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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: bruwin who wrote (58570)	11/27/2016 1:27:47 PM
From: E_K_S	Respond to of 78816

Interesting you mention R&D expense. I own a micro-cap (EnSync, Inc. (ESNC)) that has always booked a huge R&D amount until they were able to get their product out in the market. Those expenses were not really reflected in their balance sheet as a direct asset (even as goodwill and/or intangible assets) and/or I could not find anything. I think they just expensed the costs every year they were in development. The amount per share over the 18 months I have owned them was quite large but now their R&D is much smaller (almost 75 % less). If this trend continues, their future earnings s/d pop but to what extent. I think the useful life of their current technology is perhaps 10 years (flow battery) and any new technology that may leapfrog them is small for the next few years. How does this impact value? BV really does not represent their break up value but a growing EPS may/could reflect growing income streams (but for how long). I say I have a window of 24 months for the company to monetize their technology and/or license it and/or sell to a larger integrated developer (maybe even to one of their JV partners). The same company also has developed a software management service (w/ the potential for reoccurring revenues) but that only grows as their installed base grows and/or the management software can be expanded to include other off-the-grid battery storage systems. How does the value investor work this future revenue stream into their current valuation of the company? You really do not know but if/when a merger/acquisition partner is identified this intangible asset (software) may/could justify a greater valuation. So one must be cautious to not put too much into the income statement and balance sheet (especially for a micro/small cap) but pay particular attention to if asset values are over stated and/or understated. No all companies account for their R&D the same and even potential undervalued assets (like software & developed technology) are worth much more to certain parties. I also look at past revenues and try to figure out what could change future revenues (looking out 18 months). Look at what Microsoft paid for LinkedIn? Their user base, emails and big data database was very valuable to MSFT. Therefore, I look for minimum acceptable thresholds in current and future FCF, burn rate of cash, debt and their maturities, along w/ hard assets (measured by BV less Goodwill and Intangible Assets) and current partners and largest customers. Sometime you miss a big opportunity if your screening filters are too sensitive and reject all of your candidate companies. You do open up more risk for those that bleed cash and/or can not control their SG&A as a result of factors not under management's control and/or revenues just fall short. I have found that it's not always black and white and some times as a value investor you have to place your bet knowing your company may have some warts but the overall risk/reward may/could still be in your favor. Good Investing EKS