Idea Brunch with Lee Roach of The Value Road

Welcome to Sunday’s Idea Brunch, your interview series with great off-the-beaten-path investors. We are very excited to interview Lee Roach!

Lee is a private investor who publishes The Value Road, a newsletter focused on finding deep value in microcap stocks. Lee focuses on “stocks so far off the beaten path that almost no one else is talking about them,” often trading for a discount to liquidation value. Lee also shares his ideas @leevalueroach on X.

Lee, thanks for doing Sunday’s Idea Brunch! Can you please tell readers a little more about your background and your investment process?

Of course, I grew up in a small town called North Branch, went to high school, and then got a job at a manufacturing plant one town over. I always enjoyed reading about history. I would read about almost anything from just about any timeframe. As time went on I inevitability started reading pretty extensively about economics throughout various stages of world history. Feudalism, manorialism, mercantilism, free market capitalism, and the like. After reading through enough of this kind of material I began to wonder if I could learn how to successfully make money in the market while mitigating my risks as much as possible because, I frankly do not have much money to lose. That’s when I stumbled upon the Intelligent Investor in an old thrift store I was rummaging through with my girlfriend and a buddy of mine.

I had heard the title a time or two before as a friend of mine had previously recommended it to me. I read through the book and then slowly started looking into “value investing videos” on YouTube. Bill Ackman actually did a great breakdown of how to evaluate a company in under an hour. Investopedia definitions were always open in a tab on my browser. Eventually, I mustered up half of the know-how to be able to read Security Analysis by Ben Graham. With a laptop by my side to look up every word or phrase I did not know, I pushed my way through that book, in the meanwhile I began to invest in ETF’s, poorly I might add.

I like many others that started investing in 2020, put all of my money into oil, big tech, marijuana, and green energy ETFs, then lost a lot of money on all of those positions except for oil. While I was losing money, I was also chipping away frantically at learning how to invest. After reading some really less talked about hidden gems like The Phoenix Approach: A Contrarian Investor's Guide to Profiting from Out-Of-Favor, Distressed, and Bankrupt Companies and Financial Shenanigans: How to Detect Accounting Gimmicks and Fraud in Financial Reports and after learning how to work through discounted cashflows on various websites and old Martin Shkreli YouTube tutorials, I finally felt comfortable forming an investment strategy based on minimizing the potential downside risks of a business by investing in companies that have so much NAV that investors could still expect money to be paid out in cases where the business had to cease operations.

After a couple of years of finally seeing positive returns, a good friend of mine suggested I write on Seeking Alpha to help organize my thoughts and garnish feedback from the editors and other users. The very first article I attempted to write was on a small bank in my hometown. The article was pretty underwhelming and I never ended up publishing it. Then in June of 2023, I had my first article published. It was on Alico, Inc. (NASDAQ: ALCO), a citrus farming company from Florida. I then wrote about companies like Nobility Homes, Inc. (OTC: NOBH), Unit Corporation (OTCQX: UNTC), Hanesbrands Inc. (NYSE: HBI), and the Maui Land & Pineapple Company, Inc. (NYSE: MLP). My returns started getting better, and my ability to write up companies began to improve.

My investment process has developed since then. I scan stock screeners, read articles and investment ideas on websites like microcapclub.com, Seeking Alpha, and X looking for stocks that have extremely large discounts to their NAV. Oftentimes these large asset values are land plays on smaller capitalized companies but there can be an assortment of reasons why this occurs. This large NAV acts as a margin of safety that can shield the company from unforeseen negative circumstances. Should a company with a large NAV back itself into a corner, it can usually sell off something to dig its way back out.

Finally, I look for a catalyst as to why the company’s share price would move upward. This catalyst could be a land sale that would either return capital to shareholders or help position the company to realize large increases in cash flow that other investors have yet to price into the company’s stock. This could come in the form of a company having recently disclosed news such as new revenue sources or better pricing on a contract that the market hasn’t caught on to yet simply because people don’t read through earnings call transcripts and 8-Ks the same way that they read through 10-Ks and 10-Qs. If these two factors coincide with the stock having recently experienced huge share price declines, there’s a good chance that this stock could be a buy.

What are your favorite ways to come up with new investment ideas and what are the necessary ingredients for a great microcap investment?

Normally, I just scan stock screeners, microcapclub.com, Seeking Alpha, Substack, X, Reddit, and any other corner of the internet where people are talking about value investing. I’ll spend a little more time on companies that have a significant amount of land or buildings on their balance sheet as these assets can often be significantly undervalued under GAAP accounting practices. If it looks fairly certain that this company has a NAV significantly higher than their share price, I put them in one of my watchlists organized primarily by market cap.

From there I just start digging in, reading through 10-Ks, 10-Qs, earnings calls, investor presentations, press releases, 8-Ks, news articles, and whatever else I can get my hands on. You then just wait and watch. Sometimes, a company at record highs has a bad year, and you watch their share price tumble in a way that just seems to be overly pessimistic. Sometimes, it’s a company that has an upcoming bond maturity payment ahead of it and not enough cash on hand to pay it but has a bunch of valuable assets to sell off. Investors get nervous, the stock price (especially on micro and nano-cap companies) usually falls quite a bit and BOOM, a buying opportunity presents itself. In my personal experience, when management is forced to sell off assets or default on debt, they almost always choose to sell off assets. Once the fear of default is gone the stock normally sees quite a rebound. It’s a last cigar puff type of thinking.

Lately, as my X account has started to see a substantial rise in followers I’ve been getting some very good investment ideas from individuals on there. The investment side of the social media world has thus far been very kind to me and has been important to the development of my investment philosophy, especially on my first few Seeking Alpha write-ups. If there was a hole to be found in one of my articles, someone was definitely going to let me know. I became a much better investor because of that. The Seeking Alpha community also helped to show me how much of a contrarian investment philosophy NAV-based investing can be in a world that really loves technical analysis and growth stocks.

How do you think about position sizing, accumulating positions, and deciding when to sell? Have you experienced liquidity problems buying and selling your positions?

Vantage Drilling International Ltd. (ExpertMarket: VTDRF) was the only stock that I’ve ever had a hard time selling. It took about a week to selloff my handful of shares. My brokerage account is relatively small so I won’t be running into the same type of problems accumulating or selling positions that some of my readers probably would from time to time. For me, the smaller the company, the larger the potential upside needs to be to justify the purchase. If there’s a sub $15 million market cap company I’m looking into, I underwrite it with the potential for the share price to double. This insulates me to an extent from the “what if?” factor. If there’s something I missed while looking into the company and I’m wrong about my original thesis, I’m usually just wrong about the stock’s potential upside. Expecting to double your return and instead only seeing a 30% gain is why I enjoy value investing in these small companies that no one knows about.

When I find deals in the market I scoop up as many shares as my current budget will allow. If the share price continues to fall while my original thesis stays intact, I’ll buy more shares on the way down. The “when to sell?” question gets a bit more position-specific. If I believe that the company I have bought into operates a legitimately good business, with a great management team and a built-in moat to protect itself from utter economic destruction, then I’ll hold them indefinitely, keeping watch over their business performance for years to come. If my original investment thesis on a company was based around a specific event occurring that would mark the end of a reason for bad investor sentiment or, the beginning of a business turnaround and that event then occurs, I very well may use that opportunity to sell off my shares.

You seem to really like liquation investments. Why do companies liquidate and why are liquidations attractive? Can you share an example of one that went well for you?

The very basis of an investment strategy based off buying a security significantly below NAV is that, if a company falls on rough times it can sell off its assets in order to dig itself out of a hole or, when all or part of its business operations become untenable the company can liquidate itself and return this capital back to its shareholders. Almost all of the companies that I invest in have this liquidation optionality. When companies have this ability to use their NAV to make business plays, they often do so. When a company doesn’t have this moat of excessive value around it to dip into, there isn’t a margin of safety.

It’s not that I am looking for liquidation plays specifically but, when you’re dealing with companies that have the assets available to them to pay off their debts, fund new business ventures, restructure their company, or return capital to shareholders, they often do. If I was seeing more big growth stories from these small cap companies like I saw in 2023, I would write them up but a lot of these companies are starting to experience a slight pullback on sales and therefore, asset sales and liquidations have just been a bit more prominent lately. Whether it’s a story of a potential asset sale, or a story about growing revenues and incremental margins, value is value to me. Whatever I happen to stumble across on my stock market treasure hunts is what I look at and possibly buy into.

Liquidations that have worked out well for me include Alico, Inc. (NASDAQ: ALCO), Unit Corporation (OTCQX: UNTC), and the Maui Land & Pineapple Company, Inc. (NYSE: MLP). Even a large part of the United Natural Foods, Inc. (NYSE: UNFI) story was based on the company selling off major assets to cut down on their overhead costs and to pay down debt. Hanesbrands Inc. (NYSE: HBI) did the same thing when they paid down corporate debt by selling off Champion, which shot the stock up nearly 50% shortly afterward.

Governance can be notoriously bad among small companies. How do you evaluate the shareholder-friendliness of your portfolio companies? Have you ever engaged in friendly (or unfriendly) activism within your holdings?

In my wildest dreams, I might be able to afford to become an activist investor. Perhaps one day. As far as bad governance amongst small companies, I believe this creates a lot of investment opportunities.

A lot of times management will run a company into the ground, they get the boot, then a new CEO with a clearer vision comes in and can kind of clean things up a bit, maybe do a little cost cutting or find another revenue stream that the previous management team missed out on. I evaluate management based primarily on the previous companies that they have helped run and what happened to those companies while management was actively participating in running them. Listening in as well as reading through the company’s earnings calls can also be very insightful provided they are available to investors. You can get a real sense of how someone thinks when they have to answer analyst’s questions about poor performance.

What are some of your favorite ideas today?

I’ve got one idea I am excited to share that is currently hated by the market.