Sky Memos - Business & Investing

The Hidden Leverage in Insurance: A Dual-Engine ROE Machine

2026-05-31T06:44:33.905-05:00

What if the most powerful form of leverage requires no debt at all? Consider the case of an insurance company which usually has two businesses operating in parallel - an insurance operation (underwriting, reserving, and claims management) and an investment operation (deploying premiums into financial assets). While running both efficiently is widely discussed, far less attention is paid to the underlying leverage mechanics embedded in each -- leverage that, when working in concert, can dramatically boost returns on equity.

Operating Leverage

In traditional finance literature, operating leverage describes how fixed costs enhance profit growth relative to revenue growth. When a company's cost base is largely fixed - think manufacturing plants, software infrastructure, or branded retail - incremental revenue flows almost entirely to operating income. Therefore, profit grows faster than revenue, and that ratio is the essence of operating leverage.

Consider a software company with $100 million in revenue and $70 million in fixed costs, generating $30 million in operating income. A 20% revenue increase to $120 million , with costs unchanged, pushes operating income to $50 million - a 67% gain from a 20% revenue increase, implying a degree of operating leverage of roughly 3.3x. The risk, of course, is symmetric: fixed costs also crush earnings when revenue falls.

In the insurance world, operating leverage means something conceptually different. It is not about cost structure; it is about how much liability the insurer is carrying relative to its equity cushion. An insurer collects premiums upfront against uncertain future claims, and surplus (shareholders' equity) is the capital buffer that absorbs losses if claims exceed expectations. The premium-to-surplus ratio - say 2:1 or 3:1 - captures exactly this: how much underwriting exposure sits atop each dollar of equity. Higher ratios amplify returns when underwriting is profitable, but create genuine solvency risk when claims spike.

As Exhibit I illustrates, ROE rises sharply as profit margins improve at a given leverage level, and this effect multiplies further as leverage increases. An insurer with $1 billion in premiums written on $400 million of surplus has a 2.5x premium-to-surplus ratio. If the combined ratio (inverse of operating margin) is 95% (meaning 5% operating margin), ROE is about 13%. If leverage increases to 3x, ROE increases to 15% and 25% with 90% combined ratio.

Exhibit I

Source: Author (USD millions, Simple example without tax consideration)

But the downside is equally powerful - a 3x leverage scenario can erode surplus by 60% in a bad year leading to balance sheet / solvency risk. This is precisely why insurance companies are regulated around capital ratios rather than purely profitability metrics - the operating leverage in their model is a solvency concern first, and a return-on-equity consideration second. Regulators (and rating agencies like A.M. Best) watch this ratio closely - a ratio above ~3x is typically considered aggressive.

Therefore, Management quality becomes a critical variable: great underwriting discipline can compound returns significantly; poor discipline can be existentially dangerous.

Financial Leverage

If operating leverage tells us how efficiently the insurer writes business, financial leverage tells us how powerfully it deploys the proceeds. Traditional financial leverage means borrowing money to amplify returns to equity holders: a company borrows at a fixed interest rate and deploys the combined capital to generate returns above that cost, with the excess accruing to equity holders. If a company has $400 million of equity and $400 million of debt generating a 10% return on $800 million of assets, net of 5% interest on debt, the equity holders earn 15% ROE versus 10% unlevered (assuming no debt).

Insurance financial leverage is fundamentally different. Insurers, typically, do not need to borrow to achieve leverage. Instead, policyholders pay premiums upfront, before claims are settled. These premiums accumulate (partly) as investable float - cash in hand to be deployed. Combined with equity, this float creates an investment asset base that is a multiple of equity alone, generating investment income on both the equity capital and the policyholder liabilities.

As Exhibit II shows, ROE scales directly with investment return at any given leverage level, and the effect compounds as the investment assets-to-equity ratio rises. Mr. Warren Buffett has famously described float as essentially free leverage - and when underwriting is profitable, the cost of that float is actually negative, meaning the insurer is being paid to hold it.

Exhibit II

Source: Author (USD millions, Simple example without tax consideration)

The Lollapalooza Effect

Mr. Charlie Munger mentions when multiple mental models align in the same direction, you get a lollapalooza effect, producing an outsized outcome. Insurance, at its best, is a textbook example.

When both levers work together - disciplined underwriting generating cheap float, and that float deployed into good investments - the ROE machine becomes self-reinforcing. Each profitable underwriting year grows surplus, enabling more premium volume; each investment gain deepens the buffer

The below (Exhibit III) demonstrates the ROE in various scenarios.

Exhibit III

Source: Author (*approximation; USD millions, Simple example without tax consideration)

A few conclusions can be inferred from the above. In good times, both levers firing together can push towards an exceptional ROE (~60% in above example). In bad years, investment return acts as a natural shock absorber. Only when both engines fail simultaneously - catastrophic losses compounded by poor investment returns - does genuine solvency risk emerge.

The next time you evaluate an insurer, ask not just whether underwriting is profitable, but whether management understands - and actively manages - both leverages simultaneously. That combination - compounding ROE over decades where the two forms of leverage reinforce each other - is what separates great insurance businesses from merely adequate ones.

Abhay Srivastava is the Founder and Managing Member of AS Investment Partners LLC, a value investing firm (www.asinvpartners.com).

Abhay can be reached at abhay@asinvpartners.com

Please see the full disclaimer here

IG Design Group (IGR): A Boring Business at a Bargain Price

2026-04-26T07:57:00.001-05:00

Disclaimer: The views expressed here are mine and may change without notice. Past performance is not indicative of future results. All investments carry risk, including financial loss. This analysis is for educational purposes only and does not constitute investment advice or recommendations of any kind. Conduct your own research and seek professional advice before investing. Please see important disclaimers here and here.

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I prefer investing in great compounders bought cheaply. But that opportunity doesn't always present itself. More often, it's basic, boring businesses that offer the best value -- and patience is what separates those who capture it from those who don't. IG Design Group (IGR) seems one such situation.

IGR trades at a market cap of roughly $72 million, while its tangible assets are worth approximately $115 million. On an earnings basis, the stock looks equally cheap — EV/EBIT of 5–6x using management's FY2026 guidance, with six months of actual data already reported. For context, IGR is a 46-year-old gift supplies manufacturer (though roughly half is sourced) making gift wrap, greeting cards, gift bags, Christmas crackers, partyware, and stationery.

The recent past has not been smooth — an acquisitive strategy misfired on the US front, and DG Americas was eventually divested after a long struggle compounded by external headwinds. A dividend cut along the way has likely weighed on the stock, contributing to its current undervaluation. What remains is a cleaner, more focused business: DG International, operating across the UK, Europe, and Australia.

My investment approach focuses on identifying securities that offer limited downside risk (margin of safety) and potential upside. At current prices, IGR offers a meaningful margin of safety on multiple dimensions.

The downside case looks well-protected. The stock trades below working capital of approximately $100 million — not just below book value, which is already rare enough. IGR's operating margin in remaining segment is near its lowest levels in a decade, suggesting potential for improvement. No net debt means the usual cause of permanent capital loss is likely off the table. Management is actively working to close the gap between price and intrinsic value: the US business has been sold, the balance sheet is clean, costs are being cut, and the company has signaled intentions to return capital to shareholders. Importantly, the founder sits on the board with a 20%+ ownership stake — a meaningful alignment of interest. The DG Americas sale and balance sheet also carry some optionality that isn't fully visible yet.

On testing the quality of those tangible assets: the bulk of the $115 million is in receivables and inventories. The receivables seem to be in good shape — customers include Costco, Aldi, and Tesco. Inventories carry more uncertainty and could face impairment, but the steep discount to tangible book and reserves provide a reasonable cushion even in a stress scenario.

IGR doesn't have an obvious moat, and its returns on capital reflect that. But the (retained) business has been consistently profitable over the past decade, which I think is underappreciated. That resilience comes from strong distribution and sticky customer relationships: IGR supplies over 4,300 retailers across 70 countries, moving north of 550 million products annually. Those relationships don't form overnight, and they don't unravel easily. Long-term service, design expertise, and market insight keep large retailers from switching suppliers casually.

IGR's future business prospects are not bad. The underlying industry is mature. Gift packaging grows at mid-single digits globally — party products are growing faster while traditional greeting cards are in structural decline as younger consumers shift to digital. Sustainability is an important structural shift, with plastic-free and recycled materials becoming a baseline expectation rather than a differentiator. The 2025 tariffs disrupted Asian-sourced supply chains, accelerating a broader near-shoring trend toward Mexico, India, and Eastern Europe. IGR is navigating this by leaning into premiumisation — higher-margin, design-led products that consumers increasingly see as an extension of the gift itself. That's a sensible strategic direction.

This is not a clean, high-conviction bet. Management execution remains the central uncertainty — the same team oversaw an acquisitive strategy that required a painful unwind. The business is cyclical and exposed to consumer discretionary spending. And the returns on capital, while consistent, are not high. For those reasons, this is a small allocation rather than a full position.

IGR checks the boxes that matter most in a value situation: cheap on assets, cheap on earnings, debt-free, and a founder with skin in the game. The business will never win a beauty contest, but a decade of consistent profitability and a blue-chip retailer base seem to be worth more than they look at this price. I like the IGR opportunity here — but only for investors comfortable with the wait.

Abhay Srivastava is the Founder and Managing Member of AS Investment Partners LLC, a value investing firm (www.asinvpartners.com).

Abhay can be reached at abhay@asinvpartners.com

Please see the full disclaimer here

Investment Process: 9 Investing Thoughts

2026-03-31T08:22:00.003-05:00

In this post, I share the key principles I try to consistently apply in my investment process.

1. Position sizing matters.

Position sizing is a key driver of investment success. While it’s easy to keep low-conviction ideas small, it’s equally important to reflect when those ideas work. If a small position becomes a winner, it’s worth asking: should it have been larger? Can you make it a bigger size the next time such situation comes around?

2. Embrace “I don’t know.”

It’s important not to invest hard-earned money in businesses you don’t understand. True understanding goes beyond surface-level familiarity—it includes understanding the economics of the business and its competitive positioning. Too often, people invest for weak reasons: “a friend recommended it,” “it’s already gone up,” “the price is down so it must be cheap,” or “I just want to take a punt.” These are not sound foundations for investing.

3. Avoid rigid adherence to a single style.

Public markets are largely driven by human behavior, as participants are price setters. This naturally creates pockets of irrationality. An open-minded investor who is not overly constrained by a single style is better positioned to identify and capitalize on such opportunities.

4. Stay disciplined.

Breaking your own investing principles—especially those that have worked over time—can be costly .At the same time, discipline around sizing—whether at the sector, industry, or individual stock level—is critical and should not be compromised. Discipline is often the difference between long-term success and failure.

Source: Custom illustration generated using AI (ChatGPT)

5. Patience is an edge.

You don’t have to act immediately. Waiting for a price that offers an adequate margin of safety can lead to better outcomes. Acting in haste often results in suboptimal decisions.

6. Be skeptical of macro excuses.

When companies report weak results, management teams often attribute them to macroeconomic factors. This should be examined carefully. In many cases, the real issues are company-specific—such as internal conflicts, bloated cost structures, or misaligned priorities that do not serve shareholders well.

7. Think in probabilities.

Estimating upside and downside is a useful starting point, but assigning probabilities to different outcomes is equally important. These probabilities are often subjective and tied to your level of conviction, but they help frame decisions more rigorously.

8. Follow turnarounds, but with caution.

Turnaround situations can be risky. However, tracking them as they begin to de-risk—through improving fundamentals, low valuations, strong balance sheets, or early signs of strategic success—can uncover attractive opportunities.

9. Avoid blanket exclusions.

There are always exceptions in investing. Dismissing entire industries or companies based on labels (e.g., “cyclical” or “poor historical performance”) can lead to missed opportunities. Each situation deserves individual analysis.

Abhay Srivastava is the Founder and Managing Member of AS Investment Partners LLC, a value investing firm (www.asinvpartners.com).

Abhay can be reached at abhay@asinvpartners.com

Please see the full disclaimer here

Investment Process: Management and Board - Part II

2026-02-27T07:06:00.002-06:00

This post is the second in a series following Management and Board – Part I. As a reminder, my objective is to highlight a few underappreciated governance features that I have found particularly useful when evaluating management teams and boards—and deciding whether they are truly worthy partners for deploying hard-earned capital. These should be viewed as signals, not definitive conclusions.

The Weightings of Management Incentives

It is common to hear that management compensation should be aligned with shareholder interests. What is discussed less often is the weighting of those performance criteria.

The weightings reveal where management will focus its energy. For example, if a CEO’s financial targets are weighted 75% toward revenue growth and only 25% toward return on equity, the message is clear: growth will likely be prioritized over efficient capital allocation.

Performance-based incentives heavily skewed toward top-line expansion can unintentionally encourage value-destructive behavior—empire building, aggressive M&A, or growth at any cost. The structure matters just as much as the headline alignment.

Source: Custom illustration generated using AI (ChatGPT)

Management-Board interrelationships

While companies disclose related-party transactions, those disclosures alone are often insufficient to determine true independence.

Board members and executives may share long-standing personal or professional relationships that do not formally qualify as related-party transactions, yet still influence judgment. Prior affiliations through employment, shared investments, or overlapping networks can quietly dilute oversight—even when regulatory independence standards are technically satisfied.

Such dynamics can create an environment where a CEO engages in shareholder-unfriendly behavior: obscuring unfavorable developments, allocating capital poorly, or pursuing initiatives that serve management more than owners.

True independence is not merely a regulatory designation—it is a matter of conduct and behavior.

The Peer group Question

A company’s peer group in the proxy statement is meant to benchmark executive compensation, performance, and financial metrics against comparable organizations. It provides justification to shareholders that compensation is competitive and aligned with market standards.

But what happens when the selected peer group is not truly comparable—from a business model, scale, or operational standpoint?

An irrelevant peer set can inflate compensation structures and distort performance expectations. Size, margins, capital intensity, and risk profile all matter. Peer selection is not a neutral exercise—it shapes pay and, indirectly, behavior.

Management's Integrity and Ability

An aligned management team with shareholders (as discussed in Part I) often mitigates integrity concerns—but not always. Issues can arise from incompetence, incentives, pressure, or individual behavior.

Some red flags I have observed:

A controlling shareholder acting in a self-serving manner at the expense of minority shareholders.
A CFO repeatedly stating there is no near-term need for capital, followed by an unexpected capital raise.
Buying back stock at inflated valuations to signal confidence.
A terrible quarterly result released shortly after issuing healthy guidance.
Repeatedly blaming macroeconomic factors while competitors perform relatively well.
Taking on excessive debt to fund high-risk acquisitions or projects.
Pursuing transactions that appear designed to mask underlying operational weaknesses (slowing organic growth, bloated cost structures, etc.).

The solution is straightforward but demanding: Study the historical record of what management said and then what it did. Compare prior guidance to outcomes. Examine how deals are financed. Actions compound; words evaporate.

Culture and Its Preservation

When a company’s economics are tightly linked to its culture, that culture becomes a strategic asset.

In acquisitions, management often promises cost synergies. But if the target’s value is rooted in people and culture, aggressive cost-cutting may erode the very asset being acquired. Once key employees leave, culture deteriorates—and so can performance.

Synergies on paper are easier than synergies in people.

Accounting Quality

In my view, accounting quality is one of the most underappreciated indicators of management temperament. Does management recognize costs promptly? Build adequate reserves? Avoid income-inflating adjustments and one-time “add-backs”? Or do results consistently rely on aggressive assumptions?

Financial statements reflect philosophy. Conservative accounting signals long-term orientation; aggressive presentation raises a simple question: Do you want to partner with a management team that consistently pushes the boundary in showcasing its financials?

Abhay Srivastava is the Founder and Managing Member of AS Investment Partners LLC, a value investing firm (www.asinvpartners.com).

Abhay can be reached at abhay@asinvpartners.com

Please see the full disclaimer here

Investment Process: Management and Board - Part I

2025-12-27T08:33:00.239-06:00

This topic has been widely explored, and much has already been written about it. Rather than revisiting familiar arguments, my aim is to highlight a handful of underappreciated governance features that I have found particularly useful when evaluating management teams and boards—and deciding whether they are truly worthy partners for deploying hard-earned capital.

Focusing solely on management and board compensation often provides an incomplete picture of whether leadership is aligned with shareholders. Many of the more revealing signals are embedded in less obvious places, such as a company’s bylaws and proxy statements. Below, I outline four such indicators. These should be viewed as signals, not definitive conclusions.

Plurality Voting in Uncontested Elections

First, some definitions. Under plurality voting, board nominees who receive the most “for” votes are elected. Under majority voting, nominees must receive more “for” votes than “against” votes. A contested election occurs when there are more nominees than available board seats.

Consider a public company with two board seats up for election and exactly two nominees (uncontested), using a plurality voting standard. Suppose there are one hundred shareholders, but only one shareholder votes “for” the nominees while the remaining 99 abstain. Under plurality voting, both nominees would still be elected. While technically valid, this outcome hardly seems shareholder-friendly. In practice, plurality voting often functions as a rubber stamp, insulating directors from genuine accountability and allowing them to be elected without meaningful shareholder support.

In response to criticism, some boards have adopted resignation policies requiring directors who fail to receive majority support to tender their resignation. On the surface, this appears fair. However, the fairness is often undermined by provisions that allow the board to reject the resignation. In effect, a director who fails to secure majority support can remain in office if the board simply declines to accept the resignation. Investors should be cautious when such methods appear which are designed to entrench the board rather than respect shareholders.

Source: Custom illustration generated using AI (ChatGPT)

Supermajority Vote Requirement

Most corporate and governance decisions are approved by a simple majority (more than 50%) of outstanding shares. However, some companies require higher (supermajority) thresholds -- 66%, 75%, or even 80% -- to approve actions such as removing directors, amending bylaws, or approving mergers.

Given that many shareholders are passive or disengaged, achieving such high approval thresholds can be difficult in practice. Consequently, existing governance structures -- and the management teams that benefit from them -- can become effectively locked in, limiting shareholders’ ability to enact change even when there is broad dissatisfaction.

High Salaries and Age

Another potential red flag arises when a large portion of the board is near retirement age and board compensation represents a primary source of income. In such cases, directors may be more inclined to align themselves with management—who influence board pay—than with shareholders.

This dynamic is especially concerning when directors and executives have limited personal capital at risk, holding mainly stock grants or options rather than shares purchased with their own money in the open market. In effect, such board composition usually weakens board independence and alignment with long-term shareholder interests.

"Technical" Methods to Subdue Shareholders

Companies can also discourage shareholder voice through procedural and technical hurdles. Failure to meet these requirements can result in the disqualification of shareholder proposals, including director nominations. Examples include:

Extensive disclosure requirements regarding derivatives, synthetic positions, or short interests.
Lengthy and complex questionnaires with tight completion deadlines.
Mandatory venue selection (usually Delaware) for legal disputes, limiting shareholder flexibility.
Fixed board sizes that restrict the addition of new directors.
Provisions requiring shareholders to pay the company’s legal fees if they lose a case.
Lengthy ownership thresholds to call special meetings.

Individually, these provisions may be defensible. Collectively, they can serve to suppress shareholder influence and protect incumbent boards.

Importantly, these are signals to be evaluated in context, not automatic ways to reject board and management. Reasonable arguments can often be made for their existence -- particularly when executives and directors have substantial “skin in the game,” demonstrated by meaningful open-market purchases of company stock and a proven record of long-term value creation. All factors should be considered before answering the question, in Mr. Buffett's words:

“You want to figure out ... how well that they treat their owners...Read the proxy statements, see what they think of — see how they treat themselves versus how they treat the shareholders. … The poor managers also turn out to be the ones that really don’t think that much about the shareholders, too. The two often go hand in hand.”

Abhay Srivastava is the Founder and Managing Member of AS Investment Partners LLC, a value investing firm (www.asinvpartners.com).

Abhay can be reached at abhay@asinvpartners.com

Please see the full disclaimer here

Alliance Aviation Services (ASX:AQZ)

2025-11-27T17:53:00.001-06:00

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Price is what you pay, Value is what you get - Warren Buffett

It is not very common that a company becomes cheap on both asset value and earning power value at the same time. Alliance Aviation could be one such case.

Alliance’s core business is transporting workers to remote mining locations across Australia. These sites are often inaccessible by road, making aviation not just a convenience but a necessity. This gives Alliance a somewhat-essential role in the mining ecosystem. Barriers to entry are not low: the company owns a fleet of aircraft, operates across a national infrastructure network, and holds the necessary regulatory approvals. The company also leases its aircrafts to third-party airline operators while also providing crew and maintenance services.

Despite this positioning, the stock declined nearly 50% over a short period following two negative developments: a) a reduction in earnings guidance relative to market expectations, and b) the earlier-than-expected departure of its founder.

Alliance now trades at a market capitalization of roughly A$219 million (A$ is Australian Dollar currency), despite tangible book value around A$459 million (after deducting capitalized costs) and near an 8-year low share price. At first glance, such a discount might suggest structural problems or “classic” airline economics with chronic losses. However, that is not the case here.

First, the company has been consistently profitable since 2014 and management expects continued profitability in the coming fiscal year, although at a lower level.

Second, unlike commercial airlines—where demand is volatile and sensitive to macro conditions—Alliance operates predominantly under long-term contracts. This stability is reflected in the company’s unit economics (Table I), which show that Alliance has generated positive profit per aircraft on average since 2015. In FY2025, 97%+ of the flying hours were under long-term customer contracts.

This distinction is important: airline operation is a high fixed-cost business, so utilization and passenger volumes are critical drivers of profitability. Through its contracted model, Alliance has historically maintained relatively stable utilization and margins compared to traditional airlines.

Table I

Source: Company filings and Author calculations

The rapid 50% stock decline between October 31 and November 18 was an inauspicious start to new managing director's tenure. But company has wasted no time in responding to the situation. They are moving quickly to both align company's revenue with higher cost, and implementing operational changes to improve the efficiency. Since early November, Alliance has been renegotiating key contracts to reflect industry-wide inflation induced cost pressures.It is also exploring sale of non-core assets to reduce leverage, and reviewing procurement practices and renegotiating supplier contracts.

While these actions implicitly acknowledge that management could have responded earlier to rising costs, they also demonstrate a willingness to address missteps. Additionally, recent insider share purchases around current price levels signal management’s confidence in the company’s long-term intrinsic value. Importantly, most of the factors behind the earnings downgrade appear short-term in nature rather than structural.

From an asset perspective, Alliance offers a strong margin of safety. As the market price is significantly below tangible book value, this warrants scrutiny of the book value. It primarily consists of aircraft assets. However, these aircraft valuations have been independently verified by a third party (per the company), reducing the risk of a major write-down. Even allowing for valuation errors, a 50%+ discount to tangible book still provides a substantial buffer.

From an earnings perspective, the company's market price is not expensive. Over FY2015 to FY2026 (management guidance), profit per aircraft has averaged approximately A$785,000 versus exceeding A$1 million in FY2025. Based on this unit economics framework, the stock implies an earning yield of roughly 20%. Even assuming management fails to recover margins and the reduced guidance represents a new normal, the stock trades at under 7x earnings—equivalent to a ~15% earnings yield. As short-term headwinds subside, I believe Alliance has the potential to move closer to its normalized earning power.

That said, the investment is not without risks. Management execution and mining industry cyclicality remain key concerns. For these reasons, this is not a “full position,” but rather a situation that merits a small allocation.

Based on the valuation support from both assets and earnings, along with the potential for normalization over time, I like Alliance Aviation’s stock. It offers a meaningful margin of safety and the prospect of attractive long-term returns from both an asset value and earning power perspective.

Abhay Srivastava is the Founder and Managing Member of AS Investment Partners LLC, a value investing firm (www.asinvpartners.com).

Abhay can be reached at abhay@asinvpartners.com

Please see the full disclaimer here

Hurco Companies (HURC)

2025-10-28T08:10:00.007-05:00

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Value with better odds of success can take various forms — and Hurco Companies may be one such example.

Hurco manufactures Computer Numerical Control (CNC) machine tools for the metal-cutting industry under three primary brands: Milltronics (value-oriented customers), Hurco (productivity and profitability-focused), and Takumi (high-end machines). The company is vertically integrated, developing its own machines, software, and controls. Its customers include precision tool, die, and mold manufacturers, independent job shops, and specialized short-run production firms.

Despite a tangible book value of $195 million, including $44 million in net cash, Hurco’s market capitalization stands at just $116 million, about 40% discount to book value. This depressed valuation reflects soft industry conditions. The machine tools sector is highly cyclical, with demand that can change abruptly.

Beyond the low valuation, several factors increase the margin of safety. The company has suspended its dividend and is instead repurchasing shares — a clear sign of management’s confidence and a value-accretive use of capital when shares trade below intrinsic value.

Hurco also maintains a debt-free balance sheet, an important strength in a cyclical industry. Additionally, the company owns its 165,000-square-foot Indianapolis headquarters, carried on the books at historical cost. Based on comparable nearby listings, the property could be worth over $15 million, suggesting tangible book value is understated.

That said, the investment is not without its challenges. Hurco is losing money in the current down cycle due to lower volumes and product price reductions. Still, a solid cash position and management’s proactive actions (reducing working capital and cutting costs) are helping to preserve financial strength. Management has also been personally purchasing shares, signaling their view that the stock is undervalued.

Source

Risks include a large portion of cash held overseas and manufacturing operations located primarily outside the U.S., which introduce geopolitical and currency uncertainties. Furthermore, the company’s returns on capital (Table I) are below my ideal levels, likely a result of high fixed costs and intense competition.

Table I

(in USD thousands)

Source: Company filings, and my calculations

Over the business cycle (2018 peak to 2024 trough), the company's average profit margin has been about 4%. On roughly $250 million normalized revenue, this implies about $10 million operating profit — a 14% yield on an enterprise value of $72 million ($116 million market cap less $44 million in cash). And, on peak $30 million profit, the enterprise value is just 2.5 times the operating profit (40%+ yield). Hurco's valuation is attractive (Table II), trading at the lowest Price to Book multiple of its entire peer group, despite having one of the best balance sheet.

Table II

(in USD millions)

Source: Yahoo Finance, and my calculations

In summary, while Hurco may not be a top-tier franchise, its depressed valuation, strong balance sheet, and shareholder-friendly management offer a margin of safety. For patient investors, owning a basket of such undervalued, asset-backed cyclicals can yield favorable outcomes over time.

Ultimately, my goal is to find value with better odds of success—purchases made with downside protection and upside potential. Hurco appears to fit that description.

Abhay Srivastava is the Founder and Managing Member of AS Investment Partners LLC, a value investing firm (www.asinvpartners.com).

Abhay can be reached at abhay@asinvpartners.com

Please see the full disclaimer here

Webco Industries (WEBC)

2025-09-26T10:25:00.000-05:00

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At first glance, Webco Industries looks like a classic value setup. The stock trades at just 56% of tangible book value, has a consistent history of generating operating income, carries low debt, has significant insider ownership, and is repurchasing shares. On the surface, these are all attractive traits for a value investor. However, despite these positives, Webco does not align with my investment philosophy.

There are several reasons for this:

First, while the stock looks cheap relative to tangible book, but nearly all of that book value sits in inventory—primarily steel, since Webco manufactures various types of steel tubes. Steel is a tradable asset, but its value fluctuates with commodity prices, making book value a less reliable margin-of-safety measure.

Second, analyzing the financial statements, I see capital expenditures have exceeded depreciation for nearly a decade (Table I). This suggests that most earnings are reinvested just to likely sustain operations, leaving little cash flow for shareholders. (I note “likely” because I do not have long-term data on product volumes sold.)

Table I

(all figures in USD thousand)

Source: Company filings

Third, the company’s return on capital does not meet my standards. Moreover, over time, retained capital has not produced proportional or higher gains in market value (Table II). This reflects the company’s structural economics: low profit margins, the commodity nature of its product, and a high fixed-cost base. That said, management deserves credit for leverage management given the nature of the business.

Table II

Source: Company filings, Yahoo Finance, My calculations

My investment philosophy emphasizes protecting each dollar invested. Despite Webco’s apparent cheapness, its inventory composition, capital-intensive operations, and modest returns on capital limit the margin of safety. Both quantitatively and qualitatively, the setup does not meet my criteria. For these reasons, I will pass on the stock.

Abhay Srivastava is the Founder and Managing Member of AS Investment Partners LLC, a value investing firm (www.asinvpartners.com).

Abhay can be reached at abhay@asinvpartners.com

Please see the full disclaimer here

Crest Nicholson (CRST)

2025-09-10T10:49:00.002-05:00

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Apart from Beazer Homes in the U.S. homebuilding industry, I also find value in select U.K. homebuilders that appear temporarily out of favor. One such company is Crest Nicholson, which the market seems to be mispricing.

Crest currently trades at a market capitalization of roughly £380 million, despite holding tangible book value above £700 million and sitting at a 10-year low. At first glance, one might assume such a steep discount implies heavy losses. But that isn’t the case here. In fact, Crest remains profitable and carries only modest debt of around £72 million—just about 10% of equity.

It is no secret that the UK homebuilding industry is going through tough times. Higher interest rates and elevated home prices have pushed affordability out of reach for many buyers, while inflation has squeezed homebuilder margins. The industry has also been weighed down by government mandates requiring homebuilders to remediate potential fire safety hazards following the Grenfell tragedy. That said, several factors create a margin of safety at current levels.

Crest trades at about a 45% discount to book value, which is largely comprised of land and buildings. These assets are unlikely to lose significant value, as land generally appreciates with inflation due to rising development costs. In fact, U.K. home values, when adjusted for inflation, have been flat since 2010 and down since 2022. In addition, Crest carries low debt, giving it resilience through industry downturns.

Looking at profitability, the company has a satisfactory exhibit during the past 10 years. For the fiscal years 2015-2024, the earnings averaged £97 million (before exceptional items such as fire safety provisions).

As the short-term headwinds described above fade, Crest should be able to return closer to its normal earning power. Encouragingly, the company has already completed over 90% of the required fire safety assessments, reducing a major overhang.

Table I

Table II

Source: company filings and author calculations

Crest is not without drawbacks. Returns on capital and equity are only moderate (Table II), reflecting the commoditized nature of its product. The balance sheet shows assets and retained earnings growing in tandem, but without clear signs of operational improvement—something the new CEO will hopefully address. Its focus on mid-luxury homes also increases vulnerability in today’s affordability-constrained market. And while the fire safety issue is largely addressed, future regulatory changes remain an unpredictable risk. For this reason, investments like Crest are often best approached within a basket strategy rather than as a single concentrated position.

Currently nobody wants to own UK homebuilders. However, I like businesses in such unpopular industries where I see margin of safety and potential for generating satisfactory over the long-run.

Abhay Srivastava is the Founder and Managing Member of AS Investment Partners LLC, a value investing firm (www.asinvpartners.com).

Abhay can be reached at abhay@asinvpartners.com

Please see the full disclaimer here

Helix Energy Solutions (HLX)

2025-08-30T09:11:00.000-05:00

________________________________

I am looking for businesses trading at a discount to intrinsic value where management is actively working to close that gap. Helix Energy Solutions seems to fit this framework. The company operates specialized vessels that provide offshore oil producers with services such as production enhancement, well decommissioning, support for offshore renewable projects, and related activities. At current levels, the stock embeds a meaningful margin of safety.

Several factors support the margin of safety in Helix's case.

First, the company trades at roughly $980 million despite a tangible book value nearly $1.5 billion and two to three times replacement cost (based on my estimates). Some temporary factors have caused this market pessimism. In the North Sea, offshore activity is pressured by volatile oil prices, potential tax policy changes, and geopolitical uncertainty. Additionally, one of Helix’s vessels is temporarily out of service for a required regulatory docking. Moreover, the customer's planning, engineering and permitting has caused delays in Helix's vessel deployment.

Ordinarily, a company trading at such a large discount to its intrinsic value would be losing money. However, Helix remains profitable. In the first six months of 2025, the company generated $84 million in operating profit, and over the past five years it has averaged roughly $169 million annually.

Second, the balance sheet is strong with no net debt and no significant maturities until 2029 - an important positive factor as Helix is involved in a cyclical industry. Third, management has been returning capital to shareholders through buybacks and has committed to deploying at least 25% of free cash flow toward repurchases. Buying shares below intrinsic value creates meaningful accretion for remaining shareholders. Lastly, Helix has a backlog exceeding $1.4 billion, slightly above the company’s trailing twelve-month revenue, providing good visibility into future cash flows.

Helix’s operating model provides additional upside drivers: a) It is largely a fixed cost business. Thus, as utilization increased from diminishing short-term issues, the cash flows should enhance, b) They provide an integrated service to manage all aspects of full-field decommissioning. This enhances their value proposition in addition to enhancing the life of wells, c) The company completed it major growth capital investments prior to Covid and now only incurs maintenance capital expenses. Accounting-wise, the result is to show a small operating income on income statement while the free cash flow is much higher.

Management is well aligned: the CEO’s stock ownership far exceeds his cash compensation, incentivizing value creation over empire building. His reputation is generally good : on Glassdoor, Helix holds a modest rating of about 3.5/5 in Houston, with roughly 88% of employees indicating they would recommend the company to a friend. On Comparably, he carries a CEO approval score of 73/100, placing him in the top quartile relative to peers.

On closing the value gap, management has taken tangible steps to strengthen the company’s positioning: (1) share repurchases, (2) dilutive convertible debt retirement last year, and (3) diversification of the busines beyond offshore oil markets into subsea robotics and wind-trenching.

As the short-term problems ease and growth opportunities in offshore operating expense and decommissioning (per company) unfold, I expect company's vessels utilization to increase leading to growth in cash flows and likely market prices. Even in the near term, the company has guided 2025 free cash flow in the range of $90 million to $140 million implying 9% to 14% yield when AA corporate bond yields 4.6%. Researching various sources gives me the belief that supply for new build is very low. Rather older vessels are upgraded and shipyards remain focused on other vessel classes.

The company is not without risks. A sustained decline in oil prices could prompt offshore drillers to scale back production, and in a liquidation scenario Helix’s assets may not be easily converted into cash given its relatively low working-capital intensity. That said, there are mitigating factors. The industry tends to be somewhat self-correcting, and Helix’s business is more closely linked to operators’ operating expenditures rather than capital expenditures, which are typically the first to be reduced in downturns. Offshore production also has a lower cost per barrel compared to shale, and certain activities—such as well abandonment—are legally mandated, ensuring a baseline of demand. In these types of investment situations, a group operation of such stocks together with patience usually results in fruitful results.

Based on the facts and reasoning outlined above, I like Helix’s common stock as it offers an asymmetric risk and reward: a significant margin of safety, aligned management, visible cash flows and the potential for attractive long-term returns while the management is trying to close the intrinsic value gap.

Abhay Srivastava is the Founder and Managing Member of AS Investment Partners LLC, a value investing firm (www.asinvpartners.com).

Abhay can be reached at abhay@asinvpartners.com

Please see the full disclaimer here

Manhattan Bridge Capital (LOAN)

2025-08-11T07:30:00.000-05:00

________________________________

Manhattan Bridge Capital provides short-term loans for residential construction and renovation. Its operating model is designed to keep risk low while delivering steady returns on both existing and new capital.

source

Three aspects of their business model stand out:

a) Strong value proposition – Professional real estate investors often acquire properties below market value through distressed sales, estates, or short sales. These transactions require quick, contingency-free closings—usually in cash. LOAN fills this niche by offering fast financing (3–10 business days) but at high interest rates. These lending activities usually work with strong relationships, which LOAN has developed in New York metropolitan market over three decades.

b) LOAN takes minimal risk – It minimizes credit risk by taking a first lien position, securing loans with both real estate collateral and personal guarantees from borrowers. Loans are short-term (weighted average term 6+ months), allowing the company to quickly adapt lending criteria to changing market conditions - if economy is getting weak they can become stricter.

c) Attractive business economics – LOAN generates return on assets (ROA) in range of 7% to 8% which is typically higher than banks (<2%), driven by their charging higher interest rates (referenced above). Combine this leverage, they are able to generate mid-teen return on equity.

All the above factors have led to a consistent record of generating low-teens return on equity while not taking enough risk and leverage (higher Equity to Assets is better).

source: SEC filings and author calculations

Moreover, the company has compounded the incremental capital at low-mid teens without relying heavily on debt.

source: SEC filings and author calculations

How much can a seller demand for a business that can compound your initial capital and subsequent capital additions at low-teens when current government bond rate is under 5%? May be two times tangible equity or even 2.5 times. You have an asset that is backed by real estate collateral. Yet, it currently trades at approximately 1.5 times tangible equity.

However, I don't like the stock yet because it doesn't provide enough margin of safety. First, the valuation is not cheap enough at 1.5 times tangible equity. Second, with a cost of debt (~8.6% as of June 2025) exceeding its ROA, sustaining a low-teens ROE may prove challenging—especially if competition increases. Third, the company faces an upcoming ~$6 million debt maturity (April 2026)—roughly equal to its annual net income—while holding only about $200 thousand in cash on the balance sheet. Together, these factors leave minimal margin for error.

My investment approach focuses prioritizes margin on safety on every dollar invested. With LOAN, I don't see enough safety in the common stock so I will stay away.

Abhay Srivastava is the Founder and Managing Member of AS Investment Partners LLC, a value investing firm (www.asinvpartners.com).

Abhay can be reached at abhay@asinvpartners.com

Please see the full disclaimer here

MasterCraft Boat Holdings (MCFT)

2025-07-27T07:33:00.001-05:00

________________________________

Once again, I am drawn to a company in a disliked and overlooked industry—a branded boat manufacturing business operating within an oligopolistic market with strong business economics.

My investment approach focuses on identifying securities that offer limited downside risk (margin of safety) and potential upside -- criteria that MasterCraft appears to satisfy. Several factors support the margin of safety in this case.

First, macroeconomic concerns, including elevated interest rates and weakening consumer demand, have dampened demand for MasterCraft's products. As a result, the company's common stock has declined significantly, recently trading near $19— near five-year lows and more than 40% below its 2023 peak.

Second, the company's balance sheet has no net debt with over $55M in net cash, representing more than 15% of its market capitalization. This provides strong financial foundation to a company operating in a cyclical industry.

Third, the company's economics further adds to the margin of safety. MasterCraft has a highly variable cost structure (rarity among manufacturing companies) which allows it to generate profits even in a low volume environment. In more challenging scenarios, the management can also generate cash by reducing the inventory levels.

Lastly, management has been repurchasing shares, signaling confidence in the company’s higher intrinsic value and further reinforcing the margin of safety.

MasterCraft posses the qualities of a good business. Its namesake brand is well regarded within the ski and wake sports community and has historically held firm market share. The pre-tax return on capital is north of 100% driven by lower capital needs to operate the business. Working capital needs are minimal, as boat dealers hold the bulk of inventory and receivables remain modest. Additionally, the capital invested in property, plant, and equipment—primarily its manufacturing facilities—is relatively limited.

The management has ably steered the company while creating value and maintaining competitive position. A closer look at the balance sheet illustrates this progress. Comparing fiscal years 2019 and 2022 as cyclical peaks, Table I shows the transformation from 2019 to 2022.

Table I

Despite a roughly 20% increase in total assets and share repurchases, shareholders’ equity nearly doubled. Over the same period, retained earnings improved by approximately $90 million—rising from a negative balance to around $46 million. The company also reduced its net debt by nearly 80%. Together, these improvements depicts a meaningful enhancement in earnings power and the company's ability to maintain its competitive position. A long-term view of the balance sheet shows a consistent pattern (Table II).

Table II

The broader boat industry has undergone a multiyear decline in volumes, yet MasterCraft has remained profitable throughout. As the industry stabilizes, a recovery in earnings appears likely. A normalized sales volume of around 2,700 units for the MasterCraft brand seems reasonable, supporting an estimated normalized earnings power of approximately $2.70 per share. In addition, the company’s net cash position contributes roughly $3.44 per share to intrinsic value, after accounting for all debt. Based on these normalized earnings, the stock is quoted at approximately six times earnings—compared to U.S. AAA corporate bonds, which are effectively priced at around eighteen times earnings.

Operating in a stable industry with a strong track record of profitability, I like MasterCraft's common stock due to its margin of safety and potential for attractive long-term returns. While I can’t predict exactly when the industry will recover—whether in six months, a year, or longer—I believe that, as a leading brand and key player in the market, MasterCraft is well-positioned for the long run. This is an example of my investment approach: identifying good businesses facing temporary headwinds, where patience is likely to be rewarded.

Editor’s Note (August 19, 2025): An earlier version of this post included incorrect numbers in the Table II. The table has been updated with accurate data.

Abhay Srivastava is the Founder and Managing Member of AS Investment Partners LLC, a value investing firm (www.asinvpartners.com).

Abhay can be reached at abhay@asinvpartners.com

Please see the full disclaimer here

Beazer Homes (BZH)

2025-06-28T07:41:00.003-05:00

________________________________

One area of bargain hunting I focus on is out-of-favor industries. Right now, homebuilders fall into that category due to widespread concerns about housing affordability. In this post, I highlight one such company where I believe the current market price likely understates the business's value to a private owner.

The safest and most potentially profitable thing is to buy something when no one likes it. Given time its popularity, and thus its price, can only go one way: up.

Howard Marks

A case in point is Beazer Homes (Ticker: BZH). In the bull market of 2023, it sold as high as $35 per share. Recently, the company's common stock was selling at $19.56, much less than the tangible book value of roughly $36 per share. This value is after deducting all liabilities and capitalized interest costs.

The foregoing assertion warrants carefully analyzing the tangible book value. The major portion of the $36 per share resides in Beazer's inventory which is primarily land and homes, based in California and the smile states. These geographies are seeing a growing population with benefits from migration from other states. These facts provide support for the $36 value. Could that inventory face impairments, like the severe 60% markdowns seen in the 2008 housing crisis? It's unlikely. First, the weak underwriting practices of the pre-2008 period have almost disappeared. Banks have stronger underwriting standards and are not issuing "easy" loans. Second, the housing market has no excess inventory as was the case in 2008. Third, there are a few foreclosures now. Fourth, more than half of Beazer's active lots are on option contracts, reducing the company's risk (in 2008, it was under 20%). Lastly, there is limited land supply due to restrictions and lack of infrastructure.

source

If the inventory is fairly secure, why can't the company still lose money with weak future demand from high-interest rates? The answer is not complicated. First, the company has had a steady record of earnings in the past 10 years. Second, inventory could be turned into cash during times of distress to pay off debt. Additionally, the company's debt profile is manageable, with no significant maturities until October 2027. Management also anticipates further debt reduction this year, supported by ongoing earnings.

Beazer’s management team has demonstrated commendable operational improvements and prudent capital allocation. The former point is evident by analyzing company's balance sheet over the past approximately 10-years.

Despite a modest 30% increase in assets and a reduction in the surplus account (with some offset from debt reduction), Beazer’s equity expanded by nearly 350%, primarily driven by retained earnings. This indicates a significant enhancement in the company’s earning power, likely reflecting improved operational performance. Furthermore, the company’s financial position strengthened remarkably, as evidenced by a substantial decline in the net debt-to-equity ratio.

On the capital allocation front, management has shown a strong understanding of how to best deploy shareholder capital, as evidenced by significant share repurchases when the stock declined.

While we remain committed to both growth and deleveraging, the current macro environment and our share price have caused us to reevaluate our capital allocation priorities, presented with the opportunity to buy back stock at less than half of book value, we think it is appropriate to slow the rate of growth in our community count and the rate at which we are deleveraging. Today, we announced that we have received board authorization to repurchase up to $100 million of our stock. That's nearly 20% of our current market cap.

- Chief Executive Officer, fiscal Q2 2025 earning call

This is precisely the kind of shareholder-aligned behavior I like to see when a company's stock is trading below intrinsic value.

Based on the facts and reasoning outlined above, I like Beazer’s common stock as it offers a significant margin of safety and the potential for attractive long-term returns. Cases like this exemplify my investment approach—seeking opportunities in unloved and hated areas of the public markets.

Abhay Srivastava is the Founder and Managing Member of AS Investment Partners LLC, a value investing firm (www.asinvpartners.com).

Abhay can be reached at abhay@asinvpartners.com

Please see the full disclaimer here

Note on Stock Writeups

2025-06-28T07:34:00.002-05:00

Dear Reader:

Thank you for visiting skymemos.com and AS Investment Partners LLC. I’ll occasionally be sharing thoughts on individual stocks on this blog. Please note that these views reflect my personal opinions and are subject to change at any time.

Our aim is to provide interesting and valuable content for our readers, clients, and prospective investors. However, we make no promises or guarantees that these ideas are right for you personally, nor can we guarantee the merits, returns, or utility of any of our ideas. Any analysis of individuals stocks and companies is intended for educational purposes only and does not constitute investment advice or recommendations of any kind.

It’s important to understand that the information provided may not align with your specific financial circumstances. We strongly encourage you to conduct your own research and consult a qualified financial advisor before making any investment decisions. Nothing on this site should be considered personalized financial advice.

Disclaimer

All information contained herein is provided “as is” and AS Investment Partners LLC (“ASIP”) expressly disclaims making any express or implied warranties with respect to the fitness of the information contained herein for any particular usage, application or purpose. Prior to making any investment decision you should consult with professional financial, legal and tax advisors to determine the appropriateness of the risks associated with such an investment. No assurance can be given that the objectives of a particular investment will be achieved or that an investor will receive a return of all or part of his or her investment. All investments involve the risk of loss, including the loss of principal. In no event shall ASIP be responsible or liable for the correctness of any material used herein or for any damage or lost opportunities resulting from the use of such material.

Users of this website may not reproduce, modify, copy, alter in any way, distribute, sell, resell, transmit, transfer, license, assign or publish any information obtained through this website without permission. ASIP and the terms, logos, and marks included herein that identify ASIP products are proprietary materials. The use of such terms, logos, and marks without the express written consent of ASIP is strictly prohibited.

Please see additional disclaimer here and AS Investment Partner’s ADV Form for more information on our company.

Investment Process: Surface Numbers Can Deceive

2025-05-30T09:47:00.000-05:00

In this post, I want to highlight how simple yet important aspects of investment analysis are often overlooked— leading to flawed decisions. Let’s walk through two common examples.

1. Insider Ownership

Financial websites often provide data on insider ownership, but relying on these sources alone can be misleading. To get a more accurate picture, start with the “Security Ownership of Directors and Executive Officers” section in the proxy statement (Schedule 14A), which details how many shares each executive and director holds. However, this is just the starting point.

Equally important is the executive compensation section of the proxy. A strong indicator of shareholder alignment is when management and board members hold more equity than they receive in cash compensation.

But even that isn’t enough. Not all equity ownership is created equal. It’s critical to distinguish between shares that were personally purchased by insiders and those that were granted by the company. This distinction matters. I’ve reviewed numerous proxy statements where a CEO appears to hold a significant equity stake—yet none (or only some) of it was bought with personal funds. That’s not genuine alignment with shareholders.

To truly understand insider alignment with shareholders, analysts must dig deeper—cross-referencing the proxy with Form 4 filings and other disclosures. The key question is: Do insiders own more stock purchased with their own money than they’ve received in cash compensation?

2. Market Capitalization

Many investors begin their analysis with data from popular financial websites. While convenient, these platforms can provide figures that are outdated or incorrect. Market capitalization is an example—typically calculated as stock price multiplied by shares outstanding—but the share count used can be incorrect.

For an accurate figure, it’s essential to verify the current number of shares outstanding. The most reliable source is the cover page of the latest 10-K or 10-Q, which reflects the share count as of the filing date. While the balance sheet and footnotes can also provide this data, they often reflect the record date rather than the latest figures. The income statement, on the other hand, reports a weighted average share count over the reporting period, which is not suitable for market cap calculations. Occasionally, proxy statements may contain the most recent share count—particularly if filed after the latest 10-K or 10-Q.

Another oversight could be the exclusion of super-voting shares from market cap calculations. These shares carry economic value and should be included—but third-party sites can omit them.

Bottom line: Always refer to the most recent SEC filings or earnings call materials for share count and include all the relevant shares including any super-voting stock to calculate the current shares outstanding.

These two examples reinforce a broader principle: overreliance on third-party data can lead to inaccurate conclusions. I’ve made these mistakes myself earlier in my career. Investors are best served by going directly to source documents—SEC filings. In investing, like in marriage, look beyond the surface—verify the full profile, not just the highlights!

Abhay Srivastava is the Founder and Managing Member of AS Investment Partners LLC, a value investing firm (www.asinvpartners.com).

Abhay can be reached at abhay@asinvpartners.com

Please see the full disclaimer here

The Buyback Bottleneck

2025-04-25T06:59:00.000-05:00

Share repurchases have become so routine that when companies don’t buy back "enough" stock, the investment community often reacts with disappointment. While there are valid (and sometimes concerning) fundamental reasons for holding off, in this post, I want to highlight some non-fundamental factors that might explain a slower-than-expected buyback pace.

Let's get right into some of these reasons.

1. Limited Liquidity: Sometimes companies authorize such large buyback programs that absorbing the full amount without affecting the stock price becomes challenging. I have seen this happen often. For instance, a company might announce a $100 million buyback after a sharp stock decline, which excites investors. But if the stock trades only $700,000 a day on an average, executing the buyback without moving the price could take months or even years.

2. Regulatory Restrictions: In some markets, regulators impose limits on the amount a company can repurchase -- say, no more than 25% of average daily volume. The result is similar to the liquidity issue above: even with the intent and cash to buy back shares, the pace is capped by rules outside the company's control.

3. Counterparty-Driven Delays (Especially with ASRs): With accelerated share repurchase (ASR) programs, companies often work with investment banks to execute large buybacks quickly. But the bank might short the stock initially and unwind takes time. This dynamic sometimes lead companies to slow their buybacks to accommodate the counterparty.

4. Signaling Effects and Company's Reputation: For companies known to be shareholder-friendly, simply announcing a buyback can lift the stock price. Ironically, this immediate bump might reduce the company’s ability to repurchase as many shares as intended — higher prices make buybacks less attractive or more expensive.

5. Tax Considerations: In some jurisdictions, repurchases above certain thresholds trigger taxes similar to those on dividends. This creates a disincentive to go beyond a set limit, even if the company has excess cash to deploy.

6. Blackout Periods: Companies often suspend buybacks during certain times — typically ahead of earnings releases — either due to regulatory requirements or internal governance policies. These “blackout” periods can explain temporary lulls in repurchase activity.

While it’s tempting to assume a company is falling short when buybacks don’t meet expectations, there are often practical constraints at play. As Mark Twain wisely put it: “It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so.”

Abhay Srivastava is the Founder and Managing Member of AS Investment Partners LLC, a value investing firm (www.asinvpartners.com).

Abhay can be reached at abhay@asinvpartners.com

Please see the full disclaimer here

Investment Process: Your Edge.

2025-03-29T07:39:00.000-05:00

The word "edge" might initially suggest something exclusive or inaccessible. On the contrary, I think an investment manager's edge could be very specific to him or her. Knowing these edges strengthens my investment process.

But why is edge important? To generate superior returns over the long by not taking enough risk. Thus, an investor has to constantly understand his or her edge. One way to do so could be by answering "What is not your edge?" For me, this includes attempting to uncover new insights on a company already covered by hundreds of analysts or making investment decisions based on others’ opinions without reviewing company filings myself.

I have read a number of investment articles that try to classify investor's edge into a few categories, with patience and long-term orientation being two of the most commonly mentioned. While most investors acknowledge their importance, I rarely see them applied consistently. In my view, an investment manager who diligently follows these principles is more likely to outperform the market. I strive to do so myself.

Nonetheless, I think edge can come in various forms. Here are some not-so-common sources of edge:

Permanent access to low-cost capital – a valuable foundation for compounding returns.

Operating within an entity with inherent financial and operational leverage – this can amplify returns.

Longevity and a deep passion for investing – allowing compounding to work its magic.

Access to industry experts – enabling better-informed decisions.

A strong reputation – which can attract unique investment opportunities.

Consistently rational decision-making – prioritizing sound judgment over brilliance.

As you can see, apart from typical sources of edge, an investor can have a specific advantage that could enhance its portfolio returns.

So, what is my edge? In addition to my endeavors of being patient and long-term oriented, one source of edge for me is having a wide mandate for investment opportunities. As Charlie Munger wisely advised, "fish where the fish are." This flexibility allows me to explore opportunities across both small and large companies, as well as mispriced securities across the capital structure, including stocks, bonds, and preferred shares.

Additionally, my focus on smaller companies has been a good hunting ground. This reduces competition because large investment firms can't buy (or buy enough) smaller stocks that can move the needle for their portfolio returns. As long as my managed assets remain relatively small, this remains a sustainable edge. However, as assets grow, this advantage may diminish—requiring a shift to other sources of edge.

In conclusion, every investor should understand their unique edge, as that could allow them to generate superior returns. Moreover, recognizing that one’s edge can evolve over time is equally important. Edge can be both tangible and intangible, and staying adaptable ensures continued investment success. That is my objective.

_______________________________________________________________________________

Abhay Srivastava is the Founder and Managing Member of AS Investment Partners LLC, a value investing firm (www.asinvpartners.com).

Abhay can be reached at abhay@asinvpartners.com

Please see the full disclaimer here

Investment Process: Evaluating Management through Press Releases

2025-02-28T06:23:00.000-06:00

A company's management has two primary responsibilities: running strong operations and allocating capital wisely. However, businesses inevitably experience periods of ups and downs. It is during periods of weak performance that management’s true character is revealed. Since assessing management is a critical part of my investment process, press releases can sometimes serve as a valuable tool in this evaluation.

In my experience, press releases generally fall into two categories: earning and non-earning. Market participants tend to focus on earning releases, where management has the discretion to highlight areas that they deem important. These highlights often appear prominently at the top of the release, either in bold or italics, to draw attention. This is where investors need to be cautious, as misleading information can be subtly embedded.

I frequently see various forms of management communication that could lead investors to have misleading views about business performance. Here are some common tactics:

Using phrases like "record earnings", "record sales" or "record performance".
Highlighting strong performance in minor business segments that have little impact on overall profitability.
Presenting excessive information rather than focusing on the key variables driving the company’s earnings.

In non-earning press releases, I often see announcements that offer little insight into actual business progress. Some common examples include:

Frequent press releases about awards or certifications.
Announcements about attending trade shows.
Discussions about product or service applications without real evidence of customer demand.

Judging Management through Press Releases

While the specifics will vary by business, here are some key ideas I consider when assessing management based on press releases:

Earning press releases

Growth over Profitability: If a company consistently emphasizes record sales while ignoring margins, Return on Capital, or Return on Equity (ROE), that’s a red flag. A business can achieve record sales while having deteriorating ROE due to product discounting. If management prioritizes growth over profitability, it could indicate an empire-building mentality aimed at justifying higher executive salaries rather than maximizing investor returns. Analyzing a company's ROE, and more specifically incremental ROE provides more insights.
Small Segment Performance: If the company is highlighting the success of an inconsequential segment, it is possible management wants to hide the problems occurring within the core business.
Cash Flow vs. Earnings: Even if a company reports impressive sales and earnings growth, the absence of cash flow is concerning. A company that sells heavily on credit might show strong revenue and earning growth while experiencing a disproportionate increase in accounts receivable. This suggests management may be hiding the true competitive position of its product or service.
Accounting Standard Changes: When a company adjusts its accounting standards during a period of poor performance, it is likely an attempt to inflate earnings figures.

Non-Earning press releases

New Contracts & Customer Wins: If a company discloses contract wins and provides quantifiable details (even in ranges), it signals transparency and a willingness to keep investors informed about business prospects.
Senior Management Hires: Announcements about top executive hires can be insightful. Reviewing the new hire’s past achievements may provide clues about the management and board's strategic direction.
Small Transactions: The news releases around small transactions are also helpful. For example, selling an unprofitable division may indicate management’s commitment to improving margins and ROE, demonstrating a focus on shareholder value.

Analyzing management is a crucial part of my investment process, and press releases can offer valuable clues about their priorities. The key question I always ask is whether a press release is merely a promotional tool or a genuine, transparent report meant for shareholders.

_______________________________________________________________________________

Abhay Srivastava is the Founder and Managing Member of AS Investment Partners LLC, a value investing firm (www.asinvpartners.com).

Abhay can be reached at abhay@asinvpartners.com

Please see the full disclaimer here

Investment Process: A Key Principle

2025-01-20T13:58:00.002-06:00

It is part of human nature to have an unconscious conflict of interest that may lead one to act against their best interests. Recognizing this is crucial for taking the necessary steps to protect financial well-being.

In matters of money, when losses occur, whether in the stock market or personal endeavors, the normal tendency is to wait to recoup the losses. In extreme cases, I have seen "selling the loser" as a pejorative. This is an ingrained aspect of human behavior. However, it is a mistake. Therefore, one of the important principles of my investment partnership (ASIP), in the words of Mr. Warren Buffett, is

"You don't have to make it back the way you lost it"

A good example of this tendency comes from the gambling world. In the first place, indulging in gambling or speculation in the stock market in itself is self-defeating because mathematical odds are not in the gambler's favor. Yet many people participate in it. When they lose money, the urge to "break even" drives them to gamble more money, resulting in higher odds of even greater losses.

How to guard against this behavior in investing?

1) Recognize Red Flags

When negative signals in the business suggest the original investment thesis is no longer valid, it might be time to sell. I discussed one such red flag in my last post.

2) Stay Unemotional

A stock in the portfolio doesn't "remember" its purchase price! In the event of loss, thinking it could get back to the cost basis is futile. Even if there isn't a big loss but the stock is flat for a few years, there is an opportunity cost. Thus, it is important to think objectively, why the investment thesis hasn't worked.

3) Bite the Bullet

Accept mistakes, take the loss, and be confident to make a better investment next time by not repeating the mistake.

In summary, a crucial part of my investment process is quickly selling a stock, even at a loss, when I realize I've made a mistake. I aim to avoid becoming my own obstacle. In the words of prophet Benjamin Graham: "The investor's chief problem, and even his worst enemy, is likely to be himself."

Abhay Srivastava is the Founder and Managing Member of AS Investment Partners LLC, a value investing firm (www.asinvpartners.com).

Abhay can be reached at abhay@asinvpartners.com

Please see the full disclaimer here

Bargain Hunting: Hidden Risks in Balance Sheets

2024-12-06T15:58:00.000-06:00

During an industry downturn, it’s common for a company to experience weak operating performance, leading to a lower stock price. While these scenarios attract bargain hunters hoping to find diamonds in the rough, based on my experience of looking at such companies, such situations should be closely scrutinized for the company's weakened financial position and potential share dilution.

Consider a company with a solid balance sheet: a high working capital ratio, no short-term debt, no variable-rate debt, $10 million in cash, and $10 million in long-term debt due in five years. With no net debt, annual earnings of $1 million, and a price-to-earnings ratio of 10, the market value of the company is $10 million.

Now, assume the industry conditions deteriorate, and the company incurs a $3 million loss, accompanied by poor future guidance. The debt remains at $10 million, while cash decreases to $7 million ($10 million cash less $3 million loss). In such a scenario, the stock price could drop significantly, say by 50%, to $5 million. This will likely attract bargain hunters, as the stock is trading below the cash level on the balance sheet with no immediate net debt. However, there’s a potential risk that the nature of the debt could change.

For example, a breach of debt covenants due to operating losses or insufficient liquidity relative to credit lines might cause the long-term debt to be reclassified as short-term debt, requiring repayment within one year. This would significantly weaken the company’s balance sheet, leaving it with only $7 million in cash and $10 million in short-term obligations, while still facing operational losses.

Photo by Bernd 📷 Dittrich on Unsplash

If the downturn persists, lenders might pressure the company to strengthen its balance sheet by issuing warrants or shares at minimal prices, leading to substantial dilution for existing shareholders. I have seen cases of 15%+ potential dilution.

While bargain-priced stocks can present attractive opportunities, investors must thoroughly analyze the company’s financials, especially changes in current liabilities, the nature of debt, and the potential for share dilution. These details are often disclosed in the footnotes of filings such as 10-Ks and 10-Qs and require careful examination.

Abhay Srivastava is the Founder and Managing Member of AS Investment Partners LLC, a value investing firm (www.asinvpartners.com).

Abhay can be reached at abhay@asinvpartners.com

Please see the full disclaimer here

Importance Of Shareholder Base

2024-11-15T21:07:00.001-06:00

Imagine a corporation, A, that owns long-term, stable rental units, but whose shareholders are predominantly day traders. Can the managers of such a corporation have fearless nights?

Probably not. One of the most important yet underappreciated aspects of running a company is its shareholder base. A consistently successful company typically aligns its shareholders with its goals and expectations. While such objectives could be varied, I want to illustrate two critical areas.

1. Business Ownership Mindset

A lot of people are attracted by stock price movements. Worse, they try to make investment decisions from stock price movements. Such investors don't care about business fundamentals such as business economics, competitive position, and intrinsic value.

Furthermore, there are members of the financial community who do look at company fundamentals but don't really have a business owner mindset. Such investors typically care about factors that impact stock prices such as macroeconomic factors, earnings beats, or management guidance. A business-oriented investor understands they own a business where earnings can go up and down based on factors such as industry conditions, cash flows, and competitive factors. He or she would think like a businessperson rather than management's ability to satisfy some analysts' expectations.

Thus, the management of a company with a stock-oriented shareholder base will have a difficult time engaging with its shareholders. How can you detect such companies? Start by looking at their press releases and annual reports. Ask whether this is a marketing document or written by a businessman?

2. Long-term Investment Horizon

A lot of investing communities including both retail and institutional investors talk about having long-term investment horizons but they really get upset seeing their portfolio down 20% for a short-term problem in the portfolio companies. Such shareholders are not good for a company that is making long-term investments.

Having a long-term investment horizon requires not focusing on the next quarter's or next year's earnings or stock market reactions. While the author of this article is not the first person to write the prior sentence, those words are frequently forgotten, leading to a short-term investment horizon. Management of such companies would likely face disgruntled shareholders more frequently. This forces them to keep on showing year-over-year growth in profits. This could further lead to bad behavior including accounting shenanigans.

Photo by Hannah Busing on Unsplash

Building the Right Shareholder Base

How can the management of companies attract and retain the shareholders they want? While there is no formula, there are two key methods that can be useful.

1. Management Communication

Having clear messages about how management thinks about running the business will train prospective and current shareholders accordingly. Such methods include press releases, earning calls, conferences, investor day, and annual reports. For example, if management desires long-term shareholders, they should avoid emphasizing short-term earnings growth. A good management team will also address unfavorable business prospects openly, as such challenges are inevitable. These practices should be continuously followed by the management team.

2. Company Policies

A company's policies play an important role in shaping its shareholder base. A corporation having an investor relation person whose job is to pump the company prospects in every single call they receive is likely to have shareholders who care about the stock price in the next six months. In my experience of talking to management, I tend to prefer situations where a call with them leaves me feeling somewhat uninvited. This likely means that company management is using its precious time to run the operations rather than talking with every investor who reaches out.

Similarly, a policy of projecting quarterly earnings every three months conditions shareholders to concentrate on short-term stock price fluctuations tied to earnings reports, rather than on the company’s long-term business fundamentals.

In summary, having the right shareholder base is a blessing as it allows the company management to execute its priorities without external pressure. Conversely, once a company gets a misaligned shareholder base it might be difficult to change it. Thus, company management should take deliberate and continuous actions to deserve the shareholder base they want.

Abhay Srivastava is the Founder and Managing Member of AS Investment Partners LLC, a value investing firm (www.asinvpartners.com).

Abhay can be reached at abhay@asinvpartners.com

Please see the full disclaimer here

Practical Uses of Inventory Accounting

2024-10-14T08:54:00.001-05:00

Inventory accounting methods help report cost information to management and investors. They don't directly affect the physical management of the inventory operations. Yet, these methods can provide insights to general consumers of the financial world and investors.

Before describing the practical uses, here is a brief primer on three main inventory accounting methods.

1) Specific identification,
2) First-in first-out (FIFO), and
3) Last-in first-out (LIFO).

The specific identification method provides the most precise reporting by matching the cost of each sold product with its specific inventory item. For instance, car dealerships often use this method to match a specific car’s model and year with the sale. However, this approach can be cumbersome for companies dealing with large quantities of similar products, like nuts and bolts.

In the FIFO method, a company assumes the oldest inventory is sold first. This method is particularly suitable for businesses managing perishable goods, such as food products, where older items (like milk or bread) are typically placed at the front to be sold first.

The LIFO method, in contrast, assumes the most recent inventory is sold first.

Photo by Petrebels on Unsplash

Now, let's explore some practical uses of these inventory accounting methods:

1. LIFO as an inflation gauge: Most publicly traded grocery retailers in the U.S. use the LIFO method, which can serve as a useful indicator of inflation. As LIFO method assumes that the recent inventory purchases are sold first, the inventory on the balance sheet is understated compared to its current cost (FIFO method). The difference between the two methods is usually tracked by companies on a regular basis. Comparing this difference year over year provides realistic information about inflation.

2. LIFO and investment opportunities: Understanding the LIFO method can reveal potential investment opportunities. Since LIFO understates the tangible book value of a business by masking the true replacement cost of inventory, this can be especially significant in inflationary environments.

3. Management quality: The choice of accounting method provides insights into management's behavior. LIFO is a conservative accounting choice for inventory valuation. This method is also more accurate as it matches current costs to company's sale. Conversely, FIFO can show a higher profit margin, which may appeal to management looking to boost earnings and stock price, particularly in low-margin industries like grocery retail. Investors should prefer to partner with conservative management teams that use LIFO, as it indicates a more cautious and realistic approach to financial reporting while enhancing the odds of a successful investment.

Abhay Srivastava is the Founder and Managing Member of AS Investment Partners LLC, a value investing firm (www.asinvpartners.com).

Abhay can be reached at abhay@asinvpartners.com

Please see the full disclaimer here

Learnings From Mistake (#1)

2024-09-17T16:32:00.002-05:00

A few years back I bought a company in the communications services sector. That was a mistake. I stumbled in evaluating either the fidelity or the ability of incumbent managers and, I was wrong in my evaluation of the competitive position of the company. Last year, I lost confidence in the initial investment thesis and decided to sell all my shares at a loss. Perhaps, by reflecting on what went wrong, I am hoping to avoid similar mistakes in the future.

At the time of purchase, I paid a lower valuation than competitors despite having a better balance sheet and a reasonable value proposition. The management had just completed a successful deal that allowed them to pay off most of their debt, so the low valuation seemed puzzling, especially given favorable business conditions and a booming market. Confident, I made it a decently sized position.

During the past year or so, the company ran into several challenges. It saw the rise of competition, customers started leaving, rising interest rates squeezed cash flow due to high expenses on floating-rate debt, and litigation surfaced. Compounding these issues, management's questionable capital allocation decisions and unresponsive behavior weakened my conviction level in the investment, prompting me to exit the position entirely. As Mr. Warren Buffett wisely put it:

“In the world of business, bad news often surfaces serially: you see a cockroach in your kitchen; as the days go by, you meet his relatives,”

source: Berkshire Hathaway 2014 letter

Photo by Kyle Glenn on Unsplash

The company primarily served price-sensitive customers, while its competitors targeted the lower end of the market. It turned out that the company's customer base was more vulnerable to competition than I had initially realized. Management maintained that their customers were different, but they were losing them quarter after quarter—something I failed to fully appreciate early on.

Another red flag was a key executive selling a substantial portion of their personal shares. While insider sales aren't always a clear indicator (versus insider buys), the magnitude of these sales should have been a warning sign for me.

Lastly, during the pending litigation, the company continued buying back shares and investing heavily in growth, all while increasing its floating-rate debt—decisions that seemed reckless given the trial’s uncertainty. My attempts to engage with management went unanswered, which was the final straw. While the leadership seemed willing to weaken the balance sheet for growth, I wasn’t comfortable taking that risk.

Fortunately, I didn't make the mistake of not selling out as soon as I realized my mistake (I should say mistakes). Luckily, I have been able to recover all the losses by investing in another stock. This points to another lesson -- there’s more than one way to recover from a setback.

Regardless, I totally misjudged the competitive position and management of the company when I purchased the stock. Hopefully, having learned the lesson the hard way will help me avoid similar errors in the future.

Abhay Srivastava is the Founder and Managing Member of AS Investment Partners LLC, a value investing firm (www.asinvpartners.com).

Abhay can be reached at abhay@asinvpartners.com

Please see the full disclaimer here

Intrinsic Value: What Doesn't Count? Some Interesting Phenomena.

2024-07-05T16:52:00.000-05:00

Intuitively, the concept behind intrinsic value is well understood. However, I repeatedly observe various unrelated factors get into its definition. This post will highlight two of those.

The intrinsic value of the business is primarily based on its

Asset value,
Earning power value,
Growth prospects,
Interest rate,
Management and Capital allocation,
Competitive position, and
Capital structure.

There could be other factors specific to the company or industry. While an intrinsic value calculation is not simple, it is an estimate that changes based on various factors such as business conditions, future prospects, management, and interest rates. Thus, various qualitative and quantitative factors determine the intrinsic value of the business.

If we look at the current practice to discern what constitutes intrinsic value, I find two factors impacting the business valuations (subsequently investment decisions) by market participants.

Photo by Jakub Żerdzicki on Unsplash

Popularity

Popular companies often attract investors who base their decisions on recent favorable earnings, news about flashy new products, endorsements from charismatic company officers or recommendations from from friends or neighbors. As this behavior percolates among market participants, it creates its own momentum, leading to elevated stock valuations.

A typical sequel to such situations leads to a decline in such enterprises' market values. Such declines can sometimes present interesting investing opportunities, particularly in larger companies, as Mr. Ben Graham noted in his book The Intelligent Investor. The fundamental reasons are that these companies possess sufficient resources and the market can easily become enthused about such stocks again.

Market Activity

In the short term, the price of the stock is impacted by market participants looking to make quick profits, resulting in higher trading volume. This factor leads some investors to mistakenly believe that such a security should also garner a higher relative valuation compared to stock with lower trading volume.

A consequence of lower market activity sometimes leads to an interesting phenomenon. A voting stock, held by a few shareholders, may sell below the non-voting stock. Logically, one would expect a common stock with voting privileges and a limited shareholder base to sell at a higher valuation than its peer common stock with no voting power. Yet, speculators are willing to pay higher prices for the non-voting stock because it can be traded easily. These situations sometimes could be the source of investment opportunity.

A similar anomaly sometimes arises in participating preferred stocks. Such preferred could sell well below the common stock despite having a senior position and similar rights to the company's income.

As an investor, the aforementioned two factors can be important for reasons other than intrinsic business value, such as the size of the investor's portfolio. Building a substantial position in a stock with a lower daily trading volume can be challenging.

There are already inherent risks specific to a business. Introducing the preceding two factors in the investment decision-making process can greatly increase the danger of paying high prices by intrinsic value standards.

Abhay Srivastava is the Founder and Managing Member of AS Investment Partners LLC, a value investing firm.

Abhay can be reached at abhay@asinvpartners.com

Please see the full disclaimer here

Amortization Accounting

2023-09-30T09:36:00.001-05:00

Blindly following conventions is the enemy of reality. When companies or investment professionals add back certain expenses such as stock-based compensation they want you to accept concepts that are dangerously defective.

In financial accounting, "amortization" is a widely used term - and one that could be misleading. First, a definition: Amortization is an expense on the income statement and it reduces the appropriate intangible asset on the balance sheet. If properly calculated, the amortization expense states the amount of the deterioration of non-physical assets such as customer relationships, trademarks, patents, and various forms of company agreements.

Photo by Scott Graham on Unsplash

Management usually detests amortization expense because it usually saddles earnings with an annual charge that normally lasts for years. These charges are added back when management reports earnings. In addition, the investors also typically add back amortization expenses when calculating earnings. In a great many instances, this is correct because the value of intangible assets has not deteriorated. At a car insurance company, for example, the value of customer relationships is usually intact because buying insurance every year is required by law. In many cases, it actually grows if the customer buys more adjacent products such as home insurance.

Even though adding back amortization expense is a convention, it is not correct in all instances. Consider a pharma company that buys other branded drugs. These acquisitions would result in the creation of intangible assets on the balance sheet which will be amortized every year over its useful life. Nonetheless, management and investment professionals would add back this amortization expense while reporting earnings. This is deeply worrying. Management wants investors to assume that it can find similar acquisitions on a regular basis which is a tough assumption if you are a conservative investor.

In the banking industry, amortization of core deposits could be a real charge if those deposits are not stable as evidenced in the recent banking crisis. In the consumer staples industry, the acquired branded food could lose its market share to another competitor. Thus, the amortization charge shouldn't be added back. The foregoing examples illustrate that analysts should be very careful when adding back amortization expenses to determine the intrinsic value of the business.

Clearly, the attitude of following conventions that many management and investors have today is deeply troublesome. I urge investors to follow a reality-based approach to amortization expense.

Thank you for reading my blog. If you like my content, Please Do Share, Subscribe, Like, and Comment.

If you would like to connect with me, please email abhay@asinvpartners.com [edited on Oct 14, 2024 to include updated email address]