TenStocks‘ eponymous portfolio strategy is based on deep value and special situation investments, hunting for opportunities trading at 50% of their estimated intrinsic value. On March 6, we published TenStocks’ discussion of Hutchinson Technology (HTCH). HTCH recently hit 52 week lows after falling 20.25% since 2/17 (as of 3/9) after news of a restructuring and Western Digital’s acquisition of Hitachi’s hard drive division. We asked TenStocks whether their investment thesis has changed. Their response:
Hutchinson Technology (HTCH) is transitioning manufacturing from the US to a new plant in Thailand. At the moment they are incurring move related costs on both ends and are losing money. These transition costs should begin to fall away over the next year and upon completion HTCH could become the lowest cost producer of suspension assemblies. The recent Western Digital (WDC) buyout of Hitachi Global Storage Technologies further consolidates the hard drive business. The new combination will make WDC HTCH’s biggest customer at approx 50% of their order book. Clearly, WDC think hard drives have a future.
HTCH is priced for the graveyard. We think it’s a survivor.
We expect the next few quarters to be rough. But a year from now, when we hopefully get into long term capital gain territory we think a slow pattern of improvement will become evident and the stock price will reflect that.
We also think there is a possibility WDC may be interested in adding HTCH to its shopping list although that is not part of our investment decision.
Current stated net tangible assets are around $10 a share while the share price today is at $2.80. That is a mighty discount. But it’s an eroding book due to ongoing losses. The question is what will net tangible assets be when/if HTCH finds its way back to break-even? Allowing 4-6 quarters for a turnaround to take place, we have chopped tangible book to $6. We are buyers at a 50% discount to that.
HTCH is the only investment we have made in the Tenstocks Covestor model in the last four months. We are overall defensive. We consider the market overvalued. Our HTCH investment, along with our other holdings, is tempered by a 35% cash position.
Here’s the recent performance of the TenStocks portfolio:
