Land Review 2007: Part II

There was quite a bit of interest in Part I of 2007's Land Review, so today, we give you Part II. For clarification, we are not suggesting that any or all of these companies are ripe for purchase. Value is in the eye of the beholder, and the companies I value are likely to be shorted by someone who has an opposing view. (See our8/7/07 column where Greenlight Capital's David Einhorn and I tangled over our repective opinions on St. Joes (JOE).

(Market Cap and EV are in $ millions)
Scheid Vineyards
Ticker: SVIN
Recent Price: $35.55
52 High/Low: $39/$32
Avg Volume: 50
Mkt Cap: 36
Ent Value: 70
Acres Owned: 1800
EV/Acre: $38,889
Location: California
Primary Use: Vineyards
Shares/Acre: 1094

Tejon Ranch
Ticker: TRC
Recent Price: $41.43
52 High/Low: $57.09/$35.8
Avg Volume: 50000
Mkt Cap: 700
Ent Value: 620
Acres Owned: 270000
EV/Acre: $2296
Location: California
Primary Use: Development/Ag
Shares/Acre: 55

St Joes
Ticker: JOE
Recent Price: $31.01
52 High/Low: $64.1/$26.7
Avg Volume: 863000
Mkt Cap: 2306
Ent Value: 2841
Acres Owned: 718240
EV/Acre: $3956
Location: Florida
Primary Use: Development/timber
Shares/Acre: 128

Texas Pacific Land
Ticker: TPL
Recent Price: $43.45
52 High/Low: $62.75/$32.01
Avg Volume: 17000
Mkt Cap: 457
Ent Value: 448
Acres Owned: 966392
EV/Acre: $464
Location: Texas
Primary Use: Leased for grazing/oil
Shares/Acre: 11

Cadiz
Ticker: CDZI
Recent Price: $19.13
52 High/Low: $27/$16.06
Avg Volume: 37000
Mkt Cap: 228
Ent Value: 245
Acres Owned: 45000
EV/Acre: $5444
Location: California
Primary Use: Water/ag
Shares/Acre: 285

Avatar
Ticker: AVTR
Recent Price: $38.06
52 High/Low: $86.52/$37.71
Avg Volume: 116000
Mkt Cap: 315
Ent Value: 259
Acres Owned: 32000
EV/Acre: $8094
Location: Florida, Arizona
Primary Use: Development
Shares/Acre: 213

Pope Resources
Ticker: POPEZ
Recent Price: $41.78
52 High/Low: $50.01/$34
Avg Volume: 6000
Mkt Cap: 196
Ent Value: 242
Acres Owned: 118000
EV/Acre: $2051
Location: Washington
Primary Use: Timber/Development
Shares/Acre: 49

Potlach Corp
Ticker: PCH
Recent Price: $45.76
51 High/Low: $49.98/$38.99
Avg Volume: 364000
Mkt Cap: 1793
Ent Value: 2191
Acres Owned: 1500000
EV/Acre: $1461
Location: Arizona, Idaho, Minnesota
Primary Use: Timber
Shares/Acre: 32


Mauna Loa
Ticker: NUT
Recent Price: $3.55
52 High/Low: $6.27/$3.5
Avg Volume: 17400
Mkt Cap: 27
Ent Value: 30
Acres Owned: 2242
EV/Acre: $13381
Location: Hawaii
Primary Use: Agriculture
Shares/Acre: 3769

Keenawaw Land
Ticker: KEWL
Recent Price: $217
52 High/Low: $222.25/$171
Avg Volume: 500
Mkt Cap: 139.1
Ent Value: 139.1 (est)
Acres Owned: 150000 (est)
EV/Acre: $927 (est)
Location: Michigan
Primary Use: Timber
Shares/Acre: 4

This is not intended to be an exhaustive list of all companies that hold substantial amounts of land. There are many, and perhaps we'll profile others in future postings. Happy New Year!



*The author holds positions in JOE and TRC. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks following the date of this post.

Land Review 2007: Part I

What better way to say goodbye to 2007, we thought, than to review some of the companies holding one of our favorite assets, land. It’s generally been a pretty rough year for most firms that have anything to do with real estate. Some have no doubt been punished well beyond justification, but then again, Mr. Market is in control, and does as he sees fit. We believe this has created some compelling opportunities even if the housing situation worsens.

For the purposes of this piece, we’ve identified 20 or so companies with various operating businesses, that have substantial land holdings. Some of these have land that is a peripheral part of operations, or just one of several operating businesses. These companies have typically been less affected by recent market events; especially if their other operations are firing on all cylinders. Others have suffered from a double whammy: huge declines due to the geographical location of their land, and the fact that land is their primary business.

Two data calculations we use are worthy of explanation:

EV/Acres: Enterprise Value of the company/Total owned acres
Enterprise value is the market value of the firm plus debt, minus cash, and is an approximation of all claims that equity and debt holders have on a firm. We believe EV is a better estimate of true current market value, because it represents all claims investors hold in the capital structure, not just equity.

We use this calculation not to attempt to value the land on a per acre basis, but rather for perspective. The results of this calculation will be all over the board depending on the amount of land a company holds, how prominent it is in a company’s operations, as well as the land’s quality. (Obviously, timber land and marsh land is less valuable than vacation property)

Shares Per Acre
This represents the number of shares you would need to own in order to own one acre of a particular company’s land. This measure has no particular use, other than it is interesting to your Cheap Stocks editor, and helps measure an equity stake where the underlying company owns land in different terms. (For example, instead of saying you just picked up 550 shares of Tejon Ranch, you could say you just bought 10 acres of California land).

Below is Part I, the first ten companies.

(Market Cap and EV are in $ millions)
Alexander and Baldwin
Ticker: ALEX
Recent Price: $52.95
52 High/Low: 59.42/43.62
Avg Volume: 200000
Mkt Cap: 2227(million)
Ent Value: 2674(million)
Acres Owned: 89440
EV/Acre: $29,897
Location: Hawaii
Primary Use: Agriculture/development
Shares/Acre: 574

Alico
Ticker: ALCO
Recent Price: $36.87
52 High/Low: 65/35.88
Avg Volume: 21000
Mkt Cap: 271
Ent Value: 327
Acres Owned: 135466
EV/Acre: $2414
Location: Florida
Primary Use: Agriculture/Cattle
Shares/Acre: 574

Biloxi Marsh Lands
Ticker: BLMC
Recent Price: $31.00
52 High/Low: 39/28.25
Avg Volume: 200
Mkt Cap: 76
Ent Value: 70
Acres Owned: 90000
EV/Acre: $778
Location: Louisiana
Primary Use: Oil and Gas
Shares/Acre: 25

Blue Ridge Real Estate
Ticker: BLRGZ
Recent Price: $31
52 High/Low: 39/28.25
Avg Volume: 72
Mkt Cap: 76
Ent Value: 93
Acres Owned: 17009
EV/Acre: $5468
Location: Pennsylvania
Primary Use: Ski resorts, commercial, development
Shares/Acre: 176

Consolidated Tomoka Land
Ticker: CTO
Recent Price: $62.74
52 High/Low: 80.5/60.5
Avg Volume: 11400
Mkt Cap: 359
Ent Value: 363
Acres Owned: 11500
EV/Acre: $31,565
Location: Florida
Primary Use: Commercial, golf, development
Shares/Acre: 503

JG Boswell
Ticker: BWEL
Recent Price: $1025
52 High/Low: 1075/686
Avg Volume:
Mkt Cap: 960(est)
Ent Value: 1030(est)
Acres Owned: 172000
EV/Acre: $5,988
Location: California
Primary Use: Agriculture/development
Shares/Acre: 6

Maui Land and Pineapple
Ticker: MLP
Recent Price: $26.62
52 High/Low: 38.99/25.7
Avg Volume: 12200
Mkt Cap: 217
Ent Value: 248
Acres Owned: 25400
EV/Acre: $9,764
Location: Hawaii
Primary Use: Development/Agriculture
Shares/Acre: 367

PICO Holdings
Ticker: PICO
Recent Price: $34.16
52 High/Low: 49/33.01
Avg Volume: 164000
Mkt Cap: 543
Ent Value: 590
Acres Owned: 560000
EV/Acre: $1,054
Location: Nevada
Primary Use: Water/development
Shares/Acre: 31

Plum Creek Timber
Ticker: PCL
Recent Price: $45.16
52 High/Low: 48.45/37.13
Avg Volume: 1359000
Mkt Cap: 7780
Ent Value: 10092
Acres Owned: 8200000
EV/Acre: $1,231
Location: 18 states
Primary Use: Timber, some development
Shares/Acre: 27

Rayonier
Ticker: RYN
Recent Price: $45.59
52 High/Low: 49.55/38.17
Avg Volume: 545000
Mkt Cap: 3555
Ent Value: 4084
Acres Owned: 1931323
EV/Acre: $2,115
Location: several states
Primary Use: Timber, some development
Shares/Acre: 46

We’ll publish the balance of the list in our next posting.

We would like to thank all of our readers for a fantastic 2007. Our readership has grown by leaps and bounds over the year, and we just hit the 500 mark in subscribers. In any event, we look forward to delivering compelling, off the beaten path investment ideas in 2008.

*The author holds positions in BLMC, BWEL, MLP, PICO and PCL. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks following the date of this post.

Potential Bargains in Profitable, Cash-Rich Double Net/Nets Part II

As a follow up to last weeks piece, here are an additional handful of companies trading at less than 2 times net current asset value that also meet the following criteria:

*Market Cap Minimum $100 million
*Price/Earnings Ratio less than 20
*Net Cash (cash less LT debt) is at least 20 percent of market cap


Silicon Image Inc
Ticker: SIMG
Price: $5.05
Mkt Cap: $425
NCAV: $222 million
Cash & ST Inv: $226 million
PE: 11

MKS Instruments
Ticker: MKSI
Price: $18.41
Mkt Cap: $1.04 billion
NCAV: $536 million
Cash & ST Inv: $360 million
PE: 11

United Capital Corp
Ticker: AFP
Price: $25.3
Mkt Cap: $210 million
NCAV: $116 million
Cash & ST Inv: $151 million
PE: 6

Heelys Inc
Ticker: HLYS
Price: $6.45
Mkt Cap: $175 million
NCAV: $121 million
Cash & ST Inv: $151 million
PE: 6

Nice to see some non-tech companies here; nothing against tech, but the truth is, your editor just isn't adept at tech (perhaps just not smart enough). As always, buyer beware. More often than not, companies are often cheap for very good reasons. What we've published here should be seen as the starting point, not a definitive list of must-have names.

*The author does not have positions in any of the companies mentioned. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks following the date of this post.

Potential Bargains in Profitable, Cash-Rich Double Net/Nets

Occasionally, we take liberties with Ben Graham’s original formula used to identify companies trading below their net current asset value, and loosen the criteria a bit. (Truth be told, Ben would not have bought a company unless it traded for less than 2/3 NCAV, and even then, he would have had to be convinced the company had legs.) This week we’ll identify some of the companies trading at less than twice their NCAV, with the following attributes:

*Market Cap Minimum $100 million
*Price/Earnings Ratio less than 20
*Net Cash (cash less LT debt) is at least 20 percent of market cap

The objective is to identify companies that are not just potentially cheap, but also have levels of cash adequate to weather storms that may be on the horizon. As always, this is a working list that requires additional research and scrutiny prior to making investment decisions. Not surprisingly, many on the list are tech companies. Perhaps we’ll dig deeper into a couple of the more compelling names in the coming weeks.

ZYGO Corp
Ticker: ZIGO
Price: $11.29
Mkt Cap: $20
NCAV: $102 million
Cash & ST Inv: $41 million
PE: 19

Rudolph Technologies
Ticker: RTEC
Price: $11.95
Mkt Cap: $349 million
NCAV: $211 million
Cash & ST Inv: $121 million
PE: 17

Integrated Silicon Solution Inc
Ticker: ISSI
Price: $6.52
Mkt Cap: $246 million
NCAV: $161 million
Cash & ST Inv: $134 million
PE: 16

Eagle Test Systems
Ticker: EGLT
Price: $10.95
Mkt Cap: $251 million
NCAV: $141 million
Cash & ST Inv: $112.5 million
PE: 14

Cutera Inc.
Ticker: CUTR
Price: $15.14
Mkt Cap: $192 million
NCAV: $99 milliom
Cash & ST Inv: $100 million
PE: 13

Benchmark Electronics
Ticker: BHE
Price: $17.95
Mkt Cap: $1.28 billion
NCAV: $852 million
Cash & ST Inv: $379 million
PE: 13

Conn's Inc
Ticker: CONN
Price: $18.1
Mkt Cap: $420 million
NCAV: $244 million
Cash & ST Inv: $210 million
PE: 11

*The author does not have positions in any of the companies mentioned. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks following the date of this post.

New Position: Avalon Holdings (AWX)


We viewed a recent pullback in the price of tiny Avalon Holdings (AWX), as an attractive entry point, and recently initiated a position.

We initally wrote about Avalon back in October, 2006, and found it an interesting and profitable combination of assets and businesses. The company currently owns 2 golf courses (Avalon Lakes Golf Course, Warren, Ohio, and Avalon Country Club, Sharon, PA) operates the Avalon Golf and Country Club at Squaw Creek in Vienna Ohio, and runs a waste management business, which accounts for more than 85% of operating revenue.

Strong Third Quarter
Revenue rose 9% to $12.1 million from the same quarter last year, and 20% to $35 million for the first nine months of 2007. Net income rose to 547K or $.14 per share vs, 501K and $.13 for the quarter, and to $1.262 million and $.33 per share vs. 984K and $.26.

The balance sheet remains strong with $6.741 million or $1.77 per share in cash, and just 232K in long term debt. Cash did decrease significantly from year end 2006, primarily due to cap ex related to improvements at the Sharon Country Club (acquired in October 2006).

Buyer beware, Avalon is a microcap, with little liquidity. Before taking a position in a company of this size, do your homework.


Avalon Holdings
Ticker: AWX
Price: $6.50
Mkt Cap: $24.7 million
Shares Out: 3.8 million (3.191 million Class A, 613K Class B)
Book Value/Share: $10.32 (no intangibles)
Avg Volume: 8800

*The author has a position in Avalon Holdings (AWX). This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks following the date of this post.

New Life in the Land of the Forgotten: Ranks of Tiny, Profitable Net/Nets Growing

Call us strange, but we believe that a little market volatility can be a good thing. It helps wipe away market excesses, such as those that were the end result of credit that was too easy for too long, and poorly designed and misunderstood securities which have bankrupted many. (Notice, we did not use the “S” word)

We’ve whined for months about the lack of interesting companies—those worth further research—trading below their net current asset value, but recently, the situation has been looking up (or down depending on your reference point). We are beginning to see more profitable net/nets. Most are deep into the microcap space, but beggers can’t be choosers.

The criteria for this weeks net/net list is as follows:
Company profitable on a trailing 12 month basis
P/E ratio less than 50
Market Cap greater than $20 million


Company: Bexil Corp
Ticker: BXLC
Price: $31.15
Market Cap: $27 million
NCAV: $37.8 million
P/E: 42


Company: Forward Industries
Ticker: FORD
Price: $2.71
Market Cap: $21.1 million
NCAV: $24.6 million
P/E: 46


Company: GSI Technology
Ticker: GSIT
Price: $2.30
Market Cap: $65.1 million
NCAV: $66 million
P/E: 12


Company: Eternal Technologies
Ticker: ETLT
Price: $.59
Market Cap: $27.8
NCAV:$48 million
P/E: 4


Company: Atlantic Coast Entertainment Holdings
Ticker: ACEH
Price: $18
Market Cap: $179.4
NCAV: $220 million
P/E: 5
*Currently does not have an operating business, primary assets are cash

Good to see some unfamiliar names. We are also seeing a few other interesting companies that are not curretnly profitable. Perhaps we'll feature these in a furture post.

*Of the companies mentioned, the author has a position in Eternal Technologies (ETLT). This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks following the date of this post.

Lazare Kaplan Update

As we reported in our 10/19 post, diamond company Lazare Kaplan announced in their proxy their intention- subject to shareholder approval- to buy out shareholders owning less than 101 shares in order to save the company an estimated $25000 per year in mailing, printing and other costs. We believed there was more to the story, namely that LKI's ultimate intention was to reduce shareholder roles to below 300, de-list, and in doing so, avoid both SEC filing and the prohibitive costs associated with Sarbanes Oxley compliance, while still trading publicly. That's where the real savings are for small companies such as LKI.

We hoped the company would address this on their recent earnings call. However, LKI's interpretation of the facts did not match ours. When describing the reverse and forward split, Chairman Maurice Templesman stated that once the transaction was complete, the company would have "750 shareholders of record for SEC reporting purposes, which is well above the number of shareholders for the company to continue to qualify as a public company".

Perhaps it's a matter of interpretation, or one of us does not have his facts straight, but we believe that following the reverse/forward split, the company will be well below 300 shareholders of record. This is what the prospectus had to say:

The Company has a stockholder base of approximately 2,500 stockholders, including approximately 1,709 registered stockholders.

As of September 14, 2007, approximately 1,644 registered holders of the Company’s Common Stock owned fewer than 101 shares of stock. On such date, these stockholders represented approximately 96% of the total number of registered holders of the Company’s stock, but owned only approximately 0.045% of the total number of outstanding shares of stock.

By our interpretation, following the split and buyout of small shareholders, there will be 65 registered shareholders. We believe that Templesman's 750 figure was referring to stockholders, not registered holders. If Charles Schwab, for example had 100 clients with positions in LKI, the shares are held in street name, and this represents 1 shareholder of record.

In any event, shareholders did approve the reverse/forward split, and it is set to occur on November 12th.

*The author has a position in Lazare Kaplan (LKI). This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks following the date of this post.

Losing Patience With Tootsie Roll (TR)

Sometimes, as value investors, we become enamored with a good story. For Tootsie Roll, the story was a strong brand, very solid profit margins, and aging owners. Unfortunately, the company continues to stagnate under the leadership and control of the Gordon family.

We knew they might be an issue, but believed that at their ages, Ellen, 76 serving as President, and CEO Melvin, 87, would seek an exit strategy. We believed they would sell out, perhaps to Hershey (HSY), or Wrigley (WWY). This might still happen, but as shareholders wait, sales stagnate, margins erode, and opportunities are wasted.

Shares are down about 25% this year, as the broader markets have rallied, despite the credit crunch and subprime mess. Sales were flat from 2005 to 2006, and net profit margins, still very healthy at 13.3% for 2006, fell from above 15% the prior two years.

Third quarter results, typically the make or break quarter for Tootsie Roll, were disappointing. Sales fell 2% from the same quarter last year ($182.9 million, $186.4 million), and net income fell 19%, from $29 million, to 23.4 million. Net margins dropped from 15.6% to 12.8%. Nine month numbers are not any better. Nine month 2007 sales fell 2% to $377.7 million from $385.2 million. Net income fell 25% to $43.5 million from $54.2 million, net margins to 11.5% from 14.1%. Ouch!

Once again, Ellen Gordon cited higher ingredient costs, as well as unfavorable foreign exhange rates (From Canadian manufacturing operations) among the reasons for the shortfall.

Perhaps the Gordon's should consider taking a pay cut until they can right this ship. Their compensation for 2006 was $10,401,400 according to the company's DEF14A filing. This included salary, bonus, and "other compensation". The following is taken directly from the 14A:

(

2) The All Other Compensation column reflects the following benefits:

· For each of Mr. Gordon and Mrs. Gordon $1,536,767 and for each of Messrs. Ember, Newlin and Corr between approximately $1,000 and $4,000, reflecting premiums paid by the Company under the split-dollar life insurance agreements in 2006. The Company is entitled to fully recover these and all prior premium payments upon the death of the insured(s) or otherwise under the terms of the agreements. See “Compensation Discussion and Analysis—Split Dollar Life Insurance Agreements” for a more detailed discussion of the split-dollar life insurance agreements.

· The shared use of Company aircraft by Mr. and Mrs. Gordon, to travel between corporate headquarters and other locations where they maintain both executive offices and personal housing, in the amount of $503,900 for each of Mr. Gordon and Mrs. Gordon. See “Compensation Discussion and Analysis—Perquisites” above for a discussion of the reasons why the Company provides these benefits. Although the Board of Directors has approved these expenditures for Company aircraft as reasonable business expenses because of the actual and potential benefits to the Company, such expenditures are considered compensatory perquisites to Mr. and Mrs. Gordon under an SEC interpretation. The amounts included above reflect the aggregate incremental cost to the Company of travel between these locations by the Gordons, based on the proportion of hours flown for this travel relative to all hours flown. This calculation of aggregate incremental cost includes the proportionate amount of all operating costs and fixed charges (other than depreciation) such as monthly management fees, pilot charges, fuel, maintenance, insurance and other fees. In 2006 the Chief Executive Officer and the Chief Operating Officer also used Company aircraft for a minimal amount of personal travel, the incremental cost of which was $11,562 for each of Mr. and Mrs. Gordon, which usage has also been approved by the Board of Directors for security and other reasons.

· The shared use of a Company owned apartment when they are working at the Company’s headquarters in the amount of $60,993 for each of Mr. Gordon and Mrs. Gordon. The amounts in the table with regard to this item include one year of depreciation expense plus the out of pocket costs related to the apartment including real estate taxes, maintenance expenses, utilities and association fees. The Company believes that the cost of owning the apartment over time has been substantially offset by appreciation in the real estate.

· The following amounts contributed by the Company for the benefit of the named executive officers in 2006 under the Company’s pension plan, profit-sharing plan and EBP: $24,991 for each of the named executive officers with respect to the pension and profit sharing plan; $220,993, $209,235, $102,127, $154,434 and $147,522 for Mr. Gordon, Mrs. Gordon, Mr. Ember, Mr. Newlin and Mr. Corr, respectively, with respect to the EBP; and $147,000, $204,000, $197,000 for Mr. Ember, Mr. Newlin and Mr. Corr, respectively, with respect to the CAP.

· Amounts with respect to the costs of personal use of automobiles provided to each of the named executive officers other than Mr. and Mrs. Gordon and, for them, amounts with respect to their shared use of an automobile and driver based on all direct costs of maintaining and operating the automobile and the proportionate cost of the portion of an employee’s time used for driving.

By the way, the Gordon's total compensation for 2006 represented 15.78% of company net income.

What's a Shareholder to do?
Shareholders are evidently voting with their feet, given Tootsie Roll's stock price decline. They see little recourse, as the Gordon's control about 80% of the companies Class B shares, (this class has superior voting rights), and 40% of the common shares. Perhaps a continued slide in company operating performance and stock price will force the Gordon's to act as they see their fortune decline. We hope it does not take that. This could be a great company.

*The author has a position in Tootsie Roll Industries (TR). This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks following the date of this post.

Remembering Milton

Today, we take a break from our typical research, in order to pay tribute to a great man, my grandfather Milton, who would have been 100 years old today. This is the follow up to our June 16 piece: Remembering Clyde. Both Clyde and Milton played a large role in my life, and Cheap Stocks is dedicated to their memories: Two extraordinary men who exerted influence they never comprehended. (If anyone still wonders where my pen name Clyde Milton comes from, mystery solved.)

My grandfather was an Englishman, through and through. The son of a potter in Trenton New Jersey, his dry sense of humor, the jokes he told, the scotch he drank, and his calm demeanor-nothing rattled him-all pointed to his English roots. Times were generally tough during his youth-the Great Depression left its mark on nearly everyone who experienced it.

Like many in his generation, he came through it fine. Milton worked hard to put himself through college-The University of Pennsylvania-and graduated at age 25 with a degree in architecture. He was very talented, and had genuine skill as an artist; paintings from his Penn days adorn our walls. (I often wish that his talents had been passed down to yours truly.) He ultimately became President of a well-respected NJ architectural firm, a position he held until forced retirement at age 65.

My grandfather was a quiet man…usually. Other times, he could talk your ear off. But his calm presence was very soothing. I never saw him get mad. Never saw him blue, or down. He whistled constantly, and the trials and tribulations of life never seemed to get to him…(another trait that skipped yours truly!) He dealt with some tough issues, but seemed to always come through it smiling. Although he did not talk about it, his faith was strong.

The Englishman was also stubborn at times. When he built his house in the late 30’s, all the houses on his block were numbered in the 300’s. This made no sense to him given the numbering of houses on parallel streets in the neighborhood. He believed his street should have naturally been the 500 block. So what did he do? He changed the number on his house to 523, while his neigbors houses were all in the 300’s!

Stubborness was one thing, respect was another. While Grandpop liked his scotch, his parents were opposed to drinking. When he learned one day in the late 1950's that his father was heading down to his shore cottage to do some repairs, Milt remembered that there were liquor bottles in a kitchen cabinet. Out of respect for his father, Milton, a 50+ year old successful businessman, ran out of his office like a bat out of hell in order to head his father off, and dispose of the alcohol! All of this, out of respect for his parents and their beliefs.

My grandfather had the foresight in 1956 to do something that has impacted many in my family to this day. It was then that he purchased a small cottage on Long Beach Island, a skinny strip of sand off the NJ coast that is still a huge part of our lives. More than 50 years later, that cottage is still in the family, and has been the site of some amazing family time over the years. We’ve laughed there, we’ve cried there, we’ve forged bonds and strengthened family ties, and been the beneficiaries of a gift that fewer and fewer extended families have these days….we remain close, and genuinely care about one another.

Grandpop would no doubt be proud to know that what was once one house in the family on this little island, has now grown to three. LBI is our home in the summer, and we flock to it like moths to a light. It is our refuge, our place to find peace, to laugh, to love, to enjoy one of God’s beautiful creations. The times we’ve had there, the relationships we’ve built, and the wonderful memories that are continually made are all a result of my grandfather taking a chance more than 50 years ago, and putting $11,000 on the line. He loved that little cottage, that little island, and I’d like to think that the old Englishman would be smiling if he knew how much we loved it as well. He would laugh if he knew that my son is named after (middle name) our little LBI beach town.

I’m sure he would be proud of how his family has blossomed. When he passed away, there were two great-grandchildren. Now there are 13 and 1 more on the way! He would have been proud of how his children have conducted their lives, and how their children have grown up.

I was fortunate to spend a summer with him in that little beach cottage in the summer of 1986. I worked there that summer, kept an eye on him, and made sure he was well fed. Too well fed, I later found out. Grandpop was diabetic, and his blood sugar skyrocketed the summer I spent with him. Thankfully, there was no long-term effect of our "debauchery", and I am fortunate to have experienced a summer with my grandfather.

As grandchildren, we found in him a sense of peace, and of calmness. We have very fond and distinct memories of our grandfather. Long walks on the beach, the daily Grandpop "death float" in the ocean, the little jokes repeated over and over, his presence in our homes, at our ballgames, in our lives. He was Grandpop, we loved him dearly. How I wish he could have been present at his grandchildren's weddings, at the their children's christenings, and all of the other events he truly lived for.

When he passed away at 84, we celebrated his life. This weekend we will celebrate it once again....on Long Beach Island, the place he loved so dearly. We miss you Grandpop. You meant a great deal to all of us, you influenced us all, and we are blessed to have had you in our lives. Happy birthay.

4Kids Entertainment Finally Rolls Out Chaotic (KDE)

After several delays over the past several months, 4Kids Entertainment unveiled its Chaotic trading card game and website on 10/24.

We were drawn to KDE initially because of its solid balance sheet ($106 million in cash, no debt) and fact that it traded (and still trades) at less than twice net current asset value. We viewed the Chaotic rollout as a major "potential" catalyst; "potential" because of the frequent release delays prior to our initial position. The hope is that Chaotic lives up to its potential as a Webkinz-like phenomemon. Of course, its way to early to tell whether that will be the case.

For more, see our initial 7/4 KDE post.

4Kids Entertainment
Ticker: KDE
Price: $15.94
Cash & S/T Invest: $106 million
Market Cap: $211 million
NCAV: $117 million

*The author has a position in 4Kids Entertainment (KDE). This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks following the date of this post.

(Bizarre)Lazare Kaplan International (LKI): Going Private?

Diamond company and perennial net/net Lazare Kaplan International recently issued its latest proxy. Like most proxies, the items to be voted on at the November 8th annual shareholders meeting are fairly routine. That is, with the exception of the third item.

The company is asking shareholders to vote on the following company sponsored proposal:

“To consider and vote on a proposal to amend the Company’s Certificate of Incorporation to effect a reverse stock split immediately followed by a forward stock split of the Company’s shares of common stock..”
There’s nothing strange about a reverse stock split, it happens fairly often. But what Lazare Kaplan is proposing is a bit different. The company wishes to initiate a 1 for 101 reverse split, buy out any shareholders with less than 1 share post split, followed by an immediate 101 for 1 forward split. Say what?

Lazare says that this will allow the company to buy back stock from any shareholder that currently holds less than 100 shares. The company cites savings of $25,000 per year by eliminating the $11.50 annual fee associated with each company shareholder for transfer agent fees, and printing/postage costs associated with mailing shareholder reports. All this effort for $25,000 in annual savings? We think there’s more to this story.

Setting itself up to go Private?
According to the company, as of September 14th, 2007 there were 1709 shareholders of record, 1644 of which held less than 101 shares, which means that 96% of the registered shareholders own just .045% of the outstanding shares. If Lazare can buy these shareholders out, that will leave just 65 shareholders of record, well below the 300 threshold necessary to de-list, avoid SEC filing and SarBox, while still being able to trade on the Pink Sheets (a situation we’ve covered in several previous posts).

While we believe there are indeed cost savings in eliminating shareholders with small lots, we believe the real reason for the split is to “go dark”. We’re not sure why they just don’t acknowledge that in the proxy. Perhaps they don’t want to draw more interest and attention, and actually increase shareholder roles. We believe that there’s sometimes value to be had in these situations, and Lazare may want to keep its true intentions close to the vest.

For our part, we are still long Lazare Kaplan, and might just have to attend the shareholder meeting and ask the question.

Lazare Kaplan Intl
Ticker: LKI
Price: $7.55
Mkt Cap: $62.4 million
NCAV: $70 million
Mkt Cap/NCAV:1.12
Book Value/Shr: $11.30
Price/Book: .67

*The author has a position in Lazare Kaplan (LKI). This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks following the date of this post.

It's Still Boring in Net/Net Land;The Homebuilders are Clogging our Initial Net/Net Screen

Something strange began happening a few months back when we ran our net/net screen. The list of companies trading below their net current asset value was chock full of homebuilders. It’s not surprising in one sense, due to the troubles in the housing markets, homebuilders have been pounded: 50, 60, even 70% drops. As a company’s market cap falls, and net current assets don’t fall as much, the relationship between net current assets and market cap decreases, increasing the likelihood of trading below NCAV.

But, despite the screens we run, we don’t typically include homebuilders on our net/net list. Why? It’s a data issue. More on this later.

Many readers have inquired over the years as to how we come up with our list of net/nets. It is not as simple as running a stock screen and printing the results, although that is where the process begins. All you need to start here is data, namely the ability to add and subtract the components of the NCAV formula, and compare them to market cap. This is quite easy to do with some of the big name market data providers. The hard part is digging into the data to verify that the companies actually meet your desired screening criteria. (The harder part is trying to distinguish between a "cigar butt", and company with possibilities.)

There are a number of issues that can arise in the initial screening process, we’ll name a couple. First, there can be a lag in the fundamental data. Some data providers don’t get around to crunching the numbers on the micro-caps—typical net/net candidates—until well after the financial statements are actually released. So you can end up with older balance sheet data, compared to current market cap data. This can be very misleading. So, we’ll actually dig into the latest SEC filings, and verify the data manually. Second, data screening tools are not always 100% accurate. We’ve found many cases over the years where screening tools reveal net/nets that upon further inspection don’t actually meet the screening criteria. We’re not sure why this happens, but the bottom line is that stock screening tools are not foolproof.

Back to the Homebuilders
The reason we typically ignore homebuilders is because of the way they classify accounts on their balance sheets. Typically, these companies have “unclassified” balance sheets, which means that they don’t distinguish between current and non-current assets—essential data in the net/net methodology. But in the data standardization process that some equity fundamental data providers employ, homebuilder balance sheets are re-classified into current and non-current assets and liabilities. Given this fact and recent price action, it’s of little surprise that these companies are initially screened as net/nets.

This is no knock on the data providers themselves. One that follows this process is Bloomberg, which probably has the best Equity Fundamental product in the business.

We’re just not comfortable applying the net/net methodology to homebuilders. They are an entirely different animal in terms of valuation and structure. Inventories are typically relatively large relative to total assets; while this account is typically a current asset for companies in most industries, we're not sure this applies to homebuilders--especially now.

In any event, as the markets continue to head upward (at least for now), we're not finding many worthy net/net candidates these days. Stay tuned though, the markets have a unique ability of doing the unexpected.

Trading Illiquid Stocks

By now you know that some of the companies we cover at Cheap Stocks are thinly, or in some cases, rarely traded, and this brings with it a whole host of challenges and risks. These include difficulty in establishing, and exiting positions.

We recently closed a position in such a company, Bactolac Pharmaceuticals BTCP), and thought it would be both interesting and informative to detail the process, and results.

We initially purchased Bactolac(BTCP)when it was known as Advanced Nutraceuticals(ANII), and prior to the company's 1 for 500 split, so liquidity was not an issue in establishing the position. Howewer, post split, there were less than 9000 shares outstanding, and little, if any trading.

When we decided to close the position, the bid/ask was $1400/$1700. (One place to find this information is the Pink Sheets Website; which we recommend checking before you check with your online broker).
Although we were content to exit at $1400/share, we decided to to place a limit order at a higher price. It took 3 days, and 4 different orders to finally close our position:

Day 1: Placed limit order at $1600/share
Result: Order was not filled

Day 2: Placed limit order at $1550/share
Result: Order was not filled

Day 3: Placed limit order at $1500/share
Result: Order was not filled
Changed order to limit $1425
Result: Order was filled at $1450/share

The point is that there are risks in trading illiquid stocks.
1. Be very careful not to place market orders, because you may end up establishing a position at a much higher price than you intend.

2. Don't purchase illiquid stocks unless you can hold for an extended period of time. Being a panic seller here can and will be extremely costly.

3. When you decide to sell, be aware of the bid/ask prices. Don't place market orders, and be aware that if you do place a limit order, there is no guarantee that your entire order will be filled.

4. In general, don't allocate too much of your portfolio to illiquid stocks. We believe there are some great opportunities out there, but you should limit this to a small percentage of your portfolio.



*The author does not have a position in Bactolac Pharmaceuticals. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks following the date of this post.

JG Boswell Soars (BWEL)

Shares of cotton and farming giant JG Boswell, owner of an estimated 142,000 California acres, and another 30,000 in Australia, soared $73 today to an all-time high of $900 on volume of 251, and you guessed it, no news. We’ve owned BWEL shares for years, have reported on it several times in the past, but the company still remains somewhat of a mystery.

Certainly, the appeal of this company is not in its farming operation, which although impressive in its own right, merely represent the current use of assets which might ultimately be much more valuable used for other purposes. The company continues to develop its Yokohl Ranch project, a master planned community in Tulare County California, but the real gem may lie beneath the land: massive amounts of water that may be worth several billions. "May" being the operative word.

We were fortunate to obtain a copy of the company’s 2006 annual report, which we are embarrassed to admit is the first one we’ve ever seen. (We have seen financial statements from the $325/share company tender offer documents circa 2002-2003)

Here are the Highlights for the year ended June 2006:

Price: $900
Dvd Yield: 1.56%
Revenue: $386.58 million
Net Income: $19.744 million
Diluted EPS/shr: $20.41
Current Assets: $196.741 million
Cash: $5.475 million
Total Assets: $616.957 million
Current Liab: $138.637 million
Short Term Debt: $80.8 million
Long Term Debt: $0
Stockholders Equity: $430.209 million
Shares Out: 956,759
Book Value Per share: $449.55
Market Cap: $861 million
Enterprise Value: $936 million
Enterprise Value/California Acre: $6591

Based on just the California land, we estimate Enterprise Value/Acre to be less than $6600, and that ignores any value in the Australian land. We hope to obtain a 2007 annual report, when available.

*The author has a position in JG Boswell. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks following the date of this post.

Omega Protein (OME): A Different Kind of Oil, Making the Most of Menhaden

Most writers will admit that occasionally the well runs dry, and they run out of ideas. We’ve never had that problem here at Cheap Stocks. Granted, we only publish 4 to 8 times per month, but if this site was our full time job and we could feed our family and pay the mortgage from site generated revenue, we have little doubt about our ability to publish quality research 5 days a week (some of our readers might argue that point).

That being said, we’ll admit that sometimes our ideas for research come from strange situations. This is one of those times.

It so happened that we were on the beach Labor Day morning, a beautiful day, on the New Jersey Island we call our summer home. The plan was for the kids to surf before the lifeguards came on duty. But before anyone could get into the water, we noticed something strange. Dozens of pelicans attacking the water, schools of fish getting closer and closer to the shore. Then some of these fish started washing ashore. Most were still alive, some had a bite or two taken out of them. We threw them back in as quickly as they washed ashore, but we are not sure which fate was worse: suffocating on shore, or being tossed back into the midst of hundreds of mean, angry, and very hungry bluefish—the very reason these fish were so close to shore.

The fish washing ashore were Menhaden, otherwise known as Bunker. These oily fish have no use as food for human consumption (although they are excellent bait for blue claw crabs). As it turns out, they are also an excellent source of Omega-3 fish oil, commonly used to combat high cholesterol.

Omega Protein
That’s where Omega Protein (OME) enters the picture. Fish oil is their business. This small ($151 million market Cap) Houston based company uses a fleet of 32 spotter airplanes to find these fish, and 61 boats to bring home the catch. From there, the company processes the fish into Omega-3 fish oil used as a dietary supplement for humans, and sells what’s left over as animal feed, fertilizer and other products.

We’ve been intrigued by this company for years, but have never owned it-directly that is. We did own shares of Zapata Corp (ZAP), which until last year owned 58 percent of Omega. At the time we bought Zapata, this was the cheapest way to get exposure to Omega. Ultimately, Zapata decided to unload Omega, much to our chagrin, at well below market prices. The buyer of this huge Omega stake? Omega itself, which bought, and retired the shares. There’s where the story gets interesting. On November 28, 2006, the Company purchased 9,268,292 shares from Zapata for $47.5 million, or $5.125 per share. The previous day, Omega closed at $7.61, so this represented a 33% discount, not uncommon in the sale of such a large stake. The purchase was financed by a senior secured financing facility, increasing the company's debt load.

Omega also had the option to buy the rest of Zapata's stake, 5.2 million additional shares at $4.50 per share, but passed on that offer. Instead, those shares were purchased by multiple institutional investors for $5.55 per share, or $29 million. The purchasers included Special Situations Fund III QP, L.P., Special Situations Fund III, L.P., Special Situations Cayman Fund, L.P., Special Situations Private Equity Fund, L.P., Franklin Microcap Value Fund, Wynnefield Partners Small Cap Value, L.P., Wynnefield Partners Small Cap Value, L.P. I, Channel Partnership II, L.P.

The Fundamentals
Fiscal year 2006 sales rose 27% to $139.8 million from 2005s $109.9 million, and net income was $4.57 million, up from 2005s $7.2 million loss. Keep in mind though, that Hurricane Katrina was a factor in 2005s results, and several of the company's processing plants were severely damaged. For the latest reported period (Q2, June) the company netted $2.6 million on sales of $37 million.

As for the balance sheet, the company ended Q2 with $3.8 million in cash and $56 million in inventory. Certainly not a stellar balance sheet, and LT debt at $62 million increased as a result of the share purchase from Zapata. This is a fairly capital intensive company, with nearly $100 million in plant and fishing vessels, net of depreciation. Latest tangible book value per share was just north of $6.


The Risks
This company is not without its share of risks. First, Omega is completely dependent on finding an adequate supply of fish, and there are no guarantees here from year to year. Fish are the raw material, and without them, no product, no revenue. Second, fish oil yields have recently been down, and there is nothing the company can do about it. Lastly, the company has become extremely unpopular in the Chesapeake Bay area, one area where it harvests large quantities of Menhaden. Some believe the company has over-fished the Bay, posing a threat to the ecosystem, and the other fish that utilize Menhaden as a food supply. To that end, the State of Virginia imposed limits on Omega’s annual Menhaden Harvest. Further limits here, or other areas where the company harvests, could mean tough times ahead for Omega.

We view Omega as a company to keep an eye on. The valuations are not all that compelling at current levels, but this is a company in a niche market, and assuming they can continue to harvest an adequate supply of Menhaden, and that more consumers turn to natural methods of lowering cholesterol, and other benefits fish oil supplements are purported to provide, Omega may deserve a look.


*The author does not have a position in Omega Protein. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks following the date of this post.

Top 10 Net/Nets by Market Cap

Admittedly, it's still a bit boring these days in the land of companies trading below their net current asset value. Dr. Bernanke did not help yesterday when he and his band of merry men lowered the Fed Fund Rate (and discount rate) 50bps. (Cheap Stocks, for one, was surprised it was 50bps)

Still, the markets move forward, basking in the glow of the rate cut, and the list of net/nets grows stale. Chock full of "acquisition" companies that have no real businesses, or companies that have sold off good businesses, and have no real plans for the proceeds(we mean you, Zapata)and the primary assets are cash, there's not a lot to get excited about. Just two of the companies are currently profitable--that is, they have trailing 12 month positive net income-- Audiovoxx, (a perennial net/net it seems) and Tandy Brands Accessories.

Top 10 Net/Nets by Market Cap
Audiovoxx(VOXX)
Mkt Cap: 246
NCAV: 279.6
Price: $10.8

Energy Infrastructure Acquisition Corp(EII)
Mkt Cap: 204
NCAV: 206
Price: $10.8

Atlantic Coast Entertainment(ACEH)
Mkt Cap: 170
NCAV: 218
Price: $17.1

Zapata Corp(ZAP)
Mkt Cap: 137
NCAV: 150
Price: $7.1

Media and Entertainment Holdings Inc(TVH)
Mkt Cap: 94
NCAV: 97
Price: $7.4

Columbus Acquisition Corp(BUS)
Mkt Cap: 88
NCAV: 110
Price: $7.4

Transforma Acquisition Corp(TAQ)
Mkt Cap: 80
NCAV: 96
Price: $7.5

MediciNova(MNOV)
Mkt Cap: 79
NCAV: 96
Price: $6.8

Tandy Brand Accessories Inc(TBAC)
Mkt Cap: 73.6
NCAV: 74.4
Price: $4.1

InFocus Corp(INFS)
Mkt Cap: 70
NCAV: 77
Price: $1.7

There you have it. Stay tuned; we'll keep turning over rocks, looking for value.

*The author does not have a position in any companies mentioned. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks following the date of this post.

Playing 20 Questions With St Joes (JOE)

Lost amid the seemingly dim economic news that was released last week and today, all of which is fueling Wall Street's hopes for a 50 basis point cut in the Fed Funds Rate at next Tuesday's Fed meeting (don't bet on 50bps), was an interesting little press release courtesy of St. Joes.

Actually, it was 10 questions, but was no doubt an attempt by the the company to counter recent bearish sentiment about JOE. The press release, admittedly one sided, is still an interesting read. If you want to hear both sides of the JOE argument, read it in conjunction with Greenlight Capital's David Einhorn's recent response to a previous Cheap Stocks post about St. Joes.

For our part, we took advantage of the recent dip below $31 to increase our St. Joes position. We simply couldn't say no at those levels.

*The author has a position in St Joes Corp. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks following the date of this post.

Cheap Stocks Random Notes: The Frivolous Lawsuit of the Week: Jones Soda (JSDA)

The sharks are circling Jones Soda (JSDA) since the stock tumbled from the $30's to $10; yes, here come the lawyers and their class action lawsuits. We owned the stock, (yes, way out of character; search the site for previous posts) we sold it when we thought the valuations were beyond ridiculous and priced for utter perfection, we even received some very nice e-mails from "investors" who not so politely told us how stupid we were.

This particular suit, Hagens Berman Sobol Shapiro , takes the cake. Here is an exerpt from the press release:

The complaint generally charges that Jones Soda and the executives made misleading statements about an expansion into major retailers, such as Wal-Mart, Kroger, Safeway and Kmart, with a new 12-ounce canned soda and a major marketing campaign. The "continued bullish statements" caused the stock price to surpass $32 a share April 16, which more than doubled the company's market value, the suit says. But Aug. 2, the company reported significantly lower-than-expected canned soda sales and said it had difficulty getting the new products on retailers' shelves before the Memorial Day holiday, the suit said. The problems also caused the company to embargo an advertising campaign, and it "essentially bumbled the launch of Jones Soda 12-ounce cans," the suit says. The stock price, following two quarters of poor earnings results, has fallen 67 percent since hitting the record high in mid-April.

Give us a break. Not even flawless execution of the company's strategy was justification for the price of the stock. Whether or not Jones executives made misleading statements, we can't say. But we do know investors make mistakes, we sometimes get greedy, and our vision is clouded by the behavioral biases we struggle with. But we can't keep running to the lawyers everytime we get burned. Especially when we should have known better.

We aren't saying that corporate management is above reproach, and never at fault. We've seen countless examples in the past several years of fraud, and blatant disregard for shareholders. We're not convinced that this is the case with Jones Soda. We are sure, however, that investors need to take personal responsibily for their decisions. And we all make some very bad ones now and again.

*The author does not have a position in Jones Soda. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks following the date of this post.

Two GPT's Report Earnings: Avoca (AVOA) and Bactolac Pharmaceutical (BTCP)

It's back to off-the-beaten path research this week, the kind that has made this site either very original, or painfully irrelevant depending on your point of view. (We won't be mentioning the Fed, Bernanke, subprime, commercial paper conduits, or any of the other more common themes currently being beaten to death in the financial media these days.)

We will disclose recent earnings for two pink sheet companies Avoca, and Bactolac Pharmaceutical (formerly Advanced Neutraceuticals). In recent years, both of these companies went through the process of reducing their shareholder roles below 300 through a reverse stock split. This allowed them to delist, avoid SEC filing and Sarbanes Oxley, eliminating the prohibitive costs associated with each.

Disclaimer
Before we go any further it is important for readers to understand that Avoca and Bactolac are not liquid, in fact they rarely trade. As a result of the reverse splits, each company has less than 9,000 shares outstanding, and very wide bid/ask spreads:

So why write about them? We have followed these companies since before they delisted,(please search the site for previous research) and find the notion of companies effectively going "dark", yet still trading, to be fascinating. We believe that some of these situations can offer opportunity and may have a place in certain investor's portfolios. We took positions in both companies prior to their reverse splits, when liquidity was greater, and spreads were not as wide.

Keep in mind that despite the fact that neither of these companies is required to file financials with the SEC, both continue to update their shareholders; Avoca on a quarterly basis, and Bactolac less frequently.

Bactolac Pharmaceutical (BTCP)
Shares Out: 8613
Bid/Ask: $1350/$1700
Mkt Cap(bid): $11.6 million
Book Value/share: $2478
Tangible Book Value/share: $1600

For the six months ended 3/31/07 (they did not isolate quarterly results) sales rose 26% to $15.6 million. However costs rose as well, and operating margins dropped from 15.8% to 10.4%. The company cited higher material and production costs, higher quality control expenses, and customer resistance to price increases for the margin pressure. Net income was $835,000 or $96.95 per share, down from $117.79. Net margins fell from 8.2% to 5.3%.

One of the more inteesting facets of this report was management's discussion
of stock repurchases. The companies credit agreement does allow for limited stock repurchases from shareholders(as long as covenants are not violated), and they also occasionally purchase shares on the open market.

Of note, the company plans to expand, and will build a production facility on land it currently owns. The project is expected to be completed in the Fall of 2008, will cost $7,000,000, and will be debt financed.

Avoca (AVOA)
Shares Out: 8059
Bid/Ask: $6250/$6850
Mkt Cap(bid): $50.3 million
Book Value/share: $981
Tangible Book Value/share: $981

Royalty Trust Avoca, owner of 16,000 acre Avoca island, reported revenues of $1.45 million for the second quarter, down 51% from the same period last year. Net income
fell to $952,000, or $118 per share from $1.754 million, or $218 per share.

Revenue fell primarily due to the loss of production from one of the companies gas wells, Avoca No. 6-1, which expectedly went off production. Although the price of natural gas increased 1%, five of the six remaining wells saw declines in production. Natural gas production represented 80% of revenue in the quarter.

The balance sheet remains strong, with $465 per share in cash and short term investments, and $434 per share in long-term debt and equity investments. The company has no debt.



*The author has a positions in Avoca and Bactolac This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks following the date of this post.

Levitt Corp(LEV): More Than Meets the Eye, or a Sinking Ship?

We are not big fans of home builders in the best of times (perhaps we are not smart enough to understand the business), and certainly not now given current market conditions. Many of these companies are down 50% or more year to date, and while the carnage can always get worse, we've got to believe there is some value in some of the names in the sector. But, in general, we'll leave that analysis to those that really understand the home building business and instead focus on one interesting story in the sector, that ultimately has little to do with homebuilding.

Levitt Corp (LEV)is a Fort Lauderdale, FL based homebuilder and real estate company that operates in the Southeast (Florida, North Carolina, South Carolina, Georgia). As of 12/31/06, the company had an inventory of 11,700 acres, 6900 of which were considered saleable (4100 in Florida, 2800 in South Carolina). The company's market cap is just north of $50 million, but a rather heavy debt load brings the enterprise value to about $650 million.

Like most homebuilders, Levitt has been crushed lately; from a 52 week high of $15.44, down to its current price $2.72. This company has truly taken a drubbing, as housing sector woes have worsened. Levitt reported a second quarter loss of $58.1 million, including a $63 million hiomebuilding inventory impairment charge.
It was an ugly quarter, as evidenced by these company reported "lowlights":

Second Quarter, 2007 Compared to Second Quarter, 2006
Total revenues of $127.8 million vs. $133.2 million
Net loss of $58.1 million vs. $737,000
Diluted loss per share of $2.93 vs. $0.04 per diluted share
SG&A as a percent of total revenue was 26.3% vs. 23.3%
Homes delivered (units) of 379 vs. 392
Gross orders (units) of 478 vs. 423
Gross orders (value) of $122.4 million vs. $119.6 million
Cancellations (units) of 187 vs. 91
Net orders (units) of 291 vs. 332
Homebuilding Division backlog (units) of 957 vs. 1,799
Homebuilding Division backlog (value) of $297.8 million vs. $609.2 million
Land Division third party backlog (value) of $29.0 million vs. $15.4 million

To add insult to injury, the January 2007 announced merger with BFC Corp was terminated last week, sending Levitt shares down 21%. Can it get any worse? Of course it can.

Bluegreen Corp (BXG)
But there is another side to this story. Levitt happens to own a 31% stake in resort and timeshare company Bluegreen Corp (BXG). At its currect market cap of $281 million, that values Levitt's BXG stake at $87 million, at a time when Levitt's market cap is just over $50 million. Granted, an ownership stake this large would no doubt command a discount if Levitt decided to unload it. But if BXG's price can hold up, this might just put a support level beneath Levitt shares.

Proceed with caution here, though, Levitt has a relatively heavy debt load, and is operating in an industry given up for dead.

*The author does not have a position in Levitt or Bluegreen. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks following the date of this post.

Thanks, Uncle Ben

The markets got a shot in the arm today courtesy of the Federal Reserve's decision to lower the discount rate by .5%. Investors will rejoice today, because finally, the Fed heard their cries to open the discount window.

We are, of course, skeptical. We want the markets to go up. But we also believe that the Fed stepping in is:

A. An acknowledgement that this may get much worse before it gets better and
B. A band-aid that may stop a little of the short term pain, but will ultimately slow the process of the market working out built-in excesses.

So, today may be a good day for investors, but it's naive to believe this situation will abate because of the Fed's actions.

"Stay Calm, Relax, The Markets Always Come Back"

Does our title sound familiar? Perhaps not to avid Cheap Stocks readers, because we rarely, if ever, comment on the markets. You can get that anywhere. But tonight, as much as it goes against our grain, we are going to make a few comments.

Like it our not, what is currently happening in the financial markets is unprecidented. As much as pundits like to compare to the Long Term Capital Management debacle, the Asian crisis, (or insert your favorite era of market upheaval here), it is not the same. That does not mean that this won't ultimately pass, but is a reminder that we are always looking for comparisons, often fooling ourselves in the process. Makes us feel better as we watch our account balances shrink. We may be able to weather a downturn--if we aren't overleveraged, and forced to become panic sellers in the meantime, as long as we believe the return of the bull is just around the corner.

As investors, we have difficulty with down markets, (that's behavioral finance at work) difficulty with uncertainty, and we want downtrends to reverse: quickly. This time, maybe it will turn next week, or maybe it won't. We don't know. Anyone who claims they do, and ends up being right, is probably just very lucky. And, afterall, even a stopped clock is right twice a day.

The bottom line is that the markets, whether fixed income or equity, still run on a very basic principle, supply and demand. The highest quality piece of debt, or equity can languish if no one is buying--as value investors, this is something we know all too well. On the flip side, even a "dog with fleas", to quote Michael Douglas from Wall Street, can appreciate quickly if investors are buying- thats what we saw happen frequently during the tech bubble.

As asset backed securities (or ABS) continue to get crushed (more sellers than buyers)--even those of the highest credit quality that likely have little chance of default, as trouble in the hedge fund world continues, as some "quant" managers see their models failing, and as a small number of funds close their doors to redemptions, it is not surprising that volatilty has returned to equity land. Yes, it will ultimately end. But when? We don't know.

So what's the point of this diatribe? Just a venue for your Cheap Stocks editor to rant...albeit somewhat incoherrently. In all honesty, as painful as it may be, excesses in the markets need to be washed out from time to time, and that's exactly what we are in the midst of.

In all seriousness, if you are not a forced seller, and if you have some cash on the sidelines, folow the quality names you've had your eye on, or already may have a position in. You just might get your chance to buy some high quality names on sale. For what it's worth, in general, equities are not overpriced at this point. After today's action, the S&P trades at less than 15 times forward earnings.

Tootsie Roll Gets Smoked

Its been a wild ride the past few weeks as the markets once again wash out some of the built up excesses, (which however painful, is also very healthy) this time due to the "subprime" event (can we please wipe that word clear from our vocabulary....enough already) and the spectre of a credit crunch. Given the path that under-the-radar Tootsie Roll has taken the past few days, you would have thought it was a BBB rated ABS tranche.

The stock was down 14% today on four times normal volume, on the heels of a disappointing quarter. After hitting a 6 month high of $32.43 yesterday, the stock closed regular trading today at $26.48, for a $6 or 19% swing over just two trading days.

Margins Fall

Second quarter sales were up 7% to $101.9 million, from the same quarter last year. However, cost of goods sold rose substantially, lowering gross margins to 34.2% from 40.1%. The company cited rising ingredient and packaging costs for the margin pressure. Still, the company managed a healthy net margin of 10.2%, although that's down from 11.2%.

On the bright side, the balance sheet remains very healthy with cash and short term investments of $60 million, LT investments of $59 million, and split dollar life insurance of $75 million. LT Debt is negligible at $7.5 million; there is also $13.2 million in post retirment healthcare liabilities.

Disappointing
We've certainly not been happy with Tootsie Roll's performance since we've owned the stock. After considering cash and stock dividends, we are flat after 3 years. We are not rushing for the exits, because we still believe there is value in this very strong brand. However, we believe this company needs to be sold in order for the value to be unlocked.

Previous Cheap Stocks Tootsie Roll Research:
4/21/07

*The author has a position in Tootsie Roll Industries. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks following the date of this post.

David Einhorn of Greenlight Capital Responds to our Latest St Joe's Post

We were happy to hear from David Einhorn regarding our recent St. Joes (JOE) piece. David thought we were incomplete in our representation of the analysis he presented at the May Ira Sohn Research Conference. We invited him to lay out his case, which is presented in this post.

While we respectfully disagree with his conclusion, and he obviously disagrees with ours, we find this type of debate very healthy. We happen to be long JOE, while Einhorn's firm, Greenlight Capital has a short position.

David Einhorn, Greenlight Capital on St. Joes Corp.

The per acre analyses used by most St. Joe bulls exclude selling expenses and taxes. I believe that the equivalent gross value to the $9,000 an acre used in your analysis is the equivalent of $18,000 an acre, when taking expenses and taxes into account.

As it was, I did not quantify any amount of swampland at the Ira Sohn conference. I simply noted that some of the land is swampland. The weather is much worse than South Florida (just as hot in the summer and cooler in the winter), there are a lot of mosquitoes, there is not a lot to do, and the demographics are poor. I noted that I thought St. Joe overplayed the value of land within ten miles of the ocean and noted that I thought that vacationers would prefer to be "on the ocean." More than a mile is too far for many families to walk to the beach. Finally, I thought the airport development is the type of story often seen in promotional stocks designed to buy years of time to encourage the market to ignore current financial results. The current airport does not operate near capacity. Airports in Jacksonville an Ft. Myers did not spur a lot of development next to their airports and it is odd the St. Joe seems to believe that a lot of people will want to live near the airport, as if that is a residential attraction.

As I pointed out in my speech, since 2001, St. Joe has sold 268,000 acres at an average price of under $2,000 an acre. Since my speech, St. Joe announced another quarter where they sold over 30,000 additional acres at $1,500 an acre. As such, I don't see that it is very challenging to determine a value for most of St. Joe's land. Assuming they haven't sold the most salable stuff first, it appears that undeveloped land is worth on average sub $2,000 an acre before expenses.

I believe that about 680,000 of the remaining 739,000 acres are similarly undeveloped. Assuming St. Joe has no un-salable tracts of swampland and all the undeveloped land could be sold for $2,000 an acre, it would be worth $1.36 billion gross or about $700 million after selling expenses and taxes.

St Joe has just under 20,000 acres in development (some of which has already been sold). They have an additional 21,000 acres "In Pre-Development", meaning they have land use entitlements, but they are still evaluating the development or need additional permits. They have another 10,000 acres they are planning to entitle.

The developed projects have a book value of $800 million. St. Joe is not making good margins on selling developed property. Residential and commercial land sales have not covered its overhead in any quarter since 2005, when it was still in the homebuilding business. St. Joe is one of very few companies that has spent large amounts on residential development and has not taken any impairment in the current environment. To give St. Joe the benefit of the doubt, let's say the developments could be worth 1.5x book or $1.2 billion.

On that analysis St. Joe is worth $1.9 billion. Subtract $400 million of debt, leaves $1.5 billion of equity or $20 per share. I believe that adding in the time value of money would take this analysis down to the $15 number I used at the conference.

Regards,
de

We thank David Einhorn for agreeing to let us publish his response. Why would we agree to have a well-known manager present his views that are contrary to ours in a stock we have a position in? We happen to find the debate refreshing, and even helpful to investors as they seek information.

*The author has a long position in St Joes Corp. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.

What's Wrong with JOE?

We last featured Florida land giant St. Joes(JOE)this time last year when we compared it to the New Jersey island on which we have a summer cottage. At the time, we surmised, our island was terribly overpriced compared to St. Joe's. If there was a way we could have shorted our beloved little island (without selling our cottage, that is), and used the proceeds to go long St. Joes, we would have. One year later, our little island has slowed down. Some of the same houses that were for sale this time last year still have not moved. We also see more "For Sale" signs, par for the course given the housing slump, yet prices don't seemed to have fallen all that much. Go figure.

Meanwhile, all is not well in St Joes land, at least that's what Mr. Market is telling us. The stock is down nearly 20 percent since last summer, and after hitting more than $60 in February, is off 33%. Certainly trouble in the housing market, and a slowing Florida real estate market are the main contributors, but a skeptical Wall Street has also added to St. Joe's woes.

At a May Ira Sohn Investment Research Conference, Greenlight Capital co-founder David Einhorn painted a bleak picture of JOE, suggesting, among other things, that half of the company's land is swampland, and that on a DCF basis, the company is worth but $15 per share. Since this conference, the stock has tanked. Although Einhorn raised a few eyebrows with his talk--even Jim Cramer mentioned the ST. Joe swampland connection--the pullback has more to do with the asset repricing that many real-estate related firms are currently experiencing in the wake of the housing slowdown, and subprime "event".

Swampland
While we disagree with Einhorn's assertion about the quality of St Joe's land, lets assume that half of it is actually swampland. Further, for calculation purposes, we'll assume that it is completely worthless.

As of the most recent quarter, St. Joes held 739,000 acres, 331,000 of which were within 10 miles of the Gulf of Mexico. If half of these acres were worthless (which again, we don't believe is the case), and we value the entire company on an enterprise value to acre basis, we get $9,242 per acre:

Market Cap: $3.0 billion
Plus Debt: $428.5 million
Plus minority interest: $7.4 million
Minus Cash: $20.2 million

Enterprise Value: $3.415 billion
Half acreage: 369,500
EV/Acre: $9,242

Florida land for less than $10,000 per acre, given the location, does not seem at all unreasonable. Keep in mind, our EV/acre calculation does consider the company's debt, but places no value on any of the company's other assets, and values half the land at $0.

Einhorn simply views Joe on a much different basis than we do. Discounted Cash Flow analysis can be an extremely valuable tool in order to value a business, and indeed, theoretically, the value of a business is the present value of future cash flows. But any analysis that discounts cashflows is completely dependent on the inputs used in the calculation. A slight change in the inputs can have a drastic influence on the resulting value.

But, in any event, we view JOE as an asset play, one that might ultimately be acquired. We'd view additional weakness in JOE as a buying opportunity.

*The author has a position in St Joes Corp. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks following the date of this post.

Schwab Weighs in on Our Porfolio, and We're Still Not Making the Grade

It’s time once again to review our grades, that is, your Cheap Stocks editor's portfolio as "graded" by Charles Schwab's stock rating system. We ran a similar column 11/18/06, and our grades were miserable.

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 rating system would cater to the more common names, where there's actually data available, and liquidity (unlike many of the names in our portfolio).

Our Report Card
4Kids Entertainment(KDE): D
Avoca Inc (AVOA): NC
Bactolac Pharmaceuticals (BTCP): NC
Biloxi Marsh Lands Corp (BLMC): NC
Cubist Pharmaceuticals: C (underlying Stock) (Jan 2009 12.5 LEAPS-CALLS)
JG Boswell (BWEL): NC
Gallery of History (HIST): NC
Kitty Hawk(KHK): D
Lazare Kaplan Intl (LKI): NC
Maui Land and Pineapple (MLP): F
Pennwest Energy (PWE): NC
PICO Holdings (PICO): NC
Plum Creek Timber (PCL): NC
Sonic Foundry (SOFO): NC
Southwest Water (SWWC): D
St. Joes (JOE): C
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 still a D, with 3 C's, 4 D's, 1 F, and 12 incompletes (NC), about the same as last time.

Positions Closed Since Last Report Card:
Jones Soda(JSDA)

Wise Words From Marty Whitman

Marty Whitman's commentary in Third Avenue Fund's quarterly letter to shareholders is a must read, especially if you are wired as a value investor. Marty, who is now in his 80's, does not disappoint with the latest edition.

Here's just a sampling of Marty's wisdom:

A directory of those in the financial community who build great fortunes by avoiding risk:

1. Corporate executives who receive stock options or restricted stock
2. Members of the Plaintiffs' Bar who bring class action lawsuits in order to earn contingeny fees
3. Initial Public Offering ("IPO") underwriters and sales personnel
4. Bankruptcy Professionals: Lawyers and Investment Bankers
5. Money Managers, Mutual Fund Managers, Private Equity and Hedge Fund Managers
6. Venture Capitalists
7. Real Estate Entrepreneurs especially investment builders

Marty goes on to describe each category in greater detail, but in his typical direct and unapologetic fashion, hits the nail squarely on the head.

He goes on to describe how Third Avenue avoids investment risk:
1. Buy Cheap
2. Buy Equity Interests Only in Highg Quality Companies
3. Operate on a low cost basis for shareholders
4. Ignore Market Risk
5. Buy growth but don't pay for it
6. Buy and Hold
7. Don't borrow money, invest without financial leverage

We'd urge investors to read the Marty Whitman's entire Second Quarter Commentary, it is well worth the time.

**The author has a position in the Third Avenue Small-Cap Value Fund. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

Top Five Profitable Double Net/Nets

Today we again lighten our constraints, and feature the top five profitable
companies trading at less than two times net current asset value, in order of market cap. And no, we are not getting soft in our old age. Companies trading at less than twice current assets less all liabilities (and preferred stock) typically have very strong balance sheets. Throw in profitabilty, which most net/nets can't claim, and you've got a potentially formidable combination.

While Ben Graham preferred candidates trading at less than 2/3 NCAV, and we've typically focused on those trading at less than NCAV, these companies might be a couple cuts above the typical cigar butt.

Top Five Profitable Double Net/Nets by Market Cap
Ingram Micro (IM)
Mkt Cap: $3.7 billion
NCAV: $2 billion
Mkt Cap/NCAV: 1.85
Price: $21.78
P/E: 15.6

Sycamore Networks (SCMR)
Mkt Cap: $1.18 billion
NCAV: $892 million
Mkt Cap/NCAV: 1.32
Price: $4.21
P/E: 61

Exar Corp (EXAR)
Mkt Cap: $530 million
NCAV: $357 million
Mkt Cap/NCAV: 1.49
Price: $14.76
P/E: 67

Adaptec (ADPT)
Mkt Cap: $452 million
NCAV: $388 million
Mkt Cap/NCAV: 1.17
Price: $3.80
P/E: 15.3

Farmer Brothers(FARM)
Mkt Cap: $340 million
NCAV: $200 million
Mkt Cap/NCAV: 1.7
Price: $21.79
P/E: 65

Farmer Brothers is the only company we've previously covered, and frankly, the others on this list-all tech related- aren't exactly our cup of tea. We are not making a judgement on them, we just typically shy away from businesses we don't understand.

*The author does not have a position in any of the stocks mentioned in this report. This is neither a recommendation to buy or sell any of these securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks following the date of this post.

4Kids Entertainment Added to the Portfolio

Following our 7/4 piece on 4Kids Entertainment we initiated a position in the company this week.

For the record, our trading policy states that we will not trade securities mentioned on the site for at least 2 weeks from the posting date. This includes long and short positions.

Old News Leads to Big Hits: Mistake of the Day
We were stunned this morning to see hits on our site skyrocket in a very tight timeframe. Since we had not posted any new content since last week, we were puzzled by the level of interest. It didn't take long to find the reason: The Street.COM columnist James Altucher had re-posted a link to our 4/6 piece Why We Closed Our Jones Soda Position in today's edition of his Blog Watch column.

It was very evident that it was an older piece, yet any news on Jones these days garners heavy interest. However, that is not the kind of interest we want here at Cheap Stocks. There is more than enough speculation out there, and the day we begin sensationalizing, is the day we'll close down this site. For good.

We contacted Altucher, who was very gracious. He apologized for the mistake, and immediately withdrew the reference in his column.

For the record, we do not have a position in Jones Soda (JSDA), long or short.

Top Four Profitable Net/Nets by Market Cap

The markets continue to head higher, and although we are not perma-bear doomsday types, we are finding it increasingly difficult to find many names that are all that interesting--do we sound like a broken record yet?. Bear in mind (no pun intended), this is not 2000, and stocks are not trading at obscene multiples, but our definition of value is sometimes rather narrow, and we often have to turn over a lot of rocks to find one gem. There are only so many hours in a day.

With that, this week we bring you a list of the top four profitable net/nets, (aka stocks trading below their net current asset value), in order of market cap. "Profitable" in this case means that a company has a trailing twelve month profit, no matter how miniscule. No rocket science here, but then again, we've never been accused of being rocket scientists. This list should be seen as the beginning of the research process, a raw list of potential ideas that demands much further scrutiny before any decisions are made, not a definitive buy list.

Top Four Profitable Net/Nets by Market Cap:

\*please note, in a previous version of this post, we listed Bel Fuse. Due to a data error (Bel Fuse has two share classes, the market cap we used only reflected one class), Bel Fuse shout not have appeared anddoes not currently trade below its NCAV

Atlantic Coast Entertainment Holdings Inc. (ACEH)
Mkt Cap: $158 million
NCAV: $216
Price: $16.35

Trans World Entertainment Corp. (TWMC)
Mkt Cap: $146
NCAV: $209
Price: $4.69

Bexil Corp (BXL)
Mkt Cap: $30
NCAV: $38
Price: $33.3

Boss Holdings (BSHI)
Mkt Cap: $16
NCAV: $19
Price: $8.08

There you have it. Slim Pickings at best. To put in perspective, the total market cap of these four companies is less than $500 million, and we had to head pretty far down the market cap scale! That being said, proceed with caution. Smaller companies tend to be less liquid, and liquidity issues can be devastating to those not paying attention.

*The author does not have a position in any of the stocks mentioned in this report. This is neither a recommendation to buy or sell any of these securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks following the date of this post.

This summary is not available. Please click here to view the post.

4Kids Entertainment: A Double Net/Net with Possibilities(KDE)

Admittedly, we were not familiar with this company prior to attending The Value Investing Congress in Hollywood this past May. Thats where Lance Helfert and Atticus Lowe from West Coast Asset Management presented an interesting case, centered on the release of the company's Chaotic card game, which will also have an internet tie-in not unlike Webkinz. If you are not familiar with Webkinz, you probably don't have young children. Nothing more than stuffed animals, along with the ability to go to a website, play games, "buy" things for your stuffed animal, suffice it to say, it is quite the craze.

Crazes come and go, but Helfert and Finch believed this one -Chaotic- could be very big and very profitable. Two delayed release dates later, the few analysts that cover KDE are skeptical at best (not that the analysts are always right).

We've owned companies before that were at the mercy of the whims and fancies of young consumers. Topps (TOPP) is an excellent example, albeit one that was more established, with more recognizable brands and products than KDE.

4KIDS is a tiny company, a microcap with a market cap of just $198 million. Sales, and earnings have been falling, from $99.2 and $11.8 million in 2004 to $71.8 and a loss of $1.7 million in 2006. Revenues are generated from licensing- 44% of 2006 revenue (Teenage Mutant Ninja Turtles, Cabbage Patch Kids), broadcast media and advertising- 23% of revenue, (much of it from the Fox Saturday Morning 8-12 TV slot) and TV and film producton and distribution- 33% of revenue.

Chaos or Chaotic?
Sure, we were impressed by all the promise of the Chaotic brand, but we also recognize that the risk is growing, day by day, delay by delay. The main question from an operational standpoint is: Can management deliver Chaotic? The next question is, of course, if they do finally deliver, will Chaotic resonate with it's audience? Interestingly enough, we are more comfortable with the second question than the first: If management can deliver the product/website, from what we know, we believe it has a good chance of being successful.

The Safety Net(Net)
Delays aside, what really got our attention was the relatively large hoard of cash on KDE's balance sheet, and fact that the company currently trades at just 1.62 times net current asset value.

We are big fans of cash on the books, especially when it is unencumbered by debt, and not likely to be burned through in a hurry. Cash in that situation can create a safety net. While cash alone is rarely a sufficient reason to put a name in your portfolio, when combined with a potential catalyst -Chaotic, in KDE's case- it can be quite the deal sweetener.

The Numbers
Cash & ST investments: $111.6 million
Current Assets: $146.2
Current Liabilities: $24.7
Long Term Liabilities: $.7
Net Current Asset Value: $120.8
Market Cap: $195.1
Market Cap/NCAV: 1.62
Cash and ST Investments/share: $8.47Current Price: $14.82
LT Investments: $3 million

Conclusion
Management has lost some credibility due to the delays in the release of Chaotic and this seems to be reflected in the current price. Theoretically, buyers of KDE at the current price of $14.82 receive in return $8.47 in cash, while paying $6.35 for current operations, along with a call option on Chaotic. Granted, the Chaotic rollout will consume an estimated $15-20 million of the company's cash. Still, this is a compelling story to keep an eye on.

*The author does not have a position in 4Kids Entertainment. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.