Exited GENC For 57.33% Return
Shailesh Kumar | Dec 23, 2015 03:15AM ET
On Dec 2, 2015 we exited our position in Gencor Industries Inc (O:GENC) for a total return of 57.33%. This position was first established on Oct 5, 2011. We held this investment now or not is your decision, for us we felt that the capital can be reused elsewhere in this environment.
GENC has been a Value Trap for most Value Investors
A value trap is a value trap, until it isn’t.
It took us close to 4 years to get a 57% return. Was it worth it? Maybe not. I remember when we first invested in Gencor, the large amount of cash on the balance sheet was very attractive to me, and so it was for many other value investors. Over time though, many of these investors have quit the investment. It has been a frustrating experience, for sure, to watch the management do almost nothing with the cash – neither invest in new projects, nor return it back to the shareholders.
I suspect a calculation of significant increase in working capital requirements, when the highway funding finally comes through, played a big role in the management’s decision to hold on to cash. Looking at the opportunity cost of this wait, it was probably not worth it. However one cannot fault the management of being more optimistic of the US Congress’ ability to pass genuinely needed infrastructure funding. If I were running the company, I would have done the same, and then roundly vilified in the investment community. This is where the interests of the investors and the managers diverge a little, which is unfortunate, as we investors need to consider the long term strategy for the business as the primary driver of the management actions. Why would the management not return the cash to the shareholders and then when needed raise the funds in the debt markets, is a question I cannot answer.
Coming back to the Value Trap question – For the first 3 years of the holding, it indeed look like one. This year the stock has risen 35%, so for a value investor who decided to get in towards the end of last year would definitely not consider this stock as a value trap. It is all in your perspective.
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