Sunday, March 10, 2013

Why I Own Installux SA

I just bought my fifth small cap stock. It is Installux SA, a French manufacturer of aluminum products. I found all my previous four small caps on various screeners. But I found this one an article in another investor blog.

The company's English website explains what it does:

The strategy of the Installux Group rests upon three major principles: the use of a single material, aluminium, the distribution of products via a network of professionals (metal workers, ironsmiths, silverers, awning dealers, fitters, partition dealers, wholesalers), and the targeting of niche markets rather than big volumes.

We are present in three distinct yet complementary business sectors: building and residential improvement (Installux Aluminium), ready-to-install (Roche Habitat), fitting of tertiary and commercial spaces (Sofadi-Tiaso).

Installux is like most of my other small caps. It is consistently profitable, with TTM PE of less than 10, and it has a great balance sheet. See chart below.

As the chart shows, the company trades at almost the net-net, which I define as total current assets minus all liabilities.

I used to read the company's financials in English. But I admit it is still tough going. The valueandopportunity blog mentions the company is majority owned by Christian Canty. I cannot find confirmation of that but I will assume that for now. I do know that Mr. Canty, who is 67, is grooming his son to run the company. I have had good experiences with family majority owned businesses; namely, Seaboard and McRae Industries. It makes sense that you can trust such companies more because the majority owner who effectively runs the company has exactly the same long term objectives as shareholders like me. This contrasts with a CEO who has a small share of the company and who is compensated by stock market performance. Think of a CEO who has a large stock option package. That CEO is motivated to create volatility in the stock price. If the price goes up, the CEO gets stock option payoff, but if the price goes down, he doesn't have to return the payoff. And he may even get more shares at the lower price. Talk about rewarding bad performance. This illogical situation extends to the hedge fund world. A hedge fund manager typically gets 20% of profits, but he doesn't have to return 20% of his losses

On a final note, I have built a portfolio of five small cap stocks now, most of which are foreign based companies. I expect to end up with about ten such stocks in this portfolio, with a value of about 25% of my net worth. To do this, I have sold some of my other holdings. I have closed out my St. Joe position, with a +20% gain. The following table summarizes my small caps. All gains are in local currencies.

Stock Market Notes
McRae Industries OTC (USD) +15% in 6 months
Globus Maritime NASDAQ USD (Greece headquarters) -30% in 6 months
Installux SA Paris (Euro)
Riken Keiki TSE (Yen) +10% in 2 weeks
Tachibana TSE (Yen)

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