Friday, March 17, 2006

New Positions

In the interest of full disclosure, yesterday we initiated positions in two NCAV stocks which we've reported on recently:

Discovery Partners(DPII)

Lazare Kaplan Intl(LKI)

We'll update you on their progress.

Thanks to all of you who have requested a PDF of the Bloomberg Personal Magazine article mentioned in our previous post.

Saturday, March 11, 2006

Back Where it All Started

This past week, your Cheap Stocks editor spent some time reminiscing about articles gone by, thinking about the good old days, so to speak. In that process, I came across one of the articles, certainly not the first, that was at the forefront of my interest in companies trading below net current asset value. The magazine in which it was published, Bloomberg Personal Finance Magazine, one of the best on the market at the time, unfortunately bit the dust in early 2003. Hats off to any mainstream publication (this one had circulation of 400,000) willing to induldge a writer by printing a story on this strategy.

This particular article, published in May, 2002, was entitled “Raking Up Live Prospects: A 70-year-old strategy for choosing stocks is green again” and discussed a stock screen utilized to identify NCAV companies. The story ultimately featured seven promising examples of NCAV companies, each of which was either profitable on a trailing 12 month basis, had at least one profitable quarter in the previous year, or was sitting on a relatively significant amount of cash and marketable securities.

The selected NCAV companies from that article are printed below. We thought it would be interesting, nearly four years later, to see how these companies subsequently fared.
The Results
Audiovoxx(VOXX)- Up 81 percent
Blair(BL)- Up 140 percent
National Presto Industries(NPK)- Up 78 percent
Netro (now SR Telecom)- Down 71 percent
Tellium- (Acquired at $3.00/share in September 2003)- Flat
Titanium Metals(TIE)- Up 2130 percent
Valueclick(VCLK)- Up 522 percent

The average cumulative return was +411 percent. Obviously, Titanium Metals 2130 percent rise had a great deal to do with that. But otherwise, outside of Netro’s poor performance, the results were compelling.

What was very pleasing at the time of this articles publication, was to see this piece referenced in a Washington Post article by Jim Glassman (Yes, Dow 36000 Jim Glassman). That piece is still available on line, in the National Review archives: Hook, Line & Winner

The point of this post is to illustrate the fact that the NCAV strategy does have merit. It requires a great deal of patience, and has a high degree of risk, but the rewards can be outstanding: not just in dollar terms, but also in the thrill of successfully identifying an undervalued security that few investors know of, or care about. This is also a great example of an area of the market were small investors can succeed, and the institutions can’t.

If you’d like a PDF of the original Bloomberg Personal article, please e-mail your request to

*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, March 03, 2006

Update: Discovery Partners
Discovery Partners
Ticker: DPII
Price: $2.40
Market Cap: $63.3 million
Net Current Asset Value: $85 million

Since our March 2005 report shares of Discovery Partners are down 25 percent. We don't always get it right here at Cheap Stocks, or maybe our timing is not perfect, but we are not afraid to take our lumps.

As we noted in our initial post, Discovery had a sizable contract with Pfizer, whose renewal was in doubt. Indeed, Pfizer did not renew that contract, which has had a major impact on Discovery.

The company reported a net loss of $14 million for 2005. Revenues decreased 21 percent to 34.8 million. Not a pretty picture. The loss of the Pfizer contract is substantial, and as a result, the company has shut down and/or consolidated some of its facilities. Furthermore, the company is experiencing pricing pressure from outsourcing. That's quite a one-two punch.

Good News?
If there is any good news, its still the company's balance sheet. As of 12/31/05, the company had $83.5 million in cash and no debt to speak of. Thats about $3.20 in cash per share, while the stock trades at $2.40. Hold on, you might be saying, cash may be great, but if you have unprofitable operations, you'll burn through that cash quickly. Good point. In this case, the company is estimating a 2006 loss of from $15-$17 million, and cash burn of $12-$14 million. That would leave Discovery with $70 million (assuming company forecasts are accurate, a big assumption, we know)at year end 2006. Right now, the market is valuing the entire company at about $63 million. That's a fairly significant discount to cash, and a signal that the market has about given up on Discovery Partners.

Call Option?
Lets face it, its difficult to make a case for this company's operating businesses. Howevever, the cash level is interesting. If the company can truly end 2006 with $70 million in cash, purchase at current levels are essentially (ok, a stretch, we know) an in-the-money call, with a 1+ year expiration. The call being the possibility that Discovery turns the business around, even slightly over the next year, or perhaps that someone acquires them. I'd exchange $2.40 for $3.20 anyday, everyday, as often as possible. We know its not that simple. Any puffs left in this cigar butt? We'll see.

*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.