While certain sectors of the market seem overheated, I'm finding plenty of value opportunities around. Much of the market is still behaving like one in recession, and that's probably a good place to invest for the long term. One example is Friedman Industries Inc. (FRD, Financial), a steel processor.
It has generally been a profitable company over the years, though its returns on capital are not going to blow anybody away. Its profits do fluctuate quite a bit, as it buys steel, whose prices can fluctuate, leading to margins that lag as they try to pass on or deal with price increases and decreases. Lately, profits have been negative, which likely comes as a surprise to no one. But I see no reason why normalcy won't eventually return to this industry.
The company has net current assets of $53 million and yet trades for just $41 million. As recently as 2019, the company earned operating income of $8 million. Net cash is $14 million, so the company is likely to be able to ride out these slow times for as long as necessary. Book value is $66 million.
Insider activity has been positive as well, with the company's current CEO having recently picked up some shares in the open market.
The downside here is pretty well protected, considering the company's cash and inventory positions relative to its trading price, as well as the balance sheet strength. The upside potential here also looks good should things eventually return to normal. As such, I believe Friedman is an asymmetric bet worth making.
Disclosure: Author has a long position in shares of Friedman.
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