Blessed by the Potato

San Francisco does a lot of crazy things: banning happy meals, yellow pages delivery, and even made an attempt to ban puppies. Yet somehow only one of those wacky ideas has stock analysts quaking in their boots — and it wasn’t the owners of McDonald’s.

I’ve held on to Yellow Pages (now Yellow Media) for over 3 years now, and I’ve lost too much money on it already to consider averaging down again. But YLO is once again under attack.

10 years ago if I had much interest in investing, I would have scoffed at owning YLO. Google and the internet will kill off that business model in a year or two, my internet-savvy Google beta-testing younger self would have said. But it didn’t happen like that: sure, some businesses put up a website, and even got indexed by search engines so you could find them. Larger chain stores had enough of a budget to ensure they had a decent site, maybe even an online storefront… but many didn’t, and weren’t in a hurry to get one. For smaller businesses, the website would often be something the owner’s kid put together in his spare time, and may or may not have looked like the mess Geocities left behind.

So there was still a strong demand for ads in the local Yellow Pages, and YLO even started offering to make mini-websites for these local businesses on YLO’s servers. Restaurants could get not just their name, address, and phone number in the directory, but also a copy of their menu, a short video ad showing the premises, and anything else they cared to include. Though a tech-savvy person or 3rd party web designer could maybe have done a better job with an independent site, for a small business owner that one-stop-shop for advertising with YLO didn’t look too bad. And heck, for local results, Google bought the data from YLO in the first place, so you couldn’t get around giving YLO their due.

And I realized that YLO wasn’t going to die off overnight. It wasn’t going to maintain its former glory, for sure, but the print directory has been in a slow decline these past few years, while the internet side has been picking up.

Now maybe a turning point has been reached, and it’s finally going to go over the edge like people were saying a decade ago. Perhaps all at once rather than slowly, like I thought. Maybe Google has opened the web up so much that there’s no room for paid listings and basic sites (some businesses just get a blogger account, put up a single post, and call it a day). Maybe their debt is looking to be so massive that there’s no value in the equity.

It’s certainly being priced that way.

But I still hold on: the directory business revenues were down single-digit-percent each of the last 3 years, and it just looks so cheap. Maybe it’s a value trap. Maybe it always was. It’s hard to pound the table and call it a screaming buy when there are so many legitimate concerns about its future. I think it’s too cheap to give up and let my shares go, but at the same time I can’t say with confidence that it’s a good buy (and perhaps I’m making an emotional attachment error of judgement).

And I said it when it was $5, and when it was $4; I’ll say it again at $2: as a contrarian, it’s hard to get much more negative sentiment than there is for YLO right now.

Also, I looked at a few other stocks lately:

The Data Group Income Fund could be yet another Yellow Media: it’s involved in dead-tree printing, and doesn’t even own RFD. DGI prints material like reports and advertisements for a wide variety of other companies. The yield is beyond juicy: at 13.5%, it’s signalling trouble somewhere. And maybe I have a blindspot for obsolescence, but I don’t really see it. The cashflow has been looking pretty stable, and can support the distribution. The debt levels are higher than I’d like, at something like 5X cashflow, but it’s not exactly facing imminent bankruptcy. This is one I need to think about longer, because the logical part of me is saying this looks like a pretty good risk/return, but the other part is screaming it’s YLO all over again.

Corning (GLW) is a US large-cap that makes glass. All kinds of glass, but in particular the glass that goes into LCD screens. That’s where they make most of their profits from these days, and I honestly don’t hold out high hopes that that particular business line will continue to be as lucrative for the next few years as it was for the last decade when the HDTV upgrade spree was in full swing. However, the stock is starting to look cheap enough that those risks are likely priced in. The balance sheet is strong, and moreover, the company has a strong history of reinventing itself as needed (from lighting to bakeware to fibre optics to LCDs). It was just under $17 recently, and that’s starting to look attractive to me, but I’m going to wait for a while and hope it comes down a bit more to give some margin-of-safety. But I will be watching it.

AvenEx (AVF) was an income trust that was too weird to look at before, a tiny company acting like a large conglomerate, chasing multiple unrelated business lines. It has since converted to a dividend-paying corporation and focused in on oil and gas production. It’s about 50/50 oil and gas (slightly more gas), but if I’m reading the reports right (and I’m still trying to build an ability to analyze O&G stocks, definitely not there yet though) then the dividend (>9%) is covered by just the oily half of the business, which is good because they still have significant hedges rolling off from when natural gas prices were much higher. If natural gas prices move up in the next few years, then they should probably do fine, and that’s kind of how I’m framing the story in my mind: a dividend player where the dividend is covered by the oil, with the natural gas side as a bonus if/when NG prices recover. However, capital spending also has to be made, and if NG prices stay low, then in ~2 years as those hedges roll off, they may be in a tight spot and have to cut the dividend to keep up capital spending. Another issue may be reserve life. I don’t have the geology skills to know if I’m reading this right, but it looks as though they have ~11 years of reserves, which is fine, but their reserves are growing at only about half the rate they’re depleted, and I’m pretty sure for stability the replacement rate should be closer to 1:1. Anyway, attractive dividend yield which at least for the next few years is covered by cash flow, with well-managed debt. Not sure whether to buy in though since it is still a bit outside my circle of competence, and I have no idea what to think of the management (esp. if they’re switching over from managing what was halfway to a REIT into an O&G company).