Confidence and Taxes

Yesterday, I suggested DFZ as a company with earnings, a good chunk of cash, and no appreciable debt.

Today, two more suggestions – these, compliments of Aristides’ Chris Brown, whose nose for value has served us well.

All the usual caveats apply, of course. You could certainly, definitely, absolutely lose money on them in the short run, or even the long run. But these are not swing-for-the-fences all-or-nothing speculations. They are not as reckless as, oh, say, some tiny company based in Gibraltar that has no sales or customers that I’ve been touting for 11 years now. (I won’t embarrass you, B – – – – – – s, but you know who you are.)

AFOPD

This one, says Chris, “has roughly $4.75 in cash and liquid investments per share, no long-term debt, and a FY11 eps estimate of $0.75 from the one analyst who follows the company, so they are basically trading at 4x forward earnings when you back out the cash.”

Meaning that if you subtract its $4.75 in cash from its $8 stock price, it is basically selling around $3, which is not much to pay for 75 cents in earnings.

“They just had a 1:5 reverse split, which I think scared some people, [me! me! reverse splits are almost invariably the beginning of the end] but basically I think it was a first step in trying to realize shareholder value, and management seems to be willing to pursue further steps as needed. Last quarter was great, and this quarter figures to be at least as good. The entire fiber optic/optical networking industry seems to be doing really well right now in terms of revenues and earnings, so I guess the biggest potential danger is that you are catching some sort of cyclical peak. But the price is sure right.”

I bought some.

TTT

Chris: “Basically trading at 2x their annual royalty from CLF when you back out the cash they have and their ownership of roughly half of KHDHF. TTT is our largest position. It’s not the best company in the world, but at these prices, I think you’ll be well rewarded once it gets its administrative expenses in order and announces a regular dividend policy. The caveat here is that management is pretty opaque and has not done a good job in the last couple of quarters; but if you read their last quarterly press release, you can see that at least there is some good self-assessment happening.”

I bought some of this, too. Indeed, you might think of the three of these – DFZ, TTT, and AFOPD – as a trio of small value stocks that might make sense to own but only with money you can truly afford to lose, or at least not touch, if the going gets rocky, for several years (and even then, you could lose money).

TAXES

Warren S: “Your paragraph on taxes yesterday truly summarizes the different viewpoints on taxes between the major parties. I am no fan of the Republicans (I re-registered as a Libertarian after years of reading your columns and my disgust with their spending) but have not been swayed to the Democrats due to the tax issue – your column is symptomatic of our different viewpoints. I don’t know whether you have owned a small business. Taxes and uncertainty are major drivers for those of us who do. And both taxes and uncertainty are going up, not down. To minimize this shows either a lack of experience as a business owner or a lack of appreciation for how others may think. Some people do react to these things. For example, my income will go down even if my business were to stay the same (tough in this recession) due to an increase in taxes (capital gains increase, income tax increase, dividend tax increase, and Medicare tax extension/increase in the future). Meanwhile, my expenses will be going up – the insurance carrier for our employee health benefits just told me our premiums will be going up about 20% next year. This combination of events doesn’t give me the confidence to take risks and expand. And I can give you specific examples of projects we have declined (that would have meant increased jobs!) due to this combination of factors and our unwillingness to take the commensurate risk. It is just safer to save/hoard the money. I will grant you that all actions are not driven by taxes. However, to simply disregard the effect that taxes have, particularly combined with the current economic environment and the litany of changes that are creating uncertainty for businesses, does not show an appreciation for the effect they have on many others.”

☞ Helpful perspective. If this is how Warren feels, I can’t argue that he doesn’t. Or that he is alone in feeling this way. Still, I wonder whether the 35% small business health insurance tax credit will help some business owners defray the 20% rate hikes they, too, may face (Warren’s business has too many employees to qualify). And whether some of the other measures the President is asking Congress to pass would help.

I’m all for targeted breaks for small business. Even for big business. For example, I think saving GM was a good idea; and it may wind up not having cost the taxpayers a dime. But why retain the tax cuts for income above $250,000 for the hedge fund manager who makes $7 million, or the heiress who receives $700,000 a year in investment income, or the law partner who makes $400,000 or the ballplayer who makes $900,000 or the CEO who makes $4.5 million?

Ideally, no one would have to pay any taxes, ever. But were the Clinton/Gore rates really that onerous on the best off? (Or an anyone else, for that matter?) They were pretty good years.

I think the uncertainty – which is a real problem just as Warren says – relates less to resetting tax rates for the best off . . . (isn’t it actually pretty certain that sooner or later we can’t afford not to?) . . . than to whether, in fact, the economy will ever recover.

And to have confidence in that, it seems to me, you have to believe that, over a decade or two, we really will responsibly tackle the systemic problems we’ve avoided too long, like health care, energy, and education; scaling back to a somewhat more affordable military; renewing our infrastructure; and adjusting entitlements – modestly! – in ways I hope the bipartisan budget deficit commission will recommend. (This is the commission that Republican senators co-sponsored until the President agreed it was a good idea and then voted to kill. He wound up having to establish it by executive order.)

I think the Obama Administration is working hard, and with considerable success, to begin bending those curves in the right direction. It has taken an economy in truly frightening free fall and persuaded most people that – as rough as things are – the world won’t end.

My own view is that, for all the uncertainty Warren rightly feels, it would be a lot worse if we just went back to the “tax cuts and deregulation will solve all our problems” worldview that got us into this ditch in the first place. Who could have confidence in that?