The terror of the lone $LAKE

by It will fluctuate

But when the Night had thrown her pall
Upon that spot, as upon all,
And the mystic wind went by
Murmuring in melody-
Then-ah then I would awake
To the terror of the lone lake.
– Edgar Allan Poe, “The Lake

I have looked at Lakeland Industries with interest several times in the past, and recently three of my favorite bloggers, Saj Karsan, Whooper, and Nate Tobik, have written about it favorably (the first two at a much lower price than today’s, so they’re likely sitting on a nice profit). I don’t have much to add to what they wrote, and agree that, at this price, the odds favor the investor.

But I haven’t invested, because of the debt. There’s some chance, and not a negligible one, that the debt sends Lakeland into bankruptcy, and then into liquidation. How much would the receivables and inventories be worth then? I don’t know, but since those two assets make 80% of the company’s total current assets, any haircut there would hit NCAV very badly.

I’ve made some of my biggest investment mistakes in companies with substantial debt, wrongly assuming that, as usual, it was enough to make sure that value exceeded price by a nice margin. It turns out that debt can distort that calculation (one obvious way is by forcing a sale at a discount), and that’s why I’d rather invest in net-nets that don’t have much debt, like Automodular, which has been discussed here, or Solitron, or Aadvantage Technologies. After all, investing is not “all about what you give versus what you get“. It is about that, but also about what you could get elsewhere.

If Lakeland finds new loans to replace those of TD Bank (and in the unlikely case that the price of its shares don’t go up a lot immediately after the event), I might reconsider.

Long everything mentioned above, except LAKE.