insiders own about 12% of outstanding shares, over the last 5 years they've bought back 10% of outstanding shares, and Stuart Rose, the CEO, has been at the helm since 1984 and was even involved with the business before then, since 1980. The share price has increased from about $1.50 to as high as $23, and I'd take those returns over the S&P any day (or any 20 year period at least)

The balance sheet has a staggering 127M in cash (don't forget this is a 174M market cap) of which 97M is unallocated. The total equity is 257M which puts the tangible price to book value at .69, that's low! Currently the real estate owned is valued at 45M, but an actual sale value is thought to be much higher. So cash + undervalued real estate is 142M. That means MR. MARKET has designated 32M the following:

- 193 retail stores that haven't earned less than 11M a year in the last 5 years. If the 193M stores made up the entirety of the 32M that means each store of over 11,000 (average) sqft is only worth $166K
- The 88M invested in 4 alternative energy entities. On that note I bet Stuart Rose invests in ethanol plants as prudently as he invests in his own company: Stuart Rose, "At this point and time we still have, Doug correct me if I’m wrong, about 200,000 shares outstanding on the old buyback. We buy our stock like everything else. If there is an opportunistic place to…we don’t just buy it arbitrarily because we can, we buy it to support what we consider basically ridiculously low levels. So that is what we have historically done. So I would not…we have some authorization left over and as you have pointed out very, very clearly we have plenty of money to do another authorization should the board choose to do one."

RSC is probably not the best investment or easiest one to to understand. It's retail business may see trouble, the ethanol business may not make sense on a macro level, but it's not going anywhere soon. RSC is not a 1 star CAPS pick and a few other all star's thumbs up picks will be needed to bring better representation of RSC's true value.