Back in early February, I was lamenting the fact that the then market volatility had done little in the way of presenting new bargains. Small caps were not getting hammered to a greater extent than large caps as they typically do in volatile market environments. Fast forward, and smaller names are beating the stuffing out of their larger cousins year to date. The Russell 2000 (+10%) and Russell Microcap Indexes (+13.5%) are trouncing the Russell 1000 (+3.6%) and S&P 500 (+2.4%). Go figure.
In that column, I mentioned three names that I'd be interested in purchasing in a pullback; Fogo De Chao (@$10), Valhi (VHI) (@$4), and Manchester United (MANU) (@$15). How times change. I never got an opportunity with Fogo, as the Brazilian steakhouse chain was acquired by Rhone Capital for $15.75/share two weeks after my column ran. Meanwhile, MANU, one of the few ways to get direct exposure to a professional sports franchise, perhaps not surprisingly, never got close to my rather cheap buy price, and currently trades at $21.
VHI, however, has been on the skids. I took an initial position last September that I closed in late January after the stock ran up 150% more quickly than I expected. In fact, it continued to run, hitting the $9 level in April. It has since cooled off big time, and trades in the $5 range.
VHI is a complicated animal, a holding company that essentially operates through its subsidiaries, three of which, NL Industries (NL) , Kronos Worldwide (KRO) , and CompX International (CIX) , are publicly traded. It is a complicated web of ownership. VHI owns 83% of NL ($443 million market cap), NL owns 30% of KRO ($2.57 billion market cap), and VHI directly holds 50% of KRO. NL also owns 87% of CIX ($154 million market cap), which effectively means that VHI has a huge stake in CIX via ownership of NL.
The reason that VHI has fallen recently is likely because some of its holdings have stumbled. KRO is down about 13% since late May, while NL shares have fallen 35% since January. While I was looking for a re-entry point into VHI, I am now more interested in directly owning NL.
NL's structure is almost as confusing as VHI's; the company itself owns more than 35 million shares of KRO, 10.8 million shares of CIX, and, get this, 14.4 million shares of VHI. In addition, NL ended its latest quarter with $100 million or just over $2 per share in cash, and no debt.
One of the overhangs on the company has been its former paint business, which sold lead paint. NL has been out of that business since 1980, but the specter of liability has remained. Last month, NL settled a two decade old California lawsuit regarding the lead paint issue for $60.2 million. Perhaps that will remove some of the uncertainty.
NL currently trades for just over 4 X next year's "consensus" earnings estimates (note the quotes around consensus; just one analyst currently covers the name). Clearly, markets still view it with skepticism; the words "lead" and "paint" used in the same sentence typically make investors run away. I, however, am trying to get comfortable with this potential "sum of the parts" idea.
