Another value investment I came across was Audiovox (VOXX), maker of various electronics products which seem to largely fall in the value (e.g. lower margin) segment. I started following Audiovox after hearing Thomas Kahn, who’s supposed to be known as a value investor, speak about it, NY Bankcorp (NYB), and Haggar way back in 2004 during an interview on a finance discussion roundtable as good turnaround candidates to invest in. Interestingly enough, none of these stocks has fared particularly well so far, and in fact, Kahn Brothers bought out Haggar and took it private.
When I first started watching VOXX, it was hovering around $18. By November, it had dropped to $14. The reason VOXX was such an interesting proposition was that it was about to meet one of value investing’s most sought-after critera: not only was it trading below book value, but its price was trading at below net working capital (current assets – total liabilities) per share, meaning that if you bought this business, you’d be paying for only its operating costs. Sounds like a great deal, right? Such candidates are supposed to be rare, if not impossible to find these days.
The problem was that that was about the only value investing criteria that VOXX met. Their earnings were non-existent or negative, and most troubling of all was that during the company’s conference calls, management (including the CEO) seemed to think there wasn’t a big problem and outlined their strategy for getting out of it by introducing new products (whose ASP, or average selling price, had to be slashed by 50% due to unseen competitive pricing pressures) and acquiring potential targets. What company in trouble gets out by buying other companies? That just seemed like a foolhardy idea, and analysts pointed it out. The market was punishing the company’s stock price. Didn’t management get the hint and realize they might be on the wrong track?
These days, VOXX is trading around $12, whereas net working capital is valued at around $14.4 (based on their 2/28/06 financials). It dipped as low as $11.45 a couple of months ago. I haven’t had the guts yet to buy this stock, because although it’s trading at such a nice price, if management continues to destroy shareholder value by losing and mismanaging money, the company may well still be overvalued. On the other hand, if management gets a clue and starts making real profits again, the stock could take off. I’m not sure what I’ll do yet myself, but I’d be curious if anyone had any thoughts on it.
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I’ve been looking at VOXX as well recently but haven’t taken a position, mainly because I haven’t had time to do all my dd yet. The company popped up on a NCAV screen I built and I was familiar w/ the company’s products (i.e. cell phones, car stereo stuff). (Although it trades at 83% of NCAV or so, this doesn’t TRULY fit a ben graham type investment, as he preferred a company to trade at less than 2/3 of the NCAV value, but that’s just a sidenote.) One thing I did notice was that perhaps the NCAV itself should be looked at or at least considered carefully before taking a position, rather than just taking the $14.40 or so (as I calculated it also) of NCAV/share at face value. Although cash accounts for 46% of their current assets, inventories account for almost 25% but inventory write-downs have tripled yoy in 2005. Perhaps there’s more to be written down? Maybe they wrote off too much? I have no idea but the nature of their inventory (electronic equipment that goes out-of-style quickly) lends itself to write-downs. I dunno, but given that they have another $2/share in long-term assets this provides somewhat of a margin-of-safety for the investor, in addition to the value of the business, which I assume s/b greater than 0. That’s my 2 cents.
“What is worth doing is worth doing in a spreadsheet…viva la spreadsheet!”
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Ricemutt
Good points. Personally, I haven’t found something that trades at 2/3 NCAV yet (though I’ve admittedly just started doing this). You sound like you do some good in-depth financial analysis. I probably do less: some basic financial ratios and then, if they look like they have some good potential, look to 10Ks and management’s responses, openness, and attitudes during interviews and calls. I take heart in the examples Buffett gave about having multiple ways to value invest successfully.
It’s comments like these make me more motivated to do all the work that goes into finding a good investment — I swear sometimes it’s like trying to squeeze blood out of a stone — so thanks for taking the time to write!