A guest post today from Jim Hodges on Fansteel Inc (OTC:FELI). Jim is a deep value investor who also invests in Philip Fisher-style growth stocks when he can’t find value in Ben Graham NCAV’s. At 19 he was the youngest registered insurance agent in North Dakota’s history. He reports that he’s had a monstrous 683.44% return thus far for 2009, a 27.85% return for 2008, and returned 11% in 2007. He tells us that he was one of the original followers of this site, and presently operates the ValueInvestorToday website. Investing is as much a passion as music. He’s a full-time musician who has toured with Rascal Flatts. Here’s his take on FELI:
A few times I have been asked how do I go about selecting a stock for investment purposes. This dissertation is to explain in a condensed fashion how I do this as well as to fully prove to proponents of the Efficient Market Hypothesis that their theory that stocks are always correctly priced is erroneous.
The company: Fansteel Inc. (OTC: FELI)
Fansteel recently announced an amendment to effect a 7,500 to 1 Reverse Split of all issued and outstanding Fansteel Common Stock.
Fansteel does not need a proxy to go through with this motion. All they needed was an agreement from the major shareholders of the company.
The proposals were adopted on September 3, 2009 by the written consent of the holders of 2,388,730 shares of Common Stock, representing a 70% interest in the issued and outstanding Common Stock and were submitted to the Secretary of the Corporation on or about September 4, 2009. In other words, nothing is standing in the way of the Reverse split from happening.
The Effective date of the transaction will be 20 days following the distribution of this Information Statement, as required by applicable federal securities laws. This information was distributed on September 9th, 2009 making the transaction to occur on or after September 29th, 2009.
Fansteel’s amendment is for the purpose of diminishing the interests of their current shareholders. They want more control of the company and most likely are interested in taking the company private.
So, what’s in it for me?
For every shareholder who owns fewer than 7,500 shares before the Effective Date (September 29th, 2009), each shareholder will receive $0.35 per share for each share they own and no longer be a shareholder of the company. For each stockholder who owns 7,500 shares or more before the Effective Date will receive 1 share for each 7,500 it held before the Effective Date and $0.35 in cash per each such share that would result in a fractional share.
Currently, Fansteel is trading for $0.21 per share which is a 66.67% discount to what a shareholder will receive.
Are the markets efficient? I think a reasonable person can answer that question with logic for himself.
Why am I sharing this information and not purchasing shares for myself? Taxes are important in the overall valuation of your aggregate returns. I am currently 100% invested into companies that I believe are in a financial sound position and I have no interest in paying at least a 15% tax to take them out. This investment is a simple one and one that someone who isn’t fully invested, such as I am, to consider.
[Full Disclosure: We do not have a holding in FELI. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]
The real test of EMH is when you can prove that every trader has the necessary information in their heads to make a correct valuation of a company, and yet the stock still trades far above or far below what you value it at. But the fact is, even if every trader had the same information in his head, he would interpret it slightly differently, thus making it pointless to argue over EMH.
Btw, if you’ve ever been through basic econ classes at a university or if you’ve gone to B-school, you would know that they merely present EMH as a far-off theory to aspire to in a perfect utopia. Nobody is actually asking you to believe in EMH dude. You make it seems like Joe Blow investors actually believe in EMH. EMH is just an idealized model to start with when teachers try to explain how stock markets work.
Let me give you an analogy. When you first start learning engineering, you are given all these ideal equations that theorize how an ideal transistor works. As soon as you get past all the basic classes, you soon realize that those models can be basically thrown out the window because they do absolutely no good in designing real transistors. Real transistors have so many other unexpected effects due to defects and other unforeseen complications that you have create completely new equations to describe them. Likewise, EMH is just a starting point that you get explained to you at your first class at the university.
That pretty much sums up my disgust with you wasting your time to write a post trying to disprove EMH, when in reality EMH disproves itself every single day the market opens in New York.
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Your idea is worthless, you could never have purchased shares and still can’t. That is what makes it a bad idea. Saying that it proves EMH is invalid is ridiculous. I will not be back since I already know what your response will be. Some stupid remark about your genitals followed by calling me an adolescent. I also know you will respond…because you are the kind of person that can’t admit you are wrong and will always argue. The fact you still post on here just shows you are a loser with nothing better to do with your time. The thread you have created here shows everyone just how wrong and stubborn you are. Keep up the great work! Bye!
P.S.
Good luck with whatever mental issue you have.
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Adolescent tomfoolery is all you have to offer.
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Who isn’t a millionaire nowadays? Pathetic. Trying to use how much money you have to make it seem like you know what you are talking about. This idea was poor at best and you being a millionaire does nothing to change that…
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What shall we use as an indicator then to measure what one knows in regards to investing and what one doesn’t know? It’s either money or an annual return. For some moron, such as yourself, to come along and degrade someone’s work is a cowardly act. Just because you say its a terrible idea doesn’t logically make it so. You have to have proof of your knowledge that most often comes by way of a measuring stick (annual return) otherwise your voice isn’t worth much. So, which is it? Money or annual return. I’ll show you mine if you show me yours but don’t get embarrassed and run off when your wife finds out mines much larger than yours :) Unless you come back with a verifiable number, I’ll have no further use for you and will take your posts for what they are which is useless Tom Foolery from someone who is neither fortunate or able but instead an adolescent.
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Stupid Idea, Stupid Value Investor. What an ass. Trying so hard to defend his sorry excuse for an investment idea. Give us something worthwhile or admit it was a waste of space.
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Hey Idiot, my stupid ideas made me a millionaire. You’ll have to come up with your own because I won’t ever share another one of them again. Have a good life being an adolescent child.
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When someone says they are going “to fully prove to proponents of the Efficient Market Hypothesis that their theory that stocks are always correctly priced is erroneous” and also show us how to pick stocks – thats a very big check to cash.
You then follow it up with a tiny, illiquid company that does not even trade, attacks against other posters, pointless rambling about how many people visitied your house, and more nonsense about how the company is now overvalued and further disproves EMH.
You also tell us how you choose to forgo a quick 66% gain in order to avoid paying some taxes (which you would have to pay anyway in the future). I guess for someone that earned 683% Year-to-date (your claim), a 66% gain is not worth much.
Finally, you excuse everything by saying we did not pay for your “dissertation” (FYI – your post is not a “dissertation”) so we sould not expect anything.
Please wait an hour before you reply to this post.
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Sir,
My portfolio is public knowledge and you can view it at covestor.com/mbr/jimhodges
I have nothing further to discuss with you. You’re pompous and a bore to me.
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A dissertation is a treatise advancing a new point of view resulting from research.
A treatise is a formal exposition.
An exposition is a systematic interpretation or explanation (usually written) of a specific topic.
It is a dissertation and you should forgo your poor attempt at defining what ‘is’ is.
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thanks for posting that Buffet article too!
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these little odd lot tenders are some amazing examples of mispricing. great “paul sonkin” style investing and write up!! thanks!!
may i ask how you found this? thats a very small company to just “stumble across”, do you run screens to look these up?
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Shaun,
I run a specific search string on a daily basis on the SEC website. If you pass along your email address to me on my valueinvestortoday.com site, I’ll share with you the search string.
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I actually find this company very interesting. That interest has nothing to do with EMH or liquidity. The simple truth is $0.35 per share is probably an insanely cheap price for this stock. They did $3mm in free operating cash flow (cash from ops – cap ex) last year. To be really conservative let’s cut this in half to $1.5mm. It has a negative GAAP net worth, but there’s some massaging that needs to be done there. They’re carrying $21mm in environmental liabilities. These require further investigation to establish if the book is close to reality. Also, the tax assets that I mentioned before will almost certainly allow them to keep the tax bill low. For argument’s sake let’s say the net worth is $0. So that leaves us with cash flows for value. What multiple would you like on our cash flow? How’s 4X grab you? So, that’s $6mm in cash flow value. The market cap was $720,000. For $720,000 you can buy control of $44mm in cash generating assets. That’s really cheap! Still my guess is you wouldn’t be able to acquire over 7500 shares if you didn’t have them sourced already. My theory is that the control holders are sitting on bids for blocks over a certain size to keep control of the situation. There’s no need for them to hit every offer if they can take out the shares at $0.35 through the split. The controllers have launched this reverse split to clean up the residual holders from the bankruptcy re-org at a defensible price. You’ll hear from this company again in the future.
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Tried buying some shares today via E-trade and Fidelity. Could not get a single share. Bloomberg indicates many days when zero shares trade hands.
I know many Greenbackd stockes are on the small/ illiquid side, but this one takes the cake. It does not disprove EMH, and is honestly not very interesting.
I find the final paragraph of the posting to be annoying. You are not buying shares of FELI because of taxes? Give me a break. There are no shares of FELI to be bought.
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I resent your disrespectful passive/aggressive post. Every once in a while there are people who want a refund for the ‘free’ information they are receiving. Its a character flaw some people have.
My final paragraph of the article is exactly my reasoning for not owning FELI or any other publicly traded company at this time. I am fully invested and I have more capital to work with then this company would permit me in purchasing.
I gave a simple analysis of a company that cost you exactly nothing. If you want to be rude about it, then that’s your character flaw, not mine.
I look forward to reviewing your analysis of a business.
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Ignore him. I appreciated it just for the heads up and the chance to see how the market reacted to this today.
The market’s reaction is absurd today, but keep in mind that it’s all on ~2300 volume too, so it’s possible one person got it all at that price (and made a mistake). I tried to get it for cheaper but the market would not accept.
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Greenbackd,
Thank you for posting my dissertation of FELI. Are the markets efficient? FELI has been trading at $0.21 per chare for awhile now. Today, the stock shot up to $0.60 per share. I think this is further evidence that the price of a stock is not the true indicator of the value of a stock.
A few days ago while trading at $0.21 per share, there was an opportunity for a 66.67% gain. Today, the exact opposite has occurred in which there is now a chance of a -41.67% loss.
With so much lacking in terms of irrational investor behavior, one can clearly understand from this kind of information that the markets are not efficient.
Comments have been made concerning the illiquid state of this stock as well as volume and such. Although that could be something to do with it, it is a pointless issue since my dissertation was to simply point out a flaw in the pricing of a business rather than to list the reasons why this flaw has occurred.
Furthermore, to the investor, volume & liquidity have very little to do with how much someone would pay for a particular business if he were to purchase the entire operation.
When I purchase a house that was built 25 years ago, the last thing of interest to me is how many people have walked in and out of that door over the last 25 years. I’m more concerned about the foundation, the frame, is the home in an area that incurrs floods, mud slides, or such. I’m also interested in what kind of special qualities the house has.
That is how I find value. I see no extra value in a home or a business by counting feet.
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There is no “market’s reaction”, there is no market in this stock.
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Interesting. Boss Holdings (BSHI.OB) also seems to be doing the same thing as part of their decision to cease being a public company: http://finance.yahoo.com/news/Boss-Holdings-Inc-Announces-prnews-2785371531.html?x=0&.v=1. While there’s not a huge amount to be gained in holding 99 shares, like the above, it does highlight the inefficiency around many of these smaller, more illiquid stocks.
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Bid $0.21
Bid Size 1
Ask $0.55
Ask Size 1
Open $0.0000
Volume 0
This trade is not even actionable on the smallest of accounts…
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Too bad this is an illiquid stock…value realization would be easier if it traded occasionally. There isn’t even an ask price on the stock right now, let a lone a bid ask spread.
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I think the more interesting question is: why are the controlling shareholders reducing the share count so much? It appears to me that there are only 3,420,000 shares outstanding. By doing the reverse split, they are reducing the share count to 456 shares. Of course, that’s only if everybody owns only multiple of 7500 shares exactly. So effectively, they are looking to drastically reduce the number of shareholders. According to the post above the goal is to get it below 300 holders. Why would those in control do this? Because, it’s very advantageous to their wallets. They’re sitting on $7mm in deferred tax assets which are not shown on the balance sheet because they’re all reduced by an equivalent valuation allowance. The company produced free operating cash flow last year of $3mm, but the market cap is $720,000. I’d also be doing a reverse split to if I was in control. I also wouldn’t be surprised if they get bought out.
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The stock is illiquid. It is unlikely that anyone will be able to profit from this mispricing.
Although I like the idea of guest posts – in fact, all prior ones have been very good – this post does not meet the quality of a greenbackd post. It is an interesting idea but not implementable. And his opinions at the the end should have been edited out.
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Well, according to the owners of the greenbackd website, they felt differently than you. This is not a stock recommendation site, that would be illegal, this is a stock “idea’ site and in that regard, my posting fits those standards. I am not recommending anyone to attempt to purchase shares in this company, it is a simple analysis, nothing more and nothing less.
If you are dissatisfied with the FREE service you are receiving, then I suggest you take it up with the owner of this site.
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i agree. it’s not an actionable idea and it doesn’t in any way refute emh. today’s action pretty well shows that.
again, thanks for the idea, and the thought you put into it, but it’s not an actionable idea and it’s not a good idea because you can’t buy this stock at that price. your analysis isn’t correct. the one trade today was a guy buying $2k worth at $0.60.
there’s nothing wrong with saying an idea is a bad one and why- it’s nothing personal.
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tedk81,
I appreciate your interest in my article but I believe you to be wrong. Somebody was buying this up when it was $0.21 per share. How many shares is not the issue I’m presenting for debate. Furthermore, you could short sell this stock too. There are plenty of options. Not necessarily ones you may like, but there are still options.
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Oops I replied to the wrong thread see 2 comments below for my reply…
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And finally enough arguing we aren’t getting anywhere just lemme know if you want the bet. I’d love that action, we can figure out details and escrow over email if you take it.
Sorry for all the posts I’ve been in bed all day sick bored and kinda cranky. Dangerous combination!!
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ted,
If this is the wrong thread, then apparently you’re known to argue on other threads. Not surprising. You’re not the only one that is sick today. I’ve had the flu for 2 days now but I’m still able to keep my respectful ways towards people.
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When I say “thread” I mean I clicked the post button on the wrong part of this page.
I have not been disrespectful towards you at all. I said your idea wasn’t good. I didn’t say you were stupid, a terrible investor, a bad person or anything like that. Don’t get so upset, man.
It’s the same with your reply to PG- the guy says your idea is bad for a few reasons and, rather than defend your post with facts and logic, you flip out at him with “well it’s FREE and it’s my stock idea and they liked it, so there!”
The ridiculous thing about all of this is that we own some of the same stocks and have pretty much the same opinion of EMH.
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Ted,
I don’t “flip out”, I simply choose not to argue with someone that I don’t know nor do I have knowledge of your track record. If you disagree with my idea, that’s great. I’m not going to work to defend my position, especially when I don’t even own the stock I wrote about. I’m a passive person. I don’t get upset and I don’t flip out. I’m very even keeled.
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I agree with Tedk. This trade happened as a one off transaction and was previously at 35c, which would say it is extremely efficient. Even so a trade where if we are lucky we can put in ~$1500 isn’t very helpful to be honest.
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No I can’t short it! I can’t get a quote on it through ib or zecco and the bid and ask are apparently 21c and 65c respectively.
You really have missed the point of everything I’ve tried to say to you and it’s kind of aggravating. You say there are options and you’re wrong- given the illiquid market in this stock there are no options. That destroys this article and you don’t understand emh anyways so it just makes you look ignorant.
This idea is NOT actionable so it is not really an idea and if it were it would be a bad one.
I’ll bet you $1k right now that you cannot buy any shares tomorrow at 21c per share. I’m not kidding, free money for you if this idea is actionable. Just answer this post by 8 am tomorrow est to confirm you’d like to book it. Free $1k for you! Seriously sell 5 shares of gci, prove me wrong and collect your $. If 1k is too much name an amount you’re comfortable with.
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I didn’t mean “options” as in “puts” and “calls”. That’s a different kind of option I was talking about. I have no interest in arguing with you concerning the EMH. I have studied it in great detail. I have the same position as Warren Buffett has concerning its validity.
Again, it doesn’t matter if this, what you call ideal I call example, is actionable or not. Its an example of how I value a business. In the beginning of my article I state the following:
“A few times I have been asked how do I go about selecting a stock for investment purposes. This dissertation is to explain in a condensed fashion how I do this…”
Its an example, not a recommendation. You have missed the point to everything I’ve said as well. Furthermore, I have no interest in such childish games as an online wager. First of all, online wagering is illegal and second of all, it doesn’t interest me in the least. “If $1K is too much”…..LOL, please.
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No, I mean there are no options here- you can’t buy it for 21 cents, you can’t short it at any reasonable price: there is no market in the stock. That’s what I mean.
I’m sorry a free $1,000 doesn’t interest you, incidentally the wager would actually be totally legal in most states. I’d still give $1k to charity in your name if you could buy this thing for 21 cents tomorrow.
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Ok, I seem to understand your redundant point. What exactly it means to me, I don’t know. Again, I didn’t write the article as a “stock pick”. I wrote the dissertation “to explain in a condensed fashion how I go about selecting a stock for investment purposes”. Nothing more, nothing less. You, singularly, keep presenting the argument that this stock is illiquid. So what. That has nothing to do with the point of my article. I’m exhausted of this debate. All the best to you. Good night.
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Furthermore, if upon further analysis one could find that this company in fact generates an extraordinary amount of cash flow that inflows through the business, one could attempt a proxy fight and offer all the current shareholders a premium to what the company is proposing. So, to say there are no ‘options’ available is not a true statement. It maybe true for you, but there’s options available to the right investor is see’s an opportunity in purchasing the entire business.
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I made a comment over there I’ll just copy and paste it over here:
i don’t think this could say anything at about any form of emh. this thing is super illiquid, most days it doesn’t trade at all…guessing the bid/ask spread is probably huge and it’s likely you can’t get this for 21c, someone was sitting on the bid and someone else hit it today for a measly 200 shares.
so i highly doubt you could get 7500 shares at 21c a share, but even if you could you’d make around $1,000, so basically chump change… when the most you can make exploiting an inefficient market in a stock under the very best conditions is $1,000, no one with any actual money is paying attention… really, there’s no market here.
but to answer your question, no the market in a penny stock with a market cap of 700k and avg daily volume of $120 USD is usually not very efficient for many very obvious reasons, the largest one being with the lack of volume, the tiny amount of money at stake and the fact that its on the pink sheets there is not much of a market here at all. i don’t think anyone would dispute that with you.
if you want to talk emh there are just so many better examples. Post a link to “The Superinvestors of Graham and Doddsville.”
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what is the website address for:
“The Superinvestors of Graham and Doddsville”?
I did a search but didn’t find an exact match or close.
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The Superinvestors of Graham and Doddsville was an article written by Warren Buffett many years ago.
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Click to access superinvestors.pdf
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From the Schedule 14C – page 34:
Termination of Reverse Split:
The Board will have the discretion to determine if and when to effect the Reverse Split and reserves the right to abandon the transaction after stockholder approval and before the Effective Date of the Reverse Split, if for any reason the Board determines that it is no longer advisable to proceed with the Reverse Split. Although the Board presently believes that the Reverse Split is in our best interests and has unanimously recommended and voted for the Reverse Split, the Board nonetheless believes that it is prudent to recognize that circumstances could possibly change prior to the Effective Date such that it might not be appropriate or desirable to effect the Reverse Split. Among other things, the Board may withdraw the Reverse Split if any of the following occur: (1) a change in the nature of our shareholdings that (a) would prevent us from reducing the number of record holders below 300 as a result of the Reverse Split, or (b) would reduce the number of record holders below 300 persons without effecting the Reverse Split; (2) a change in the number of shares to be exchanged for cash in the Reverse Split that would substantially increase the cost and expense of the Reverse Split (as compared to what is currently anticipated); or (3) any adverse change in our financial condition that would render the Reverse Split inadvisable.
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