2 Stock Pitches by Lee Roach (The Value Road)
Interview #133 - Discusses approach to investing, and shares two stock ideas.
For this edition we welcome Lee Roach from The Value Road newsletter.
Lee discusses his approach to investing, and shares two microcap stock ideas.
(Disclaimer: This interview is for informational and educational purposes only, and should not be seen as investment advice. Please do your own research before investing in any company mentioned).
Hi Lee, thanks so much for taking the time to do this interview.
Can you please tell readers about your background, and how you got involved in investing?
Absolutely, I began investing because I worked in an industrial manufacturing facility. When you work at a “shop” it becomes very evident that nobody around you can afford to retire.
Most people around me couldn’t afford to buy a house and most (if they’re lucky) lived in trailer parks with lot rents that are now as high as $700 a month.
It was very evident my future was going to be bleak if I could not figure out how to supplement my income. I really thought about what I wanted to do and I began trying to learn about economic history in an attempt to understand current global economics and how I fit into that picture.
When you do this, it becomes pretty obvious that tipping your toes into the market was a must. I was already reading about old economies so I picked up some Ben Graham and Philip A. Fisher, other stuff and began trying to learn.
I began writing on Seeking Alpha, not even as a side hustle but as an attempt to have to focus my thoughts on the companies I was researching as well as a way to get some feedback from the investor community as to what I lacked. Slowly but surely I kind of evolved into what my current investment approach is today.
As I began writing about companies with smaller and smaller market caps, I moved mover to writing on Substack because Seeking Alpha kind of wants to limit write ups on sub $50M market cap companies. That’s why I started The Value Road.
Can you provide readers with a brief overview of your investment style and strategy?
My strategy is based on looking primarily at a couple of things. How much is the company worth in the event of a sale?
There’s three ways to kind of home in on that. You can obviously start with the P/B. NAV, and NCAV figures. These will give you a rough estimate of how much that company may be worth.
Next, if the company you’re looking into has a lot of hard assets like land and buildings, then the value of that property may very well be understated on the company’s balance sheet.
This is because that property has to be carried at cost less depreciation. In most of the country however, the value of buildings generally increase as they get older because replacement costs aren’t going down.
You can start assessing what the actual value of this property might be by first looking into the tax assessed value of this land. Most counties have portals to this information.
The most accurate and up to date way to finally assess the value of a company’s property is by comparing that property to other similar properties. You’ll look into what those properties have sold for in the past and what those similar properties are going for now.
Once all of this has been done you should have a pretty good idea on the range of values this company’s assets could sell for despite how the actual business operates. That’s margin of safety #1.
Margin of safety #2 is to compare the business’s P/S. EV/S, EBITDA/S, and these types of figures to other similar companies.
What is the market pricing them in at? After whatever negative catalyst has ran its course or after a management team has successfully completed an operational turn around, the market will often revert the share price back closer to those peer comparison ratios.
Should the company decide to sell off its operations to a peer, those buyers will often pay a price much closer to those comparable valuations peers hold vs a largely depressed Market Cap value.
If the company is priced below asset value and well below your peer comparisons, the last thing we need to look for is a catalyst to rerate the stock.
If the company has been spending a lot on launching a new product or service, it might be about to experience a margin boost as these expenses are about to disappear for the company’s income and cashflow statements.
Does the company have a large debt due and needs to sell off assets to pay down this debt? This makes investors nervous and crashes the price, but when a company has assets to sell and needs to come up with money, they usually do that.
Once the worst of the negative catalyst has come to pass and the business comes out of it more stable with less debt, the market usually rerates it.