A Brief Review of David Einhorn's book: "Fooling Some of the People All of the Time"

One of the tangible things (and there were also a multitude of valuable intangibles) we walked away with from the Value Investing Congress West was a copy of David Einhorn's new book "Fooling Some of the People All of the Time". A long wait at LAX before a Wednesday night redeye back to Philly left plenty of time to crack open Einhorn's 379 page work. Unfortunately, once I started reading, I could not put it down.

Einhorn presents a very detailed account of financial shenanagins happening within Allied Capital, a midcap darling of the high yielding, rising dividend "subculture". Seems that, among other transgressions, the investment company was very reluctant to mark down securities (primarily debt)on its balance sheet that were impaired. Instead of being marked to market, these were "marked to fantasy".

What you will find within the pages of this book will blow you away. This is a tale of deceit, fraud, misrepresentation, cloak and dagger antics, millions and millions of wasted taxpayer dollars, and an unbelivable amount of effort expended by Einhorn and others to bring it all to light. Unfortunately a mounting pile of evidence still falls on deaf ears--far longer than you'd imagine in the post-Enron, Sarbanes Oxley world of today.

Einhorn often takes his lumps in the press for being a hedge fund manager and short seller, (which comes with the territory), and he's been short Allied for years. But don't let that cloud your judgement as to his motives for writing this book: all profits from it's sale, as well as any from his Allied short positon are going to charity.

Einhorn's attention to detail is one of the great attributes of this book, plus he's got a great "voice". This book may go down as one of the classic financial forensics books of our time. CFA wannabe's would do themselves a great service by giving it a read--its a great testament to the propensity of many a modern day analyst to stop well short of the in-depth analysis many aspire to provide.

The Allied Capital story is not over yet, but thanks to David Einhorn for having the guts to bring us in on what's transpired to date. Of course Allied Capital will tell you a much different story--I'm waiting for their book.

I've never met David Einhorn, have never spoken with him, just traded a few emails. (we tangled over a piece we published on St. Joe's back in August. Einhorn believed his analysis had been misquoted, and we subsequently published his response). But I could not walk away from this book without believing that Einhorn has a great deal of character. The fact that he's a hedge fund manager, or profits from short sales does not diminish that character.

*The author does not have a position in Allied Capital, long or short. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks following the date of this post.

Value Investing Congress West: 2008

We're just back from another excellent Value Investing Congress in Pasadena. A lot of great speakers and great ideas; some a bit contoversial. Rather than go into detail, there's a summary of the events on the Value Investing Congress blog.

Tootsie Roll "Pops"; but Don't Get too Excited

Shares of Tootsie Roll Industries surged 6.4% today, due primarily to news that candy giant Mars will acquire gum giant Wrigley. In typical Wall Street fashion, the assumption is that Tootsie Roll won't be far behind. Don't get excited though, we've been down this road before, and still Tootsie Roll shares languish near 10-year lows.

The problem for Tootsie Roll is control; namely that Melvyn and Ellen Gordon control 80% of the company's B shares (with superior voting rights) and 40% of the common shares. Despite their advanced ages, the Gordon's don't seem to be in a hurry to exit stage left. Meanwhile, historically healthy margins continue to slip, a superior brand name languishes leaving a great deal of potential on the table, and opportunities are wasted.

Still, we hang onto our Tootsie Roll shares. Why? Good Question.


*The author has positions in Tootsie Roll (TR) and Wrigley (WWY). This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks following the date of this post.

Top Ten Net/Nets

The combination of volatile markets and economic uncertainty typically provides fertile ground for Net/Nets. Companies already in questionable shape can be beaten into submission, ultimately finding their way onto one of our lists of companies trading below net current asset value.

Sometimes this provides opportunity; sometimes it's the manifestation of Mr. Markets' survival of the fittest. In any event, we are starting to see some new names on the list. More interestingly, some are profitable on a trailing 12 month basis.

Top Ten Net/Nets By Market Cap

Usec(USU)
Price: $5.03
NCAV: $652.3
Mkt Cap: $556
P/E: 5

Adaptec(ADPT)*
Price: $2.95
NCAV: $394.7
Mkt Cap: $357
P/E: NA

Audiovoxx(VOXX)*
Price: $10.95
NCAV: $272.2
Mkt Cap: $250
P/E: 25

Force Prtoection(FRPT)
Price: $2.97
NCAV: $194.7
Mkt Cap: $202.7
P/E: 4
Note: Company currently has a delinquent 10K filing; balance sheet data is as of 9/30/07

Heely's(HLYS)
Price: $4.31
NCAV: $116
Mkt Cap: $116
P/E: 4.5

West Marine(WMAR)
Price: $5.48
NCAV: $146.8
Mkt Cap: $120
P/E: NA

Trans World Entertainment(TWMC)*
Price: $3.5
NCAV: $205
Mkt Cap: $109.2
P/E: NA

Activeidentity(ACTI)
Price: $2.18
NCAV: $108.9
Mkt Cap: $99.8
P/E: NA

Hampshire Group(HAMP)
Price: $9.5
NCAV: $88.7
Mkt Cap: $74.7
P/E: 25.3

Flexsteel Industries(FLXS)
Price: $11.47
NCAV: $75.7
Mkt Cap: $75.4
P/E: 7.8

Ditech Networks(DITC)*
Price: $2.92
NCAV: $86.1
Mkt Cap: $76.1
P/E: NA

*Companies denoted are members of the proprietary Cheap Stocks 21 Net/Net Index

As always, data for net/nets is a moving target, and it is possible that some of the names on this list will no longer qualify once the next quarterly earnings and financial statements are released.

*The author does not have positions in any of the companies mentioned. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks following the date of this post.

St. Joes (JOE) Update

Since hitting the $27 mark in November, St. Joes, Florida's largest landowner has been on fire, hitting $47 in March before pulling back to $40 more recently. You may recall our August 7th post which questioned hedge fund manager David Einhorn's (Greenlight Capital) assessment of St. Joes and Einhorn's response, which we published word for word a few days later. While JOE is certainly well off it's bottom, and there have been some positive developments as of late, we don't see the stock breaching the $80+ level it hit back in 2005 anytime soon. While we still believe the company offers value, it may have gotten ahead of itself in the short-term.

St Joes is a bit leaner than it has been in the past, having shed its home building business, 780 employees, and it's dividend, to go along with some significant management changes. The company is now focused solely on land --not that it's a great time to be in that business, especially in Florida.

Still, JOE does own an impressive portfolio of 700,000 acres (that's more than 1000 square miles) as of February 2008, 310,000 of which are within 10 miles of the Gulf Coast. Now, as David Einhorn previously argued, not all of this is prime, quality land. In fact, during 2007, the company sold 105,963 acres of rural land for $161.3 million, an average of $1500 an acre.

Still, on an Enterprise Value to Acre basis (which puts no value on any assets other than land, and does include LT debt) that's $5100 per acre. If we assume, as in we did in our August 7th post that half of St. Joes land is worthless (which we don't believe to be the case) that puts EV/acres at $10,200. Certainly not as compelling in the midst of a difficult real estate environment, but it is if you believe there are better times ahead for Florida real estate.

In order for JOE shareholders to realize value, the company must ultimately convert its land into cash. The land -even the most rural- does have value, but ultimately, this land must be transacted. Recently, JOE has resorted to interesting (for lack of a better word) methods of doing so, offering 3000 acres in an online auction. Up for bid is land in three St. Joe properties-3,000 acres of recreational property in Gadsden County near Tallahassee, 56 acres in Port St. Joe, and 29.5 acres in Bay County near Panama City. We're not sure whether this represents desperation, or whether JOE is dipping it's toe in the water of a new potential distribution channel.

If there's been any good news lately for JOE, its been the Panama City Airport project--which is underway, and expected to open in 2010. Whether or not the airport will open the floodgates of tourists and homeowners to northwest Florida remains to be seen. But it does potentially strenghten the company's position.

Finally, St. Joes recently sold 17 million shares at $35. Secondary offerings are rarely if ever positive for existing shareholders and dilutive to earnings, but the proceeds should all but cover the company's $500+ million in debt.

We don't currently hold a position in St. Joes (our shares were called in March when the stock blew past our covered write). We still like the company though, and will be looking for a re-entry point, hopefully somewhere below the current price.

As for David Einhorn, we're not sure whether or not he is still short St. Joe's, but would again be willing to print a response from him.

*The author does not have a position in St. Joes. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks following the date of this post.

CS21 Net/Net Index Week in Review & Individual Member Performance

The CS21 Net/Net Index closed the week down 1% to 104.36 Since inception, the index is up 4.36%.

This week, we take a look at index constituent's performance since index inception. The returns are diverse, and lend credence to the notion that if you are interested in owning net/nets, one of the best ways to do so is through a portfolio approach, unless you have a very strong stomach for risk:

CS21 Net/Net Index Members
Prices as of 4/11/08, Returns Since Index Inception(2/12/08), Best to Worst

The Finish Line, Inc.(FINL)
Price: $6.19
Return: 157.92%

Nu Horizons Electronics(NUHC)
Price: $6.59
Return: 15.61%

InFocus Corporation(INFS)
Price: $1.83
Return: 7.65%

MediciNova, Inc(MNOV)
Price: $3.75
Return 7.14%

Emerson Radio Corp(MSN)
Price: $1.17
Return: 6.36%

Audiovox Corporation(VOXX)
Price: $10.25
Return: 5.67%

FSI International, Inc(FSII)
Price: $1.76
Return: 3.53%

Adaptec, Inc(ADPT)
Price: $2.77
Return: -1.07%

Anadys Pharmaceuticals Inc(ANDS)
Price: $1.58
Return: -1.25%

Renovis, Inc(RNVS)
Price: $2.2
Return: -4.35%

Ditech Networks Inc(DITC)
Price: $2.83
Return: -5.67%

Pomeroy IT Solutions, Inc(PMRY)
Price: $6.37
Return: -6.32%

Richardson Electronics, Ltd(RELL)
Price: $4.67
Return: -10.19%

Parlux Fragrances, Inc(PARL)
Price: $3.21
Return: -10.83%

Leadis Technology, Inc(LDIS)
Price: $1.93
Return: -12.27%

Charles & Colvard, Ltd(CTHR)
Price: $1.31
Return: -12.67%

Chromcraft Revington, Inc(CRC)
Price: $4.06
Return: -15.42%

Trans World Entertainment Corporation(TWMC)
Price:$3.34
Return: -24.09%

Replidyne, Inc(RDYN)
Price: $1.55
Return: -29.55%

Tandy Brands Accessories, Inc(TBAC)
Price:$4.73
Return: -38.57%

Handleman Company(HDLM)
Price: $0.42
Return: -72%



*The author does not have positions in any of the companies that comprise The Cheap Stocks 21 Net/Net Index. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks following the date of this post.

Exxon Mobil: The Root of all Evil

Since the gas lines of the '70s, Democrats and Republicans have talked about energy independence, but nothing's changed — except now Exxon's making $40 billion a year, and we're paying $3.50 for gas. I'm (candidate's name). I don't take money from oil companies or Washington lobbyists, and I won't let them block change anymore. They'll pay a penalty on windfall profits. We'll invest in alternative energy, create jobs and free ourselves from foreign oil.

-Presidential Contender (who shall remain nameless)

In the very emotional debate over oil, our title suggests what at least a couple (we won’t name names) of the current Presidential candidates believe. One recently suggested that Exxon’s $40 billion 2007 profit should be subject to a windfall profit tax. Great idea!

Lets punish big oil, they are gauging us at $3.50/gallon. If we garnish their profits, surely we’d all be better off, and the price of gas will fall. We should also force them to contribute to renewable energy solutions, viable or not.

Its not sufficient enough that the evil Exxon empire paid $29.864 billion in taxes last year to Uncle Sam. Nor, that the government picked up another $1 billion in taxes paid on $7 billion in dividends Exxon paid shareholders last year. Nor that there's a $.184 per gallon federal tax on gasoline; not to mention the billions states receive through gasoline taxes.

Exxon's 11.32 percent net profit margin is obscene. Lets tax them to the point that it is no longer worth being in the oil business, no longer worth developing technology to find oil in very difficult to reach places. That will make us all very happy. We can all grow our own corn. Make our own ethanol, and we’ll never be beholden to big oil again.

*The author does not have a position in Exxon-Mobil, but does have a position in Vanguard's Energy Fund. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks following the date of this post.

CS21 Net/Net Index Week in Review: Another Strong Week
The CS21 Net/Net Index closed the week up 5.2% to 105.4. Since inception, the index is up 5.4%.

For the past two weeks, the index is up more than 11%.

This Week's Winners:
Handelman(HDLM): +104.2%
Replidyne (RDYN): +33.1%
FSI Intl (FSII): +25%
Finish Line (FINL): +20%

Losers:
Tandy Brands (TBAC): -17.4%
Chromcraft Revington (CRC): -11.4%
Trans World Entertainmebt (TWMC): -9.5%

Performance: Cheap Stocks 21 Net/Net Index vs Russell Microcap Index
Since inception (2/12/08):
CS21Net/Net: +5.4%
Russell Micro: -1.42%

We've stated often that net/nets are cheap for a reason, and they don't typically make the list because of positive company performance. They are often beaten down beyond belief, and the 1 year performance of the current members of the CS21 net/net index certainly proves this: On average, the 21 companies in the index are down an average of 53.33% since last year! Talk about bottom fishing! Could the CS21 Net/Net Index be the poor man's "Dogs of The Dow"?


*The author does not have positions in any of the companies that comprise The Cheap Stocks 21 Net/Net Index. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks following the date of this post.

Value Investing Congress West: May 6 & 7
Last May, we attended our first Value Investing Congress in Hollywoowd, and were extremely impressed by this conference; from the quality of speakers, conviction of ideas presented, to the venue. We are heading back again for this year's edition, in Pasadena.

The folks at The Value Investing Congress have been kind enough to extend a $500 discount to Cheap Stocks readers. If you are intested in attending, please click here and use discount code P8JHBL1, which will be good until April 20th.

Hope to see you in Pasadena!

Premier Exhibitions (PRXI): Value not Without Controversy

Of all the presentations we saw at last year's Value Investing Congress in Hollywood, one of the most interesting featured Premier Exhibitions, the Atlanta based company that develops and promotes touring exhibitions around the world. Not just any touring exhibition, mind you, and that's where controversy enters the picture.

Premier happens to operate the highly successful Bodies: The Exhibition, which features whole and partially dissected human bodies, preserved through a technique called "polymer preservation". Certainly not my cup of tea, although the exhibit apparently does an excellent job of displaying the complexity of the human body, as well as detrimental effects of some of the things we know we shouldn't do, such as smoking and overeating.

In order to have a body exhibit, you need human bodies, and questions as to the sources of those bodies were raised on a 2/15 episode of ABC's 20/20. While Premier claims to lease the bodies(all said to have died of natural causes)from a Chinese university, 20/20 suggested among other things that some may have been prisoners, and not all died of natural causes. Of course, if true, the human rights violations are obvious. In reaction, politicos around the country moved quickly to stop the exhibits. The company responded with a press release vehemently denying the claims, and it is worth reading.

Obviously, the stock was punished, falling about 25% in the days following the 20/20 broadcast, to the $4.5 level (its also down significantly from year ago levels of $11.50). The controversy seems to have slowed regarding "Bodies", but there's a more compelling reason to take a look at this company; the primary one that led us to take a position last month.

Premier also happens to operate the traveling Titanic exhibits. But its also the salvor in possession of the Titanic, with exclusive rights to recover artifacts
from the wreck site. The company already holds an impressive array of Titanic artifacts, potentially valued into the hundreds of millions.

Not without its own controversy, the Titanic ownership issue is still in the courts. Earlier this week, the company received a favorable ruling from the government, which has essentially given thumbs up to company ownership of the 3500 artifacts it has already recovered (worth an estimated $100 million or higher). Now its back to the courts, who'd asked the government for guidance on the issue.

This may also be a step closer to Premier being allowed to resume excavation of the Titanic site in order to recover more artifacts. Some have suggested this may all be worth up to $3 billion, a figure we view with some skepticism.

There are apparently stipulations on the collection, one of which is that if Premier ever wants to sell, the company must sell the entire collection at once. This somewhat limits Premier, and perhaps lessens the value of the artifacts, but we still believe this company offers compelling value.

Premier's current market cap is less than $200 million, the company is profitable, and has no debt. Prospective investors must recognize the controversy, volatile nature of the stock and understand that Premier's future is dependent on the courts, and settlement of some rather controversial issues.

Premier Exhibitions: (PRXI)
Price: $6.37
Market Cap: $192 million
P/E: 14.6
Cash: $29 million
Enterprise Value: $167 million
Profit Margin : 24.7% (2007)
27.2% (9 months ended 11/30/07)

*The author has a position in Premier Exhibitions (PRXI). This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks following the date of this post.