Friday, May 27, 2011

A rags-to-riches investment story for the holiday season

This advisory shows how small cap firms — and their investors — fulfill their dreams as it gives an award to a company that made the grade.

This is a story of rising from humble beginnings. It is a story true to Horatio Alger and the American dream. It’s the sort of heartwarming tale you can expect at this time of the year. It’s also about zinc.

But perhaps we’d better explain. Mr. Max Bowser likes to hand out awards from time to time in The Bowser Report. Three months ago, he handed out The Investor of the Year award. True to this advisory’s down-to-earth approach, it did not go to some Wall Street wizard, but to a woman in Eugene, Oregon (Daily Buy-Sell Adviser, September 20).

With the approach of Christmas, he hands out his Microcap Horatio Alger Award to the people who have lifted their enterprise from modest beginnings to a position of strength. As the name of the award testifies, Mr. Bowser specializes in small cap investing. This year the award goes to a company that had a very small cap (and a slightly different character) when it was one of this advisory’s first recommendations in 1977.

The company is North American Galvanizing & Coatings Inc. (NASDQ-NGA). But who in the world is Horatio Alger?

Against great odds

The name Horatio Alger will probably ring a bell for most readers. It is invoked frequently in the United States as a byword for pulling oneself up by one’s bootstraps and making a success of oneself.

Horatio Alger was, in fact, a 19th century writer of dime novels (or boys’ stories, in Mr. Bowser’s description) that charted the path to success. Struggling against great odds, the hero lifted himself out of poverty and into a life of righteousness and respectability. Alger wrote more than 100 of these books, and there is even a foundation in Alexandria, Va., that keeps his name alive and honours those who have overcome adversity.

Mr. Bowser has no affiliation with the Horatio Alger Association of Distinguished Americans, but it is certainly not hard to draw the parallel between the Alger ethic and small companies striving to succeed.

Let’s hear the story of this year’s Horatio Alger winners.

Anti-freeze, luxury hotels and galvanizing

The award goes to President Ronald J. Evans and his staff at North American Galvanizing & Coating for having “lifted the company from rather humble circumstances to a leading position in a very specialized industry.”

That specialized industry consists of the reduction of erosion in steel and iron by means of immersion in molten zinc. "It is obvious that stockholders have been rewarded handsomely,” says Mr. Bowser. “When it was our Company of the Month in March 2006, these shares were at $2.35. Since then, they’ve traded as high as $16.90, before a 3-for-2 split.”

The very evolution of this company is a telling example of how smaller firms find the footing that will help them grow up into big ones. Back in 1977, when it first came to Mr. Bowser’s attention, it was called Kin-Ark Oil and had been in existence for eight years.

It was a sort of mini-conglomerate, with packaged chemicals (anti-freeze especially), luxury hotels in Tulsa, Oklahoma and Little Rock, Arkansas and some steel galvanizing. Mr. Bowser admits that he did not then realize the stock’s full potential “because way back then we had the crazy rule that, as soon as a stock went over $3, we sold.”

Ultimately, the company made the decision that galvanizing was the foundation of its future success. In 2003, it adopted its current name.

Mr. Bowser interviewed Mr. Evans and came away with some timely observations on his company, the industry and the economy.

Boat trailers

Here’s a question that’s on the minds of many companies — and investors — these days. Is your business closely tied to the economy?

Up to a point, responds Mr. Evans. “But, what we believe drives our business is capital goods spending. We are talking about large capital projects for utilities, petrochemicals and paper industries, etc. The general economy doesn’t seem to affect these types of projects as much.”

Asked if he has any offbeat business, the president replies yes, boat trailers. NGA works with the manufacturers of 16- to 30-foot trailers. These, of course, are affected by the economy.

Inevitably, the price of zinc comes into the conversation. “Recently, the price has come down,” says Mr. Evans. “We were able to increase our prices to cover the additional cost plus a little more — but, only because the market was so strong.”

The speculators go away

And why did zinc go so high? Mr. Evans’ response is blunt. “There were two factors. One was demand. The other was speculation. Now the speculators have gone away.”

Zinc is not produced in the United States. China has been a big supplier, but their internal demands have increased, says the president. Asia, Australia and South America are the other sources.

Future predictions? “We don’t give guidance,” explains Mr. Evans. “However, our last quarter indicates that we continue to run at a very high volume. Sales were up and we almost doubled our earnings as compared to a year ago when part of our volume was hurricane-related business.”

The president goes on to compliment the management team. They’ve built the company through internal and external growth, shed some subsidiaries and become profitable. They are also down to zero debt. He has no comment on a possible dividend, however.

The 3-for-2 stock split occurred for two reasons: “One, we did want to increase the flow. Two, our stock price at that time indicated the market was beginning to recognize us. Our stock was undervalued, based on the fundamentals.”

A real person answers the phone

Mr. Bowser notices with approval that the company doesn’t have “one of those crazy telephone trees.” A real person answers the phone.

“We are in a service industry,” says Mr. Evans simply. “We are the last ones to touch a product that is made by someone else’s manufacturing process.”

North American Galvanizing has over 400 employees and 11 plants. The president describes how the market has changed. “The market is beginning to be composed of a number of larger hot-dip galvanizing operations with seven to eleven plants. The old structure, which consisted of individually-owned facilities servicing a local market, has changed.” He estimates that his company is the second or third largest in the nation.

The company has many repeat customers. “We market to some of the larger engineering firms and stress the convenience of our different locations and our turnaround time.”

And so the company has come from, if not quite rags at least a ragged collection of businesses, to the relative riches of being one of the largest galvanizers in the United States. It trades at $6.06.

Rags to riches with Lee Iacocca

Is Mr. Bowser’s latest selection as Company of the Month a rags-to-riches story in the making? Well, it doesn’t sound like it’s sporting too many rags, since one of its board members is none other than Mr. Lee A. Iacocca, the celebrated Chrysler ex-chairman.

It is in the business of promising rags to riches, however. Full House Resorts Inc. (AMEX-FLL) is in the gambling trade. The company owns casinos and also manages casinos on behalf of Native American tribes and commercial clients.

Full House operates a major video lottery operation — a “Racino” — at the Harrington, Delaware Raceway. Early this year it bought all of the outstanding shares of Stockman’s Casino and its adjoining Holiday Inn near Reno, Nevada. It has since sold the Holiday Inn for $7.2 million, and will use the proceeds to pay down debt.

After a series of legal and political battles, the company is a little over a year away from opening the Firekeeper’s (or Battle Creek) Casino in conjunction with the Nottawaseppi Huron band of southwestern Michigan. 100 miles from the closest competition, in Detroit, this casino is expected to cater to over 8 million people.

Two future casinos are in the works: the fully-owned Namba Casino, near Santa Fe, New Mexico, and the Tongue River Casino on the Wyoming/ Montana border, which is being developed and managed on behalf of the Northern Cheyenne Tribe.

There’s no doubt that this is a lucrative business. Full House is ten years old, and the controlling shareholders are the founder’s son and his family trust, at 17 per cent. Mr. Iacocca, who is the chief consultant for the company’s investment philosophy, is the second largest shareholder.

Perhaps Mr. Iacocca’s involvement gives this stock an extra allure. He is certainly no stranger to the art of attracting attention. The stock is currently attracting moderate attention at $2.70.

Without having read through the entire 100-plus works of Mr. Horatio Alger, we’re willing to guess that none of his heroes achieved their lofty goals at the gaming table.

No matter. Whenever investors struggle against the adversity of an uncertain market and achieve their goals with wise investments, it’s a heartwarming story in our books.


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