Sangoma Technologies Corp (STC.v) – Update

I am going through my current portfolio and sharing thoughts on my holdings in hope of getting some feedback from readers. At the very least, it’s a therapeutic exercise for me. Please don’t expect clear succinct thoughts from these posts, it’s more of a mental dumping ground for my brain.

I originally wrote up Sangoma way back here and briefly mentioned it here. Since writing Sangoma has made some acquisitions (and integrated them), invested new products and services, and is seeking a larger share of wallet from customers. Since coming onboard, the CEO has stated that he wants to grow top line and move away from one time product sales towards having recurring revenue to remove lumpiness in the business.

All this has led to a shift in the financials as the new services, acquisitions, and legacy products all have different margin profiles. As with many analysts on the conference calls, I was somewhat skeptical of the desire for top line growth given how much cash was sitting idle. Most of the high cash net-nets sit on cash and do nothing with it. At least with Sangoma, management was acting.

All the hard work has led to a higher top line, less lumpiness through the year, and still have the combined gross margins above 60%. Operating margins have been challenged as this work was integrated and more expenses were required to market to new verticals and geographies. All this was done while maintaining positive net income over the last two years in a corner of the market that is not booming.

The tone from management has been consistent stable growth in top line will translate into a stronger bottom line eventually. Around 40% of revenue is now coming from services and the legacy products now make up about 30% of revenue.

Below is a look at their product vs. service revenue mix. Quite a change. And you can see the working capital required as a % of revenue has declined as well.

STC rev mixstc-wc

Here is a look at the new IP phones that bundle several of their products together. Demand has been strong according to the last two conference calls.

Over the last two years there have been some angry investors attending the conference calls that were not supportive of management’s actions (I could only imagine how many emails and calls the company has gotten directly). From my vantage point, management has executed the plan that they have consistently communincated to investors.

Will 2017 be the year that we see the hard work bear fruit? I am betting on it.

STC.v was also mentioned on Investorfile.

Q1 2017 results should be out really soon.


*author is long shares at time of writing


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Why I Sold MUEL

I recently sold Paul Mueller Co. I thought I would go into a little detail on the decision. The decision relates to how I have evolved as an investor. For those who want the history, please read my previous post.

Paul Mueller Company is a provider of manufactured equipment and components for the food, dairy, beverage, transportation, chemical, pharmaceutical, and other industries, as well as the dairy farm market. Overall I think that the company has done a decent job running the business. Of the four segments (Dairy Farm Equipment, Industrial Equipment, Field Fabrication and Transportation); Dairy and Industrial make up the majority of the top line for the consolidated company.


Dairy has been stable  since the acquisitions post 2007-08. I was hoping for the Industrial segment to post some sort of turnaround in 2015. That has not happened.


The company’s valuation is still quite cheap without any contribution from the Industrial (or Field Fab and Transportation) segments.


So there are a few questions to get comfortable with the company as an investment:

  1. Does the Dairy segment continue to do well?
  2. Does Industrial turn around?
  3. If yes to the first two, does the valuation of the company improve?
  4. And aside from all 3 of those, is this a business run by quality mgmt?
  5. Lastly, does the pension liability on the balance truly reflect reality?

I honestly can’t really answer any of the above. I never really could. My original thinking was that if I buy shares cheap enough, I don’t really need to answer any of these questions. That’s not a bad way to invest, it’s just not the way I have gotten the most comfortable with.

When you buy a business like MUEL, you are buying a business with low(ish) product differentiation, capital intensive, and the business is subject to shocks that are beyond the control of the current management team. As well, you aren’t getting a ton of communication with the outside investor world. When buying microcaps, you hope for a business that is somewhat nimble, you aren’t getting that with MUEL.

It should be mentioned that MUEL has recently announced a share buyback. With such low volume on the stock, it could really move the stock higher.

In order to properly accommodate all the specific risks with MUEL you would need a portfolio that has 20-30 names. As well the amount of churn in the portfolio would have to be high. Something I don’t have time nor the personality for.

You may think that I will shun commoditized businesses or a business with little product differentiation to end users, that is not entirely correct. I have been putting a lot of thought into whether or not you buy companies that are part of a market that is commoditized or with little barriers to entry, and the answer of course….it depends. I’ll try and get some thoughts down to encourage conversation.



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Life After Renting for 1.5 years

I feel bad sometimes for not posting more on the Petty Cash. The site has brought a ton of connections and ideas to me and sometimes I forget that. I heard somewhere that the key to any successful relationship is low expectations, I think that applies to anyone still following the site. Expect (next to) nothing and be happy when anything happens.

I want to take some dedicated mental energy and share how the transition from owning a home to renting has been. To be fair, I don’t know if owning is better than renting I just know it works for me. This won’t be me convincing you to rent or buy, but just me putting some thoughts, feelings and experiences out there. For my family owning vs. renting really came down to the math.

I know there are many home owners out there who are waiting for a crash and want to time the market. As well, there are many people who don’t own currently that feel the societal pressure to own a home.

First, the former is just a stupid idea. To think you can actually time when the market is going to crash (and presumably jump back in after the crash) is asinine. Your ability to time the market is likely no better than anyone else’s.

The latter is tough to quantify. Generally we have been taught as Canadians that anyone successful owns a home and learn to associate renting as someone who “is starting out” or “doesn’t get it”. People said congrats when I told them that I was approved for a mortgage. In fact, many people brag on how much they are approved for. When I tell people that I sold my house to rent I get this puzzled look. Most immediate dismiss anything that comes out of my mouth after that. “How can he know anything about investing (or anything else for that matter) if he isn’t even smart enough to buy a house.”  That’s what I imagine others are thinking of my decision. It takes more courage than you realize to act upon something that makes sense for your family when you know you will be scrutinized by your peers, friends, co-workers, etc.

For me and my family it came down to math. Simply removing emotion and letting actual facts make the decision.

Owning – pros and cons


  • capital appreciation in the house
    • one should note that unless you are able to pick the right house, capital appreciation expectations should be limited to annual inflation rate as housing costs make up a large portion of the annual inflation rate
  • likely inflation protection vs. holding cash in a bank account
  • stability (for the term) in mortgage payments
  • ability to pay off mortgage faster and get a guaranteed after tax way to build your net worth
  • Stability for the family – I can pretty much know where I will live for the foreseeable future
  • can borrow against the house (via HELOC) for anything I want
  • Tax free capital appreciation for your primary residence in Canada
  • It’s easier to fit in


  • Property tax goes up pretty much every year
  • Can be expensive
    • You buy a new(er) house and have big payments
      • Something to note is that many have had bad experiences with new homes still not being built with high quailty
    • Or you buy an older/fixer-upper and have to spend time/money maintaining it
  • Reduced mobility
    • it takes a lot of time and money to move (especially if you have a family)
  • Your Time required
    • cutting the lawn, painting, shovelling snow, raking leaves, etc

Renting – pros and cons


  • the biggest one for me is time
    • none of my time is dedicated to maintaining the house: no yard work, no snow shovelling, etc
  • usually you can lock in your expenses for a minimum of a year (likely longer)
  • no surprise breakdowns/repairs that you have to pay for
  • most people who rent have high mobility
    • they are able to pick yup and move quicker
    • that means less “things” which for me led to less mental clutter and more time/energy to focus on the things I truly value
  • If you have capital built in your house, you now have better access to it


  • You can have very little notice on when your house/condo/apartment can be sold and you have to move
  • You have to make rent payments as long as you rent
    • eventually when you own you stop making mortgage payments
    • I mean that’s the dream right?
    • You get to live in your house for free at some point
  • You could have a bad landlord
  • You aren’t able to “make it mine” by painting the rooms whatever color you want or knocking down a wall or renovating the kitchen

For us it was a matter of taking the capital that was tied up in the house and investing it in the public markets to (hopefully) get a higher return than if the capital was left in the house. This of course requires a ton of time.

You also have to consider ALL the expenses with home ownership. Property tax, utilities, sewer, additional fees from the city to upgrade streets, appliances, anything that breaks down.

Once we ran the numbers and realized that it makes sense for the family, we executed in pretty short order. It was actually quite therapeutic to downgrade the size of our living space. We got rid of a ton of things that we didn’t need. Without being forced to move, we likely would have kept many of those things.

Post Move Feels


  1. The largest thing that I noticed since we moved was how much extra time I have to do things I really want to do. I have been surprised with how much I’m into fitness. I spend a decent amount of time in the gym and wouldn’t be able to do that without sacrificing something else if I had a house to maintain. I also get more family time which is really appreciated in Edmonton’s short summer. Investing performance has improved as I spend more time understanding each business I purchase.
  2. Probably more important that the time is the reduction in mental clutter. I don’t worry about remembering to do or organize something related to the house.
  3. Going against the grain by renting has given me courage to challenge other societal norms. If I didn’t try renting then I wouldn’t have the courage to challenge other traditional beliefs.


  1. We have less geographical security. Once in awhile you hear a horror story about someone renting and having to move with very short notice. This has crept into my thoughts a few times. We like to keep as nimble as possible so we are able to react to surprises.
  2. Even after almost 2 years, I still have friends and family think that I’m “wrong”. It’s funny how many people have it ingrained that you just own a home.

Not sure if it’s positive or negative, but many people want me to look stupid. Since they are so emotionally attached to rising house prices, they feel that anyone who doesn’t own a home is a bet against their fundamental beliefs and values. It’s hardened me as a person. In my 20s I would seek acceptance from people, in my 30s I really don’t care what others think of me.

Concluding Thoughts

The only thing I would encourage the reader of this article to do is to ask yourself what is right for you. Not what is easy. But what makes the most sense for you as a person. It wasn’t always easy and yes there is always times of doubt, but in the end renting has been a worthwhile endeavour.

If anyone has a similar experience, please share it.



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Paul Mueller Co (MUEL)

Microcaps are not for the faint of heart. The same thing that can give a small investor like myself an edge also leads to volatility around earnings time. Many small and microcaps don’t do much to keep investors in the loop regarding business updates (especially when they are negative). They also lack institutional following to assist in the information dissemination process.

I was recently reminded of such volatility when MUEL reported earnings a few days ago. The share price responded by dropping nearly 30% on the day. Since the shares started the week pretty much where I originally purchased them, I am essentially down 30% on my position. I need to re-evaluate the position and make a decision to add, maintain or sell.

Here is a quick rundown on the business segments.

  • Dairy Farm Equipment
    • Milk cooling and storage for dairy farms
    • Processing and storage tanks
    • Refrigeration products
    • Heat transfer equipment
  • Industrial
    • Standard and customized stainless steel and alloy processing and storage tanks
    • Pure water equipment
    • Heat transfer products
    • Over the road tank trailers
  • Field Fabrication
    • Large field erected tanks/vessels
    • Equipment installation
    • Process piping
    • Retrofit and/or repair of process systems
    • Turnkey design and construction of compete processing plants
  • Transportation
    • Delivery of products and components to customers and field fabrication sites
    • Backhauls of materials and contract carriage

Company Website

The original thesis was a function of a few different factors (those interested should check out OTC Adventures latest post on MUEL):

  1. Continued deleverage of the balance sheet, including:
    1. minimal impact from the company’s pension liabilities
    2. pay down of debt (or at least not increasing leverage)
    3. management of working capital
  2. Execution of the largest reporting segments (Dairy and Industrial), including:
    1. continued execution on the Dairy segment
    2. progress on turning around of Industrial segment
    3. overall margins on a consolidated basis
    4. strong message from CEO on the other segments

Balance Sheet

Pension Liabilities

I am no expert on company pensions. Over the years I have strayed away from companies that have large pension liabilities. For the most part, they have a ticking time bomb feeling to them. But that is truly an unfair statement. There are companies that have defined benefit pensions that are not underfunded or at the very least are not dramatically underfunded enough to be a worry.

What I have decided is good enough for me in order to pursue an investment in the company is:

  1. pension that is not enormous enough to distract the company’s management team from executing on growing the business. it should be mentioned that the size of the obligation can be crudely modelled into a fair value for the stock
  2. conservatively valued (low discount rate and return expectations)
  3. underlying investments are not “junky” or high risk
  4. most importantly, management recognizes the potential risk and puts appropriate measures to mitigate risks involved

MUEL seems to have this part under control in my mind. The size of the obligation is high, but there is little mention of it by the CEO in the letters to shareholders and (due to the next few points) I don’t think it consumes a ton of management attention.

Discount rates currently at 5.34% and expected return is 6.78%. Seems reasonable over the long term. It should be noted that both have been trending down over the last 6 years.

Investments in the plan are a mix of equities and fixed income. Equities include a broad range of publicly traded securities (including US listed and ADRs). Fixed income is made up of high quality corporate debt and government debt. Currently 61% of the plan is in equities and 38% in fixed income. It passes this test for me.

Lastly, there has been some initiatives put into place to reduce the total liability over the long term. There is a couple of moving pieces here, here’s the language from the latest 10-k.


You can see the initiative bearing fruit as the service cost under the benefit obligation summary has been zero for the last 3 years.

Overall, I am mindful of the pension liability, but feel the right measures are in place to simply include some form of the obligation into the valuation of MUEL.

Pay Down of Debt

Given the pension liability, I view this as important to minimize balance sheet leverage. In this instance management has been executing for the last number of years.


Working Capital Management

There have been stories of some businesses running into hard times simply because they don’t manage their working capital. Here I look at 2 metrics; CCC and working capital as % of TTM rev. To be fair, I haven’t smoothed these numbers out to take an average amount over the course of a year, so they are not perfect. But from my vantage point, they are enough to show that the company is not in a risky position with it’s working capital.



Overall I am happy with MUEL deleveraging the balance sheet. The main sore spot over the last year has been the pension obligation increasing on the liability side of the balance sheet.

Business Execution

The Diary and Industrial segments have been 80-90% of revenue for the past 6 years. So if you wanted to see what will move the needle, you need to understand the underlying mechanics of each and have confidence in execution.

Dairy Segment

A couple of acquisitions in 2008 changed the segment dramatically. Sales rose dramatically due to the acquisitions. Since 2008, sales have been between 70-90 mil with EBITDA slowly expanding to the 15 mil mark in 2014. This is the most valuable part of the business by far. Having said that, starting in 2015 there will no longer be a quota on mild production in Europe. This will impact the Diary business to a large degree. At this point, it seems to be a short term non-event with a medium term tailwind. You can read about it here. Something to monitor for sure.

Industrial Segment

The other large segment is the Industrial segment. Results have not been good over the last 10 years.


There is no surprise something labelled Industrial is cyclical. Part of the reason I invest in small companies is that expect them to be nimble to a certain degree. The other part is that I would the CEO to be able to make change to culture of the business in shorter order than a larger company.

Processing Equipment is the largest part of this segment. In 2013 the Processing Equipment portion earning 6.3 in pretax profit on better efficiencies and margins, meaning the remaining parts of the business lost around 8.1 mil. In 2014, the Industrial segment as a whole lost 0.652 mil and the Processing Equipment had a “small loss”. One can infer that the other Industrial portions of the segment were around breakeven. That’s quite an improvement. This is confirmed in the letter to shareholders with the statements being generally positive with the other parts of the Industrial segment.

I do have a concern with the Industrial segment on a consolidated basis. I would assume that some tough decisions are in order for this part of the business as the CEO has now been in place for 2 years and yet the Industrial segment is not performing.

Overall Margins

Gross margins are down in Q4 2014 from a year ago. As the chart shows, given the low gross margins inherent in the business, one needs to be really comfortable with the management team’s focus on doing business that makes sense financially and not “making work” to stay busy which is a struggle for many production related businesses with unionized labour.


CEO Message Around Business Culture and Shareholder Interests

The company doesn’t have quarterly conference calls, and doesn’t participate in investing conferences. However, the annual letter to shareholders does set a tone of accountability by naming the various manager of the various divisions. It also mentions revenue and margins to some degree, but does not give exact numbers for analysis purposes. Also, managers compensation is more closely tied to the business segments in which they are responsible for.

There is mention of efficiencies in processes and right sizing of headcount a few times. For this to be talked about openly is a positive and gives at least some confidence that the management team can make tough decisions if needed.

Other things of importance

  • The other 2 segments (field ops and transportation) are performing well except an accident at a customer site with a field fabricated unit where the company has taken a 2.9 mil reserve against the accident
  • MUEL used to pay a dividend, but stopped in 2009
  • Lower Euro hurts the Diary operations in Europe
  • Backlog is down from a year ago, but within is last 3 year range
  • David Moore has taken over as CEO in 2013, he has been with the company since the late 90s


I think the best valuation metric for this type of potential investment is either EV/EBIT or EV/FCF.


Including the pension in the calculation is up for debate. Something should be included in my opinion. How much, I’m not sure. Given the way pensions are calculated leads to wild swings in value. This is why it makes no sense to use book value as a metric for this business. I think given the ROC potential (20%+), even just the crude measure of including the entire liability still makes this company cheap.

As far as upside goes, one could paint a picture with continued strength in Dairy and some modest profit from Industrial. Couple this together with some operating earnings from Field Ops and Transportation, I could get to 16 mil in operating earnings. This would put current shares at 4.14 EV/EBIT or 6.35 EV/EBIT if you include the pension obligation. If the business is earning those kinds of margins, I would think a valuation almost double today’s would be fair.


There are some things I need to understand before making any sort of a move:

  1. Increased context on the pension calculation and more information on the employees on the defined benefit plan. What does this look like on a go-forward basis
  2. More information on the accident that caused the 2.9mil provision. Specifically, what is the company’s risk mitigation strategy when one accident can make up a reserve charge that equal to 20% of the segment’s revenue
  3. What is going to be done with the Industrial segment and when can we expect some sort of stability in that business
  4. Additional context on the milk quota removal and what it means to the dairy segment
  5. Some color on the backlog

I plan on attempting to contact management over the next week or two to get this information over the phone.

Feel free to comment.




The author is currently long MUEL, but that can change at any moment, so do your homework.

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Evolution of a “Value Investor”

This post will not involve in depth company analysis, instead I wanted to catalog some things that have changed with my philosophy when it comes to picking stocks to invest in.  Recently, some good news was released on one of my top holdings that clearly displays my change.

I started purchasing Pivot Technology Solutions (PTG.v) in the summer of 2014.  The idea behind the investment was a cheap company with decent ROIC (though admittedly low margin), capable management and a large overhang in the capital structure.  There was a large amount of preferred shares outstanding that I felt were preventing the company from being properly valued by the market. The common shares are illiquid and well under $1, making it something that many institutions would ignore. Given who owned the common and preferred shares, it would make sense to do some sort of conversion of the preferred to common to clean up the capital structure. Management had mentioned several times that they had intended to do so.

I continued to purchase shares throughout the fall of 2014 as the company executed on operational promises to investors. There was still mention of some sort of conversion in the future. I was happy with management running the business and the focus on operations. I figured the conversion eventually happened whether organically or being forced by some sort of activist once the value of the business was made apparent.

At the beginning of March 2015, the company announced some good news:

  • company officially initiated a process to convert the preferred shares to common shares
  • announced a normal course issuer bid to repurchase. though many company’s announce this and don’t follow through
  • initiated a quarterly dividend starting in Q3 2015, annual yield at today’s price is around 10%

Old vs. New

The previous version of myself would have simply sold the shares on the good news and likely plowed the winnings into something that was “cheap” (likely one of my losers). I would put money into something the market doesn’t understand and likely a dinky little company that abuses the share price and struggles to execute. I would expand the numbers of company’s I own, which has two effects on the portfolio.

  1. Another company for me to keep tabs on, therefore increasing the demand on my time to maintain an understanding of yet another business with yet another management team.
  2. Increasing the number of company’s in the portfolio reduces the effect that the winners have on the portfolio as a whole.

The new version of me took a few days to reflect and reassess. I reviewed the business, the management team and what I see as the market’s expectation going forward. I have concluded that shares are still cheap, and I have recently increased my position.

Why would I sell a cheap company that is growing and shouldn’t need to dilute shareholders in the future?


Disclosure: The author is long PTG.v

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Superior Industries International

Superior Industries (SUP) has been on my “to research” pile for over a year. I never got around to spending some time on the company until the last 2 weeks. There are a few others that have opinions on SUP, so check them out.

I though I should share my thoughts to timestamp my research and potentially get a discussion going around the name.


From their website:

Superior Industries International, Inc. is engaged in the designing and manufacturing of aluminum road wheels for sale to original equipment manufacturers (OEMs). The Company is a supplier of cast aluminum wheels to the automobile and light truck manufacturers, with wheel manufacturing operations in the United States and Mexico. The Company operates five manufacturing facilities in the United States and Mexico. Products made in its North American facilities are delivered to automotive assembly operations in North America, both for domestic and internationally branded customers. Its OEM aluminum road wheels are sold for factory installation, as either optional or standard equipment, on many vehicle models manufactured by Ford, General Motors (GM), Chrysler Group LLC (Chrysler), BMW, Mitsubishi, Nissan, Subaru, Toyota and Volkswagen.

Here is a quick summary of how the business has performed over the last 10 years.


You can see a tough time before the Great Recession and a decent recovery. Now lets take a look at the income statement.



The previous 2 charts are further evidence of a rough time during the recession and hint at the nature of how tied the business is to the new auto market.

Once you get a glimpse of the company over a business cycle, you can see how little they control their fate if there the ultimate end user stops purchasing products. Having said that, the purchase of new autos can really only be delayed as eventually cars and trucks wear out and need to be replaced.

Another chart will give some additional context to the business. This is from their latest conference call presentation.


You can see that the company shipments of wheels tracked the NA vehicle production closely until the end of 2011. The main reason for this is that they have hit their peak capacity from their current PPE while the NA production continued to grow. They even operated above capacity for a few quarters, but that is unsustainable.

Remember those negative gross margins in the last downturn? That is the price you pay to keep capacity idle during a downturn. If you read Frank Voisin’s post, it mentions how they shut down some plants due to lack of demand from end users. Though the idea likely seemed good at the time, I wonder if given the hindsight of today they would have made the same decision.

Currently, the company is building a new facility in Mexico that will give them an additional 20% capacity jump when finished.

Some of the characteristics mentioned and some not mentioned:

  • limited top line by PPE capacity
  • for the most part a price taker
  • historically has had a tough time earning excess returns on invested capital

Given these factors, I would think the valuation of choice would be some sort of earnings power value (EPV). Buying at a discount to EPV or buying at a replacement value and selling at EPV (if the gap is large enough to provide a margin of safety) makes sense to me for a company where the dynamics of their business does not change dramatically over 10 years.

Earning Power Value (EPV)

Before I get to my interpretation of EPV for Superior, I should make note of capex. For a business with a large portion of assets being fixed, capital expenditures are important to analyze. Here is a quick summary. Capex

Nailing down maintenance capex is important to properly understand EPV and a distributable cash flow or owner earnings. We know what revenue took a dive during the recession, so one could assume that only the most basic expenditures were being made. But maybe there were under-investing in the PPE and would eventually pay the price for it. Either way I assumed 3% of rev or 20% of average net PPE must be spent on maintenance. Here is what those numbers look like relative to Depreciation. The conference calls and annual reports I researched didn’t give a hard number for maintenance capex, so I have to take an educated guess.


You can see how close they have tracked each other over the last 5 years. So I took the average of the 2 and used that as maintenance capex.

Here is what I get for EPV.



You can see a strong recovery in EPV after the recession. But is struggles to eclipse NAV (which I have kept as tangible book value). This coincides with ROIC being little more than their likely cost of capital outside the really low interest rate environment.


I ended up passing on SUP. Even with some cheap(ish) valuations based on EV/EBITDA and P/TB. I see 3 reasons why I want more margin of safety:

  1. Tangible book and EPV haven’t moved much over the last 10 years for a business that doesn’t pay a huge dividend. Meaning that they won’t grow additional margin of safety for me.
  2. Very low gross margins will lead to operating leverage that cuts both ways.
  3. My history with large capacity expansions has not been positive. There can be something that goes wrong that spooks the market and presents opportunity.

Some Potential Positives I haven’t Mentioned

I mentioned that they are building a new plant in Mexico. There is some additional scale in the fixed SG&A costs that may bring up EBIT margins.

There is also a large cash balance on the books that can give them additional flexibility if needed.

I have taken a rough stab at what the income statement could be like with the successful integration of the new plant and eventual scale from lower SG&A spread out over the entire business. This is based on a jump in revenue, 11% gross margins, and 3% of revenue spent on SG&A. The business could see a run up to 82 million in operating earnings. That’s dramatically higher than the current 36 million. But with a more normalized 9% gross margins we get 62 million in operating earnings. If a person put a 10x EV/EBIT on these numbers you would get around $36 and $28 as a rough estimate of where the share price could move to. At around $20 today, I would like a little more room for error given that we are likely 18-24 months away from full operation of the new platn.

I would look at SUP again in the mid teens. It may never get there, so do your own research if you like the name.


Company Website


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Finding the right Net-Net

I would assume that the majority of the followers of this blog understand what a net-net is and why investing in them is supposed to generate superior returns. The theory is easy to understand, at least the way I interpreted it anyway. Buy something no one else wants (based on a discount to some sort of liquidation value) and wait patiently for “something good” to happen to sell your shares into. Risk is low as valuation is already so depressed, that all the “bad news” is supposed to be factored in.

I have not had great luck with net-nets. Maybe it’s because I try to take a look under the hood rather than just mechanically buy shares based on valuation. I am going to profile a few net-nets I have held. It should be noted that it may be too early to call each example a winner or loser, but all of them have tested my ability to remove emotions from investing. The real test with any net-net is likely patience, as they tend to be dinky little businesses with no real competitive position. As the market grinds higher, you have the sense that you are missing out and hold an illiquid little company that no one really cares about. It’s certainly not sexy.

To be clear, I have nothing against net-net investing as I continue to hold shares in companies that trade at a discount to NCAV. I am just stating some of my experiences.

ADDvantage Technologies Group, Inc. (AEY)

I bought AEY way back in Q2 & Q3 2011. I sold over 6(ish) months in 2012. Average performance was a loss of 16%. To be fair I bought mostly at NCAV, not at a discount to NCAV (which is what Graham was doing and is recommended). A quick summary of the stock at the time:

  • about 50% of assets were in inventory
  • major debate as to true value of inventory as they carried quite a bit and sales were weak
  • heavy insider ownership
  • working towards a net cash position (cash – debt)
  • end users (major cable companies) were hesitant to engage in major projects
  • recent change in agreement with Cisco was likely negative and creating uncertainty
  • Family owned and controlled, though compensation was reasonably fair and insiders where incentivized to realize larger profits

All of these factors led to a stock at NCAV. FWIW management seemed to “get it” for the most part as far as executing a business potentially in decline and one that definitely that had a ton of uncertainty in front of it.  They made a small acquisition to push some slow moving product through, they mentioned not chasing revenue but profit, and paying down debt. What they didn’t get (as is true with most net-nets) is capital allocation. No desire to buy back shares below NCAV, no special dividend, no marketing of the story to increase valuation.

After a few painful conference calls, I decided to sell. I have moved on and haven’t really looked back until today. I was sure that the top line wasn’t going to move anytime soon and figured the inventory would eventually be written off, which would remove my margin of safety. The inventory has not been written down since I let go of the shares, but the top line has struggled.

Here is what it would have looked like had I held onto the shares since my original purchase or if I had bought (and held onto) an ETF that tracks the S&P500.


LGL Group (LGL)

I still own a small position in LGL Group. As with AEY, I bought most of my shares at NCAV, not at a discount to NCAV. This sums up the stock at the time of my original purshase (Q3 2012):

  • discount to NCAV
  • stable backlog, dropping top line
  • major markets for products were soft
  • 30% of total assets in cash
  • 13-15% of total assets in accounts receivable
  • 18-20% of total assets in inventory
  • some PP&E on the books that may hide additional value
  • significant owners of the stock that may pressure for management action
  • CEO that owned very little of the company

Since purchasing there were some positives to show that management was willing to right size the organization to survive. A reorganization was done to reduce costs, a strategic review was conducted, and moderately stable gross margins.

The issue was that the continued weak top line and small reduction in what was likely a very bloated expense line has led to operating losses. I am currently underwater by about 20% on the name and undecided what to do. The strategic review did nothing to close the gap between the share price and liquidation value. The following chart sums up the recent poor performance.


The valuation has bumped around 1x NCAV, while NCAV has fallen. My margin of safety continues to erode. Recently the CEO resigned and there have been some board changes. Maybe this will be the catalyst to unlock value, but I am considering this one an (expensive) lesson.

Bri-Chem (

I had watched BRY for about a year or so before taking the plunge after a 30% drop over the course of a year, (I still own). Here’s a summary:

  • CEO owns about 5%, about 2 years salary
  • Director & former President to a subsidiary (Brian Campbell) owns 25%
  • Essentially 2 companies: one fast growing (fluids) and majority of revenue and one slow growth (steel pipe) and dragging down consolidated results
  • high debt load, no cash
  • 45-50% of assets in inventory
  • 30% of assets in accounts receivable

Since my purchase I am down about 8%. Several things have happened to change the story. First of all due to them being debt heavy and light on cash, they issued shares (fairly dilutive) at a discount to NCAV. A couple of things have brought encouraged a more scrutinized look at the balance sheet (strategic review and LOI to purchase the manufacturing facility of the steel pipe division) have brought down NCAV from almost $2/share to just over $1/share now. Yikes.


I also bought the shares with an idea that they were trading at a discount to the sum-of-the-parts. The fast growing fluids division was growing steadily with increased oil & gas activity in the US and steady activity in Canada. There was some organic growth and some acquisitions. Both seemed to require capital and I never paid attention to how cash strapped the company was.

The steel division consisted of manufacturing and distribution. I didn’t pay enough attention to how poorly the business was performing and how little management (or analysts) seemed to care. Here are the last 9 quarters of sales versus production.


They obviously overestimated the likelihood of success with this venture and were slow to respond to lack of demand for their product. They stated a 25-30% gross margin target in late 2012, then 20-25% in Q3 2013 and 15-20% now.

There may still be value here. The fluids division has a current run rate of about 10 mil in EBIT vs. the enterprise value of 100 mil. As mentioned there is a LOI to purchase the steel manufacturing division, but not the distribution part of the steel pipe division. Though management was confident both would go in the sale. Depending on the price, we could see some cash freed up for further fluids expansion and a re-rate in the company valuation to peer level. Even though the top line is extremely seasonal, I am holding my small position until there is some more color on the steel pipe division sale.

Sangoma Technologies (STC.v)

I wrote up STC here. Currently I am up about 40%. Most of this is due to the recent attention the company received from this blog. Here is a quick summary:

  • 23-25% of total assets in cash
  • 25-29% of total assets in accounts receivable
  • 17-18% of total assets in inventory
  • former CEO owns 20% of company
  • current CEO (from Q2 2011 until present) owns very little
  • transitioning from old legacy product to new products. split between revenue 50-50
  • CEO made it apparent that top line growth is priority 1
  • revenue is lumpy
  • small player in a large market
  • at the very least they have been break even from a cash flow standpoint over the last few years if you just include maintenance capex


They actually took a large write-down since I purchased shares, but it was all Intangibles and Goodwill, so my margin of safety was never compromised. I continue to hold and might even add as I think the lumpiness in revenue has the market spooked. But they are slowly executing on transitioning to more and more “new products” and with 65% gross margins, there is quite a bit of operating leverage.


What seems to be a large disconnect between investors and management in the land of asset based investments is timeframe. The CEO should be looking out several business cycles and making strategic business decisions based on all sorts of inputs. What levers to pull are more important than the markets current perception of the organization. Investors (generally) want to make a quick buck. They seem to be more interested in liquidating or putting lipstick on a pig to sell to an institution. Which isn’t a bad thing per se, it’s just a different set of priorities. The CEO is losing his source of income and I don’t think it would look good on his/her resume or LinkIn profile to say that the last job was something that was pressured to break up or liquidate because even after 10 years at the helm, the company was worth more dead than alive.

Many times these net-nets are family controlled and have been in the family for several generations. They are more precious to this family than a 1963 Corvette in mint condition. It’s their legacy.

So whether it’s right or wrong to try and cherry pick net-nets, I will be at least putting even more time to do some detailed research on them. I should note that I haven’t mentioned all net-nets I have interacted with, but just pointed out 4 examples of what you could be getting yourself into if you purchase a net-net.

So far I would like to see at least:

  • growing sales or at least flat sales
  • some cash position (preferably the largest current asset)
  • no cash burn from operations

Anyone have any thoughts on net-nets they would like to share?



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