Monday, May 29, 2006

Anyone For Some Louisiana Swamp Land?

Biloxi Marsh Lands Corp
Ticker: BLMC
Market cap: $83.8 million
Price: $30.00
Average Volume:1700

By now you’ve gotten used to (or are getting tired of) the off the beaten path ideas we often feature here at Cheap Stocks. It’s not that we are trying to be different, we just believe there is a whole other world of investment ideas out there for investors besides the Microsofts, Home Depots, Harleys, and all the other big names institutions own. Not that there’s anything wrong with any of these companies. But they have been researched to death, and there is no new information under the sun. The dead horse has bean beaten, so to speak.

While we try to come up with original ideas, we are the first to admit when they don’t originate from our research alone. Take this week’s company, Biloxi Marsh Lands Corp. Last year we received a few e-mails asking for our opinion, or whether we had any research on this company. Truth be told, at the time, we’d never heard of the company. Fast forward to last week’s e-mail from a reader asking if we covered BLMC, as he’d seen our research on Avoca. Reader, we hear you loud and clear. Thanks for the idea, even if it was not ours. (We are big believers in honesty here at Cheap Stocks).

Biloxi Marsh Lands Corp, which trades on the pink sheets, and is not required to file with the SEC, owns 90,000 acres in St. Benard Parish in Louisiana. The majority of company revenue is from oil and gas exploration and production taking place on company land. 2005 revenue of $22.5 million was up slightly from 2004’s $22.2 million. This was due primarily to an increase in natural gas prices. Net income also rose, to $13.9 million, from $13.8 million.

First quarter 2006 revenue was $8.35 million, up from $6.8 million for the same quarter last year. The increase was due to rising oil and gas prices, and a one time change in revenue recognition. Net income rose to $5.3 million from $4.5 million.

The Land
Sure, we could do our typical Enterprise Value/Acre calculation we are becoming know here at Cheap Stocks, but keep in mind this is marsh land, 90,000 acres of it, which is about 14 square miles. This is not St. Joes, nor JG Boswell quality land. Its value is from the contents that lie beneath. There’s probably little use or value besides. (Ok, we can’t help ourselves. With an enterprise value of $83.8 million, and 90,000 acres, that’s an EV/acre of $931)

The Balance Sheet
As of 3/31/2006, the company had $1.6 million in cash, and $19.5 million in LT marketable securities, to go along with no debt. With 2.85 million shares outstanding, that equates to about $7.00 per share in cash and securities. The land itself is carried at cost, a paltry $234,939, or $2.61 per acre. We don’t know its true value, but granted, the oil and gas beneath are worth significantly more than carrying value.

The Dividend
During 2005, the company paid 3 dividends, for a total of $3.25 per share. In 2006, the company paid a $2.00 dividend in January. BLMC recently stated in its first quarter earnings release that it intends to “equal or exceed the amount of dividends paid in 2005”. That statement got our attention. Assuming the company equals 2005 payout, ($3.25 per share), that equates to an 11% yield at current prices. If that ends up happening, we’d expect some share price adjustment above the current level. Keep in mind, BLMC was a $60 stock just one year ago, and has not yet come close to pre-Katrina levels.

The Risks
In our minds there are two risks or factors that are either weighing on this stock, or could if conditions change. The first is what we’ll call a “Hurricane Discount”. This company’s production was affected by Katrina and Rita, and with another hurricane season approaching, this no doubt weighs on the stock. The second is the price of natural gas. If gas stays relatively high or rises, the expected dividends should follow, they may even rise. If gas falls, so will revenue, and further dividends this year (the company usually pays one dividend per year, last year it paid three) may be at risk.

Once again, some of the most interesting stories are lurking in the pink sheets. This company reminds us of Avoca (in which we have a position), but has much greater liquidity (if you consider 1700 shares/day liquidity). At $30.00 per share, it’s compelling, but not without a degree of risk. If you were interested in Avoca, and its fat yield, but wary of the $5500 price tag and lack of available of shares, this one might be for you. BMLC has 2.8 million shares outstanding, while Avoca has just 8 thousand.

*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.

Thursday, May 18, 2006

Hats Off to Avoca Inc (AVOA)
A Credit to SarbOx Avoiders

If you read our previous post regarding Scheid Vineyards delisting, and de-SarbOxing primarily to save money, you'll remember that de-listing absolves companies with less than 300 shareholders of filing with the SEC.

Your Cheapstocks editor currently has positions in two companies that don't file, JG Boswell (BWEL) and Avoca Inc. (AVOA). Although Boswell has performed well for us, there are no investor communications provided. We are in this one on faith and gut. The only communication I've ever received from Boswell, was information on a company self tender offer in 2004. Nothing since then.

Avoca, on the other hand, continues to send quarterly and annual financials. Avoca is a small royalty trust that owns 16000 acre Avoca island, which is off the coast of New Orleans. Their primary revenue source is royalties from gas leases on the island. We received a report for Q1 today. For the record, sales tripled to $3.6 million from the same period last year, and net income nearly quadrupled to $2.5 million, oe $309.71 per share.

No, that is not a misprint, they really earned $309.71. Avoca split 1 for 100 in early 2005 in order to delist, which left the company with just 8,057 shares outstanding. You can imagine what that does to liquidity. The stock currently "trades" on the pink sheets, with a current bid of $5000. In 2005, they paid a $400 dividend ($350 the year before), and if Q1 is any indication, that should rise nicely for the next annual dividend (Dec 2006).

If you have any interest in this company, be very cautious. I believe there is tremendous value there, and between our originl purchase price, and two nice dividends, we've doubled our money in just over one year. But there just aren't many shares to go around, and both entry and exit will be difficult. There's a lesson in careful when placing orders, especially when there is little liquidity, and wide spreads. That's what limit orders are for.

In any event, our hats go off to tiny Avoca, a $40 million market cap powerhouse.

*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, May 13, 2006

Getting Around Sarbanes Oxley
Scheid Vineyards (SVIN)

You may have seen our original post on this issue back in 12/04. We followed up on this interesting issue with another report on 2/22/05.

I'd urge you to read those reports for background, but in summary, some small publicly traded companies have found a way to stay publicly traded, while avoiding filing with the SEC, and costly compliane with Sarbanes Oxley. The way to do this is to reduce registered shareholder roles to 300 or less. Companies have gotten creative in their attempts to make this happen. One way is to effect a reverse split, then buy out very small shareholder positions for cash. For instance, by effecting a 1 for 100 reverse split, any shareholder with less than 100 shares will be left with a fractional share, which is then bought back by the company. Once below 300 shareholders, the company files a from 15-12G with the SEC, which effectively ends their need to file with the SEC, or comply with SarbOx. For some companies, this can drastically cut pre-tax expenses.

The Downsides
While avoiding somewhat prohibitive costs, and freeing up senior staff who spend a lot of their time on SarbOx issues are pluses, there are negatives to be aware of. First, many of these companies go from barely trading to never trading. Their shares outstanding drop proportianate to the reverse split, so often there is little in terms of public float. While these companies continue to trade, they do so on the pink sheets, and bid/ask spreads tend to be very wide. There is little, if any liquidity in these companies. If you find one that is compelling, be prepared to hold for a long time. Finally, once these companies no longer file, it is sometimes very difficult, even for shareholders to get information. Your Cheapstocks editor currently owns positions in two companies which no longer file, Avoca, which still sends out quarterly reports, and JG Boswell, which does not. (Incidentally, JG Boswell has never filed as far as I know, and was not part of the latest wave of companies avoiding filing).

Scheid Vineyards
Ticker: SVIND
Price: $32.10
Market Cap: $25.84 million
Shares Out: 805 thousand
P/E: 8
Enterprise Value: $70 milliom

Scheid Vinyards is a small, California based grape and bulk wine producer. The company grows 17 varieties of grapes, most of which are sold under short and long term purchase agreements. The company also makes bulk wine with a portion of the grapes. Your Cheap Stocks editor has followed this company on and off for the past five years, but to date, has yet to pull the trigger. We first learned of this company when we discovered they were a dividend paying stock, but not in the traditional sense. The dividend in this case was a wine dividend. As we recall, it was good for a 50% discount on a case of Scheid wine.

The Fundamentals

Fiscal Year 2005 sales were up 51 percent from $23.6 million to $31.2 million. Net income rose sharply, from $1.3 million in 2004 to $4.4 million in 2005. Grape growing is a tough industry, dependent not only on weather, but also the ultimate quality and supply. Hence, Scheid's sales and earnings numbers can jump around quite a bit from year to year.

Scheid's balance sheet is not great, with $1.2 million in cash, but $36 million in long term debt. Bolstering this is Scheid's land holdings. Of the 5700 acres the company operates, it owns 1800, or nearly 3 square miles, in Monterey. California. On an Enterprise value/Acre calculation, (one that we are both fond of, and we believe originated) that's $23,333. Does not sound cheap based on the land alone, but we admit that we don't know what a vineyard acre in Monterey is worth.

"Going Private":The Reverse Stock Split

The company's recent 1 for 5 reverse stock split was intended to reduce shareholder roles below the magic 300 shareholder level. This allowed the company to de-list its stock fropm NASDAQ, while still allowing it to trade on the pink sheets. The main purpose for this was to save the company an estimated $485,000 in annual fees, broken down as follows:

Audit and Accounting
$ 100,000

Legal Fees

Stockholder Expenses

Nasdaq Fees


Internal Control Compliance*

$ 485,000

While $485,000(pretax) may seem like a pittance to many companies, its substantial to a company that earned $4 million last year. The other potential benefit is that management will no longer spend time and energy on SarbOx and SEC related issues, allowing it to focus more on the business. We'll see if they are succesful.

We are interested in Scheid's situation and will follow it closely. For more on the de-listing, please read the companies latest proxy, which goes into great detail about the process and reasoning.

*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.

Friday, May 05, 2006

It's All About The Inventory:
Gallery of History

Ticker: HIST
Price: $1.648
Market Cap: $9.27 million
Avg. Volume: 1000
52 Week price range: $1.00-$6.50

What could there possibly be to like about a company that loses money quarter after quarter, that is so deep into micro-cap land, that its market cap is south of $10 million? This same company barely trades, has a sizable bid/ask spread, and recently came close to being delisted by the NASDAQ, but was able to work out a deal with its founder and major shareholder in order to maintain listing requirements. It has trouble generating $1 million in annual sales, and even this top line number has been falling from year to year. This truly sounds like a cigar butt, and it may turn out to be just that: a discarded cigar butt with no puffs left in it.

But your Cheap Stocks editor initiated a small position in this stock a couple months back anyway. Would you expect anything less from Cheap Stocks? We venture off the beaten path quite often, and this is no different.

Gallery of History
Galley of History is a Las Vegas based historic documents seller. The company sells letters and documents, and signatures of presidents, political figures, significant physicians, inventors, aviators, scientists, entertainers, authors, artists, musicians, military figures, and sports heros to name a few. If you've ever collected historic documents you know that its a very popular and expensive market. Documents and letters signed by US Pesidents, for instance, can command big bucks. I've dabbled in this market from time to time, and can attest to its strength and allure.

Gallery of History runs periodic auctions, but also sells direct on its History For Sale website. I am impressed by their inventory, especially in the Presidential area. I am not, however, impressed by their pricing. Their documents appear to be very high quality, which should command a premium, but HIST still prices these high. Which is probably why they don't generate much revenue.

So what's to like, and why did your CS editor sink any money into what appears to be a sinking ship? Gallery of History has a vast inventory of 182,000 autographs and documents, which are carried on the books at cost, not in excess of market value. Current inventory as of 12/31/05 was listed at $6.5 million. On a per document basis, that comes out to $35.71 each. We believe that the company's inventory is worth many times that amount, and thats why we hold a position, albeit a small one.

The Risks
The risks are great with this company. The large majority of shares are held by insiders, and Founder and Chairman Todd Axelrod holds about 2.25 million shares. The company was in debt to Axelrod (and his wife Pam, who is also involved in the company), and through a conversion of debt to preferred equity, the company was able to stay listed on NASDAQ.

Here's a brief description from the company's most recent 10K 10Q:
On August 18, 2005, The Nasdaq Stock Market informed the Company that the Staff of The Nasdaq Stock Market was reviewing the Company's eligibility for continued listing on The Nasdaq SmallCap Market. The Company did not have a minimum of $2,500,000 in stockholders' equity, $35,000,000 market value of listed securities or $500,000 of net income from continuing operations for the most recently completed fiscal year or two of the three most recently completed fiscal years. In fact, the Company's stockholders equity was $2,361,681 as of the quarter ended June 30, 2005, the market value of its common stock was $9,676,692 as of August 1, 2005 and the Company reported losses from operations for the years ended September 30, 2004, 2003 and 2002. On September 7, 2005 the Company submitted a plan to The Nasdaq Stock Market detailing how the Company would attain and maintain compliance with the listing requirements for The Nasdaq SmallCap Market.

The Nasdaq Stock Market approved the Company's plan on September 20, 2005. Pursuant to the plan, Todd Axelrod, President of the Company, waived $564,000 of accrued but unpaid salary and Pamela Axelrod waived $140,000 of accrued but unpaid salary. Such waivers resulted in an immediate increase in stockholders equity of $704,000. The Company believes that it has regained compliance with the $2,500,000 stockholders equity requirement. Also, the Company intends to call a special meeting in which shareholders will be asked to approve a transaction in which $3,231,722 of indebtedness would be exchanged for a new series of preferred stock, thereby resulting in a further increase in stockholders equity of $3,231,722. The Company has scheduled a shareholders meeting to be held January 20, 2006.

And then from the most recent 10Q:

Subsequent Event
On January 20, 2006, the Company held a special meeting of shareholders for the following purpose: (1) to approve and authorize the amendment of the Company's Articles of Incorporation to authorize the issuance of up to 4,000,000 shares of Series A Preferred stock, par value $0.0005; and (2) to approve and authorize the issuance of 1,615,861 shares of Series A Preferred Stock, par value $0.0005, with an aggregate liquidation preference of $3,231,772, to Todd M. Axelrod, in consideration for cancellation of $3,231,772 in aggregate principal amount of indebtedness of the Company owed to Mr. Axelrod. The preferred stock will be entitled to a semi-annual dividend based on an annual rate of 3%. The remaining amount of this loan due Mr. Axelrod, $232,271 as of January 20, 2006, will continue with the same terms as previous including an interest rate of 3% annually.

In a nutshell, this gives Axelrod even greater control, but the upside is the stock is still listed.

Other Assets
Besides the document inventory, the company also owns a 33000+ square foot building in Las Vegas, carried on the books at less than $1 million. Part of this is leased out, and we are not sure of its market value.

Putting All Our Eggs In One Basket?
There's more negative here than positive, we admit. So why do we own it? Our ventures into the historic document arena tell us that HIST's inventory is much more valuable than $6.5 million. We also believe the stock is currently priced according to all the negatives we mentioned int his piece. Proceed with caution. Again, this is a thinly traded issue, with relatively wide bid/ask spreads.

*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.