Wednesday, December 27, 2006

Cramer May Be Right About Jones Soda (JSDA), but Keep it in Perspective: Investors Beware: Do Your Homework First

First of all, for Cheapstocks to take a positive view on a company such as Jones Soda (JSDA) was a stretch. To actually take a position in this growth stock went far beyond that. We are deep value investors by nature, and paying 100 times earnings for a company that also has a high price/sales multiple, and little in the way of assets goes against our nature. But we bought Jones anyway, placing a high value on the intangibles: brand name, growing recognition, innovation in a somewhat stale industry, and great tasting products.

However, we were perplexed by Jones 12% pop last Friday(12/22), come to find out that it was a Jim Cramer-induced rally. On Mad Money's Thursday edition, Cramer spoke highly of Jones, suggesting for one, that earnings could double next year. This propelled the stock on Friday, amid a frenzy of message board activity. Small investors everywhere wanted to join the party.

We could only shake our heads in disgust. Oh, it's nothing against Jim Cramer, we believe he is not only entertaining, but has a great gut for the market. We wish we were as savvy as Cramer can be. But for one man to have a legitimate and well thought out opinion on literally every stock is hard to imagine. But thats another story.

When Cramer said that he expected earnings to double next year, that should have been the cue for investors to investigate what that statement actually meant. Jones earned $.06 per share in 2005, and is expected to earn the same for 2006 (year ends in late December). The average analyst eps estimate for 2007 is $.12 per share. So, if earnings did indeed double, Jones would still be trading at 100+ times earnings. Even if the high estimate for 2007 ($.20) was achieved, the stock still trades at 60X earnings.

Our point is that investors need to do a better job of interpreting what the pundits are saying. Jones earnings had better at least double in order to justify its current price, (as well as its price before Cramer's comments).

We'd love to see Jones go to $20, $30, $50, $100 per share. But not because of hype, not because of "irrational exhuberance", not because small investors are jumping on a bandwagon.

Are we shooting ourselves in the foot with these comments (we hold JSDA)? Maybe. But we are big believers in accurately interpreted information. If Cramer said that Sirius earnings would double next year, would investors quickly pile into that stock as well, without doing their homework? We hope not. Sirius has no earnings.

*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.

Tuesday, December 26, 2006

It's Not Easy Being Net(Net)

This website was originally built and dedicated to identifying potentially profitable ideas among the ranks of companies trading below their net current asset value. In the ensuing years, we’ve expanded into other areas—anywhere we find value, be it real estate, companies going private, etc: Which is a good thing, given the fact that the net/net world has become very stale, and somewhat boring. You’ll no doubt see what we mean later in this piece when we reveal the list of the top 10 net/nets in terms of market cap: you’ve probably seen them all before.

The reason we are not finding many interesting net/nets these days is related to the strength in the markets. In terms of net/nets, a rising tide (the markets) does lift all boats: including those with holes. Net/nets are few and far between as compared to when we started looking at them five or so years ago. We counted as many as 500 in 2002-2003, now there are less than 100, and many are so tiny that they don’t bear mention.

Don’t worry though, there’s other value out there, and we’ll continue to offer our opinions and insights (as convoluted as they may often seem). Don’t be fooled though, there will be another time when the net/net list grows, when the markets suffer from a downtrend. Meanwhile, we’ll enjoy this bull-run we are currently experiencing, maybe a bit skeptically. And we’ll still churn out research on the oft chance we identify an interesting and compelling net/net. We actually identified one the other day, and took a position, but the company is so small and trades so infrequently that we are hesitant to reveal it, for fear of being branded a pumper and dumper. That is not what we are about.

Below is a list of the top 10 companies trading below net current asset value in order of market cap:
InFocus Corp(INFS)
Lazare Kaplan Intl(LKI)
Orthologic Corp(OLGC)
Overland Storage(OVRL)
Kaiser Group Holdings(KGHI)
CallWave Inc(CALL)
Inhibitex Inc(INHX)
Selectica Inc(SLTC)
Remec Inc(REMC)

Here are the top 10 double net/nets-companies trading at less than twice NCAV:
Ingram Micro(IM)
Tech Data Corp(TECD)
Celera Group(CRA)
Sycamore Networks(SCMR)
Leapfrog Enterprises(LF)
Elector Scientific Industries(ESIO)

*The author has positions LKI, and LF. This is neither a recommendation to buy or sell these securities. All information provided believed to be reliable and presented for information purposes only.

Tuesday, December 19, 2006

The JG Boswell Conundrum: Lots of Water, yet no Liquidity

JG Boswell continues to prosper in silence. The owner of some 142,000 acres of prime California land (along with 30,000 in Australia) continues to grow cotton and other crops, continues to pay your Cheap Stocks editor and some 500 or so other shareholders $3.50 per share in quarterly dividends, and continues to be rather tight lipped about its finances. We knew that would be the case going in, yet we continue to add to our holdings, little by little. The truth is, shares rarely trade, and it is difficult to find more than a handful for sale. Call it faith, call it gut feeling, or call it blind stupidity.

We call it value. At a market cap of around $600 million, and assuming an enterprise value of $800 million (exact figure unknown), that yields an estimated EV/Acre of $8000-$9000. As the share price has run up from the $300 range 3 years ago to about $700 per share, that figure is not as compelling as it once was (see our January 2005 research), but there is much more to the story than land.

JG Boswell’s cotton land is on the dry bed of Tulare Lake. Below Tulare Lake sits an aquifer that according to a recent report in Money Week titled “how to profit from the world’s water crisis”, is estimated to hold between 400,000 and 2,000,000 acre feet of water. (An acre foot measures the amount of water that would cover the area of one acre by one foot). This is enough water to serve 800,000 Californian families annually. The article also states that the California water agency values water at $10,000 per acre foot, giving Boswell’s aquifer alone a potential value of between $4 and $20 billion. That by the way, does not include the value of the land. While we could only hope this analysis is accurate, we discount it by our very nature.

Incidentally, if you wish to do further research on Boswell, good luck. You won’t find financial statements; the company does not have to file with the SEC. But for an excellent company history and for some perspective, we recommend a book about the company and it’s founder The King Of California: J. G. Boswell and the Making of a Secret American Empire.

Previous JG Boswell Research:

*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.

Thursday, December 14, 2006

Avoca(AVOA)Declares Dividend: $720

Today, Avoca Inc declared a $720 dividend payable 1/31/07 to shareholders of record 1/12/07. The stock will "trade" (quotes around trade because the stock rarely does) ex dividend 1/10/07.

We were slightly disappointed with the amount, despite the indicated yield of 11.43% based on the most recent bid price of $6300. As you may recall, our 12/01/05 Avoca update suggested a dividend of between $800 and $1000.While we were out of range on our estimate, that brings total distributions over the two year period we've owned Avoca to $1470 per share. (We paid around $28.25 share prior to the 1 for 100 reverse split/delisting). No complaints here.

*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, December 13, 2006

Maui Land and Pineapple (MLP) Update

Maui Land & Pineapple Co, the Hawaii based pineapple producer/land developer has continued to fly under the radar since our initial research. The company had a solid 2005 with revenues of $186.7 million, up from 2004's $153.2 million and net income of $14.6 million, from a loss of $400 thousand. Through the 9 months ended 9/30/06, the company reported revenues of $132.4 million, and net income of $8.7 million (vs $118.1, $9.7 for the same period last year).

We originally took a position in MLP because of its land holdings (28,000+ acres) in Hawaii. We were not crazy about their low margin pineapple business, but to us, that’s a freebie.

Resort segment: Kapalua Land Company
Nine Miles of Hawaii Beachfront

Part of Maui Land’s 28,200 acres include 22,800 in West Maui, including Kapalua Resort a golf community, which borders the ocean, and boasts 3 beaches, 2 hotels, 3 championship golf courses, 10 restaurants, and 700+ single family homes and condominiums. Oh, did I mention the 9 miles of beachfront property?

Approval for Expansion
The big news for MLP was the recent decision by the Maui Planning Commission which approved Maui Land's plans to build multimillion-dollar homes and a new private golf course at the Kapalua Resort. This potentially opens the door for the company to finally unlock shareholder value.

At it's current enterprise value of $263 million, that MLP's land is valued at about $9300 per acre, on an Enterprise Value/Acre basis, a calculation we are fond of here at Cheap Stocks. Granted, some of the land is preserved, and land utilized in the pineapple operation (6000 acres) is not nearly as valuable as the Kapalua Resort property. But, a compelling calculation nonetheless.

*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.

Friday, December 08, 2006

Jones Soda(JSDA)Goes Back to Basics

Jones Soda's recent announcement of the introduction of a sugar sweetened soda, as opposed to the more typical corn syrup sweetened variety, went largely unnoticed by the Street. Can you blame them? What's the big deal. Corn syrup or sugar? Who cares, what's the difference anyway?

Soda afficionados know that there is a huge difference. Pure cane sugar just plain tastes better. Some of us go to great lengths prior to Passover (your very Presbyterian Cheap Stocks editor included) to obtain supplies of Coca Cola's kosher version of Coke, made with sugar, produced in limited quantities and available only in certain parts of the country. It tastes like the Coca Cola from many years ago, much better than the corn syrup version, with a much healthier head of foam.

Jones is touting their soon to be released Jones Pure Cane Sugar Soda as a healthier alternative to corn syrup sweetened sodas. While cane sugar is natural, high fructose corn syrup is not. Whether or not there are health benefits is up for debate.

Jones sees this new release as a differentiator in the already highly competitive soft drink market. Ultimately, if taste wins out, perhaps Jones and ultimately shareholders will benefit.

*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.

Friday, December 01, 2006

Avoca (AVOA) Reports Third Quarter Earnings; $1000 dividend in 2007?

Avoca Inc, the owner of 16000 acre Avoca Island off the coast of New Orleans, which generates the bulk of revenue from gas royalties, recently issued 3rd quarter financial statements. For most companies the act of doing this is both required and expected, but for Avoca, which delisted in 2004, there is no requirement. Still, the company continues to keep shareholders well informed.

For the 3rd quarter, revenues were $3.5 million, up sharply over last year's $1.3 million. However, $1.8 million of that represented proceeds from the settlement of a lawsuit. Net income was $2.3 million, or $291.32 per share up form last year's $835,000, or $103.65 per share. For the nine months ended 9/30/06, revenues were $9.95 million, (vs $3.7 million), and net income was $6.6 million, or $818.64 per share (vs $2.3 million, $291.05/shr).

Last year, Avoca paid a $400 dividend in January (declared in December). Since the company typically pays out most of its earning in dividends, we expect this year’s dividend may be in the range of $800-$1000.

Since Avoca is thinly (if ever) traded, its difficult to get a true sense of valuation. Indeed, the company has just 8059 shares outstanding, and the most recent bid price was $6000 (no ask). If that is truly representative of Avoca’s value, that would give the company a market cap of $48 million, a p/e in the 4-5 range, a trailing twelve month dividend yield of 6.7%, and an expected yield of between 12 and 16%, if our estimates are correct.

If that sounds too good to be true, keep in mind the risks inherent in investing in such a company. First, there is no liquidity. Shares are difficult to buy, and sell. Second, Avoca operates in a commodity based (gas royalties) business where there can be very wide price swings. Third, information is difficult to find. Before Avoca delisted (1 for 100 reverse split, to avoid costly provisions of SarbOx) they were required to file financials with the SEC, now they are under no such requirement. Fortunately, for shareholders, Avoca continues to send audited financials, not available to anyone else.

*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.