Thoughts on Echelon Corp. [ELON]

Company Overview and History

Echelon was founded in 1988 by Clifford “Mike” Markkula Jr., who also has served as CEO of Apple in its early days. For years, the company operated in two divisions: Internet of Thing (IoT) and Grid. Both sides suffered operational difficulties and wasn’t able to turn to profit. New CEO Ron Sege was brought in October 2010 to try to turn the ship. In August 2014, Echelon agreed to sell the whole grid business to a European company S&T AG. Around the same time, it also made an acquisition of Lumeware, a smart lighting startup. It was essentially an asset swap, so that the new company can get rid of non-core business and focus on smart lighting – the area management thinks has the most potential.

The troubled operation was reflected by the stock price as it lost almost 95% value since 2007. Also noted, that the firm had a 10 for 1 reverse split in December 2015, so you are basically looking at a penny stock to some extent ($0.6 if adjusted for the reverse split).

ELON_1

After the changes, the business operates in two segments: 1) embedded systems and 2) smart lighting. Embedded systems include the legacy IoT division’s products which are the networking products (chips, routers, gateways & software etc.) for Industrial IoT devices (smart meters, refrigerators, etc.), however this side of business kept deteriorating on a continued basis. Smart lighting, on the other hand, consist the acquired Lumeware products plus the existing lighting control IoT products (wired & wireless controllers, gateways, servers & software etc.) In the most recent investor presentation, management indicated the lighting business has seen 4 straight quarters increase (however, without further details). Clearly, the management has identified the lighting business as the future of company and allocated resources accordingly to pursue this opportunity (e.g. hiring lighting controlling sales veteran Rick Schuett on April 2016)

Basically, it is an unloved business by Wall Street as the legacy businesses are doomed and the turnaround seems to take much longer than expected, if not impossible. When a stock looks like a road kill, it may be a great opportunity for investor who can see through what appears at the surface. Next thing is to examine whether the price is attractive enough to make this crappy business (suppose it is for now) an attractive investment.

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Texwinca (0321.HK) – a Cigar Butt or Anything More?

Disclosure: I do not hold position in mentioned stock. Also, the price has increased slightly since I initially wrote it up (from HK$5.11 to HK$5.30), however all points in this write up are still valid with a price level of HK$5.30.

Company Overview and Recent History

Texwinca is a Hong Kong-listed textile & apparel company, with two main business segments: 1) Textile business, which produces, dyes & sells knitted fabric and yarn, & 2) Retail and distribution business, which sells casual apparel and accessories. Each segment contributes about the half of the revenue to the firm. The vertically integrated cost-efficient model used to work well, however both segments have been hit hard by some adversity recently.

Texwinca’s textile business is one of the largest fabric producers in the world, serving many global fashion brands like A&F, Ralph Loren and Gap. However, it is facing cyclical headwind driven by the soft global (especially US, which is the main textile revenue source) economy and the increasing production cost in mainland China.

The retail business sells its apparel majorly through brand Baleno. However, Baleno (along with many other local mainstreet fashion brands like Esprit, Giordano & Meters/bonwe) has been squeezed very hard in its mainland China market (its main retail revenue source) by new-entering international fast fashion brands like Zara, H&M and Uniqlo. Baleno, once a high end fashion brand, lost its value significantly in the past few years, and is now considered merely as an “immigration worker (lowest income city worker from rural area) brand”. To cope with the competition, the business tried to streamline by disposing all the non-core brands and focus solely on Baleno.

Driven by weak performance on both sides, the stock has lost more than 40% of its value since the recent peak at HKD 9.38 in July 2015. At the current stock price (5.11), the stock looks attractive from first glance with following traits:

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Changyou.com (CYOU) – A value buy with potential near term earning catalyst

So here is how I came across this name. As I mentioned in my old post “A Part Time Investor’s Investment Process”, I didn’t have a systematic way of sourcing idea, thus usually leaving the portfolio under-invested. More recently, I started playing around with some quantitative funds’ strategy selection criteria, and found LSV’s fit my style pretty well. It goes by two parts: 1) identify value opportunities, by looking at some traditional ratios including EPS, current P/B, current P/CF and current P/S, if any of the ratios is lower than industry median, keep them for step 2; and 2) eliminate “value traps” by examining the recent momentum (e.g. Relative Price Strength over past 26 weeks >=0 & Relative Price Strength over past 13 week is larger than that of past 26 weeks. What is does is basically to look for cheap stocks in a turnaround story, the idea being if the market recently recognize a name, it usually is not a value trap. For further information about LSV, you could visit http://lsvasset.com/research/ for further research done by them.

CYOU came out from these filters and happened to be a Chinese ADR, which I thought I may be able to gain some informational edge by researching in its local language. First, still need to give credits to following posts provided me some directions. By the way, their timings are much better as the stock price already went up 40% from the price level they posted their ideas. However, without the recent price surge, it possibly won’t go through the step 2 of momentum checking, meaning I wouldn’t be able to see it until the name started to rebound anyway.

https://www.valueinvestorsclub.com/idea/CHANGYOU.COM_LTD/137906

http://seekingalpha.com/article/3962034-changyou-extremely-undervalued-possible-privatization-candidate

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Indirect Hard Lessons – Gurus’ Recent Mistakes

As an old saying says, “you best teacher is your last mistake.” However what’s challenging for value investors is that it’s very difficult to realize you’ve made a mistake to start with. As you are always going against herds, you’ve already made “mistakes” in others’ eyes, meaning you are left alone to make the judgement. Plus, you have to re-convince yourself about your verdicts when the name keeps going down after your purchases, or if the names move higher you just cannot stop feeling good about yourself, either way it’s really hard to maintain an objective view on your own past decisions.

Market recently has seen some big failures on names backed by some legendary value investors. Although may not be able to learn the lesson as deeply as the investor themselves do, I found these are great case studies nonetheless.

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Thoughts on Nexpoint Residential (NXRT)

Disclosure: I established a long position in NXRT on 4/4/2016.

First of all, I want to thank following posts drew my attention to this name. It caught my eye first that Michael Burry held it as his biggest position.

Michael Burry’s SEC 13F filing

Clark Street Value post about NXRT

Value Investors Club post about NXRT

 

After I made my trade, I wanted to write something about it, however I noticed there are this Gurufocus article on 4/4/2016 and this Seeking Alpha article published on 4/5/2016 already did most of the job and shared some of my views. Thus, I will be brief on the upside as you will be able to get them from articles listed above, and will try to dig more into the downside.

Short pitch: NXRT is one of the few REITs using “value add” strategy on class B properties. The management is very determined to execute on this strategy and thinks the market didn’t get them (small cap, spun off a year ago, only 2 analysts from some boutique sell sides covering them). In my view, this firm is actually a flipper partnership under a REITs cover (to avoid corporate level tax), and their flipping strategy seems to be very lucrative (if it works out).

Following I will touch some of the red flags that people dislike the most (and I disliked initially):

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A Part Time Investor’s Investment Process

For the past few years, I have been doing value investing practice on an ad hoc basis. I read news & investment message board, follow the ones I deem interesting, do some my own researches & make decisions on building positions. So far, overall I have more hits than misses and my personal investment fund’s performance has been in line with S&P 500, even though I usually keep 30-50% cash at hand due to lack of opportunities (except for 2013 during which year the index ran up 30% and the cash drag bit me badly). Clearly, the cash drag was my problem. I also know that it is mainly because of the ineffectiveness of sourcing potential opportunities, given that my spare time resources are limited. To solve this issue, I have to have a formal investment process.

Based on my current knowledge, a typical value investing process would look like this:

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[Pinned Post] Who’s Who – Behind VIC Anonymous Users

[Latest update: 8/13/2019, please go to the bottom to see new additions]

Value Investors Club (VIC), founded by the legendary investor Joel Greenblatt, is an anonymous elite value investing club whose admission is said to be very selective. According to John Petry, the co-founder of the club, there’s “a lot of very well known money managers” and “very, very successful hedge fund managers” who all use the site. However, from traits left by these “anonymous” users, we may be able to tell these well known and successful investors. I firstly carried out some of these researches purely out of my curiosity, but later found identifying these great investors helps me focus on quality ideas and discussions. Sometime I cannot tell who exactly they are, but certainly can tell the ideas were from some greatest minds. By all means, these guys’ writings are great stuff to read regardless who’s behind.

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