Would you invest if really cheap, but expensive management?

[paperweight]

I found something trading at a ~3x PE, earnings should be sustainable for at least 4 years. Cash position covers debt and comes out (net) to ~1/2 market cap. P/B ~0.5. No dividend for the last 4 years.

 

The business does not have a moat, it's a product I would categorize as differentiated but otherwise commodity like. The company is not the market leader (in fact, it's a copycat) and is riding a trend wave. I don't think margins and sales levels are sustainable long term. (+10y)

 

Management is quite expensive, paid themselves $7M (2 people). That comes out to about 40% of net profit!!

 

As I'm writing this down, I realize it's a pass. I need to be more strict when looking at companies.

 

Anyone have any management horror stories for me to read so I can say no quicker next time?

[longlake95]

Nope,

 

maybe that’s why it’s at 3x earnings.

[schin]

@paperweight I will throw another name out -  Universal Security Instruments, Inc. ($UUU). 

 

They're just publicly traded to get any multiple P/E of 5... So, if they were privately owned, they would just get 1x... but, at 5x... they are suckering/stealing from the shareholder base.... The company is only 11 people, but the CEO is just paying himself and over the long run, you can see it popped a bit, but comes straight back down. 

 

All the profits are funneled to the CEO not shareholders and nothing one can do about it.  No catalysts in sight... One of their largest investors don't care... I called them eons ago.. and the major holder just passed it to his investor base and acted stupid. 

 

Sadly, not criminal, but no integrity. So, again, I've never seen it turn well unless you can change the board.

Edited February 10 by schin

[Spekulatius]

One thing I have learned is that it’s hard to make money on a stock when management works against you as the owner. It’s hard enough to make money when management is on your side, but if they are decidedly not, I think it’s time to move on, unless there is a path to get rid of them. This applies even more so to nano or small caps than to larger business.

Edited February 10 by Spekulatius

[scorpioncapital]

well if pe is 3 after the 7m payout it seems they still make good money right? It isn't so much different than SBC, although in that case they do get ownership, but the cost basis is 0.00$, or something below fair market value. In all these cases it is a headwind but look at abnb - even after netting out a very high level of sbc, the cash-flow adding back what they ditched out is still quite respectable. Where the danger comes is if the business turns (you said its a commodity). In that case, the numbers will quickly change and the money given out is definitely not coming back. How many managers returned money when the business went south?

[ACooke]

I really struggle with the topics question.

There's no doubt times when you probably 'should' but to me it's almost like a subconscious and principled response - I double take, chunder in my mouth a little, then close the report - never to be reopened.

 

I'm sure I probably have and will continue to miss opportunities because of the aforementioned; but it is what it is. 

[paperweight]

Thanks for all the replies. I'm happy you also think that way.

 

Since you threw out some ideas, let me reveal what I was talking about. I'm looking A-Z and have only done Netnets before, so please give me some (even if it's negative) feedback on this one.

 

I realize China is a hard pass for some, but I decided it is worth my time.

 

The company in question is Hyfusin Group Holdings Limited. It is listed on the HKSE with ticker 8512.HK. The ratios I gave above were done in my head, very approximately, so they aren't on the mark. But just from the numbers, it looks cheap.

 

They manufacture scented candles, and since there was just a major recall, I looked up and found out they sell to Target. As I'm non-US, I might be wrong here but Target probably rotates products very quickly, so the short to mid term earnings picture is also in question here. Target is like 80% of their revenue. They just built a new factory, which might or might not be a good thing.

 

Additionally, costs from product recall are coming & 2 guys got 40M HKD, so about 5M USD, which just seems crazy.

 

Please give me feedback. Do you think this might do good in a basket? Or is the old: "If you are not prepared to buy a lot of it, then don't buy it at all." applicable here?

[RVP]

I've looked at this and passed, but mainly because I thought recent years earnings were abnormally high. Numbers over the past few years were remarkable, but reversion to the mean (which should be around 1/4 of current) is common in this industry, and tends to happen very quickly. That dynamic might be even more pronounced here, given the customer concentration. Their business track record since going public already reveals how wild the swings can be.      

[paperweight]

Thanks for all your takes on this!

 

In the last month I have found a lot of stocks trading at these multiples, so I don't feel the need to jump on something of that sort anymore. IMO the risk is not worth the reward here (both business risk with Target being >80% of revenue, and management with the huge payout).

 

Cheers!