Stingy Investor Contact - Subscribe - Login
  Home | Articles | Screens | Links | SNW | Rothery Report
 
  MoneySense Articles
 Cdn Top 200 2016
 US Top 500 2016
 Retirement 100: 2015
 Cdn Top 200 2015
 US Top 500 2015
 Retirement 100: 2014
 Cdn Top 200 2014
 US Top 500 2014
 Retirement 100: 2013
 Cdn Top 200 2013
 US Top 500 2013
 Retirement 100: 2012
 Buffett Buys
 FB IPO
 Stocks that pay
 Value in the S&P500
 Cdn Top 200 2012
 US Top 500 2012
 Retirement 100: 2011
 Where to invest $100k
 Where to invest $10k
 Summer Simple Way
 A crystal ball for stocks?
 Cheap & safe
 Risky business
 Cdn Top 200 2011
 US Top 500 2011
 Retirement 100
 Dividend investing
 Value investing
 Momentum investing
 Low P/E P/B
 Dividends
 Dividend growers
 Cdn Top 200 2010
 US Top 500 2010
 Graham's prescription
 Income 100: 2009
 The case for optimism
 Cdn Top 200 2009
 U.S. Top 500 2009
 Wicked investments
 Simply spectacular
 Income 2008
 Small stocks, big profits
 Cdn Top 200 2008
 US Top 500 2008
 Value that sizzles
 So simple it works
 Income 100
 No assembly required
 Investing by the book
 Cdn Top 200 2007
 US Top 500 2007
 Invest like the masters
 A simple way to get rich
 Top Trusts 2006
 Stocks for cannibals
 Car bites dogs
 Cdn Top 200 2006
 US Top 1000 2006
 So easy, so profitable
 Top Trusts 2005
 Dogs of the Dow
 Top 200 2005
 Money for nothing
 Yield of dreams
 Return of the master

MoneySaver Articles
 2 Graham Stocks for 2017
 3 Stingy Stocks for 2016
 5 Graham Stocks for 2016
 3 Stingy Stocks for 2015
 3 Graham Stocks for 2015
 3 Stingy Stocks for 2014
 4 Graham Stocks for 2014
 8 Stingy Stocks for 2013
 6 Graham Stocks for 2013
 9 Stingy Stocks for 2012
 8 Graham Stocks for 2012
 Simple Way 2011
 5 Stingy Stocks for 2011
 7 Graham Stocks for 2011
 Simple Way 2010
 5 Stingy Stocks for 2010
 8 Graham Stocks for 2010
 Simple Way 2009
 Timing Temptation
 19 Stingy Stocks for 2009
 4 Graham Stocks for 2009
 Simple Way 2008
 Active at Passive Prices
 Unbundling ETFs 2008
 5 Stingy Stocks for 2008
 5 Graham Stocks for 2008
 Is your index too active?
 Graham's Simple Way
 Canadian Graham Stocks
 5 Stingy Stocks for 2007
 8 Graham Stocks for 2007
 Top SPPs
 The Simple Way
 A hole in your IPO?
 Monkey Business
 8 Stingy Stocks for 2006
 Graham Stock Gainers
 Blue-Chip Blues
 Are Dividends Safe?
 SPPs for 2005
 Graham's Simplest Way
 Selling Graham Stocks
 RRSP Money Market Funds
 Stingy Stocks for 2005
 High Performance Graham
 Intelligent Indexing
 Unbundling Canadian ETFs
 A history of yield
 A Dynamic Duo
 Canadian Graham Stock
 Dividends at Risk
 Thrifty Value Stocks
 Stocks in Short Supply
 The New Dividend
 Hunting Goodwill
 SPPs for 2003
 RRSP: don't panic
 Desirable Dividends
 Stingy Selections 2003
 10 Graham Picks
 Growth Eh?
 Timing Disaster
 Dangerous Diversification
 The Coffee Can Portfolio
 Down with the dogs
 Stingy Selections
 Frugal Funds
 Graham Revisited
 Just Spend It
 Ticker Temptation
 Stock Mortality
 Focus on Fees
 SPPs for the Long Term
 Seeking Solid Stocks
 Relative Strength
 The VR Approach
 The Irrational Investor
 Value Investing

Globe & Mail Articles
 Indexing advice
 Media-shy stocks
 Curse of size
 Market uncertainty
 Be even lazier
 Scary beats safe
 Small, illiquid, value
 Use the numbers
 What value is good value?
 Sculpt for value
 Value vs CAPE
 Graham Rules
 CAPE vs PeakE
 Top value ratio
 Low Beta
 Value and dividends
 Walter Schloss
 Try unloved AIG
 Why I'm a value investor
 New world of ETFs
 Low P/Es possible
 10 yielders
 Be happier
 Long-Short
 Dividend Downside
 Shiller's P/E
 Copycat investing
 Cashing in on class
 Index roulette
 Theory collides
 Diving too deep
 3 retirement villains
 Scourge of inflation
 Economic omens
 Analyst Expectations
 Value stock scarcity
 It's all in the index
 How to pick good funds
 Low Beta Wins
 Hunt for dividend stocks
 Think garage sale

Advisor's Edge Articles
 Passive Rebundling
 Doing the math

Norm Speaks
Flip Books

Tools:
 Asset Mixer
 Periodic Table
 ETF Fee Calculator



Money For Nothing
by Guest Columnist Mike Chung

Anyone attuned to the pop music scene during the roaring 1980s, will perhaps remember the above title was an era-defining big hit for the British group Dire Straits back in 1985. However, the intent of this essay is not to write about showbiz, nor about the sometimes surreal behaviour of its protagonists. Rather, focus will be directed towards the surreal behaviour of stock market players during the latest crash and how cash was demonstrably given away for nothing in return; Money for Nothing if you will.

Anadigics Inc. (Nasdaq: ANAD) is a U.S. technology company providing semiconductor solutions to the broadband wireless and wireline communications markets. Its products include power amplifiers, tuner integrated circuits, active splitters, line amplifiers, and the likes. In line with the rest of the market, its stock price did not escape the recent carnage, tumbling to an intra-day low of $1.13 on November 18, 2008, a 92% drop from the 2008 year high of $13.54 on June 5.

Price Graph

However, the most astounding aspect of Anadigics' predicament is not to be found in the more than 90% loss in market value of its common stock. To find this most amazing feature, the intra-day low of $1.13 should be viewed against the assets and liabilities of the company.

On November 18, 2008, the latest available balance sheet (albeit an unaudited one) for Anadigics was the one as at September 27, 2008. A simplified version thereof is laid out in Table 1:

Table 1:
27-Sep-08
Anadigics Inc. $ '000s$ per share

Cash & Cash Equivalents (A)130,1022.06

Total Assets (B)340,786
Total Assets less Cash (C = B-A)210,684
Goodwill and Other Intangibles (D)6,330
Tangible Assets excluding Cash (E = C-D) 204,354

Total Liabilities (F)78,105

Net Tangible Assets excluding Cash (E-F)126,2492.00
Shares Outstanding ('000s)63,256


On the balance sheet, the definite eye popping item is Cash and Cash Equivalent which Anadigics reported at $130 million. With some 63 million shares outstanding, this translates into $2.06 of Cash and Cash Equivalent per share.

Therefore, on November 18, 2008, the sellers of Anadigics shares at $1.13 were willing to receive only $1.13 while giving up ownership of $2.06 of cold hard cash. In other words, on the basis of the latest information available, they accepted to receive only 55 cents for every dollar of the company's reported cash holdings, thereby giving away 45 cents of Money for Nothing!

Assets For Free

Yet, this was not the end of this mind boggling giveaway freebie. Going further down the balance sheet, Anadigics reported Total Assets of $341 million. Subtracting 'Cash and Cash Equivalent', 'Goodwill and Other Intangibles' and 'Total Liabilities', one ends up with $126 million ($2.00 on a per share basis) of Net Tangible Assets excluding Cash as shown in the last but one line of Table 1.

And the sellers at $1.13 were giving away all that for free, relinquishing their part ownership of Anadigics' Land, Buildings, Machinery, Inventory, Receivables, etc. (having an accounting book value of $2.00 per share) for nothing in return, thereby implicitly valuing all those tangible assets at zero. Equally important, any earning power of the company to generate future profits, was also being given away for free.

According to Bloomberg data, 4,550 Anadigics shares were traded in total on November 18 at $1.13 in 3 separate trades. And 2 days later (November 20), 18 separate trades at the same low price again took place for 6,750 shares in aggregate. Why would some Anadigics shareholders give away their part ownership of cash and other tangible assets for much less in return?

Market Capitulation

This is the most often heard explanation. With the market value of their holdings in free fall, some shareholders panic. They are willing to receive much less in return, preferring to get rid of their shares in order to spare them the anguish of experiencing any potential future drop in market value of those shares. They throw in the towel so to speak.

The company is expected to be worth less in the future

A ferocious bear market like the one recently experienced is usually a harbinger of an upcoming recession. With the economic outlook so unfavourable and fear ruling market sentiments, some Anadigics shareholders might extrapolate that the long term future of the company will be very negative and therefore, will eat into the current value of its assets. Hence, for these shareholders, such overly depressed price is fairly representative of the present value of the company's shares.

However, as the father of Security Analysis, Benjamin Graham had shown decades ago (1), there is a paradox in such a way of looking at the company's future. Company's management probably makes up the most knowledgeable people on the company's affairs. If management truly thinks the company will be worth less in the future as some shareholders do, it will put forward a resolution with the shareholders to immediately cease the company's operations and liquidate it.

So, instead of waiting for a negative future to eat away the value of the company's assets, the shareholders will receive more upon immediate liquidation of those assets than what they can fetch in the stock market. And if the managers have themselves been buying the shares at such overly depressed prices, they will personally profit upon the company's liquidation.

In Anadigics' case, its latest balance sheet shows Net Tangible Assets (i.e. including Cash) of $4.06 per share. If the company is to be liquidated on the spot, the shareholders will probably receive less than such accounting book value of $4.06 per share. But with cold hard cash making up $2.06 of this $4.06, there was a sufficient margin of safety for the shareholders to receive more upon the company's liquidation than if they sell in the market at or in the region of $1.13 per share. However, given that Anadigics management is not calling for an immediate liquidation of the company, its overly depressed market valuation is more likely to be a reflection of irrational shareholders behaviour.

Institutional Constraints

Institutions such as pension funds, insurance companies and endowments are often characterized by constraints which they self-impose on their stock holdings. One frequent restriction is the minimum market capitalization of the companies in which they put money. During a severe bear market, a good number of those companies (especially those which were hitherto teetering on the brink of slipping into the small cap segment) have seen their market capitalizations plummet below those required minimums, thereby instantaneously becoming unqualified to be held by the institutions. The latter are thence compelled to sell the shares of those companies in order to satisfy their compliance requirements once again and such sales are bound to be done at whatever prevailing market price; unfortunately, with the added consequence of triggering capital losses.

Margin Calls

Nowadays, it is not uncommon for market players to be buying shares on margin. As market prices go down precipitously, margin calls are issued. However, it would not be unusual to find the margin account holders dithering on any course of action at such times because they are bewildered or even paralyzed by market fear/panic. In those instances, the brokers will take the initiative to liquidate some of the holdings in order to bring the margin accounts back into compliance. Those liquidations are typically carried out by the broker's margin compliance officer who will sell wherever there is a bid, without much regard to the market prices that can be obtained during such sales.

Fund Redemptions

Similar to margin calls, when mutual funds and hedge funds face massive redemption requests during market slumps, they are forced to liquidate part of their holdings. Virtually in a panic selling mode during those times, they will sell at whatever available price.

Other examples

Anadigics was not the only instance in the U.S. whereby the recent market bear valued the whole company at less than its cash holdings. Table 2 shows a few other instances which have occurred during the latest market slump.

Table 2:
SiRF TechnologyNanosphere Inc.Hilltop Holdings
2008 Low $0.79 $3.03 $7.74
2008 Low Date 30-Oct-08 27-Oct-0821-Nov-08
Latest Balance Sheet available on Low Date30-Jun-0830-Jun-0830-Sep-08
$ '000s $ per share $ '000s $ per share $ '000s $ per share
Cash & Cash Equivalents (A)85,0111.3693,9904.23750,57313.30

Total Assets (B) 215,629 110,336 1,150,233
Total Assets less Cash (C = B-A) 130,618 16,346 399,660
Goodwill and Other Intangibles (D) 27,769 5,091 38,457
Tangible Assets excluding Cash (E = C-D)102,849 11,255 361,203

Total Liabilities (F)41,96715,281362,667

Net Tangible Assets excluding Cash (E-F)60,8820.98-4,025-0.18-1,464-0.03
Shares Outstanding ('000s)62,353 22,228 56,452


Although in the cases of Nanoshpere Inc. and Hilltop Holdings where their respective Net Tangible Assets excluding Cash turned out to be negative, their latest reported cash holdings were sufficiently above the low market price to provide further illustrations of the sellers' surreal behaviour as discussed above.

On the other hand, how about those who were on the other side of the trades; i.e. the buyers of those shares at the low prices? It would be readily understandable if they felt like Santa had indeed been in town.


About the Author: Mike Chung, CFA is an analyst at a leading Canadian pension fund and occasionally writes on a freelance basis. Before immigrating to Canada, he was a financial journalist in the Indian Ocean island of Mauritius, including a stint as correspondent for Reuters, the global information company. He graduated from U.K.'s London School of Economics with a BSc. (Econ) in Accounting and Finance. He can be contacted at m.chung[at]rocketmail.com

Disclaimer: The sole intent of this essay is to illustrate irrational behaviour during times of market stress. Under no circumstance, it should be construed as investment advice, nor should it be used as an investment advice. The opinions expressed are those of the author alone and do not necessarily represent those of Stingy Investor or related parties.

Reference:

  (1): 'Is American Business Worth More Dead Than Alive?' Benjamin Graham, Forbes, June 1932.

 
About Us | Legal | Contact Us
Disclaimers: Consult with a qualified investment adviser before trading. Past performance is a poor indicator of future performance. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, financial advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. More...