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Yamil Berard
Yamil Berard
Articles (149) 

Gurus Pile on Dirt-Cheap Small-Caps in 1st Quarter

Stock of a REIT pays 15.62% dividend in a market where 'deep value appears to be unusually cheap'

June 12, 2018 | About:

A flurry of trading among gurus was focused on a pair of small-caps representing stakes in dirt-cheap stocks in the first quarter.

Some of the world’s top investors, including Seth Klarman (Trades, Portfolio) and Paul Tudor Jones (Trades, Portfolio), zeroed in on the stock of the Los Angeles-based diversified equity real estate investment trust known as Colony NorthStar Inc. (NYSE:CLNS). Trading today at a little more than $6 a share, Colony NorthStar pays an aggressive dividend of 15.62%, which easily beats the industry median of 4.95%.

A total of five gurus initiated a position in Colony NorthStar in the early months of the year, buying as much as 2 million shares in one swoop. Four other gurus, including Klarman, expanded their stakes by more than 114%.

The second, dirt-cheap small-cap pick was the stock of Steel Connect Inc. (NASDAQ:STCN), formerly known as ModusLink Global Solutions (MLNK). After some disappointing earnings, the Massachusetts-based logistics company is promising shareholders better earnings as a result of a widespread restructuring. It also recently acquired a direct marketing company that it says will lift earnings.

At least four gurus bought shares of Steel Connect in the first quarter of the year. On Tuesday, Steel Connect was trading a little over $2 a share.

A number of gurus, including Arnold Schneider (TradesPortfolio), noted in their fund commentaries that the super-cheap small-caps represented great buying opportunities. There exists one of the largest potential portfolio valuation gaps versus the market in recent years. As a result, “deep value appears to be unusually cheap,” Schneider wrote in a first-quarter commentary letter to clients of his Small Cap Value Fund.

Steel Connect

Besides Schneider, gurus who bought shares in the first quarter included Mario Gabelli (Trades, Portfolio), Jim Simons (Trades, Portfolio) and Murray Stahl (Trades, Portfolio).

The investment has produced an estimated loss of 4%, GuruFocus projected based on market results on Tuesday afternoon.

Steel Connect provides digital and physical supply chain solutions to companies that provide consumer electronics, medical devices, retail and luxury and connected devices. It does business in North America, Europe and the Asia Pacific.

In a second-quarter financial update for fiscal year 2018, the company said it expected to post positive earnings before interest, taxes, depreciation and amortization in fiscal 2018 as a result of its purchase of IWCO Direct, a direct marketing company.

It purchased the company for about $469 million. The purchase essentially doubled the size of the company and added significant earnings and free cash flow. The impact creates “significant opportunities to drive both top- and bottom-line results."

Steel Connect was up 2.33% to $2.20 a share on Tuesday. Year to date, the stock is down 13%. The 52-week range is $1.46 to $2.90 a share. Its stock price is trading slightly above its historical value, based on the median-price sales chart provided by GuruFocus.

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It is trading at 4.3 times earnings and has a price-book ratio of 0.96 times and price-sales ratio of 0.27 times. The price-sales ratio is more than 85% higher than its peers in the Global Integrated Shipping and Logistics sector.

In 2011, it paid a dividend yield of more than 11% to investors. It has not paid a dividend for several years.

In revenue, it reported $451 million in the trailing 12 months on earnings of 50 cents per share. Net income and revenue have been declining in recent years, as characterized in the chart below. The company saw revenues increase to over $1.14 billion over several years just over a decade ago.

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The company has a Piotroski F-Score of 4, which denotes a financial situation that is typical for a stable company.

Its market cap is $129.44 million. GuruFocus ranks its financial strength 3 out of 10 and its profitability and growth 2 of 10.

Its low financial rating is partly due to a long-term debt of $448 million over a trailing 12-month period. Its free cash flow is -$12.7 million over the same period.

Colony NorthStar

Gurus who opened positions in the stock in the first quarter include Jones, Louis Moore Bacon (Trades, Portfolio), Hotchkis & Wiley and Michael Price (Trades, Portfolio). Others expanded positions in the stock, including Murray Stahl (Trades, Portfolio), NWQ Managers (Trades, Portfolio), Pioneer Investments (Trades, Portfolio) and Klarman. David Dreman (Trades, Portfolio) left his stake unchanged in the first quarter. Jim Simons (Trades, Portfolio), David Abrams (Trades, Portfolio) and Diamond Hill Capital (Trades, Portfolio) sold out, while Chuck Royce (Trades, Portfolio) reduced his exposure.

Colony NorthStar has lost an estimated 27% since the shares were purchased by the guru in the first quarter, according to GuruFocus estimates based on market returns on Tuesday.

The eye-fetching characteristic of the stock is its dividend of more than 15%. It reported a forward dividend yield of 7.56%.

The company’s properties include health care, industrial and hospitality buildings, equity and debt investments and an institutional and management business.

On Monday, Class A shares closed up 2.58% for a stock price of $5.97 a share. By Tuesday afternoon, shares had climbed to $6.11 per share, up 2.26% in trading. The stock reported a 52-week low of $5.28. The 52-week high was reported at $14.74 a share.

GuruFocus shows its stock price is below its historical chart, based on the median price-sales chart provided by GuruFocus.

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GuruFocus detected a serious warning sign, which is an Altman Z- Score that indicates financial distress. It also bears a Beneish M-Score that indicates it might have manipulated its financial results.

In earnings, it shows an average annual growth of 14.8% over the last five years, and -45.20% over 12 months.

In revenue, the company reported more than $3 billion in December 2017, compared to $938 million the year prior. It reported a gross margin of 90.06% in the trailing 12 months. But operating margins have declined to 23% recently from as much as 78% in 2013. And net income is in the red.

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It has a market cap of $2.97 billion. It has more than $12 billion in long-term debt, results from December 2017 show. It has a free cash flow of -$524 million over the trailing 12 months.

GuruFocus ranks it 4 out of 10 in financial strength and 7 of 10 in profitability and growth.


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