As Greece and Puerto Rico continue to dominate the news flow, I am going to continue to do my best to ignore it all. I own some Greek banks and will either win or lose a little bit of money, depending on how all this plays out, but when I bought them I viewed them as a hero or zero long-dated option on Greece and I haven't changed my mindset. If Greece collapses and the banks fail, I will lose a little bit of money. If one or both of my positions survive, they should make a pretty fair sized amount of cash over the next decade.
I have an interest in buying Puerto Rican banks if they fall further, and I might be interested in Puerto Rican munis if we see some defaults and panic. However there is not one thing I can do about either situation today, so I will keep my head down and continue this weeks search for low priced stocks with high return potential.
Having covered the growth and value selection in the low-priced world, I am going to move onto special situations today. This allows me to talk about one of my favorite stocks in the whole equity universe again. Volt Information Sciences (VISI) has been one of my favorite stocks for a couple of years now and the shares have pulled back below $10 after a pretty poor earnings report in the last quarter.
Since we last visited Volt, there has been a shake-up in the board and last week the CEO stepped down amid some discontent from shareholders. The board is moving forward with plans to dispose of non-core assets and focus on the core staffing business. This is a potentially great business that has been hidden by lackluster management, and the process of uncovering that great business has begun.
The Chairman of Volt, Michael Dean, is going to assume the role of president and CEO. He is no stranger to the corporate fix-up business, and he most recently was CEO of Nature's Sunshine Products (NATR), where he turned things around at the global health and wellness company, and returned it to growth. He told shareholders upon taking the CEO role that "I am looking forward to working closely with the very talented team at Volt, to move the company forward by focusing on executing strategic initiatives, top line growth and margin improvement during this period. Volt is a well-established company and brand in a growth industry, and I am excited about the company's future prospects."
Yesterday I spoke with David Neuhauser of Livermore Partners, an activist investor who owns a large position in the stock and he had good things to say about the future for Volt. Among them: "Livermore feels Volt has made bold and defined moves to both the board and management and the company is now positioned for growth and further equity appreciation. The intrinsic value of Volt remains dramatically higher than the current price as the company steers on a forward path".
The stock is currently trading at what appears to be almost three times book value. However, when you add all the net operating losses and tax credits in, Volt is trading at a discount to the actual value of the shares right now. I think the core staffing business can easily earn north of $1.50 a share two years out and continue to grow at a reasonable pace. Add in the value of the non-core holdings and real estate and this stock is an easy double or triple in the next few years, in my opinion.
If you think, as I do, that the housing recovery will not be an explosive V-shaped recovery but a long, slow return to normal, then you might want to consider shares of Hovnanian (HOV). The homebuilder has been struggling of late because it overextended itself with spec houses. As a result it had to turn to substantial incentives and concessions to move the unsold inventory. That should begin to abate as we move into the second half of the year.
Like Volt, it has substantial tax-related assets. In fact, CEO Ara Hovnanian told shareholders recently that "at the end of the second quarter of FY15, our valuation allowance in the aggregate was $643 million. The remaining valuation allowance is a very significant asset not currently reflected on our balance sheet, and we have taken numerous steps to protect it. Will not have to pay cash federal income taxes on approximately $2 billion of pretax earnings.
We show that we ended the second quarter with a total shareholders' deficit of $146 million. If you add back the remaining valuation allowance ... then our shareholders' equity would be a positive $497 million."
If the home building markets continue to just slog along in a slow recovery, the stock is a double or better. If we get a stronger market and the company continues to expand in the fast-growing active adult housing market, the returns could be enormous over time.
I am a big fan of special situations like these two stocks. Being able to buy them with single-digit price tags just makes them that much more appealing.