Tuesday, October 19, 2010

Parting Ways with Lazare Kaplan (LKII)

One of the great frustrations with the companies that end up in net/net land, is that you never know what might happen. This comes with the territory. In the case of diamond company Lazare Kaplan, "lost diamonds" led to a 10 month period where shares did not trade. The company was not talking, either. Shareholders were left in limbo with very little information, and no financial statements. The company was suspended from trading, but ultimately listed on the pink sheets, and began "trading" again in July.

We'd all but given up on Lazare; this was the second time we owned it, and thankfully our cost basis this time was $1.18.

But more details of the company's troubles began to emerge over the summer. We've seen some speculation by others that the company's $640 million lawsuit against its insurers, who are refusing to pay claims over the missing diamonds, may end up handsomely rewarding shareholders. We, however, have decided that the risk-reward is not in our favor in this case, and have closed our position.

While a lawsuit victory would be a huge windfall to the company, we believe that the fundamentals continue to deteriorate. The company's most recent 8K suggested that Q1 revenue will be about $33.2 million, down from $74.2 million last year. Meanwhile, we don't know what shape the balance sheet is currently in; it's been ages since we've seen one. In any event, we would rather walk away with $.80 or $.90 per share of our original $1.18 investment than take the chance of total loss.

*The author has no position in 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.

Wednesday, October 13, 2010

Value Investing Congress: David Einhorn on St. Joes

Today ended the sixth annual New York Value Investing Congress, and the day's action did not disappoint. Once again, John Schwartz and Whitney Tilson put on a great event.

One of the conferences best presentations was this morning from Greenlight Capital's David Einhorn. A well respected colleague of mine joked just yesterday after seeing the title of Einhorn's presentation (If You Build it They Won't Come), that he hoped that Einhorn was not referring to St. Joes (JOE), a name in which my colleague has a small position. Its also a name that I previously owned, and we previously covered here at Cheap Stocks. In fact, a few years back David Einhorn took exception to some of our comments about JOE, and we invited him to write a response, which we ran unaltered.

Indeed, Einhorn's very detailed, very well delivered presentation was about St. Joe's. He left no stone unturned, and weaved together a very compelling case that JOE is overvalued at current levels. In fact, Einhorn suggested that JOE is worth no more than $7 to $10 to an acquirer now, and perhaps less if the company continues to sell property in order to cover operating expenses.

In a similar style used in his book "Fooling Some of the People All of the Time", Einhorn laid out his case. He used photos, and video of some of the current St. Joes developments, some of which appear to be ghost towns. He also used detailed property sales data, to reach the conclusion that St. Joes should probably be writing down the value of some of it's properties. It was indeed a sobering look of a company that we were bullish on in previous years.

While we never quite reached the same devastating conclusion as Einhorn, our patience did ultimately wear thin, when we realized that the company might have difficulty converting its only assets into cash.

Once again we give Einhorn a great deal of credit. His analysis was incredibly well done, and he's probably one of the brightest guys in the business. Time will tell whether he's nailed the St. Joes story the way he did with Allied Capital in "Fooling Some of the People..."

*The author has no positions in any of the securities 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.

Thursday, October 07, 2010

Whatever Became of The Cheap Stocks 21 Net/Net Index?

Although we wrapped up our experimental 2 year index of net/nets last February, we still have the ability to track it. While it ended the 2 year run up 5.1%, nearly 1400 bps points ahead of the Russell Microcap Index, and more than 2500 bps ahead of the S&P 500, we'd actually hoped for better performance.

Although we've generally stopped tracking CS 21 since the intended February wind-down, we thought it would be interesting to check performance since then. Since February, the Index is up 14.3%, vs. 5.13% for the S&P 500, and 12.25% for the Russell Microcap Index. Since orignal inception, CS21 is up 20.45% while the S&P 500 is down 16% and the Russell Microcap is down about 9.8%

The primary determinant of the continued decent run by the index has been the performance of former net/net The Finish Line (FINL) which is up more than 500% since the original index launch.

Please search the site for past posts on CS21. Below are the orignal components, and their initial weights.

Adaptec Inc(ADPT)
Weight: 18.72%
Computer Systems

Audiovox Corp(VOXX)
Weight: 12.20%

Trans World Entertainment(TWMC)
Retail-Music and Video

Finish Line Inc(FINL)

Nu Horizons Electronics(NUHC)
Electronics Wholesale

Richardson Electronics(RELL)
Electronics Wholesale

Pomeroy IT Solutions(PMRY)

Ditech Networks(DITC)

Parlux Fragrances(PARL)
Personal Products

InFocus Corp(INFS)
Computer Peripherals

Renovis Inc(RNVS)

Leadis Technology Inc(LDIS)
Semiconductor-Integrated Circuits

Replidyne Inc(RDYN)Became Cardiovascular Systems (CSII)

Tandy Brands Accessories Inc(TBAC)
Apparel, Footwear, Accessories

FSI International Inc(FSII)

Anadys Pharmaceuticals Inc(ANDS)

MediciNova Inc(MNOV)

Emerson Radio Corp(MSN)

Handleman Co(HDL)
Music- Wholesale

Chromcraft Revington Inc(CRC)

Charles & Colvard Ltd(CTHR)
Jewel Wholesale

We still intend on developing a new Net/Net Index, this time equal weighted. Stay Tuned.

*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.