BUY: TTES (NASDAQ)

Because I was compelled to sell PLAY before the one-year period, I have free money to invest in my bank account. I was thinking of lowering the cost of my WON position, as the stock price has fallen a great deal in the last while... This has been an excellent opportunity to learn about the difference between tangibles and intangibles and to discover that in addition to more condensed information, one should really look at full balance sheets when making decisions.

Essentially, the bulk of WON's book value was goodwill. The loss they posted this year was in fact a paper loss -- they simply introduced a "special charge" and charged away almost half a billion dollars of goodwill. POOF! There goes your magical book value, from ~$8.00/share down to ~$2.35. So the bottom line of their income statement is relatively meaningless. On the other hand, their current assents only cover current liabilities 1.24x (for 2006, against 1.72x in '05 and 2.14x in '04). Meanwhile, although interest coverage has slipped and interest expenses have risen, total liabilities and (long-term) indebtedness are lower than in 2005.

Now, a company will often hit itself with special charges in a year that in considers to be abnormally bad in order that future results are then presented in an exaggeratedely positive light further on. So the question is, does WON's management have a compelling reason to believe that 2007 will turn out better than 2006? Frankly, neither the earnings picture, which is declining over the past 5 years by all measurements (net, EBIT, &c.) against a general trend of advance in the economy, nor the financial position of the company, are particularly rosy. Moreover, the price of the company is not all that attractive. It looks like its appearance on the magic site is one of a few artifacts of the formula working in general but being spectacularly wrong in some cases.

In this case, the return-on-capital number seems phenomenal even though it is calculated like this:

ROC = EBIT / (Net Working Capital + Net Fixed Assets)
=EBIT / (Net Current Assets - Net Current Liabilities + Net Fixed Assets)
=EBIT / ($29.31M + $37.35M)
=$79.94M / $66.66M
=120%

It's not that the ROC isn't a valid metric -- on the contrary, it's proven to be a valid one in tandem with earnings yield. I would argue that the problem for this case is that the ROC -- which would normally be wonderful -- is overweighted and overlooks the following:

• That Net Working Capital is shrinking due to increases in current liabilities and decreases in current assets.
• The aforementioned 5-year shrinking earnings.
• The fact that even after that whopping charge, 67% of the company's supposed assets are intangibles. e.g.: Shrink that $2.00 book value down to $0.66/share (this isn't necessarily a big deal -- just a shocker based on the $8/share figure I thought it was a month ago).

To make a long story short, I'm buying elsewhere.

• Purchased 175 shares of T-3 Energy Services Inc. (TTES/NASDAQ) at $19.66/share = $3,440.50.

Initial bank account: $3,883.37
Total cost (shares): $3,440.50
Total cost (transactions): $15 x 1 = $15
Final bank account: $427.87

Portfolio:

• PNCL (NASDAQ): 333
• CALL (NASDAQ) : 545
• SGTL (NASDAQ): 271
• KG (NYSE): 131
• ANIK (NYSE): 254
• PPD (NYSE): 78
• HNR (NYSE): 217
• MOT (NYSE): 133
• PWEI (NASDAQ): 90
• HRB (NYSE): 109
• CLMT (NASDAQ): 79
• FCX (NYSE): 46
• FDG (NYSE): 82
• XJT (NYSE): 378
• DLX (NYSE): 112
• ASEI (NASDAQ): 49
• INTX (NASDAQ): 265
• CECO (NASDAQ): 113
• CRYP (NASDAQ): 148
• UIC (NYSE): 49
• CONN (NASDAQ): 105
• HGT (NYSE): 102
• WIRE (NASDAQ): 117
• IPS (NYSE): 27
• SHOO (NASDAQ): 81
• IIN (NASDAQ): 138
• LMS (NYSE): 82
• KSWS (NASDAQ): 70
• WON (NYSE): 338
• TTES (NASDAQ): 175

Total portfolio price is 83,724.49. On a random note, every time I do this I think to myself, "Sigmatel can't fall any lower, can it?". Every time, I am proved wrong.