When I first start looking for new investments, stocks whose names I cannot pronounce always stick out. Maybe it's the fact that my tongue is in a knot that makes me take another look, or it could possibly be that unpronounceable companies are some of the best investments.
Why do odd sounding names make good investments? My first reaction is to say they don't. Doesn't matter what their name is, what it starts with, or how many vowels, it won't affect the business one bit. True, but none of that matters because an odd name doesn't affect the growth side of the business, it affects the value side where investors make their profits.
The man reason why odd, unpronounceable names can have extra value is that they aren't covered by analysts as much. Without as much coverage, mis-pricing is more apt to occur, and many great investments are seen by the general public. Most companies that are selling below liquidation value aren't covered by many analysts because if they were, the market would be quick to correct this discount.
It's true. Basically, if you can't say it, they probably don't cover it. Okay so it might not be that simple, but it's still true. Most firms that analysts cover are firms everyone can relate with, everyone knows. You can relate to names like Nike, Intel, Walmart, even Exxon. The question is however, are you familiar with KHD Humboldt Wedag International (KHD, Financial)?
As of March 29th, 2009, KHD had a grand total of 2 analysts, both of which hadn't posted an update in months. One firm, BB&T Capital Mkts, lists KHD as a Hold, while Oppenheimer rates them with a Strong Buy. Lack of exposure may not be great for KHD, but it sure is for potential investors.
Overview
KHD is an industrial engineering supply company. What does that mean? Basically they provide the know-how in building and designing cement and coal and mineral plants all over the world. Obviously this doesn't sound like a fantastic field to be in right now, but looking at the fundamental aspects of KHD, the risk/reward ratio is too good to give up.
Value, Value, Value
Margin of safety. Simple words, but incredibly hard to find in todays market. While KHD doesn't provide complete peace of mind, their valuations are almost too good to be true. Sitting on $408 million in cash ($13.40 per share) and virtually no debt ($13 million), KHD easily has enough cash to survive the economic downturn. It gets even better when you find out KHD has a $211 million market cap, pegging it with a $-183 million enterprise value. Usually you find this kind valuation in money losing firms, but KHD had a profit and operating margin of 11% and 12.4% respectively last year. Other figures:
P/E: 3x
Forward P/E: 7x
PEG: .13
Price/Sales: .42
Price/Book: .77
How can KHD, in these trying times, still sport a forward P/E in the single digits? You can attribute that to their $1 billion plus backlog. Even though most people take backlogs for a grain of salt in this credit environment, KHD's is unusually strong. Many of their orders are from the Middle East and China (headquarters) where the slowdown has taken slightly less of a toll.
Conclusion:
Even though the next year or two will be tough on KHD's industry, they seem to have enough cash and a large enough backlog to survive. Once the economy picks up, KHD will be a great play on continuing global infrastructure. With a beta of over 2, investors may see a roller coaster ride the next few quarters, but in the long-run, I think this could be a potential winner.
Disclosure: I hold no position in any security listed in this article at time of publish.
Ryan Vanzo
Why do odd sounding names make good investments? My first reaction is to say they don't. Doesn't matter what their name is, what it starts with, or how many vowels, it won't affect the business one bit. True, but none of that matters because an odd name doesn't affect the growth side of the business, it affects the value side where investors make their profits.
The man reason why odd, unpronounceable names can have extra value is that they aren't covered by analysts as much. Without as much coverage, mis-pricing is more apt to occur, and many great investments are seen by the general public. Most companies that are selling below liquidation value aren't covered by many analysts because if they were, the market would be quick to correct this discount.
It's true. Basically, if you can't say it, they probably don't cover it. Okay so it might not be that simple, but it's still true. Most firms that analysts cover are firms everyone can relate with, everyone knows. You can relate to names like Nike, Intel, Walmart, even Exxon. The question is however, are you familiar with KHD Humboldt Wedag International (KHD, Financial)?
As of March 29th, 2009, KHD had a grand total of 2 analysts, both of which hadn't posted an update in months. One firm, BB&T Capital Mkts, lists KHD as a Hold, while Oppenheimer rates them with a Strong Buy. Lack of exposure may not be great for KHD, but it sure is for potential investors.
Overview
KHD is an industrial engineering supply company. What does that mean? Basically they provide the know-how in building and designing cement and coal and mineral plants all over the world. Obviously this doesn't sound like a fantastic field to be in right now, but looking at the fundamental aspects of KHD, the risk/reward ratio is too good to give up.
Value, Value, Value
Margin of safety. Simple words, but incredibly hard to find in todays market. While KHD doesn't provide complete peace of mind, their valuations are almost too good to be true. Sitting on $408 million in cash ($13.40 per share) and virtually no debt ($13 million), KHD easily has enough cash to survive the economic downturn. It gets even better when you find out KHD has a $211 million market cap, pegging it with a $-183 million enterprise value. Usually you find this kind valuation in money losing firms, but KHD had a profit and operating margin of 11% and 12.4% respectively last year. Other figures:
P/E: 3x
Forward P/E: 7x
PEG: .13
Price/Sales: .42
Price/Book: .77
How can KHD, in these trying times, still sport a forward P/E in the single digits? You can attribute that to their $1 billion plus backlog. Even though most people take backlogs for a grain of salt in this credit environment, KHD's is unusually strong. Many of their orders are from the Middle East and China (headquarters) where the slowdown has taken slightly less of a toll.
Conclusion:
Even though the next year or two will be tough on KHD's industry, they seem to have enough cash and a large enough backlog to survive. Once the economy picks up, KHD will be a great play on continuing global infrastructure. With a beta of over 2, investors may see a roller coaster ride the next few quarters, but in the long-run, I think this could be a potential winner.
Disclosure: I hold no position in any security listed in this article at time of publish.
Ryan Vanzo
