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Nova Lifestyle is a cigar-butt investment

As I was reading the Little Book of Behavioral Investing by James Montier (which I highly recommend) I came across a passage that described my investment in Nova Lifestyle NVFY: (%) perfectly.

Warren Buffett has described Ben Graham’s (his mentor) investment style as cigar-butt investing – that is, buying really cheap stocks almost regardless of the underlying industry economics, and then selling them when they get close to intrinsic value.

Montier 2010

Nova lifestyle is a clear example of a cigar butt company and both my initiation and planned future exit were dependent on the market realizing their intrinsic value not any growth on their part.  The company has a cash balance of close to $50 million and market capitalization plus total liabilities is a little over $28 million. This implies that if the company were to shut down operations tomorrow, equity holders would receive a 52% premium on their holdings.  Management announced last Tuesday that they would begin using their cash to repurchase shares. I believe management will continue to allocate cash to increase their share price bringing it more in line with intrinsic value.

Yes, the company is undervalued.  Yes, the upside is not trivial (>52%).  Yes, management is correctly allocating capital to improve the share price.  However, there are some risks inherent with an investment into Nova Lifestyle.  Firstly the company is a nano-cap corporation (market cap under $50 million). This confers a large amount of volatility and uncertainty regarding their share price and accuracy of their books.  Secondly, the allegations of fraud by Andri capital on Seeking Alpha was disquieting. Although Nova hired an independent auditor to look at the books and the actions taken by Andri were diametrically opposite of their stated position it is still difficult to look past.

Conclusion: The potential to almost certainly double your money when the market becomes rational far outweighs the (probably false) allegations of fraud and its extreme volatility. The only major foreseeable risk to an investment in Nova Lifestyle is ourselves. In order for an investment in such a volatile security to be successful you cannot react to its volatility and must stick to your understanding of its underlying fundamental.

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