Li Lu teaches you how to bottom-fish unpopular stocks, excerpted from Columbia Business School speech, must-watch

The example is investing in Timberland during the 1998 Asian financial crisis, purely practicing the strategy of buying when no one cares and selling when everyone is excited.

Use the new low list to screen target companies

First, focus on companies hitting new lows, whether it's price-to-book (PB) ratio, price-to-earnings (PE) ratio, or other indicators. Compared to the list of stocks hitting new highs, those hitting new lows are indeed more attractive.

In August and September 1998, Timberland's stock price was around $28, hitting a new low, which caught Li's attention.

Valuation analysis of target companies

The first priority is valuation. If the valuation doesn't meet the standard, no other conditions will work. So, how was Timberland's valuation?

2.1 Net asset analysis

Net asset (book value) analysis is the most important, requiring the market cap to be below book value. But every time you see the market cap below book value, you need to clarify: what exactly is included in the book value?

In Q3, Timberland had $300 million in book assets. Current assets were $200 million (including $100 million in cash), and fixed assets were $100 million. Further research revealed the fixed assets were real estate. With a $300 million market cap and $300 million in net assets ($200 million in current assets, $100 million in real estate investments), the company had decent downside protection.

2.2 Profitability analysis

Focus on EBIT and calculate the return on investment without debt leverage to see the essence of the business.

Timberland's operating margin was about 13%, with operating revenue of $808.5 million and profits of around $101.1 million. The actual invested capital was $200 million, so the company's return on invested capital was about 50% at the time. So, this was a good business.

2.3 Business outlook analysis

Li visited various stores and found that people at the time considered wearing Timberland shoes fashionable. Stores complained about frequent stockouts, almost to the point of being unable to meet demand. From this perspective, Timberland's growth prospects were still quite good.

Analysis of reasons for low valuation

Since this was a good business, why was the price so low?

3.1 Macro environment analysis

The 1998 Asian financial crisis caused competitors like Nike and Reebok to see significant declines in their Asian performance, leading many to believe Timberland would also suffer.

3.2 Survey industry insiders' views

Surprisingly, there were no analyst reports—no one was paying attention to this company! A review of its financial data over the past 10-15 years showed the company had little need for market financing because its business was growing steadily, profitability was improving, and it had long-term excellence, so it didn't care about the capital market.

3.3 Poor ownership structure

A family-controlled business, with the family holding 40% of the shares and 98% of the voting rights. This ownership structure directly turned many investors away.

3.4 Numerous shareholder lawsuits

There were many shareholder lawsuits, suggesting the company was harming minority shareholders' rights.

In summary, for someone without deep knowledge of the company, it would seem too risky and not worth investing in. This explains why the price was so low.

However, Li downloaded all the court records of the lawsuits and read through them, only to find that these lawsuits were just repeated complaints about the same issue. The court records also revealed the management team to be very straightforward. Additionally, their business in Asia was mainly footwear, accounting for less than 10% of their operations, and footwear accounted for less than 27% of Timberland's total business. So, Asia's business was only 27% * 10% = 2.7% of the company's total—losing it wouldn't matter much.

Analysis of management quality

Li positioned himself as an investigative journalist, immersing himself in their community, church, and neighborhood, truly becoming one of them to understand what contributions the management made to the community and how neighbors praised them. This gave deeper insight into their character. He also clarified family relationships—Li even became colleagues with the chairman's son and learned that the chairman's family was highly admirable. This strengthened his investment confidence.

Buying and selling points

After completing the above analyses, he concluded the company had minimal downside risk and a P/E ratio of only 5x, so he invested heavily. Within two years of buying, the company's stock rose 6x, but the P/E never exceeded 15x, and profits grew 30% annually.

Later, the new CEO shifted the company's philosophy and began engaging with the capital market. The first analyst meeting had only three attendees, but by late 2000, 50-60 people showed up, packing the room. Li Lu judged it was time to sell.

Only applicable to U.S. stocks.