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.

Hyperfeed
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.

Water
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:
8/6/06
7/22/06
4/7/05
1/21/05

*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.

Cheap Stocks added to Stockpickr.com'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 RealMoney.com, and are thrilled that he added us to his top 100 on Stockpickr.com 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!

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)

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.

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.

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).

Growth

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.

Creativity
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.

Conclusion

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.