Graham commented on the illogical relationship between stock advisor and 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 nowadays - 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
that traded for about $3. But now capital
market decided that each 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
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
. 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
I doubt whether you find the paper tissue industry fascinating.
But it may interest you to know the change in the stock price of companies that
operate in the paper industry. A few examples:
trades at $12.40
today while it traded for $16.41 a year ago, a 24% decline.
trades at $24.35 today compared to $46.23 a year ago, a
47% decline. Conversely,
trades today at $10.80 compared to $4.5 the year prior, an increase of 140% in
market value. And Orchids Paper showed the
steepest drop in market value - it now trades at about $4, compared to $14 the
year prior, a precipitous decline of about 70%.
I sifted through Orchids Paper’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 peformance. 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. Even at the
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
invariant of whether the
is at 2,810 or 2,1711. 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 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 here should be a reason behind a change in market value, 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 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 borrower 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
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