Unfavorable Areas Can Yield Bargains

 | Mar 19, 2015 | 1:03 PM EDT
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I wrote earlier this week about the value of having a routine as an investor. Great appliers of their professional craft, whether athlete, pilot, or investor, have a disciplined routine that they regularly and rigorously apply in order to get better. I discussed the merits of having a sound search strategy as a source of investment ideas.  

With the goal of any investor to buy low and sell high, I suggested looking at unfavorable areas as a process of finding opportunities to own things below intrinsic value. Spending half an hour each day looking at a least 52-week lows is not a bad place to start.  

This morning I see Layne Christensen (LAYN), a heavy construction company that is being valued for $91 million and an enterprise value of $180 million. The company shows $205 million in net tangible assets, although that number is down from $275 million a year earlier. The stock has crashed over the past year as the company is reporting losses due to commodity price pressures.

Layne's business appears decent with gross margins in the high teens and annual revenues of nearly $900 million. Yet the company has lost money for three years, so I'm looking forward to digging in to see if this is a diamond in the rough or a value trap.  

Dover Saddlery (DOVR) is a $22 million micro-cap company that provides equestrian sporting products. Micro caps can be risky ventures given their "small size" but they can also be very lucrative, but they demand close analysis. Dover has been profitable the last three years. For a company of this size, the balance sheet is quite leveraged with $16 million in debt and very little cash. The bulk of assets consist of inventory and that can be risky if the company faces a period of losses.  

The biggest hurdle for a bargain-hunting investor is to understand what constitutes a bargain. Bargains aren't low-priced stocks or even low price-to-equity ratios. But they are businesses that can, in one way or another, create greater future intrinsic value. That can come from a liquidation play, but it can also come from future growth.

A high-quality business such as a Whole Foods (WFM), when it was trading for less than $40 a share and 20x earnings, was just as good a bargain. Knowing how to apply a sound search strategy to look everywhere for potential-value opportunities is precisely the reason that a rigorous routine makes sense. 

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