NAPEC, Valuation, and Random Thoughts

Dilbert

NAPEC Inc. (NPC.to) is up 10% since my publication on April 20, 2015. The article demonstrates that NAPEC is severely mispriced and offers a lot of value. This opportunity exists because a variety of missteps led the market to severely punish NAPEC’ stock in the last couple years. Management and part of the board got the boot and a new slate of C-suite executives took over in the summer/fall of 2014. With the current turnaround in place, NPC presents an attractive contrarian opportunity with upside.

At around ~$0.95 a share, the current price reflects thoroughly negative sentiment and has made shares available at a cheap valuation. Valuation is the key here (it should always be when investing). Using different methods, I arrived at an intrinsic value range of $1.40 to $1.60. Even if my valuation is off 50%, you can still make some money.

You can buy high quality companies. It’s something I recommend. The issue is valuation. You will end up paying a lot in relation to assets or earnings. High quality assets and earnings don’t come cheap. That’s what everyone wants. The dream is to buy high quality assets at dirt cheap prices and these occasions are rare. You need a 2008/2009 moment when the world was falling apart and those moments don’t come around too often. So in the meantime you need to work hard at finding interesting investment opportunities.

On the topic of frothy valuation, Twitter (TWTR) just announced disappointed results and the stock collapse. Why? Twitter’s expectations are sky high. The pressure to deliver super spectacular results weights on the stock. Plus the investor base of Twitter is probably composed of speculators and short-term investors. The second they read a negative tweet, they sell the share. I’m not saying Twitter is a bad company. I love Twitter and I think it’s an excellent company but it’s not a good investment because of its rich valuation.

Obviously investing in NPC doesn’t come without risk. It’s a tiny company with limited volume and a lackluster past. The key to the turnaround’s success is to improve operating metrics and regaining investor confidence. With the low expectations surrounding NPC, the company only needs to deliver less than worse results to move the stock up.

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