DHB Industries, Inc.
My DHB Story contintued...

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By BenHacker
September 6, 2005

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I just got back from a weeklong vacation (no media access) and I had a lot to catch up on in the financial world. Katrina, Gas, Oil, various stock price movements, etc. And then I saw DHB @ $4.77... I thought Quicken's website was screwed up... and then I read the news.

Sorry for those long DHB, I feel for you, but I thought I would hunt down a message I wrote on the HG Watchlist message board a year and a half ago and add some of my current thoughts.

For those who don't have access, [ Take a Hidden Gems free trial here] I'll repost:

---- From HG Watchlist board - 1/22/04 ----

"I thought I would share my story about DHB.

After a lot of reading about investing and some work on valuation I decided to take my first plunge into the stock investing world (I had just been indexing before that) by purchasing a company that I thought would be a great investment - DHB. I made this purchase for a bout $2 back in September 02'. Now before you all get jealous of my beginners luck, read on...

I am the kind of person who HATES to lose money more than anything. So once I had some money on the investing table I began to learn about investing at about 10 times my previous rate, and I began to dig deeper into DHB. I came to realize that DHB was:

1) Cheap, really cheap.
2) Selling a great product
3) holding a competitive advantage (gov contracts and whatnot)
4) run by management that was not so good - weird non-independent corp. loans - CEO had been convicted of some insider trading in the past.
5) Dilution was intense

I thought about it for a while, and I decided to sell my shares soon after I bought them for a 15% gain. The stock proceeded to fall to $1.26 and I checked in on it occasionally and watched to rise to about $8 just a while back.

I'm not sharing this because I want to bash or pump DHB now, I just thought that it was an amusing learning experience. DHB will likely always carry a discount because of its management, but how much of a discount is the question. I think that my decision over a year ago was correct, but I still missed out on 4 bagger.

I hope someone found my story amusing or interesting, I certainly do. Good luck to all the DHB investors out there, we might see another 4 bagger from here, but I think I'll still be on the sidelines...

Ben - not as sad on missing a 4-bagger as you might think, the learning was more valuable."

---- End of original message ----

After I wrote this message, I watched the stock nearly triple AGAIN; meaning that I missed out on a potential 10 bagger from my initial price of $2.35 (and keep in mind this was the first stock I ever invested in... wow...). What did I miss out on...

The thing I find interesting (and the reason that I'm writing this; to share what I've learned) is that as time passes, regardless of what the price of this stock has done, it has only been solidified in my mind that much more that I made the correct choice to sell. And I still think DHB is worth in its current state just above $0. Let me elaborate...

Over the years, I've settled that there are (like most Fools) three basic ways to value a company/share of stock:

1. The first most basic way is what I consider a balance sheet valuation. You basically figure out what all the assets of the company are worth, and then you say that the company is worth some value based on that.

2. The second method, which is commonly discussed here on the Fool, is a discounted cash flow (DCF) analysis. Basically, you assume that you are a business owner, and you discount the free cash flows of the firm at an appropriate rate.

3. Takeover value � you can assume that an investor will take the business private at some value, and you will buy at some discount to that price.

Since DHB's value stems from operations, I think we can all agree that a NAV sort of valuation (#1) doesn't make much sense. So that leaves #2 and #3. What originally made me decide to sell the shares I owned in DHB was that after looking into the management, I saw that the fair value of DHB using method #2 is approximately zero, and the value of #3 was only slightly above zero due to Mr. Brook's near majority (at the time) stake.

What is all the more clear to me today is that if a company has a controlling management team that's not on the same team as shareholders, you can't use just measure the discounted cash flows of the business and come up with a value... because you ARE NOT an owner, and those cash flows will NOT accrue to you. You're just a sucker who is in the market to create liquidity for the executives' stock options sales.

I think that this lesson is non-intuitive for many because they see a company growing, and profits building up, and book value growing, etc. The problem is that some companies can essentially be turned into a wealth transfer machine from owners to management, and your % of that growing book value decreases every year (This is what I believe DHB has been for years.).

What I believe now more than ever is that if a company has management that is anti-shareholder (not just incompetent), and that does not pay a dividend (I guess that was redundant), it is worth only what it would be worth to a would-be acquirer AFTER factoring in the probability that it WON"T be acquired.

Some people now (and back when I owned the stock) talk about how Brooks' owns so much stock that he has it in his best interests to get the stock price up. I would say that is true, but only marginally. If he can just grant himself some more warrants at $1, why does he care... he has control with his entrenched board, and he can just mint some new shares or re-price some options, etc if he wants... I've seen better investment thesis then "Brook's is greedy so he'll get the stock price up..."

Just remember, when we put our money in a company for the long term, we our giving our capital to another person or group to deploy it for us. DHB seems cheap by many metrics, but there is no amount of cheap that would convince me to leave my hard earned $$$ with David Brooks. This is the same way I would pay many kinds of expensive to leave my $$$ with Warren Buffett to manage them.

Once again, I'm not trying to bash DHB... I just wanted to share one of those lessons that all new investors have to learn. I didn't learn it the hard way, and I thought perhaps I could help a few new and old Fools escape a little wrath as well (in DHB or other issues).

Best of luck to all, and I truly hope that DHB turns into a 10-bagger for someone (other than Brooks that is).


Ben � No position in DHB, Long BRK.b � and still not regretful about missing a 10 bagger... especially after it turned back into a mere double... :-)


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