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Identifying Winning Value Stocks How to Find Companies that are Trading Well Below their Intrinsic Value World Money Show – February, 2006 Company Introduction Financial Newsletter Publisher Founded in 2001 Independent, Unbiased Research Five Different Newsletters

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identifying winning value stocks

Identifying Winning Value Stocks

How to Find Companies that are Trading Well Belowtheir Intrinsic Value

World Money Show – February, 2006

company introduction

Company Introduction

  • Financial Newsletter Publisher
  • Founded in 2001
  • Independent, Unbiased Research
  • Five Different Newsletters
  • Over 100,000 Subscribers
  • Paul Tracy – Co-Founder

World Money Show – February, 2006

today s topic

Today’s Topic:

  • Edited by John DiStanislao
  • Degrees in Investment Finance and Accounting
  • Two Decades of Experience
  • Uses advanced screening methods to uncover companies that are trading at a significant discount

Identifying Winning Value Stocks

World Money Show – February, 2006

where to search for undervalued companies

Where to Search for Undervalued Companies

  • Ignore the mainstream financial press
  • Widely-followed firms tend to be efficiently priced
  • Look at small-caps and select micro-caps

World Money Show – February, 2006

reasons to look primarily at small cap and micro cap value stocks

Reasons to Look Primarily at Small-Cap and Micro-Cap Value Stocks

  • Less Coverage on Wall Street
  • More Likely to be Undervalued
  • More Likely to have Hidden Assets that Wall Street isn’t fully aware of

World Money Show – February, 2006

example american intl industries amin

Example: American Intl. Industries (AMIN)

  • Diversified Holding Company
  • Majority owner of Delta Seaboard – a well servicing contractor
  • Full ownership of Brenham Oil & Gas
  • Majority stake in Intl. American Technologies
  • Full ownership of Northeastern Plastics
  • Owns a variety of real estate

World Money Show – February, 2006

amin price chart on june 20 th 2005

AMIN Price Chart on June 20th, 2005

World Money Show – February, 2006

what really caught our attention about amin

What really caught our attention about AMIN

  • Selling a piece of waterfront property at an asking price of $16.3 million
  • At that point in time last summer, investors were valuing the ENTIRE COMPANY at just $12 million
  • What this meant is that Wall Street was valuing the entire company at far less than the value of its real estate assets alone

World Money Show – February, 2006

enterprise value vs market cap

Enterprise Value vs. Market Cap.

  • Market Cap. = Shares outstanding * Share Price
  • Problem: Market cap. just measures equity value and ignores the impact of debt and cash.
  • Enterprise Value = Market Cap. + Total Debt – Cash
  • Enterprise value better represents the TOTAL value that all investors – both equity holders and bondholders – have placed on a firm

World Money Show – February, 2006

an important note about corporate balance sheets

An Important Note aboutCorporate Balance Sheets

  • Real estate assets are listed at their HISTORICAL COST
  • This cost is often far different than the real estate’s current market value.
  • In the case of AMIN, the firm’s waterfront property was recorded at its historical cost of only $225,000, yet its current market value was around $16 million

World Money Show – February, 2006

shares of amin soar 100 after the firm receives two cash offers for its valuable real estate

Shares of AMIN Soar +100% After the Firm Receives Two Cash Offers for its Valuable Real Estate

World Money Show – February, 2006

what to look for in an undervalued stock

Low levels of institutional ownership

  • Little or no brokerage research available
  • Quality earnings
  • Strong cash flows
  • Experienced management teams
  • Shareholder-friendly firms
  • Low debt
  • Substantial liquid net assets
  • Enterprise value of less than 3X gross profits
  • Reasonably valued relative to annual sales
  • Strong profit margins
  • Avoid common pitfalls

What to Look for in an Undervalued Stock

World Money Show – February, 2006

time tested methods to use when searching for companies with hidden value

Time-Tested Methods to use when Searching for Companies with Hidden Value

  • High levels of property, plant and equipment relative to current share prices
  • Rising net tangible assets
  • Large cash balances
  • Low enterprise values
  • Insider buying by several key executives
  • Promising new products
  • In-depth industry analysis

World Money Show – February, 2006

staffing and outsourcing industry relative valuation comparison

Staffing and Outsourcing Industry(Relative valuation comparison)

World Money Show – February, 2006

adjusted enterprise value ev

Adjusted Enterprise Value (EV)

Adjusted EV =

Share Price – Cash – Accounts Receivable + Debt

World Money Show – February, 2006

staffing and outsourcing industry including adjusted enterprise value

Staffing and Outsourcing Industry(Including adjusted enterprise value)

World Money Show – February, 2006

general employment job data as of june 2005

Share Price of $1.20 in June 2005

  • $0.91 per share in Cash
  • $0.36 per share in Accounts Receivable
  • $0.44 per share in Liabilities
  • Adjusted Enterprise Value = $1.20 - $0.91 - $0.36 + $0.44 = $0.37 per share
  • Book value of $1.00 per share
  • Free Cash Flow of $1.00 per share
  • Annual sales of $4.00 per share

General Employment (JOB)Data as of June, 2005

World Money Show – February, 2006

shares of job soar 70

Shares of JOB Soar +70%

World Money Show – February, 2006

important catalysts

Important Catalysts

  • Positive earnings
  • Important press releases
  • Acquisition by a larger competitor
  • Other investors finally discover the stock

World Money Show – February, 2006

a few examples of winning value stocks we ve uncovered since may 2005

A few examples of winning value stocks we’ve uncovered since May 2005:

World Money Show – February, 2006

vodavi technology vtek

Maker of traditional and IP-based phone systems

  • Growing demand for computer-based phones
  • Enterprise value of $17 million
  • $6 million cash + $11 million in A/R and inventory = $17 million in current assets
  • Trading at half of industry average P/E and P/FCF ratios
  • $50 million in annual sales (EV/Sales = 0.3)
  • $15 million in gross profits

Vodavi Technology (VTEK)

World Money Show – February, 2006

harvest natural resources hnr

Oil & gas company with primary operations in Venezuela

  • Shares of HNR have declined -50% in the past year
  • Operating cash flows surge +65%
  • P/E of 7 – well below industry norms
  • Enterprise value (EV) of $200 million
  • EV / Gross Profit ratio of 1.3
  • Profit margin -- 25%
  • $71 million in free cash flow

Harvest Natural Resources (HNR)

World Money Show – February, 2006

collectors universe clct

Collectors Universe (CLCT)

  • Grades and assigns value to collectibles
  • Undisputed market leader
  • $70 million in cash and no debt
  • Enterprise value -- $60 million
  • $34 million in annual sales
  • $7 million in annual EBITDA
  • 20% operating margins
  • Expanding into new markets

World Money Show – February, 2006

general employment job

General Employment (JOB)

  • Professional staffing company
  • Enterprise value -- $3 million
  • $20 million in annual revenues
  • $12 million in gross profits
  • Clean balance sheet
  • One of the best values in the Staffing & Outsourcing industry

World Money Show – February, 2006

avalon holdings awx

Diversified holding company

  • Strong cash flows
  • Substantial real estate holdings
  • Enterprise value -- $6 million
  • Annual sales -- $35 million
  • Annual free cash flow (FCF) -- $2 million
  • Strong balance sheet with $11 million in cash

Avalon Holdings (AWX)

World Money Show – February, 2006

sten corp sten

“Burger Time” fast food chains

  • Market cap -- $10 million
  • Strong balance sheet -- $4 million in cash
  • Significant real estate holdings
  • Price/Sales of around 1.0
  • Share buybacks and insider purchases provide positive signals from management

Sten Corp. (STEN)

World Money Show – February, 2006

x rite xrit

X-Rite (XRIT)

  • Manufactures optical & electronic sensing instruments
  • Double-digit sales growth
  • $20 million in cash, zero long-term debt
  • ROE of greater than 20%
  • Stock now trading near 52-week low
  • Recent round of insider purchases

World Money Show – February, 2006

thanks for attending

Thanks for Attending

World Money Show – February, 2006