As I grow older I've learned an important lesson: age (experience) and treachery will always trump youth and enthusiasm. Unfortunate but true-- and nowhere else do you see this as well demonstrated as in the investing world.
Along these lines, I'm never afraid to steal a great idea from people that may be smarter than me. Even more satisfying is the opportunity to buy a fractional ownership in a company at a considerably more favourable price than a good or even great investor has--- essentially utilizing all their expensive expertise and resources for FREE! Sounds pretty parsimonious, doesn't it? Isn't that what value investing is all about?
Of course the usual caveat applies: don't ever follow gurus (not even Warren Buffet) blindly. Their investment objectives and constraints are likely vastly different than yours. You need to understand the investment thesis in depth. If you don't want to do the research to do that, buy a few ETFs.... the couch potato's portfolio will do better than 90% of the "experts" at any rate and now is probably one of the best times to set one up.
Although I get a lot of my best ideas from the value gurus that I follow from gurufocus.com, I also search SEC sites for the smaller cap stocks that the giants pretty much need to ignore. These companies may have a lot of promise but they are simply too small to move the needle for these funds.
One company that has caught my eye for a couple of years and I'm intensifying my research efforts is Fortress Paper Ltd FTP.TO.
In my thieving and lazy fashion, I'm going to let the ABC funds guys (value investing oriented hedge fund, based in Canada) describe the compelling fundamentals, strong management and excellent prospects for this company that is trading at a fractional of its tangible book value-- providing a decent margin of safety. A sum-of-the-parts and DCF analysis conservatively indicates an intrinsic value of $10/share and FTP.TO is trading at half that today. I think that they are dead right about what the "Street" is missing: this is not a commodity play whatsoever. The market is treating the stock as if the company had a crappy balance sheet or negligible or absent earnings. This type of dislocation is where opportunity for small investors lies. I also think that investors see the wallpaper segment and run away screaming.... because it has something to do with housing and construction. We're still suffering from that hangover and probably will be for some time. Surprisingly, the wallpaper part of the company has been doing very well by selling to eastern European customers doing inexpensive renos.
The other issue is that not just anyone can open up shop and start printing security papers and currencies (lol) for obvious reasons. There are regulatory hurdles and expertise/reputation to attain first. I think this warrants FTP an economic moat albeit a narrow one. That is rare for such a small company.
The only thing I can add that isn't covered in the link above is that management owns 25% of outstanding shares and insider buying has occurred throughout 2008--- having the top people with "skin in the game" is almost mandatory for my investments, particularly these days. It firmly aligns their interests with ours, focuses their minds when market values dwindle and encourages long term thinking.
Downside risks:
- microcap and smallest in its industry
- competition coming on line for non-woven wallpaper niche
- material costs/capex high and difficult to anticipate
- really in the tech sector and in a rapidly changing industry-- we prefer slowly changing ones
- no dividend (a considerable downside when a near-term catalyst is not on the horizon)
I'm in no rush to invest in this company mostly because of downside #5. I plan to continue studying it for another quarter. A possible entry point would be <$5/share and target of >$10/share.
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3 comments:
I like the business (the security paper part, not the wall-paper - where i don't see any moat: Maybe I'm ignorant, but it't just paper, isn't it?) and the valuation. Moreover I like the idea of owning a money-maker literally.
But I have trouble to get an idea about the compensation and the granted options, it's a bit confusing to me. Do you have an opinion on that?
From the Q3 SEC filing:
Stock-based Compensation. Stock-based compensation expense was $0.4 million during the period ($0.1 million and $0.4
million in the third quarter of 2007 and the first quarter of 2008, respectively) reflecting the grant of 982,675 options issued
to directors and officers of the Company in fiscal 2007 and 30,000 issued to an employee in January 2008.
Stock-based Compensation. Stock-based compensation expense was $1.1 million during the period (prior year comparative
period, $0.6 million) reflecting the grant of 982,675 options issued to directors and officers of the Company in fiscal 2007
and 30,000 issued to an employee in January 2008.
STOCK OPTIONS
During 2006 the Company adopted a stock incentive plan. The exercise price of options granted under the stock
incentive plan shall be as determined by the Board of Directors when such options are granted, subject to any
limitations imposed by any relevant stock exchange or regulatory authority. The maximum number of options that
may be granted must not exceed 10% of the common shares outstanding at the time of the grant.
On April 5, 2007 and May 2, 2007 two tranches of options were granted for 320,350 and 122,325 shares,
respectively to directors and officers of the Company with an exercise price equivalent to the IPO price with expiry
10 years from the IPO date (June 20, 2007). On November 1, 2007 a further two tranches of options were granted
for 240,000 and 300,000 shares to directors of the Company with expiry 10 years from the grant date. On January 1,
2008 a further tranche of options was granted for 30,000 shares to an employee of the company with expiry 10 years
from the grant date.
The stock options vest from one year to three years from the later of IPO or grant dates.
The Company recorded stock-based compensation expense of $376 and $1,128 during the three and nine month
periods ended September 30, 2008 respectively (2007 - $121 and $621).
The weighted average fair value of the options, being $3.09 per option, has been estimated at the grant dates using
the Black-Scholes option pricing model. Option pricing models require the input of highly subjective assumptions
including the expected volatility. Changes in the assumptions can materially affect the fair value estimate, and,
therefore, the existing models do not necessarily provide a reliable measure of the fair value of the Company’s
stock options.
Couldn't find much about cash compensation other than one quote from businessweek stating that the CEO was paid $300,000/year salary. No info about bonuses etc but I'll keep digging.
I'm almost done my due diligence.
I agree about the lack of a moat with the coated non woven wallpaper although Raymond James states that they are by far the lowest cost provider and have the global market share (30+%)
To learn more about Fortress Paper, visit the blog www.specialtycellulose.com
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