Saturday, April 29, 2006

At top of the List: VOXX: The Biggest of the Small
Trading Below Net Current Asset Value

Ticker: VOXX
Price: $12.14
Share Out: 22.6 million
Market Cap: $271.9 million
Average Daily Volume: 128000
NCAV: $319.6 million
NCAV/Market Cap: 1.18
Cash/ST investments/share: $7.90

Audioxx, an international distributor of electronics equipment, primarily mobile electronics, and consumer electronics, has the distinction of being the current king of companies trading below net current asset value. With a market cap just south of $280 million, which for all intents and purposes puts it squarely in microcap land, this company still dwarfs its NCAV cousins.

Research references to Audiovoxx in terms of being a net-net are not new. Interestingly, this is not the first time the company has traded below its NCAV, it was also on the list four years ago, when it traded in the $6 range. The company had a subsequent run-up, and now finds itself back on the list few companies would wish to be on.

Audiovoxx's mobile products include:
o mobile multi-media video products, including overhead, headrest and portable mobile video systems,
o autosound products including radios, speakers,amplifiers and CD changers,
o satellite radios including plug and play models and direct connect models,
o automotive security and remote start systems,
o navigation systems,
o rear observation and collision avoidance systems, and
o automotive power accessories, including cruise control systems

Consumer electronics products include:

o LCD and Plasma flat panel televisions,
o home and portable stereos,
o HDTV Antennas,
o Two-way (GMRS) radios, digital multi-media products such as personal video recorders and MP3 products,
o home speaker systems and home theater in a box,
o portable DVD players,
o hand-held portable GPS,
o flat panel TV mounting systems, and
o home electronic accessories such as cabling and performance enhancing electronics.

Obvously, this company operates within a highly competitive industry. It is important, however to keep in mind, that the company is a distributor of products, and not a manufacturer. This company has been very active the past few years discontinuing operations, divesting businesses, and making small acquisitions.

The Fundamentals
Fiscal Year 2005 sales fell 5 percent to $539.7 million from 2004s $567 Net income fell dramatically from $77.2 million in 2004, to a loss of $9.5 million in 2005. The electronics business is highly competitive, and its been an especially rocky road for this company over the years. For the most recent quarter, ended 2/28/06, the company reported net income of $.183 million (including disc ops of -.184 million) on sales of $103 million.

The Balance Sheet
Cash stood at $17.8 million, and short term investments at $160.8 million as of 2/28/06, while long term debt was $11.8 million. The company also listed short term debt (curr portion of long term debt) of $6.7 million. Adding in the debt, and preferred stock and subtracting the cash from market cap gives VOXX an Enterprise Value of $112 million.

The NCAV calculation:
Current Assets:
Cash: $ 17.8 million
S/T Investments: $160.8
Accounts Rec: $106.7
Inventories: $96.1
Prepaid/other: $6
Total: $387.4

Current Liabilities
Accts Payable: $40.1
Curr portion LT Debt: $6.7
Total: $46.9

Long Term Debt: $11.8
Deferred Liab: $6.6
Preferred Stock: $2.5

NCAV: $319.6 million

Institutional Ownership
Total Institutional ownership is about 65 percent. The top 5 holders
Donald Smith & Co: 8.7%
Dimensional Fund Advisors: 7.9 %
Kahn Brothers & Co: 7.7%
Aegis Financial Corp: 5.1%
Barclays Global Inv UK Holdings: 4%

Long Term Investments

The company also lists long term investments of $26.5 million. We don't have much clarity on what these represent. Keep in mind, that we do not include these, or any other non current assets in our NCAV calculation. Thats all part of the "margin of safety".

How many times have you heard us say that we "aren't crazy about the business this company operates in"? We usually say that, and its no different here. NCAV companies are what they are for a reason. We are intrigued, however, by a company trading at $12.00 that has nearly $8.00 in cash, and little debt.

*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, April 25, 2006

Discovey Partners: DPII
A Reader's Take on the Merger

A well informed reader emailed his take on the Discovery Partners/Infinity Pharmaceuticals merger. It is very insightful, and goes far deeper into the industry than your Cheap Stocks editor ever could. We are never afraid to admit our shortcomings here at CS.

Merger changes the essence of the investment. The acquiring company clearly needs a development team, and Discovery was unlikely to provide the return on the cash that the board was looking for, hence the merger. Since I suspect this is all a San Diego area bio deal, expect to see the company transformed into a biotech with a high burn rate. This will be a boom-bust investment, and there is no way to value the net asset value because any pipeline drug must be devalued by at least 90% until completion of phase II trials. Then you still have further development and marketing execution risk.

Whatever the future of the company holds, it is not a net asset value company anymore, as the cash will now be used to “develop” speculative compounds. A little like buying a company with a wad of cash and land, with unproven oil reserves, but in Texas, near where gushers were located. In my business, slow and steady just doesn’t excite enough people.

Thanks, reader. Please don't hesitate to offer any other views you may have. Such well thought out insights are few and far between these days.

If the reader's analysis is correct, and this merger goes through, your editor no longer own a cash play NCAV company, but rather a biotech, likely to burn cash at a high rate. This is new territory!

*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, April 22, 2006

Whats a Penny Worth? Northern Orion Resources (NTO)
Copper, Thinking outside the Box

The accelerating price of copper had your Cheap Stocks Editor deep in thought earlier this week. (We like to think outside the box here at Cheap Stocks, and that includes our philosophy of incorporating non-traditional asset classes into our portfolio.) With the realization that prior to 1982, pennies were 97.5% copper, I decided to do a few calculations. Based upon weight, 155 pre 1982 pennies make up a pound of pure copper. With copper trading at more than $3.00 a pound, that seemed like a natural business opportunity. I'd trade $1.55 for $3.00 anytime.

Armed with this information, I explained it all to my very skeptical (and highly intelligent) brother in-law. I told him, if we bought $10000 in pennies, and sorted out all the pre-1982 pennies, we could make some money. With a 50 percent hit rate, I explained, that is having half of the one million pennies being copper, we could
make a nice return, even at $2.00 per pound. The leftovers, or newer, primarily zinc pennies could be returned to the banks for cash, thus there is no downside to the strategy. If the strategy was successful, our 500000 copper pennies could be worth as much as $10,000...not a bad return.

My brother in law made some excellent points, including the time and effort needed to sort $10000 in pennies, as well as the sheer bulk and size of such a payload. He did seem intrigued, though.

The Experiment
So I pledged to do an experiment. I would go to a bank, obtain $10 worth of pennies, and get to work. Well, with help from my children, we completed that exercise this morning, sorting through the $10 in minutes. The results were disappointing. In that $10 in pennies, we found about 10 pre 1982 copper pennies. Thats a 1 percent hit rate. So back to the bank we go with our $9.90 in copper coated zinc, but don't be surprised if we try again.

Northern Orion Resources

Here's the other way we've been playing copper here at Cheap Stocks. Last year, we purchased shares in Northern Orion Resources, a Canadian based company (ticker NTO:AMEX)which owns or has interest in some low cost Argentinian copper mines. With a current market cap of $750 million, the company has $136 million in cash, no debt, and a forward P/E of less than 20.

Initiating a position in a copper company was a huge acknowledgement by your Cheap Stocks editor that a portfolio needs exposure to non-traditional asset classes. (Maybe one day he'll even buy a growth stock!!!) So far it has paid off nicely. We got in around $2.80, and are pleased with the results. We are not fooled though, this company goes as the price of copper goes. But we are believers in commodities exposure. We doubt their validity for pure investment purposes, but believe that their low correlations to other asset classes can help lower risk, and enhance returns.

*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, April 12, 2006

Company Update: Discovery Partners and Infinity Pharmaceuticals To Merge
Ticker: DPII
Price: $2.54
Market Cap: $67.15 million
Net Current Asset Value: $85 million

Today Discovery Partners, which we recently featured on March 17th and March 3rd announced intentions to merge with Infinity Pharmaceuticals, a private company. Under the agreement, Infinity would own 69% of the new company, current Discovery Partners ahareholders would hold the balance. The new company will focus on cancer drug discovery and development.

The stock was up as high as $2.84, but closed at $2.54, up 5.4 percent on heavy volume. Clearly, the market, (and frankly your editor as a shareholder)does not know what to make of this merger. Since Infinity is not publicly traded, there is not a great deal of information available. It is difficult to calculate what a 31 percent stake in this new entity may be worth. It is clear however, that Discovery's cash position made it an attractive merger candidate to Infinity.

To a NCAV investor, a merger or takeover (which was part of our speculation in our March 3rd report)can be the key to unlocking value. In this case, it's too early to tell whether this deal will do that. We simply don't have enough information.
While its great to be right, we're not sure what the payoff will be. Stay tuned.

*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, April 09, 2006

A Legend: Marty Whitman from Third Avenue Funds
Explains His Take on “Net Nets” (aka companies trading below their net current asset value)

To me, Marty Whitman is truly a living legend in the world of value investing. Here’s the disclaimer: I’ve owned Third Avenues Small Cap Value Fund for several years. I’ve heard Marty speak, and I’ve spoken with him. So he’s a little cranky from time to time, that’s okay, he’s allowed. To be in this is business at his age (he’ll be 82 in September), as good as he’s been, and as much clarity as he’s brought to the world of value investing, a little crankyness is just fine with me. (Even your Cheap Stocks editor can be a bit of a curmudgeon from time to time. Just ask Mrs. Cheap Stocks editor…)

So I was very pleased upon receiving his latest letter to shareholders (dated January 31, 2006)
to notice his discussion on "net nets", otherwise known as companies trading below net current asset value. Whitman starts the "net net" discussion by disclosing that over 80 % of the Third Avenue Value Funds (the larger cap version of the fund I own) were bought at prices
" which at the time of acquisition, represented meaningful discounts from readily ascertainable net asset values.
After reading this I was astonished, wondering why I’d never discovered the plethora of companies Whitman has? The reason is because Marty is a genius who takes the whole concept of “net nets” to the next level…a level of sophistication, insight, and research that is far beyond the scope of our “Cheap Stocks” research. (Not that we couldn’t take it to that level, mind you, unfortunately our time is limited, and I only wish this was my full-time job).

Later, Whitman explains this better:
"Rarely (except for cash and equivalents) were these readily ascertainable asset values classified as current assets under Generally Accepted Accounting Principles ("GAAP"). The Fund’s definition of “Net-Nets” is taken from Graham and Dodd’s Security Analysis, but with a few twists. Graham and Dodd relied on a GAAP classified balance sheet to define current assets in order to ascertain if a common stock was a Net-Net. TAVF (Third Avenue Value Funds) uses its own judgement rather than GAAP classification to define current assets in order to decide what is a liquid, i.e., current asset." we are getting somewhere. Here at Cheap Stocks, we are using Graham and Dodd’s interpretation, not that that is the only way. In Marty’s world, you can’t manage significant amounts of money looking for net-nets the way we do here at Cheap Stocks. There simply is not a big enough pool of them available and, the large majority are micro caps. That’s where we come in. Since most of the net-nets we research are far too small to have a great deal of institutional interest, they tend to languish, unnoticed by the market. Therein lies the opportunity for the small investor.

Back to Marty Whitman’s interpretation. He goes onto describe the differences between TAVF’s net-net process and Graham and Dodd’s:
"First the fund is not interested in Net-Nets unless the company is extremely well financed. A large quantity of current assets, especially if they consist of inventories, costs in excess of billings, or receivables from less than credit worthy customers, probably cannot help the common stock of a company which cannot meet its obligations to its creditors."
We certainly agree with Marty on these points. We place a much greater degree of value on cash and marketable securities than we do on other current asset accounts, but truth be told, here at Cheap Stocks, we do cover some companies that are not extremely well financed. That is one reason they are so "cheap", and its our charge to try and determine whether there’s any life left in these companies. We are not always right. But we don’t need to be. In this realm of deep value investing, it is not wise to concentrate too much money in too few companies.

Marty continues
"Second, many current assets classified as current assets under GAAP are really fixed assets of the worst sort. Take department store merchandise inventories. If the department store is to be liquidated, merchandise inventories are indeed a current asset, convertible to cash within 12 months at prices that conceivably could be close to book value, although much less than book value may be realized if the merchandise is disposed of in a GOB (Going Out of Business) sale."
Again, we couldn’t agree more. When current assets are primarily inventory, we are much more skeptical of whether the NCAV calculation reveals true undervaluation. All else being equal, we like our current assets in cash and short-term marketable securities.

Marty continues down the inventory path
:"On the other hand, if the department store is a going concern, merchandise inventories are a fixed asset of the worst sort. The merchandise inventories have to be replaced, are hard to value, and are subject to markdowns, obsolescence, shrinkage, seasonality and mislocation."

"Third, the Graham and Dodd formulation does not account for off balance sheet liabilities which may, or may not be disclosed in footnotes, nor do Graham and Dodd take into account excessive expenses or losses; at TAVF such expenses or losses are capitalized and added to liabilities."
The takeaway here is that is extremely important to read the footnotes in a companies SEC filing. You need to know what you are buying. Think of the footnotes as the "fine print".

"Fourth, Graham and Dodd only seem to recognize partially that certain fixed assets,e.g.m property, plant and equipment, can sometimes create cash."
Let me handle this one, Mr, Graham, and Mr. Dodd: we at Cheapstocks want to be aware of the non-current assets, we don’t ignore them. We simply don’t include them in the calculation. This creates a safety net of sorts, depending on how valuable these assets may be. Essentially, we value the company as (Current Assts) – (Current Liabilities) – (Other long term liabilities), "ignoring", at least in the calculation, the potential value of property, plant and equipment, and any other long-term assets. (Certainly, we are interested in those assets, and knowing what they are.)

Whitman closes with the following:
"When all is said and done, however, TAVF management owes an enormous debt of gratitude to Graham and Dodd for introducing the concept of Net-Nets. It remains the most important part of the Fund’s common stock portfolio."

Well said, Marty.

Monday, April 03, 2006

Back With Another List:
Profitable Companies Trading Below Their Net Current Asset Value

Once in awhile, your Cheap Stocks editor throws in a list, and today is no exception. Truth be told, the latest NCAV company I "discovered" was not actually trading below it's NCAV. I was halfway through writing my report when the numbers just did not look right, much to my disappointment. The company yields 3%, trades at less than 8 times earnings, and about 1.3 times NCAV. But, I scrapped that report afterall. Maybe I'll save it for another day.

This list is comprised of companies trading below their NCAV, that have positive trailing 12 month earnings. Avid readers will recognize a few of the names from previous posts. It is pretty slim pickings though, as evidenced by the fact that we went all the way down to $10 million in market cap.

Trans World Entertainment (TWMC)
Industry: Entertainment Products
Current Price: $5.57
Market Cap: $269 million
NCAV: $322 million
P/E: 80

Tandy Brands (TBAC)
Industry: Apparel
Current Price: $10.3
Market Cap: $69 million
NCAV: $73 million
P/E: 40

Lazare Kaplan (LKI)
Industry: Diamonds
Price: $7.80
Market Cap: $68 million
NCAV: $79 million
P/E: 32

Boss Holdings (BSHI)
Industry: Apparel
Current Price: $7.9
Market Cap: $15.6 million
NCAV: $16.8 million
P/E: 22.5

Hirsch Intl (HRSH)
Industry: Machinery
Current Price: $1.28
Market Cap: $11.15 million
NCAV: $10.86 million
P/E: 42.75

*The author has a position in Lazare Kaplan. This is neither a recommendation to buy or sell this security, or any others mentioned in this piece. All information provided believed to be reliable and presented for information purposes only.