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.