Wednesday, December 27, 2006

Cramer May Be Right About Jones Soda (JSDA), but Keep it in Perspective: Investors Beware: Do Your Homework First

First of all, for Cheapstocks to take a positive view on a company such as Jones Soda (JSDA) was a stretch. To actually take a position in this growth stock went far beyond that. We are deep value investors by nature, and paying 100 times earnings for a company that also has a high price/sales multiple, and little in the way of assets goes against our nature. But we bought Jones anyway, placing a high value on the intangibles: brand name, growing recognition, innovation in a somewhat stale industry, and great tasting products.

However, we were perplexed by Jones 12% pop last Friday(12/22), come to find out that it was a Jim Cramer-induced rally. On Mad Money's Thursday edition, Cramer spoke highly of Jones, suggesting for one, that earnings could double next year. This propelled the stock on Friday, amid a frenzy of message board activity. Small investors everywhere wanted to join the party.

We could only shake our heads in disgust. Oh, it's nothing against Jim Cramer, we believe he is not only entertaining, but has a great gut for the market. We wish we were as savvy as Cramer can be. But for one man to have a legitimate and well thought out opinion on literally every stock is hard to imagine. But thats another story.

When Cramer said that he expected earnings to double next year, that should have been the cue for investors to investigate what that statement actually meant. Jones earned $.06 per share in 2005, and is expected to earn the same for 2006 (year ends in late December). The average analyst eps estimate for 2007 is $.12 per share. So, if earnings did indeed double, Jones would still be trading at 100+ times earnings. Even if the high estimate for 2007 ($.20) was achieved, the stock still trades at 60X earnings.

Our point is that investors need to do a better job of interpreting what the pundits are saying. Jones earnings had better at least double in order to justify its current price, (as well as its price before Cramer's comments).

We'd love to see Jones go to $20, $30, $50, $100 per share. But not because of hype, not because of "irrational exhuberance", not because small investors are jumping on a bandwagon.

Are we shooting ourselves in the foot with these comments (we hold JSDA)? Maybe. But we are big believers in accurately interpreted information. If Cramer said that Sirius earnings would double next year, would investors quickly pile into that stock as well, without doing their homework? We hope not. Sirius has no earnings.

*The author has a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

Tuesday, December 26, 2006

It's Not Easy Being Net(Net)

This website was originally built and dedicated to identifying potentially profitable ideas among the ranks of companies trading below their net current asset value. In the ensuing years, we’ve expanded into other areas—anywhere we find value, be it real estate, companies going private, etc: Which is a good thing, given the fact that the net/net world has become very stale, and somewhat boring. You’ll no doubt see what we mean later in this piece when we reveal the list of the top 10 net/nets in terms of market cap: you’ve probably seen them all before.

The reason we are not finding many interesting net/nets these days is related to the strength in the markets. In terms of net/nets, a rising tide (the markets) does lift all boats: including those with holes. Net/nets are few and far between as compared to when we started looking at them five or so years ago. We counted as many as 500 in 2002-2003, now there are less than 100, and many are so tiny that they don’t bear mention.

Don’t worry though, there’s other value out there, and we’ll continue to offer our opinions and insights (as convoluted as they may often seem). Don’t be fooled though, there will be another time when the net/net list grows, when the markets suffer from a downtrend. Meanwhile, we’ll enjoy this bull-run we are currently experiencing, maybe a bit skeptically. And we’ll still churn out research on the oft chance we identify an interesting and compelling net/net. We actually identified one the other day, and took a position, but the company is so small and trades so infrequently that we are hesitant to reveal it, for fear of being branded a pumper and dumper. That is not what we are about.

Below is a list of the top 10 companies trading below net current asset value in order of market cap:
InFocus Corp(INFS)
Lazare Kaplan Intl(LKI)
Orthologic Corp(OLGC)
Overland Storage(OVRL)
Kaiser Group Holdings(KGHI)
CallWave Inc(CALL)
Inhibitex Inc(INHX)
Selectica Inc(SLTC)
Remec Inc(REMC)

Here are the top 10 double net/nets-companies trading at less than twice NCAV:
Ingram Micro(IM)
Tech Data Corp(TECD)
Celera Group(CRA)
Sycamore Networks(SCMR)
Leapfrog Enterprises(LF)
Elector Scientific Industries(ESIO)

*The author has positions LKI, and LF. This is neither a recommendation to buy or sell these securities. All information provided believed to be reliable and presented for information purposes only.

Tuesday, December 19, 2006

The JG Boswell Conundrum: Lots of Water, yet no Liquidity

JG Boswell continues to prosper in silence. The owner of some 142,000 acres of prime California land (along with 30,000 in Australia) continues to grow cotton and other crops, continues to pay your Cheap Stocks editor and some 500 or so other shareholders $3.50 per share in quarterly dividends, and continues to be rather tight lipped about its finances. We knew that would be the case going in, yet we continue to add to our holdings, little by little. The truth is, shares rarely trade, and it is difficult to find more than a handful for sale. Call it faith, call it gut feeling, or call it blind stupidity.

We call it value. At a market cap of around $600 million, and assuming an enterprise value of $800 million (exact figure unknown), that yields an estimated EV/Acre of $8000-$9000. As the share price has run up from the $300 range 3 years ago to about $700 per share, that figure is not as compelling as it once was (see our January 2005 research), but there is much more to the story than land.

JG Boswell’s cotton land is on the dry bed of Tulare Lake. Below Tulare Lake sits an aquifer that according to a recent report in Money Week titled “how to profit from the world’s water crisis”, is estimated to hold between 400,000 and 2,000,000 acre feet of water. (An acre foot measures the amount of water that would cover the area of one acre by one foot). This is enough water to serve 800,000 Californian families annually. The article also states that the California water agency values water at $10,000 per acre foot, giving Boswell’s aquifer alone a potential value of between $4 and $20 billion. That by the way, does not include the value of the land. While we could only hope this analysis is accurate, we discount it by our very nature.

Incidentally, if you wish to do further research on Boswell, good luck. You won’t find financial statements; the company does not have to file with the SEC. But for an excellent company history and for some perspective, we recommend a book about the company and it’s founder The King Of California: J. G. Boswell and the Making of a Secret American Empire.

Previous JG Boswell Research:

*The author has a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

Thursday, December 14, 2006

Avoca(AVOA)Declares Dividend: $720

Today, Avoca Inc declared a $720 dividend payable 1/31/07 to shareholders of record 1/12/07. The stock will "trade" (quotes around trade because the stock rarely does) ex dividend 1/10/07.

We were slightly disappointed with the amount, despite the indicated yield of 11.43% based on the most recent bid price of $6300. As you may recall, our 12/01/05 Avoca update suggested a dividend of between $800 and $1000.While we were out of range on our estimate, that brings total distributions over the two year period we've owned Avoca to $1470 per share. (We paid around $28.25 share prior to the 1 for 100 reverse split/delisting). No complaints here.

*The author has a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

Wednesday, December 13, 2006

Maui Land and Pineapple (MLP) Update

Maui Land & Pineapple Co, the Hawaii based pineapple producer/land developer has continued to fly under the radar since our initial research. The company had a solid 2005 with revenues of $186.7 million, up from 2004's $153.2 million and net income of $14.6 million, from a loss of $400 thousand. Through the 9 months ended 9/30/06, the company reported revenues of $132.4 million, and net income of $8.7 million (vs $118.1, $9.7 for the same period last year).

We originally took a position in MLP because of its land holdings (28,000+ acres) in Hawaii. We were not crazy about their low margin pineapple business, but to us, that’s a freebie.

Resort segment: Kapalua Land Company
Nine Miles of Hawaii Beachfront

Part of Maui Land’s 28,200 acres include 22,800 in West Maui, including Kapalua Resort a golf community, which borders the ocean, and boasts 3 beaches, 2 hotels, 3 championship golf courses, 10 restaurants, and 700+ single family homes and condominiums. Oh, did I mention the 9 miles of beachfront property?

Approval for Expansion
The big news for MLP was the recent decision by the Maui Planning Commission which approved Maui Land's plans to build multimillion-dollar homes and a new private golf course at the Kapalua Resort. This potentially opens the door for the company to finally unlock shareholder value.

At it's current enterprise value of $263 million, that MLP's land is valued at about $9300 per acre, on an Enterprise Value/Acre basis, a calculation we are fond of here at Cheap Stocks. Granted, some of the land is preserved, and land utilized in the pineapple operation (6000 acres) is not nearly as valuable as the Kapalua Resort property. But, a compelling calculation nonetheless.

*The author has a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

Friday, December 08, 2006

Jones Soda(JSDA)Goes Back to Basics

Jones Soda's recent announcement of the introduction of a sugar sweetened soda, as opposed to the more typical corn syrup sweetened variety, went largely unnoticed by the Street. Can you blame them? What's the big deal. Corn syrup or sugar? Who cares, what's the difference anyway?

Soda afficionados know that there is a huge difference. Pure cane sugar just plain tastes better. Some of us go to great lengths prior to Passover (your very Presbyterian Cheap Stocks editor included) to obtain supplies of Coca Cola's kosher version of Coke, made with sugar, produced in limited quantities and available only in certain parts of the country. It tastes like the Coca Cola from many years ago, much better than the corn syrup version, with a much healthier head of foam.

Jones is touting their soon to be released Jones Pure Cane Sugar Soda as a healthier alternative to corn syrup sweetened sodas. While cane sugar is natural, high fructose corn syrup is not. Whether or not there are health benefits is up for debate.

Jones sees this new release as a differentiator in the already highly competitive soft drink market. Ultimately, if taste wins out, perhaps Jones and ultimately shareholders will benefit.

*The author has a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

Friday, December 01, 2006

Avoca (AVOA) Reports Third Quarter Earnings; $1000 dividend in 2007?

Avoca Inc, the owner of 16000 acre Avoca Island off the coast of New Orleans, which generates the bulk of revenue from gas royalties, recently issued 3rd quarter financial statements. For most companies the act of doing this is both required and expected, but for Avoca, which delisted in 2004, there is no requirement. Still, the company continues to keep shareholders well informed.

For the 3rd quarter, revenues were $3.5 million, up sharply over last year's $1.3 million. However, $1.8 million of that represented proceeds from the settlement of a lawsuit. Net income was $2.3 million, or $291.32 per share up form last year's $835,000, or $103.65 per share. For the nine months ended 9/30/06, revenues were $9.95 million, (vs $3.7 million), and net income was $6.6 million, or $818.64 per share (vs $2.3 million, $291.05/shr).

Last year, Avoca paid a $400 dividend in January (declared in December). Since the company typically pays out most of its earning in dividends, we expect this year’s dividend may be in the range of $800-$1000.

Since Avoca is thinly (if ever) traded, its difficult to get a true sense of valuation. Indeed, the company has just 8059 shares outstanding, and the most recent bid price was $6000 (no ask). If that is truly representative of Avoca’s value, that would give the company a market cap of $48 million, a p/e in the 4-5 range, a trailing twelve month dividend yield of 6.7%, and an expected yield of between 12 and 16%, if our estimates are correct.

If that sounds too good to be true, keep in mind the risks inherent in investing in such a company. First, there is no liquidity. Shares are difficult to buy, and sell. Second, Avoca operates in a commodity based (gas royalties) business where there can be very wide price swings. Third, information is difficult to find. Before Avoca delisted (1 for 100 reverse split, to avoid costly provisions of SarbOx) they were required to file financials with the SEC, now they are under no such requirement. Fortunately, for shareholders, Avoca continues to send audited financials, not available to anyone else.

*The author has a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

Monday, November 27, 2006

PICO Holdings (PICO) Reports a Strong 3rd quarter

PICO Holdings, which we’ve referred to in the past as the “poor man’s” Berkshire Hathaway, recently reported third quarter sales of $37.2 million, up from last year’s $8.1 million, with net income of $11.8 million versus last year’s $9.2 million loss. The increase in revenue and net income was due primarily to the sale of the Spring Valley Ranch and related water rights for $22 million, or $18.8 million pre-tax. The company originally acquired Spring Valley out of bankruptcy in 2000.

PICO continues to sell off Nevada land, but still has 648,000 acres in inventory, or about 1000 square miles. When we originally purchased PICO, land holdings were about 1.2 million acres, and the company continues to opportunistically convert this land into cash.

One major disappointment has been Hyperfeed Technologies which contributed a loss of $7.8 million for the quarter. Hyperfeed appears to be the only major miscue by PICO since we’ve held shares, and we say good riddance as PICO has come to the realization that this was a terrible investment.

With appeals rejected, the company continues to build the 35 mile pipeline which will annually deliver 8000 acre feet of water from Fish Springs Ranch to the North Valleys of Reno, Nevada. According to PICO, this will be the only source of water to new developments in that area.

Balance Sheet
PICO’s balance continues to be strong, with cash of $115.8 million, and investments (not including land and water rights) of $286 million. Keep in mind, though, that the increase in cash is primarily due to the May 2006 sale of 2.6 million shares of PICO common stock. Also, completion of the pipeline to Reno is expected to cost between $78 and $83 million over the next 9 to 15 months.

We continue to hold PICO shares, and believe that the company is executing well, Hyperfeed aside. Even Warren Buffet strikes out once in awhile.

Previous PICO research:

*The author has a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

Thursday, November 23, 2006

Cheap Stocks added to's Top 100

We are very pleased to have been added to this sites Top 100 Finance/ Business / Investing Blog Index. We've received frequent mentions in James Altucher's Daily Blog Watch on, and are thrilled that he added us to his top 100 on as well.

We'll continue to try and push the envelope at Cheap Stocks, offering off-the-beaten path ideas. Thanks for reading, and Happy Thanksgiving!

Saturday, November 18, 2006

Schwab Weighs in on Our Porfolio, and it’s not Pretty

It’s report card time again for millions of students, and we thought it appropriate to review our grades again, that is, your Cheap Stocks editor's portfolio as graded by Charles Schwab. We ran a similar column 2/3/06, and our grades were miserable.

We were prompted to do the exercise again by a piece of mail we received from Schwab yesterday, a four page post-card size piece which states:

You’ve been working so hard you haven’t had time to plan for not working
Start today with your Get On Track portfolio Counsultation

The fact is, we'd be afraid to ever make that phone call. The analyst on the other line would no doubt be shocked by our portfolio. He/she would probably not even recognize 90% of the names. Which is just fine with us. We still see opportunity where few others do. Sometimes to our detriment.

This is not to denigrate Schwab, or their rating system. We've had a Charles Schwab account for years, and their service has been outstanding. Plus it's natural that their stock rating system would cater to the more common names, where there's actually data available, and liquidity (unlike some of the names in our portfolio)

Our Report Card

Avoca Inc (AVOA): NC
Bactolac Pharmaceuticals (BTCP): NC
Biloxi Marsh Lands Corp (BLMC): NC
JG Boswell (BWEL): NC
Gallery of History (HIST): NC
Jones Soda (JSDA): D
Lazare Kaplan Intl (LKI): NC
Maui Land and Pineapple (MLP): F
PICO Holdings (PICO): NC
Plum Creek Timber (PCL): NC
Southwest Water (SWWC): D
St. Joes (JOE): F
Tejon Ranch (TRC): D
Tootsie Roll (TR): C
Vermont Pure Holdings (VPS): NC

Names in italics: Research in previous postings
Names bolded: New to Portfolio since previous report card

In Summary, our grade point average is a solid D, with 9 incompletes (NC). Our grades continue to slip. Last time, we had a C- and 9 incompletes. What hurt was the fact that we closed positions in some well-known, widely held large cap names.

Positions Closed Since Last Report Card:
Abbot Labs (ABT)
BHP Billiton (BHP)
McDonald's (MCD)
Merck (MRK)
Northern Orion Resources (NTO)
Temper Pedic Intl (TPX)
Infinity Pharmaceuticals (INFI)(formerly Discovery Partners)

Tuesday, November 14, 2006

Next 10 Net/Nets by Market Cap

As we promised in our last column, below is a list of the next ten net/nets (companies trading below their net current asset value) in order of market cap.

Adams Golf (ADGO)
Boston Communications Group (BCGI)
Peak Intl Ltd (PEAK)
Meade Instruments Corp (MEAD)
Strategic Distribution (STRD)
American Homestar Corp (AHMS)
First Aviation Svcs (FAVS)
Bexil Corp (BXL)
Praecis Pharmaceuticals (PRCS)
Eternal Technologies (ETLT)

Please proceed with caution with any of the names on this list. We have not initiated research on these companies, this is simply a list of companies meeting the net/net formula criteria. We are familiar with Adams Golf (ADGO) which happens to be one of the only profitable names, and has a relatively large cash position ($11.7 million) relative to market cap ($35 million).

*The author does not have a position in any of these companies. This is neither a recommendation to buy or sell these securities. All information provided believed to be reliable and presented for information purposes only.

Thursday, November 09, 2006

Top 10 Net/Nets by Market Cap

Since we last published this list in June, we are happy to see a few new names. Happy if only because the world of net/nets is typically very static, and it's nice to have some new blood from time to time. Still, we are not seeing many "quality" names, as convoluted as that may sound for an investment technique (companies trading below their net current asset value) bound to identify troubled companies.

Here they are, in order of market cap:
  1. Audiovoxx (VOXX)
  2. InFocus Corp (INFS)
  3. Harbor Acquisition Corp (HAC)
  4. Lazare Kaplan Intl (LKI)
  5. Selectica Inc (SLTC)
  6. CallWave Inc (CALL)
  7. Orthologic Corp (OLGC)
  8. Remec Inc (REMC)
  9. Inhibitex Inc (INHX)
  10. Intrabiotics Pharmaceuticals (IBPI)

(Companies in bold are new since our last list.)

Still slim pickings, we know. Not one of the bunch is currently profitable on a trailing 12 month basis. All but Lazare Kaplan (which we own) are awash in cash relative to market cap.

There appear to be some interesting names further down the list, but all are tiny: in the $10-$35 million market cap range. We'll save that for another day.

*The author has a position in LKI. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

Saturday, November 04, 2006

Taking the Leap: A Deep Value Investor Goes out on a Limb with Jones Soda (JSDA)

When we first published research on Jones Soda (JSDA) we acknowledged the fact that such a company had no business being within ten feet of our value oriented website. We are not too keen on small growth oriented companies trading at 100X earnings. But we are also the first to admit that there are other ways to view the world than our rather narrow view of value. While we were intrigued with Jones at the time of our research, we held out for a year before taking a position.

The Case for Jones
Lets face it, its not about the fundamentals, the company trades nowhere near its net current asset value, does not have tons of cash, does not own a nice tract of land or valuable water rights, nor is it about to delist to avoid the costly provisions of SarbOx—the typical common (and sometimes boring) themes here at Cheap Stocks. Our interest in Jones stems from what we view as a talented, innovative, creative, think-outside-the box management staff that has taken a start up to $34 million in sales in short order. Our frequent trips to Target always involve a stroll down the soda isle, and we were initially surprised to see Jones 12-packs proudly displayed (that arrangement will ultimately come to an end, but we understand that to be Jones decision, not Target’s).

2005 sales were $34.2 million, up 25% from 2004's $27.5 million. However, net income was flat at $1.3 million. For the first 9 months of 2006, sales were $28.5 million, with net income of $2.9 million, for a solid 10% profit margin. We'll have to see what Q4 brings. Make no mistake, this company is not exactly cheap at 60 times earnings, and there's a substantial amount of growth priced in.

While creativity does not necessarily translate into cash, it may when a company is able to create strong brand awareness, and a following. Jones has done this through innovative flavors (who can forget the annual Thanksgiving releases: A limited edition run of flavors including turkey and gravy soda), packaging (the company solicits photos from Jones loyalists to be part of bottle labels), and an engaging and entertaining website.
Call it what you will, but for once, we've stepped out of the value box, and so far its paid off nicely. We'd only hope that Ben Graham would forgive us for our foolishnes.
*The author has a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

Tuesday, October 31, 2006

Update: Tootsie Roll Industries(TR), 3rd Quarter Results, the Gordon’s are Hanging Tough
Tootsie Roll Industries recently reported a decent 3rd quarter. Net sales of $186.4 million were up 7% year over year, while net income of $28.97 million was up 5%. Net profit margin was a healthy 15.54%, but down from last year’s 15.93%.

Our original research on Tootsie Roll focused on the company’s high level of profitability, with admittedly flat sales, in conjunction with our theory that the company would make a great takeover target. This was based not only on the attractive brand name, strong balance sheet, and relatively high profit margins, but also that the majority owners, the Gordon’s (Ellen, President, COO, and Director and Melvin, Chairman of the Board and CEO), who own 40% of the company, are aged 74 and 86 respectively. We surmised that they’d be looking for an exit strategy, and companies such as Hershey’s (HSY) and Wrigley’s (WWY) would be potential suitors.

Fast forward 2 years, and not only are the Gordon’s still in control, they’ve made a major acquisition (Concord Confections), and if Sifel Nicolaus analyst George Askew (who has a hold rating on the shares) is correct, the company may be in the market for the New England Confectionary Company (NECCO), maker of NECCO wafers, Clark Bars, and one of your editor’s old-time favorites, the Sky Bar. Askew suggests that NECCO owner UIS Corp may have the company on the block, in the $150-$200 million range. NECCO 2005 sales were $80 million.

Looks like the Gordon’s are not slowing down, but rather trying to build their brand. More power to them. We’ve been wrong before. We continue to hold Tootsie Roll shares, and still believe that ultimately, the company will be acquired. While the valuation from a p/e perspective does not seem compelling at 23 times earnings, this is a high profit margin business, which should trade at a premium. Healthy amounts of cash, ST and LT marketable securities in excess of $100 million, and little debt complete the picture.

Previous Tootsie Roll Research:

*The author has a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

Saturday, October 28, 2006

Stretching the Net/Net Definition II: Leapfrog Enterprises (LF)

Those of you who are not familiar with this company may not be thinking hard enough, especially if you are parents of small children. California based Leapfrog makes technology based educational products, aimed at sharpening children's skills, but in a fun and entertaining way. (If you have a LeapPad lying around your house as we do, you'll know what I mean).

Leapfrog has had its share of challenges in recent years, evident by it's stock price, and also by the fact that most analysts don't like it, which may be music to our Cheap Stocks ears.

The Fundamentals
There's been no topline growth for Leapfrog, and earnings have not been anything to write home about either. Fiscal 2005 sales of $649.8 million were flat with 2004 ($640.3), and down from 2003 ($680.0). The company earned $17.5 million in 2005, following a loss of $6.5 million in 2004, and income of $72.7 million in 2004. Costs, particularly SG&A, have also been increasing as a percentage of sales.

Leapfrog's business is seasonal; the company books the bulk of sales and earnings in the third (back to school season) and fourth (holiday) quarters. For the first two quarters of 2006, sales are off year ago levels.

Where are the Positives?
While operating results have not been stellar, Leapfrog has two things (in our minds, anyway) going for it: A fairly strong brand name, which we can't quantify in terms of value, and a strong balance sheet, which we can attempt to quantify. As of 6/30/06, the company had $181 million in cash and s/t investments, or $2.87 per share, in cash and no debt.

The company also currently trades at just 1.73 times market cap/net current asset. Not a net/net, we know, but a compelling valuation that bears further scrutiny.

We'll admit, we are at the beginning of our dance with Leapfrog. We don't currently own it, but are at the very least, intrigued. We know that this could be somewhat of a value trap, a company with a nice balance sheet, that can't get its act together in order to profitably move product. It's difficult being at the whims of young consumers, tastes change quickly, and competition is fierce. Still, its interesting to find a brand name company, in the $500 million market cap range, trading at less than twice NCAV.

The Numbers
Price: $9.33
Market Cap: $588 million
Cash and s/t inv: $181
Enterprise Value: $407
Current Assets: $454.1
Current Liab: $94.7
Other Liab: $19.6
NCAV: $339.8
MktCap/NCAV: 1.73

Top Institutional Ownership
Third Avenue Management LLC: 14%
Ironbridge Capital Managemet: 4%
Prentice Capital Management: 2%
Brandywine Global Invt Mgmt: 2%

*The author does not have a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

Wednesday, October 25, 2006

Tweedy Browne American Value Broadens its Mandate: Not Enough Value in the U.S.

There was an interesting but unsurprising announcement this week from Tweedy Browne Company LLC, legendary value investors who’ve been very outspoken the past few years regarding the lack of attractively priced value oriented shares in U.S. markets. Not only are they changing the name of their flagship Tweedy Browne American Value Fund, they are also expanding the Fund’s mandate.

As of December 11, 2006, the Fund will be known as the Tweedy Browne Value Fund; “American” will be dropped. So will the Fund’s former mandate to invest “no less than 80% of its assets in US securities”. The newly named Tweedy Browne Value Fund will have the ability to invest up to 50% of the portfolio in non-US investments.

The gentlemen at Tweedy have never been shy about relaying their frustrations when their stringent investment process is unable to uncover value. We reported on a similar theme (Is Value Dead, Again?) in April 2005.

We’ve always believed in Tweedy Browne’s investment philosophy and process, and have been invested in this particular fund for years. That’s through years of good relative performance to go along with some challenging ones as well: years of low turnover, and relatively large cash positions (they are currently 12 % in cash) because their process told them pickings were slim.

Above all, we’ve always appreciated Tweedy’s management team’s honesty, and still believe in the merits of their investment philosophy, whether or not they feel the need to go outside US borders to find attractive opportunities.

As for the research staff at Cheap Stocks, we still believe that the markets we cover are inefficient, and there’s still value to be found for those willing to do some heavy lifting.

*The author has a position in the Tweedy Browne American Value Fund. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

Saturday, October 21, 2006

Lazare Kaplan International (LKI): Still a Net/Net

Diamond company Lazare Kaplan recently reported lackluster results for the first quarter, losing $1.8 million on sales of $139.8 million. Sales were flat with same quarter last year, but the company earned $900K during that period. Lazare blamed the loss on flat sales, and margin pressure from increasing costs. Not surprisingly in an economy where consumers are wratcheting back spending, sales of polished diamonds suffered, while sales of rough diamonds increased.

Still trading Below Net Current Asset Value
In terms of operating performance, this company is nothing to write home about. Despite $538 million in fiscal 2006 sales, the company earned just $1.5 million, for a sub .3% net profit margin. However, Lazare still trades below its NCAV, as it did when we initiated research this past January, and ultimately took a position in March.

With a net current asset value of $76.9 million, and market cap of $67.2 million, Lazare currently trades at 1.14 times NCAV/Mkt cap. We'll admit though, the capital structure of this company is of concern: short term debt of $69 million, long term debt of $64 million, with just $6 million in cash.

Its the Inventory
What is compelling about Lazare is the company's inventory of $15 million in rough diamonds, and $111 million in polished diamonds. These are carried at the lower of cost or market, and are the reason we comtinue to own LKI. This is another asset play, where we believe the value of inventory is potentially worth a great deal more than carrying cost. A risky strategy? You bet.

Price Action
Shares of LKI are up about 6 percent since we initiated our position, despite pulling back from a high of about $10 a few months back.

The Numbers
Current Assets: $262.7
Current Liab: $122.1
Long Term Liab: $ 63.7
NCAV: $ 67.2
Market Cap: $ 76.9
NCAV/Mkt Cap 1.14
Book Value: $ 11.45
Price: $ 7.75
Pr/Bk: 1.48

Lazare Kaplan Research: 1/07/06

*The author has a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

Friday, October 13, 2006

Avalon Holdings (AWX): Value in the Sum of the Parts? Trading at Twice NCAV
This marks the first in a series of research pieces on companies trading at twice net current asset value.

Tiny Ohio based Avalon Holdings hit our radar again the other day. We were intrigued by Avalon’s interesting combination of assets and cash a few years back, but lost track of the company. So many companies, so little time. Upon taking a recent look, we believe that there may be unrecognized value within.

Even with a market cap just north of $26 million, institutions own about 1/3 of Avalon. However, you won’t find any analysts covering the company. There simply isn’t enough Avalon to go around in order to generate interest from the analyst ranks. (Yet another recurring theme with the companies we cover here at Cheapstocks.)

Garbage and Golf
Avalon’s primary revenue source is its waste management business, which generated $29 million of the company’s $34 million in revenue for 2005. Waste management has two segments, disposal (American Waste Management Services), and landfill management (American Landfill Management).

The company also manages two 18 hole golf courses, through its Avalon Lakes Golf Inc subsidiary. One of which, a championship course in Warren, Ohio, the company owns. The other, Squaw Creek Country Club, is operated but not owned by Avalon. In 2005, the golf segment generated $5 million in revenue.

The Fundamentals
Revenue for 2005 was $34 million, up 13% from 2004’s $30 million. Net income was $541,000 up from a loss of $845,000 in 2004. In fact, 2005 was the first positive year on the earnings front since 1999. For the first six months of 2006, revenue has been $18 million and net income $500,000. However, a closer look at these numbers shows that operating income is actually negative, and what is aiding the bottom line is the interest income generated from a relatively large amount of cash and short term investments. Buyer beware, it’s typically not a good sign when your operating businesses need an assist from your cash position in order to put you in the black.

The Balance Sheet
Lets cut to the chase. As of 6/30/06, Avalon had $14.2 million in cash and short-term investments, and less than $250,000 in debt. That’s the equivalent of nearly $3.75 in cash per share, while the stock hovers around $7.00. We recognize that cash is meaningless if a company is burning through it rapidly, but that does not appear to be the case at Avalon.

The Burning Question: What’s an Ohio Golf Course Worth?
We are intrigued by the company ownership of a 200 acre golf course. We don’t purport to know what it might be worth, but believe it may be a potentially valuable asset. We also can’t begin to value the waste management businesses. That leaves us with one question. Are Avalon’s non-cash assets the waste management business, and golf course worth more than $12 million (market cap less cash)? We’ll continue to try and find that answer. We don’t currently hold Avalon shares.

NCAV: $12 million
Mkt Cap: $26.3 million
NCAV/Mkt cap: 2.19
Enterprise Value : $12 million
Book Value Per Share: $9.76
Price/Book : 1.41

Recent Price Action
Avalon has been on a bit of a tear lately. We are not sure what is driving this, but it is important to be aware that tiny companies such as this can be very volatile. When we started writing this column, the stock traded below $6.00, and in one day on volume of less than 40,000 shares, rose above $7.00 intraday. This type of price action could occur on the downside as well. Also, low liquidity stocks such as Avalon may have wide bid/ask spreads.

Postscript: With current shareholder roles hovering at 534 for Class A shares, and 11 for Class B, this company may be a candidate to shrink sharteholder roles below 300, delist, and avoid SarbOx.

*The author does not have a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

Wednesday, October 04, 2006

Biloxi Marsh Lands Corp (BLMC) in Forbes, Declares $2.00 Dividend

Tiny pink sheet company Biloxi Marsh Lands hit the big time recently with a mention in Forbes Magazine. Pink sheet companies rarely get that kind of coverage, especially in such financial media giants such as Forbes.

Louisiana based Biloxi, owner of 90000 acres of marshland in St. Bernard Parish, which it leases to natural gas companies, is up 20 percent since we purchased shares back in late June. It’s been no steady ride, though we’ll admit. Such companies tend to trade in a very choppy fashion, up $3.00 one day, down $2.00 the next, followed by flat prices for weeks, and also tend to trade at relatively high bid/ask spreads.


The company also recently declared a $2.00 dividend, payable October 12th. This puts the trailing 12 month yield for Biloxi at 10.8 percent percent based on $4.00 in dividends, and a current market price of $34.50

For more on Biloxi, please see our 5/29 report.

*The author has a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

Wednesday, September 27, 2006

Bactolac Pharmaceuticals(BTCP)Delists

On September 21, Bactolac, formerly Advanced Nutraceuticals (ANII), filed Form 15 with the SEC. Now delisted, the company trades on the pink sheets under the symbol BTCP.

An interesting ride

The company threatened to halt it's attempt to split 1 for 500 in order to get below the Mendoza Line of shareholders (300), following a flurry of buying in lots of 499 by investors trying to capitalize on the buyout price of $4.00 per share. This forced the company to cough up more cash to buy out the burgeoning number of odd lot shareholders(or 499ers as we've previously referred to them) than it had originally intended. Whether the company was truly serious about halting the transaction due to the additional cash outlay, or whether it was trying to smoke out some 499ers we'll never know for sure.

The reverse split/odd lot buyout leaves the company with 50 shareholders of record, well below the requisite 300 required to delist. With about 9000 shares outstanding, the company's transparency and liquidity are history. Still, we hold shares in this tiny but profitable company, obscene bid/ask spread and all.

*The author has a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

Wednesday, September 20, 2006

Losing Patience with Zapata Corp (ZAP)

Most Zapata investors threw in the towel eons ago. Now, your Cheapstocks editor is on the brink. Truth is, we purchased shares long after many investors had given up. Tales of poor management and too much family involvement by the Glazer clan (there are 5 Glazers on the board) made many investors skeptical of Zapata’s future prospects. We were aware of this situation, but chose to focus on what we viewed as a package of undervalued assets. Chock with cash, and large stakes in two publicly traded companies, Safety Components (formerly SAFY), and Omega Protein (OME), we were confident that value could ultimately be unlocked. Shame on us. Bad management can ruin most companies.

Then the selling began. First, Zapata disposed of its 79% share in Safety Components (formerly traded under SAFY) for $51.2 million. The price was a bit disappointing, but did bring in a lot of cash to Zapata, plus, we always believed the bigger gem to be the company’s 58% stake in fish oil producer Omega Protein. Then, Zapata announced plans to sell its stake in Omega. “At what price” we wondered? Omega has an interesting business but suffered due to Hurricane Katrina. Then there was controversy in the Chesapeake Bay area as to how many tons of Menhaden, the source of the company’s products, Zapata could safely harvest without harming the ecosystem. Both situations hurt Omega, and potentially damaged its allure to potential acquirers.

Then came the long pause. We heard very little about the company’s attempt to sell Omega, which we translated into difficulty finding a buyer. As of 06/30/06, Zapata owned 58 % of Omega, valued at about $94.5 million in terms of the current market cap of Omega. We did not expect Omega to fetch a premium, if anything, large stagnant stakes in publicly traded securities typically sell at a discount.... especially those that are on the block for many months with no takers. And ultimately, a discount it was…

The Transaction
On September 8th, Zapata announced it was selling 9.268 million shares, or 36.8% of Omega Protein, back to Omega for $47.5 million, or $5.125 per share. That’s a 21% discount to the current price. Furthermore, Zapata, which still owns 5.2 million shares, must sell any shares it still owns after 270 days back to Omega for $4.50 per share. The kicker? Omega has 120 days to compete the purchase. Say what? Now the scramble will begin for Zapata to sell its remaining stake. Remember, Zapata could not find a buyer in the first place, and this puts Omega in the catbird seat.

Winners and Losers

The only potential winners that we see are Omega shareholders, who are able to buy back a significant portion of their company at a discount. If Zapata can’t sell the rest to another entity, and Omega can come up with the cash, the discount gets even better for the remaining shares. However, there may be a negative short-term effect on the current market price of Omega, especially if Zapata finds an outside buyer north of $4.50 per share, but south of the current price.

"We are excited about the future at Zapata. The sale of our Omega Protein shares represents an important step as we continue to explore ways to enhance shareholder value."
- Avram Glazer, President and Chief Executive Officer of Zapata

Zapata shareholders lose out on this deal. Once Omega is sold, Zapata has no operating businesses left. True, they may have up to $150 million in cash and little if any debt by our estimates, but bad management is still bad management. What will they do with all that cash? We are afraid to ask. While Zapata’s current market cap is $134 million, conceivably less than the ultimate cash on the balance sheet, that gives us little comfort. We have little confidence left in current management.

Perhaps the best way to play it is sell ZAP, and buy OME.

Previous Zapata Research

*The author has a position in Zapata, but does not have a position in Omega. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

Friday, September 15, 2006

Discovery Partners-Infinity Pharmaceuticals Merger Completed (new ticker INFI)
Decision Time for Net/Net Buyers

When we purchased shares of Discovery Partners, it was because Discovery was not only trading below its NCAV, but at a discount to the cash on its balance sheet. We also saw some promise that the company could get back to profitability, or so we thought. We essentially viewed the purchase as a free one year call on the recovery of the company’s business.

The game changed when Discovery announced plans to merge with Infinity Pharmaceuticals, a private biotech company. Presumably, these companies saw the merger as a marriage between a company with lots of cash and no products (Discovery) and a company with a little cash, and some products in the pipeline. Now the merger is complete, and the new entity, Infinity Pharmaceuticals, trades under the symbol INFI.

Decision Time?
Just last week, we published a piece “When to sell a Net/Net”, which stated that the time to sell a net/net was when the original reasons you purchased it were no longer true. Believe it or not, we wrote this piece with Discovery Partners in mind. We knew the merger was approaching, we also knew it was decision time.

Torn and Lucky?
Shares of Discovery Partners have been on a nice tear since we purchased in the $2.40 range this past March. Factoring in the 1 for 4 reverse split that went hand in hand with the merger, shares are up about 67% since our purchase. We'd like to believe that gain is a result of our skill as deep value stock pickers. But we value honesty too highly here at Cheap Stocks. We got lucky with this one. Just prior to the completion of the merger, Infinity announced a cancer drug development deal with Medimmune (MEDI) which provides an upfront $70 million payment, with the possibility of up to $430 million in milestone payments. This news lifted the stock 10%, to the $3.50 range, and since the merger, it now trades at $16.00 post the 1 for 4 split, or $4.00 split adjusted.

The Dilemna
We hate being right for the wrong reasons. We have little interest in owning a biotech company, yet this company has some momemtum (Did we use the word momentum?)
with the Medimmune deal as a tailwind. Our net/net is gone, replaced by a cash burning biotech company. Forgive us Ben Graham. Maybe its time for a trailing stop.

Other Discovery Partners Research:

*The author has a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

Tuesday, September 12, 2006

Plum Creek Timber Takes it on the Chin, Temporarily

You've gotta love the way investors react to analyst downgrades. Depending on the particular analyst and downgraded company, this situation can create short-term buy opportunities especially in quality companies. We are not short-term traders here at Cheap Stocks, but we know a temporary market inefficiency when we see it.

Look no further than Plum Creek Timber (PCL), which was downgraded today by Morgan Stanley to "underweight" from "equal weight". Excuse me? What does that mean? Well, it meant something to Mr. Market who proceeded to punish Plum Creek, dropping the stock more than $3.00 at one point in today's trading to $31.21. Cooler heads prevailed, and the stock closed at $33.51, down $.79.

We are still interested in Plum Creek's 7.8 million acres of land, and 4.7% yield, and continue holding the shares. Thank you Wall Street analysts, for continuing to create market opportunities.

Prior Plum Creek Research:

*The author has a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

Sunday, September 10, 2006

Stretching the Net/Net Definition
We hope Ben Graham wouldn't take offense if we loosened up a bit, and took a gander at some "double net/nets"(that's our own Cheap Stocks term), or companies trading at less than two times their net current asset value. Afterall, we've already taken liberties with Ben's philosophy; he preferred companies trading at less than 2/3 of net current asset value, and we tend to focus on those trading below NCAV. Truth be told, it's slim pickings these days to find these companies (not unusual), but we'd thought it would be interesting to see what we could dig up at 2 times NCAV.

What we found was a list of about 300 companies, and below are the top 15 in terms of market cap. In the coming weeks, we'll profile what we believe to be the most interesting.

Company (Ticker)
Ingram Micro (IM)
Tech Data Corp (TECD)
Sycamore Networks (SCMR)
UTStarcom (SCMR)
InfoSpace Inc (INSP)
Electro Scientific Industries (ESIO)
Exar Corp (EXAR)
LeapFrog Enterprises (LEAP)
Adaptec Inc (ADPT)
Utilicom Inc (ULCM)
Plug Power Inc (PLUG)
Cohu Inc (COHU)
Farmer Bros (FARM)
Portal Player Inc (PLAY)

Please keep in mind that we are not abandoning the typical formula we use to identify companies trading below their net current asset value. We just like to experiment from time to time. Companies trading at twice (or less) than their NCAV's could still be very cheap....or, they could be cigar butts.

*The author does not have a position in any of the stocks mentioned in this report. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

Thursday, August 31, 2006

Threats to Advanced Nutraceuticals Delisting Attempt: Attack of the 499ers

Ticker: ANII
Price: $3.50
Mkt Cap: $16.7 million
Ent Val: $19.4 million
Ent Val/Ebitda: 4.8
P/E: 9.5

There's never a dull momemt in our bizarre little Cheap Stocks World. You may recall our recent research on ANII, their desire to get below 300 shareholders in order to delist, and the subsequent increase in the buyout price for post 1 for 500 split fractional shares.

The company announced today in an 8K filing that there's been a significant number of investors purchasing 499 share lots. Why you might ask? These investors want to exploit the buyout price for post split fractional shares ($4.00 per pre split share), recently (and quietly) raised from $3.25, while the current share price hovers around $3.50. May seem like a measly profit of $245 before commisions, but 200 bucks is still 200 bucks.

At Cheap Stocks, we took a different view of the delisting, and purchased in 500 share increments...we want to own this company after the reverse split. If there is a reverse split....

The problem is that ANII estimates that there were 170,000 shares recently bought in 499 share increments. That means the company will have to find another $680,000 in cash to buyout these shares. Unfortunately, the company's senior lender only approved $1,000,000 in funds to take out post-split fractional shares. That may leave the 499ers as well those as of us who intended to be owners of a free-from SarBox, free-from SEC filing, profitable company, out in the cold.

The company has not decided how to proceed, but has laid out a few options: 1)to delay or cancel the reverse split, and with that, the delisting is history, 2)seek approval from the senior lender to increase funds available to purchase fractional shares, or 3)change the reverse split ratio.

We are in favor of the third option, and suggest that ANII change the split to 1 for 499. Nothing against you 350 or so 499ers, you saw opportunity, and you pounced. That's what capitalism is all about.

*The author has a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

Saturday, August 26, 2006

When Do you Sell a Net/Net?

Here at Cheapstocks, we devote plenty of time and space to companies trading below their Net Current Asset Value. We attempt to identify those that we believe have a solid shot at survival, and the ability to ultimately deliver a nice return to those investors willing to take the risk. But the question that sooner or later must be answered is "When do you sell"? The easy but often incorrect answer is that you sell when the the company is no longer a net/net. All else being equal, that is exactly the time to hang on.

Net/Net Perspective
Consider that net/nets are still quite rare, and most companies trade at large multiples to net current asset value, if indeed their NCAV's are even positive. To put that into perspective, consider that Coca Cola, for instance, has a negativeNCAV to the tune of $3 billion! Tootsie Roll Industries NCAV is $38 million, and with a market cap of around $1.5 billion, trades at 40 times NCAV. (We are not comparing any of the companies we've identified in our research to either of these, but simply trying to put net/net multiples into context.) Companies trading below their NCAV's, assuming there is any life left, are potentially trading at bargain basement prices.

The time to sell a net/net is when the reasons you purchased it in the first place are no longer valid. The fact that a company trades at a discount to it's NCAV is just the starting point in the analysis-there need to be compelling reasons or a catalyst that will catch the market's attention, attract investors, and ultimately drive the stock price higher.

Many of the net/nets we research are either profitable, have a large amount of cash relative to market cap, have what we believe are undervalued assets on the books, or a combination of the three. In the case of a company with at large amount of cash,(recent examples DPII LENS) should the cash burn rate increase, it's time to bail.

In conclusion, net/net investors need to keep their eye on the ball. As we are fond of saying here at Cheapstocks, companies trading below their net current asset value are often "cheap" for good reasons. The trick is finding those with a little life left. Happy hunting.

*Of the stocks mentioned in this post, the author has a position in DPII and TR. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

Saturday, August 19, 2006

Avoca Reports Another Solid Quarter

Avoca Inc, the tiny owner of a 16000 acre island off the coast of New Orleans, which generates the bulk of its revenue from natural gas royalties, recently reported second quarter earnings. You won't read about that anywhere else, because Avoca no longer files with the SEC--only to shareholders. We've reported on Avoca previously, it was our first venture into the world of companies that delist their shares, avoid SarBox and SEC filing, yet continue trading on the pink sheets.

Avoca reported revenue of $2.6 million for the second quarter, netting $1.75 million, or $217.61 per share ($1.3 million, $830K, $102.95 same period last year). For the six months period, revenue was $6.43 million, with net income of $1.98 million, or $527.32 per share ($2.1 million, $1.5 million, $187.40 same period last year).

The balance sheet continues to improve, with cash and short term investments of $7.63 million, and long term investments (mainly debt) of $2.63 million. On the liability side, there is $3.1 million in income taxes payable, which represents nearly all of total liabilities.

One piece of negative news was that Avoca well No. 6-1, which represented 29% of net royalty income for the six months ended June 2006, was recently taken offline. Production from this well had been declining, and it is believed that the resevoir may no longer be capable of commercial production.

Still, Avoca results are way ahead of last year. Since this company is a royalty trust, much of net income will be paid out in the form of dividends. Last years annual dividend was $400 per share. Given results of the first six months, we expect the next dividend to be in the $700 to $1000 range. Revenues for the next six months, however, are highly dependent on the price of natural gas, and the gas wells ability to deliver.

Avoca Inc
Ticker: AVOA
Price: $5600 bid/$8000 ask
Shares Out: 8,059 (actual)
Market Cap: $45 million
Yield: 7%

Please see our previous posts on Avoca:


*The author has a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

Sunday, August 13, 2006

Blair Corp: The Aftermath of a Buyback
Will This Company be Next to go Private?

Ticker: BL
Shares Out: 3.94 million
Market Cap: $94.4 million
Ent Value: $67.2 million
Price: $24.2
Avg Volume: 27,500
P/E: 5.4
Dvd Yield: 5%

In our last report on this tiny Warren PA based catalog and internet based clothing retailer, Blair had recently sold its credit portfolio, and used the proceeds to repurchase more than half of its outstanding shares. This former net-net company bought back 4.4 million shares, at $42 per share. At the time, we viewed this as perhaps the first step in taking the company private.

A Rough Stretch
Since then, the road has been rocky for Blair. Hindsight may be 20/20, but the company is currently valued at about half of what it was when Blair completed the tender offer. This raises the question as to whether the company did itself and its shareholders a disservice by repurchasing a large block of shares at an $18.00 premium to the current price. Or, is the market- small as it may be for a company like Blair- strongly undervaluing Blair?

Recent Results
The recent trouble started when the company reported poor first quarter results, losing $4.5 million (vs income of $650,000) on sales of 104.2 million (down from $107.6 million). Blair blamed poor advertising efficiency and increased SG&A for the lackluster results. In response, the shares plumetted from about $46.50 into the 20's in the ensuing months.

The recently reported second quarter was not much better-sales fell 5 percent, and net income of $233,000 was down sharply from last year's $6.1 million. The company blamed the sales shortfall on higher unit volume, offset by lower selling prices, and higher costs on increasing postage and paper costs, exacerbated by greater catalog circulation. One concern here is that the company has been attempting to do more internet business, where paper/postage are less of a factor. In the second quarter, Blair did generate $27 million in sales from its e-commerce site, up 18 percent from the same quarter last year, but still less than 25% of sales.

Attractive Valuation? Dividend Cut?
Operating results have been disappointing. From an enterprise value perspective, however, (EV=$67 million) Blair is interesting. This former net/net currently trades at just 1.38 times net current asset value. The company also pays a $.30 quarterly dividend, yielding 5%, although we don't believe this is sustainable if results do not improve soon. The company does have $27 million in cash, but it would be difficult to imagine Blair exceeding a 100% payout ratio for long.

Will Blair Go Private
We certainly believed they were headed that way following the tender offer. Although we believe the possibility does exist that the company will be taken private, we don't believe it will be through the delisting/pink sheet/SarbOx avoiding route we often write about here at Cheap Stocks. As of 12/31/05, Blair had 1929 shareholders of record, far above the magic 300 level required to delist. Yes, it could be done, but would perhaps require a very creative reverse stock split and/or tender offer.

We've followed Blair for years, but have never owned shares. At least for now, its back on our radar.

*The author does not have a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

Tuesday, August 08, 2006

Hansen Gets Crushed

Ticker: HANS
Price: $29.46
Mkt Cap:$2.68 billion
Enterprise Value: $2.62billion
P/E: 38

When we wrote about Hansen in our 7/15 report, this high flyer was soaring at around the $46 level, the winds of excess expectations keeping it aloft. It's only a matter of time, we speculated. Well, the company reported strong second quarter earnings yesterday (sales up 83 percent to $156 million, net income up 85 percent to $28.2 million), meeting analyst eps estimates, and slightly below sales estimates. But that was not enough to keep the energy drink maker from falling 26 percent, to $29.85. So much for estimates.

Lofty Expectations
Hansen's has had a habit of beating analyst estimates by a wide margin, and this has become the expectation. Just meeting the consensus number was not enough, however, and the results are clear. This is not an indictment of Hansen the company. It's an indictment of the valuation that we as investors placed on this former $40 million market cap company, which became a mid-cap in short order.

*The author does not have a position in this stock (HANS). This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

Friday, August 04, 2006

PICO Holdings:
A Reader Strikes Back--
Berkshire Backlash

Ticker: PICO
Price: $35.46
Market Cap: $470 million
P/E: 15.4
Price/Book: 1.56
Enterprise Value: $429 million

We rarely print feedback from our readers, but an e-mail from this past week caught our attention, and we are compelled to print it (with the readers permission of course.) In reaction to our recent posting that dared to label PICO Holdings the "poor man's" Berkshire Hathaway, "Jim" let us have it:

Dear Mr. Milton:
I read your blog and admire your perspicacity. That was why I was surprised when you described PICO as a poor man's Berkshire.

I owned PICO for years. I agree with you that PICO has an interesting smorgasbord of holdings that appear to represent value. I got disgusted with seeing the top managers pull gargantuan salaries year after year while us poor John Q. Public shareholders sat around sucking our thumbs, so I bailed out.

The problem with PICO is that its top brass is grossly overpaid. At the same time as owning a significant percentage of its shares, these men pull enormous salaries relative to PICO's net worth. At PICO, service of self trumps service to shareholders. That kind of double dipping-- significant share ownership coupled with outsized executive compensation-- is anything but Berkshire Hathaway like.



The Numbers
Point taken, Jim. Relative to earnings, PICO execs are overcompensated. In 2005, CEO John Hart and COB Ronald Langley both took home $932,988 in salary, and $3,013,326 in bonus. They were also awarded 838,356 options, or 77.4% of the total options granted, at a strike price of $33.76. The same year, Langley exercised 752,395 options, realizing $15,625,170. Hart exercised 838,356, realizing $17,851,842. In 2005, PICO reported net income of $16.2 million. Hart and Langley's 2005 salary and bonus was nearly half of net income. Seems outrageous. By comparison, Warren and Charlie each took $100,000 in salary last year from Berkshire Hathaway.

Poor Man's Berkshire Revisited
Still, when we had the audacity to put PICO and Berkshire in the same sentence, it was in terms of the ability to build a portfolio of undervalued assets, and the ability to increase shareholder wealth. PICO has come through on both fronts since we've been shareholders. Shareholder equity increased from $221 million year end 2002 to $301 million year end 2005. In terms of book value per share, it rose from $17.86 to $22.67 during the same period. The share price tripled.

Are Hart and Langley overpaid? Maybe. But that depends on your vantage point as a shareholder, namely when you became a shareholder. If the duo is successful in continuing to purchase undervalued assets in turn to creating wealth for shareholders, they should be paid accordingly. If their strategy begins to fail, they should not be paid. We realize it is just not that simple.

As shareholders, we do have the option of voting with our feet, which is what Jim did. We don't blame him. While we don't know exactly when he held shares, we suspect it was during a period when the company was trending downward--PICO was a $50+ stock in the early 1990's, and a sub $10 stock in 2002.

Finally, one of the downsides of owning a stock with a high level of management/inside ownership is that they call the shots. That situation can be good, or, it can be devastating. We've had a positive experience with PICO so far, but as Jim points out, there are shareholders who gave up. We are hopeful that FMR Corp's (parent of Fidelity)recent purchase--they now have a 14.4% stake--brings an outside voice to the table.

Please read the company proxy for more on the compensation/ownership structure.

*The author has a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

Friday, July 28, 2006

Advanced Nutraceuticals Ups the Ante

Ticker: ANII
Price: $3.40
Mkt Cap: $16.1 million
Ent Val: $19.7 million
P/E: 9.66

When we reported on Advanced Nutraceuticals last month, the story revolved around the company opting to effectively go private, but retain its ability to trade on the pink sheets. We've written about this concept ad nauseum here at Cheap Stocks, but we see these situations as potential unique sources of excess return. In ANII's case, as you may recall, the company intends to reduce shareholder roles below the magic 300 level via a 1 for 500 reverse split. Those with fractional shares after the split will be paid in cash. Nothing new here.

New Price For Fractional Shareholders
What is new, however, is the price the company will pay fractional shareholders. When we wrote the last report, the company had stated in its June 8, 2006 proxy that it would pay fractional shareholders $3.20 per pre split share. The company recently revised its proxy, dated July 25th, and has raised that to $4.00 per share. This change went unreported in the media, but that's no surprise due to this company's small size.

The revised proxy states the following:

Based upon the board’s considerations taking into account the above factors, for purposes of the re-purchase of fractional shares, it was determined that the reverse split re-purchase would be based upon $4.00 per fractional share. This value was established based upon the past 30 days’ average closing prices of the common shares which equaled $3.06 increased by a premium of 30% to reflect the board’s estimate of the current fair value of the company. This value was unanimously agreed to by all board members.

The board of directors considered the fact that in mid 2005 a self-tender offer was conducted to re-purchase approximately 19% of the then outstanding common shares at a price of $4.25 per share. A significant motivating factor in the 2005 offer was to attempt to persuade large numbers of smaller shareholders to tender their shares. In addition, under the circumstances, such smaller sellers had no costs to sell their shares. The board of directors determined to re-purchase shares at a 6% premium to the market price of the stock in a further attempt to entice shareholders to sell. Nevertheless, as discussed above, only approximately 2% of the company’s shareholders participated, leaving approximately 4,200 smaller beneficial shareholders holding shares.

The board of directors believes that the reduction in the public market value of its shares in 2006 to the current level as compared to the approximate $4.10 level in 2005 when the self-tender offer was conducted, is due to the following factors, among other market conditions:

1. Erosion in product margins due to significantly higher quality costs to comply with the recently secured National Nutritional Foods Association quality manufacturer certifications and higher raw material costs.
2. Continued price competition as competitive manufacturers attempt to gain and retain market share.
3. Continued increases in interest rates causing higher borrowing costs and lower profits, as well as more investment dollars moving out of the stock market and into interest sensitive funds.
4. The Company’s borrowing of over $4.5 million debt to fund the 2005 self-tender offer.

The company popped slightly last week, trading in the $3.50 range. While the new offer may not mean a whole to those investors who plan on remaining shareholders after the split, it does show that the company is serious about enticing smaller shareholders to get off the books, paving the way for the company to reach the sub 300 shareholder level. This could be an interesting ride.

*The author has a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

Saturday, July 22, 2006

PICO Holdings: The Poor Man's Berkshire Hathaway?
Company Update

Ticker: PICO
Price: $29.72
Market Cap: $394 million
P/E: 12.9
Price/Book: 1.35
Enterprise Value: $369 million

We last wrote about PICO a couple years ago, we owned it then, and still do. This company is typically not on anyone's radar, but is an interesting combination of businesses and investments.

Graham and Dodd: In Management's Own Words
We acquire businesses which we identify as undervalued based on Graham and Dodd-style fundamental analysis, and our assessment of what the business is worth based on the private market value of its assets, earnings, and cash flow. We favor long-established businesses in basic industries, with a history of operating successfully through industry cycles, recessions, and geo-political disruptions. We also acquire interests in companies where there is significant additional unrecognized value in land and other tangible assets. Our objective is to generate superior long-term growth in book value per share.

When we purchased PICO a few years back, the primary reason was the company's vast Nevada land holding-the company was the largest private landowner in the state-at the time nearly 1.2 million acres. This was old railroad land, certainly not the same quality as some of the other companies we've researched, but it included water rights, a very compelling package at just $13 per share.

Not Just Land and Water
PICO also owns two insurance companies in "runoff" Physicians Insurance Company of Ohio and Citation Insurance Company. Insurance companies in runoff no longer write new business, just service existing policies, and claims on those policies. PICO makes money by managing the investment portfolios associated with these companies, essentially booking the difference between claims and investment income.

European Investment Portfolio
As of 12/31/05, PICO also listed the following holdings:

Jungfraubahn Holding AG: 1.3 million shares or 22.5 % of this Swiss railroad company
Raetia Energie AG: 70,556 shares in this producer of hydro electricity
Accu Holding AG:29,294 shares of this Swiss battery manufacturer

Hyperfeed Technologies
PICO also owns more than 6 million shares, or 80% of Hyperfeed (Ticker:HYPR) which provdes financial market data and data-delivery solutions to the financial services industry. Truth be told, we are not sure why PICO invested in this company in the first place, but it represents is a very small portion of company interests.

First Quarter Results
The company reported first quarter net income of $7.2 million, primarily due to a gain on the sale of investments. The company ended the quarter with $243 million in investments, $54 million in cash, and $12 million in debt.

Stock Offering
In May 2006, PICO completed a private placement of 2.6 million shares of newly issued PICO common stock with two institutional investors, for $30 per share. The offering generated $71.4 million. It is believed that FMR corp, parent company of Fidelity family of mutual funds, was one of the institutions. FMR recently reported that it owns a 15.3 percent stake in PICO.

If you are looking for a steady ride in terms of earnings, this is not the company for you. Management is focused primarily on increasing shareholder equity, and due to the structure of the company, reported earnings will be choppy. That being said, management has done an excellent job of increasing shareholder equity, and the stock price has followed. We can't but help think of PICO as the poor man's Berkshire Hathaway.

*The author has a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

Saturday, July 15, 2006

My Island Part 2:
Looks Cheap Relative to Hansen Natural (HANS)

Hansen Natural
Ticker: HANS
Price: $45.83
Mkt Cap:$4.17 billion
Enterprise Value: $4.08 billion
P/E: 60

Your Cheap Stocks Editor is the first to admit that we sometimes stretch the limits of sensibility in some of the comparisons we draw here at Cheap Stocks. Last week, we compared the "market value" of a small piece of our little vacation island to St. Joes Corp. We think St Joes looks more attractive in that comparison. This week, we take a look at beverage company Hansen Natural (HANS). This time, our little island wins out.

Sour Grapes
Back in 2003, we had a position in Hansens. We wrote about our experiences in a previous post in March of 2005. In our sob story, we described purchasing Hansen's, at the time a stock no one cared about, riding it sideways, and finally selling it after tripling our money. At the time of the post, the stock had gone from a $40 million market cap company, to a $500 million company. We felt bad. Fast forward to now, and Hansens is now a $4 billion company. That's right, a 100 bagger since we initially purchased shares. We are astonished at this company's metoric rise. Maybe we are also disappointed for not hanging onto the shares.

Sales Explosion
Hansen's 2005 sales were nearly $350 million; double 2004's, and nearly triple 2004's. Net income rose from $20.3 million in 2004 to $63.8 million in 2005. The latest reported quarterly sales were $120 million, with net income of $21 million. This company is on fire, and it's expansion into energy drinks has truly paid off. The balance sheet also looks good: $100 million in cash and marketable securities and no debt.

After a recent 4 for 1 stock split, the company now has more than 90 million shares outstanding, and we are wondering how much room this company has left. Sure, sales may continue to grow, but we don't believe Hansen is worth 60 times earnings. The forward P/E is half that, but one small slip in sales and earnings growth, and watch out. We just don't believe Hansen's can continue to grow at such a rapid pace.

If you are looking for your Cheap Stocks editor this weekend, I'll be on the beach of my beloved (albeit overpriced island), sipping a Hansens, reading St. Joes annual report.

*The author does not have a position in this stock (HANS). This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

Saturday, July 08, 2006

My Island Looks Expensive; St. Joes (JOE) Looks Cheap
A View of the Real Estate Bubble
From Your Vacationing Cheap Stocks Editor

St Joes Corp
Ticker: JOE
Market Cap: $3.63 billion
Price: $48.65
P/E: 32
Dvd Yield: 1.4%
Enterprise Value: $3.98 billion
Acres: 800000
EV/acre: $4975

We've been enjoying some rest and relaxation on a small island strip of NJ coast we call our summer home. I've not been completely on vacation, however. As I ride up and down this island, and see the ridiculous property prices, I can't help but to wonder...

And wonder I have, which has given rise to a few calculations. You see, on our little island, I'd estimate there are about 40 properties on each street from bay to ocean. This includes 4 beachfronts, and 2 bayfronts. Based on recent prices, I'd estimate that an entire street worth of property would sell for about $30 million based on the following:

Beachfront home(4 per block): $1.5 million each
Bayfront(2 per block): $1 million
Oceanside(14 per block): $750 thousand
Bayside (20 per block: $ 600 thousand

Total Value/Street: $30.5 million

This is actually a very conservative estimate, and does not include streets, or infrastructure, just private property and homes.

So, theoretically, 130 streets worth of property, or an area of approximately 5 miles by 1/4 mile, or about 800 acres, about 1.25 square miles, would be worth about $4 billion. We know this calculation is a bit ridiculous; if every homeowner on 130 streets put their house on the market, property values would plummet. Still, it is food for thought.

We know of a company that is also worth about $4 billion based on Enterprise Value, St. Joes Corp, which we've written about in the past and have a position in. The company owns about 800,000 Florida acres, more than 300,000 acres of which is within ten miles of the Gulf of Mexico.

St. Joes has had quite a run-up over the past few years, hit $85 in 2005, but now trades for less than $50. This profitable company has no doubt been stung by a pullback and slower growth in Florida real estate. We see tremendous value in these shares for investors with a little patience.

So does Third Avenue Funds, led by the legendary Marty Whitman. Third Avenue owns a huge stake in St. Joes, about 14 percent, and has been adding to positions. We were pleased to note Michael Winer's (Portfolio Manager of the Third Avenue Real Estate Value Fund--while we don't own this fund, we do own Third Avenue Small Cap Value, which also has a position in St. Joes) column much of which focuses on St. Joes in the latest letter to shareholders. This letter is typically fantastic, and I'd urge you to see for yourself. Winer's explaination of why St. Joe's is still safe and cheap is outstanding.

Back to our little NJ island. A real estate agent friend of mine told me the other day that there are hundreds more homes for sale this summer compared to last. Sales are down as much as 50 percent. This should surprise no one.

Finally, I've been thinking. What's more valuable, 800,000 acres of prime Florida land, or 800 acres of a NJ barrier island? I guess value is truly in the eye of the beholder.

*The author has a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

Tuesday, June 27, 2006

Paying for Illiquidity
Another Company Heads Toward Delisting: By Choice

Advanced Nutraceuticals
Ticker: ANII
Price: $3.00
Mkt Cap: $14.2 million
Ent Val: $17.8 million
Ent Val/Ebitda: 4.6
P/E: 8.52

Your Cheap Stocks editor realized today just how off-the beaten path his portfolio building antics have become after listening to Charles Schwab’s automated quote line. You know, Schwab account holders, the familiar voice that will read through your list of current holdings, should you so desire? You know you’ve entered no-mans land when this great voice gives you a ticker only for some of your holdings, and not the company name. Not even Schwab knows the names of these companies. Not even the great voice!

That’s certainly the case for our latest acquisition, Advanced Nutraceuticals Inc, a tiny, but profitable Denver based manufacturer of supplements and vitamins, through its NY based subsidiary Bactolac Pharmaceuticals. Fiscal year end 2005 sales were $22.9 million, up 30 % from 2004’s $17.6 million. Net income was $1.9 million in 2005, down from $3 million in 2004. The company is dependent on 2 unnamed customers for 24.5 % of sales (Q1 2006). 2006 Q1 sales of $6.7 million were up from $5.5 million from the same quarter last year. Net income was essentially flat at $590,000

As of Q1 2006, the company had $1.9 million in cash, and about $5.4 million in short and long term debt. Book value per share as of 3/31/06 was $2.93, so the company does trade at about book value. However, on a tangible book value basis (excluding goodwill) that figure drops to just $1.33. Not a bad balance sheet, but not stellar.

Going Private
Based on fundamentals alone, it’s doubtful that we’d have taken a position in ANII. Not that the fundamentals are bad, they are actually quite good. But what caught our eye was the fact that ANII is yet another company seeking to avoid Sarbanes Oxley and SEC filing, essentially going private while maintaining a listing on the pink sheets. (An avid Cheapstocks reader alerted us to ANII’s intentions a few months back, after reading the proxy) We find these situations rather interesting, for a couple of reasons: Companies going this route save money by avoiding SarBox, and SEC filing in general, and since many of the companies are very small, the savings can be relatively significant. Furthermore, key personnel, such as the CFO, often spend a great deal of their time on compliance related issues. Going private removes these constraints, allowing management to spend more time on growing the business(We know, that's only positive if management is competent). Furthermore, going private may telegraph that management feels the company is undervalued, and wants a bigger piece of the pie.

The Downside
Going Private is not a free lunch for shareholders. Despite the potential positives, there are negatives. First of all, companies effecting the GPT transaction often shut off communications with shareholders. Remember, they no longer are required to file with the SEC, so financial information can be difficult to acquire—even if you are a shareholder. Some such as Avoca, are very forthcoming, as we’ve previously reported, but as shareholder, you may be on your own. Another major downside is that in order to meet the requirements to avoid SarbOx, and SEC filing—getting the number of shareholders below 300—the fallout is that liquidity disappears.

Getting There
There are a few ways to shrink to less than 300 shareholders, the one we see most often is the reverse stock split. In this transaction a company will split 1 for 100 (Avoca), 1 for 500 (as ANII intends, 1 for 5 (Scheid Vineyards), or any way it believes will be effective. Once the split occurs, this will leave many shareholders with fractional shares which the company redeems for cash—hence the reduction in shareholder roles. But that’s not the only reduction—with a reverse split comes a reduction is shares outstanding. Depending on the magnitude of the split, this can be an overwhelming reduction in the float. Avoca, for instance now has just 8 thousand shares out. If ANII’s proposed split commences, they’ll have just 9 thousand. Bye-bye liquidity, bye-bye daily trade volume, not that there was much before anyway. Post-split, shares are difficult to find, and difficult to sell. Hence, these companies are only for those with longer time horizons, patience, and the wherewithal to contend with a lack of information.

Going private could also be negative if management has an agenda not in the best interest of shareholders. Since they are no longer beholden to SEC reporting, financial shenanigans will be easier to hide. Finally, these companies virtually close the doors to further financing by shutting down communications with the outside world.

A Calculated Risk
We were compelled to take a small position in ANII. The combination of decent fundamentals, and the prospect of going private sealed the deal. Please note the words “small position”. The rules and benefits of diversification still apply here.

The Proxy

The company’s recent proxy outlines the reasons for the proposed de-listing; this is a move that must be approved by shareholders. However, in this case, it’s a moot point because management owns nearly 69% of the outstanding shares.

Rather than drone on, we thought it beneficial to delve into the actual proxy. The following is directly from the proxy:

Why are we proposing the reverse split?

The purpose of the reverse split is to reduce the number of shareholders of record below 300, which will enable us to terminate the registration of our common stock under the Securities Exchange Act.

By terminating our registration under the Securities Exchange Act, we hope to:

• Achieve significant savings in ongoing legal, accounting and other administrative costs associated with being a public company and related to the reporting process and shareholder communications required by the Securities Exchange Act;

• Avoid significant expenses and efforts that would be necessary for us to comply with additional procedures relating to internal control that otherwise are required by year-end 2007 under the Sarbanes-Oxley Act and SEC regulations; and

• Enable management, employees, and the board of directors to focus their efforts on the operations and management of the Company’s business, rather than the reporting processes.

The primary purpose of the reverse split is to reduce the number of holders of our common stock below 300, which will enable us to suspend filing periodic and annual reports with the SEC and to no longer incur the significant costs of complying with the reporting requirements of the Securities Exchange Act. The elimination of those requirements will allow management to refocus the time spent preparing reporting documents and engaging in securities law compliance activities to the pursuit of operational and business goals. In considering the proposed amendments, our board of directors considered the benefits and costs to us and our shareholders set forth below.
• We believe that as a result of the reverse split we will be able to realize cost savings of at least approximately $200,000 annually by eliminating the requirements to make periodic public reports and by reducing the expenses of shareholder communications, including legal expense ($60,000), audit and accounting expense ($40,000), printing expense ($15,000), postage ($8,000), data entry, stock transfer and other administrative expenses ($5,000), as well reduced staff and management time ($75,000) spent on reporting and securities law compliance matters. In addition, we will avoid the costs of initial compliance with the internal control over financial reporting systems requirements of the Sarbanes-Oxley Act, currently expected to be required for public companies of our size by year-end 2007, which are estimated to range from $150,000 to $200,000, and continued annual costs of related compliance and reporting in amounts not determined. Our board of directors believes that the increased disclosure and procedural requirements will result in continuing increased legal, accounting and administrative expense, and diversion of board of directors, management and staff effort without a commensurate benefit to our shareholders.

• Given the limited trading in our common stock, our board of directors does not believe that the costs of reporting are justified. Our earnings are sufficient to permit our expected growth and we are not dependent on access to the capital markets to obtain additional financing. If it becomes necessary to raise additional capital, we believe that there are adequate sources of additional capital available through private or institutional sales of equity or debt securities, although we recognize that there can be no assurance that we will be able to raise additional capital when required, or that the cost of such capital will be attractive.

• The reverse split is expected to result in the cashing-out at a price determined to be fair by our board of directors of the equity interest of approximately 2,950 record shareholders (98%) of our common stock who own less than 500 shares of our common stock on the record date.

• Our board of directors has determined that the price to be paid for the shares of our common stock to be cashed out in the reverse split is fair, and that the transaction is fair to our remaining shareholders.

• The reverse split will enable small shareholders to divest themselves of their positions without the expenditure of efforts disproportionate to the value of their holdings, without transaction expenses and at a price which reflects the current market value of our common stock.

• The reverse split and deregistration will have an impact on the ability to trade our common stock, as our common stock will not longer be available for quotation on the OTC Bulletin Board. Trades will continue to be the result of direct communications between buyers and sellers, although a market may develop in the “Pink Sheets.”

• Operating as a private company will allow management to better focus its efforts on the operations of the company.

• The reverse split and deregistration will permit a significant number of our shareholders to continue as shareholders and to enjoy the benefits of share ownership, including dividends, when, as and if declared, and potential capital appreciation. Currently, under our senior credit facility we are prohibited from paying dividends. At the same time, we will be relieved of significant expense and diversion of management time and effort, which may result in improved operating efficiencies and reduced need for additional compliance-related employees, and in potentially increased net earnings.
Effects of the Reverse Split on Cashed-Out Shareholders
Upon consummation of the reverse split, shareholders owning less than 500 shares immediately prior to the reverse split will:
• Receive $3.20 in cash, without interest, per share;

• Not be required to pay any brokerage commissions or other service charges in connection with the reverse split;

• No longer have any equity interest in the company and therefore will not participate in our future potential earnings or growth, if any, as a shareholder; and

• Be required to pay federal and, if applicable, state and local income taxes on the cash amount received for the purchase of fractional shares. See “Special Factors–Certain Federal Income Tax Consequences.”

Effects of the Reverse Split on Remaining Shareholders
The effects of the reverse split on shareholders owning 500 or more shares immediately prior to the effective time of the reverse split will include:
• Continued Ownership of Shares. Shareholders who own 500 or more shares immediately prior to the effective time of the reverse split will continue to be shareholders of the company;

• Increased Ownership Percentage. Remaining shareholders will have an increased ownership percentage in the company as a result of the reverse split;

• Decreased Liquidity. The liquidity of the shares of our common stock held by remaining shareholders will decrease by the reverse split due to the reduced number of shares of common stock outstanding and the fact that our common stock will not longer be available for quotation on the OTC Bulletin Board; and

• Decreased Access to Information. If the reverse split is effected, we intend to suspend our reporting obligations to the SEC under the Securities Exchange Act. As a result, we will no longer be subject to the periodic reporting requirements and the proxy rules of the Securities Exchange Act.

The Good, the Bad and the Ugly
We think the company does a pretty good job of outlining it’s reasoning behind the transaction. As always, enter at your own risk. We'll update you on our progress.

*The author has a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.