The Year in Review and a Thank You to All!

With 2012 drawing to a close and some travel for me in the near future, I’d like to take a moment to thank you and all the other readers of my humble blog before signing off for the year.

When I started this blog way back in January 2012, I never expected it to find more than the tiniest audience. After all, US unlisted stocks are an obscure, often ignored segment of the global securities market. Imagine my surprise to see this blog’s readership gradually grow to thousands each month! Through the course of the year, I have greatly enjoyed your comments and emails, whether you have offered words of encouragement or of criticism. I welcome it all.

I’ll be back in the new year with plenty more investing ideas and updates on situations I have previously covered. Some ideas in the queue include a manufacturing company with 28% operating margins and a 14% free cash flow yield, a fascinating little bank with a consistent earnings history trading at 6x earnings and 50% of tangible book value, and a profitable leveraged pharmaceuticals company that is rapidly paying down debt and equitizing its capital structure.

If you’d like to know when a new blog post is up, I encourage you to sign up for email updates or follow @otcadventures on Twitter.

Performance

With that said, let’s take a look at how my investing ideas have performed so far. In 2012 I wrote about 31 different companies I viewed as worthy investments. Of these, 30 ideas are active and one, Abatix Corp., is inactive due to its going-private reverse split.

(Please note, the fact that I view a stock as having good investment potential DOES NOT MEAN I think anyone else should buy it! Unless I know you and your financial situation and goals quite well, I am in no way qualified to recommend the purchase or sale of anya security or investment strategy to you. Please see my Disclaimer page.)

The performance of these ideas was, on the whole, quite good! These 31 stocks produced an average total return of 13.48% and exceeded the S&P 500 Total Return benchmark by an average of 8.99% from the time of each write-up. Of course, the performance of these ideas varied widely, from QEP Company returning -16.00% to Mexican Restaurants returning 117.14%. I must caution all that the long-term performance of these stocks is highly uncertain and short-term gains or losses do not guarantee longer-term results.

The Winners

Mexican Restaurants – CASA: Mexican Restaurants was a pure valuation story. Trading at an EV/EBITDA multiple of just 1.46 at the time of posting, the company now trades at a still-modest EV/EBITDA of 2.83. Future results will depend largely on the company succeeding in turning around operations and refinancing its debt.

ALJ Regional Holdings – ALJJ: When ALJ announced agreement to sell its Kentucky Electric Steel operations to Optima, shares leaped to $0.75 and higher. Optima has had trouble lining up financing for the deal, which has sent shares slumping back to $0.66. If the deal does go through, expect to see shares reach $0.80 or thereabouts. If not, things could get ugly. If the deal fails, I am confident that ALJ can continue its successful deleveraging process under CEO Jess Ravich’s leadership and create returns for shareholders.

McRae Industries – MRINA: McRae Industries is a classic value investing story of a sleepy, over-capitalized company trading at a single-digit P/E ratio. Since my write-up, McRae has churned out profits, bought back stock and declared regular and special dividends. The market rewarded the stock with a 46.37% total return. McRae still trades at a very reasonable valuation and could have more upside potential.

And….The Losers

QEP Company – QEPC: QEP Company is a great lesson in the danger of customer concentration. Since my write-up, QEP has faced gross margin pressure as its largest customers demand price concessions. The company has tried to make up lost ground with acquisitions, but now faces the threat of product discontinuation from a major customer in 2014. Profits remain excellent for now, but can they be maintained? The company’s choice to reverse course on its deleveraging process worries me and I am considering removing the company from the “active ideas” list and cementing the loss. I sold all the shares I owned personally last week for a better opportunity.

Schuff International – SHFK: Silence makes investors nervous, and silent is what Schuff has been. The company decided to stop releasing quarterly reports, meaning no one knows how business has been since the 2011 annual report. I have great confidence in Schuff for the long run. Nate Tobik has some thoughts on Schuff here.

IEHC Corporation – IEHC: I wrote about IEH Corporation less than a month ago, but the stock is down 7.25% since. No specific bad news appears to be affecting the share price, just a continued lack of interest. IEH Corporation trades at 4.76 times trailing earnings and an EV/EBITDA of 2.04. Price to book value is 0.59.

Once again, thanks for reading! Happy holidays to all and I look forward to providing more research and analysis for you all next year.

Until Then,

OTC Adventures

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8 Responses to The Year in Review and a Thank You to All!

  1. jack says:

    Tiny bank, 50% book, 6x earnings…is that a Bank of Utica write up on the horizon?? (If not,check it out 🙂 )

  2. Ian Cassel says:

    Great work in 2012. Look forward to following your picks in 2013.

  3. Sjoerd says:

    I wonder what the reason is that Hummingbird has sold a large part of their position. I can only guess, but I can relate if it is due to the consistent lack of management for creating shareholder value…

    • otcadventures says:

      Could very well be. Hummingbird’s sales could also be partially responsible for the stock’s decline. If you ask me, the company’s trading at a ridiculous valuation even with all its issues.

  4. Sjoerd says:

    I agree with you that Hummingbird selling their stock will be likely the reason the stock has declined as much as it did. I also agree with you that the company is currently gross undervalued based on its balance sheet and cash flow in relation tot its stock price. But…if management does not care about shareholder value, this discrepancy will likely be persistent.

    If a longterm major shareholder as Hummingbird gets frustrated with the company (which is still a guess and not a fact) I will, as a minor shareholder, certainly get frustrated as well. And I don’t need any more shares that frustrate me, I have enough of those…;-)

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