Manhattan Bridge Capital (LOAN): Let’s Not Get Too Repetitive

8 06 2010

By any standards, LOAN is not an investment for the faint of heart. Its market cap is only $4.4 million, but it has a net current asset value of $7.4 million. This is a textbook example of the famous Graham Net-Net.

I first found out about LOAN via an investor that I follow on seekingalpha.com (and I suggest that you follow him too!).

Hester does a great analysis in the above article, so writing one here would be mostly repetitive. However, there are a few extra things I’d like to point out. First of all, Hester writes that “LOAN does two things, it provides bridge loans and it does something called factoring.” Once Hester’s article was published, LOAN took notice and released this statement concerning the article.

LOAN writes that they actually don’t take part in factoring anymore. One other thing that I noticed was the number of potentially dilutive stock options that insiders have. Hester addresses this concern (quite intelligently IMO) by pointing out that most have strike prices above where an intelligent investor would sell LOAN anyways. Another possible risk is that of inflation. While inflation is a risk for any company, LOAN does not earn a very high ROE, so inflation could possibly demolish their value.

I think that LOAN is a great deal, and it’s in these sort of micro-cap stocks that small investors have the advantage over large investors. Buffett once said:

There are little tiny areas, as I said, in that Adam Smith interview a few years ago, where if you start with A and you go through and look at everything — and look for small securities in your area of competence where you can understand the business and occasionally find little arbitrage situations or little wrinkles here and there in the market — I think working with a very small sum, there is an opportunity to earn very high returns.But that advantage disappears very rapidly as the money compounds. As the money goes from $1 million to $10 million, I’d say it would fall off dramatically in terms of the expected return — because you find very, very small things you’re almost certain to make high returns on. But you don’t find very big things in that category today.

LOAN is about as good of an example of this as I’ve seen.

Disclosure: Long LOAN

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2 responses

12 06 2010
Ziv

Hey Adam,
Can you explain shortly why low ROE means risk of inflation?
Ziv.

14 06 2010
Adam

Hey Ziv,

I probably should have stated what I meant more clearly. Low ROE doesn’t necessarily mean a higher probability of experiencing inflation, but rather that when inflation is experienced, it’s going to have a more intense effect. In a period of inflation, a pile of cash’s real value just declines. If that cash is being put to a productive use, the decline isn’t so severe. That’s really all I meant.

Buffett’s 1983 letter to shareholders has some pretty interesting points (in the appendix) about companies with large amounts of economic goodwill:

“For years the traditional wisdom – long on tradition, short on wisdom – held that inflation protection was best provided by businesses laden with natural resources, plants and machinery, or other tangible assets (“In Goods We Trust”). It doesn’t work that way. Asset-heavy businesses generally earn low rates of return – rates that often barely provide enough capital to fund the inflationary needs of the existing business, with nothing left over for real growth, for distribution to owners, or for acquisition of new businesses.”

Here’s the link to it: http://www.berkshirehathaway.com/letters/1983.html

-Adam

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