Although Western markets are soaring and many indexes are breaking records, bargain hunters should not lose hope. Currently, some Eastern markets have been more suitable for bottom fishing, but every now and then it is possible to find some deep-value stocks from the U.S. market. Company-specific situations often differ from the overall market sentiment. That is why bottom-up stock picking, when correctly executed, always works. To follow are some stock ideas for deep-value investors:
FreightCar America Inc. (RAIL, Financial)
FreightCar America is a manufacturer of aluminum-bodied railcars and railcar components in North America.
The company has seen some tough times lately as earnings have disappointed the past couple of quarters and orders are not especially strong. The total order backlog for railcars decreased from 9,840 railcars as of Dec. 31, 2015 to 4,259 railcars as of Dec. 31, 2016.
Last August, the company announced a cost reduction program where approximately 15% of its salaried administrative workforce would be eliminated. After this restructuring program is fully implemented, annualized cost savings should be approximately $5 million.
While FreightCar America is known for making coal cars, it has taken gradual steps to diversify its product line. This move to non-coal railcars has strengthened the company's overall business and has shifted the company toward a much more customer-focused approach to meet railcar needs. Unfortunately, these efforts have partly been wasted because the cyclical industry entered a downturn.
After strong headwinds, there could be also some tailwind in sight. President Trump’s energy policies should boost both the rail and coal industries. Industry-wide railcar deliveries are expected to fully rebound by 2020.
Market cap: $162.21 million
Price: $17.26 (Net cash $2.13, net-net working capital $6.58, net current asset $12.96)
Price/NCAV: over 100%
F-Score: 5
Z-Score: 4.11
Debt to equity: 0.0
Dividend yield: 2.1%
EV/EBIT: -20.5
FreightCar America was trading near its net-net range. It does not provide a great margin of safety, but it has valuable long-term assets. The tangible book value per share is $19.
FreightCar has solid earnings history, is profitable and pays dividends. Since the balance sheet is strong, it should carry the company through to better times. Current assets cover all liabilities about 2.5 times over. There are still some losses expected this year and maybe next year. But even if the company experiences losses, investors do not need to worry because it has strong fundamentals.
Since FreightCar America is a smaller railcar manufacturer, it could be acquired. Insiders own just about 3% of the company and no one has the power to block such a transaction.
Investors can collect a solid dividend while waiting for better times, which may come sooner than people think.
Manning & Napier Inc. (MN, Financial)
Manning & Napier is an independent investment management firm that provides investment solutions through separately managed accounts, mutual funds and collective investment trust funds.
The company manages tens of billions of dollars in assets. Manning & Napier may not be the most famous household name among the investment management companies, but it has been successful with its portfolio performance.
Since market indices are flourishing, Manning & Napier has been struggling. During the long bull market, a trend toward more passive investments on market indices, especially among institutional investors, has cost the company several major customers. It has also led to a steady decline in assets under management, from $50.8 billion in 2013 to $31.7 billion last year.
A class-action lawsuit against the board of directors has caused the stock price to drop near all-time lows.
Market cap: $86.91 million
Price: $5.30 (net cash $5.37, net-net working capital $6.48, net current asset $7.18)
Price/NCAV: 74%
F-Score: 5
Z-Score: 3.83
Debt to equity: 0.0
Dividend yield: 5.7%
EV/EBIT: -0.95
Institutional and intermediary distribution is likely to remain challenging for Manning & Napier in the near term. First-quarter 2017 ended with net client outflows of $2.0 billion. By contrast, the company is seeing better traction through focusing on high net worth and midsize institutional clients. The company’s revenue is still under pressure, but margins are improving.
No one likes to see dividend cut, but a dividend reduction is inevitable when a business shrinks. Despite its recent dividend cut, the company continues to yield an attractive 5.7%. The balance sheet is of the most interest because it has a lot of cash and other valuable tangible assets and only a very small amount of goodwill on the books.
Manning & Napier’s cash, equivalents and short-term investments alone are $127.7 million, which amounts to $5.37 net cash per share. This means the company can be bought at roughly the level of its net cash. It is profitable and debt-free net-net company with definite bargain balance sheet.
It is difficult to predict market reactions, and the pessimism can drive the company down in the near term. Class-action lawsuits typically take a very long time to settle, but I believe it is already largely factored into the price. Although there is no straightforward catalyst for a big rebound, one positive earnings report that beats expectations could quickly restore the stock price. At the very latest, when the current market sentiment has changed, Manning & Napier will see better times. While waiting for its return to glory, investors can collect sizable dividends in this case as well.
STR Holdings Inc. (STRI, Financial)
STR Holdings designs, develops and manufactures encapsulants that protect the embedded semiconductor circuits of solar panels.
The stock currently trades on the over-the-counter market because in September 2015 - with shares trading under $1 and a market cap under $15 million - the company was delisted from the NYSE and moved on to the OTC market. The delisting cut the stock price by half.
STR Holdings is an unconventional and extreme case, even among net-nets. The company is in deep trouble and the share price has reached a level that could only be justified if bankruptcy was just around the corner - which is not the case.
STR is extremely undervalued. This extreme undervaluation comes as a result of a number of issues. Five years ago, the company was relevant market player in a growing solar industry. The future looked bright. Currently, the company is struggling to reach one-tenth of its former revenue, having lost many of its most important customers. What really happened?
Increased competition, particularly from China, significantly reduced the average selling price of its products. Extra capacity on the market drove a severe inventory build. Due to the supply glut, inventory write-downs were recorded. At this point, the entire industry focused on cost reductions. Unfortunately, STR Holdings was determined to be an underperformer with permanently decreasing revenues in a low margin business of a lagging industry.
Since these events, STR Holdings has been trying to find solutions to reverse its stagnating revenues. In 2014, the company partnered with Zhenfa Energy Group, a Chinese developer of solar power stations. The idea was to move production and business away from struggling solar markets in the West to the growing industry in China. The agreement looked quite promising and Zhenfa agreed to buy a 51% stake of STR for $21.7 million. This arrangement would have given the company exposure in China. Zhenfa even agreed to provide manufacturing facilities for five years.
Unfortunately, business in China, even with a Chinese partner, proved to be more challenging than expected. Fierce competition forced STR Holdings to reduce its prices and the desired revenue growth from China was missed. The continued decline of revenues in the U.S. and Europe made the situation worse.
After closing its Malaysia facility in 2015, STR Holdings is now shutting down its factory in China. Management is currently looking for new ideas and trying to find playing ground in India.
Market cap: $4.23 million
Price: 19 cents (net cash 36 cents, net-net working capital 52 cents, net current asset 89 cents)
Price/NCAV: 21%
F-Score: 3
Z-Score: -7.22
Debt to equity: 0.0
Dividend yield: 0.0%
EV/EBIT: 0.67
After the losses and declining revenues, STR Holdings has managed to maintain a healthy balance sheet. The company is trading at 24% of its net current asset value and the tangible book value is $1.63 compared to its market price 21 cents. STR Holdings is a strong cash play and gives a lot of downside protection. Net cash per share is 36 cents, almost twice the share price. Even if nothing particularly positive happens and the company continues burning its assets, it would take over five years to do so. And even then, STR Holdings would still have over 50 cents in fixed long-term assets (factories, real estate) per share.
CEO Robert Yorgensen has been with STR Holdings for 31 years. He owns about 2% of the company and other insiders combined own a little less than 12%. In general, STR Holdings has been shareholder-friendly, open and honest. Management's main goals are cost reduction and finding new ideas to use the company’s excess cash on to create shareholder value with strategic alternatives.
STR Holdings is definitely a high-risk investment. This stock can become a 10-bagger (or even more) if the company becomes profitable again or comes close to turning a profit.
The more likely option is STR Holdings will continue to report the same results while pursuing new business alternatives. In this case, an immediate catalyst is not visible, but investors should wait to see what happens before deeming the company a value trap.
Disclosure: Long FreightCar America (RAIL, Financial).
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