Coast Distribution System: No Margin of Safety Here (CRV)

I regularly screen for Graham NCAV stocks which are companies that are trading at less than the amount of their current assets less total liabilities. I find this to be a good place to begin hunting for value opportunities, though the hit rate is pretty low since many companies show up on this list for a good reason, such as losing money with no signs of abating (thereby quickly decreasing the apparent NCAV value) or they have large off balance sheet liabilities (making the NCAV only superficial).

Coast Distribution System Inc (CRV), a wholesale supplier of replacement parts and accessories for RV and boat dealers across North America, has been showing up on my screen for more than a year now. When I first looked at the company earlier this year, it had seen two years of large declines in revenue, swung to a loss and then back up to breakeven. The first nine months of this year are looking slightly better with profit up (on cost-cutting measures as well as an increased top line). Things are looking up, so is now a good time to invest? Perhaps not.

CRV’s Executive Chairman and holder of 11.2% of its outstanding stock, Thomas McGuire, recently filed a 10b5-1 Share Trading Plan with the SEC announcing his intention to sell up to 100,000 shares over the next two years. This represents a decrease of nearly 20% of Mr. McGuire’s current holdings, so it should raise a flag as to the reasoning for such a large transaction. In the press release issued by the company, Mr. McGuire states that this move is intended to increase the diversification of his portfolio and that he maintains his confidence in the company. Sounds like a reasonable explanation, but if you take him at his word (the market apparently does not, sending the shares down 15% since the announcement on higher than average volume) you still have to consider the effect the sale will have on the company’s share price.

According to Google Finance, CRV has an average daily volume of just 878 shares. With an average of 252 trading days in a year, this works out to 221,256 shares trading hands. Mr. McGuire’s 100,000 shares being sold represents 45% of this amount, so you can bet it will have a negative impact on the share price.

As a value investor, we recognize that we invest in companies rather than shares so does this have an effect on the company? Likely not (perhaps if the company planned to issue shares in the next two years, and will suddenly have a lower “currency” to do this with), so how does this impact our decisions? Knowing that the odds are that the shares will decline further, we can wait for an even better deal!

Talk to Frank about Coast Distribution

Author Disclosure: At publication, the author DOES NOT hold securities of any company mentioned in this article.