I agree with your statement, "identify great businesses and then be willing to wait patiently with the bat on the shoulder until the pitch (price) gets so fat (skinny) you just can't lay off."
However, it is very difficult in this market to not attempt to work momentum investing into a value strategy.
I find it easier to use this strategy when I find an investment that is not quite a value investment, but "a special value situation" because, as James Clarke says, "the best value investments are ones that turn into "momentum investments" for somebody else."
James Clarke - you asked for additional ideas to my Cort purchase. My key is great management and a great niche product.
Here is another long term hold idea and one for you or others to analyze and improve upon my research.
Recently, I began adding to my position in a small mystery company, wherein I first bought a 2% position around $3.00 U.S. in 1998.
I love the management's cost controls, great nich product line, so when the mystery company's stock price recently dropped to $7.50 per share (where it is now but up from $3.00 in 1998), I made the decision to buy more as it declined. I recently bought a 1% position at each of 71/2, 77/16, 76/16, 7 5/16, 71/4, 73/16, 71/8 and 71/16. Maybe this is easy for James Clarke to do, but it is very tough for me (I was very happy to stop increasing my position at the 8% additional portfolio level). I made the decision to go up to a maximum 20% position, because I thought the downside might be as low as $6 U.S., if the market declined in the U.S.
Now the requisite information.
In 1998, I met Rob Bakshi, an impressive, take no prisoners, cost conscious and hard charging CEO of a tiny, illiquid Canadian company which wanted to design, develop, and manufacture high technology closed circuit television monitering and surveillance systems.
Bakshi, a cofounder of the company, had left his company shortly after its founding, and returned in 1991, finally gaining full control around March 1996, when annual revenue approximated 600,000C (all as part of a hostile takeover and the removing of directors and the forcing out of senior management).
Bakshi has established a culture of innovation, intense focus on consumer satisfaction and the UNRELENTING PURSUIT OF COST EFFICIENCIES. How has he done?
Revenues have increased from $600,000 Canadian in fiscal year (June) 1991, to 5.6C in 1995, 8.3C in 1996, 13.4C in 1997, 21.7C in 1998, 34C in 1999 and is on its way to 45C in fiscal year ended June, 2000.
Earnings wise, the company has done even better and achieved break even by its June 1996 fiscal year, then earned .21C in fiscal 97, .38C in 98, .65C in 99 and I anticipate they will exceed .80C in fiscal 2000 (June) and they are also well positioned for the future.
The company is financially well managed:
-1- ROAE has approximated 40% + over the past three years;
-2- NO DEBT;
-3- Price to sales is less than one;
-4- PEG is less than .5;
-5- Revenue growth of 40-50% per annum;
-6- earnings per share growth of greater than 50% per annum;
-7- PE of 11.5 times my estimate of June 2000 earnings
-8-Bakshi has beat estimates every year since gaining control in 1996 (underpromise and overproduce).
The company has four publicly traded peers in the U.S. - Vicon Industries, Loronix Information Systems, Ultrak and Sensormatic Electronics.
The company has the highest gross margins of its peers which translates into high operating and net profit margins. Its high margins appear to occur because it competes on product performance characteristics rather than price.
The company has smart management (my real key) which efficiently uses its capital. They outsource virtually all of their production, undertaking only final assembly and testing in house.
The company is increasing the amount spent on R&D from 3.3% of sales in 96 to 5.5% of sales in 99 and expects to spend 6% of sales on R&D in 2000.
Although a Canadian company, 75% of its sales are now to the U.S., with 12% to Europe mostly France and Germany). The majority of its raw materials are purchased outside of Canada, as such, the company faces exchange risk; however, since most costs and revenues are based maily in the U.S., a natural hedge occurs in most cases.
Another risk is an extremely short product life cycle; however, since Bakshi's takeover in 1996, the company has won numerous awards for design and manufacturing excellence. The company has developed leading edge products, but has been somewhat lax in patenting its products. The company is correcting this problem and indicates it is a process now well along.
The company has two main operating divisions.
Twenty percent of revenue (and declining dramatically in importance to the company) comes from its mobile video division in transit surveillance systems.
Its growth business is the traditional security market, (eighty percent of sales), which includes offices, hotels, casinos, prisons, industrial sites and residences.
The company has a GREAT CEO (adding additional management for backup) and has established a great NICHE by designing and manufacturing the world's toughest and most innovative surveillance camera system, be they infrared, weatherproof, or even bulletproof. Their cameras can be set to activate when they detect motion. It then records at up to two frames per second in a digital format. No VCR is required, although images may be recorded or viewed on a VCR when or if desired. The maximum recording time exceeds ninety minutes, with images saved even when a power outage occurs.
Its distributors include the likes of Brinks and ADT, while servicing impressive clients like the Department of Defense and Lockheed Martin, amongst others.
Over the past four years, the company has grown from 25 to approximately 125 employees.
The company's competitors are goliaths, but I believe the company's NICHE products and great leadership, with its outstanding track record make this a comfortable value like investment.
The name of the mystery company? Silent Witness. It was listed on the Toronto Stock Exchange and only recently listed in the U.S. as SILW. It is very thin. I always just insert a bid and it eventually gets hit. A cheap stock which I hope will do even better than Cort, which luckily was too large a position in my portfolio.
The real kicker with Silent Witness! SILW has decided to list on NASDAQ national market and has stated that they will begin the procedure in the second quarter of 2000. In their conservative manner, they expected to complete the process in the normal time period, but they could not give any assurances on how long it would take NASDAQ to complete their work. That additional visibility should help bring this company's above average record and low pe to the markets attention.
I can find no US brokers who follow this stock. However, the Red Chip Review, a value line like publication on tiny companies has followed the company for several years and gives the company its highest rating. The Red Chip Review recently sold a portion of their equity to Cruttenden Roth, so I anticipate that SILW will eventually make their way to one of Cruttenden Roth's investment conferences.
I understand that SILW implemented a shareholders rights plan in December 1999 (at their annual meeting).
James Clarke, I would be interested, if after a review, you would concur that this is a story that could become a "momentum investment" for somebody else.
Deb |
