Benjamin Graham commented on the illogical relationship between the stock advisor and the client:
“If the reason people invest is to make money, then in seeking advice, they are asking others to tell them how to make money. That idea has some element of naïveté. Businessmen seek professional advice on various elements of their business, but they do not expect to be told how to make a profit.”
And that veracious comment is rarely mentioned today - I find that to be strange.
Strange, too, is the stock market that we witness nowadays. I recently saw the market value of a stock I bought ten months ago increase to nonsensical levels. Less than a year ago, I bought 500 shares of Carver Bank at $3. But now the stock market decided that the stock is worth $6.
And it is a complete mystery why the sudden change in valuation. I wrote on my rationale behind the purchase of the stock in But I’ll be the first to admit - I am absolutely clueless why I did so well.
Another unusual story I came across this week relates to the stock of Orchid Paper Company. Headquartered in Pryor, Oklahoma, the company is in the business of converting bulk tissue paper into paper towels, bathroom tissue and paper napkins. Over two thirds of its product is sold to just three retailers: Dollar General, Walmart and Family Dollar. Orchids Paper is a U.S.-based company with 2017 sales of $162 million, of which it generated $6.67 million in profits, an unheroic profit margin of less than 5%.
I doubt whether you find the paper tissue industry fascinating. But it may interest you to know that Orchids Paper showed the steepest drop in market value for companies in the paper industry - it now trades at about $4, compared to $14 the year prior, a precipitous decline of about 70%.
I sifted through Orchid’s latest annual report, trying to understand the drop in market value. What I found were five factors that may explain the loss in value.
First, Orchids Paper stopped paying dividends to shareholders as of the second quarter of 2017. Second, the company showed poor operating margins, and lower earnings per share, compared to its past performance.
Third, the company’s CFO, Mr. Rodney Gloss, had unexplainably resigned in March of this year. Fourth, its current liabilities balance increased by ninefold, from about $20 million the year prior to about $180 million this year. Fifth, Orchids Paper is a miniature company, with a current market valuation of merely $44 million. Its stock is thinly traded and does not draw the attention of Wall Street.
But the stock of Orchids Paper peaked my interest. Over the past decade the company had not reported a single loss. Its average 10-year were $1.15. So, its 10-year earnings multiple is 4 times. The company also reported $13.61 of tangible book value per share, which translates to a 70% discount to book value based on its current market value. And if you look at its stock price graph over from 2012 to 2017, you will see that the stock traded as low as $8 and as high as $36.
I was also attracted to the non-cyclical nature of the tissue paper industry. While most of the stocks I own are sensitive to the overall health of the U.S. economy, it seems to me that our use of paper tissue is not sensitive to how high or low is the Dow-Jones index.
The sale of paper towels composed about 50% of Orchids Paper’s sales. And the sale of bathroom tissue composes an additional 40% of its revenue. And unless the use of the Bidet completely changes how to spend our time in the bathroom, I am quite confident that we will keep using toilet paper in the bathroom for the foreseeable future.
While I was taught that capital markets are rationale; that there should be a reason behind a change in market prices, I often feel differently.
To remind myself that capital markets are frequently irrational in the short term, I recently hung the following quote from Berkshire’s 2018 annual
"Berkshire, itself, provides some vivid example of how price randomness in the short term obscure long-term growth in value. For the last 53 years, the company has built value by reinvesting its earnings and letting compound interest work its magic. Year by year, we have moved forward. Yet Berkshire shares suffered four truly major dips. Here are the glory details:
March 1973 to January 1975: High $93 and Low of $38. A 59.1% drop in stock price.
October 2, 1987 to October 27, 1987 as high as $4,250 as low as $2,675. A 37.05% drop in stock price.
June 19, 1998 to March 10, 2000 as high as $80,900 and low as $41,300. A 48.94% drop in stock price.
September 19, 2008 to March 5, 2009 high as $147,000 low as $72,400. A 50.7% drop in stock price.
This table offers the strongest argument I can muster against even using borrowed money to own stocks. There is simply no telling how far stocks can fall in short period.
Even if your borrowings are small and your positions are not immediately threatened by the plunging market, your mind may well become rattled by scary headlines and breathless commentary. And an unsettled mind will not make good decisions."
Over the next few weeks, I will write more about Orchids Paper’s balance sheet, income statement and the paper tissue industry. If you would like to be notified when I post these meditations, please subscribe by clicking the button at the top of this page.