Cigar Butt Investing & IDT Corp.
Cigar-butt investing came into being during the Great Depression. The thinking behind this strategy is that it is best to find something for free than to pay full price. Rather than going into a cigar shop and paying $12 bucks for an Ashton Reserve, you are much better off walking along the streets of New York, picking up a cigar butt out of the curb and taking a few puffs for free.
The same idea would be applied to investing–find a stock that was not doing well operationally but had a great balance sheet, buy it for a certain price below the value of the assets less the liabilities, and you have little risk and some nice upside potential.
The father of cigar-butt or deep-value investing was Benjamin Graham–investor, Columbia professor and author of The Intelligent Investor, the bible of deep-value investing and security analysis. The impression that one has of people who still religiously follow the strict interpretation of Graham’s work is that of a curmudgeon, cheap and misanthropic–not the type of person you want to spend much time with. You might make money, but not a lot of fun.
One stock that has come close to meeting the pure interpretation of Graham’s cigar-butt definition of value is IDT Corp, a Newark, New Jersey-based telecommunications company. IDT and its Chairman, Howard Jonas, did one of the great deals of the late 1990s. By being years ahead of the curve in undestanding the transition of voice communications to IP networks, he formed Net2Phone which he sold to AT&T for over $1 billion plus (if memory serves me correctly).
Jonas’ IDT group owned Net2Phone so a lot of money went on to IDT’s balance sheet. For the last bunch of years, with little to no debt, IDT has traded at the value of the cash on its balance sheet. Essentially, the market is giving no value for management’s ability to deploy the cash into future profitable ventures. Here comes the cigar-butt investor: “No management team could be that bad as to waste $1.0 billion bucks.”
Reporting results this week, IDT is burning through cash at a nice clip. The company is run by Jim Courter, former New Jersey candidate for governor and very much wired like a politician. IDT’s results support this–it runs a deficit every year. Cash has gone down from $1.0 billion to around $700 million in the most recent quarter. And the operating metrics completely collapsed during the quarter. In addition, the fixed wireless business that IDT owned and sold some parts of recently (which it attempted to dump on the public but had to pull from the market) is a financial disaster.
Also IDT is getting more into the movie production business, an industry notorious for losing money. While it seems that the company has some interesting projects coming to market in 2006, whether they can earn a profit to offset the losses in the other businesses appears unlikely.
All told, IDT has a lot of things going on, but most of them are consuming huge amounts of cash.
This is one cigar-butt stock I would stay away from. I would rather pay the premium price for the Ashton Reserve.
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