A Thank You, An Update, and Some Thoughts on 2013’s Ideas

2013 is drawing to a close and I have a little travel ahead, so this will likely be my last post this year. I’d like to take the time to thank all of you readers who make this blog such fun to write. Your thoughtful comments and e-mails have both informed and challenged me, and I am grateful. I hope you will continue to include OTC Adventures on your reading list in 2014, because I have plenty more to talk about!

I am pleased to announce that the process of opening my RIA practice is progressing well, and I should be ready to accept investors in late January. I appreciate the patience that many of you who are interested in my practice have shown, as the state approval process is complicated and lengthy. I am currently working on a website and informational presentation for my new firm, which I will share as soon as I can. In the meantime, I can always be reached at otcadventures@gmail.com with any questions or comments.

In the course of this year I wrote about more than 30 different companies. Many of these have performed extremely well, some of them reaching or exceeding my opinion of fair value. Others have performed well but have plenty of potential left. A few…..let’s just say I wish I’d never learned their names. I’d like to highlight a few companies that still offer compelling value in my estimation. Hopefully 2014 will see the market come to appreciate the value these companies offer and their share prices will respond accordingly.

Quality Products Inc. – QPDC

Quality Products’ shares lagged in 2013, even as the company continued to profit and expand. In April, the company announced the acquisition of Pacific Press Technologies, a manufacturer of hydraulic presses. The acquisition compliments Quality Products’ existing Multipress business and was funded mainly by debt. Quality Products recorded a bargain purchase gain of a little over $200,000 on Pacific Press, likely indicating the assets were acquired for less than fair value.

For the twelve trailing months, Quality Products earned $1.86 per share for a trailing P/E of 7.9 on today’s bid/ask mid-point of $14.37. The company continues to be stunningly profitable, recording a return on equity of more than 50%. I am mystified as to why Quality Products continues as a public company, given the infrequent activity in its stock and its high insider ownership. For the present, anyway, Quality Products offers the chance to invest in a high quality industrial enterprise at a very cheap price.

Regency Affiliates, Inc. – RAFI

Regency Affiliates shares handily out-paced the S&P 500 (when using the current bid/ask mid-point rather than last trade) since my February write-up, but the stock continues to trade far below any reasonable estimate of intrinsic value. Regency’s real estate holdings continue to pay down debt, increasing earnings and cash flow and hastening the point at which Regency will be able to re-finance the mortgage and fund a large cash distribution to the parent company. Regency’s steam power generation asset’s earnings have leapt and its debt is also being reduced steadily.

On a trailing twelve month basis, RAFI earned 97 cents per share, for a trailing P/E of 10.3 on a share bid/ask mid-point of $9.95. Earnings should continue to rise as debt is reduced, and the company’s real estate holdings and excess cash are likely worth the current market capitalization without even considering the steam power asset.

Regency Affiliates initiated a quarterly dividend in September and now pays out 20 cents annually.

Awilco Drilling Plc – AWLCF

Awilco has had a great year, with a total return of nearly 70% since my first write-up in May. As predicted, the company has used its free cash flow to pay a total of $3.10 in dividends since, and is poised to continue rewarding shareholders with large payouts. The company’s rigs are contracted for years to come at higher rates than now. The company has announced some planned capital expenditures for rig upgrade and the UK is contemplating some tax increases, which seems to have reduced investors’ enthusiasm for the shares.

Still, management has been making the right moves and keeping its promises. Capital expenditures and tax increases may reduce the cash flowing into Awilco’s coffers somewhat, but will not make nearly enough of a difference to justify Awilco’s current price or dividend yield. I continue to view fair value as somewhere in the $30s, and plan to hold on until fair value is reached and to enjoy a healthy stream of dividends along the way.

Visteon Corporation – VC/VSTOW

Visteon continues to execute a quiet transformation from a low-growth, domestic auto supplier to a high-growth market leader focused on Asian nations. The company plans to return one quarter of its current market cap to shareholders in the form of buybacks in the process. Still, the company trades at a discount to competitor valuations, particularly those operating in similar geographies.

Visteon closed on the sale of its automotive interiors joint venture yesterday, receiving $840 million, with another $181 million to come.

Retail Holdings NV – RHDGF

Despite its underlying businesses setting earnings records and paying out a large dividend, Retail Holdings stock produced a pitiful return in 2013. Fears of currency devaluations and slowing economic growth in South-East Asia caused investors to mark down companies doing business in the region, disregarding fundamentals. For the twelve trailing months, Retail Holdings earned $2.46 per share, for a trailing P/E of 7.7. Consolidated revenues for the six months ended June 30, 2013 were up 7.8% from the same period in 2012, while parent company earnings grew 24.7%. The performance of the company’s financing divisions continued to be strong, with low credit losses and minimal accounts in arrears.

In additional to being cheap on an earnings basis, Retail Holdings continues to trade at a large discount to the value of its subsidiary companies, all of which are publicly-traded and so can be priced by direct observation. The market values of the subsidiaries held by Retail Holdings sum to $26.83 per share. Adding the debt that Retail Holdings holds adds another $4.29 per share for a total net asset value of $31.12 per share. At a recent trade of $19.05, Retail Holdings trades at a discount to net asset value of 38.8%.

Retail Holdings made moves to divest its subsidiaries through an IPO this fall, but those plans fell through in the face of stock market weakness in many South-East Asian economies. The company is intent on receiving full value for its shares, and is willing to wait for the right moment to sell. Until then, I am happy to own a growing emerging markets company at a single-digit P/E and a large discount to NAV.

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2 Responses to A Thank You, An Update, and Some Thoughts on 2013’s Ideas

  1. Josh says:

    Dave, you are the antithesis of The Wolf of Wall Street. You have rekindled the joy of investing for me. I continue to be grateful for your hard work and public service. And you provide it free of charge no less! Thank you.

  2. Ian Cassel says:

    Congrats. It’s always fulfilling making a living doing what what your passion is.

    Ian Cassel

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