Doro looks cheap

“What do you call a stock that’s down 90%? A stock that was down 80% and then got cut in half.”

David Einhorn

As a follow up to my blog post on 'Swedish Value and Glamour Stocks' I have now updated my list to also include EV/EBITDA in addition to P/E, P/S, P/B and dividend yield. The addition of this ratio to the composite does not change things so much, however the top 5 is shown below.

Although this type of investment strategy is usually applied by buying a diversified portfolio of the cheapest stocks, and not stock picking, I wanted to focus a little bit on Doro as it has now floated to the top of the list and I would say feels the most difficult to invest in of the five* (curiously the stock is up about 7% these past two days so the above figures are out by a bit).

Doro is a Swedish based company that develops and sells telecommunications products and software that is designed for the senior market. Products include mobile phones, cordless and corded phones, remote controls, alarm clocks and headsets.

I'm sure everyone must know an elderly relative who struggles to understand and use modern telephones, so I'm sure there is a market out there for simplified technology. However, one does wonder where the sustainable business model is, can't they just download an app onto a smart phone that simplifies the user software and shows big letters/numbers?

Anyhow, below is Doro's share price from the past two years, it has pretty much done a round trip from 25sek, up to 57sek and then back again to 30sek!

So what has happened the past year? Well the company has lost a lot if its growth from 2013, with lower sales, margins and weak cash flow (link analysis in Swedish) A company doesn't become cheap without good reasons!

So we know the latest financials are weak and have fallen below expectations, however it might be interesting at this point to (attempt to!) apply some Howard Marks' style of second level thinking (youtube and here) on Doro.

First level: Doro's fundamentals and growth have deteriorated; sell the stock.

Second level: Doro's fundamentals and growth have deteriorated, however the market has priced in too much bad news so the price has fallen too far compared to its fundamentals; buy the stock.

There is no magic or investment edge in the valuations shown in the table, the market sees the number too. Perhaps this is falling knife and we are far from the bottom.

However, what we do know is Mr Market is only prepared to pay this much for Doro's business and at the moment it's relatively little. Such stocks have a habit of surprising investors on the upside.