Shares in "small, obscure, ugly and scary" companies
Hands up. Who has read Security Analysis, the weighty, 725-page magnum opus of Professors Benjamin Graham and David Dodd (now in its 6th edition)? Not many, we'll wager. But David Desjardins has. Twice.
To say Mr. Desjardins has a passion for stocks and investing is no overstatement. He is completing his finance degree in April, and will be working as an equity analyst on Bay Street this summer. In the fall, he'll begin studying for his chartered financial analyst (level 2) designation.
How he invests
In his portfolio, Mr. Desjardins follows the approach laid out in Security Analysis of buying shares in companies whose stocks are trading below net current asset value (NCAV). The latter is defined as cash and other current assets minus total liabilities.
When a stock can be purchased for less than NCAV, investors can still earn a return even if the company is liquidated – because cash should be left over after paying off all liabilities. Such deep undervaluation is rare but it can be found among stocks that lack analyst coverage or are too thinly traded for professional investors to take positions.
These "small, obscure, ugly and scary" companies give individual investors a chance to earn better returns than the market, Mr. Desjardins believes. In support of this view, he cites on his website (www.netcashvalue.com) a study by Victor Wendl, author of The Net Current Asset Value Approach to Stock Investing. It found that a portfolio of stocks selling 75 per cent below NCAV turned $1 into $44,500 from 1951 to 2009. The S&P 500 Index returned less than a tenth of that amount.
Mr. Desjardins' holdings include Spackman Equities Group Inc., Zimtu Capital Corp., Inspira Financial Inc. and Western Resources Corp. More details are available on his website (a useful resource for investors interested in the NCAV approach).
It was buying Ivanhoe Mines Ltd. stock in early 2016 at 60 cents (now trading just under $5).
In 2014, he was put through the wringer with coal stocks (until reversing course and buying put options on them). The experience brought home the realization that an unpopular company can be a value trap if its balance sheet is dodgy or its cash burn is unsustainable.
"I think it is very hard to compete against somebody passionate in a discipline ….," says Mr. Desjardins. "In financial markets, it translates into finding your niche and capitalizing on it."
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