I’ve recently been adding to my position in Solitron (SODI). The more I revisit the stock, the more value I think there is.
So let’s start this post off with a quick recap. Assuming all options are exercised (and they will be, their strike place is way below today’s share price), SODI has under 2.5m shares outstanding. With its current share price drifting about in the $3 range, that gives it a market cap of ~$7.5m.
For that $7.5m, you are getting 3 things.
- A cash pile of $7.6m dollars (the company has no debt), which actually understates their cash pile per share because I’ve used diluted shares but given them no credit for cash from option exercise (small adjustment though).
- A business that did almost $750k in ebit last year and has averaged ~$1m in EBIT over the past five years.
- Has an off book asset of over $14m in NOLs that expire through 2031 (we will discuss these later).
You can look for holes to explain why the company is trading for (basically) less than cash despite a history of profitability. They’re tiny. They’re controlled. They include this quote in their 10-K every year
However, due to the level of current backlog and projected new order intake (due to the status of the general economy and the shift to Commercial Off–The-Shelf (COTS) by the defense industry), the Company might operate at breakeven or at a small loss during part of the next fiscal year.
But I think the basic reason is market inefficiency- this is a tiny, unglamorous company with a strange shareholder base due to a past bankruptcy. If there was ever a place for market inefficiency, this is it.
I think there’s even an interesting twist- Nate over at oddball stocks sent a letter to the board and is organizing an “activist” campaign to get the company to repurchase shares.
I fully support his campaign, with one caveat:
I’m not sure if share repurchases, even at these depressed prices, are the best use of shareholder funds.
The reason is the company has a lot of NOLs. Those are extremely valuable, but there’s no way the company in its present form could make use of all of them.
Given that, it makes sense to do an acquisition if the company can find a complementary business within their wheelhouse. If they had an excellent capital allocator at their helm, buying stocks or bonds could make sense. Even hiring a real estate expert and purchasing income producing real estate at a decent price could make use of the NOLs. One real interesting idea- acquiring a closed end fund at a discount to NAV and using the NOLs to shield tax distributions.
The reason is pretty simple: because of their tax NOLs, SODI can be the best owner of businesses. Profit generating small businesses are worth much more to SODI than they are to other random owners.
Now, I’m not recommending SODI go out and buy anything and everything. But I do think it would be a shame to waste those valuable NOLs. If they got desperate for ideas, I’d be happy to recommend several small businesses that would make excellent acquisitions at these prices!
Disclosure: Long SODI
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