APV (Arise)

Guys,

continuing on from the current emails about Arise i have a few questions.

Eric, how do you go about estimating the book value of the company at $0.10?

Also you said the company is losing money every quarter but according to this (if i am reading it correctly, that is), they are making money.

http://tmx.quotemedia.com/article.php?newsid=34507080&qm_symbol=APV

The preliminary unaudited results indicate that revenue for Q3 2010 is expected to total approximately $23.0 million, of which $3.7 million was from wafer tolling. This result represents a 50% increase from the $15.3 million in Q2 2010 and a 249% increase over the $6.6 million in Q3 2009

I am not by any means criticizing your analysis ( i really have no idea what i am talking about) but i would like to understand how this works.

I have just filed the papers to start my trading account and will be trying to become the "investment sponge" by hopefully learning from you guys.

Regards,

Luke

http://www.arisetech.com/images/stories/documents/ir/SEC%20Filings/Quarterly%20Reports/arise%20statements%2030-jun-10%20v7%20080310%20final%20clean.pdf

With regard to your quote below, there is a big difference between "revenue" and "income". The difference is expenses. Income is revenue - expenses. If you look at the financial statements on the link above, you can see that the net income is negative. I recommend always to go to the source (the financial statements) and see the facts for yourself. How, you might ask, can a company continue to stay in business if it loses money year after year? The answer: issuing stock. In fact, many resource companies lose money year after year and this is just a part of the business cycle (raise money by issuing stock, spend money on exploration, repeat until exploration successful).

For book value, I am taking the June 30, 2010 Equity balance (assets - liabilities) of $28 Million directly from the financial statements. However, a big part of financial statement analysis is knowing which categories on the financial statement can be relied upon as correct, and which can be inaccurate. I notice that half of the assets of the company are related to "Property, plant, and equipment". For accounting purposes, this is a very broad category and is generally shown at cost. There are two main problems with this: 1. When I think of "book value", I think of what the assets would be worth if the company was forced to sell them (probably less than depreciated cost, although possibly more if the value has risen). 2. A lot of the price the company paid for the property is speculative, and if they are wrong, they may never recover the full cost (although possibly could be worth more if the speculation is correct). In my valuation, I am trying to measure the risk and to do so, I need to know the worst case scenario. I am deducting an arbitrary $8 Million from the $50 Million "Property, Plant, and Equipment" value, which is generous when attempting to consider a worst case scenario. This brings my book value down to approx $20 Million.

Next, we need to know the # of shares outstanding. Quick check reveals approx 190 Million shares. To be conservative again, and allow for all the shares that have been committed to be issued under stock options, purchase agreements, etc... I round up to approx 200 Million shares.

From there it is simple math. $20 Million / 200 Million = $0.10 per share book value.


I approach analysis from a risk perspective. I start with book value under conservative scenario, and then try to understand what it would take to justify the current stock price. If the current price is below the conservative estimate of book value, then I will be strongly tempted to buy it. If the current price is above book value, then I assume the difference between book value and stock price is expected income per share. I can compare that to the current income levels to see how far away we are from expected values.

Other things I look for:

-Industry. Does the industry as a whole have a positive or negative trend
-Company. Is the company positioned with a strategice advantage
-Current assets and current liabilities vs. long terms assets and liabilities.
-Debt load
-Dividend yield and payout ratio

To continue with this theme, there are basically three ways to value a company:

1. Fundamentals. This refers to balance sheet and other financial analysis to come up with a present value of net assets and all future income.

2. Technicals. This refers to identifying and exploiting patterns in the trading behaviour of the stock which result from patterns in human behaviour.

3. News/event/pure speculation. This refers to timing the market in order to exploit an event which could have either positive or negative consequences on the stock price.


I tend to focus on fundamental analysis, since I do not have any skill with thte other valuation methods, but if everyone was focused on fundamentals, there would not be much opportunity for big gains. While market psychology is not to be ignored, it is also difficult to trade with confidence on technicals and news. As in most things in life, it is often best to combine a little of everything. Each valuation method has its strengths and weaknesses.

In the case of ARISE, Aaron had pointed out a few items that would not easily be detected on the balance sheet that may justify the current stock price such as superior technology and rapidly increasing demand.

So to sum up your second post with regard to Aarons pick:

Aaron has probably made a good pick due to the fact that he knows the company has technology that other companies don't possess and that there will probably be a large demand in the future for said technology.

You are also correct in being cautious due to the weak numbers the company is posting.

Having said all that, am I safe to assume that if the company doesn't see the large demand for their specialized technology before they require more operational capital, we will see them issue more stock which will lower the price of the stock?

If what i said makes sense, would it also be safe to assume that i should wait until this scenario plays out then buy low and hope the specialized technology and high demand finally make the company profitable and making the stock soar?

Let me know what you think.

regards,

Luke

I think you got the idea quite well. There is no single point of view which will have all the answers. I am sure one of the ideas behind this site is to bring together our different specializations kind of like the A-Team of finance so that we can get a more rounded picture.

There are several strategies used. One is to pick a stock and hold it until it pays off, another is to pick a wide variety of stocks with the expectation of losing on most of them, but making enough off of the winners to cover the losses of the losers. Another strategy is to do whatever the hell Fred does to pull winners out of his ass. Really the argument is for or against diversification which is really a tradeoff of risk vs. reward. More diversification equals less chance of being burned by a single stock, but also less chance each stock you pick being a winner.

What I like to do is make small, safe bets with small safe returns. Fred likes to make large crazy bets with a higher risk of both good and bad results (QEC being an example of both). The proof of either strategy is in the returns, and we have both made some good money this year.


Back to the case at hand, ARISE could be a winner based on what Aaron says. My input is that the stock price is already bid up to the point where it will not make much difference if their sales meet the target Aaron has set. However, if it does not work out, there is a long way to fall. Can any company expand sales 5x without a significant additional cash infusion? I am almost certain this company will dilute the value of the shares on its way. In fact, if you look at the IPO price of $2, you can see that it has done exactly that for the past 2 years. They will do a reverse stock split to confuse shareholders, then issue more shares.

With this said however, I have already been proven wrong in the short term. The stock is up 5% since yesterday. My advice will be more correct on a longer term horizon, but there is money to be made in the short term. These kind of stocks can and do take off to ridiculous valuations regardless of what the fundamentals say. As Ben Graham said, the market can stay irrational longer than you can remain solvent. My perspective is highly limited, so I would not put too much faith in my advice, but only to raise a point that there is a very real risk of loss.

Hey Max, good call!


From your last reply in this post:

... I am almost certain this company will dilute the value of the shares on its way. In fact, if you look at the IPO price of $2, you can see that it has done exactly that for the past 2 years. They will do a reverse stock split to confuse shareholders, then issue more shares.

http://newswire.ca/en/releases/archive/December2010/02/c2187.html

ah.... yes, not quite sure... we did have one of there senior guys in earlier this week, and we have a pretty good volume contract with them... not sure their overall picture... haven't had time to really look into honestly... still in fairly signifigantly with 20000 shares... hmmm....

Alright, I called one right! Issuing shares is not exactly a rare event, but I guess I am doing slightly better than a broken clock. Once we see the reverse stock split, will that make me a true stock douche?

We will come back to this one in a year or so and do a fresh analysis and see how things have changed. Until then, I am staying away.

http://www.thestar.com/business/article/1091889--waterloo-s-arise-technologies-to-be-delisted-from-tsx

Arise is in trouble. Hope you bailed already Aaron. If not, don't worry you are not alone. I bought RIM and it is doing pretty much the same thing despite all my predictions of a turnaround.