While David Einhorn, of Greenlight Capital, has had a difficult year versus the broad market, his recent investor letter did a nice job of putting value investing into perspective.
To paraphrase, Einhorn does not believe that value investing is dead -- just out of favor. If you were a value investor in the late 1990s as I was, you've seen this before. It is not fun, but don't believe the rhetoric that the investment landscape has changed to the extent that the old fundamental metrics no longer matter.
Value can take time to unfold, and in such a fast-paced world, that is unacceptable to many investors. While I was away last week, I was pleased to finally see some positive developments unfolding for the only remaining net/net (company trading below its net current asset value or "NCAV").
Richardson Electronics (RELL) , which has had difficulty shaking the notion that it is a value trap, saw its stock hit a two-and-a-half year high last week, after posting better than "expected" second quarter results. (Keep in mind that just one analyst follows the name, hence the quotation marks around the word expected.)
Revenue was up 15.6% year/year, and beat the "consensus" by $4.0 million. Earnings per share of $0.01 were well better than the expected $0.08 loss. Shareholders were rewarded with a 15% jump in the share price on Thursday, and shares exceeded the $8 level for the first time since June 2015. RELL is off to a great start for 2018, up 21% year to date.
In addition, the balance sheet remains solid, one of the better ones that you will see for a net/net. RELL ended the quarter with $59.3 million, or $4.60 per share in cash and investments. That's a whopping 58% of the company's market cap. Despite the recent run-up, the company remains a net/net, trading at 0.98 times NCAV. There is still no debt on the books, and shares still trade below tangible book value.
Getting back to profitability, however small net income was this quarter, this is a big step for RELL. It has to break the cycle of being a company with a relatively large amount of cash, but never generating a positive bottom line.
While the company currently yields 3%, and continues paying its $0.06 quarterly dividend, it did not repurchase any shares during the quarter. RELL has reduced shares outstanding by more than 28% over the past seven years, but unfortunately that has been through a period of declining operating performance and a declining stock price, and not a positive. However, if the company is truly on the path of regaining and maintaining profitability, buying back shares might send a signal of confidence to investors. I use the word "might" only because of the company's buyback history. You can't fake this; buying back shares at prices in excess of the real value will not fool shareholders.
Now we need to see two consecutive profitable quarters. We need to see that this quarter was not an anomaly, and that the company can actually generate a positive bottom line.
