Feng Yu
Norman Rothery is the value investor for Globe Investor's Strategy Lab. Follow his contributions here and view his model portfolio here.
Value investors are thrifty folk who have a natural affinity for like-minded people. They detest CEOs who live it up on the backs of shareholders.
One way to double-check the frugality of top managers, beyond simply summing up their pay, is to examine the office space they work in. If it's stuffed to the gills with expensive art and furnishings, think twice about investing in the company.
On the other hand, a modest office tends to be an encouraging sign for potential shareholders. In fact, spartan accommodations are one reason I became interested in a stock owned by money manager Tim McElvaine. He quipped that he felt the need to get a tetanus shot before visiting the aging headquarters of the company in an industrial strip of a gentrifying Vancouver neighbourhood. While such a joke might be normal when dropping by a scrap metal dealer, it's not common for a visitor to a white-collar business.
The company in question was Glacier Media, which runs a portfolio of local newspapers across Canada and in parts of the United States. It also owns a slew of trade magazines and a variety of business information services.
While the firm isn't a rusty iron merchant, it has some uncomfortably similar characteristics. It's in the newspaper business, a mature industry that is showing signs of decline as people spend more time online. But at a good enough price, firms with modest prospects can be bargains.
In this case, Glacier Media's stock has basically been given up for dead. It keeled over from just over $4 per share in the spring of 2008 and hit the floor just below $1.50 per share a year later. Since then it staggered up a bit and was recently spotted at $1.85 per share. Many days, there are fewer than half a dozen trades in the stock.
The idea of buying a small illiquid stock in the face of such a huge collapse and prolonged period of weakness might be unfathomable to some. But the value seems right.
It trades at only 6.5 times earnings and 0.5 times book value, according to S&P Capital IQ. Both are low on an absolute basis. They are also low compared to levels seen before the crash of 2008, when it traded for more than 13 times earnings and 1.6 times book value.
Problem is, the situation has changed since early 2008. Back then Glacier Media had a solid growth record, which tends to attract good multiples because it allows investors to dream of better things to come. Then the economy hit a difficult patch, its earnings got chopped in half and the dreams became nightmares. To compound matters, its profits have yet to return to their former highs, although they're getting close. As a result, its record is now less than stellar, which isn't unusual for value stocks.
More positively, the company started paying dividends in 2011 and yields 4.3 cent, which indicates management has some faith in the business. The company has plenty of room to boost the dividend, and did so by 33 per cent just last week, because it only paid out 21 per cent of its earnings over the prior 12 months.
To be sure, there is risk. The company's strategy of buying media properties – mostly community newspapers – and betting it can turn them around is far from an assured success. But it's encouraging to note that management has a big stake in the firm's future. Its CEO is a principal of Madison Venture Corp., which owns 34 per cent of Glacier Media. Such a large ownership stake provides plenty of motivation and it goes a fair way in explaining the choice of office space.
Mind you, the firm recently decamped from its old fear-inspiring location. With any luck, the relocation might spare Mr. McElvaine's arm from receiving another booster shot. (I'm sure he'll still be visiting because he has about 12 per cent of his fund's assets in Glacier Media.)
For my part, I like the firm and hold a few of the company's shares myself, although I'm not quite as enthusiastic as Mr. McElvaine. Nonetheless, Glacier is an interesting situation for patient deep value investors who don't mind holding on for several years. One encouraging sign? The company's new head office is across the street from an auto body shop.
Norman Rothery