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Wednesday, January 16, 2008

AeroCentury Corp (ACY)

I just happened to see a stock price for AeroCentury (ACY, sec) and it immediately added an interesting perspective to the current view of things.

AeroCentury is a tiny company that I followed from early 2001 to roughly 2004 or so. They bought very small turboprop airplanes opportunistically and then leased them out to small airlines around the world. I liked the business model and I believed it was a great niche, although there was always the long term threat from regional jets. The company was run by people with enormous amounts of experience in the industry and lots of patience. It was vaguely similar to other companies I've looked at such as EPLN, CFRI, LVWD. They typically sold their aircraft for significantly more than the carrying value on the books. However, I was particularly afraid of the regional jet threat.

At the time they were somewhat profitable (and sometimes not, if I recall), but they were slowly building the business. Looking at the latest 10-Q, the balance sheet is still very leveraged. Most of the assets are the aircraft and engines. Net margins are now a healthy 15%. Maintenance costs have dropped for some reason, resulting in the good margins. Cash flow from operations for 9 months is great; they used it plus some additional borrowing to purchase more aircraft.
Operating lease revenue was approximately $2,128,000 and $1,304,000 higher in the nine months and three months ended September 30, 2007, respectively, versus the same periods in 2006, primarily because of increased operating lease revenue from aircraft purchased in the fourth quarter of 2006 and first nine months of 2007 and lease modifications which involved rent increases for several of the Company’s aircraft.
and also this:
The Company’s maintenance expense is dependent on the aggregate maintenance claims submitted by lessees and expenses incurred in connection with off-lease aircraft. As a result of lower total lessee claims and less expense incurred for off-lease aircraft in 2007, the Company incurred approximately $2,305,000 and $494,000 less in maintenance expense in the nine months and three months ended September 30, 2007, respectively, as compared to the same periods in 2006.
So the maintenance decrease is not some kind of structural improvement in the business. Ok, fine.

Now I haven't looked in detail at this company in the last few years, but it's been long enough, and the results are different enough, and the stock price has increased enough to make an observation. I did buy and sell this stock a couple of times: Mar 2001 and May 2002 for a bit under $5. I didn't make any money off of it and I basically gave up on it. The stock dropped below $2.50 in mid 2004. At that point, I moved on.

So where is the stock now? It's been around $20 ($18.25 now), which is about a 23% annual return from when/where I was buying it, and I don't even want to think of how big the annual return is from it's 2004 prices. I wonder how many of the stocks I've given up on, such as EPLN and LVWD will follow this same sort of trajectory? How about stocks I currently own?

I believe the important thing is that large gains are worth waiting for.

Just curious Bruce, what are your typical holding periods?
Typically 1 to 2 years, but right now things are stretching out a long time. I've held Strathmore for about 3 years. A bit over 3 years for CVU, about 1 year for CFRI, and less than a year for the others.


Right now, I suspect the market is not going up significantly any time soon, but I could be wrong. As an amusement, I sometimes try to figure out short term stock price movements and the only pattern I see that seems to correlate much at all is that stocks tend to fall quickly when they're going up in the long term and they tend to rise quickly when they're going down in the long term. That's just an observation and I've seen it be wrong enough times to not put much faith in it.

The events currently going on make me happy in the sense that I'm glad to see that the market has not outgrown wildly emotional behavior. I wasn't too worried about it, but it's good to see a little panicking going on.

Even if the economy is in for a period of slight contraction, I see a lot of things driving it upward in the long term, especially the global economy.

I see that the spot price of uranium dropped this week by 6% related to the sale of something like 200K pounds. I'm not worried, especially with Strathmore at $1.76 which is pretty close to what I paid for it when uranium was at $29.

I'm currently digging up cash wherever I can find it and tossing it into the market. I'm not sure what I'll buy. Maybe NICK or CFRI. I already own a lot of uranium stock.

If I was more like Warren Buffett I would be very busy looking at stocks right now. I suppose I might start looking more now that things are getting stirred up a lot. But the only stock I have that's not insanely cheap right now is SDTH and I don't own all that much of it. So I'd need to find something that more than insanely cheap.

I've done a lot of looking back at past decisions and it's amazing how often I would have done better to do nothing at all. That's my thinking right now. I watch the news and look for bad signs, but I really don't see anything notably bad with Strathmore or CVU or CFRI or NICK or SDTH or FSSIF. So I just go back to sleep.
I do sympathize with you on the frustrating nature of the timing of investments. I came to investing by way of my interest in poker and continue to draw many parallels.

With poker, you play situations that have very defined and quick resolutions. Hence, it's easy to quickly traverse the learning curve. But with investing, the fact that situations take years to play out really retards your progress. Plus, it can be very frustrating that your success is largely a function of your observation window.

My recent attempts at education are aimed at going through past case studies to try and gain as much experience vicariously as possible. I've really enjoyed "You Can Be A Stock Market Genius", "Margin of Safety", VIC writeups, as well as the early Buffett Partnership letters. Are there any other resources you would recommend?
d le,

I take a very different approach from the poker side of things. I try to take the Graham/Buffett approach of finding things that are cheap, buy them, then wait for the market to reach full value. I've never seen it fail, but I've definitely seen cases of misunderstanding the value of the stock.

I've been lousy in the short term on investing, but I've taken the view that this is fine so long as I'm right in the long term. Stocks I buy typically drop for a while, then eventually get around to going to full value.

The ideal approach, which is where I think Buffett is right now, is to do both angles: playing poker against the market in order to pick up stocks at a very cheap price relative to value.

As far as other reading material, I assume you've read Buffett's shareholder letters. In my own experience, once I learned the fundamentals, the best thing to do was look at lots of stocks. I've also been focused lately on trying to counterbalance my own biases and errors in judgement. There are some books in my reading list that deal with that stuff. I've found this to be very helpful, but if you come from the poker side of things, you've already been focused on it.

Watching the market now, I definitely see the emotional factors at play. I think it might be to my advantage to make this my next area to focus on: the poker game.
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