Value Stock Guide

Adult Diapers, Defense supplies, and small kitchen appliances – product portfolio as diverse and uninspiring as these, topped up with no-frills, relentless execution, long term contracts and transparent and shareholder friendly policies, and stellar dividend history – this is National Presto Industries Inc. for you. The company has continued to show revenue growth and profitability through the recent economic downturn and the stock is still undervalued with forward PE less than 10. The company carries no debt, has a Price to Book ratio close to 2 and sports a pristine balance sheet. It is also a company with over 100 years of history, and one which apparently Benjamin Graham himself was a shareholder once.

Interested readers should take a look at the company financials, its quarterly and annual reports. You might be struck with how straightforward the reports are and the distinct lack of sub-texts, asterisks, and CYAs. While the prose is not so important to me, it does paint a picture of a company that is run for the benefit of the shareholders and is not trying to hide or obfuscate or otherwise paint picture that is rosier than the reality. The company also shies away from traditional PR, does not feel compelled to manage their business on a quarterly cycle and therefore being a 100 year old company has much less following on the street than one would expect.

But what really interests me is its positioning. Let’s take a brief look at its product segments.

Small kitchen appliances: Consumers are surely not going to be eating any less in the future. But what has started to happen, thanks to the recession, is a trend towards more home cooking and less eating out. This means that small kitchen appliances will continue to sell in high demand. In fact, National Presto has been enjoying significant sales gains in this segment (about 20% YOY in the most recent quarter). National Presto’s positioning at Walmart stores, will no doubt continue to be an asset.

Absorption Products: One only has to look at the US demographics to understand that the demand for adult diapers is not going to slow anytime soon. The wave of baby boom retirees and the increasing life expectancy will continue to demand more of these products.

Defense products: National Presto makes ammunition and other products for the US government under a long term contract that was recently renewed. Given the state of current geo-politics and the fragile nature of many economies and political entities around the world, it is quite understandable if the US defence spending continues to remain high or even increase.

In short, not only is the company well run and the stock undervalued, it is also positioned to compete in prosper in the segments that have the ability to do well in the future regardless of the other economic factors. As the stock market continues to be volatile, any drop in the NPK stock price should be seen as an opportunity to buy. NPK is one of our top small cap stock picks.

Disclaimer: The author owns and is actively adding to his stock position in National Presto (NPK) as of this writing

Have we not learned anything from history?

This time it is different. How often have we heard this and how often has it turned out not to be different? Capital markets and investing have been around for decades, and there is not really much new to see or learn. The problem is that even the so-called savvy investors get caught up in the heat of the moment and have to keep re-learning the basic precepts of investing that have stood the test of time.

Case in point: Wall Street Journal reports on the recent surge in momentum investing. The conventional wisdom states that an investor is much more likely to get burned buying the latest hot stock. The “new wisdom”, arising from the recent few years of volatile and unpredictable markets (really!), and the general inability of the professional money managers to find good investments, states (and I am paraphrasing from the WSJ article):  we have entered into an era of multiple mini-bubbles and the way to take advantage of them is to buy stocks that have been doing well and move on to the next bubble when this one goes kaput.

Apparently, patience, due diligence and sound investing methods are no longer the key.

There are but two problems with this hypothesis

1. Bubbles do not announce themselves in advance. If we, or the smart professionals on the Wall Street knew how to figure out the beginning and end of the bubble, than we would not have endured such a horrid last two years. The reality is that most investors who invest in momentum stocks, get on the ride too late, and get off too early (or get burned) and as a result cannot translate their crystal ball into long term sustained portfolio growth
2. The very fact that so many are jumping on the momo investing bandwagon should make value investors smile. Why is that? It is because when there are multiple bubbles in the market and the dumb money is chasing quick returns, invariably many good company stocks start languishing. This is where a savvy value investor swoops in and than waits for the market to realize its folly. Value stocks are inherently less risky as they are already undervalued

When a momentum inspired investment sours, it can hurt really bad since the fall can be precipitous and there are usually no visible signals of impending doom. A value investment, however, is one where the risks are known and understood and the investor has ample time to take evasive action if necessary.

So if you are looking for stock investment advice in the actions the wall street herd takes, you may not find any. There are lessons however, and we will all do well to heed them.

Be patient, Value Stock Guide is coming soon.

If you are a value investor, investing for long term portfolio growth, you will want to check back soon.

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