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Bottom Fishing For Potentail Value

Posted: Nov 03, 2009 09:34 AM by Sham Gad

Tickers in this Article: AHC, CENX, SSW, DRYS

Any time you try to bottom fish for bargains, you often find garbage. Keep this in mind when considering the investment candidates that follow. When bottom fishing, you have be aware that the majority of the time you are getting what you pay for. However, occasionally, a pearl may turn up among the waste.

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Be Skeptical
To make this a worthwhile list, I've only chosen companies that have a viable business that is or was profitable. Also, I only selected names that trade below book value in order to give some sort of margin of safety to the candidates. However, buyer beware: often the book value can continue to deteriorate, which explains why what may seem cheap on the surface is actually a value trap. Finally, I wanted names of businesses that were trading for significantly higher prices when the economy was doing well. While I don't expect any of these names to do that well again anytime soon, if they can improve their fortunes and be worth a fraction of those prices, investors will do well. (For more, see The Value Investor's Handbook.)

Steep Falls
Century Aluminum (Nasdaq:CENX) has a market cap of $627 million and about $250 in net debt. It trades at half of sales and 75% of book value of $12.61, almost all of it tangible book value. Insiders own over 38% of the shares. No question that the decline in aluminum prices over the years has hurt this company, but shares fetched over $70 a year and a half ago. Today, they sit at $8 and some change.

Seaspan Corp (NYSE:SSW) operates container ships to maritime shippers used to transport a wide array of goods. Most of Seaspan's business is chartered for fixed long-term contracts. The problem is that this line of business continues to be terrible as global economic demand is way off what it was two years ago. Just look at shares of dry bulk shippers like Dry Ships (Nasdaq:DRYS), which continue to remain depressed despite the market rally. Plus, Seaspan has over $1.5 billion in debt with a market cap of $600 million. Insiders hold 18% of the stock and the equity still yields 4.5%. Shares trade at 64% of book and the forward P/E estimates are seven times, respectively.

No Debt
Newspaper publisher AH Belo Corp (NYSE:AHC) may be the most intriguing bottom fish. It's hard to find anything good to say about the newspaper business these days. However, AH Belo's balance is good enough to warrant a closer look. Shares trade for $4, implying a market cap of $82 million. The company has no net debt and an enterprise value of $61 million. Book value per share is $14.50, but in this case tangible book value is around $10.

Bottom Line
Bottom fishing gets its name for a reason. But occasionally, treasures can turn up. (For related reading, check out Profit From Panic Selling.)

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By Sham Gad

Sham Gad is the Managing Partner of Gad Partners Fund's, value inspired investment partnerships modeled after the Buffett Partnerships of the 1950's. Previously, Gad ran the Gad Investment Group and delivered annualized returns of 22% from 2002 to 2005. Gad is also the author of "The Business of Value Investing" which will be out in the fall of 2009. Gad earned his MBA at the University of Georgia in May of 2007. Gad runs a value investing blog. He can also be reached by visiting the Gad Partners Funds site. When not writing or analyzing businesses, Gad enjoys hanging out with his wife Maggie, reading, golf, and yoga

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