November 2013 Issue is Released

Investment Opportunity 1 – Down 97.5 Percent from the 2-Year-High

Several weeks ago, Eric Sprott of Sprott Asset Management said that his company bought shares in a gold producer for 2.5 percent of the five-year high. At first, I did not know which company he was talking about because various regulations prohibit brokers from mentioning the names of individual companies. However, after connecting the dots, I realized that he was talking about this company whose stock was down 97.5 percent from $4 per share in December 2010 to $0.09 per share at the end of June 2013.

You see in 2010/2011, the market discovered that destroying the value of currencies was bullish for gold. Consequently, herd followers convinced themselves that gold was going to the moon. Because of this widespread belief, they were happy to own gold miners like this one and they bid up the prices of all gold miners. This included this company, which at that time was trading for a market cap of more than $1 billion.

Now that governments around the world are destroying their currencies faster than ever, you would think that the market would still like gold, but this is not the case. Instead, the herd followers have convinced themselves that printing money is now bearish for gold so they don’t want to be seen anywhere within a 100-mile radius of a gold miner. To express their disgust and dissatisfaction with gold miners, they sell them off so severely that companies such as this one trade for only 2.5 percent of what they used to trade.

Investment Opportunity 2 – Fighting for its Life Again

If you have a stable job, taking on debt may not be a terrible idea because you can service the debt without a problem. However, when your job is not stable or your compensation is irregular, taking on too much debt is not advisable. If you lose your job or do not get paid on time, you might have to miss your regular debt payments and maybe even declare bankruptcy.

Investment opportunity is a company with debt operating in a cyclical industry which means that its revenues can fluctuate significantly. Because debt creates financial leverage, you can make or lose a lot of money in a short period of time when owning the stock. The last time the business slowed down, the debt burden caused the stock price to collapse from $26 per share to $0.64 per share. However, on the recovery, the stock went from $0.64 per share to almost $5 per share.

We are now facing a similar situation. Again, the business has slowed down and the stock price has collapsed and the company is fighting for its life. If the company can survive and the business rebounds, investors will make outsized returns.

Investment Opportunity 3 – Size Matters

In certain businesses, size matters because it creates economies of scale. This is especially true when you are running a dealership business. If you only have one location, your margins are likely to be low but when you are running several locations, you can build certain functions to be shared by several locations, thereby creating efficiencies and improving margins.

This is exactly what the management of this company has been doing. Since 2007, the company has been buying up small dealership locations and consolidating them. This strategy delivered increases in sales and profits. Even though a lot of value has been created since the company went public in 2007, it does not appear so when you look at the stock price, which is almost exactly where it was in 2007.

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