Thursday, October 29, 2009

A Shoutout to Cheap Stocks 21 Net Net Index Member Richardson Electronics (RELL) from the Value Investing Congress

At first, I could not believe my ears when Candace King Weir, of Paradigm Capital Management mentioned Richardson Electronics (RELL), a member of our very own Cheap Stocks 21 Net Net Index, at the 5th Annual New York Value Investing Congress last week.

Weir, a self-professed bottom up stock picker, held out tiny Richardson as one of her favorite ideas citing the following:

*High barriers to entry in their market
*Trading at a discount to tangible book value
*Trading at just 7.5 times expected 2011 eps ($.80)
*Believes shares are worth $9-$11

Although Richardson, which is up 21 percent since the inception of the CS21 Net Net Index in February, 2008, no longer trades below its net current asset value, its very close at just 1.06 times NCAV.

Richardson Electronics
Ticker: RELL
Price: $5.94
Market Cap: $106 million
NCAV:$100 million
Mkt Cap/NCAV: 1.06
Cash: $43.9
Debt: $52.3

*The author does not have a position in Richardson Electronics (RELL). This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.

Thursday, October 22, 2009

Notes From The Fifth Annual Value Investing Congress Day 2

Fifth Annual Value Investing Congress Day 2: Part 1

Jason Stock and William Waller, M3 Funds
Banks & Thrifts: Opportunities in a Troubled Sector

M3 was founded in 2007, and invests (long and short) in small and mid cap names in the US bank and thrift sector. There are 1300 publicly traded banks, and 93% have market caps less than $500 million. Stock presented his view of the current state of the banking sector:

• Banks still undercapitalized
• Credit quality still deteriorating
• More bank failures
• Unemployment rate will continue to rise
• Commercial real estate is in trouble

The team is bearish overall on the sector, believing that banks are currently priced for perfection. Still, he and Waller are finding opportunity on the long side, and look for the following:

• Low Price/Tangible Book
• Excess capital
• Low loan/deposits
• Attractive markets
• Bearish management team
• Share repurchase plan
• Attractive deposit base

One of their favorite long ideas:
Beneficial Mutual Bancorp (BNCL)

• $4.2 billion in assets
• Oldest/largest bank in Philly
• Excess capital
• Owns 42 of 68 branches
• Mutual holding company structure has benefits
• Trading at 79% “fully converted book value”

Kian Ghazi, Hawkshaw Capital Management
Kicking the Tires

Ghazi, who runs a concentrated long/short US equity portfolio, emphasizes proprietary, investigative research in his investment process:
• Focuses on value
• Identifies high-quality one-of- a-kind franchises
• Ensures financial strength, have excess cash, strong balance sheet, and monetizable assets
• “Kick the Tires Hard”- know what you own
• Asks: “What could cause stock to drop 30% or more, that would cause you to not want to buy substantially more?”
Ghazi presented the case for Coremark (CORE)
• Second largest distributor to convenience stores
• $300 million market cap
• $30 million net debt
• Trading at 12 times est 2009 earnings, 8 times TTM earnings
• Admits that this is a low margin business with low ROC, but is well capitalized, difficult to replace, underfollowed
• Highly fragmented industry
• Cigarette sales account for 70% of revenue, but just 29% of gross profit
• Company moving toward providing more fresh foods, which have much higher margins. This should more than supplant potentially declining cigarette sales.
• Believes company may ultimately be worth $45-$50

Eric Sprott, CEO Sprott Asset Management
The Financial Crisis Isn’t Over

Sprott began by pointing out that Dow 10,000 is meaningless; we were there 10 years ago, and since then, have “accomplished nothing”. He is highly skeptical of the US banking industry, and predicts many more bank failures in the days ahead.

Sprott also took shots at the “Quantitative Easing” process being used at the Fed these days, likening it to the very dangerous practice of simply printing more money. He questioned who is buying all of the US govt debt, with issuance up 200% this year, and concluded that it’s the central banks doing all of the buying. Sprott then asked the most relevant question: “What happens when quantitative easing is done?”

Sprott believes that gold is a relevant place to invest these days, pointing out a sticky supply/demand situation, fact that more demand is consumed than produced each year, central banks have been selling as the price has risen substantially over the past ten years. He doubts that some who claim to have gold in their vaults actually do.

Some Favorite Ideas:
• Norseman Gold PLC (ASX:NGX)
• Corridor Resources (TSX:CDH)
• Sensio Technologies (TSX-V:SIO)

Alexander Roepers, Portfolio Manager, Atlantic Investment Management
Atlantic’s Approach to Value Investing

Roepers who runs a concentrated portfolio, laid out the rules of the road for concentrated investors:

• Define your universe
• Transparent companies that can be analyzed and understood
• No leverage in the portfolio
• Only companies with solid balance sheets
Roepers Universe:
• Market caps between $1 billion and $20 billion
• Total of 450 US companies, 700 international
• Takes positions between 2% and 7% of outstanding shares
Ropers Avoids Companies exposed to:
• Technological obsolescence (software)
• Product Liability (tobacco, pharma, asbestos)
• Government Intervention (cable, utilities)
• Lack of transparency (banks, brokerages, insurance)
Roepers is an engaged shareholder:
• Build rapport with managers
• Craft/discuss proposals with management
• Does not seek board seats/proxy fights
• Will apply pressure in the press, when necessary
Roepers likes Smucker’s (SJM)
• Consumer staples, benefits from slow economy
• Bought Folger’s last year
• Strong Cash flow
• Trading at 12 times earnings
• 12 times EV/EBIT
• 12 month target: $74

Whitney Tilson and Glenn Tongue, T2 Partners
More Mortgage Meltdown & a Stock Idea

You can always count on Whitney Tilson to spoil the party with yet another sobering discussion of the mortgage mess. Yet, the story must be told, and Tilson, as always, does a fine job of it.

• Home prices are currently affordable, but that’s due to low interest rates and massive price declines
• Home prices rose slightly this past Summer
• However, there will be another leg down
The Stabilization we’ve recently see, is due to the following factors none of which are sustainable:
• Low interest rates
• The $8000 government tax credit to buyers (set to expire in Novemeber)
• Decline in resets
• FHA support
• Seasonality
Tilson pegs the current housing overhang at 7 million homes, which he believes is effectively 24 months of inventory. He believes that home prices will fall another 10% before we hit bottom.

Glenn Tongue presented one of the duos favorite ideas, Iridium (IRDM)
• Satellite systems
• Has 66 satellites in low orbit, 7 spares
• Enterprise value: $492 million
• Trades at just 3.8 X Ev/EBITDA
• Estimates 2009 EBITDA at $130 million
• Will launch new, more advanced satellites in 2014
• Much can be financed through internally generated cash flow, and payloads carried on the satellites for others
• Sees this as a multi-bagger

Zeke Ashton, Managing Partner, Centaur Capital Partners
Stocks the Rally Left Behind

The always-interesting Ashton has been putting up some great numbers; his fund is currently #1 in the one, two, and three year periods in its category. Ashton highlighted three names at this Congress; Alleghany (Y), Lab Corp (LH) and MVC Capital (MVC), none of which has materially participated in the recent market rally. (For more on Alleghany, please see notes from the last Value Investing Congress, held in Pasadena, this past May).

Lab Corp (LH)
• #2 player in the clinical lab testing business, behind Quest
• $4.5 billion in revenue
• Market Cap $7.05 billion, Enterprise value $8.4 billion
• Estimates $670 million free cash flow in 2009, trades at 10.5 X FCF
• Share buybacks
• Has suffered due to perceptions of what “Obamacare” may do to the industry
• May be worth 15-17X FCF, or $95-$105 per share
• Centaur’s largest holding
MVC Capital (MVC)
• “Dollar trading for $.55”
• Business development company that makes debt and equity investments in small companies
• Currently has 32 investments
• Value of underlying portfolio misunderstood

Bill Ackman, Managing Member, General Partner Pershing Square, LP
Prison’s Dilemna

Ackman closed out the Fifth Annual Value Investing Congress with the case for private prison owner/operator Corrections Corp of America (CXW):
• Not just a prison operator, but real estate; owns land and buildings at most locations
• Market Cap $2.9 billion, EV $4.1 billion
• 2009 Est Cap rate: 12.2%
• P/FCF 13.2
• Maintenance cap ex limited
• Rising crime rate, overcrowded state prisons.
• More efficient/cheaper than state run prisons
• Bought back 8.2 million share below book
• Board and management have skin in the game: own 6 million shares
• 61000 beds
• Solid management
• Worth $40-$54 per share
• Ackman’s position is passive; he owns more than 9% of the Company, but has no current intentions of activism

Ackman also suggested Realty Income (O) as a good short candidate. Believes company is overpriced, and that focus on monthly dividends as an attractive feature to investors will not last.

Wednesday, October 21, 2009

Notes From The Fifth Annual Value Investing Congress Day 1

David Nierenberg, Founder, D3 Family Funds
D3 War Stories: Practical Lessons About Building and Protecting Shareholder Value by Improving Corporate Governance

David Nierenberg, who has appeared at several other VIC’s including Pasadena this past May, led off the first day of the Congress. Nierenberg’s typically invest in busted microcap growth companies. His average holding period is 7 years, and there is 5 year lockup for investors.

The focus of this presentation was the importance of corporate governance. Nierenberg believes that much of the activism occurring these days is focused on the wrong things. He believes that putting a board in place that is capable and independent, focused on the real issues, and properly incented for the long-term can greatly improve potential company success.

Nierenberg highlighted three companies, including Move Inc (MOVE), Brooks Automation (BRKS), and Heartland Payment Systems (HPY). D3 currently has holdings in these companies, including 18.2% of Move, and 7.2% of Brooks.

Nierenberg believes that Heartland, a credit and bank card processor which currently trades for around $14.00, may ultimately be worth more than $ 40. Nierenberg cited the Company’s strong management, solid compound annual growth rates in revenue, EBITDA and EPS, and an overreaction to a security breach that sent the stock plummeting.

Nierenberg concluded with 3 points:
• Investing is not all about the numbers, it’s also about people and process
• Selling is not the only exit option (change can be brought about by major shareholders)
• In microcaps, large block positions and knowledge about governance can protect and build shareholder wealth.

Steve Dobson, CEO Amherst Securities
Fishing in a Poisoned Pond

Frequent VIC attendees have become accustomed to their bi-annual dose of bad news on the mortgage and housing front, and I am among many that are thankful for the honest portrayal. For the past two years, that somber topic has been delivered by Glen Tongue and Whitney Tilson, authors of “More Mortgage Meltdown”. Today, it was Steve Dobson’s turn.

Dobson’s expertise and analysis was a critical component of the book, and his candid portrayal of the continuing difficulties facing the residential mortgage market was sobering.

Among Dobson’s more frightening observations (and there were many):
• There are 8 million homes currently not paying their mortgage
• Once a borrower has missed 2 mortgage payments, foreclosure is all but inevitable
• The rate of recoveries is still declining
• The resolution process is grinding to a halt
• The amount of bank-owned real estate is falling, but that’s primarily because of a slowdown in the foreclosure process
• 29% to 50% of modified mortgages re-defaulted within six months
• 79% of all defaulted loans have a current loan to value (LTV) ratio above 120%

If there was any good news, Dobson reported that loss severities (recovery rates) have stabilized in all states.

Dobson concluded that:
• Loss severity will not increase substantially
• Losses will take longer to realize
• Loan modifications/Government programs to address the situation will evolve

David Einhorn, Chairman, Greenlight Capital
Liquor Before Beer, In the Clear

Einhorn opened his presentation with his thoughts on the importance of learning from bad decisions. He cited his 2005 IRA Sohn conference presentation on the merits of homebuilder NBC Holdings, which ultimately fell 40% as the homebuilding sector collapsed. Although the rest of the sector fell much further, an average of 70%, Einhorn learned the following:

• It is not reasonable to be agnostic about the big picture, a macro view is vital
• Even given the above statement, you can still be a stock picker

Einhorn went onto give a stirring speech about what he believes to be the current macro risks:

• The government is too focused on the short-term, too focused on getting re-elected.
• Too much focus on special interests (protection of banks, for one)

Einhorn believes that the lesson of the Lehman collapse, a company that he very successfully shorted, is that companies should not be so big that their collapse can jeopardize the entire financial system.

He went onto state that he has changed his view about the validity of owning gold, given its propensity to perform well not just during inflationary times, but when monetary policies are poor in general. In terms of form of ownership, Einhorn owns physical gold, believing that to be even more efficient than the ETF.

Joel Greenblatt, Managing Partner Gotham Capital
Formula Investing with a Value Mindset

Greenblatt, author of “The Little Book That Beats the Market”, presented a re-cap of his concept of the “Magic Formula”, which utilizes earnings yield and return on invested capital as the criteria to select stocks that will outperform. While he admitted that historical return on capital is backward looking, he stated the importance of estimating future ROC.

Greenblatt described two periods of underperformance by the strategy:
• 2/1/2006 through 12/1/2008 (34 months)
• 5/1/2002 through 6/1/2003 (13 months)

Despite his somewhat self deprecating depiction of the Magic Formula, the returns utilizing the strategy have been outstanding. For instance using back tested data, the strategy returned 291 percent or 14.6 percent annualized, for the 10 year period ended 5/30/2009. During the same period, the S&P 500 Index was down 2 percent (-.2 percent annualized). Furthermore, the Magic Formula has outperformed the market for ten of the past eleven years, through 9/30/2009.

Despite the simplicity of utilizing the Magic Formula, Greenblatt’s data suggests that it is not a good candidate to use for identifying short candidates. For instance, going long the top decile of Magic Formula companies and short the bottom decile substantially increases portfolio volatility, and does not enhance return.

Julian Robertson, Founder, Tiger Management
Question and Answer Session

Investing legend Julian Robertson took questions for a half hour; an extremely pleasant surprise for this Congress. Here are some of Robertson’s thoughts:

Concerns about the current state of affairs:
• Big concern is that we are still spending more than we earn, which is not sustainable. Debt must be paid back, and we are not even thinking about that. More focused on borrowing more from the Chinese, and hoping they won’t decide they have better things to do with their money.

On Energy:
• Although bullish on oil stocks, he is impressed by advances in solar energy. Believes that solar will continue to improve, wind power too, and this will ultimately help the environment and hurt oil companies.

On China:
• Might be a bubble
• Consumption not enough to pull the world out of recession

On Gold:
• An anti-gold bug—“none has been used since it was discovered”

On Norway:
• The most prosperous/sound country in the world

Companies he’s bullish on:
• Visa, Mastercard, Ryanair, Intel

What He’s Learned/Best Advice:
• Never be overconfident
• Don’t get overly enthusiastic about your business

Lloyd Khaner, General Partner Gotham, Kahner Capital
The Key to Turnarounds

First time presenter at the Value Investing Congress, Khaner, who has compounded 445.4% since 1991 (versus295.2% for the S&P 500), looks for the following attributes in potential investments:

• Unique management
• Strong decision making ability
• Avoid value traps
• Debt/Equity less than 70%
• Avoid dying industries
• Franchise companies with manageable debt

Khaner is a big believer in the concept of “CEO family trees”, placing value on those that have been trained or worked under other successful CEO’s.

Khaner listed the signs of a successful turnaround, including:
• Cutting unprofitable sales
• Cutting headcount
• New senior managers
• Fix customer relationships
• CEO sets plan within 3 months
• Gross Margin up
• SG&A down
• Focus on Return on Capital
• Restructure Debt-Push out maturities.

One of Khaner’s favorite ideas is Starbucks (SBUX):
• Slowing new store openings
• Improving service
• Expects positive comps fiscal 2010
• ROIC growth 100-200 bps next 3+ years
• FCF $500-$750 million 3+ years

Candace King Weir and Amanda F. Weir, Paradigm Capital Management
Bottom-up Stock Picking Back in Fashion?

Candace King Weir and Amanda Weir presented the case for bottom-up stock picking, especially in the small cap universe, believing that in this space:

• Management is more accessible
• Business models are more easily understood
• Companies tend to be domestically based, and have less currency and commodity exposure
• Companies are more nimble, have ability to scale, and can react more quickly to changing events
Part of the Weir’s strategy involves frequent contact with management. They focus on one name at a time, and are agnostic to both sector weights and macro trends. They believe the current market provides unique opportunities for investors, and such markets occur only once every 1 or 2 decades.

One of their current favorites is retailer Wet Seal (WTSLA):
• Cheap clothes with a fashion edge
• $350 million market cap, $150 million in cash
• 575 stores (495 Wet Seal, 80 Arden B)
• Hired New merchandise managers
• Sees expansion opportunities for Arden B

Paul Isaac, CIO Cadogan Management
Investing as a Pari-Mutual Proposition

Isaac, a first-time VIC presenter, is a 40-year industry veteran. Issac presented the long case for Waste Management (WM):
• Largest waste management company in the US
• 273 landfills, 355 transfer stations
• Trading at 15 times trailing earnings, 14.5 times 2010 consensus estimates
• Trades at 6.8 X EV/EBITDA
• Return on Invested Capital: 8.5%
• Free Cash Flow Yield: 8%
• Dividend Yield : 3.7%
• Bought back 17 percent of outstanding shares over the past ten years; new buyback recently announced
• Barriers to new entry in this business due to regulation
• Permitting new sites is difficult
• Could trade up to 8 X EV/EBITDA
• Potential IRR up to 20%
• Rising operating and net profit margins

Friday, October 09, 2009

Lazare Kaplan Trading Halt (LKI)

Perennial net/net Lazare Kaplan International, which we last profiled on July 8th, is currently in the throes of a trading halt on AMEX, as a result of its failure to file the Company's 10K in a timely manner. In fact, no shares have exchanged hands since September 15th. Yesterday, LKI submitted a plan to NYSE AMEX outlining how it intends to regain compliance with exchange listing requirements.

This type of situation is rarely, if ever good news. Lazare did not file its 10K in order to resolve "a material uncertainty concerning the collectability and recovery of certain assets, and "the Company's potential obligations under certain lines of credit and a guaranty". While the Company believes it will file it's 10K by 12/15/2009, delisting is certainly a possibility. Lazare has also stated intentions to trade over-the-counter if the Exchange does not approve the plan.

As we stated in the July piece, LKI was in a dangerous situation, and although we knew we were putting capital at risk, we still believed the Company had some potential value, in excess of the $1.16 per share we paid in March.

A brief conversation with CFO William Moryto last week yielded no new information, for obvious reasons.

While we presume there is bad news on the way for shareholders, we certainly would not mind being paid in inventory (polished and rough diamonds) in the event of a liquidation. It's too early to tell how this will end, but such situations are never surprising in the land of the net/nets.

Stay tuned.

*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.

Tuesday, October 06, 2009

Gannett on the Move

We typically shy away from large, or even mid caps on this site; the fact remains that they already get a great deal of coverage, and in our minds, they just aren't typically as interesting as the nano/micro cap markets.

That being said, over the past several months, we've been intrigued by some larger names that were all but written off for dead. Some appeared to be trading like cheap call options. Foremost on this list is publishing powerhouse Gannett (GCI), parent of the 2.1 million daily circulation USA Today.

Stung by a deep advertising slump, and declining newspaper circulation S&P 500 member Gannett fell to $1.95 last March. This was a $30 stock one year earlier, and topped out in the $90 range in 2004.

But advertising slumps can be brutal, and this was perhaps one of the worst on record. I lived through the last one in 2001-2002 as senior markets editor and writer for Bloomberg Personal Finance Magazine. I was perhaps naive to the ways of the publishing world, having jettisoned a management career at Bloomberg to enter a whole new world. As advertising worsened, Bloomberg Personal got thinner in terms of page count. Already losing money on the 400,000 circulation magazine, and with new management in place following Mike Bloomberg's election as New York City Mayor, the company pulled the plug on Bloomberg Personal. That's a day I'll never forget; I'm sure the publising veterans among the crowd called into the conference room for the announcement knew what was happening, but I certainly didn't. Ironically, the upcoming issue of Bloomberg Personal was finished, and I had the cover story for a magazine that was never released. I digress.

What attracted us to Gannett was the option-like price (the bulk of the position taken in July, at $3.13), for a company that we believed would survive. Perhaps it would never see $90 again, but at $3 and change it looked like a steal. So far, this appears to be a classic case of Mr. Market throwing the baby out with the bath water.

Gannet closed at $12.62 yesterday. Smarter investors might trim their position here, we have not...yet, anyway. Last week, company guidance suggested earnings of $.39- $.42 for Q3, versus consensus estimates of $.29. Full year 2010 consensus estimates are calling for $1.52 a share, so GCI currently trades at about 8 times forward earnings. Certainly not as cheap as it was a few months back, but still an interesting turn-around story.

We were concerned with Gannett's debt levels, currently around $4 billion in long-term debt with the completion of this week's senior note offering, but the Company has paid down a line of credit, pushing mnaturities into the future. This has at least bought the Company some time.

Trailing twelve month earnings have painted a bleak picture, with the Company losing $4.4 billion, or $19.32 per share. However, that includes more than $5.5 billion in non-cash charges, and Gannett has actually generated nearly $2.00 in free cash flow during that period.

The publishing world may never return to "normal", but we believe that Gannett, with more than 80 daily newspapers, 700 non-daily publications, 23 television stations, and a website that draws more than 20 million visitors per month, is a best of breed in the space.

Gannett Inc
Ticker: GCI
Price: $12.62
Market Cap: $2.96 billion
Cash: $104 million
Estimated Enterprise Value (EV): $6.4 billion
Price/Sales: .48
TTM FCF/share: $1.97
2010 Est EPS (consensus): $1.52
Forward PE: 8.3
Yield: 1.4%

*The author has a position in Gannett(GCI). This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.

Friday, October 02, 2009

Chromcraft Revington (CRC) Update

Shares of this tiny furniture manufacturer, which we profiled in June,have risen nearly 80 percent in the past three months. Chromcraft is a member of The Cheap Stocks 21 Net Net Index

As we indicated in our June piece, this is not a great business to be in. Net/Nets are typically somewhat ugly, a fact that is often reflected in the stock price. In Chromcraft's case, we saw some potentially interesting assets we believed were worth a great deal more than the sub $1 stock price.

Recent results demonstrated some progress by the Company, but are still nothing to write home about. Chromcraft lost $2.5 million for the second quarter, on sales of $14.6 million, versus a loss of $5.6 million on sales of $31.3 million for the same quarter last year. These results reflected cost cutting efforts by the Company, including the elimination of some product lines, and the consolidation of facilities.

The Company has generated $2.2 million in cash for the six months ended 6/30/2009, but $4.3 million in the first quarter alone. So, CRC burned $2 million during Q2, and ended the quarter with $3.1 million in cash, and no debt.

Current book value per share is $4.54, and there are some compelling tangible assets backstopping that figure, including the 560,000 square foot Senatobia, Mississipi manufacturing/distribution site (which sits on 100 acres), and the 519,000 square foot warehouse/distribution center in Delphi, Indiana.

The risks here are very evident, but the Company is not encumbered by debt. As always, be very cautious in net/net land.

Chromcraft Revington
Avg volume: 11,800
Market Cap: $10 million
Book Value per share: $4.54
Shares Out: 6.1 million
NCAV:$18.02 million
NCAV/Market Cap: 1.8

*The author has a position in Chromcraft Revington(CRC). This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.