Qian Feng Fabric Tech part 1

In general under value investing there are 2 types of stocks, Cigar Butts and Buffett stocks. Cigar Butts, named by Benjamin Graham the father of value investing, are companies that are so cheap that they are worth more dead than alive. Their liquidation value being more than their market capitalization. Warren Buffett explains it as “If you buy a stock at a sufficiently low price, there will usually be some hiccup in the fortunes of the business that gives you a chance to unload at a decent profit, even though the long-term performance of the business may be terrible. I call this the "cigar-butt" approach to investing. A cigar butt found in the street, which has only one puff left in it, may not offer much of a smoke, but the bargain purchase will make that puff all profit."

Buffett Stock, named after Warren Buffett the greatest student of Benjamin Graham, is one of those rare companies that have an unassailable competitive advantage. These companies usually are the monopolistic dominant companies in their industry (Microsoft, Straits Times), or have a worldwide trademark (Coca Cola, Macdonald), or is the lowest cost competitor (Wal-Mart). Usually, their competitive advantage keeps getting stronger. Usually, one would buy these type of stocks when they are moderately priced and hold forever unless the economics of the business has changed or they are very over priced.

Recently I bought stocks in Qian Feng Fabric and I would list it as a Cigar Butt stock. Currently, Qian Feng has a market capitalization of US$ 28 million, and debt of US$ 6.1 million. But Qian Feng is sitting on cash reserves of US$ 41.7 million. This means that if I were to liquidate Qian Feng, after paying back all its debts and buying back all its stocks, I would still have an extra US$ 7.5 million.

Of course, nothing is certain in life and even less so in investing. Many things could go wrong, the company may not survive, the management could misuse the cash on bad investment, textiles have a bad economics or the stock price could remain very low for a very long time. Indeed, last year sales have fallen by more than 40% mainly due to the economic crisis. But I am confident that the company even though it may not prosper, will at least survive. Even though sales have fallen, Qian Feng still makes a profit, and has a positive cash flow.