The stock market competitions from 2012 are coming to a close. In 2012 I had to move away from the net-net picks of 2011, getting further away from the kinds of stocks I like to own. My favorite stocks are small, asset (hopefully cash!) rich with great free cash flow. I’ll have a performance and commentary update after the last day of trading in 2012, which should be Monday, December 31.
This year I’m getting back to my roots with two picks that fit as small (micro) cap stocks with significant assets. Here’s my picks for 2013:
Conrad Industries CNRD – What I like about it:
- Low valuation.
- Majority owned by the founding family who have been good to minority shareholders.
- Understated book value stemming from the controlling family’s connections in the shipping industry (intangible), land assets are carried at cost despite having been purchased decades ago.
- Great financial reporting. Clearly documented capex in each filing, which I really like.
- Hidden catalyst in the form of a $20 million+ potential settlement from BP’s Deepwater Horizon settlement fund.
- Potential buyout candidate, especially if the patriarch of the controlling family retires, passes away, or simply wants to leave the business.
- Added that it would seek “strategic alternatives” in its most recent filing. Last time I saw the words “strategic alternatives” I made a lot of money.
I could list Conrad Industries on Craigslist and probably get a better price than its current market cap. I like it…a lot.
Solitron Devices SODI – What I like about it:
- Low valuation (trades for less than net current assets on the balance sheet.)
- Government contracts mean steady revenues and profits.
- Complicated legal history which stymies investor interest. (These will clear up in 2013.)
- Likely activist target in 2013, which will unlock shareholder value.
This business, like Wireless Telecom Group in 2011, is a Pawn Star stock in that the profitable business is essentially free. You get the share price back in net current assets.
American Capital Ltd. ACAS – What I like about it:
- Recovering business development company.
- Growing asset management business.
- Converted to a C-corp from RIC to use loss carryforwards and aggressively buy back stock in lieu of a dividend.
- Hopes to convert to a RIC early in 2014 and spin off equity assets as a diversified holding company.
- Net asset value well above current share price with lowered debt-to-equity ratio (potential for relevering the balance sheet with a dividend recap.) Holdings are valued at 5.5x EV/EBITDA, which is appropriate. The stock’s discount to NAV isn’t.
- Tremendously complicated company misunderstood by investors which is hurting its valuation. Spin-off would help here. (This is the most complicated stock I’ve ever owned.)
I’ve written about this one before in a post about when to buy dividend-paying stocks. My biggest regret is not including it in last year’s stock market competition. I’ll bring it in this year, but I’m definitely not expecting a repeat of 2012 performance for this one.
S&P 500 Index ETF (SPY) – What I like about it:
- The rules of the stock market competitions require I pick four stocks.
- Everyone else will have four equities, so I want to get even on exposure.
- Will likely outperform half or more of all picks from other stock pickers.
Disclosure: I own CNRD, SODI, and ACAS. Do your own due diligence before investing.