Addvantage Tech (AEY) is a long time holding of mine and one of the most discussed stocks on the site. It’s doubles as one of my largest holdings and one of my biggest losers. So I was pretty interested in this article by my friend Jonathan over at Booth Laird.
I 100% agree with everything in it…. except for one thing: the conclusion (selling the stock). Which is pretty obvious, considering I’m still long.
To sum up, the big issue with AEY is the new CEO owns basically no shares and seems determined to make an acquisition instead of repurchasing shares. It’s hard to overstate how big an opportunity he’s passing up: the easiest way to create buckets of share holder value is to repurchase your stock when you’re selling for less than NCAV.
So yes, it’s easy to sell. Pretty much every shareholder is sitting on either a big loss or, at best, has a flat stock during the middle of a huge bull market. It’s so easy to grow frustrated and sell when management refuses to take advantage an opportunity to reward all shareholders with huge value creation.
But every net net has some hair on it. That’s how they get to be net-nets. And in terms of hair, I think you could do a lot worse than management potentially making a bad acquisition.
AEY has NCAV of $2.25 per share if you completely exclude their cash. They also have another $0.50 per share in cash, and $0.95 per share of long term assets (mainly PP&E, which is likely worth more than it’s on the books for). Even if you assume the company is going to burn through all of that cash in a disastrous worst acquisition ever, you’d still be looking at a profitable company trading under NCAV and way under book.
And make no mistake about it- AEY’s stock price would not be this low if the market didn’t believe AEY was about to make a terrible acquisition. Which is actually a bit funny- the two majority stockholders have shown a proven ability to create value through acquisitions if you go back in time and look at their deals. It’s true the current CEO wasn’t involved in any of those, but the stockholders own 50% of the company and serve as the Chairman and in the C-office. If the CEO wants an acquisition and they don’t, guess who’s going to win? If they decide they want to increase their personal wealth and buyback shares and the CEO doesn’t, guess who wins?
So, personally, I think selling is the opposite of what you should be doing here. Could something go even wronger than I mentioned? Sure. Maybe management issues share to do the acquisition. Or takes on tons of debt and bankrupts themselves.
But the great thing about investing at these prices is the odds are in your favor.
The company continues to be profitable, the key players own huge stakes that will encourage them not to do anything too stupid (though they continue to leave stupid on the board!), and the shares are priced for a disastrous acquisition. Imagine what happens if they don’t do an acquisition? What happens if they make a decent one or, heaven forbid, a tremendous one (their last one was an absolute home run)?
What happens if management wises up, the CEO buys some shares, and the company starts repurchasing shares?
Disclosure- Long AEY