I heard from a YouTube video recently that 1 out of 7 calories in the world consumed is in the form of rice. That seemed kind of surprising but correct, and then I looked this statistic up and it seems to actually be in the range of 1 out of 5 calories in the world comes from rice. It’s a wonderful food source, highly concentrated and dense in calories when its dry and easily stored in sacks. It’s a commoditized product, you can buy a large 50lb bag of jasmine rice and get 300-400 servings out of it depending on how much rice you use per serving. Comes down to around 10-20 cents per serving, it’s not hard to image how this food source keeps people fed.

However, I’m not looking at investing in rice paddys today, but rather in rice cookers. In my last post I was talking about the Korea trade and one of the names I mentioned was Cuckoo Holdings. It wouldn’t be hard to find something like Cuckoo Holdings just flipping through screens or going A-Z until you find some good names on asset basis, earnings or both. You may be familiar with their product, they may be the #2 or #3 well known rice cooker brand behind Zojirushi, Tiger or Toshiba and an affordable one at that:

Business Figures and Ratios

Price: ₩27,400 (As of 8/18/2026)*

*Note: Some prices utilized in parts of this writeup/calcuations may vary a bit as I worked on it on and off the last 2 weeks, should be minimal difference in regards to the thesis

Market Cap: ₩851b

P/E - Owners Earnings: 5.7x

EV/EBIT: 4x

P/TBV - Liquidation Value: 0.65x-0.75x

Dividend Yield: 5.9% @ 25% Payout Ratio

Z-Score: 5

ROE - ex-Cash Normalized: 12.5%

Background & Business

Cuckoo Holdings is a Korean holding company that is engaged primarily in the manufacturing, R&D and sale of rice cookers and secondarily in sale or lease of kitchen and lifestyle appliances.

They were founded in 1978 as Sungkwang Electronics by Ja-Shin Koo producing basic electronic components and small appliances. In 1955 a Toshiba inventor created the first modern rice cooker which fueled Japan’s economic miracle years and a race to capture the market ensured with other makers such as Zojirushi and Tiger among many others. Sungkwang entered the market with an LG partnership in 1982 to develop a model specialized for the Korean tastes which became Cuckoo in 1998. Like many great business stories, the Cuckoo rice cooker was so successful that they changed the name of the entire company to Cuckoo Co., Ltd. in 1999.

The business in later years diversified a bit into water purifiers, home appliances and appliance rental/leasing business. They went public in 2014 at ₩104,000/sh and then restructured into a holding company primarily operating the Cuckoo Electronics, Homesys and a few other minor distributing/operating subsidiaries ever since.

Cuckoo today is a dominate brand in South Korea and I think calling it a duopoly with along with Cuchen does it a disservice. Cuckoo holds a 70%+ market share in the rice cooker category in Korea. It is extremely entrenched into the daily lives of the Korean household. A rice cooker frequently is a wedding gift or gift to Koreans abroad:

Translated from the link: https://finance.ettoday.net/news/1248277

For many Koreans, this electric pot is even their connection to their hometown Bobby Yoon, a Korean man who opened a restaurant in New York, said that when he was studying in Pennsylvania, his mother in South Korea sent him a Cuckoo to the dormitory, but it was unusable because of the different plugs. Yoon said, “My mother knew I I cried when I couldn’t use it, and the electric cooker weighed so much on Korean families

I’ve looked around and asked AI for other brands that have this level of market concentration and it’s difficult to come up with some good comparisons.

Operating Companies, Revenue Breakout & Outlook

The holding company has two major operating companies that drives about all of the revenue for the holdco.

• Cuckoo Electronics (100% Stake) - Manufacturing and sale of rice cookers, induction ranges, microwaves and dishwashers. Most of the revenue will be from rice cookers while mature still slowly growing while the non-rice cooker appliances have been their new growth engine.

• Cuckoo Homesys - 284740 KR (40.55% Stake) - Rental and sale of kitchen and lifestyle appliances such as Water Purifiers, air purifiers, bidets and vacuum cleaners. A decent growing business at 7%-8% revenue growth per year.

For financial statement reporting purposes the revenue line is 100% from Cuckoo Electronics, however they do stuff the 40.55% of revenue from Cuckoo Homesys as some sort of equity investment income/(loss) kind of line item. Just combining the 100% from Cuckoo + 40.55% of Homesys revenue the holding company generates 67% from Cuckoo Electronics and 33% from Cuckoo Homesys.

Outside of all of this, both sides of the domestic and export market have been doing well. The export market has been a great source of revenue growth for the business I imagine and there’s probably considerable upside for them to continue to grow this part of the business especially with the currency advantages with the Won vs USD or EUR for example.

The outlook for rice cookers is around the rate of inflation if not a bit more. Asking around AI references various research reports puts it around 5-7% CAGR in the next 10 years. This depends on the rice cooker segment with smart and IH technology being higher growth and the basic traditional technology maturing. There’s still a lot of growth in the export market outside of the maturing Chinese market which seems about right when I look at how the export business has performed at Cuckoo.

There’s been a general trend with kitchen appliances globally in the recent decades that has slowly isolated functions that you normally perform on a stove into its own product. This may be for energy efficiency sake, convenience sake or what you have to do with smaller kitchens.

More smaller batch cooking and baking is done in air fryers, instead of cooking rice and other grains in a pot on the stove you cook it in a rice cooker, instead of cooking in a dutch oven you may cook meat in a crockpot. You also have appliances like the instapot that tries to be an all in one which can cannibalize all categories.

Main Catalyst - Value-Up Disclosure

The company disclosed a value-up this year and states the following (translated from KR to EN):

https://engkind.krx.co.kr/common/disclsviewer.do?method=search&acptNo=20260325000672&docno=&formProcsCd=070&language=english

• Goal Setting: In order to improve corporate value, our company sets growth potential, profitability, and shareholder return as key indicators, and aims to continuously increase shareholder value by expanding shareholder returns such as dividends based on stable growth in the mid to long term. In addition, we aim to build a virtuous cycle of growth and shareholder returns based on strengthening business competitiveness and securing financial soundness.

• Planning: Our company plans to strengthen product competitiveness and advance our business portfolio in various areas of home appliances, including kitchen appliances. To this end, we will continue to promote R&D investment and strengthening product competitiveness based on differentiated technology and quality competitiveness, and strengthen our growth base by expanding our product lineup and targeting overseas markets, focusing on major dependent companies. In particular, we plan to improve profitability and cash generation by expanding premium products and improving product mix. In addition, we will promote the sustainability and gradual expansion of dividends based on stable cash generation, and strengthen shareholder returns through various shareholder return policies such as the use of treasury stocks. Through this, our company will build a virtuous cycle of growth and increased shareholder value.

Most of this is will read like standardized text for how companies announce these value-up programs, however this company has already been doing some of what they have described. Dividends have increased from ₩659/sh in 2021 to ₩1,550/sh so far in 2026. That represents a 26% annual growth rate in the dividend. To add in further, if there is some set payout ratio maybe 20%-25% of earnings, the dividend will grow as the earnings grow year over year.

As for the R&D spend, it is true they have been increasing the R&D spend, still hovers around 1% of sales (not including Homesys). It’s not really clear how much of this will to maintain the business as it is, rice cooker technology doesn’t particularly change all that much, my guess is they may increase these investments to grow their non-core/mature part of the business with household/lifestyle appliances.

Appraisal Value

I’ll pull out a Buffettism or Grahamism where there was a quote along the lines of “You don’t need to know a man’s weight to know that he’s fat.” You can eye ball some multiples or simple calculations and see that the stock is ridiculously cheap on an asset or owners earnings basis. My back of the envelop math below:

Asset Value

Most of this exercise is pretty straight forward, most of the assets will be in cash or in other investments, so I’ll focus there. Cash consists of cash, deposits and other short-term investments so we can take values as is on the balance sheet.

The other major piece is the other investments and that consists of investment real estate at ₩80b and equity investments at ₩642b. I don’t really have any solid info on where to start on the investment real estate and its around 6% of tangible assets so we can pass.

As for the equity investments. About ₩335b is in Homesys in historical cost vs their market value of ₩202b (₩497b * 40.55%), so a -40% decline from their investment. However, Homesys trades at a P/E of 4x for a business that has over 10% ROCE, sounds ridiculous but I don’t think it’s insane to say in a full liquidation they can get double today’s stock price for that operating entity. So in the end I think other investment may be worth around ₩711b in liquidation value (₩642b total equity investments - ₩335b of Homesys book cost + ₩404b fair market value of Homesys in a hypothetical sale). The rest of the equity investments involve private equity stakes in subsidiaries for product distribution channels in other countries.

So in the end we get ₩38,285/sh of liquidation value at 0.69x today’s share price which is a pretty rough estimate but I’m comfortable with.

What’s the business worth on an asset basis? If the enterprise is capable of generating over 10% after-tax ROE or ROCE, normalized for excess cash, it should trade for at least book value, so around 38,285/sh (45% from today’s price). Zojirushi (7965 JP) trades around 1x book and I don’t think that business is much better than Cuckoo.

Owners Earnings

The path to the company generating ₩4.6b in owners earnings is very achievable with some of the conservative assumptions in place. Keep in mind Cuckoo Homesys Earnings don’t appear at the revenue line and get pushed in down the income statement. I took a simple approach and added in 40.55% of their most recent earnings.

I believe Cuckoo Holdings is worth 10x EV/EBIT (165% from today’s price), similar to Zojirushi (7965 JP) in Japan that trades on average around 8x-10x while generating what may be around 6%-8% ROE. With Cuckoo at 12.5% ROE I think we can justify a 10x EV/EBIT multiple, which at ₩69,944/sh would have it at 15x our price to appraisal value, Zojirushi trades at LTM P/E of 15x today.

Potential Upside

Combining the two methods, we have a scenario that has a lot of potential in generating decent returns with a significant margin of safety. This also underestimates the fact that there will be continuously dividend increases. If re-rating happens in less than 10 years the returns would be quite strong at these price levels.

Should We Buy Cuckoo Homesys?, Tax Inheritance Planning?

One of the questions that I had in my mind is that should we instead buy Cuckoo Homesys (284740 KR), the sole publicly traded operating company? It’s incredibly cheap just looking at the initial view of the numbers. 4x LTM P/E, 0.45x P/BV, growing high single digits, above average returns on equity, and so on. Assuming there’s similar financial alignment with insiders Homesys as there is with Holdings, perhaps we can:

Insiders own more of the Holdco, however they are invested enough into Homesys in my opinion that I doubt they would want to do any shareholder unfriendly actions with the operating company that would hurt the long-term performance of the stock given the tax inheritance planning from the founder to his heirs have concluded in 2021. However it’s not clear to me if incentives work the same in Korea. Many of the family control situations don’t seem to care that much about their stock performance vs keeping control of the family business.

The only other piece that somewhat bothers me with this situation as well as many others in Korea is that if Homesys is an above average business or even someday a great business depending on how that segment works out, why even let the public have 59.45% or whatever ownership in this thing? Why not own the whole thing?

Coming from the more greedy western markets if you have a business with a small stake in a related operating company that is doing well trading at depressed multiples investors will ask why is the public allowed to own the rest of a good running business instead of the holding company. Why are we not increasing our economic interests in that business? I don’t have answers but stocks don’t get this cheap without there being some wear and tear on the thesis.

Conclusion

Cuckoo Holdings is a great entry point into the South Korea trade. The holding company structure is easier to understand than most, avoids the general tax inheritance/family succession issues and its a simple easy to understand business and idea. It seems like there’s so many ideas that are similar to this where you aren’t really competing on uncovering information, you’re competing on just entering the market and buying a position, many don’t but overtime that may change as the Korean market reforms play into effect.

There is nothing really interesting, hidden or eye popping about this stock, it’s a beloved blue chip rice cooker brand where you can purchase ₩4,600/sh of owners earnings or ₩38,285/sh of adjusted net tangible assets for ₩27,400/sh, collect the 6% dividend yield and wait for the value-up catalyst to workout or for investors to notice. It’s an average to above average business trading at Graham & Dodd prices and holding a basket of those type of ideas tend to do very well.

Risks

South Korea Corporate Governance Issues: While the tax inheritance planning issue is behind us, there can still be potential for abuse for minority shareholders which has been common in Korea but improving overtime.

Value-Up Initiative Underperforms: If the Value-Up initiatives doesn’t work out and ends up being just a performative filing, this could hurt investor confidence in the Korea market to realize value.

Losing Market Share: While Cuckoo is a phenomenal brand in South Korea, a 70%+ market share also means a big pool for competitors to constantly test the resilience of and any cracks in that competitive advantage could cause business deterioration.

Foreign Currency Risks: Cuckoo has a big export market that is quickly growing, results could get really volatile around earning in foreign currencies and returning it back in KRW.

Disclosure: I own a long position 192400 KR, no position in 284740 KR - I may purchase shares in the future. I am not short on any positions mentioned in this post. I may add or sell my long positions over time. I only manage my own personal accounts and do not manage outside capital. Nothing here is a recommendation to buy or sell securities, nothing here is financial or tax advice, please DYODD.

The Korean stock market was a fairly closed off stock market for as long as I can remember until recently. There aren’t many stocks that are referenced from that country in the West except for a few export driven name which are the common ones that we know their products of such as Samsung, LG, Hyundai, etc. If you are an e-sports fan you may know some of the Korean companies that sponsored teams in this space such as SK Telecom, KT and LG. Outside of that Charlie Munger & Daily Journal Co. had an interest in the steelmaker POSCO that value investors are generally aware of.

Recently Interactive Brokers has allowed investors to buy shares in Korean stocks. Previously you were only able to buy ETFs that went out and bought the big export driven stocks or you may have needed to have some account domestically in that country to be allowed to buy stocks there.

Is Japan the Playbook for the South Korea Trade?

I was listening to the Planet MicroCap Podcast recently with Dan Rasmussen, around 27 minutes in he was talking a bit about South Korea and he like many others know it’s a large opportunity to enter a very cheap and attractive market. One thing he mentioned which resonated with me here is that this is very new for everyone. There isn’t really a strong playbook on how to play the SK trade. The assumption is to play the trade similar to Japan but we should be mindful South Korea can be have its own unique situations or issues in this idea. A few bulletpoints on some of the research I’ve done on regarding the SK trade:

• Value-Up Program: Korean version of the Japan TSE reforms that attempts to address the overcapitalization of corporate balance sheets and improving corporate governance.

• Overcapitalization: A ton of companies that have too much cash on the balance sheet and payout ratios that are too small. You have some compounding effect on the overcapitalization where holding companies own publicly traded subsidiaries that are worth more than their book cost.

• Family Controls: South Korea has a lot stocks that have 30-50%+ family shareholders which may spread across different subsidiaries or webs where a lot of the business operations could all be publicly traded on different tickers. Ex: Cuckoo Homesys is owned by Cuckoo Holdings and some individuals from the family, maybe 20%-25% is the public float. Why doesn’t the holdco just own the whole subsidiary? I’m not sure.

• Depreciation of Local Currency to USD: Not a macro expert but both countries are trade heavy countries that favor depreciating currencies. Great for exports, less good for the domestic economy.

• Corporate Governance Issues: There’s different flavors between the two, there was a lot more the kind of stuff that seeks to keep control of a JP company from outsiders that may not have always been in the best interest of shareholders. Value investors loved less insider ownership for a lot of JP companies in that regard. With Korea the concern is more in realm of the insiders decides to buyback stock but doesn’t retire the shares which allows them to keep control and doesn’t create value for shareholders.

• Business Quality: Not sure if this is what it looked like in the early 2010s when the Japan trade was conceptualized but there’s a lot more quality businesses that I see in SK especially when you string out excess cash. Maybe this is a bias here since all of the quality businesses in Japan have already re-rated or taken private. You can find more of the kind of stuff that pays higher dividends, can return over 5% ROE and doesn’t have to have the thinnest of net margins. There’s a few household name type of stocks that may be attractive or comfortable, although can be questionable if they are cheap or quality businesses. ex: Cuckoo, E-Mart, Daesang, Nongshim, Samyang, etc.

• Inheritance Tax Issues: Korea has a very high inheritance tax and there’s a lot of behavior that gets influenced by the inheritance tax rules, I can’t tell you if its either good or bad or both for investors. I wrote more on this below regarding buying into these ideas. I believe Japan has a few of these type of ideas as well but its nowhere as wide spread as it is in Korea.

Types of SK Ideas

I’ve entered into a few SK positions 3 months ago. These were positions I read others on X or Substack mention and talk about and then did my research to understand what exactly we’re getting ourselves into here. I ran through some screeners and looked through online on different ideas and I have basically three buckets here:

Quality/Compounder Businesses
This is probably the easiest one to get behind on and they may end up being larger well known names. These are the types of businesses that are highly cash generative, already paying strong dividends, high returns on capital, may be already following the value-up program to some extent. You may find some household names here that could get re-rated quickly.

Net-Nets/Deep Value
This was my immediate thought when I jumped into SK. I think there’s a lot of deep value stocks that look attractive, however I do want to be mindful the part that might be difficult here is if we can actually determine a margin of safety around some of the family control issues.

Some of them might not have the multi-layer family structure thing going on, you might look at a company that is directly owned by the individuals in that family. Is it safer to own just a single business owned by the family that’s ready to sell, or maybe you want to enter into a business that got sold to an outsider after the fact and price didn’t move? I’m also not sure if this is obviously better than owning some holding companies that has a lot of undervalued 10-year+ booked investments.

I found a net-net where the new owner made a new entity, issued bonds and sold it to the buyer and then he bought the shares from the buyer with the proceeds from the bond sale, not sure how to feel on that, those usually are red flags when looking anywhere else. However if you can buy things at 2/3rds of NCAV and a PE of 5, you generally will do quite well.

Special Situations/Tax Inheritance Plays
I think one idea that would be interesting if I can find one which is an M&A rollup of a similar type of business. I own a few positions that do something like this in the UK with TPFG LN, VTU LN which have the ability of buying similar businesses at very cheap or reasonable prices. Similar enough with EuroEyes (1846 HK). The ability to buy things in 2x, 3x EV/EBITDA in SK sounds incredible to me.

I believe the mainstream idea here is investing around the inheritance tax play. And I think there’s two parts to this. One being the taxes accrued on the actual gifting of the shares and two needing to come up with the money to pay on creating a tax event from gifting unrealized stock.

There is a 50% inheritance tax and what a lot of these families and insiders do is stuff the balance sheet full of cash, perhaps they have some underlying investments that are also undervalued on the balance sheet, they suppress the share price and then try to gift shares to other families members. Since they’re based on the average market value of the shares within a few months before and after the date the gifted shares were made the tax impact on paying severely undervalued shares is not as severe as opposed to paying tax on fairly valued shares. I did an overly simplified back of the envelop calculation below to visualize this point.

Since these families would be gifting unrealized shares to their descendants, they now have to come up with the cash to pay this tax. You either will sell stock which will remove some of the controlling ownership or you need to save up enough dividend distributions to pay the tax.

I have to credit Ryan Albert here as he did some great work talking about this in his X post regarding Ace Bed which describes this situation well. Keep in mind if we were to pretend if some of the family heirs had to pay this 50% inheritance tax solely from distributions from the business and didn’t have lot of cash on hand to do so, they would have to really raise the dividends once they get past the tax valuation period for the gifted shares.

I’m not a tax expert, so keep that in mind with all of this and I don’t know 100% if this is how it really works but this is how I’m thinking of the scenarios as we try to model it out. My guess is that this ends up being a giant timing exercise where a controlling family does the following:

1. Keep the stock price suppressed. Stuff the balance sheet with cash and other undervalued assets

2. Gift the shares to your descendants based on severely undervalued market values

3. Paying the tax in installments over five years just accruing dividends slowly without forcing the stock price to increase

4. Once all of the shares that needed gifting is done and the are outside of the tax valuation window, they raise the dividend payouts. I believe there are some tax reductions on maintaining higher payout ratios so then it wouldn’t matter if the stock price goes up at that point.

So if you’re wondering why does this matter at this point, its because we want to be long on these types of situations that get to point number 4 here. Controlling families are incentivized to minimize their tax obligations by playing around these two major events and if they’re successful here then common shareholders should do quite well.

Now to be fair, tax inheritance issues are a form of corporate governance issues that plague common shareholders for the benefit of the controlling family. We don’t really know how likely a lot of these ideas will work out but these kinds of special situations are not far from the kind of plays stuff seasoned investors work with. You have things like broken succession/family dynamics, plays where the chairman is 85 and may have to sell the business, the kind of stuff that has nothing to do with the business itself but are the catalysts to creating value that investors love to look for.

Conclusion

I wrote a lot of this stuff to get my mind in gear in thinking about this region and how I want to invest. To be honest here, I’m not sure it matters all that much what types of ideas you want to pursue in Korea. Going outside of the large, AI/semiconductor related, high visibility names and finding any cheap stocks on assets and earnings that has consistently made money it seems like you could potentially throw darts at them and do very well.

Does it actually matter if you buy a great business or a net-net or some tax inheritance special situation when the owners earnings or P/E is around 4x-8x and they pay a 6%+ dividend yield? It seems likely with the laws and regulations pushed through in this region plus the value-up program that eventually a lot of these stocks will re-rate assuming the corporate governance issues don’t get worse. If there’s one way to describe the South Korea trade as of now it’s a bet on corporate governance improving from bad to average while we’re holding them at dirt cheap prices and that change could be extremely accretive to stock returns over time.

Additional Content

Michael Fritzell had an interview with Ryan Albert that just came out around the time I was finished writing this piece. I haven't gotten a chance to listen to the interview, I’ll circleback and update this post if I have any updated thoughts but excited to listen to it as its one of the few longer discussions on SK stocks that I know of. Michael puts out some high quality interviews and guests so this one should be great.

Disclosure: I own a long position in 1846 HK, VTU LN, TPFG LN, 003800 KQ, and 192400 KS. I am not short on any positions mentioned in this post. I may add or sell my long positions over time. Nothing here is financial or tax advice, I only manage my own personal accounts and do not manage outside capital. Nothing here is a recommendation to buy or sell securities, please DYODD.

EuroEyes is a position that I own in my portfolio that I got recently interested in from a high quality piece written here, I’ve never done a full write up of the idea but I doubt I could write a better deep dive than that, I would check out Swissie’s post if you are interested. Wanted to provide a quick note/update where things sit post-M&As and review the thesis. Quick background provided below.

Background

EuroEyes International Eye Clinic is a premium vision correction ophthalmology group based in Germany listed on the SEHK. The business was founded by the current CEO Dr. Jørn Slot Jørgensen in 1993 who is still the current controlling shareholder. They specialize in refractive surgery and treatments for patients with myopia and presbyopia. They operate on a private or self-pay model meaning their patients are generally higher income individuals who are paying out of pocket for these treatments.

The business is structured much like a lot of professional services firms where key partners, managers are awarded or subscribe into management shares of the local subsidiary/clinics as a sort of “golden handcuff” arrangement. In this case for EuroEyes a lot of their expertise in being experienced eye surgeons will have stakes in their particular clinics or regional operations where they will be incentivized to grow the business.

Their core markets are in Germany, China, UK, and Denmark with Switzerland and Netherlands recently added-on via M&A. The business went public in 2019 on the SEHK with a similar idea to what I written in my Prada write-up which was to take advantage of growth opportunities in mainland China.

The main thesis for EuroEyes is that you can take a position in a fairly cheap (4.5x EV/EBIT) and organically growing healthcare based professional services with a large cash position where they could deploy in accretive add-on acquisitions and/or capital returns to realized value for shareholders.

Strategic Acquisitions

Betterview Swiss & UK

On 9/2/2025 EuroEyes entered into an agreement to acquire Betterview Swiss and UK assets for ~HK$119m which the company paid for the deal in cash on the balance sheet which is somewhere around 16%-20% of their cash being used for this deal. Not massive but not insignificant either. We don’t know what the EBITDA is for this deal but the company has talked about making deals around the 8x-12x range. This is also a turnaround play that they are expecting to work out by mid FY2026.

FYEO Europe B.V.

On 2/26/2026 EuroEyes entered into an agreement to acquire FYEO Europe B.V. for HK$1,234m with a mix of cash, debt and management team subscription into the EuroEyes Netherland’s subsidiary vehicle for the assets.

This was the massive deal in that it used up a good amount of the cash on the balance sheet and took on some debt from UniCredit to finance the deal. Most of the consideration is funded by debt. I’ve done some AI research/estimates that the debt may be structured as EURIBOR debt, perhaps around 4%-6% interest rate, just an absolute guess here.

The revenue increase is quite significant at 58% (Note: the press release on this deal has the rev growth around 65%? May be the difference in EUR?) and the 10.2x EV/EBITDA multiple sounds more than fair when the alternative is that they just hold the cash as they’ve been doing.

I’ve tried to come up with a guesstimate on what owners earnings could be here and it can be a wild range from HK$180m to the HK$77.6m management has guided as a proforma combined value which puts it somewhere around 4.3x-10x earnings. That range is not helpful, but still attractive anywhere within it for what this business is and its growth. There is a margin of safety here that I am comfortable with.

As far as the owners earnings math goes there’s too many questions we have that could impact the income statement. What is obvious is that EuroEyes is likely underearning its potential due to integration/acquisition costs, acquired clinic turnarounds and lower capacity utilization that is around 18%. Which may be a really considerable upside if things go well and a lot of these measures improve as does the business.

The Catalyst Timeline

I think EuroEyes is very interesting as it seems to have two paths to making money on this idea.

1. Event Driven (2yr+ holding period): The business does something with the cash that is accretive/positive to returns thus the market re-rates the stock.

2. Business Improvement & Successful M&A Integrations (Hold and Reassess Thesis): The business solves its utilization issues, continues to have pricing power and is able to successfully integrate and turnaround any new clinics they’ve acquired in recent and future M&A deals. Also note that they will likely continue to make more add-on acquisitions over buybacks and dividends if possible. In part that its difficult to repurchase on 35%-40% of the public float that’s not held by insiders.

The thing is something was already done with the two acquisitions for Betterview and FYEO Europe, value hasn’t been recognized, the stock price has continued to drift lower. Where we are in the chronological order of potential catalysts here:

1. 9/2/2025 - Betterview M&A

2. 2/26/2026 - FYEO Europe B.V. M&A

3. 8/4/2026 - We are here, value gap still remains

4. Late Aug 2026 - H1 Results

5. March 2027 - FY 2026 Annual Results

6. Post FY 2026 - Future Reporting Periods

7. Random Events - Other M&A deals/increased dividends/share repurchases

I have a hard time imagining once the large increase in revenues shows up in official reporting data it doesn’t end up being recognized by the market within this year or next year. Of course other factors would help such as where the utilization rates are at, number of surgeries, what gross margins are looking like, etc.

The proforma earnings for the combined group at HK$77.6 of earnings after the FYEO Europe deal seems incredibly conservative to me, they would be making less than what they did in FY 2024 (HK$84.36m). The reality is this business will earning much more than HK$77.6, it’s just a matter of when and what the quality of the earnings will be.

Conclusion

I would predict we would know by end of this year if the market is going to recognize value via the event driven path or this will end up being a longer dragged out play. In the case that the stock is still at HK$2.75 or lower perhaps we may need to reassess the thesis and decide if we want to hold through the second scenario alongside management for the long haul.

I didn’t discuss too much of the business in depth and that’s because I think holding the stock as an average to above average quality business is a bit more complicated than following the event driven thesis and involves having a lot of faith in management here.

The company has discussed their “three pillars of growth” which in short is just improving the business and making more M&As. The M&As will muddy up results a bit, the returns on capital employed and other metrics. There’s a bit of a timing difference with the potential earning power post-M&As where it may take year 2 or 3 after before we see some normalized results after integrating with EuroEyes. Since they’re paying what I would say fair prices for these deals, I’m a bit hesitant to start calling this a high quality business until we see improvements in the cash returns vs the increased asset base that came with these deals, and that takes time.

There’s a little bit of value here in how obscure this company is and it’s reflected in the price. It’s a European company that’s listed in Hong Kong, most of the revenue is generated in European based currencies, financials reports in HKD. It trades at a $100m USD market cap which is considered small in the US but in a lot of Asian countries this could be a mid-cap stock. Insiders own 60%+ of the business, its a business that’s fairly young in terms of how long its been public. There’s maybe 2 or 3 sources I ever found on Substack or X or anywhere else where investors are aware of this company.

To many investors this is probably a value trap, dead money, waste of time, etc., but for others these are the kind of ideas you turn over rocks for (or in my case read substack write-ups). It’s potentially a great business with a focused M&A strategy tucked away in the ignored and forgotten world of HK stocks waiting for Mr. Market to come knocking at the door.

Risks

1. Reputation Risk - EuroEyes is viewed a premium high quality correction services provider and any major errors in surgeries or experience could have long-term reputation risks.

2. Weak Demand/Pricing Power - Given EuroEyes targets out of pocket paying patient and surgeries are usually non-reoccurring the pool of potential patients could be poor. Could also fluctuate depending on the quality of public healthcare and coverage of these types of services in some of the countries.

3. Integration Risk from Acquisitions - What happens if EuroEyes fails the turnaround of the Swiss part of the business? I’m not sure what they would do but I do know value would have been destroyed in that event. If there are issues with the Netherlands part of the business, that business is large enough it would just break the thesis at that point.

4. Foreign Exchange Risks - Most of the revenue is generated in Europe in EUR, GBP or CHF. In 2025 the business has taken a 14m loss in currency exchange losses, in 2021 they taken 12.7m gain.

5. Delisting Risk - Since they trade in Hong Kong, the business could be subject to delisting risks that are usually commonly discussed around PRC stocks. Since they’re based in Europe they could relist in another market, however it’s not clear what impact this would have for outside investors.

Additional Reading

1. Swissie’s Post:

   Swissie Letters

   Paying LESS than 3 x FCF for a high-margin, growing, durable business

   I track EuroEyes (Ticker: $1846, HK listed) closely since 2023. Over the past couple of weeks I materially increased my position. Because the current valuation is, frankly, stupid. This is a decent company with c. 15% net profit margins, 5Y revenue CAGR of 11% and you can buy it today for less than 3 x FCF…

   Read more

   a year ago · 57 likes · 21 comments · Swissie ⚔️

2. GlobalStockPicking piece on Non-Chinese family businesses: https://www.globalstockpicking.com/2024/01/28/year-of-the-dragon-hk-stock-picking/

3. VIC Post: https://valueinvestorsclub.com/idea/Euroeyes_International_Eye_Clinic/8297163808

Disclosure: I own a long position HK 1846. I am not short on any positions mentioned in this post. I may add or sell my long positions over time. I only manage my own personal accounts and do not manage outside capital. Nothing here is a recommendation to buy or sell securities, please DYODD.

Jerash Holdings reported Q4 and FY 2026 results on Monday and they were quite good. The company generated a record $166m of revenue, a 450% increase in operating income from FY25 to FY26 which results in a return to profitability for the first time since FY23.

I haven’t written up Jerash Holdings before but it is essentially a low-cost apparel manufacturer that contracts out to produce some of the branded clothing and apparel that we know such as The North Face, Adidas, Timberland, etc. It operates in Jordan which has favorable tariff rates compared to the average. In most cases a business like this can be subpar and unappealing as it’s determined by which country has the lowest wages and the trade barriers. However these can be appealing as a Ben Graham type of stock buying on the balance sheet and poor margins, selling on the earnings/margin expansion assuming its operations are in a non-Western developed nation economy.

Asset Values

The stock isn’t all that cheap on an asset basis in part as the company was still paying dividends during its loss years. The NCAV & TBV calculation here is purely statistical, truthfully it may be closer to 2x or so discounting inventory if we were to do a proper liquidation value analysis. On an potential earnings basis it may still have a lot of juice left as Jerash production capacity is fully booked through December while that also suggests they are capacity-constrained as well.

There will be some additional capacity increasing in early to mid 2027. The chairman highlighted the Aqaba and Haifa ports starting to normalize operations. The company has invested around 3%-4% of their revenue into capex in the last couple of years to build out this capacity and the company looks to double their operating capacity in the next couple of years according to the earnings call. Management is guiding at a 20%-22% growth rate into Q1 but won’t guide beyond that.

They had a big win on obtaining a strategic partnership with Hansoll Textile, a South Korean apparel company to fill orders for a multinational retailer in the country as the company continues to diversify its customer base. This has generally been an ongoing strategy where they’ve sacrificed some margins to get some customer diversification. Their #1 customer VF Corporation was around 64% of sales in FY25.

When to Sell?
One of the most difficult things with these types of Graham & Dodd type investments is when to sell. They generally aren’t the highest quality businesses so it easy to want to dispose of them when the stock starts to re-rate. However it’s pretty easy to leave a lot on the table selling too early. This doesn’t end up being too bad since it was a 2.5 year old holding for me, I do want to be careful to not delude myself or be too greedy here, once there starts to become some story around this company and it’s achievements in this return to profitability it may be time to take profits by that point.

So back to the question, when do I think about selling Jerash? I’m honestly not sure yet. It’s approaching towards TBV, there’s a lot of earnings potential left going into 2027. I’m in-between deciding if I want to take the Peter Cundill approach and sell half or let it ride for another year and see what happens. I think it’s likely that I will be disposing a part or all of this position either by end of the year or in 2027 as the momentum starts to pick up around this name. For now I’m going to leave it alone.

Disclosure: I own a long position JRSH. I am not short on any positions mentioned in this post. I may add or sell my long positions over time. I only manage my own personal accounts and do not manage outside capital. Nothing here is a recommendation to buy or sell securities, please DYODD.

I was recently looking at the South Korean market as a place to fish for cheap and overlooked stocks. I was very interested in it since IBKR have offered trading permissions in that market a few months ago. I bought 2 positions last week and entered the purchase data in Koyfin to look at my portfolio weighting and as of those purchases I am now 70% global equities vs 30% US equities. It got me thinking, how much more of the world do I actually want to own? Does it really matter?

It’s really fascinating to me because sometimes I would read about how other value investors in other countries talk about the investing cultures in those countries and sometimes there are people who have anywhere from 80% to even 100% invested in the S&P 500 or in US growth stocks. Then here’s me who wants to own this Japanese company that has 2 or 3 unrelated subsidiaries the sell below book value or NCAV in their home country.

One of my goals when I set out to invest my own money is that I wanted to invest a good amount of my money in global stocks. It was hard to fathom with how many stocks that are in the world, the only ones that mattered are the 500 that trade in the United States. I wanted to own maybe 75%-50% in the US and the rest in international stocks, obviously I didn’t meet that goal.

How did we get here?
The main reason of course is owning stocks in the US for me has become less attractive, there are less ideas that I really like compared to what I can find globally, even accounting for higher quality businesses, better corporate governance, capital allocation, etc.

I own shares of Stride, Inc. (LRN) which I’ve wrote up, this idea is really uncharacteristic of most things you find here. Its in an industry nobody cares about, it’s not a stock that’s been passed around by various quality investors and fund managers, and it’s not a stock that has 4 or 5 podcasts shows talking about it. Compare this to Adobe, Fiserv, PayPal, the many beaten down SaaS companies, Copart, etc., which get really crowded and filled with noise. There’s a post everyday on X or on Substack on how buybacks will do nothing for Adobe, people argue if AI will make photoshop and pdf documents worthless, arguing if the departure of the recent executives are jumping a sinking ship and so on.

I took small tracking positions in Fiserv and PayPal many months ago, and today I don’t see any reason to increase that bet. Not because these will be terrible investments but rather I don’t really have an edge or some competitive advantage vs the many thousands or even millions of investors looking at these ideas. I sometimes ask myself if I like a beaten down name vs a forgotten name, both are great opportunities to look at a stock but a forgotten name is much easier for an individual retail investor to have an edge in. A lot of times I’m asking myself do I decide if I want to own one or some mix of Fiserv, PayPal, Global Payments, FIS, Shift4 or do I just go buy Prada (write-up) that was forgotten in the SEHK for a number of years? Sometimes the easiest decision looking at an attractive name that has a lot of questions is to just not play the game and pass.

To expand on that we have really three options on how we want to approach opportunities in the US vs globally:

• Option 1: We like the opportunity so we buy the US stock.

• Option 2: We don’t like the opportunities we’re presented with and sit on cash until we find something that we like.

• Option 3: We look at global equities and buy those where we have the option to exit those ideas in the future when we want to reallocate back in the US.

For me I have been taking option 3 for the most part since 2021. Option 2 is not a bad idea if you really want to stay in US equities or are a concentrated investor and don’t mind taking bigger bets where good ideas are rare. Personally for me I’m not much of an investor who just sits in cash, nor am I much of a concentrated investor vs when I started. As a side note a small result of going the global equities route where I wouldn’t be familiar with these names vs businesses in my home country is that buying baskets tend to be ideal to protect myself from my own ignorance.

So How Much of the World Do We Want to Own?
If I’m not willing to lower my standards and buy expensive stocks or lower quality ideas just for the sake of being in the US and I’m not willing to sit in cash I think I could own as much as I want. Although there’s a few things to keep in mind. I think I don’t wish to be over-allocated forever, I don’t think its impossible to find one or two good ideas per year and take a larger sized bet. The other part is to think about exchange rates and taxes. If the currency depreciates 1-3% per year vs the USD or your local currency that’s a drag on those returns because one day you will need to convert those funds back.

As far as taxes go, I’m not a CPA or chartered accountant, but in the US we have tax treaties with certain countries. UK stocks are very attractive as we Americans don’t have dividend withholding tax from the UK so it can be treated as owning any other US stock, other countries not so much so that impacts your after-tax returns a bit when they take dividend withholding tax.

The last piece is making sure I find a few regions I’m comfortable with. Lets not trivialize region based issues, macroeconomical issue, culture around the investor base and capital allocation. The US stock market is uniquely good at create a ton of value for shareholders for a reason. There are regions that have corporate governance problems, boards/executives that don’t know what ROCE is or even the fact their stock trades for 30% of its book value, these are some of the reasons why some of those stocks are that cheap/attractive. If they did the right thing all the time then we probably wouldn’t be looking at these ideas.

Canada and UK sometimes are easy because they are English speaking countries with characteristics that may be close enough to our businesses or market dynamics, etc. Japan is another easy one because there’s been over a decade of deep value investors digging in the country and its generally viewed as a trustworthy region for foreign capital to enter in. There’s many that aren’t and it doesn’t mean that they are a hard no but sometimes stocks are cheap enough that it could outperform all of the crazy reasons why it won’t and generally speaking if a lot of capital won’t dig in those regions, it is an opportunity for somebody else to do so.

Conclusion
To come full circle here, this is a long way of saying that it depends on the opportunities that present itself. Maybe some years I will be more heavy in global names, maybe it will be balanced in other years. This method for me aligns with the Peter Cundill way in there always being something to do. I doubt we will run out of opportunities in regiosn such as Japan, SEHK and the UK anytime soon but if we do, maybe it’s time to broaden our investable universe.

Disclosure: I own long positions in LRN & HK 1913. I own tracking positions in FISV and PYPL. I am not short on any positions mentioned in this post. I may add or sell my long positions over time. I only manage my own personal accounts and do not manage outside capital. Nothing here is a recommendation to buy or sell securities, please DYODD.

Background
Prada is a luxury goods group that needs little introduction. It was founded in 1913 by the Prada family as Fratelli Prada, a specialty leather goods store for wealthy Italians. The modern story of Prada starts in the early 1980s with Miuccia Prada and Patrizio Bertelli, who transformed the family business by creating the iconic Pocono handbags. In the 1990s, the company expanded its Miu Miu line, positioning it as a younger, more accessible brand a role it still holds today.

By the late 1990s and early 2000s, however, the company nearly went bankrupt due to various empire‑building activities. It tried to go public multiple times during the 2000s but never found a favorable market environment, caught between the dot‑com crash and the 2008 global financial crisis. Prada was forced to sell some of its assets to pay down debt and stay afloat. The company finally held its IPO in 2011, primarily to fund its expansion in China and other Asian markets.

The whole family history around Prada is really interesting, I won’t go into it here for sake of the investment write-up but it’s worth reading.

For those unfamiliar with this industry, it revolves around the “Veblen Effect”. High prices for these goods are intended and it helps support scarcity and rarity on these goods. Higher volumes and discounting destroys brand value, the exclusivity is a major feature.

Business Figures & Ratios (6/3/2026):

Market Cap: HK$97b ($12.5b)

Price: HK$38.28

P/E: 12.5x

ROE: 19%

Dividend Yield: 3.8%

Revenue Growth: 8.45% - Avg since IPO

EPS Growth: 14% CAGR since IPO

Why is this stock interesting?
Prada is a foreign-listed $12.5b conglomerate of luxury goods brands in a sea of old economy stocks on the SEHK. Most people will know what Prada is, they likely are aware of what Prada bags are, it is a prestigious global brand. Prada, Miu Miu, Versace are higher quality assets than most things you find on the SEHK, which you don’t really find something like that often. If you search for top 10 luxury brands on Google or an LLM you will find Prada on the top 10, sometimes Miu Miu and Versace will appear on top 20 lists.

The long-term google trends for Prada look good as well as the break down of the countries that have interest in the business’s products.

Interestingly enough the big spike of interest in May of this year was due to the release of “The Devil Wears Prada 2”. I’m not a big movie buff and have no idea how successful it is but some commentary from Cineplex a movie theater stock in Canada suggests it had a really good opening weekend in May.

There’s probably considerable upside here if the interest from the movie does convert into paying customers. Although I am not the one to figure out how a $15-20 movie ticket can create a $4,000 Prada bag sale.

Insiders own 80% of the business which is the Prada family, this founder story isn’t perfect but the incentives don’t go away. They started hiring outsiders around 2023 to run and management the business who came from similar industries who had experience working with founders who are actively engaged in the business. Their current CEO is of Luxottica and LVMH backgrounds.

Prada acquired Versace from Capri Holdings last year for $1.25b. Which if they are successful in turning around this mismanaged asset would have been a very cheap price to pay for a top luxury brand. The management commented on the recent earnings call that they are still working through restructuring of Versace and it will likely be dilutive in 2026 and we will start to see improvements in 2027 to that part of the business.

I kind of wanted to avoid mentioning this piece because I really don’t know how this would happen but a dual listing of Prada shares has been discussed for a long time if they are able to list in Milan. The reason why I don’t think it would happen is that I think it would have to involve dilution AND they would have to find another deal like Versace. I think the management team talked about doing stuff like this but I’m not sure if the Prada family cares about addressing the stock’s discount if they never plan to sell.

Why does this Opportunity Exist?
The core reason why this opportunity exists is that it trades on the SEHK. There was a point of time where everyone wanted to raise capital in Hong Kong and had China business ventures, in 2026 SEHK is where stock valuations go to crash. It really has to do with geopolitics around China which is above my pay grade. However it does offer opportunities to pick through foreign-listed stocks on that exchange.

A few secondary reasons:

• May be in a bad cycle with Luxury goods right now. LVMH reported -5% revenue at start of the year.

• 80% insider ownership might make re-rating/catalysts/stock buybacks difficult or non-existent on 20% float.

• Less faith in the Prada brands vs like those of LVMH and Hermes.

• Downside risk with Versace where it ends up being empire-building activity like they once had in the past and doesn’t create shareholder value.

What is this Business Worth?

Let’s say for the sake of argument the Prada family was willing to put the group up for sale. What would they get in a sale? I ran some AI analysis just checking around what public information is available for EBITDA multiples paid for other luxury brand deals that we can compare to, these are a few notable LVMH deals below:

Between the prompts I ran for LVMH and others I’ve come to conclusion that durable quality luxury brands can go as low as 16x EV/EBITDA and as high as 25x+ EV/EBITDA. Anything below 16x seems to be turnaround and distressed asset type of situations for players in this industry. Now to be fair the price to buy a whole business will be significantly more and the price to buy a minority stake that trades on any given day. I think it would be fair for the stock to re-rate to 16x EV/EBITDA at some point if the business does well/continues to do well, 6x at current price just seems too cheap for what this is.

Conclusion
To sum it all up, we have an unusually higher quality business that can grow perhaps 5%-8% per year. It pays a 3.8% dividend yield to hold it while also progressing the payouts over time as earnings compound. It has elements of it being a story stock or a Peter Lynch type of stock that could be interesting if the company continues to perform well. We have two small lottery tickets that could give us some upside either with the Versace integration into the group or the interest from The Devil Wears Prada 2 film.

Disclosure: I own a long position HK 1913. I am not short on any positions mentioned in this post. I may add or sell my long positions over time. I only manage my own personal accounts and do not manage outside capital. Nothing here is a recommendation to buy or sell securities, please DYODD.

Happy New Year to everyone. Hope everyone got time away from work and are spending it with loved ones. I spent the last couple of days catching up with some of my holdings and seeing where things are at. Took the chance to tax loss harvest any losses - I will note any below that I plan on re-entering.

This has been a so-so year for me, my long-term goal is to earn 12-15+% IRR while that seems like a low threshold, I want to be able to do this through good and bad markets. I don’t want to make big changes based on any one year but it’s important to review through my holdings and reaffirm the thesis on every investment.

Also a part of this is a bunch of new capital going into some of these ideas that will take a few years to playout, best performing themes have been Japanese net-nets, quality businesses did average. The worst performing has been US Deep Value and most UK stocks which has me down as much as -30+% on two positions.

A costly lesson here is that US deep value has generally been a bad idea for me. Even catching up folks that I know who still dumpster dive for US names I haven’t seen it work out that well for many folks, its really hard to find something that is cheap on assets, have some minimum quality of a business or the assets itself that gives a meaningful margin of safety. US banks might still be okay such as mutual conversions and playing in some of the M&A deals.

Caveat here is that I’m not really into commodities, cyclical and land plays. This is out of my circle of competence and I’m not sure its worth risking a few % of returns that I would likely lose to learn investing in those types of assets. There’s probably folks who are doing really well in these markets given the prices of commodities and inflation over the years so I can’t speak for those ideas. What I’m speaking to is just those simple low-IQ buy on the balance sheet, sell on the earnings, high Z-Score and long term profitability type of ideas. A lot of this still exists in international markets but not as much in the US without taking significant risks.

Going forward I have to take margin of safety really seriously when it comes to net-nets and deep value ideas. If the best US deep value idea is not as good or safe than ones I can find in Japan or in Europe I should just pass on it. The best time to bargain hunt for these in the US is when the markets start panic selling like they did a few years ago with the crypto banks going bust.

Again, this isn’t a slight against deep value or Ben Graham style of investing. It’s still one of the best forms of investing any individual can do, it all revolves around the idea of margin of safety and risk-return profiles I was taking and I can do better here.

Portfolio Holdings

Note: Foreign holdings converted to USD at the local currency’s conversion rate to USD at the start date, end date and at dividend ex-dates.

My portfolio holding’s country exposure is as follows:

• US: 43.14%

• UK: 24.87%

• Japan: 28.51%

• Rest of the World: 3.48%

Quality Businesses:

• Paycom Software Inc. (PAYC): A provider of cloud-based HCM solutions and payroll processing for clients all across the country & UK - similar offerings to Paychex and ADP. Stock got attractive as the company rolled out Beti (Better Employee Transaction Interface) in the last couple of years which is a self-serving payroll application by empowering employees to do payroll themselves, cutting out laborous process done by HR and payroll professionals. Short-term it has cannibalized parts of their higher margin business as a result of the efficiencies in Beti, long-term it is expected that this would be a differentiator for the business and help increase/maintain client retention. Stock trades at 16x forward PE, they’ve bought back 2.6% of the shares in 2024, and is looking to chip away 3% this year with $1 billion of the authorization remaining. If they end up earning back some of the margin lost, this stock ends up being extremely cheap.

• Stride, Inc. (LRN): Previous post: Stride, Inc. (LRN): Temporary Tech Issues, Attractive Opportunity in this School-as-a-Service Leader. Stock became attractive on software rollout issues that caused 10,000-15,000 enrollments to leave. Business looks extremely attractive at these levels, growing economics and a $500m buyback program initialized. Even with the value portion re-rating, this is a business worth holding for the long-term if the thesis holds. Will continue to build up this position going into 2026.

• Yakult Honsha Co., Ltd. (2267.T): Not sure how much of a quality business we can claim Yakult is but this investment is partially an intelligent speculation on buying a defensive CPG export business after -50% down from its highs that leverages a bit of the yen-carry trade. Stock is not particularly cheap at 16x-17x earnings however a stock that earns maybe around 11% ROE, has put in significant amount of capex for FY 2023/2024, it’s expected there will be a lot of revenue growth going forward. Management long-term goals is around 80,000m yen of operating profit by 2030 which would be a 44% increase from here in 5 years. Additionally there will be growing dividends and share buybacks in the meantime.

• JET2 plc (JET2.L): An integrated UK Airliner & tour operator of low-cost all-inclusive package holidays where families can book a vacation with minimal planning. Gained some fame via celebrities, and some TikTok notoriety with the phrase “Nothing beats a Jet2holiday!” Stock is very cheap at 0.57x EV/Gross Profit and 1.5x EBIT. Company bought back 11% of its outstanding shares last year and it hasn’t moved the share price. Large opportunity with how bad the macro environment is in the UK for the company to be able to make massively accretive share repurchases for EPS to outgrow its revenue growth rate. Investment in London Gatwick will be coming online as well, earns around 15% after-tax ROCE with around 50% of FCF being retained. Possibly will add more in 2026.

• Ultimate Products plc (ULTP.L): Previous post: Ultimate Products plc (ULTP): UK Household Brands Owner with 9% Dividend Yield, Buybacks, and High ROE — What's the Catch? It appears the catch is that results were going to be much worse than I expected. I’m down -15% on the position. Trading environment for consumer related companies in the UK currently are going through a rough patch. A few things that will be dragging down the stock: EPS could be as low as 5 pence by FY 26, there’s an ERP implementation that will cost around £2m over the next few years that will hit operating expenses. There’s a considerable amount of technology investments being made including the ERP system that supposedly should create efficiencies on the sales function as well as improving operating margins. Stock buybacks may get paused as the company hovers around 1x net debt/EBITDA. The company is going to delist from the LSE and list to the AIM by January 15, 2026. Stock still is attractive, but it will take much longer to realize its value. I may tax loss harvest some of this position and re-enter by Q1.

Rollups:

• Property Franchise Group PLC (TPFG.L): A leader in managing the top lettings agency brands, company was a result of the merger with Belvoir Group PLC as I owned Belvoir to this point. They were the #1 and #2 public facing groups in the lettings agency business, both around the rollup strategy to acquire some of the other top independent brands as well as assisted acquisitions to help expand current franchisee’s markets. Stock doesn’t seem that expensive at 14x Forward PE even being on the 40% annual return heater in $USD. Some minor headwinds with the Renters Rights Bill as some landlords want to exit the space and the business is trying to find landlords who want to increase their RE portfolio size. Company is looking to increase capital returns via dividends and buybacks as M&A becomes less active. Management made the following comments in the recent H1 call regarding any big acquisitions/targeting Winkworth PLC (WINK.L):

• Vertu Motors PLC (VTU.L): A rollup of traditional auto dealers under the Vertu umbrella of high diversified car brands. Previous posts: Vertu Motors plc (VTU): What Price Could It Command in a Buyout Offer? and Vertu Motors (VTU): Challenges Ahead? A Trading Update & £12m Buyback Program. There’s various things happening at Vertu, there’s been a focus on growing their chinese brands (BYD, MG) as UK is the prime market for Chinese EV and hybrid manufacturers. There’s been continued cost reduction/AI augmented efficiencies to lessen the impact of some of the minimum wage increases. Additionally there’s going to be less uncertainty around the ZEV mandates as the UK government emphasizes no manufacturer will pay fines failing to meet ZEV targets. The group contains to grow UK retail market share to 5%. There will be somewhat of a slowdown with the rollups as the group seems to understand capital allocation quite well:

Turnarounds:

• Fiserv, Inc. (FISV): Talked a little bit about this company in this previous post: Are US Mid-Caps Getting Interesting? There’s been a shakeup at the management level recently with the departure of the previous CEO on top of new management resetting expectations for business performance in the next few years with client’s pushing back on Clover fees. This opened up the opportunity to own what I believe is an above average quality business going through some short to mid-term issues, shares were really overvalued a year ago and now are the cheapest its been in over a decade. Balance sheet is a bit of mess with the levered buybacks + acquisitions over the years.

Net-Nets & Deep Value:

• Jerash Holdings, Inc. (JRSH): A below-average business in low-cost manufacturing of apparel items such as North Face and New Balance. Business is based in Jordan and run by business owners who own a lot of stock. Trades at 0.6x book value and pays 6.6% dividend yield, was formally a net-net that took the cash and reinvested in more PP&E to grow capacity. Business went through two loss years and are coming out on top as a neutral sourcing location outside of highly tariffed countries for the US and other markets. Business will be having a profitable year and I will look to sell if the stock re-rates on good earnings.

• CBB Bancorp, Inc. (CBBI): A K-Bank based out of Korean-American markets in California, Hawaii, and New Jersey. There was another change of leadership with with a new CEO. Costs have been increasing in the bank in the last couple of quarters with the efficiency ratio rising above 60% now. Stock as cheap as always, around 0.5x tangible book value, 6x earnings and 4.55% dividend yield. I may cycle out of this in 2026 as an opportunity cost disposition. I’ll await to see any updates from management with the annual report and shareholder letter.

• Dynam Japan Holdings Co Ltd. (6889.HK): A leading operator of 423 pachinko halls in Japan and aircraft leasing business in Ireland of a few Airbus A320s and Boeing 737s. Also engages in acquisitions of smaller/individual pachinko hall operators. Insider controlled company, maybe 30-40% of the float trades. Currently trades around a PE of 9x and 0.36x tangible book value. Trades in $HK dollars, reports in both HK & Yen. Pays dividends in Yen at 7.5% yield. Awaiting for the annual report in March to see where things sit.

• Sanko Techno Co., Ltd. (3435.T): A specialized manufacturer of fasteners, drill bits, anchor screws, power tools and other specialized tooling. A consistent net-net that hasn’t had a loss year since 2009 and has generated free cash flow for 17 out of the last 20 years. Shareholder friendly capital return policy as they have grown dividends over the years and done small buybacks here and there. By Japanese net-net standards its actually an okay business that can earn around 8% ROE. Company is expecting ¥24b sales and ¥2.1b of operating income by FY 2026 which would be significant from today’s price. Upside is cheap at a PE of 9.8x, 0.55x book value and 1.3x NCAV.

• Create Medic Co., Ltd. (5187.T): Manufacturer of silicone based products for the healthcare industry such as urology products (catheters, drainage tubes), surgical products, gastroenterology products and various other silicone products. Mostly a domestic Japanese business with a considerable amount of growth in international markets. Stock trades around 0.55x book value, 0.90x NCAV, and P/E of 11x. Over 20 years of positive net income, and free cash flow positive for 18 out of the last 20 years. Dividend Yield of 3.5% and the company is buying back shares on the open market. Management seems to want to address the book value discount. Stock still seems cheap.

• Nansin Co., Ltd. (7399.T): Wrote this up recently on a previous post: Nansin Co., Ltd. (TYO 7399): A Micro-Cap JP Net-Net Selling at 0.55x NCAV + Marketable Securities With A Disclosed Sale of Securities. No updates, stock still cheap, will check back in around Q1/Q2 when the investment gains hits the books of their income statement.

• JAFCO Group Co., Ltd. (8595.T): This company is essentially a fund manager or GP in global VCs and the buyout/PE market. Truthfully, this company as an investment feels a bit like buying into a black box, so I wouldn’t concentrate in this beyond a position in a net-net basket. Company has a long history going back to the 1970s. They’ve incurred losses around GFC and earlier but since then they’ve done quite well. The two pieces I find interesting is that the company in the last 10 years has essentially bought back 60% of their shares outstanding and the stock still trades around NCAV. The other piece is the company is pivoting away from western markets to focusing on the domestic Japanese market which has been increasingly less taboo and attractive for PE firms to operate in.

Closed Positions at YE:

Comments below on a couple of closed positions

• Hilton Food Group plc (HFG.L): Tax loss harvested this position, will re-enter when my wash sale window ends. I’m down -30% on the position inclusive of dividends. Hilton food is going through a hard inflationary environment currently. They issued a trading update that was not well received by the market. Demand for red meat has been strong but it was offset by the poor demand in white-fish. There’s been delays of shipments to the US as result of the government shutdowns a few months ago. Result may be flat or worse in 2026. There will be a CEO transition as well. With all of that in mind, the stock seems way too cheap at 0.11x sales. Like a lot of UK names we’ll need to hold through a number of years for the investment to work out. Not sure where the dividend holds up over time but collecting a 7% dividend while we wait helps the case here.

• Sapporo Clinical Laboratory (9776.T): An operator of stand alone pharmacies and medical testing in Japan announced a take private deal at ¥1,965/share. The remaining shareholders of the private company will be the Date-related entities and SRL, Inc. This ends up being a 105% gain for me, I fully exited my position.

• Foot Locker, Inc. (FL): On May 15, 2025 Dick’s Sporting Goods, Inc. announced an acquisition of Foot Locker, Inc. for $24 per share or 0.1168 shares of DKS. I took 50% of my gains last year, I fully liquidated the rest for a 40% gain.

• Canare Electric Co Ltd (5819.T): Previous post: Canare Co. Ltd. (TYO 5819): A Graham & Dodd Bargain Trading at Near Net Cash I wrote this one up earlier this year, stock seems like it has more to go, truthfully the reason for selling is that I never really got a good sizable position before it started to run up. I unfortunately was split between two Japanese net-nets and decided I could enter into both positions. I fund my investment account from savings from my day job it sometimes can take a few weeks before I size a considerable position and it just never got there with Canare. So this ended up being an opportunity cost sale into some other JP name in my undisclosed bucket that I was able to size up. Took a small gain here.

Watchlist:

I didn’t get a lot to time go dumpster diving for a lot of names, perhaps a future post could be just looking through a bunch of cheap names internationally and forming a watchlist that can shared - going to think on that going into 2026. Curious on comments on any of these from readers. I know very little of most of this list.

Final Thoughts:

Looking forward to 2026, I think there’s a lot of opportunities internationally. It’s kind of interesting because I’m now less than 50% in US equities. That could change if I want to concentrate more on Paycom, Stride, Fiserv, or potentially open a new position, or maybe their market values outgrows everything else in the portfolio. I want to buy some more Japanese names as I was screening for them there’s still a lot of low hanging fruit that can be realized in that market, likely more Ben Graham stocks to write up. UK seems cheap as ever and maybe worth going through again.

Happy New Year to everyone and thanks for reading!

Disclosure: I own long positions in all of the tickers mentioned in my portfolio holdings as well as any tracking positions in the watchlist section. I also own long positions in undisclosed positions that have not been previous mentioned. I am not short on any of the tickers listed here. The above portfolio is a portion of my personal net-worth. I do not manage outside capital. I may buy or sell positions at any point. Nothing here is a recommendation to buy or sell securities, please DYODD.

Background

Founded in 2000 as K12 Inc., Stride was a pioneer in the “school choice” ideals of the time, built on providing high quality virtual alternatives to the traditional public school education. In the early 1990s the idea of independently operated charter schools has been conceptualized which has paved the way to a business like K12, Inc. The company’s roots were on the political reform of public education but transformed itself over the years into the complimentary “School-as-a-Service” model that we see today.

The company today primarily contracts its proprietary infrastructure, curriculum and licensed teaching staff to non-profit charter school boards and local school districts backed by state and local government funding.

Beyond the K-12 core, Stride heavily expanded into the Career Learning portion of its business in the last couple of years that provides students and adults with learning resources to earn certifications and upskill in high demand fields like IT, Healthcare and Data Science.

Business Figures & Ratios (12/19/2025)

Price: $66.08

Market Cap: $2.8b

P/E: 10.42x

EV/EBITDA: 4.49x

EV/FCF: 8.76x*

*Enterprise Value / (CFO - Stock Comp - PP&E - Capitalized Software/Curricumlum)

ROCE: 21%

Rev Growth: 3%-5%

Business Overview

Stride today has two primary businesses: General Education and Career Learning.

General Education (60% of total FY 2026 Revenue) is the primary business the company has been known for from its founding. The managed public school model contracts with non-profit charter school boards and local school districts. A state or local district may authorize a virtual charter school, then the board of that school would hire Stride to provide the technology infrastructure such as the curriculum, the learning management system (LMS) and potentially administrative and marketing services to finds students likely as some value-add services. Stride through K12 has a centralized locator for families to search online through the schools the company is contracted with their services.

The funding for these services come from state and local tax dollars on a per-enrollment/student basis. The student enrolls in the virtual charter school, the funding originates from the local district to the virtual school and then Stride takes a percentage cut for managing the operation.

Stride can also leverage its existing platform and technology to vendor itself out to the traditional brick-and-mortar school districts. A local school perhaps may want to offer some virtual/hybridized options and may not have the resources, talent and/or experience to build these models from scratch. They can contract out with Stride to create licensed curriculum and maybe perhaps hire Stride’s virtual teachers as a form of professional services. In some cases they may want to create their own online schools entirely.

From my view and research these are extremely sticky reoccurring revenues that could have very high costs to switching if there is even truly an alternative service comparable to Stride. The average contract with these customers is around 5 years in length and they have over 90% retention rate.

It’s comparable to customizable/semi-customizable software from other public facing technology companies like tax preparation, bookkeeping, payroll processing, CRM etc., the kind of software that does the “dirty work”, employees get used to it, they know what buttons/prompts to press for it to do the thing they want, gets deeply embedded into the daily operations of an organization that may make it very hard to get it out once its rooted in.

On top of all of that it has the bluest chip funding source which is state and local government backed by taxpayer funds.

Career Learning (40% of total FY 2026 Revenue) is a newer line of business that was created as a result of over $172m dollars worth of acquisitions in Galvanize, Tech Elevator and MedCerts, LLC in 2020. This business augments their current K-12 business in the following ways:

1. Fulfill training and education needs for high growth career paths in the IT and medical fields for adults pursuing nontraditional education path or just to upskill at their current experience and education.

2. Create more value-add services within the Middle School/High School part of their K-12 business with college prep curriculum, college credit courses and guiding students towards high growth economical career paths.

3. Open the doors to corporate training and training sourcing services.

Career Learning opens a lot more doors for the company in leveraging their current partners to increase value in the education pipeline.

Management

The two most important figures in Stride’s recent history has been former CEO/Chairman Nathaniel Davis and current CEO/Chairman (Former CFO) James Rhyu. They really were more business people who took control of a company run by education people essentially. Nate took the reigns to grow the business organically via their general education business and inorganically through the 2020 acquisitions prior to his retirement.

James Rhyu who has been at the company since 2013 through various capacities was to succeed him for some time, working through some sort of a transition phase prior to the change being public in 2021. I would read the transcript from the company’s 2023 investor day (You can read on Tikr or listen to the audio on Quartr, I can’t find it anywhere else) if you want to understand how he views the business but one of the pieces I found interesting:

This quote below was interesting regarding Stride paying for remediation for students who’s been with them from K to 3rd grade failing to be able to read effectively:

Last quote is regarding why some of the top companies are successful:

There’s a little bit of a Jeff Bezos type of obsession with the “customer” in this case that you don’t see that often. I think you have to at the end of the day if this is suppose to be more effective and competitive with brick-and-mortar public schooling. The bar is really low but I think management wants to do more than just beat public schooling satisfaction ratings by a single point.

Financially, it was very apparent that James from the CFO role to the CEO role he had a strong cost conscious influence as over time as SGA as a % of Revenue went from 33% in FY 2017 to 20% today. Now to be fair, there’s probably a lot of scale advantages as the company grew but the company started to track this percentage figure in recent years. The result of this change has created a tremendous amount of value in improving operating margins.

I also think James is very aware of capital allocation and the intrinsic value of the company. He somewhat gives it away here at the 2023 Investor Day:

Stock was trading around $30-$40 per share when this event would have happened.

Last note, there’s not a lot of insider ownership within the management team. James owns the most around 1.7% of the outstanding shares:

Still large enough dollar wise that I don’t think I would put his incentives in question.

Investment Thesis

The investment thesis is simple for this company. You are buying a “School-as-a-Service” leader that earns basically a “royalty” from state and local school districts for the use of your education technology infrastructure to improve student experience and outcomes. I find this to be a high quality company, with a durable business model, high retention rates and first movers’ advantage with no true alternative or competitor to what Stride, Inc. does. Pearson’s Connections Academy is the closest competitor and I’m not 100% sure if it is comparable to the scale Stride is already operating currently.

I find the opportunity to be fitting for where the timeline is for the company. Where a lot of cash historically was plowed into the business and in acquisition augmentation. Today there is a lot of cash being generated, they are returning above average returns of equity and capital is starting to be returned to shareholders. There’s that potential for the “Davis Double-Play” where the EPS will grow via business growth and share repurchases, AND through potential multiple expansion from today’s price. Lastly, I believe the management team is an above average one given their recent history partially discussed in the previous section.

At today’s stock price you can purchase the stock at around 7.41x Owners Earnings based on a 4.5% revenue growth for FY 26 on 24% EBITDA Margin. I think the business is worth at least around 18x Owners Earnings multiple or P/E Multiple which puts it at around $158/share which is just under 15% return per year. There is also $500m stock repurchase plan announced by the board which is about 14% yield on today’s stock price adjusted for stock comp that would dilute the repurchases.

Why Does This Opportunity Exist?

• Technology Implementation Issues: The company had made investments and improvements in their technology based learning platforms when implemented/deployed was negatively received by their customers. It caused the company to lose around 10,000-15,000 enrollments. With 234,000 enrollments on FY 2025 numbers that is around a 5%-6% of its current base.

• For-Profit Education Label: There’s been a number of cases such as DeVry University and University of Phoenix in higher education that had very public lawsuits over their marketing practices and accreditations that has made any idea of a for-profit company serving the education industry a difficult idea for investors.

• Other: There’s a few other potential reasons such as stock comp/share dilution, company’s acquisition history and political risk. To be honest I’ve worked back on these items and these reasons just didn’t really pass the sniff check. Stock comp makes up about 11% of FCF, share dilution has been around 1%-3% historically vs the high growth of the revenues. Lastly the acquisitions looked questionable at the time but it did generate around $3.2b sales in the Career Learning segment from FY 2020 to date on $172m worth of acquisitions.

Risks:

• Political Risk: Stride’s business revolves around the idea of school choice and mixed in with public perceptions on charter schools and/or for-profit education there is some risk here. Additionally the company has to be very careful on any narratives or comments that are politically sensitive.

• Stock Comp/Dilution: I wouldn’t rule this out for a really large acquisition using stock, but this could be a risk that could destroy value depending if shares used when the company is undervalued vs at perhaps above 20x earnings for example. Like mentioned above, there’s some stock comp involved, I think they will grow at a rate that will make this really unnoticeable for investors, especially with a stock buyback program now in place.

• Permanent Operation Issues: This may be one of the most worrying ones is what if the technology implementation issues are more structurally permanent issues with the company? I don’t see anything that would tell me this is anything but a poor deployment or upgrade of their current platform/technology that they just need to patch up.

Conclusion

I think this is one of the more interesting business models I’ve come across in the companies I have covered. I didn’t want to go the “hidden champion” route but I always wonder if this company that is the biggest in its niche, who actually is aware of this company outside of some parents and educators? It was probably more true prior to the Career Learning business being stood up that has more B2C exposure.

I’m particularly surprised how much of an open field this is for a single player to just capture an entire market. Since I mentioned Jeff Bezos above, at some point he mentioned how AWS had a 7 year head start before Microsoft and Google entered the market. Does Stride have 7 years to dominate this market before people start noticing the returns and economics of this business? I don’t know but it wouldn’t surprise me if it continues to be unnoticed for a while longer. Great business in an odd/disliked industry tends to do really well for investors.

Disclosure: I own a long position LRN. I am not short on any positions mentioned in this post. I may add to my long positions over time. I only manage my own personal accounts and do not manage outside capital. Nothing here is a recommendation to buy or sell securities, please DYODD.

Everyone’s talking about the market concentration issue, the one where the top 10-20 best performing stocks have been representing more of the index. It’s the Mag 7 AI story stocks dominating things, with a bizarre mix of legacy companies that have become the new bonds. I’ve not been in the loop with a lot of the larger companies in the US outside of one or two legacy positions that I catch up with once in a while. To add to that there’s not been much to do in OTC/small-cap land so I shifted my focused entirely to the UK, Japan, HK and Europe.

But what about US mid-caps? Wouldn’t these naturally be picked over? If we are paying 40x earnings for a maturing $900b Walmart (WMT), we must be paying 60x earnings for $8b Paycom (PAYC) right? Well no, you can buy this stock for 16x NTM P/E for a Terry Smith stock. That’s not super cheap but it’s fairly good for what it is as a business.

Over the last two years these bargains have become more common. At some point last year Dollar General (DG) sold off from tariff/macro related issues. It was trading at prices that hasn’t been seen in a decade. Then the stock gained almost 50% by Q1.

Crocs, Inc. (CROX) had a similar story when management announced a mix of price increases and sourcing diversification plans.

We also had beauty stocks like Estee Lauder (EL) and Ulta Beauty (ULTA) that was part of the GARP-y/quality investing world where everyone was convinced that such high quality businesses couldn’t have had a bad price to pay for them until there was a catalyst that allowed you to buy them at very cheap prices in the last couple of years.

Okay, so market is starting to get interesting, I’ve been starting to pay a attention a bit more lately.

New Tracking Positions

I’ve been a bit late on following on some of these names, but I took tracking positions in a few larger names than I usually discuss on the Substack. That is Fiserv (FISV), Stride (LRN) and Paypal Holdings (PYPL).

I’ve come across FISV and LRN through some other value investing circles and podcasts and I was pretty surprised at this meltdown for these two names. I have to ask myself. How is it even possible for these capital light, cash generative SaaS/payment processor companies to sell off to these levels? It just seems like a lot money has been invested in these stocks at very high prices and any disappointment in earnings was going to shake them out of the position. Paying perfect prices required perfect stories and business performance and even then it was surprising to me how quickly they exited out the positions. PayPal has some similarities here as well as it was an iconic FinTech name thrown in the bin for about 2 years now.

I know people reading this post will cringe at some of these names and to be honest, I don’t blame them. Going into it, FISV and PYPL are in the most liberal sense turnarounds. They have a solid core business that is going through some problems with a lot of competitive pressure, and requiring a lot of execution from management to get the business back in track. However, I think the risk-reward profile of these names are very compelling and I won’t avoid larger ideas just for the sake of it. I’ll skip discussing Stride (LRN) here as I’ll save that one for its own individual write-up/post.

A graph is worth a thousand words:

The price at today’s levels seems so attractive that I would need very little for either of these investments to do well. I just need to know if there’s any operational or permanent issues that could impair my margin of safety. I would need to learn a bit further about these businesses because generally these capital light businesses do have a ton of upside on being these cash generative compounders that don’t have to reinvest a ton of cash to grow.

That’s the easy part, the hard part is, what if we are wrong? What if the downside isn’t just low revenue growth or no growth. What if the downside is the company could get wiped out/competed away in 5 years? It sounds absolutely absurd to even ask that, but this is sometimes the risk with these capital light businesses. There’s is a measurable market value to a factory when it no longer generates revenue. What is the value of an intangible asset when customers no longer use it or the business has been competed away?

It kind of reminds me of a stock I missed out on the post-2020 recovery play for Booking Holdings (BKNG). There was a time that I was very convinced that Google could be a major disruptor in their business given how much internet traffics runs through Google. I wasn’t sure if it would have wiped out the company if all of a sudden Google Travel gained a ton of market share and got into the business streamlining travel destination and planning. Which the idea again feels ridiculous but what if I was wrong? Would the company be able to co-exist with another competitor alongside Airbnb and Expedia? I don’t know so I couldn’t get myself over that minimum threshold to feel comfortable with owning the position, so I passed.

I have company summaries below with a few of my questions that I need to dig into in-order to establish it as a real position in the portfolio.

Fiserv, Inc. (FISV)

Price: $66.21

NTM P/E: 8.26x

ROCE: 11% (A bit overstated on goodwill being included, incremental returns may be higher if large expensive acquisitions are avoided)

Debt/EBITDA: 3x

Est Revenue Growth (2025/2026): 2.4%-4%

Company Overview:

Fiserv is a diversified global FinTech business headquartered in Milwaukee, Wisconsin. They engaged in two primary businesses: Merchant Solutions and Financial Solutions. Both are great businesses and may have some overlaps but generally, Merchant Solutions contains more of the higher growth business which contains their Clover and SMB client engagements. Clover is an integrated, cloud-based point-of-sale (POS) and business management solution for SMBs. This segment focuses on payments acceptance and commerce-enabling technology, competing directly with companies like Block (Square) and Stripe.

The Financial Solutions business is the legacy core processing/bank technology business that is low to no growth but is reoccurring and has solid retention. Digital Payments and processing is also part of the mix. They compete with other large core processors like Jack Henry, FIS and CSI.

Notes/Questions:

• What are the risks involved with the management fallout and reset of financial expectations? Recent earnings call had the CEO admitting that previous management has over-promised results, does this open the company up to litigation? Are we in Fraud territory?

• Understanding new management and who they are and what expertise they have in banking/core processing

• Will they continue to repurchase stock now that the prices have come down?

• Look into issues with clover clients not accepting higher fees/mending relationships

• How quickly could their legacy banking solutions business decline as bank branches continue to consolidate + M&A activity?

• Get an understanding of their capital structure/leverage

• What value-added services are there for their Small Business segment/Clover clients?

• What are the economics of the cash advance, why do they do it, is it a business development activity or is it meant to generate an economic return?

PayPal Holdings, Inc. (PYPL)

Price: $61.66

NTM P/E: 11x

ROCE: 17% (Similar to above, although it may be correct as I think they may just keep acquiring assets)

Debt/EBITDA: 0.21x

Est Revenue Growth (2025/2026): 4.8%-6%

Company Overview:

PayPal Holdings is a FinTech holding company headquartered in San Jose, California. They are the iconic platform that connects customers to merchants originally founded as it own business in 1998 but become a core compliment to eBay at its peak. They primarily engage on the commerce side through PayPal Branded Checkouts and Venmo but also on the P2P side to send cash through these same platforms. They measure their performance through Total Payment Volume (TPV). These are good brands/businesses, sometimes things get noisy with merchants around fees but generally if consumers are paying with PayPal they deal with it, similar with the Visas and Mastercards. There’s an interesting piece here on purposely cannibalizing their PayPal business with Venmo as it has a higher take rate, really curious to dig into that.

Notes/Questions:

• Ensure the durability of the business. Can a serious operational/competitive risk create permanent capital impairment at these levels?

• Assess competitive risks from Google Pay/Apple Pay apps as well as Shopify as a one stop shop for the an entire e-commerce storefront/merchant model.

• Does PayPal benefit in a world/internet where mobile purchases are the most dominate method of shopping? Although this may just be answered via Venmo, is the downside risk Google/Apple Pay?

• Determine how good owner earnings are when accounting for stock comp

• Compare Merchant fees with alternatives, seems to always been a complaint with PayPal, are they switching off PayPal? If not, why not?

• Assess management, as there are a number of initiatives that have some sort of execution risks involved. Are they overextending themselves on too many initiatives?

Conclusion:

Some of my initial thoughts are interesting on these names. At first I was thinking FISV was an easy buy and PYPL was an easy pass, but as I kept reading some into their situations at a high level I've come to terms that they probably are at similar risk-return profiles. Fiserv has a better margin of safety on their core businesses in that they have a predictable no growth oligopoly business in core processing augmented with a highly competitive growth business with Clover, however they have a lot of mess on the balance sheet from M&A, leverage and carrying a lot of bloat through these business units that management wants to consolidate. Year 1 will be a bit uncomfortable for long investors here. Interestingly enough there’s been large insider buying at these prices by the management team.

PayPal on the other hand has no leverage, its balance sheet is pretty clean and the core business still revolves around PayPal & Venmo at the end of the day that is growing TPV. With a management team that has a healthy appetite for buying back stock and getting the core business back on track. They have capacity to do something with a mix of cash and debt if they needed to.

Happy to hear any thoughts or comments on any of these names. Curious on any other mid-cap names that been getting interesting/attractively priced. It seems like the whole FinTech/payments/legacy processors have gotten much cheaper over the last year or two, seems like a good pool to look at decent businesses.

If you want to read more on this industry Bob’s Payment Stock Substack was a great place to get an initial overview and learn the fundamentals of the industry, go and give him a sub, he does good work.

Bob’s Payment Stock Substack

Former analyst and portfolio manager. Fundamental buy-and-hold investor. Talking stocks and markets. Focus on Payments, Financial Technology, and Payroll and HCM.

By Bob Hammel

Disclosure: I own a long tracking positions in PYPL, FISV, and LRN. I own a standard long position in PAYC. I am not short on any positions mentioned in this post. I may add to my long positions over time. I only manage my own personal accounts and do not manage outside capital. Nothing here is a recommendation to buy or sell securities, please DYODD.

Nansin Co., Ltd. is a specialized manufacturer of casters and trolleys, primarily serving the Japanese market with some operations in China and Malaysia.

The company was founded in 1947 as Nansin Rubber Industries, Co., Ltd., initially manufacturing rubber products. In 1962, the subsidiary Nansin Co., Ltd. was established to focus specifically on the production of casters.

The growth of the caster business led the parent company to formally adopt the name Nansin Co., Ltd. in 1987, cementing casters as its core product. The 1990s saw significant expansion through mergers, acquisitions, and related business ventures. However, this international focus was curtailed in the 2000s when the company liquidated its foreign subsidiaries in the UK and Europe, leading to its current, highly centralized operating model.

Business Figures & Ratios (12/6/2025)

Market Cap: ¥3.7b ($24m)

Price ¥575

P/E: 15x (Recently poor net margins)

P/NCAV + Marketable Securities: 0.47x

P/B: 0.34x

Dividend Yield: ~4% (On 40% Payout Ratio)

ROE: 2%

Z-Score: 2.98

Product Offerings & Customers

The company develops and manufactures various types of caster and trolleys that fit for some sort of purpose, need or what type of load capacity they are working with.

They also produce a smaller compact version for the consumer market for use around the house or keeping in your car. In general it seems like these products have that Japanese build quality and utility to them where their casters have shock absorbers, noise reduction, longer performance, locking mechanisms. For the Kaizen brand casters they emphasize being higher priced initially but your long-term usage would be lower on replacement cost. Maybe a different way in saying you get what you paid for!

I found some of their marketing material on their corporate website and YouTube channel to be helpful in understanding what they do as a business:

Kaizen Caster Performance Tests:

Silent Master Trolley Performance Tests:

The range of customers for these kinds of products can be quite wide. Their largest customer consists of 16% of sales which is Yamazen Corporation a Japanese trading company. I suspect they have other household name customers like Toyota or Nissan since they talk about serving large automotive industry partners. Nansin’s customers are primarily in the automotive, logistics/trading, and healthcare industries, but their products could be used in many businesses that require you to haul around goods and other large items by hand.

Quick Investment Thesis

There’s not a lot that is particular interesting about this business, there’s a lot of stocks in Japan that are like this one. It’s a stock trading below book that has generated below average returns for a long time, it might have been a net-net for multiple years, engages in some capital/labor intensive business and is extremely conservative on capital returns and its balance sheet.

These tend to be prime candidates for these sleepy “one day” stocks which was a term coined back in the day by some of the early blogspot value investing blogs. You hold a basket of these eventually one day something happens and it may realize its value but only if you can hold the position until then. You basically have your hold return which is the dividends +/- minor unrealized movements and then your realized return while is going to be the entirety of the stock returns. You sell at any point before then you end up crystallizing any underperformance which is not a strategy a lot of people can buy into.

Asset Value - The main attractiveness of Nansin is that on any net asset ratio you can come up with, it is cheap. On a price of ¥575/sh, you can purchase ¥1072/sh of NCAV at face value or ¥1,240/sh of net assets adjusted on a liquidation basis or the least conservative at face value is their reported book value at ¥1726/sh.

On the NCAV front there’s a fair balance between Cash, Receivables and Inventory, it’s a lot better than I was expecting looking into this business. I lumped in some of the marketable securities that are publicly traded since those could in theory be liquidated quickly. Although Japanese companies tend to make these investment in securities as a vote of confidence in a partnership with a customer and/or supplier sort of arrangement. As a result, there’s formalities when it comes to buying or selling stock of other companies such as the one they did with $7817 where they asked for permissions from their board of directors.

The company announced the sale of $7817 Paramount Bed Holdings which I will mention later in this post which may just get piled on to the cash they already have and/or pay down of some minor liabilities.

Outside of NCAV, there’s some older property on the books that may be worth more on market value basis. The company has their main factory in the Chiba New Town built in the late 2000s at a book value of ¥2,607m. Some ChatGPT/Gemini estimates on 79,960 sq. meters of property could be valued around 2x-3x the book value of the building. I haven’t made adjustments to the PP&E as I think the assets are cheap enough but the PP&E seems like it could be worth book value at minimum.

Balance Sheet Strength - Nansin has been a net-net for about 10 years now. In many cases there’s net-nets you can hold for 10 years and there has been no real intrinsic growth in the value of the stock either on earnings or on equity. It essentially is like owning a bond assuming it can continue to survive. Nansin on the other hand, has been a net-net for 10 years, while it hasn’t done the things investors really want like pay higher dividends and consistent stock repurchases, they have pay down liabilities and grown their cash pile over time that is best represented below:

The stock essentially has fall down to 0.50x NCAV based on the price movement in recent years while there’s been this slow growth in NCAV & book value has increased by chipping away from the liabilities denominator.

The company is well fortressed as of today, they’ve payed down enough long-term liabilities that all there really is left is the short-term leverage they need for their working capital.

Consistent Operations - One of the things that impairs a margin of safety is when you have a permanent problem in a business or operation. It’s not always easy to tell a problem at the company vs a problem in the environment, macro, inflation, etc. Long operating histories of making money, paying dividends, doing anything really tends to underwrite the safety in a lot of stocks in this country.

In the last 20 years this company has lost money on a net income basis only once in 2009. Somewhat similar on the free cash flow side depending on how much capex is actually growth projects but a fairly good history for a company that is a net-net.

Catalysts - I think you can make the case on catalysts falling into the following buckets here:

• Sale of $7817 shares: The company disclosed they will record ¥236m of realized gains for Q3 ending March 2026. What will they do with the cash? They can’t really delever any more it seems? Will it sit on the balance sheet? Will there be a special dividend? Also they have disclosed this info and there has been zero reaction to the stock. Will there be a catalyst when those gains actually get booked?

• Cash Pile Options: Like mentioned above, the company will run out ideas on what to do with the cash. They spent a better part of 10 years deleveraging the balance sheet, what will they do for the next 10? Will they pile the cash? Will they go out and buy assets? Growth capex projects? Projects that earn low returns will be better than earning deposit rates on the cash.

• Capital Returns: Goes a bit with the above bullet point but increasing dividends/engaging in stock repurchases. Something to note, the company did repurchase around 9.9% of the shares outstanding in 2019, 1.3% in 2024 and 0.2% in 2025. I don’t think its out of the realm of possibility of further large stock buybacks.

• Margins Improve: The business currently is earning some low margins due to inflationary/environmental pressures. They are earning some of the worst margins since 2009.

Why is the Stock Cheap:

• Below average business - The business earns really poor returns on equity, in recent years this is around 1-2%, on really good years that may be around 3-4%. Maybe you can make the case some of that is being suppressed by the cash but it’s still pretty low return.

• Poor Recent Results: The business has been deteriorating in margins in the last couple of years. They’ve been earning around 1.7-2.5% in net margin where as this was at some point around 4.5%-8% in the not too distant past. They struggle with pricing power and being able to pass increasing input costs to consumers. They do struggle a bit with the recent inflation. They have some of the biggest COGS as a % of sales in recent years at around 75%. They have operating losses in Japan and Malaysia as of current.

• Perennial Net-Net: Stock has been a net-net for about 10 years now with not much that has been done to realize value.

• Underfollowed: This stock is pretty underfollowed as far as anything on western resources go (X, VIC, etc). It is a $24m market cap company mixed with a lot of poor performing business metrics that would have this be hidden from the sort of stuff folks screen for. Surprisingly it seems like there’s some folks who follow it on Yahoo Japan on the forum/comments section but I think that is comparable to the 8 American investors on X who post about their favorite deep value $20m business that nobody wants.

Conclusion

There’s really not a lot of think about with this one. It’s a compelling one-day stock to add to the JP net-net/deep value portfolio that pays you a 4% dividend yield while you wait. I’m not sure if this stock is actually worth book value, not sure if anyone does, but the discount on a NCAV and book value basis is so large that the risk/return profile seems like a no brainer to buy some shares and forget about them for a few years.

Disclosure: I own a long position in TYO 7399, I am not short on any positions mentioned in this post. I may add to my long position over time.

These are some interesting times we are in as far US markets go. The VIX has hit over 50 for the first time in years, the S&P and the VIX just go back and forth on jumping +-5% or so on any given day, there are discussions of Black Mondays, gold is at the highest price ever, and everyone has become an authority on macro, tariffs and geopolitics.

For me I am not an expert on any of these topics, nor will I talk authoritatively on any of these topics. My only certainty is my uncertainty on these topics. In general this is the least amount of investing discussion that I have heard in years and I wish that has reflected more in US stocks than it did. Either way I am opportunistically looking for any stocks that have been beaten down by the recent hysteria. I wanted to share some of my findings below digging into markets, screens, and checking through certain industries, etc.

Mr. Market’s Resilience

Stocks have stayed pretty resilient throughout the volatility. US Stocks have been expensive, the Shiller PE Ratio is at 33, basically the same level as a year ago. I don't really see great businesses at fair prices, there's stocks that have a lot of exposure to the tariff situation decline by large amounts in price where you have to have some view on tariffs to be comfortable investing like $NKE, $EL, $ELF and a bunch of retailers.

With Crude prices coming down, some stocks related to oil and gas have looked a bit more attractive, especially considering as an industry they weren't really overvalued to begin with. I haven't spend a lot of time in this industry but I have Vitesse Energy (VTS) on the watchlist/research list, may be a good time to dig into it at today's prices.

Banks don't really look expensive but they aren't cheap either. I still keep up with some of the K-Banks time to time. CBB Bancorp (CBBI), RBB Bancorp (RBB), and OP Bancorp (OPBK) look cheap enough to research especially considering some of these are repurchasing shares.

Lastly I ran through a list of net-nets to see how many decent one's popped up since the volatility began.

US Net-Nets

I ran a screen where I exported balance sheet data into excel and calculated any stocks where NCAV > Market Cap. I got 44 net-nets, and once you strip out the Chinese companies, unprofitable and dilutive companies I came up with 7 to look at:

• Saker Aviation Services, Inc. (SKAS)

• Surge Components, Inc. (SPRS)

• FONAR Corporation (FONAR)

• Tandy Leather Factory, Inc. (TLF)

• America's Car-Mart, Inc. (CRMT)

• Gencor Industries, Inc. (GENC)

• Deswell Industries, Inc. (DSWL)

I summarized some of the ones below that seem interesting enough to dig into.

Saker Aviation Services, Inc. (SKAS)

Price: $7

Market Cap: $6.93m

P/Net Cash: 0.88x

P/NCAV: 0.76x

Cash % of Total Current Assets: 87%

P/B: 0.76x

P/E: 4.97x (Doesn't manner since business no longer in operation)

Saker Aviation Services, Inc. was an operator of a Heliport in Downtown Manhattan New York City as well as a repair and maintenance service for a Kansas Airport. Their contract to operate their repair and maintenance business in Kansas was terminated in 2022 and now their main business in New York City has expired as of last month. Their corporate website has been updated to reflect this reality [here](https://sakeraviation.com/). This is a Nevada incorporated company as well, not a fan of seeing that for net-nets.

The thesis likely revolves around buying a cash box where the insiders who have considerable ownership of the business will do "something" with the cash now that there really isn't a business attached anymore. Obviously if they distribute the cash it's a 13% gain from today's prices, upside doesn't seem large enough for the potential risk if they do something stupid with the cash but extreme margin of safety exists.

Surge Components, Inc. (SPRS)

Price: $2.08

Market Cap: $11.61m

P/Net Cash: 1.71x

P/NCAV: 0.64x

Cash % of Total Current Assets: 53.11%

P/B: 0.60x

P/E: 14.86x

Surge Components was founded in 1981 and is headquartered in Deer Park, New York (also another Nevada incorporation). They are a supplier of electronic components. Some of their products are capacitors, discrete semiconductors, buzzers, speakers, microphones, and other electronic related pieces. It is a pretty globalized business with customers in the US, Hong Kong/China, Taiwan, Europe and South America.

This stock has hovered around 1x-2x P/NCAV for many years. They never have paid dividends in the last 20 years, they had a big share buyback in 2017 where they bought $7 million dollars worth of stock back which is 60% of today's market cap.

FONAR Corporation (FONR)

Price: $12.10

Market Cap: $76.61m

P/NCAV: 0.86x

Cash % of Total Current Assets: 39.02%

P/B: 0.45x

P/E: 10.30x

FONAR Corporation was founded in 1978, they specialize in magnetic resonance imaging (MRI) through their Medical Equipment segment and their Physical Management Diagnostic Services segment. They basically engage in R&D, development and production of MRI related equipment and then management services through a subsidiary where they earn a fee for services rendered.

A few things with this one I'm not really fond of is there's multi-class structure funny business going on here where distributions are owed to non-controlling interests before common shareholders get paid. The President & CEO owns his shares through the class C and preferred A shares where he has control of the business but very little of the common that outside shareholders would be holding.

There's a bunch of related party transactions with the CEO, family members, and businesses owned by family members. Seeing some of these was an immediate pass for me on the investment idea. I don’t know if this business is necessarily being run to the benefit of common shareholders. On the flip side they have been repurchasing some shares recently with the common which is nice. The business seems pretty decent for a net-net, it's the kind of thing where if there were just a single share class I could see a scenario it would have been taken private a long time ago.

Tandy Leather Factory, Inc. (TLF)

Price: $2.86

Market Cap: $24.3m

P/NCAV: 0.74x

Cash % of Total Current Assets: 26.26%

P/B: 0.43x

P/E: 31.78x

Tandy Leather Factory was founded in 1919 and headquartered in Fort Worth, Texas. They are a specialty retailer and wholesaler of leather and leathercraft related items. They have a long 100+ history in the leathercraft business. They used to be known as the Tandy Corporation who went on to found Radioshack using the Tandy model for leathercraft retail. Interestingly enough after Radioshack met it's end the leathercrafting industry still lives on through Tandy being the industry leader.

Tandy currently trades at 0.74x P/NCAV, it is mostly inventory but reliable inventory as it rarely changes over the years. What Tandy may sell at their stores in the 2010s very well may be what they are selling today in the majority of their SKUs. Also we can't bet on a 100+ year old business liquidating across the country. Tandy used to have really good returns in the 2000s and early 2010s. They could realistically earn above 15% returns on capital.

Tandy had inventory tracking issues that got them in trouble and delisted for a moment around 2019 and 2020. The stock is somewhat known through Chairman Jeff Gramm who is known for the value investing book "Dear Chairman: Boardroom Battles and the Rise of Shareholder Activism". This blog and substack were good reads on Tandy here and here. I own a position in Tandy so I may post updates on the stock as they become available.

I ended up passing on the rest of the list but feel free to take a look if something seems interesting! If anyone reading this has a position on any of these net-nets, let me know your thoughts I would love to discuss these ideas.

Conclusion

Not a lot of cheap US stocks, screening for Net-Nets might be the easiest check to do to see how severe overselling can go during volatile times in the US market. Outside of that may be a good idea to check certain affected industries as discussed earlier in the post but in general I'm not seeing a lot of cheap or quality ideas to look at. For all of these net-nets you can make the case that it would be better to just buy them in Japan as many ideas there are better for this sort of thing and you might have some upside or hedge with owning foreign securities incase US markets do get a bit dicey. Sometimes that's the way it goes, you turn over a bunch of rocks hoping to find gold and come back empty handed, maybe I'll have better luck later in the year.

Disclosure: I own a long position in TLF and CBBI and may make additional purchases or dispositions in the future, I am not short on any positions mentioned in this post.

The markets have been turbulent this week, which means Mr. Market may soon be knocking at the door with a great offer. Hope everyone is looking for bargains out there. I have a quick write-up on another UK stock here as a result of my UK A-Z process which you can read here.

I often come across stocks that look appealing at first glance, but as I dig deeper, the picture becomes less convincing. Despite this, I still find it beneficial to write up my findings, as the research itself offers important lessons and helps refine my investment thinking even if I don't end up taking a position. I also enjoy writing about obscure stocks like these, so much of investing discussion has revolved around the same 50 names you hear all the time, there has to be someone who's interested in a £7.8m British manufacturer.

Background

Samuel Heath & Sons plc (HSM) is a closely held nano-cap manufacturer and distributor of luxury bathroom fixtures for wealthy homeowners. They are based in Birmingham, UK where they operate and run their only facility. They have a UK showroom in Chelsea and a US customer services location in New York City. They have around 110-120 employees at their company, most of them are involved in the manufacturing of their products. The company was founded in 1820 and held within the Heath family at least since the 1950s, it's not clear if this company was under a different name or family prior to that.

As you can see below these are some really pricey bathroom fixtures. You aren't going to find these are your local Home Depot or hardware store. They also have a case studies page with some images of their products in some of their client's homes.

Source: Link

In the last couple of years about 50% of the revenue is derived from the UK and 50% from overseas customers which I imagine is predominately the US but they don't really say. None of their customers account for 10% of sales or more. In general over the past 20 years, the company goes through cycles of higher margins and cycles of lower ones:

Source: Tikr

It is very impressive seeing a company of this size being able to generate over 35 years of reported earnings with no losses.

Source: Tikr

Business Figures & Ratios (4/3/2025):

Market Cap: £7.84m

Price: £3.10

P/E: 10x

P/TBV: 0.75x

P/NCAV: 1.36x

ROTCE: 6.26%

ROE: 6.24%

Z-Score: 5.17

Closely Held Enterprise: Low Information Stock

This is a pretty low information stock, not surprising at its market cap size. I've tried to learn about the business, its history and the history of the Heath family and it's pretty obscure. There's not much you can uncover about this company off of the annual reports either, things I've looked for to no avail:

1. Business Summary/Detail

2. Sq. footage of their PP&E

3. Inventory detail beyond stages of production

4. Who their customers are or a general idea of who they target

5. If they utilize a supplier or a middle man

Without an answer or a good educated guess on these items, figuring out this business and trying to come up with an appraisal value seemed very difficult. This company basically acts like a private business in many respects given how bare some of this information is on their annual reports.

For anyone who's interested in this stock or interested in the future it may be worth getting a list of questions and sending them in to their finance director who runs their IR page. I was considering it but given that I'll be passing on it, I'll be respectful here and not waste their time.

Illiquid Stock

This stock is pretty illiquid where insiders own about 79% of the stock although taking a count from the ownership information from Tikr summed up, it could be as much as 85-90% of the shares are locked up by long-term holders. Shares turnover at a very low rate at about 1% per year (24k shares traded last 12 months / 2.5m shares outstanding = 1%) and the stock has a beta of 0.07.

If you are running a diversified portfolio you shouldn't have trouble accumulating enough shares for a decent position however at 24k shares trading in the last 12 months that could mean you could only accumulative ~£77k worth. Can you accumulate more than 24k shares? Possibly, you never know unless you put the bid out and see if it gets filled. Additionally, if you are having trouble getting shares you can put orders in around times when the company issues their mid year & annual reports you may have better luck since Mr. Market likes to buy and sell off of the announcements.

Pensions

The company has an employee pension plan that it contributes to. Historically it was in a deficit for a number of years but the company has made significant contributions to it to clear the deficit. In the last annual report, the chairman's letter has discussed a potential pension buyout plan. Pension contributions in 2024 were around £870k, contributions for 2025 will be around £300k.

Quite frankly I'm not sure what this pension buyout will entail, I think this is something I'm not familiar with and would have to research this in depth to understand if this could potentially mean more cash would have to be tied up in seeing these buyouts through or if there's enough invested in the pension plan to buyout members. They did just get out of a pension deficit and now have £767k in retirement scheme assets on the balance sheet.

The pension contributions have ate away at FCF causing large differences between earnings & CFO as well as FCF. It's a big problem in trying to understand where your returns come from and trying to appraise the stock because your owner's earnings or FCF is much less than reported earnings.

Source: Tikr/Own Calculations

What I ended up doing is just backing out the pension contributions to see what the FCF numbers could theoretically look like over the last couple of years if the pension plan didn't exist. It ends up smoothing out those EPS to FCF conversion rates quite well. It ends up being a difference from earning £7.5m FCF vs £3.25m. Unfortunately this isn't the reality here, there will be some amount of the pension contributions that will hit CFO until the buyouts are worked out. In the meantime the company deciding to fund the pension will lower returns, and the company deciding to fund less of the pension will increase returns, viewing it like debt in a way.

Why I Am Passing on Samuel Heath & Sons?

There's a number of reasons why I am passing on this idea, I poked holes in this idea and in the end it seemed like there were too many questions, not enough answers and not cheap enough. Some of the reasons below, by themselves perhaps it wouldn't be problematic but all in aggregate makes the idea less attractive for me:

• Insider controlled company of a sub-par business, meaning very low chance of someone to take it over nor would you want to earn the poor returns while you wait.

• 1% share turnover and 80-90% shares locked up long-term meaning stock buybacks are unlikely, nor do I think the company would ever do it based on their capital allocation history.

• Some of the questions previously discussed I couldn't answer from reading through annual reports and basic company research.

• Low earnings quality due to pension contributions/obligations

• Don't have good working knowledge on how the pension buyout will play out

• Unsure if this business can earn its cost of capital, ROE has been around 6-8%

• Don't have a good way to determine an earnings based appraisal value

• Book value contains a lot of inventory and PP&E. Did a quick liquidation analysis below.

Source: 3/31/2024 AR/My Own Calculations

Notes on the follow assets:

• Receivables at 71.5% - as it includes only current receivables

• Inventory at 50% - A complete guess, I'm not sure what you can get for expensive luxury bathroom fixtures in a liquidation sale.

• PP&E at 100% - It seems like the company does book revaluations for their PP&E done by a valuation specialist. The big one I was looking into was the manufacturing facility in Birmingham which is around £1.7m per the annual report. No idea on the sq footage, tried to compare what was around the area and running a grok/chatgpt prompt to get an idea and it seems like £1.5m - £2m is a decent estimate. To be honest using 100% of the value is probably not right but by that point it was obvious that on a liquidation basis it's already too expensive.

On a liquidation basis I got £1.09 per share on a £3.10 stock price which is just much less attractive vs it's book value.

Conclusion

This stock looked attractive when publishing my UK A-Z list but as I dug into the numbers there was very little that I actually like in this idea. It's a good reminder how sometimes book value can be very deceiving until you verify the quality/value of those assets yourself. On liquidation basis the stock is unattractive, on earnings basis I don't have a good idea to estimate an appraisal value on the stock. A lot of the general catalysts for something like this seem less likely. Although it is an illiquid stock which can be beneficial to hedge some of the crazy volatility in the markets as it won't trade often but returns will be lacking here. Outside of reporting good results, it seems like the stock may be dead money for a number of years.

Disclosure: No position, I am not short on any securities mentioned in this post.

Wanted to share this really insightful podcast with Jeremy Raper on the ValueHive Podcast. It ended up being this 45 minute pitch on why value investors should be interested in investing in Japan and some of the macro-level catalysts that are changing the environment in shareholders benefit. It's been circulating around Fintwit/Substack among the JP investing circles so it's worth a listen! The main points made in the podcast:

1. Background of the TSE Reforms and how they have shaped the JP equity markets

2. How shame culture works to incentivize JP management to improve corporate governance

3. Guidelines for M&A and how it is attracting foreign institutional investors

4. Great comparison of Broken Biotechs to JP value stocks

5. Perfect environment for private equity

6. What Jeremy looks for in a stock & general red flags to be alert for

Initial Thoughts

Valve investing in Japan is probably the most bullish I've ever seen it in the time I've been investing. Japan prior to some of these market reforms has been a region where only specialists and the Graham & Dodd types were fishing in. Institutional types hated it, foreign/western hedge funds hated it, many valve investors hated it, it was a region that mostly a subset of enterprising retail investors who invested in it. There's a group of investors I talk stocks with over Discord and anytime a JP idea gets mentioned a joke that always comes from this is: "I think we can realize value from Bitcoin before a Japanese corporate balance sheet."

Japan vs Community Banks

Back in the early 2010s, two of the largest buckets for idea generation was Japan and community banks. Community banks in less than a decade has realized almost every dirt cheap and/or high quality community bank through some catalyst or M&A. Fishing for ideas in community banks today feels a lot like scrapping the bottom of the barrel and asking if 80% of tangible book value is cheap enough.

In Japan, a lot of retail investor did quite well buying dirt cheap names below net cash and net current asset value and yet many years later, there's plenty of opportunities. I sometimes go back and read some of the old value investing blogs that were popular in the pre-Substack era and try to compare how cheap some ideas were back then with today and a lot of Japanese stocks are still very cheap while I don't feel the same on the community bank ideas. I remember reading this blog and made me think how many value investors have based entire portfolios/blogs/fintwit profiles on just Japan without running out of ideas. If there are very obvious ideas for value that can take a ton of capital they can very quickly get eroded away but not Japan and that is just so fascinating to me.

Did Japan Always Make Sense to Invest In?

Now to be fair, depending on who you are, what you are familiar with, what country you live and invest in, it may not have made sense to buy JP stocks for a while. For myself personally, it took a long time before I started to dip my toes in on the JP thesis despite being aware of it for many years and that's in part that there were still opportunities in the US for a good part of the 2010s. If you can buy a great business that can return 15-20% returns on equity for a PE of 13x with average to good capital allocation policy and good margin of safety from its appraisal value it may not have made much sense to buy a Japanese net-net.

But that's not the reality of today, the SPY sits around a 35x shiller PE ratio, most decent and safe Graham/deep value type of opportunities have been found and realized and all of the good businesses are no longer trading at a fair price but at a ridiculous price with no margin of safety. What are your choices if you wanted to keep investing in the US? You either have to lower your standards, spend a lot of time waiting or consider looking overseas. For diversification sake it has some advantages for an investor's stock portfolio when you are buying some less correlated foreign stocks at cheap values. What if the SPY declines by 35%? Does a JP net-net at 50% of NCAV decline 35%? What about a UK hallmark competitor at 10x free cash flow? Probably not.

The Broken Biotech Comparison Was Awesome

If anything Jeremy's comparison with the broken biotech plays in the US to Japanese value stocks is the most compelling one and a comparison I somewhat did on my own in regards to some of the banking/retail stocks that I was invested in. Basically to continue to find things to do in US markets the closest thing to deep value investments are these biotech companies where they all have the same thesis. It's some cash rich speculative biotech company where they fail some sort of trial for a drug and likely will liquidate the company and distribute cash to shareholders. Part of the analysis will be to look up the cash with the most recent quarterly report, estimate some kind of cash burn and how long you have to wait to see something play out.

There's people who are really good at this kind of stuff so there's nothing wrong with these plays if you are a specialist in this kind of stuff but it's not what I am good at. I don't like owning things with a cash burn, I don't like owning things that lose money, destroy equity/book value, have bankruptcy risk, etc. In a similar vein in Japan, if there's 10 years of earnings and they lose money in 3 of them, I'm out on that idea. I’m not someone where there’s a risky idea will try to diversify that risk, I would prefer to pass on the idea and either hold cash for something else or put more capital in the safer and higher margin of safety idea.

For me I did some post-mortems on some of the US stocks I've been invested in such as Foot Locker, K-Banks, Jewett-Cameron, etc and came to terms that while I've done well with these names, depending on how long I was holding them, they may have been losing trades for me. I asked myself why was I invested in Jewett-Cameron that had no dividends, no buybacks, the board & management was not aligned with shareholders and they were destroying value. It was a net-net when I bought it, but a low quality one at that and yet there may have been 100 other Japanese stocks I could instead invested in that was a better thesis to be involved in more Ben Graham type of ideas.

Conclusion

To wrap up my rambling here, something that I do to avoid home country type of biases when investing is that I keep many watchlists of stocks that I run across for various criteria. Particularly I keep a list called "High Interest" or "Buy List" of stocks that I think are highly attractive, I've done a good amount of due diligence and I could consider opening a position on them. Any new idea I come across, if it's not better than the worst idea on that list, I pass on it or push it down to a "Medium" or "Low" interest watchlist. If I run across a US stock idea and it doesn't have similar return & safety characteristics of JP stocks and some of my UK stock ideas, it's a pass.

Disclosure: None, no individual stock ideas discussed.

Taking a momentary detour from UK equities to explore undervalued Japanese opportunities. I keep a list of cheap Japanese stocks on a watchlist that I will go through once in a while and drill in when prices look very cheap or opportunities in US and other parts of the world are looking less attractive. To be honest I think there's always something to do in Japan and many can run a whole investment portfolio in this country. I keep a list of ideas that I read around Substack/X and score them around consistent business performance, safety, long history of profits, free cash flow, and if they are cheap on net tangible assets or net current asset value. Recently, I came across Canare Co. Ltd. featured on Net-Net Hunter Japan - he does great work on JP names, give him a like or a sub if you find that post helpful.

Background

Canare Co. Ltd. is a supplier of cables, harnesses, connectors and other wiring for the broadcasting, television, audio and media industries. They work with a number of clients in Japan and abroad that I would imagine are blue-chip kind of clients:

Source: Canare Co. Ltd. IR

The company was founded in the 1970s by Kimiyoshi Kawamoto in Nagoya, Aichi Prefecture for constructing low-voltage electrical equipment primarily audio equipment. The company exited this business in the 1980s when they went into the broadcasting cable business. In 1983 the company established Canare Harness Co., Ltd. for processing and manufacturing harness products which continues to be a major part of the business today. They established sales/trading relationships in the US by this time and by the 2000s they continued to open up sales offices in Taiwan, South Korea, Singapore and China. In the 2010s they opened up sales subsidiaries in India, Germany and the UAE.

Business Figures & Ratios (3/19/2025)

Market Cap: ¥10.5m

Price ¥1536

P/E: 10x

P/NCAV: 0.71x

P/Net Cash: 1.07x

P/B: 0.57x

Dividend Yield: ~4% (On 40% Payout Ratio)

ROE: 7.75%

Z-Score: 6.5

Now, I don't fully know what the business relationship is between Canare and most of its clients, how its structured, is it contract work, what are the retention rates, etc. I did look into it's business a bit in the US where I live and Canare comes up when discussing high quality audio/recording/studio cables for a fair price. When I was younger I used to play guitar quite a bit and I had some decent equipment for individual purposes in recording and remixing tracks that I played. I had this small Line 6 amplifier that connected into my computer and I could play/record tracks via my computer and in the earlier 2010s I thought this was revolutionary when I was doing that. In reality this was the most basic setup possible using basic equipment, guitar cable that I bought from Radioshack, and knowing how to use the software with the Line 6 amplifier. For professionals who are serious about playing, touring and mixing they aren't going to be using Amazonbasics cabling and equipment to meet their goals.

Some of the discussions online for the US seem to mostly revolve around cabling for studio recording, audio and podcasting purposes. Canare seems respected among the "Audiophile" community which is a community of audio enthusiasts that are very obsessed with sound quality. These are kind of consumers that will tell you to go buy Sennheiser wired headphones when you ask if you should buy a Sony or Bose bluetooth headphones because they sound better. When researching audio cables online, you'll frequently encounter comparisons like "Mogami vs Canare vs Gotham Cables" discussing sound quality differences. If they perform similarly to each other then Canare cables is your best cost-effective choice because they will be significantly cheaper than the other premium brands.

Some links below for example:

Redditors Discussing Cables

Again this is a really niche area and it's not really clear if this is something that's more recognized in some of commercial/trade/contractor work with Canare's cables that may not be reflected online which is more of a everyday consumer check.

Is Canare a Good Business?

I don't know the answer to this, my indication immediately when I ran across this stock was to say its a subpar business, but there are factors when digging into the numbers that I find more relatable with good businesses than poor ones.

1. Gross Profit Margin Variation - Going back 20 years of data, gross profit margins are extremely stable. EBITDA & EBIT less so especially as you go down the income statement but stable profitability is something I don't find as often in net nets.

Source: Tikr/My Own Calculations

2. Good Business Returns? - Taking screeners or pre-built excel formulas at face value will say that they earn around 6-8% returns on net tangible assets (Working Capital + PP&E - Depreciation). The truth is the business probably earns returns better than that, I don't know how much better but its obvious they are over capitalized. I did an exercise basically saying, lets strip out all the cash excess of 2x total liabilities and see what the returns look like:

Source: Tikr/My Own Calculations

3. Long History of Profitability and FCF - Basically if you go back 20 years, they have never had reported losses. They have one year in 2022 where they had slightly negative free cash flow as they made a large capex investment that year.

The areas where I think this business struggles is on average they only generate 80% of its net income into free cash flow. That I don't think is either good or poor, it seems average. I can't really determine how much of the business is a low-cost commodity driven business for some of their cables and what are higher margin commercial contract based work. The stability of their gross margins seems to indicate that there's some sort of contractual agreements in place with some of their clients I described above.

So in the end, the best estimate I could say is that this is a business capable of making returns that can match the long term market returns of 10% per year, at worst it may be around its long-term ROE averages. For a net net this is great, some may be in the business of buying wonderful businesses at fair prices, this is more like buying a fair business at a bargain price.

Why does this matter? Canare's severe overcapitalization presents a compelling acquisition opportunity. A private buyer or external firm with stronger capital allocation discipline could recognize Canare's underlying value proposition. By stripping away excess cash reserves, streamlining management expenses, and capturing operational synergies, an acquirer could transform what appears to be a cash-heavy balance sheet into a lean, capital efficient enterprise. Will that actually happen? Who knows.

Appraisal Price - Asset Value

Source: 2024 Securities Report/My Own Calculations

I have the following asset values:

- NCAV @ ¥2,179/sh - 0.71x Multiple

- Net Cash @ ¥1,441/sh - 1.07x Multiple

- Tangible Book Value @ ¥2,779 - 0.55x Multiple

I think the easy determination here to make is to say if price meets NCAV then we can earn a 41% returns + dividends over time. That is true, however if Canare really can earn on average a 10% unleveraged after-tax return as mentioned on the previous section those firms in most instances do trade at book value. I want to be careful here because I did strip out the cash in the previous exercise to determine those returns but the assumption here is that we will get paid a big special dividend or the company takes the cash and invest in something that earns returns better than bonds, treasuries and other cash equivalents. In doing so, it will remove capital from the balance sheet and ideally it may increase ROE/Returns on NTA. However if it invests it in assets that make poor returns then I don't think the company on returns is worth book value.

With that said I put the appraisal price on an asset value basis at ¥2,779/sh which is 81% from today's price. At a ¥1,243 yen discount that is a 45% margin of safety.

PP&E & Land Value

Something to consider if one was to perform a liquidation value analysis, I did look through all of Canare's PP&E that they listed in their securities report.

Source: 2023 Securities Report

I wanted to try and estimate some land value per sq meter of the Nagoya Head Office & Kanare Harness Co Ltd. as they are two of the largest amounts of the PP&E, it may or may not be worth to analyze the rest of these assets. What we do know is that these two assets highlighted in blue do seem to belong on the same lot for 18,538 sq meters.

Source: Canare IR/Google Maps

The Nagoya Head Office is that lower building while Kanare Harness Co Ltd is the longer looking one that seems like a manufacturing facility. The land + buildings may have been on the books since the company's early years in the late 70s/early 80s.

I didn't have a good way in figuring this out other than prompting Grok for some large estimate which it came down to between 1.9b - 4.8b yen for that lot & buildings. At the low end of 1.9b yen that would have those assets on the books at 85% of market value.

(Nagoya Head Office 863,862 + Kanare Harness Co Ltd. 758,908 = 1,622,770 / 1,900,000) = 0.85x

Someone who's a bigger expert on land & property values in Japan may be able to figure this out better than I can. Buying a stock at net cash/NCAV I think provide plenty of upside and safety so I didn't really need to get into the liquidation value analysis but I think it is worth mentioning here.

Management Recognizing Stock Discount

Another great JP Substack Altay Capital regarding TSE Reforms:

Altay Capital - Mostly Value Investing

I Emailed my Portfolio Companies Asking About TSE Reform Compliance. Here Are Their Responses

As I’ve shared on Substack and X, I’ve been sending emails to every company in my Japanese portfolio that hasn’t complied with the Tokyo Stock Exchange (TSE) request to improve corporate governance. It’s a simple, polite email asking companies why they aren’t on the exchange’s monthly published…

Read more

2 years ago · 28 likes · 8 comments · AltayCap

In the post Altaycap talked about TSE reforms on getting companies in Japan to address the large price/book discounts in the market. The TSE reforms in short is the TSE making a naughty and nice lists of Japanese companies for complying with addressing price-to-book value and ROE deficiencies due to overcapitalization.

Management at Canare released communications (in Japanese) back in October on recognizing the discount in summary:

- Recognized P/B Ratio being under 1x for the past 5 years and ROE being under 8%. It seems like they want to target 9% ROE.

- Taking action to address the discount:

1. Growing the business and/or improving margins

2. Improving asset efficiency & inventory turnover rate

3. Managing their capital structure with high discipline

4. Stable shareholder returns (40% dividend payout ratios)

Not sure if it's just a translation error from JP to EN but some of the specific actions seem like just generalized language you write to shareholders but don't really mean anything. I think #1 and #4 are the most meaningful as management has discussed these points in previous securities reports. There's probably a very realistic chances that they will try to address the discount by capex investments or buying business elsewhere which again is better than cash sitting on the balance sheet. The easy way in addressing the discount is via special dividends or share repurchases but nothing is ever easy here.

Conclusion

At current valuation, Canare presents a compelling opportunity to acquire a stable business trading near net cash, offering both capital preservation and reasonable returns over the long term. Significant upside potential exists depending on future deployment of the substantial cash reserves and management's approach to Tokyo Stock Exchange governance reforms. Finding stocks with a long term history of profitability at net cash is very rare, even in Japan it's becoming harder to find these kinds of opportunities.

Risks

1. Core business deteriorates due to commodity like conditions/elevated price of copper over the long run

2. Large capex/other investments made with the cash destroys value

3. Non-compliance of TSE Reforms

Disclosure: I own a long position in TYO 5819, I am not short on any positions mentioned in this post. I will be making additional purchases in the near future.

Background

Ultimate Products plc is a supplier of household products to the UK and European markets such as cookware, laundry, floorcare, audio and other types of products. They work primarily with Supermarkets, Retailers and online channels to sell their products. The company manages some of UK’s oldest household brands:

Salter (est. 1760) - Began as manufacturer of precision scales and weighing equipment before expanding into wide range of household items and kitchen appliances that they are known for today. Acquired by the group in 2021.

Beldray (est. 1872) – Known for producing laundry and household related goods, evolved over time with the group in developing expanding products under the laundry category, floor care, and heating and cooling items.

Progress – Brand that’s been around for 50 or so years specializing in cookware and bakeware items.

Kleeneze (est. 1923) – Similar to Beldray focusing on laundry and floorcare products under the group.

Petra – A new brand developed in the last 20 or so years focusing on small domestic appliances.

Intempo – Similar to Petra in being a newer brand revolving around consumer electronics such as portable audio devices.

Entire Brand Portfolio on ULTP’s website.

The business designs, develops and distributes these products as they have offices in the UK (Headquarters), Germany and China. It’s a pretty diversified mix of territories, brands, distribution channels and product categories. A neat infographic below on the sales mix:

2024 ULTP Annual Report

Business Figures & Ratios (3/5/2025):

Market Cap: £87.53m

Price 79p

P/E: 6.5x

EV/EBITDA: 4.5x

P/B: 1.7x

Dividend Yield: 9%

Net Debt/EBITDA: 0.63x

ROE: 21%

Ultimate Products plc was founded in 1997 by Simon Showman (current Chief Commercial Officer) and Barry Franks (a former board director who retired recently). Showman, an experienced auctioneer, began his career sourcing carpet tiles from the US and reselling them to UK DIY customers. After meeting Franks, they partnered to establish Ultimate Products, expanding their sourcing operations. In 2005, they brought in Andrew Gossage, a chartered accountant who now serves as CEO. Gossage has been instrumental in driving the group's operations and profitability.

By 2013 the business was evolving in branding their products giving the group some leverage with suppliers reducing the capital intensity of their balance sheet over time. Showman, Franks and Gossage led a management buyout of the business in 2014 and then IPO’d the business in 2017. The group made the biggest acquisition in 2021 by acquiring Salter for around £34m. Since then, the group has been working to grow the business while navigating through various macro-economic events in recent years.

Management

A big part of the investment thesis in Ultimate Products, plc is a “bet on the jockey”. The three individuals I mentioned above who helped found and shape the group as it exists today collectively own about 40% of the company.

For those interested in the idea I would listen to some of the investor presentations and trading update calls that they set up in the last couple of years. Generally, these things are done performatively for a lot of companies and it’s not always helpful to look through but Gossage and Showman I think really get into the weeds on where things are at with the business. Listening through the last 6 of these calls it’s very obvious that we’re talking with owner operators and not C-Suite executives. I also believe they’ve recently platformed with InvestorMeetCompany, so retail investors attending the live webcast can ask questions for management to answer during the sessions.

In general, one of the big worries for me is industry level groupthink with companies where they all just try to replicate each other. In many cases this is fine but it’s especially bad if it’s on irrational decisions. My thoughts with management is that they only look through the lens of Ultimate Products, only talk about things pertaining to the company’s business, brands, customers, suppliers and sometimes get into macroeconomics now that they are at a size where that matters.

Why the comment on avoiding industry groupthink is important is that this management team appears to be very active and agile in being able to respond to issues that the company faces. The company made a lot of money around some perhaps COVID-related growth in air fryers. They were aware of it and it would have been very easy for them to get too greedy and over capitalize their inventory on these air fryers to end up having to get rid of them for discounts a year or two later. A lot of companies struggled with this problem and ended up taking earnings hits and/or destroying equity in the company as a result.

Lastly I think while they have a good track record up to this point, they are still quite ambitious and they do sometimes make these kinds of remarks where I think they want outperform these kinds of expectations set. I imagine they have heard from investors for 20 years about the company being a commodity-like business where they can’t dictate the markets at their size, they’re a price-taker, etc.

2/5/2025 Trading Update Call

Margin of Safety / Business Durability

The company's competitive advantage isn't built on substantial hard assets, but rather on scale and supplier leverage developed over time as they've built their brand portfolio and acquired Salter. The true margin of safety here lies in having an owner-operator mindset within the management team, combined with the ownership of iconic British household brands - notably Salter and Beldray, each with over 200 years of heritage. These historic brands provide durable protection against intense competition and potential substitutes. This resilience has been demonstrated by their ability to successfully navigate challenges from aggressive Chinese disrupters like Temu.

4/12/24 Trading Update Call

On a P/E or EV/EBITDA basis I certainly think the stock is quite cheap. 4.5x EV/EBITDA is probably around a P/E of 6.5x using recent annualized results. Results will be poor this year, so that may be a P/E of 7, 8 or 9 for instance. The company is levered around 0.6x Net Debt/EBITDA and the company has communicated no intention to lever more than 1x Net Debt/EBITDA. Only other time they broken this rule is to acquire Salter where they levered up to 2x Net Debt/EBITDA which they quickly paid off to current levels.

Appraisal Value

It a bit difficult to come up with a good idea on how much EBITDA they could generate in the next year or two. These items below may have an impact on EBITDA:

1. National Insurance Increases

2. ERP Regulation Costs

3. Food Inflation Potentially Persisting (Reduces Spending for Non-Discretionary Items)

4. Shipping Costs Due to Geopolitical Issues in the Middle East

5. Slow Down on Air Fryer Sales

I looked into some of the renumeration/bonus/awards for management. In 2023 the bottom threshold for awards was £19.8m and in 2024 it was £21.7m. I went with the low end to see what this would like it, and it seemed a bit absurd to assume 198m in sales at 10% EBITDA margin where the most recent year we have only done 155m.

I think 17.5m in EBITDA is a pretty conservative estimate, and one they have done in the past. Will that happen next year? Will it happen in 2 year or 3 years? I don’t know, the group has announced that they expect 14-16m in EBITDA this year in the latest trading update.

If we expect those shipping costs to be one-time adjustments then 17.5m EBITDA should be very obtainable.

If we believe this capital light, highly cash generative business is worth 8x EBITDA, that would put this at a 13x P/E multiple. 86% upside from today’s price. Holding the stock for 10 years you would earn 8.6% return per year + 8-9% dividend, although this may be reduced next year as they distribute 40-50% of their earnings as dividends. There’s some stock buybacks that will create some value at these prices. It may be worth more than that if we are right about the business, especially if it continues to compound at 20% ROEs for the next decade.

Risks

1. Misjudged ULTP’s brand values/durability

2. Geopolitical Risk/Increase shipping costs

3. Temu/Low-priced substitutes

4. Sustained Food Inflation

5. Retailer Oversupply

Disclosure: I own a long position in ULTP, I am not short on any positions mentioned in this post. I will be making additional purchases in the near future.

In my regular day job, I often gather data through web searches or by using APIs, typically with Python or other tools. The most valuable datasets are often those that can’t be fully automated or require some manual effort. For example, when companies need state-by-state tax rates for earnings projections, they either hire an accountant to compile the data or assign an associate to research and interpret the information manually and in house. Having accurate tax data is crucial for businesses to forecast their after-tax earnings and understand their cash flow over the next 3 to 12 months. I think investing is a lot like this too — I always question the idea of how easy it is to find ideas by just screening low price to book or low price to earnings multiples.

To be fair sometimes there are bargains in plain sight waiting for a buyer while everyone else is trying to figure out what’s wrong with it. I bought back into one of these recently in CBB Bancorp (CBBI). You run any low price to book screener on US companies or on US banks and you will consistently see CBBI in them. You would have seen it in 2022, 2023, 2024 and even in 2025 In my view, it’s a clear bargain, though it could easily be dead money for years.

On the flip side, how would you have discovered The Property Franchise Group PLC (TPFG) or The Hilton Food Group plc (HFG)? You might only know these names if you’ve spent time in the UK small-cap/AIM universe, are a UK resident, read other value investing blogs/substacks or discuss investments with someone from the region. I want to uncover more ideas like these. While CBBI is a solid opportunity, many U.S. stocks that come up in screens are far less compelling and I found it to be getting progressively worse in trying to source ideas here.

One thing I want to do regularly on the Substack (and as an investor) is work through an A-Z list of stocks to uncover ideas and opportunities that are either actionable or worth adding to a watchlist. This isn’t a pure A-Z method like Buffett or other investors might follow — it’s more of a hybrid approach, aided by one or two screening criteria to filter out uninvestable ideas. I wasn’t sure how effective this approach would be, considering what I mentioned earlier, but if it turns up a solid number of ideas, it could be a valuable time-saver. By using this method, I can skip past hundreds of unprofitable companies, early-stage growth stocks, and other dead ends.

I’ve been fascinated by investing in UK stocks for a long time, as I’ve discovered many compelling ideas that I wouldn’t typically find in the US. While the number of classic Graham-style deep value opportunities has dwindled, there are still plenty of average to above-average businesses trading at below-average prices — exactly the kind of opportunities we aim to capture.

Generating the Initial A-Z Stock List

In generating the initial list, I did the following:

- All stocks in the UK market (LSE, AIM)

- EV/Sales < 5x

- Excluding the largest caps (optional)

I wanted to avoid implying too much bias and judgement on creating this initial list. We might lose an interesting idea or two doing this. Generally, the goal is to exclude anything excessively overvalued and steer clear of large caps, as my focus is on smaller companies with significant upside potential — whether through value discovery or business growth. I also want to avoid automatically excluding certain industries or business types — like retail, insurance, or commodity producers. While it’s likely we’ll find fewer investable ideas in these areas, I want to stay open-minded to the possibility of overlooked opportunities that other investors may have left behind.

With that in mind, applying the above criteria and judgments narrows the list to around 900 stocks to review.

The Review Process

The review process has to be fairly quick; they are quick judgments on the businesses on some key figures/criteria/metrics. What we basically want to know on each security is if we are passing on them, we are expecting to pass on over 95% of the securities from this list. I want to spend maybe 3 minutes or less on each security, it’s okay to spend more time on it if it seems attractive. We are using an eye test and maybe some quick math here and there to do this, here are some of the basic criteria below:

Value Metrics:

P/E < 15x

P/TBV < 1x (If it makes sense to the quality of the business/what the business description is)

P/NCAV < 1x (If it’s a net net)

Source: TIKR

As a general metric to quickly pass on questionable ideas Altman Z-Scores < 2 as a statistical measure to keep us out of troubled assets. Net Debt/EBITDA > 3x would also likely pass on to avoid leveraged situations if possible.

Efficiency Ratios/Margins:

We can use these measures to kind of guestimate the quality of the business, and we can match it up with the long-term stock returns. Low or negative returns on equity signal to me a deep value idea where we want to investigate the balance sheet. Higher returns on equity could mean that we can ease up on the P/E and P/TBV multiples and it may just be a watchlist candidate for future research.

Source: TIKR

Profitability:

In general, we want to see 10 or more years of reported net income, free cash flow and perhaps cash from operations. This prevents us from being fooled by reported net income by focusing in on the opportunities that are truly cash generative. But it could also give us some insight on the timing of how the enterprise generates free cash flow. A lot of reported net income with a lot of negative free cash flow is generally a pass on the idea.

Source: TIKR

We can also investigate on the retained earnings to understand the history of past profits or losses. Most years of growing retained earnings is also an exciting trend to see.

Source: TIKR

Lastly, a history of paying dividends or stock buybacks, might be important with some of these deep value/obscure stocks. I’ve found a number of stocks listed on the LSE/AIM that was headquartered in another country that looked cheap, profitable and never paid a dividend. Have no idea how legitimate that would be.

Balance Sheet:

If I’ve gotten this far without passing on the idea and the stock looks cheap on a book value basis, I want to ensure there isn’t an excessive amount of goodwill or intangibles on the balance sheet — otherwise, it’s not as cheap as it first appears. I also check whether the company has a history of eroding tangible book value or equity. Depending on the situation, it might be acceptable if the business is burning 2-3% of tangible book value annually, but that can act as a drag on returns and set a ticking clock for the investment thesis to play out. Since that dynamic isn’t really my preference, I try to pass on those ideas when possible. If there’s a lot of PP&E in the book value that’s fine but usually less attractive than current assets as we would have to give an appraisal value or an estimate on those assets.

For net nets, current assets being full of inventory is less attractive than cash & receivables on a liquidation basis, although I don’t think that is a means to pass on an idea unless the underlying business is really poor.

The Final UK A-Z List:

In the end I did have marked down around 100 stocks that I found interesting throughout this exercise. I went back and tried to reduce this down to 20 ideas, but this was very difficult to do, so in the end I have around 25 ideas to work with in the UK. Now it is very possible I will pass on a lot of these after I spend more than 15-20 minutes on going through their investor relations materials. My hope in the end is there is around 1-5 actionable ideas at the end of this procedure. This is the list below (descriptions from Google or ChatGPT):

Anexo Group plc (ANX): A company specializing in integrated credit hire and legal services, primarily assisting individuals involved in non-fault motor accidents.

Anglo-Eastern Plantations plc (AEP): A company specializing in the ownership, operation, and development of agricultural plantations in Indonesia and Malaysia. The company primarily produces crude palm oil, palm kernels, fresh fruit bunches, biomass, and biogas products, as well as rubber slabs.

Camellia plc (CAM): A holding company primarily in the agricultural business producing nuts, avocados and some specialty crops. They have some investments in engineering enterprises and other alternative assets.

Card Factory plc (CARD): An online & brick and mortar retailer of greeting cards, gifts and celebration essentials with some similarities to hallmark.

Churchill China plc (CHH): Manufacturer and distributor of ceramic products such as plates, bowls, teapots, mugs, etc.

Creightons plc (CRL): Developer, manufacturer and marketer of toiletries and fragrances. Mix of bathroom, beauty and other bath and body items under various brands.

Enwell Energy plc (ENW): Company engaged in the oil and gas E&P activities with exposure to Ukraine.

FDM Group (Holdings) plc (FDM): Talent agency engaged in recruitment and training of IT and business consultants for potential clients.

Ferrexpo plc (FXPO): Swiss-based commodity trading and mining company, recognized as the world's third-largest exporter of iron ore pellets with primary operations in Ukraine.

Fletcher King plc (FLK): A company engaged in real estate services, including property fund management, asset management, investment broking, valuations, development consulting, and ratings advisory.

Halfords Group plc (HFD): Provider of motoring and cycling products and services. Established in 1892, the company has evolved to operate through two main segments: Retail and Car Servicing.

Ingenta plc (ING): Prominent provider of content management, advertising, and commercial enterprise solutions tailored for the publishing industry.

Jersey Electricity plc (JEL): Primary provider of electricity in Jersey, has operations in retail, building services and property management.

Jet2 plc (JET2): British leisure travel group specializing in low-cost airline services and package holidays.

Luceco plc (LUCE): Manufacturer and distributor of electrical products, wiring accessories, LED lighting and portable power solutions.

Macfarlane Group PLC (MACF): Provider and designer of packaging materials, boxes, bubble wrap, etc serving large number of retail e-commerce customers.

Next 15 Group plc (NFG): Company specializes in delivering strategic insights, customer engagement, digital marketing, and business transformation services to clients across various industries.

Nexteq plc (NXQ): The company specializes in providing outsourced design, development, and supply chain solutions for industrial equipment manufacturers across various sectors.

Samuel Heath & Sons plc (HSM): Manufacturer and marketer of high-quality products in the builders' hardware and bathroom sectors.

Sanderson Design Group plc (SDG): Luxury interior furnishings company specializing in the design, manufacture, and marketing of wallpapers, fabrics, and a range of ancillary interior products.

The Character Group PLC (CCT): Independent toy company specializing in the design, development, and international distribution of toys, games, and giftware

Ultimate Products plc (ULTP): Supplier of branded household products. The company specializes in designing, sourcing, and distributing a diverse range of homeware items, including small domestic appliances, housewares, laundry products, audio equipment, and heating and cooling solutions.

Vesuvius plc (VSVS): Global provider of molten metal flow engineering and technology solutions. The company specializes in designing, manufacturing, and supplying consumable products and equipment for the steel and foundry industries worldwide.

Wynnstay Group plc (WYN): is a leading supplier of agricultural products and services in the United Kingdom. Manfactures and supplies various agricultural inputs and specialized products related to farm & outdoor.

Group idea - UK Homebuilders/Housebuilders: This entire category seems pretty cheap, there were 5 or 6 ideas in this category that all seemed cheap on assets and some being net nets (mostly loaded with housing related inventory). I’m familiar with the US Homebuilder stocks and I think there’s some interesting opportunities to compare these ideas.

It looks like I’ve got plenty of ideas to keep me occupied for the next few months. I’m thinking of doing something like this once or twice a year if it generates a solid number of ideas. I’d also like to go through A-Z for Japan and Poland, though Japan’s list might be quite large, so I’ll probably need to split it into a few posts over time. Hopefully, the effort will pay off in the end.

Disclosure: I am not short on any of the tickers listed here. I own a small tracking position in ULTP. I am long on CBBI, HFG and TPFG. I may open a position on some of the listed tickers in the coming weeks/months.

A few days after my last post on Vertu Motors the company releases a pretty loaded trading update with some long-term concerns and some interesting pieces in it.

Link to PDF

Video Commentary from Vertu

Major points from the trading update are that the company is facing major headwinds as a result of: ZEV Mandate, SG&A increases due to minimum wage increases and National Insurance Contributions (NIC).

ZEV Mandate:

CEO of Vertu Motors: Robert Forrester has been pretty outspoken in the last few years in regards to the issues that the car market and the OEMs are facing in regards to the ZEV Mandate by the UK government through official press releases and in his Twitter/X posts he makes time to time like this:

As a general summary for those not familiar or are outside the UK, OEMs basically are mandated to sell a certain percentage of Battery Elective Vehicles of all total vehicle sales in a given year and that percentage increases every year until they meet the 100% threshold in the 2030s. A major problem with this being that these mandates don’t reflect consumer behaviors and OEMs as a result have to do a mix of playing with the margins in terms of discounting vehicles and providing less of the rebates so they can avoid selling vehicles in a loss. What may be happening also is that they are charging higher prices for petrol/diesel vehicles to subsidize the lower margin vehicles. This is somewhat what’s happened here in the US in a reverse way with CAFE regulations where OEMs are selling lower quality small cars in order to be able to sell higher demand larger vehicles that consumers want.

Source: Recent Trading Update

In these two statements Vertu is basically saying that there’s going to be a deterioration in the business environment for new car sales through a mix of the ZEV issues and poor economic activity. Until these issues in one way or another get addressed this will be a long-term reoccurring headwind that the whole industry will have to face.

Minimum Wage & NIC:

Source: Recent Trading Update

There’s not too much to say here, these increases will hurt the company’s SG&A in the short-term but will work itself out over time as they pass on some of the cost, make labor cuts, and invest in technology automated solutions to require less labor. Following the CEO of this company for a number of years he has no problem getting ahead of a problem and doing what needs to be done, especially in a lower margin business like this. He has closed under-performing stores instead of playing around with the idea of turning it around like many other businesses would. The company incurs around 15-20% turnover each year, they will likely replace less of the employees over time as a cost savings measure.

Stock Buyback Program:

Vertu motors announced a £12m Stock Buyback program and some language indicated that they recognize a significant discount in the share price:

Source: Recent Trading Update

This is a pretty significant increase in shareholder returns. Assuming they clear the authorization in 2025 that is £12m in share repurchases + £7.8m in dividend payments if we assume they will pay the same amount again as last year = £19.8m in total cash returns. That’s around 11.5% compared to today’s market cap assuming they spend the authorization in 2025 and the stock price continues to trade below the board’s intrinsic value estimate. I think this may confirm a belief from my last post that Vertu is going to slow down on the acquisitions after the last large acquisition which added some leverage to the balance sheet and the company doesn’t feel comfortable levering anymore than 1.5 net debt-to-EBITDA.

Attractive Stock?

Overall, I believe the stock is still attractive and can be purchased at a price that gives you a significant margin of safety in the discount to intrinsic value, the management team and the business durability of Vertu. It’s really difficult to find opportunities that potentially are returning cash to shareholders in one form or another of 10% of the company’s market cap. However, we need to be mindful of some of concerning issues that have been happening around the environment for auto sales and it seems likely we will have some mediocre results in the next year or two.

Disclosure: I own a long position in VTU.L, I am not short on any positions mentioned in this post.

Summary:

Vertu Motors plc (VTU) is a current holding of mine and a £190 market cap UK car dealer roll-up of 193 sales outlets focused on standard car brands such as Vauxhall, Peugeot, Ford, Honda, Nissan, etc. They have a few premium and electric car brands such as Ferrari, BYD, Volvo, and Land Rover but a small part of their business. They have a simple business model similar to any car dealer in the US or anywhere else in the world which is that they sell new and/or used vehicles to customers which are normally single digit margin items with the goal of retaining them as customers over time as they need oil changes, regular maintenance or even repair work done which they call “Aftersales” which is a much higher margin item. The CEO of the business founded the company in 2006 and has been running the operation ever since.

Business Figures & Ratios:

P/E: 9.9x

P/TBV: 0.82x

ROE: 9.75%

ROTCE: 10%

Dividend Yield: 4.4%

Stock Buybacks: Accretive 2-3% of Shares Outstanding

In general the UK car dealer industry has gone through a significant amount of M&A in recent years, Lookers, plc was taken over for £465m in 2023. Cambria Automobiles was taken over for £82.5m in 2021. Pendragon plc was taken over by Lithia in 2023 for £397m after a battle between multiple bidders. Lastly Marshall Motor Holdings was taken over by Constellation Automotive Group for £323m in 2021 via it’s subsidiary CAG Vega 2 Ltd which interesting enough has recently made an investment in Vertu Motors.

Source: TIKR / Vertu Motors Investor Relations Press Releases

Vertu Motors essentially is the last man standing in publicly traded UK car dealers that I know of where as everyone else has been acquired. The founder/CEO doesn’t own a lot of shares as he once had mixed in with an outside investor known to put money down in the automotive industry it’s becoming more abundantly clear that Vertu Motors may see an offer come in the mail for the business.

UK Car Dealer Takeover Comps:

The question we may want to know is what can Vertu Motors theoretically get in sale compared to offers we’ve seen in the past?

Source: Own calculations from comp financials

I did some quick back of the napkin math on these other UK car dealers that were taken over previously and to get an idea of what they went for on a few multiples and found a couple of problems trying to comp this out.

1. Lookers PLC potentially might be a wild outlier as prior to being acquired, the company has gone through an audit investigation on fraudulent transactions in 2020 and it seems like even the trading of its shares ended up being suspended because of it.

2. P/E Ratios don’t give any insight here but also it varies how much of earnings convert to free cash flow in each individual car dealer and in Vertu’s case they on average convert 60-70% of it’s earnings to free cash flow. So we can pass on any sort of basic P/E comps.

3. The offers for Pendragon seem pretty crazy in comparison to everything else, it’s hard to determine if this is what other enterprises will really offer for a “strategic acquisition” in the UK or if this is what they think a car dealer like Pendragon is worth. Most likely we will pass on trying to value Vertu based on Pendragon’s scenario.

4. A lot of the acquisitions were made in the last few years which has been the least stable periods for getting an idea if car dealers we overearning/underearning, how much prices increases they were able to pass with inflationary concerns, dealing growing SG&A expenses, etc.

Appraisal Price – Earnings Value:

Source: Own calculations / VTU Annual Report

Vertu Motors will generate around £4.8b sales using TTM numbers. Vertu’s EBITDA margin in recent years has been very good, I don’t know if I can bet on them having around 2.5%-3% EBITDA margins, but I don’t see anything that will indicate that they will earn less than 2%. £4.8b * 2% EBITDA = £95.8m in EBITDA. Between Cambria & MMH I’m comfortable saying that we could negotiate 5x EBITDA multiple on that estimated EBITDA which would put the sell price of £479m.

Source: Own calculations / VTU Annual Report

If we’re right about the price that we can sell this business for we can earn 112% on the sale of the stock which is around 11.2% annually over 10 years excluding dividends.

Appraisal Price – Asset Value:

Source: Own calculations / VTU Annual Report

My tangible book value calculation is a bit more conservative than what Vertu’s management is calculating which they call “Tangible Net Asset” where the main difference is that they are adding back deferred tax on intangibles. With a 73.7p per share on a 53p per share stock price would have it at 0.72x. I’ve tried to overanalyze this part because book value tends to be really broad for a lot of stocks but it makes sense here as most of these assets of a mix of productive buildings/PP&E being the dealerships, offices, repair centers, etc, and then the inventory which gets turned around 5x-6x per year.

In any case, 1.5x tangible book value is close to what Cambria and Lookers have gone for that has us at a 96p share price where we can earn 82% return or 8.2% annually excluding dividends.

Conclusion:

That puts us in the range of 96p – 113p for a potential buyout which is extremely attractive not including the returns we can get from the business overtime. At a PE of 10, puts us around 7%-8% FCF yield, in actuality I suspect that it’s probably closer to 10-12% FCF yield by next year when the merger & acquisition costs from the Helston acquisition roll off the books. There probably will be less acquisitions for a year or two as Helston was a £115m deal. Part of the FCF will be in the 4.4% dividend yield, some of it will be in stock buybacks, and perhaps the business will organically grow around 3-5% per year. It’s hard to not imagine being able to earn above market return holding the stock overtime regardless if a takeover bid ever happens.

I added to my position last week at 55p, I really enjoy these kinds of ideas where you have this potential lottery ticket being the takeover bid, but the price is attractive enough, business is decent enough and they are making good capital allocation decisions where you can be satisfied to hold and earn a good return from the business. It also doesn’t really seem all that hidden, it’s what I would call simple value in my books.

Disclosure: I own a long position in VTU.L, I am not short on any positions mentioned in this post.

Happy new year to everyone, hope everyone is having a great start to 2025 and is finding success bargain hunting out there! It’s been a slow year for writing on the substack as I’ve been occupied with training/learning outside of my job which has taken up a good deal of time in 2024 (although some will say I would be wasting my time since AI will take over all our jobs). I still do a lot of light research and reading for ideas, so I may post some links/other substacks every now and then of some actionable ideas. Otherwise, I think trying to get out maybe one to three of my own ideas during the course of the year would be a good goal.

I regularly would score the stocks in my portfolio on a scale to determine what stocks I should consider cutting out for the next best ideas. At a minimum any new position has to be as good or better than the worst idea in the portfolio. We will see how long I would run with this but in general I try to concentrate some of my position into 10 to 15 stocks, maybe I’ll introduce more if I need to basket a bunch of net nets, bank stocks or some deep value type investments. I mention this because I may write-up an idea and that idea could quickly hit the bottom of the list going against a better ideas that I’ve found in the marketplace and might get cut. I sold some of the K-Banks/Asian-American bank stocks, and ended up selling them as a whole to buy shares in PAYC, JRSH, VTU, etc.

We ended the year with 23.91% return, very happy with that in any year. It felt in some ways worse than it really was because we took some pretty bad hits in some positions but had enough return that it was sustained. There’s some opportunity here with some of the beat down positions to be big contributors next year such as VTU, FL, and perhaps even NAII.

Note: Some foreign positions bought with foreign currency is listed below converted to USD so the return profile may be slightly different in the local currency. Positions that end with a “:” & a two-digit country code are those positions.

Thoughts on Current Holdings:

(TPFG:GB) The Property Franchise Group PLC: This position is the result of a merger between (TPFG:GB) The Property Franchise Group PLC & (BLV:GB) The Belvoir Group PLC to combine two of the biggest players in the UK’s sales and lettings agency businesses. I wrote up some of these names here. An interesting catalyst to make this kind of deal funny enough was due to a large amount of overlapping shareholders/retail investors who owned both stocks and it had some influence in restarting merger talks again. The main thesis is still intact post-merger which is a consolidation of smaller lettings agencies into the group’s portfolio of high-quality brands while continuing to earn high returns on invested capital as an asset light franchise model with reoccurring revenue streams. I don’t think shares are particularly cheap, but around 13.98x NTM earnings it’s probably good enough to own. You probably could make the case that it is very cheap if you believe in the UK government’s initiatives to solve their housing problems. I don’t know how these numbers translate for TPFG, I’m not sure if this even the right question to ask in regards to this investment. I’m not from the UK so I don’t know how this would 100% translate into results for the group but I would imagine these types of initiatives eventually would benefit the group at some point.

(VTU:GB) Vertu Motors PLC: This was one of the few UK positions I entered as a result of the UK equities sell-off in 2022. Some of the commentary at the last earnings call with management seems to indicate that Vertu will have a strong H2. On a full year basis along with some of the recent acquisitions that were made, I don’t see how sales can be less than 4-5% year over year. There have been some concerning discussions around UK mandates on electrification and potentially issues with unsold electric vehicle inventories. The UK appears to have EV to Gasoline car ratio mandates year over year where OEM’s can get fined for failing to meet these incentives. It doesn’t seem to be an issue for the company currently but sometime to pay attention to over time.

Constellation Automotive Holdings Group (CAG) has become the biggest shareholder in Vertu Motors in 2024.

It seems like they have purchased right under 9.3% of the shares of the company for £21.8m, at 32,946,043 shares that puts the purchase price of around 66 pence. At today’s price (1/29/2025) it can be acquired for 54 pence which comes with 4.2% dividend yield + 1.75% buyback yield and around 0.73x tangible book value. Stock still seems pretty attractive, however for CAG I don’t know what their goals are here, there are many reasons to sell shares but usually only one reason to buy shares. Digging around their annual report they do have a history of making acquisitions/investments in the automotive/dealership industry in the UK. They previously had an investment in Lookers PLC which is another public dealership group comparable to Vertu that was sold in 2023 and they had to realized the investment which they earned around 21% return for a 1.5 year holding period. While it seems like CAG is too levered to make a full bid for Vertu Motors, it’s becoming more likely over time that someone may make an offer for the company.

(NAII) Natural Alternatives International, Inc: A formulator and manufacturer of vitamins, minerals, and other nutritional supplements. Makes money either direct selling to marketplaces or via contractual productions. One of their products CarnoSyn is well known around the fitness/bodybuilding communities. This investment for me is a statistically cheap stock that I would buy on the balance sheet and sell once earnings resume at the company. The company has an extreme customer concentration position where 68% of sales originate from 3 customers. The company temporary shutdown one of their plants in August of 2023 due to operational slowdown of one of their customers, they resumed operations at the plant 7 months later. The company is guiding for a net loss in 2025, it seems that Q3 and Q4 we will see if they return to some semblance of profitability. Company still appears cheap as it has 80 million dollars of book value compared to 25 million in market cap which puts this at 0.31x book value. I treat this investment similar to some net-nets where I’ll hold it for 2-3 years and cycle out for another idea if it gets stale or the company continues to burn cash.

(PAYC) Paycom Software, Inc: This is probably a much larger investment than I would usually look for as far writing on the substack, but I felt like it was a strong bargain around 15x earnings that it was trading for a few months ago. As a business they engage in SaaS offerings for small to mid-sized businesses in human resource management (HRM), payroll processing and data analytics type of client engagements similar to larger competitors like ADP and Paychex. I’m familiar with these types of businesses having networked with CPAs who had to winddown payroll services over the years as those services have been commoditized. It has all the usual SaaS like business qualities like high returns on invested capital, 80%+ gross margins, reoccurring revenue sources, customer retention, etc. 15x earnings seemed like an obvious bargain vs the 25x+ that ADP and Paychex trades at. I won’t write-up the stock here but this VIC write-up is a great resource to get started. This will likely be a long-term holding for me unless the market starts to get ridiculous with SaaS stocks again and it’s priced at a value I have to take.

(FL) Foot Locker: Not much to update with this one, seems like management has revised full year outlook to be worse than expected, appears though at some point profitability will return late this year or into 2026. Relationships with Nike seemed to normalize over the course of the year, and they’ve taken up a partnership with the Chicago Bulls. I’ve taken profits on 50% of my position in 2024 for other opportunities, I will likely exit the rest as I run into other ideas. I will still be following this company through 2025 as the stock has been very volatile.

Closed Positions:

(UNIF) U & I Financial Corp: Really unfortunate the way this one played out, but the company took a $18 million dollar loss on issues with loans related to equipment financing. The borrower in question went into receivership on fraudulent activities. The bank is dealing with litigation in relation to these loans. Got this one wrong by a mile, sometimes that happens with banks in OTC land with limited reporting but I wished this story played out different. I felt like I ran into this one pretty quickly behind the K-Bank general thesis without understanding how much of a black box some of these small OTC banks are without that long operating history. Something to understand at the end of the day, banks are leveraged institutions and have very limited margin of safety even with deep discounts and it’s a learning lesson to make sure to stack the deck with as many items as possible that can offer some sort of safety (buying a basket, high insider ownership, better due diligence). Cut my losses early when it seemed like things were deteriorating and took -20% loss on the position, to be honest better than I deserved for that one. This won’t be the first or the last stock I write-up when I look back it didn’t work out, we just need our wins to outweigh our losses to generate meaningful returns in the end. News Link

Other K-Banks/Asian-American Banks (RBB & CBB):

Exited both positions at 102% and 3% gains respectively. RBB was a great trade for a depressed bank stock that regularly paid dividends & repurchased shares. CBB on the other hand hasn’t moved too much, thesis is very much alive, there has been language in the last annual report on exploring other capital allocation options. One of the concerning ones mentioned being expansion/acquisition of other branches which is not ideal if it’s done in shares.

In general there were other opportunities that I wanted to enter that it made sense to exit CBB. When I get a chance to pile up more cash I still have CBB in mind. I still have some belief that the story will play out where value will be realized for CBB but it’s looking like it could be a 2-5 year horizon when that happens.

Update: 2/1/2025 - had incorrect dividend yield info VTU:GB, updated to correct info.

Disclosure: I own long positions in above mentioned tickers. I am not short on any of the tickers listed here. The above portfolio is a portion of my personal net-worth. I do not manage outside capital.

U & I Financial Corp the parent for Unibank is a one of the main publicly traded Korean-American focused banks in the US alongside of names such as $HOPE, $HAFC, $PCB, $CBBI and $OPBK. They are the main player in the Korean-American communities right outside of Seattle, WA sharing the market with Bank of Hope not far behind them. The bank seems to have a similar history to CBB Bancorp that I wrote about in a previous post, Unibank was started in the mid-2000s by a local group of Korean-American business owners who pooled together capital to start the bank. Unibank is certainly cheap, prices for the K-Banks as a group have been fairly depressed recently with general CRE and urban market concerns by investors.

Based on prices as of 2/16/2024

Key Business Figures & Ratios:

P/E: 6x

P/Pre-Tax Earnings: 4.68x

P/TBV: 0.55x

Dividend Yield: 2.5% (10-20% Payout Ratio)

Net Interest Margin: 4.45%

Return on Earning Assets: 2.68%

Return on Average Tangible Equity: 16.01% (Normalized around 11-13%)

Efficiency Ratio: 48%

Branches: 4 (Full service)

I’m not going to lie here, Unibank is definitely a low-information stock, finding every small piece of information on this bank is both incredibly helpful and difficult to do. They aren’t a dark stock, but unlike some of the other OTC and even NASDAQ bank you won’t get a lot of the other supplemental documents such as investor presentations that contain detail on the loan quality, loan detail, deposit and branch level figures. In short, they do the bare minimum to satisfy listing requirements on the OTC, so you will have to dig around FDIC call reports and regulatory filings if you want to know a bit more than what’s in the annual reports.

Unibank is an illiquid stock, they have around a 20% share turnover, they are liquid enough for a lot of individuals to enter a position but it could take a long time for a fund to open a large position. At a minimum 50% of the shares being a mix of the insiders and some of the funds who were able to buy into the bank are held and may not be traded in any given year. It could be more than that but it is at least 50%. Insiders own a considerable amount of the bank, they own around 35% of the bank, mostly held by the Chang family. There’s also AllianceBernstein and Stilwell who may have considerable influence on the board as activists who own 10.52% and 9.91% respectively.

Form FR Y-6 12/31/2021

So why is the stock cheap and what is interesting about it? Well, the stock declined on a poor Q4 earnings report where they had to provision $3.2 million for potential loan losses on some deteriorating loans. This essentially wiped all of the earnings for the quarter, the CEO got fired and the bank is on the search for a new CEO. That’s a lot for a small bank like this but not really unusual, going dumpster diving for stocks like this you have to determine most of the time how bad it needs to be to pass on an investment and if the margin of safety/upside potential is worth whatever problems the business may have. A K-Bank firing their CEO, CFO, or whoever is not really uncommon with these banks. Bank of Hope, CBB, RBB would be lucky to keep an executive for more than a few years. The deterioration in one of the lending relationships can be concerning and something to monitor in the coming months but as it sits currently, I’m not as concerned as the bank is very well capitalized at 17.29% Total RBC Ratio. The bank has a strong earning power and decent expense controls at place to be able to absorb those losses and then some without having to raise any capital.

I think this bank is particularly attractive where it has earned a strong return on tangible equity where on average in the last 10 years it earned around 11%, never dipping lower than 8.37%. There’s some level of decent expense control leveraged at the bank where it continued to lower its efficiency ratio over time especially as it continues to increase its earning assets over time without increasing more branches. It’s hard to go back earlier than 2018 Annual Report on these details but it seems like they’ve been operating with just 4 branches for quite a while. It’s very attractive to see a bank that can scale its lending in this matter without increasing branches which comes with additional operating costs and scale-up time to earn the bank’s average type returns.

Source: Own Calculations/Annual Report/TIKR

The bank’s loan book is kind of a black box since they don’t give out much detail on what’s contained outside of what you find on the annual report and FDIC Call Reports. If you’re familiar with some of these K-Banks they tend to mirror each other on the type of lending they tend to do. For many of them Commercial Real Estate makes up anywhere from 50%-80% of the loan book and that is neither good or bad without knowing the stratification of those loans. I got comfort on the loan book just reading what the other K-Banks are doing as well as knowing the interest that some other banks/funds have in buying the bank. What’s interesting for Unibank is that they’ve reduced their CRE exposure dramatically by lending out to Residential Real Estate just in the past two years as the interest rates have increased. Which I particular like where they make a lot of small dollar value loans in RRE vs in CRE where one loan relationship can cause a considerable issue relative to the size of the bank.

Source: Own Calculations/FDIC Call Reports

In summary you have a few things in play here if you decide to buy these shares. You are buying a very cheap bank at 55% of TBV that is improving its operations over time by just lending more and growing its deposits without growing its branches and ultimately its fixed costs. The bank is very attractive as it maintains its 40% to low 50% efficiency ratio. The bank will earn anywhere from 8-11% returns on tangible equity, they can earn more than this if acquired by another bank as they can cut out director salaries and other costs by consolidation. You also have activists such as Stilwell who are known in the banking industry as being a great activist on behalf of outside long-term investors. Within a year of their investment in Unibank the board announced a stock buyback program and bought back $2.64 million of stock (a bit less with stock based comp dilution) that represents 6.18% of the market cap in 2021. They paid $1.10 million in dividends representing a 2.5% yield. Stilwell has some influence on the board and has reported having discussions with the board. Which makes this a very compelling investment as the bank is very well capitalized, they either will return large amounts of capital over to shareholders if they end up slowing down lending or they go out and make loans that compound at 8-11% ROE. They represent margin of safety in price, but also a margin of time safety where you can wait a long time for this investment to work out as they compounded tangible book value on average between 9-10% in the last decade. I have no belief that the value gap wouldn’t close within 3 years but you could wait a decade for something like this to close and earn an above average annualized return.

The other piece that gives me comfort around this bank’s operations and loan book is that they were supposed to be acquired back in 2017 by Bank of Hope at 1.3x book value, a 30% premium to book. This agreement ended up being terminated due to internal control issues at Bank of Hope that devastated its stock price making the issuance of $HOPE shares to acquire $UNIF really unattractive when issuing at below book to pay for something above book.

Many investors may be interested in this bank for the acquisition potential in closing that value gap but like I said it could take a really long time especially since $HOPE’s valuations still haven’t returned to book value. Could they be acquired or merged with another K-Bank? Yes, but it’s unlikely, Hamni is not as acquisitive as Bank of Hope, and the other banks that are closer to a similar size would either incur heavy dilution or be willing to merge together and having to buyout some of the management. A problem still with all of these banks is that they don’t pile up cash since they are a bank and need to have a lot of earning assets which comes down to how they would fund such an acquisition. The K-Banks are definitely lower leverage banks and don’t pay out a large portion of their earnings so they could lever up an acquisition with debt, but the interest expenses would be quite expensive at today’s rates. It comes down to using shares as a currency and right now all of the K-Banks are quite cheap so there’s going to be hesitation on issuing shares at a discount to buy another bank instead of just making more loans.

I sometimes have friendly arguments with deep value type investors with the type of investments they like vs the ones that I like and this is a good example of one of them. People look at stocks like Unibank and CBB and say:

“Why would I buy this bank at 55% of book that hasn’t done anything, hasn’t returned enough capital, isn’t actively selling the bank. When I can buy something at 30% of book that has this M&A catalyst within 3 years”.

They might be right on this, statistically 30% of book is much better than either of these stocks I mentioned but I rarely see investors who talk about stocks where it has this deep discount with that lottery ticket attached to close the gap AND you can earn potentially a market return or better while you wait. Truthfully with these two stocks, we don’t know if we will earn a market return holding them, banking in the US is a commodity business that rarely earns above average returns and it’s very hard to earn good returns in the stock without buying below book or excellent capital allocation. These stocks haven’t increase share price by 10% per year looking back at it like some compounder stock. It’s not reflective in the share price but the growth of book value definitely is as well as the business returns. Our return is basically the capital payouts + return on equity (or book value growth) each year. There’s a lot of ideas where its really statistically cheap at 30% of book value but is barely earning its cost of capital, or it can compound book value at 1 to 2% per year with a horribly inefficient operation that has generated losses. I still respect these kinds of ideas and am willing to invest in those as well, it’s a lot of what you sometimes find in Japan or other cheap bank stocks but I much rather be able to earn a decent return in the business itself AND have that lottery ticket in the event of an acquisition/liquidation/etc.

Catalysts:

1.       Stock buyback program/increased dividend payouts

2.       Sale to Bank of Hope or another bank

3.       Stilwell activism

4.       Continuing to generate returns above the average bank

Disclosure: I own shares in UNIF, CBBI, HAFC. I am not short on any of the tickers listed here.