The Deep Value Week #2 – 2024/41
The Deep value Week is created in the spirit of Shelby Cullom Davis who wrote a market letter (on insurance) that “no one read”, and when questioned on the why of still writing it, answered that they wrote it for themselves, as a form of self-reflection on their activities – helping them refine their thoughts, test their theories and maintain discipline.
This week was a rather quiet one for the deep value stocks on our radar; mainly decent “old economy” type of businesses trading below tangible equity.
Companies mentioned:
· Natural Alternatives International (NAII)
· Sunlink Health Systems (SSY)
· Biglari Holdings (BH – Indirectly)
In Hurco Companies (HURC) (P/TB 0.69x), a manufacturer of machine tools for metalworking, the company's largest shareholder, Polar Asset Management Partners Inc. (a fund manager), reported changes in its ownership. In two transactions, on October 7 and 8, 2024, they sold a total of 44.6k shares (24.3k shares on October 7 and 20.4k shares on October 8) at average prices of $22.5 and $21.45 per share, respectively. Their sales were the equivalent of 45% and 53% of the trading volumes on the 7th and the 8th of October. The average volume is just 17k so they were extra active during two of the more heavy trading days.
After these sales, Polar Asset Management indirectly owns 786,580 shares in Hurco (12.2%), with a market value of $16.8m. Polar Asset Management Partners manages $6 billion.
Seeing the largest shareholder begin to sell is, of course, not encouraging (they have held the current position since 1Q22), and it will be interesting to follow whether this was a one-off from a portfolio rebalancing perspective or if we will see prolonged selling pressure moving forward.
Source: 13F.info
HURC also presented AI-driven innovations at the International Manufacturing Technology Show (IMTS) 2024, which aim to improve the speed and precision of their CNC machines. Through AI, complex programming tasks can now be completed in seconds. Tools such as their AI Feature Recognition and ChatCNC™ Chatbot assist operators and reduce programming time.
Key Tronic Corporation (KTCC) (P/TB 0.49x) entered into a sixth amendment to its loan, guarantee, and security agreement with Bank of America on October 9, 2024. The amendment addresses prior violations of loan covenants and failure to deliver audited financial reports within 90 days after the fiscal year-end.
The amendment increases the interest rate by 50 basis points, effective October 9, 2024. The margin on base rate loans is now 3.50%, and for SOFR loans, 4.50%. Howvever, the limit on available loan capacity increases from $8m to $10m, with further increases to $11m and $12m on December 31, 2024, and March 31, 2025, respectively.
The company has unfortunately also identified accounting errors where certain facilities incorrectly recorded cost recovery as a reduction of cost of goods sold instead of as revenue, leading to understated revenue and cost of goods sold in previously reported financial statements. Due to these errors, the company’s audit committee has determined that previously issued financial statements for the fiscal years ended July 1, 2023, and July 2, 2022, as well as for the first three quarters of fiscal years 2022, 2023, and 2024, can no longer be relied upon and will be restated.
The restatements are expected to increase both revenue and the cost of goods sold, but they will not affect gross profit or net income. The company is also reviewing preliminary adjustments for the fourth quarter of 2024, including a negative adjustment of $2.0 million related to capitalized costs, insurance recovery, and credit losses. The final annual report is expected to be submitted as soon as possible. The stock price has performed very well recently, and Mr. Market does not seem to have been spooked by this.
In Natural Alternatives International (NAII) (P/TB 0.35), a company that specializes in the research, development, manufacturing, and marketing of nutritional supplements and related products, however, the recent stock price performance has been the opposite. After a weak quarterly report at the end of September, the stock price has dropped by 27%. Discussion activity on X has been unusually high.
The stock is now valued near all-time low levels in terms of P/TB. Since the end of 2011, NAII has only been valued below 0.40x TB on less than 2% of trading days. NAII has historically been somewhat of a “cannibal”. But unfortunately, due to covenant breaks they do not seem to be able to pull on that lever for the time being.
Healthcare company SunLink Health Systems (SSY) (P/TB 0.38x), through its subsidiary Southern Health Corporation of Houston, has sold the property of its formerly operated Trace Regional Hospital in Mississippi for $2m. The net proceeds from the sale amount to approximately $1.9m and will be used for working capital and general purposes. The sale is part of SunLink's strategy to prepare for a potential strategic transaction that could provide shareholders with future value growth at an acceptable risk level. It will be interesting to follow this and see if “something happens” – SSY has been a “perennial” in Deep Value Land now for a long time.
Finally, Biglari Capital Corp (BCC) (the major shareholder of Biglari Holdings (BH) – which is occasionally valued below tangible equity) sent an open letter to the shareholders of Cracker Barrel Old Country Store Inc. BCC, with a 9.3% stake, is the company's third-largest shareholder after institutional investors Blackrock (14.5%) and Vanguard (11.8%). This marks the twelfth consecutive letter to the company's shareholders and board since 2011. As a value investor, “activist letters” are always interesting to read.
Additional reading:
Dirtcheapstocks wrote a very interesting and insightful piece on investing in net-nets - highly recommended reading.
The writer may own shares of the companies mentioned. This communication is for informational purposes only.