Resolute Forest Products Inc. (RFP, Financial) (“RFP”)
As of June 30, 2022, the market price of RFP was US$12.76 per share. Having said that, it is quite comical to us how a commodity stock can be hammered beyond all logical comprehension. RFP paid a special dividend of US$1.50 a share in 2018, and it was trading as low as US$1.17 per share in April 2020. Back in March 2020, the company announced that it would buy back 15% of its common shares for US$100 million. At the lowest price of US$1.17, the whole market capitalization would be approximately US$99 million. In other words, instead of buying back 15% of the company with US$100 million, it could repurchase 100% of the company. RFP shares have since recovered a very healthy 990.6% to US$12.76 as of June 30, 2022.
The investment in RFP goes to show you what it takes to have the mindset of a value investor. I wrote about it in the 2021 annual letter, but it’s worth repeating. “When the stock is that cheap, assuming that you don’t own any shares, a rational investor should back up the truck and buy every share that is offered in the market. But what makes it difficult for some investors to buy is not the rational side of their mind but more the psychological aspect of it. In the stock market, you are bombarded with noises that affect a person’s rationality. It can get radically altered. Stock prices can move unrelated to the fundamentals of a business. During a bull market, you may see several stocks trading at anywhere from 50 times to more than 100 times earnings, and conversely, there can be several stocks that sold at 10 times earnings going down to below five times earnings. The fundamentals of the company are ignored and, instead, investors are transfixed on the price movements of the last couple of years. Then new narratives are written most convincingly on why these are the “new” paradigms, and why they are not worth giving weights and considerations to what the assets are worth and what the company can earn over several years. I remember talking to one value manager in 1999 when the tech stocks were in full bloom. He said, “I have a family to feed and I will keep losing assets if I don’t accept the new headlines and paradigms. Sticking to buying companies that are undervalued is not the way to be successful in the long run”. He changedhis philosophy before the tech stocks were about to go into a severe decline over the next couple of years.”
“In spite of the price of RFP trading at US$15.27 per share, it is still quite cheap. Let us look at a few facts. The shares may be able to get back close to US$400 million in duties (approximately US$5 per share), but the earning power over the next two years is most likely to be more than US$3 per share annually and the lumber prices may stay elevated for a while because there is an imbalance between supply and demand in housing that may take a few years before it comes back into equilibrium. Meanwhile, it is making money hand over fist.”
Since June 30, 2022, RFP announced that Domtar will be purchasing the company. The transaction will be carried out by way of a merger between RFP and a newly created subsidiary of Domtar, providing for the conversion of each share of RFP common stock into the right to receive US$20.50 per share, together with a CVR (Contingent Value Rights) entitling the holder to a share of future softwood lumber duty deposit refunds. Each share, on a fully diluted basis at closing, will be entitled to receive one CVR.
What it proves is that in investing, an accurate valuation of what a company is worth matters the most.
From Francis Chou (Trades, Portfolio)'s Chou Associates Fund semiannual 2022 letter.
