Monday, March 28, 2011

Equity Research Piece: Sterling Construction Co. (STRL)

I came across Sterling Construction Co. (STRL) after running a screen on Capital IQ for companies with: low debt levels, market caps between $100M and $500M and trailing EV/EBITDA multiples below 7x. I happen to believe that there is a lot more inefficiency in the small cap space and thus I often dig in that arena. What I quickly saw was that companies reliant on government infrastructure spending were trading at very low EV/EBITDA multiples. In fact, during my research I also came across Orion Marine Group (ORN), a company that operates in similar markets to STRL. At first I was intrigued by the valuation of ORN, but after more digging, STRL became the more compelling research candidate.

Unfortunately, I discovered the company a few weeks too late. On March 14th, 2011, the stock closed at $12.48, a price that implied a trailing free cash flow yield over 18%. Since then the stock has jumped to a price above $16 and no longer offers a sufficient margin of safety for my taste. However, I do think the stock bears watching because of the uncertainty surrounding state infrastructure spending. It is possible that the pessimism regarding states' ability to fund capital expenditures will drive the stock price down to a level that more than compensates for the inherent risks. Plus, I believe that STRL is a takeout candidate because the larger players such as Fluor and KBR may only be able to achieve growth through acquisitions over the next few years.

I should mention that this is my own personal research and the analysis and opinions presented should not be attributed to West Coast Asset Management. I hope you enjoy the piece as a I think it is representative of the type of research I like to do. For those of you who do not have time time read all 12 pages, I have included an executive summary in the first two pages of the write up. Please feel free to make comments or suggestions. I am always looking for feedback on my research, both positive and constructive.

As usual, I have put the write up in Scribd format to preserve the formatting of the charts. However, if you have trouble downloading the piece, feel free to email me and I will happily send you a copy.

Sterling Construction Co. Write Up

Monday, March 14, 2011

Please Help Japan


For anyone who has been following the events in Japan over the past week, it has been a very painful time. But, there are people there who are really suffering and need as much help as we can provide. I happen to be a member of the Japan America Business Association (JABA) at UCLA Anderson. As such, I know many students who are from Japan and are likely going to return there after graduation. Sadly, I find myself not knowing what to say to people or how to console them. How can you really convey how sorry you are after watching the images of the tsunami wiping out everything in its path? The before and after pictures of the Sendai area are breathtaking in their brutality. Personally, I feel helpless to extent that it causes a sort of paralysis. So, I have been trying to find a way to help that has the greatest potential impact. Therefore, I am hoping to use my position as a very minor celebrity in the value investing world to raise money for those affected and increase awareness of the ongoing situation in Japan.

So, this is what I am asking from you:
  1. Please help the MBA programs at UCLA Anderson, Pepperdine, and USC support the disaster relief effort by making a donation at All of the proceeds will be donated to the the US Red Cross. The acute crisis may be nearing an end (at least we all hope), but the devastation is ongoing and, as citizens of the world, we can't just forget about the people of Japan once the news cycle shifts to another topic.
  2. Keep informed about what is going on in Japan. Read newspapers, watch the news, keep up with your favorite blogs, follow Twitter. Do something to prevent yourself from moving on with your life just because the disaster didn't happen in your backyard. Because, especially if you live in California, one day it might happen here. The point is that the people of Japan deserve our empathy and for us to realize that we have an obligation to understand their plight.
  3. Finally, reach out to anyone you know who has roots in Japan. I am living vicariously through someone who is very close to me and is currently in Japan. I have to say it is so difficult that I can't imagine how hard it would be if my family, friends, and the place where I grew up were going through so much turmoil. Believe me, they need your support.
Let us all hope that the earthquake and volcanic activity subsides and that the situation with the nuclear facilities becomes more manageable soon. The Japanese people need some indication of hope so that they can move forward. In the meantime, please help any way you can.


Ben C.
The Inoculated Investor

Santangel's Review Strikes Again!

My friends at Santangel's Review are back at it again. Apparently, aside from working day and night on the upcoming newsletter, they somehow find the time to listen to the interviews recently conducted by the Financial Crisis Inquiry Commission and transcribe them for our reading pleasure. From the guys who brought us the transcript of David Einhorn's testimony, the newest transcription includes the wisdom of none other than the Oracle of Omaha himself. I don't want to spoil it for you, but I think everyone will want to hear what Warren Buffett said about what single act saved the entire financial system during the depths of the crisis. No, it wasn't the bogus bank stress tests or TARP. And is wasn't the FASB relaxing the rules on mark-to-market accounting. Have a read and see if you agree...

I also wanted to get in another shameless plug for Santangel's Review. I have inside knowledge regarding the subject of their soon-to-be-released newsletter. In fact, I expect to have a chance to read a draft this week. As such, for those of you who are high net worth individuals or who work for funds of funds, I highly recommend that you visit the website, read the free issue available there and strongly consider subscribing.

Now, without further ado, here is the transcript:

Transcript of Warren Buffett Interview With FCIC

Wednesday, March 2, 2011

Lance Helfert on CNBC Last Friday

My boss at West Coast Asset Management continues to be fixture on the TV circuit. Last Friday he was on CNBC discussing some of our research on rising input prices and the ultimate impact on clothing retailers. The question we are interested in answering is which retailers are going to be able to pass on higher input costs to consumers, assuming cotton prices stay at elevated levels for a while. Our thesis is that investors in clothing retail stocks should make sure the companies that they own have pricing power and are not dependent on discounting. See if you agree...