Value Library

The following is an excerpt from the ABC Perspective - October 2011 - Pg. 1

Despair

As I write our ABC third quarter 2011 market commentary, I am, admittedly, thoroughly perplexed. Interestingly, although the general global macro news headlines have become increasingly bleak, generally, individual corporate earnings and business conditions remain rather benign.

Looking back over the past six months, economic, financial and political news have all been rather dismal. This includes: slowing worldwide economic growth, anemic job creation, festering European sovereign debt concerns – in particular, the unresolved Greek debt crisis, European bank issues with the repercussions of a potential Greek government default, and fears of a global economic double dip recession. In addition, we cannot minimize the impact of the early April 2011 disastrous Japanese earthquake/tsunami and the resulting major Japanese and global economic disruptions.

The onslaught of negativity has culminated into a massive worldwide investor dash to liquidity as panicky investors exited from any or all common stock holdings without hesitation. In many instances, the frightful flight to cash resulted in investors simply hitting any common stock bids with complete disregard to the fundamentals of book and net asset values, price to earnings and price to cash flow ratios of the companies they held.

In this process, many common stocks have been severely pummeled. In particular, many less liquid, small/medium capitalization deep-value equities – the primary focus of our ABC Funds, were absolutely devastated. In effect, investor despair has become rampant. Akin to a dog chasing its tail, the more panicky investors liquidated their common stocks, the lower prices declined and the more they fell, the more margin calls and fearful emotional selling led to even lower prices. Similar to the March 2009 market nadir, extreme investor negativity has become all-pervasive.

At the present time, we believe equity markets are pricing in a significant recessionary environment. While we expect an eventual resolution of the European sovereign debt problem, the steep descent of the broader market has resulted in many equities trading at unusually low fundamental valuations. In fact, many common stocks are now trading at significant discounts to their intrinsic value and well below replacement cost. Specific examples of deeply undervalued ABC Funds holdings include: Daylight Energy, Equitable Group, Flexsteel Industries, Flint Energy Services, Genworth MI Canada, Legacy Oil & Gas, Martinrea International and Savanna Energy Services.

Despite our disappointing performance over the past six months, we are neither despairing nor pessimistic. While persistent negative and emotional news headlines are testing even the most patient investors, we are committed to our investments and believe that positive fundamentals will ultimately prevail. Unlike the global economic crisis that plagued the stock market in late 2008, it should be noted that North American companies are in their best financial shape in decades, with U.S. companies sitting on over $2 trillion in excess cash alone.

In summation, we strongly believe that investors should retain their undervalued common stocks and ride out the current frenzied financial storm.

Irwin A. Michael, CFA