Pennsylvania Investment Observer

Opportunity Strikes

by Daniel J. Nestlerode

Some stock market observer once said that in the short run the stock market is a voting machine. In the long run, however, it is a weighing machine. The metaphor is apt in that in the short run, the stock market seems to be a popularity contest. What do investors like today and of course, why do they like it? I let the financial press answer that question. We live in a representative democracy and we are reminded, especially now, that voting is an important part of our lives. Yet our founding fathers were smart about the voting process. We get to vote a lot in this country and we also get to vote people out of office occasionally. So if we make a popularity mistake in voting, we can change in the future and vote for someone else.

Well then, what is a weighing machine? It is a very different process from a voting machine. Weighing is an approximate measure of mass as determined by the effect of gravity. Weighing doesn’t concern itself with popularity. It looks at facts, not feelings. It is not nearly as exciting as voting, yet it is much more certain. Still, weighing things takes some work beyond just having an opinion. To weigh something you have to do some things and have some competencies. Having an opinion takes no competencies at all. I am interested in the distinctions between voting and weighing and how they interact. The interacting of voting and weighing creates opportunities for me.

In recent weeks the SOX index has fallen sharply from highs earlier this year. The SOX index is an index of the stock prices of a number of companies that are in the business of producing electronic chips. Chips are part of many everyday goods, from computers to cars to refrigerators and indoor outdoor thermometers. They are part of our everyday life. The fall in the index occurred for some reason I have yet to fathom. Clearly, the voting machine was at work because the business of the chip producers is very good. According the CNBC this morning, chip manufacturers were running at 95% of capacity in an economy where most of the manufacturing is running at only 75% of capacity. In this environment, the voters were selling their chip stocks as fast as they could get rid of them. In this process, a few of the chip stocks got down to price levels that were historically ridiculous. One little company with about $50 million in sales dropped in price to less than $1.20 per share. Yet, in weighing the company, I noticed that the company has $1.45 in net cash after all debts, not counting plant, property and equipment. Further, the company is operating on a positive cash flow basis, even though they have yet to make an after tax profit this year. On this basis, if I could buy all the stock I could have made a profit of 21% by putting the company out of business. Historically, companies rarely sell for less than their net cash after all debt.

Disregarding the voting, I bought over 130,000 shares of the company for about $1.27 a share in a stock market that was headed lower. Was this a foolish move or a gutsy move? It all depends on how it turns out, of course. Today my little stock is trading at $1.40 a share and I have a profit of $.13 or 10% in just a few weeks time. So far I am right. But, it will take more time to validate my original purchase. But I feel like I am on the right track.

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