Oh boy! I was a little bit excited about buying Reitmans for the first stock in the Uproar Fund a few weeks back, but now I’m really excited about this second position for the fund, mostly because I think it’s a no brainer. It’s called MRRM Inc., which stands for the Mont Royal Milling and Manufacturing Company. The company produces rice products and rice flour, selling finished products to other food producers and grocery stores, either under the Dainty or the store’s private labels. MRRM also has a great lakes shipping company called Robert Redford (no, not that Robert Redford), which does about 5% of the business that the rice company does.
You guys all know me by now. MRRM is a beaten up company. Here’s a 5-year chart, courtesy of the Google.
Immediately, you’ll notice a couple of problems. Particularly:
- This stock has a market cap of $8.87 million. I could probably raise $8.87 million by canvassing the readers of this blog. I’m apparently serious about investing in small caps.
- It’s extremely illiquid. It commonly goes days without anybody buying a share. Limit orders, people.
Let those be problems for other people. I love that this company is so small that nobody notices it.
Let’s look at the balance sheet first, because it’s a little bit sexy. Remember, this stock has a market cap of just under $9 million.
Current assets are $36.33 million, including $3.66 million in marketable securities the company purchased because it had a mountain of cash and decided it was going to buy a bunch of stocks and bonds. It has been known to periodically pay out some of this out as dividends, most recently an 80 cent special dividend in 2012. There’s $1.44 per share in value right there.
The company has liabilities of $18.68 million, including debt of $3.5 million. Debt has gone up a lot over the last year because the company invested more than a million dollars to bring certain outsourced tasks in house. It also has a lot invested in inventory and is waiting on more accounts receivable than usual.
This puts the company’s book value at $17.65 million, or about two times the current price. MRRM is trading at about half its book value.
From 2009 to 2012, the company recorded net profits of 60 cents, 70 cents, 24 cents, and 32 cents per share. 2013 was less than impressive, as the company recorded a loss of 7 cents per share. 2013 results were down because the company imports rice from the United States, meaning the weaker dollar hurt its input costs. It also had to deal with much higher rice prices from the U.S. because 2013’s crop was the worst in years. It wasn’t able to pass those higher prices to customers.
But these are temporary events. The Canadian dollar has stabilized at right around 90 cents U.S. The company just needs for the dollar to be stable to avoid the hit, since it enters into supply contracts months before it actually takes delivery of product. And U.S. rice producers have expanded their acreage significantly because last year’s bad crop sent prices so high. If the crop turns out well, that’ll push prices down. That will get costs back in line so MRRM can return to profitability.
But wait. There’s more. Here’s where this investment gets extra sweet.
I bought 1,000 shares in the middle of April for $3.15 each. I wasn’t paying attention and could have gotten more at $3.00, but that’s okay. So MRRM is only 3.15% of the Uproar Fund, at least for now. I’d buy more in a heartbeat for $3.15, and I’m thinking of even averaging up on this one even though I never do that. Why? Two little sentences in the company’s latest quarterly results.
In this context [of challenging results], the Company’s board of directors has set up a Strategic Review Committee. The principal duty of the committee is to oversee a strategic review of the Company’s business conducted by outside advisers.
Let me translate that for those of you who don’t speak corporate B.S.
The company is for sale.
The stock immediately moved 15% on the announcement last week, albeit on volume of about 1000 shares. The company makes a good acquisition target, for a few reasons. A suitor is looking at a company that’s trading at half book value, and is sitting on $1.44 worth of easily valued financial assets. Strip those out and the company is trading at $2 per share. A suitor could come in, pay $5 for the whole thing, pocket $1.44 in easy money, and get the rest of the company under its value.
There’s a decent brand there, which has some goodwill even though there’s none on the balance sheet. Dainty rice also makes generic rice brands for some of Canada’s biggest grocers, and is the only supplier of rice flour in the country. These are moats, and they’re pretty solid moats.
Oh, and the company’s rice mill is so close to the new bridge crossing the Detroit river in Windsor that it needed to invest $2.9 million into air purification improvements so the dust from construction wouldn’t spoil the finished product. The feds have already reimbursed the company $1.6 million of costs, and MRRM is going after the Government of Ontario for the rest. That $1.3 million is a nice bonus for investors if they can get it, but let’s not count on it. Let’s focus on the terrific location of the rice plant. That’s a huge bonus for a buyer.
I have a target price of $7 on the stock, but I’m not even sure it’ll get there. The company’s controlling family owns 60% of all outstanding shares. This could represent a roadblock, but the fact is the company wouldn’t be for sale without the controller’s approval. Minority shareholders have put pressure on the company to sell, and it appears to be listening.
I’ve scheduled this post for Tuesday so I’ll have Monday to buy more shares. I’ll update you guys if I do. I think even if you can get in for anything less than $4, then you should. This company is what contrarian investors dream of.
What is? A fund? Sounds fun. I’m here all week. Because I’M IN VEGAS SUCKAS. (Gets drunk, tackles a cop, everyone laughs because it’s Vegas)
Just in time for the market to melt down completely, it’s the Financial Uproar fund, which I really should call the FU fund. Nah, that seems a little offensive. So the Uproar fund it is.
The fund is simple. It starts out with $100,000, all in cash. Positions are added as I buy stocks in real life. I can’t cherry pick and choose investments for the fund based on stocks I’ve bought before. It’ll be a concentrated fund, never having more than 20 stocks in it, but will most likely peak at just 10 or 12 different positions. Stocks will be chosen on my contrarian values. I’m looking at stocks that are beaten up, have potential for spectacular recoveries, that have great balance sheets, and can hopefully beat the market over time.
I think I can, but I’ve been lax at tracking my results. That’ll change. Each stock will get a writeup as I buy it, disclosing the price I paid, what percentage of the fund it makes up, and a real time buy or hold ranking on a separate page on the site. Just scroll up and you’ll find it.
We’ll do quarterly updates on the fund, probably starting in July. Feel free to mock me if my stocks go down.
Before I get into the first position for the fund, remember my disclaimer which I haven’t cracked out in a little while, but here goes: If you buy shares in a company because some guy on the internet did, you are a moron who deserves to lose their money. Do your own research.
Okay, onto the stock I bought for the fund. ARE YOU READY KIDS? I’M MORE JACKED THAN THE ULTIMATE WARRIOR DOING A PRE-MATCH INTERVIEW. Except, you know, not so much now.
Purchase Reitmans (TSX:RET.A)
- Number of shares bought: 2,000
- Price paid: $6.295
- Percentage of fund: 12.60%
- Target price: $15.75
(Shares in Reitmans were purchased twice, half at $6.48 per share and half at $6.11. Purchase price is adjusted based on getting a dividend from the first half.)
Reitmans is a classic deep value play. They’re a retailer of women’s clothing under several different banners, each catering to a certain subsection of the market, including maternity, plus-size, and professional wear you’d wear to work. They have almost 900 stores in total. Same store sales numbers have been negative lately, due to a bunch of factors, including crappier selection at Smart Set (the company’s chain catering to younger women), expansion into the U.S. building stores inside Babies-R-Us locations which flopped miserably, and the emergence of Target in the Canadian market.
Latest earnings weren’t terrible. The company tumbled to a small loss in the most recent quarter – which did beat analysts expectations – and posted same store sales weakness of 2.8%. The stock popped on the news, briefly touching the $6.48 level I first paid for the name. It promptly sunk back to the $6.15 range where I picked up the second half.
A big problem in this space is losing sales to online only competitors. Reitmans was slow embracing the internet, only making a token effort to get online prior to 2013. Last year the company started taking it seriously, rolling out totally revamped websites for each of its brands. The company’s new inventory system (implemented in 2012) now links inventory for each of its stores and the website, allowing merchandise to be taken from stores and shipped to online customers. This should hopefully cut down on discounting, a problem that’s plagued the company during its recent sales slump.
The balance sheet is practically arousing. Although I wish it had a nice real estate portfolio like a Sears Canada, Reitmans still has an asset rich balance sheet. Book value is $6.56 per share, about 7% higher than current levels. The company slashed its dividend back in December, cutting it from 80 cents per year to 20. Still, it represents a 3.2% yield, and is easily covered by cash flow. Oh, and Reitmans is sitting on almost $2 per share in cash, and has just spent a bunch of money improving stores.
Management has been at the company for a long time. CEO Jeremy Reitman has been in charge since 1974. His brother, and COO, Steven, has been around since 1976. Insiders own a whack of the stock, 57% of the voting shares and 7% of the non-voting shares. Noted value investor Prem Watsa bought 13% of the class A non-voting shares in December. I like when management has skin in the game, and I seem to follow Watsa from investment to investment these days.
Reitmans is the perfect contrarian stock. It has a rock solid balance sheet, pays you to wait, and has fixable problems. I’ve set a target price of $15.75. Let’s see if it makes it there.
Today is a big day around here. Today, I’m officially launching the Uproar Fund!
The Uproar Fund (from here on in will be referred to as “the fund”) is my attempt to beat the market using my contrarian investment strategies, as outlined on my Tenets of Investing page.
I start out with $50,000 of my own money, buying what will end up being 15-20 positions in various stocks that meet the criteria. When I buy a position, I will post an update on my Twitter page and then blog about it in the next couple of days. Chances are, I will have done an analysis of it beforehand, so you’ll have a pretty good idea whether I like the stock or not.
You’ll get quarterly updates as to how well the fund is doing. I’ll also have a page where I’ll list the contents of the fund, as well as the price I paid and whether I rank the holdings as a buy, sell or hold. Over time, that page will grow to include the solds as well.
Since I am not a licensed investment advisor, you should obviously not buy the stocks I do just because I do it. I will not invest your money for you. You can always e-mail me for advice, but typically I’m not so keen on that type of thing.
I’ll post results of the fund every quarter, starting on July 1st. Since the fund will still be mostly cash at that point, the first few results will likely be somewhat boring.
The first ever position bought happened earlier on today, with my purchase of Nokia at $9.55 per share. I’ve set my target price at $23.50, for a 146% return. Remember that this stock has spent extended periods trading above the $30 mark as recently as 2007.
Be sure to check in often for updates on the fund. Hopefully I can beat the S&P 500.