CHEAP STOCKS: Below Net Current Asset Value, Real Estate, and other Value Strategies

Cheap Stocks Named to Top 22 Investment Blog List

2012-01-26T18:23:00.001-05:00

We were honored to be included in Vuru's list of the best investment blogs. Click here to see the list and associated commentary.

Cheap Stocks 26 Net/Net Index Update- Up 18.6% since inception

2012-01-19T09:47:00.005-05:00

Net/net investors are typically not accustomed to instant gratification. But we are seeing some good early results with the CS 26 Net/Net Index, which is up 18.6% since inception (9/13/2011). The true test is not the short-term, but a period of at least two years.

Furthermore, the overall direction of the markets has been higher since we rolled out the Index, and the benchmark Russell Microcap Value Index is up a solid 14.5% during the same timeframe.

We need to see a period of market stress to truly re-test our net/net index approach. It's way too early to declare this approach a success. Our previous net/net index experiment, the Cheap Stocks 21 Net/Net Index, which was cap weighted, and commenced in February 2008, performed fairly well. The jury is still out on the current incarnation, which is equal-weighted.

Top performers since inception have been Synageva BioPharma (GEVA, +287%, formerly Trimeris), Parlux Fragrances (PARL, +67%), ModusLink (MLNK,+49%), and Adams Golf (ADGF, +40%).

Top detractors include Advanced Battery Technologies (ABAT, -66%), Opnext (OPXT, -33%), and Imation (IMN, -20%).

*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.

Cheap Stocks 26 Net/Net Index Update

2011-12-13T09:20:00.000-05:00

Three months since launch, the Cheap Stocks 26 Net/Net Index is plain and simple getting the stuffing knocked out of it. We are not all that surprised at this point. The Russell Microcap Index is up 7.3% since the inception of CS26, while the Index itself is up about 2.1%. We expect a roller coster ride with this index over the next couple of years, and believe that a 2 year timeframe is the minimum time period for proper evaluation of indexing net/nets.

So far, much has happened to the constituents of CS26. BigBand Networks was acquired, which resulted in a 65% gain. Rather than replace BigBand, the proceeds now sit in cash.

In November, Trimeris (TRMS) merged with Synageva BioPharma Corp (GEVA), and that company replaces Trimeris in the Index.

The winners to date include ModusLink (MLNK, +35.8%), Synageva (Trimeris-GEVA, +116%), and RCM Technologies (RCMT, +21%). The losers include Advanced Battery Technologies (ABAT, -73%), Opnext (OPXT, -37%) and Volt Information (VOLT, -24%)

Stay Tuned.

*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.

JG Boswell Fundamentals Update- 2011

2011-10-27T10:46:00.001-04:00

Thanks to the addition of the most recently available year-end data, we've now strung together nine years worth of fundamentals for JG Boswell. Due to the complexity, and growing size of our spreadsheet, we've decided to share just some of the data that will put BWEL's current valuation in perspective.

JG Boswell (BWEL)
9 Year Averages Based on Annual Data:
P/E: 26
Price/Sales: 1.58
Price/Book Value: 1.41
Net Profit Margin: 7.87%
EV/EBITDA: 9.51
Dividend Yield: 2.29%
Market Cap: $616 million
Enterprise Value: $718 million

Current Data (2011 Annual)
Price: $714 (10/26 close)
EPS (Fully Diluted): $48.05
P/E: 14.9
Price/Sales: 1.62
Price/Book Value: 1.32
Net Margin: 10.9%
EV/EBITDA: 7.47
Indicated Dividend Yield: 2.24%
Current Market Cap: $713.1 million
Current Enterprise Value: $918.9million
Cash: $1.31 million

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

Cheap Stocks 26 Net/Net Index Update: Bigband Networks to be Acquired

2011-10-14T09:01:00.000-04:00

We've already had one name change, and a reverse split (Steel Excel, formerly ADPT) among the members of the CS 26 Net/Net Index, and now another name is being taken out. Big Band Networks (BBND) is to be acquired by Arris for $2.24 per share. Big Band is now the leading performer since inception for CS26, up 67%. If and when the deal is completed, for the purposes of the index, proceeds from the sale will be put in cash.

Its only been one month since we launched CS 26, and given past experience, there will likely be more acquisitions, perhaps a bankruptcy, and other surprises during the two year period we'll be traking this index.

So it goes in Net/Net land.

*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.

Cheap Stocks 26 Net/Net Index Update and Crates

2011-10-10T09:52:00.002-04:00

There's been one change in the Cheap Stocks 26 Net/Net Index since we rolled it out on September 13th. Adaptec has undergone a 1 for 10 reverse split, and changed it's name to Steel Excel Inc (ADPTD). There will no doubt be more changes on the way; at least that was our experience with the CS21 Net/Net Index.

Four weeks in, CS26 is down 2.59%, while the Russell Microcap Index, the benchmark we are using, is up 1.89%. The biggest gainer so far is Trimeris (TRMS), which is up 41%, while the biggest loser, Opnext (OPXT) is down 23.4%. Stay tuned.

Crates??

You may have noticed the reference to "Crates" in today's title, as well as the ad for Overhead Crates that was added to the site this morning. This is a complete departure for us, but we wanted to recognize this amazingly simple innovation. This is an unpaid, unsolicted ad, and we have no financial ties to the company that has created this product. Nonetheless, we felt compelled to bring the company, and it's product to our subscribers attention.

Overhead Crates has designed a simple product that takes advantage of space available in many basements, that most people don't realize could be utilized as storage space. We've installed the product ourselves, and found it to be brilliant! A very simple installation! Check out the site for yourself.

*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.

Interview on Moneyshow.com

2011-10-04T08:30:00.001-04:00

Kate Stalter of Moneyshow.com recently interviewed me for a piece that was released today regarding net/nets.

Portfolio Metrics for The Cheap Stocks 26 Net/Net Index

2011-09-22T08:46:00.001-04:00

Thanks for all of the e-mails that we've received regarding the new index. Some have questioned the inclusion of certain companies in the Index, based on one issue or another. The truth is, net/nets often have fleas. Perhaps there are corporate governance issues, the operating business is broken, or there is simply great skepticism as to whether a company is a going concern. Sometimes the companies are simply too small to generate any interest, and a decent name may have fallen through the cracks. Make no mistake, we fully expect that there will be bankruptcies by the time the our two year time frame has passed. There will probably be companies that will be acquired; and a few whose stock price will skyrocket relative to their current price. We experienced all of the above with the CS 21 Net/Net Index; this is simply another experiment in Net/Net Indexing.

Cheap Stocks 26 Net/Net Index Portfolio Metrics at inception (9/13/2011)

Total Market Cap:$6.297 billion

Average Market Cap:$242 million

Total Cash and ST Investments:$3.944 billion

Price to Book Ratio:.63

Price to Net Current Assets Value (NCAV):.84

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

Introducing The New Cheap Stocks 26 Net/Net Index

2011-09-13T17:06:00.002-04:00

Back in February of 2008, we launched the Cheap Stocks 21 Net/Net Index, an experiment in net/net indexing. This was not a particularly good time for net/nets; the quality of those available was quite low. What better time, we thought, to truly stress test the concept. The results after two years, while not as compelling as we'd hoped, were still quite good. The CS 21 Net/Net Index, a rag-tag bunch of troubled companies outperformed the S&P 500 by 2537 basis points, and the more appropriate benchmark The Russell Microcap Index by 1537 basis points, returning 5.1% during the two year period.

In the past year or so, the ranks of net/nets have been extremely thin. Our readers have wondered where we've been, with so few postings in recent months, but the truth is, there simply has not been much to write about in net/net land. The recent market pullback, however, has helped to push a few more companies below net current asset value. While the number of net/nets is still a bit thin, we've decided to introduce a new net/net index.

Unlike our previous CS 21 Net/Net Index which was cap weighted, the New Cheap Stocks 26 Net/Net Index will be equal weighted. It is comprised of 26 companies with market caps in excess of $40 million that were trading below their net current asset value as of today's market close. There will be no rebalancing, no companies will be added or deleted, and we'll track the results over the next two years. We are keeping this very simple.

Here are the constituents of the CS 26 Net/Net Index:

Ingram Micro (IM)
ADPT Corp (ADPT)
Benchmark Electronics(BHE)
Imation Corp.(IMN)
RealNetworks, Inc.(RNWKD)
ModusLink Global Solutions(MLNK)
Tuesday Morning Corporation (TUES)
Maxygen, Inc.(MAXY)
Volt Information Sciences, Inc (VISI)
Axcelis Technologies, Inc. (ACLS)
Kimball International (KBALB)
Opnext, Inc. (OPXT)
Advanced Battery Technologies,(ABAT)
BigBand Networks, Inc. (BBND)
Myrexis, Inc.(MYRX)
Gencor Industries, Inc. (GENC)
Parlux Fragrances, Inc. (PARL)
Trans World Entertainment Corp (TWMC)
Heelys, Inc. (HLYS)
RCM Technologies, Inc. (RCMT)
Trimeris, Inc. (TRMS)
GTSI Corp. (GTSI)
Emerson Radio Corp (MSN)
Adams Golf, Inc. (ADGF)
Planar Systems, Inc. (PLNR)
Books-A-Million, Inc.(BAMM)

In true net/net fashion this is not a well diversified group of companies, and is very heavy on technology.

The beginning value for the Index will be 260.00, and we'll update the progress weekly.

Stay tuned for more on the index members, portfolio fundamental data, and more.

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

Confirming JG Boswell's Dividend

2011-06-13T09:44:00.000-04:00

In the years that we've held shares in Bosewll, the dividends have risen from $2.75 per quarter in 2003, to $3.50/qtr beginning in 2005/2006. For the past five years, the dividend had not changed. However, we can now confirm that the latest dividend, which was paid on 6/10, was $4.00 per share.

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

JG Boswell Revisited: Beware of the Message Boards

2011-04-29T13:58:00.000-04:00

I've owned and covered mysterious under-the-radar cotton farming giant JG Boswell for several years now. Time was that no one knew about, or discussed this highly illiquid pink sheet company. There was good reason for that, too. Although publicly traded, Boswell behaves more like a private company, and keeps information close to the vest. You'll never see an earnings release, company guidance or any other communications associated with many public companies. The fact is that Boswell is not required to file with the SEC because it has fewer than 300 registered shareholders. Even annual financial data is somewhat difficult to find.

Owning such companies is risky. This is a risk that I'm willing to take, because I believe that the company is worth significantly more than it's current $780 million market cap. But I am taking a lot on faith; not the least of which is the belief that the company will ultimately convert valuable assets, such as water rights, into cash. But there are no guarantees this will happen.

Lately, the message boards have been hopping with activity related to BWEL. For years, there was nothing. Now, there are some fairly wild claims being made about the company and it's ultimate value; claims about the value of the land, the water rights, and other assets that I'm not certain the company even posesses.

Don't get me wrong, I am long this company and believe there is value there. But the true value of the land, and even the size and scope of the water rights is unknown. I've seen claims of $100 earnings this year due to higher cotton prices (BWEL earned $31 per share last year), that the dividend will be raised, that a special dividend will be paid, that shares are worth $10,000 or more. Don't get me wrong, there are few that would be happier if BWEL was truly worth $10,000 per share, but I'm certain that much of this is being perpetuated by one or more individuals, and I'm not sure where they are getting their "facts".

The bottom line is to be careful what you read, and what you believe.

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

Net/Nets Becoming Rarer than a Blue Moon

2011-04-05T10:03:00.000-04:00

Just when you think that the ranks of net/nets can't get any smaller, they do just that. This site was originally dedicated to the identification and research of companies trading below net current asset value, and at the time of launch in 2003, was the only site, at least that we were aware of, that covered net/nets.

Since then, interest has grown, and there are several websites that now cover net/nets. All of this coverage has brought the concept more into the mainstream. Ten years ago, net/net was a foreign term, even to some value investors. That's not so much the case any longer.

We believe that all of the additional coverage along with rising markets, have acted in tandem to reduce the universe of net/nets.

At ths writing, we can only identify 2 net/nets with market caps above $100 million, ADPT Corp (ADPT) and perennial net/net Audiovoxx (VOXX).

It's not much better between $50 million and $100 million. There, we find Myrexis (MYRX), Gencor Industries (GENC), Parlux Fragrances (PARL), Heely's (HLYS), Integrated Electrical Services (IESC), Trans World Entertainment (TWMC), and Planar Systems (PLNR).

We are starting to sound like a broken record, but that's the fewest number of net/nets we ever seen above $50 million in market cap. This will change. When? We don't know.

*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.

Flashback: Investment Lessons Learned From a Bully

2011-02-03T15:04:00.001-05:00

This is a little light on ideas, but happens to be our favorite column in the history of this site. This originally ran on January 26, 2008.

Charlie was the consumate bully. One of the older kids in the neighborhood, and also the paperboy, he had a bad reputation and it was well earned. The event that occurred on one snowy day in our small quiet town in central NJ some 30 years ago can today be used as a metaphor for an important investment lesson.

We'd spent much of the day building a huge snow fort--my brother and I, Jimmy and Jon, brothers who lived across from us, and a few other assorted neighborhood kids. We could all fit inside this circular structure, but the walls were so high that we could not see out, save for a "window" or two built into the wall. Definitely the best snow fort we'd ever built.

But we soon realized that our snow structure's hours of existence were limited. Not because of the sun, but because of something much more menacing: Charlie. We realized that he was due to make his afternoon newspaper deliveries, and as soon as he saw our fort, he would very likely destroy it. At 15 or 16, Charlie was a big kid, and could severely damage our fort with one flying leap.

We thought quickly. If Charlie was going to take down our fort, he was going to do so at his own peril. We quickly loaded that snow fort with everything we could find--rakes, shovels, other garden implements standing upright, even a full size garden tractor. He might take down the fort that we spent all day building, but that bully was not going to walk away unscathed.

We hid in the bushes, and along came Charlie. He saw our snow fort, but could not see what was contained within. He stopped, he sprinted, he jumped, and landed, destroying our fort. How proud he must have been as he hit that wall of snow--until a split second later when he landed on a tractor, several garden implements, and half the contents of Jimmy and Jon's garage. Charlie got a big, painful surprise that snowy afternoon. What appeared to be a harmless, ultra white snow fort, was actually much more. It's contents could not be seen from the outside; hidden within it's walls were dangerous, unseen risks.

That day, Charlie the bully cried like a baby. I don't remember seeing him all that much after that. He didn't suffer any permanent damage, and in hindsight, I'm glad he was not injured. We all (I hope) learned important lessons that day.

Hopefully the investment lesson is clear. During those times of financial crisis, when companies are beaten down, we as investors have the propensity to be fooled by the "It's down 50%, it can't go any lower" sentiment. That's the time to be aware of what might really be contained within a given company's situation. Is their peril lurking behind snowy white walls? Is it really worth the risk?

Charlie, if you are out there, I'd bet you wouldn't go near the Radians (RDN), MBIA's (MBI), or other such companies that have been trounced, yet may still conceal the unexpected. There may ultimately be reward, but how much risk are you willing to take?

*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.

Discount to Value Investing Congress West

2011-01-25T16:03:00.000-05:00

Our friends at the Value Investing Congress are once again extending Cheap Stocks readers a discount to attend May's conference (May 3rd and 4th) in Pasadena. The current offer will expire on February 17th. To learn more, please click on the ad to the left of this post. Hope to see you in Pasadena!

Where are All the Net/Nets Part II

2011-01-18T07:46:00.001-05:00

We've received several subscriber inquiries regarding the othernet/nets, those with market caps above $50 million, that we referenced last week. The pickings are slim, but here the are:

Myrexix Inc
Ticker: MYRX
Price: $4.21
Market Cap:$106
NCAV: $121.5
Mkt Cap/NCAV: .87
Cash & ST Invest: $124.8
P/E:NA

HQ Sustainable Maritime Ind
Ticker: HQS
Price: $4.75
Market Cap:$85
NCAV: $111
Mkt Cap/NCAV: .77
Cash & ST Invest: $64.5
P/E:7

Insmed Inc
Ticker: INSM
Price: $.65
Market Cap:$84.5
NCAV: $123
Mkt Cap/NCAV: .69
Cash & ST Invest: $124.3
P/E:50

Parlux Fragrances
Ticker: PARL
Price: $3.44
Market Cap:$70.5
NCAV: $91
Mkt Cap/NCAV: .78
Cash & ST Invest: $14.2
P/E:NA

Gencor Industries
Ticker: GENC
Price: $7.36
Market Cap:$70
NCAV: $76.3
Mkt Cap/NCAV: .78
Cash & ST Invest: $256.8
P/E:24

Trans World Entertainment
Ticker: TWMC
Price: $1.74
Market Cap:$55
NCAV: $114
Mkt Cap/NCAV: .48
Cash & ST Invest: $6.1
P/E:NA

Integrated Electrical Services
Ticker: IESC
Price: $3.64
Market Cap:$54
NCAV: $66
Mkt Cap/NCAV: .82
Cash & ST Invest: $32.9
P/E:NA

Duckwall Alco
Ticker: DUCK
Price: $13.87
Market Cap:$53
NCAV: $63
Mkt Cap/NCAV: .85
Cash & ST Invest: $5.4
P/E:NA

Not to sound like a broken record, but this is among the shortest list of net/nets with market caps above $50 million that we've seen in the dozen or so years we've been researching net/nets.

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.

Last Call For JG Boswel Fundamentals Spreadsheet

2011-01-13T10:17:00.000-05:00

We've decided to offer this spreadsheet, which includes the past 8 years of as-reported fundamental data taken directly from the annual reports, until February 1st only. Data includes the most recent fiscal year end.

If you are interested in obtaining this, please contact us at:cheapstocks@verizon.net for pricing.

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

Where Are All The Net/Nets? Ben Graham asked the Same Question in 1968

2011-01-11T11:01:00.000-05:00

At this writing, we've never seen so few net/nets at any point in the decade plus that we've been studying and researching them. In fact, we currently count a total of 12 with market caps in excess of $50 million. Unfortunately (or fortunately, depending on your perspective) a rising market tide tends to lift all boats, including net/nets. We've also seen a growing population of websites covering net/nets since we started this site in 2002, which may also partially explain the lack of opportunity; there are simply more investors that have caught on to this fascinating sub-culture.

Periods of low net/net opportunity are not uncommon; even Ben Graham wriote about one such period that occurred in 1968 in the 1973 edition of Intelligent Investor. Ben wrote:

But the picture changed in the 1970 decline, and at the low prices of that year a goodly number of common stocks could have been bought at below their working capital value.

In our experience, it's more than likely that the univerese of net/nets will only grow if there is a significant market pullback. I'm not wishing that on anyone, but will continue to look for opportunity in the current crop of net/nets. Having some dry powder available is not a bad idea.

Top 5 Net/Nets by Market Cap

Imation Corp
Ticker: IMN
Price: $10.59
Market Cap:$408
NCAV: $412
Mkt Cap/NCAV: .99
Cash & ST Invest: $256.8
P/E:NA

ADPT Corp
Ticker: ADPT
Price: $2.88
Market Cap: $317
NCAV: $368.6
Mkt Cap/NCAV:.86
Cash & ST Invest: $365.8
P/E: NA

Volt Information Sciences
Ticker: VOL
Price: $8.92
Market Cap: $186
NCAV: $199
Mkt Cap/NCAV: .93
Cash & ST Invest: $145.6
P/E: 4

Audiovox
Ticker: VOXX
Price: $7.91
Market Cap: $184
NCAV: $212
Mkt Cap/NCAV:.87
Cash & ST Invest: $73.1
P/E: 9

Maxygen
Ticker: MAXY
Price: $4.04
Market Cap: $121
NCAV: $142.5
NCAV/Mkt Cap: .85
Cash & ST Invest: $152.4
P/E: NA

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.

JG Boswell Fundamentals

2010-12-01T11:43:00.000-05:00

Thanks to the addition of the most recently available data, we've now reviewed 8 years of data, crunched a lot of numbers for JG Boswell, and have been able to string together eight years worth of fundamentals. Due to the complexity, and growing size of our spreadsheet, we've decided to share just some of the data that will put BWEL's current valuation in perspective.

JG Boswell (BWEL)
8 Year Averages Based on Annual Data:
P/E: 27.3
Price/Sales: 1.56
Price/Book Value: 1.41
Net Profit Margin: 7.49%
EV/EBITDA: 9.71
Dividend Yield: 2.31%
Market Cap: $596 million
Enterprise Value: $718 million

Current Data (2010 Annual)

Price: $699 (11/30 close)
P/E: 22.5
Price/Sales: 1.72
Price/Book Value: 1.48
Net Margin: 7.7%
EV/EBITDA: 10.06
Dividend Yield: 2.0%
Current Market Cap: $692.7 million
Current Enterprise Value: $857 million

We now have compiled 8 years of JG Boswell as-reported fundamental data (balance sheet, Cash Flow, Income Statements, Summary Valuation Data and ratios) in an excel spreadsheet. If you are interested in obtaining this, please contact us at:cheapstocks@verizon.net for pricing.

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

Lazare Kaplan Lives; Still No Balance Sheet, Though

2010-11-18T11:08:00.002-05:00

No sooner did we part ways (for the second time) with LKII than the company announced a settlement agreement with ABN AMRO Bank and the Royal Bank of Scotland, which, as we understand it, resulted in $64 million in obligations being deemed "satisfied in full". ABN also agreed to transfer 2,151,103 shares of outstanding LKII stock, more than 25% of outstanding shares, back to the company. Lazare Kaplan forked over $14 million in cash to ABN and RBS as part of the settlement.

Shares jumped on the news, and now "trade" in the $1.41 range. With such a small float, trading volume is extremely light, and the bid ask spread very wide; $1.30/$1.75 at this writing.

Certainly sounds like some positive developments for Lazare, which has suffered in the aftermath of some missing inventory (diamonds), but we still don't know what shape the company is in, and have not seen a balance sheet in ages. We also don't know that status of the company's $640 million lawsuit with it's insurers.

This could get interesting, but there are still many unknowns.

Stay tuned.

*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.

Parting Ways with Lazare Kaplan (LKII)

2010-10-19T09:04:00.001-04:00

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.

Value Investing Congress: David Einhorn on St. Joes

2010-10-13T20:52:00.000-04:00

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.

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

2010-10-07T10:17:00.000-04:00

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%
Electronics

Trans World Entertainment(TWMC)
Weight:7.58%
Retail-Music and Video

Finish Line Inc(FINL)
Weight:6.30%
Retail-Apparel

Nu Horizons Electronics(NUHC)
Weight:5.76%
Electronics Wholesale

Richardson Electronics(RELL)
Weight:5.09%
Electronics Wholesale

Pomeroy IT Solutions(PMRY)
Weight:4.61%
IT
Acquired

Ditech Networks(DITC)
Weight:4.31%

Parlux Fragrances(PARL)
Weight:3.92%
Personal Products

InFocus Corp(INFS)
Weight:3.81%
Computer Peripherals
Acquired

Renovis Inc(RNVS)
Weight:3.80%
Biotech
Acquired

Leadis Technology Inc(LDIS)
Weight:3.47%
Semiconductor-Integrated Circuits

Replidyne Inc(RDYN)Became Cardiovascular Systems (CSII)
Weight:3.31%
Biotech

Tandy Brands Accessories Inc(TBAC)
Weight:2.94%
Apparel, Footwear, Accessories

FSI International Inc(FSII)
Weight:2.87%

Anadys Pharmaceuticals Inc(ANDS)
Weight:2.49%
Biotech

MediciNova Inc(MNOV)
Weight:2.33%
Biotech

Emerson Radio Corp(MSN)
Weight:1.71%
Electronics

Handleman Co(HDL)
Weight:1.66%
Music- Wholesale

Chromcraft Revington Inc(CRC)
Weight:1.62%
Furniture

Charles & Colvard Ltd(CTHR)
Weight:1.50%
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.

Slim Pickings

2010-09-19T20:17:00.001-04:00

There's just not been a great deal to mention these days in the land of the net/nets. That typically happens as a rising tide lifts all boats, even those with a few holes. At recent count, there are just a handful of net/nets with market caps in excess of $100 million.

There are more names in the $10-$100 million range, and among these are a few retailers. As you may recall our February 2010 recap of net/net retailers, there were a dozen retail net/nets in the dog days of early 2009, and the returns the following year were quite good.

While we are not suggeating that the current crop of retail net/nets, which are very few in number, will have the same outcome, we are nonetheless intrigued.

AC Moore
Ticker: ACMR
Price: $1.78
Market Cap: $44.8
NCAV: $62.4
Mkt Cap/NCAV: .72
Cash: $31.4
PE: NA

This 135 store craft retailer has struggled throughout the recession and has not had a profitable year since fiscal 2007. Company has $31.4 million in cash and $19 million in debt. Currently trades at .3 times book value per share.

Duckwall Alco
Ticker: DUCK
Price: $12.99
Market Cap: $49.9
NCAV: $64.7
Mkt Cap/NCAV: .77
Cash: $3.7
PE: NA

Regional retailer has 258 stores in 23 states; tends to be located in towns too small to support a Wal Mart. Currently trades at .48 times book value per share. Two of past five quarters have been profitable. Company is a perennial net/net with no analyst coverage. Has generated more than $3.00 in free cash flow in trailing 12 months. Ended last quarter with $41 million in debt. Currently trades at just over 5 times EV/EBITDA.

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

Next Value Investing Congress October 12-13 in NYC

2010-08-31T16:22:00.000-04:00

I have not missed a session of the Value Investing Congress since my first visit to the VIC West (at that time held in Hollywood and now in Pasadena) back in May of 2007. Its a first class event, and I've never walked away without several actionable ideas.

There have been a few surprises along the way as well. Two years ago at the New York VIC, Carl Icahn gave an unexpected (to me, anyway) presentation.

This is indeed a great opportunity to hear from some of the best value investors of our time, network with other like-minded investors, and rub elbows with value managers.

My friends at the Value Investing Congress have been kind enough to offer Cheap Stocks readers a discount of $1400, the early-bird rate starting today and ending on 9/13. For more information see the ad on our front page.

Hope to see you in NY!

Top Net/Nets By Market Cap

2010-08-25T10:15:00.001-04:00

While the markets continue their rocky road, the ranks of the net/nets have slowly been increasing. There are currently 100 or so with market caps above $5 million. Certainly still somewhat slim pickings, but never boring.

Top 5 Net/Nets By Market Cap
Imation Corp
Ticker: IMN
Price: $8.70
Market Cap: $338 million
NCAV: $413.9 million
Market Cap/NCAV: .82
Cash & ST Investments: $251.3 million
PE: NA

ADPT Corp
Ticker: ADPT
Price: $2.84
Market Cap: $342 million
NCAV: $381.1 million
Market Cap/NCAV: .90
Cash & ST Investments: $389.7 million
PE: NA

PC Connection
Ticker: PCCC
Price: $6.36
Market Cap: $172 million
NCAV: $180.8 million
Market Cap/NCAV: .95
Cash & ST Investments: $49.8 million
PE: 12

Tuesday Morning
Ticker: TUES
Price: $3.6
Market Cap: $152 million
NCAV: $167.8 million
Market Cap/NCAV: .91
Cash & ST Investments: $2.6 million
PE: 19

Audiovoxx
Ticker: VOXX
Price: $6.32
Market Cap: $145 million
NCAV: $209.8 million
Market Cap/NCAV: .69
Cash & ST Investments: $83.6 million
PE: 6

What's a net/net list without Audiovoxx? This company has seemingly been a net/net for as long as I've been researching.

Further down the list in terms of market caps, We are also seeing some interesting names, and will opine on those in our next column.

*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.

Cheap Stocks on "Investor Questions Podcast with Geoff Gannon"

2010-07-19T08:33:00.000-04:00

Geoff Gannon, formerly of the excellent "Gannon on Investing" site, now has a new venture Investor Questions Podcast with Geoff Gannon. Last week he interviewed me in depth. Geoff asked some great questions about net/nets, the website, and other investment related topics. It's a long interview, so if you are having a sleepless night, this might be the cure. Many thanks to Geoff, and best wishes to him on his new venture.

The "Return" of Lazare Kaplan (LKII)

2010-07-12T11:14:00.000-04:00

If you've followed our coverage of perennial net/net Lazare Kaplan over the years, it's been perhaps one of the most bizarre stories since another former net/net, Allou Health and Beauty went up in smoke, literally in 2003.

The latest twist on Lazare Kaplan, which recently announced a $640 million lawsuit against it's insurers who are refusing to pay claims over missing diamonds, is that shares now trade on the pinksheets under the symbol "LKII". Shares are currently changing hands in the $.60 range, less than one fourth of where the stock last traded in September of 2009, before trading was halted.

How this will all end remains to be seen. Financial statements have not been filed for several quarters, and the company's chances of winning the lawsuit remain unclear. Never a dull moment in net/net land.

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

Setting the Record Straight on St. Joes (JOE)

2010-07-07T09:19:00.000-04:00

A recent post that appeared on Greenbackd.com, which happens to be one of my favorite deep value oriented sites, opened up the great debate on Florida land giant St. Joes Corp, a company we covered fairly frequently in the past, and one that I owned for several years.

For the record, while I believe that there is value in St. Joe's assets, I have not owned the name since 2008. I originally purhased shares in the mid $20's back in the early 2000's, watched it run past $80, and finally had the position closed at around $40.

You may recall the back and forth between David Einhorn and I that appeared on this site nearly 3 years ago. David was short JOE, while I presented the bullish case. Einhorn had a $15 price target on the stock, and JOE bottomed at $16 and change in March of 2009, so David nailed it.

The reason that I don't own St. Joe's now is my skepticism about the company's ability to convert it's land holdings into cash, and how quickly it will be able to do so given the continuing Florida land depression. The oil spill, and how it will effect the Florida panhandle, is another concern.

With 577,000 acres, St. Joes currently trades at $3518 on the Enterprise Value/Acre metric that I typically calculate for companies with vast land holdings. While that may seem very cheap,it's not that far below 2007 ($3956)and 2008 levels ($4016).

Bruce Berkowitz, whose firm Fairholme Capital Management owned nearly 29% of the company as of 3/31, laid out the bullish case for JOE at the recent Value Investing Congress West in Pasadena. While Berkowitz is way smarter than I'll ever be, he used a lot of the same reasoning that I did when I was a shareholder, in order to present his case. I've just grown skeptical.

This may be the epitome of the value investor's dilemna: a company with extremely valuable assets, but the assets need to be converted into cash in order for value to be realized. Can St. Joe's pull it off?

I'd be an aggressive buyer of the stock at $2000 on an EV/acre basis, in order to provide a wider margin of safety. That would put the share price at about $13. That's a long way from current levels, and it's doubtful that we'll get there.

*The author does not 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 Downside of Net/Net Investing- Lazare Kaplan (LKI)

2010-06-10T09:18:00.000-04:00

We've tried to make it clear over the years that there are substantial risks investing in individual net/nets. While some pay off quite handsomely, others can implode, hence the idea of indexing net/nets, as we explored with our Cheap Stocks 21 Net Net Index.

This brings us to Lazare Kaplan International, a company that we have both covered and owned over the years. We closed our position in this perennial net/net in February of 2008 in the $10 range. In July of 2009,we initiated a new position in the $1.15 range. The shares subsequently ran up to $2.50, but in September, trading was halted,and not a share has traded since.

The company has repeatedly delayed filing it's financial reports with the SEC, due to:

a material uncertainty concerning (a) the collectability and recovery of certain assets, and (b) the Company's potential obligations under certain lines of credit and a guaranty (all of which, the "Material Uncertainties").

The NYSE AMEX granted the company several extensions to regain compliance; the latest on April 26th, which gave the company until May 31st to regain compliance with listing standards.

Here's where the story gets either very interesting, or ridiculous. On May 20th, the company filed a lawsuit suing various insurance companies for $640 million regarding "the disappearance of diamonds that were insured by the defendants". And now, finally, we learn what all of this is about: missing diamonds. The company had reportedly received a $28 million payment in January but the insurers are refusing to pay any more. This is not what a shareholder wants to hear, especially when you are stuck with the shares, and information about what is really happening at the company has been next to impossible to get. As of 3/31/2010, some institutional holders were in the same boat; including Dimensional Fund Advisors, which owned 7.54%,royce & Associates (1.16%), Royal Bank of Canada (1.15%), and CALPERS (.55%). A call to Lazare Kaplan CFO William Moryto placed late last week has not been returned.

This story will probably not have a happy ending for shareholders, and it raises many unanswered questions. What happened to the diamonds? Why isn't the company willing to speak with it's shareholders on the issue? Why are the insurers unwilling to pay? And again, what happened to the diamonds?

*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.

What Happened to Cheap Stocks?

2010-06-02T13:07:00.000-04:00

It's been 3 months since we last published, and we've been getting many e-mails wondering whether we have a new site, or have just fallen off the face of the earth. The truth is, we've been taking a break while we decide the future of this site, which was originally started in 2003.

Good content takes time and patience to develop, and we are a little short on both these days, especially when it does not help pay the bills. We've considered making this a paid subscription only site, but are still on the fence.

In any event, stay tuned...

Value Investing Congress West: May 4th and 5th

2010-02-28T16:40:00.004-05:00

I'll be heading back to Pasadena in early May, to attend my sixth session of the Value Investing Congress, and fourth on the left coast. This is the premier forum for value investors; an extremely well-run event that attracts quality speakers, offering compelling insights and investment ideas. What's more, I've found the presenters to be approachable both during and after the Congress.

Last year, I walked away with several actionable ideas. One of them, Huntsman (HUN), has more than doubled since I initially took a position in early May.

The folks at The Value Investing Congress have been kind enough to extend a discount to Cheap Stocks readers, $1300 off the regular rate. If you are intested in attending, please click here and use discount code P10CS3, which will expire on March 16th.

I hope to see you in Pasadena!

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

Winding Down The Cheap Stocks 21 Net Net Index; Outperforms Russell Microcap by 1371 bps, S&P 500 by 2537 bps

2010-02-25T16:26:00.003-05:00

Two years ago, we launched the CS 21 Net/Net Index, the first index designed to track net/net performance. The index was cap weighted, and comprised of the 21 largest net/nets by market cap at the time of launch. We had a few restrictions on inclusion in the index, including average daily volume and price, but otherwise, this was a very simply constructed index.

We originally intended to replace companies that were acquired, but thought better of it, instead deciding to keep proceeds from acquistions in cash. We also did not replace any names if they no longer met the net/net criteria. This was simply an experiment in order to see how net/nets at a given time would perform over the subsequent two years.

The results are in, and while it was not what we'd originally hoped for, it does lend credence to the long-held notion that net/nets can outperform the broader markets.

The Cheap Stocks 21 Net Net Index finished the two year period relatively flat, gaining 5.1%. During the same period, The Russell Microcap Index was down 8.61%, while the Russell Microcap Value Index was down 9.9%. During the same period, the S&P 500 was down 20.27%.

Here are the index constituents, their original weights, and performance.

Adaptec Inc(ADPT)
Weight: 18.72%
Computer Systems
+7.86%

Audiovox Corp(VOXX)
Weight: 12.20%
Electronics
-29.28%

Trans World Entertainment(TWMC)
Weight:7.58%
Retail-Music and Video
-69.55%

Finish Line Inc(FINL)
Weight:6.30%
Retail-Apparel
+350.83%

Nu Horizons Electronics(NUHC)
Weight:5.76%
Electronics Wholesale
-25.09%

Richardson Electronics(RELL)
Weight:5.09%
Electronics Wholesale
+43.27%

Pomeroy IT Solutions(PMRY)
Weight:4.61%
IT
Acquired
-3.8%

Ditech Networks(DITC)
Weight:4.31%
Communication Equip
-56.67%

Parlux Fragrances(PARL)
Weight:3.92%
Personal Products
-51.39%

InFocus Corp(INFS)
Weight:3.81%
Computer Peripherals
Acquired

Renovis Inc(RNVS)
Weight:3.80%
Biotech
Acquired

Leadis Technology Inc(LDIS)
Weight:3.47%
Semiconductor-Integrated Circuits
-92.05%

Replidyne Inc(RDYN)Became Cardiovascular Systems (CSII)
Weight:3.31%
Biotech
+126.36%

Tandy Brands Accessories Inc(TBAC)
Weight:2.94%
Apparel, Footwear, Accessories
-57.79%

FSI International Inc(FSII)
Weight:2.87%
Semiconductor Equip
+66.47%

Anadys Pharmaceuticals Inc(ANDS)
Weight:2.49%
Biotech
+43.75%

MediciNova Inc(MNOV)
Weight:2.33%
Biotech
+100%

Emerson Radio Corp(MSN)
Weight:1.71%
Electronics
+118.19%

Handleman Co(HDL)
Weight:1.66%
Music- Wholesale
-88.67%

Chromcraft Revington Inc(CRC)
Weight:1.62%
Furniture
-54.58%

Charles & Colvard Ltd(CTHR)
Weight:1.50%
Jewel Wholesale
-7.41%

Cash Weight: 8.58%

We are in the process of putting together a new net/net index, and still trying to decide whether or not we want to disclose the constituents, or keep them under wraps. 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.

Retail Net/Nets One Year Later, up an Average of 146%

2010-02-06T11:54:00.002-05:00

This time last year we ran a two part series on retailers that were trading below net current asset value. Retail was all but left for dead then, and as we all remember, market conditons got even worse by March.

One year later, the twelve companies are up an average of 146%. There was just one company in negative territory, Zales.

Here are the companies and returns:

A.C. Moore Arts & Crafts
ACMR
Price Then: 1.47
Price Now: $2.72
Return: 85%

MarineMax, Inc.
HZO
Price Then: $2.49
Price Now: $10.22
Return: 310%

Perfumania Holdings, Inc.
PERF
Price Then: $3.78
Price Now: $6.46
Return: 71%

West Marine, Inc.
WMAR
Price Then: $5.69
Price Now: $8.24
Return: 45%

Zale Corporation
ZLC
Price Then: $2.88
Price Now: $2.12
Return: -26%

Signet Jewelers Ltd.
SIG
Price Then: $9.42
Price Now: $27.00
Return: 187%

Duckwall-ALCO Stores, Inc
DUCK
Price Then: $10.50
Price Now: $12.59
Return: 20%

Stein Mart
SMRT
Price Then: $1.28
Price Now: $8.05
Return: 529%

Shoe Carnival
SCVL
Price Then: $8.04
Price Now: $18.08
Return: 125%

Cache
CACH
Price Then: $2.00
Price Now: $4.34
Return: 117%

PC Connection
PCCC
Price Then: $5.25
Price Now: $6.19
Return: 18%

Tuesday Morning
TUES
Price Then: $1.33
Price Now: $4.95
Return: 272%

At this writing, just two of the company's AC Moore, and Duckwall Alco remain in net/net territory.

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

Cheap Stocks 21 Net Net Index Update; CS to Launch New Net Net Index

2010-01-19T14:06:00.001-05:00

Back in February of 2008,we launched a rather unique experiment, an index of companies trading below their net current asset value. We laid out our selection criteria and premise in our February 15, 2008 post. Truthfully, this was a rather naive approach to creating an index, a fact we were well aware of.

We did make some adjustments along the way; we did not rebalance annually, nor did we use cash that was the result of acquisitions to replace index constituents. It became a set it and forget it portfolio of companies that were net/nets at the inception date of the index.

Our original intent was to wind down the index at the end of two years, and judge performance against the Russel Microcap Index. As of Friday, the CS21 has outperformed the Russel Microcap Index by 1356 bps. While we'd hoped for better absolute returns than the 6.6% since inception that CS 21 has realized, we consider this first attempt to be mildly successful.

We are busy creating a new index of net/nets, which will be tentatively released in early February. Stay tuned; the new index will have an interesting twist.

Former Net/Net Tuesday Morning Soars

2010-01-12T08:33:00.000-05:00

Closeout retailer and former net/net Tuesday Morning, that has graced the ranks of companies trading below their net current asset value for much of the past two years, was up 33% yesterday. The company reported better than expected guidance for Q2, suggesting eps of between $.40 and $.43 for the quarter. Same store sales rose, 5.1% versus the same period last year, and sales were up 6.2% to $289.6 million.

Given yesterday's jump, Tuesday morning is no longer a net/net, but still trades at just 1.12 times NCAV. However, that is based on first quarter balance sheet data, and Q2 won't be announced until January 26th.

If you've never been to a Tuesday Morning store, it is an interesting experience. I've referred to it in the past as a "rich man's dollar store", given the interesting mix of closeout inventory, at reduced prices. You never know what you will find at a store.

Founded in 1975, Tuesday Morning currently has about 850 stores in 45 states. With a current market cap of just $172 million, and almost identical enterprise value, these seem rather small for an 850 store chain. On an EV to store basis, that's just $200,000. The company does not, however own it's real estate.

I've owned shares a few times over the past couple of years, and the only reason that I've closed positions is due to trailing stops I've set. With the extreme volatility retail shares have experienced, stops seemed a prudent way to limit damage, but also lock in gains as shares rose.

I've been back in Tuesday Morning shares since mid December, and plan on seeing how events progress with the company (with a trailing stop to protect gains).

Tuesday Morning
Ticker: TUES
Price: $4.02
Market Cap: $172 million
Enterprise Value: $172 million
Net Current Asset Value (as of 9/30/2009):$153.6 million
Market Cap/NCAV: 1.12

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

Mark Boyar: Net/Net Pioneer

2010-01-04T10:41:00.001-05:00

Long before I started this site, or even knew what a net/net was, deep value legend Mark Boyar, who currently runs Boyar Asset Management, the Boyar Value Fund and an excellent independent Research Product Focus Asset Analysis, offered a newsletter devoted to the subject. I was still in elementary school at the time, while Boyar was devoting a considerable amount of time identifying net/nets, and building a business during an extremely difficult period. It certainly was not as easy in those days as it is now to identify net/nets. There was no software, no Bloomberg or Factset, or even electronically filed SEC documents to make the task easier. It was all done by hand.

Today, Boyar and his analysts provide an excellent, in depth research product. Their recent report on International Speedway Corporation provides a fascinating look at a company that few other research providers cover.

For more on Mark Boyar Integrity Research just published an interesting piece on his career.

*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.

Steak n Shake Update

2009-12-23T12:22:00.001-05:00

Last September, we posted a Guest Blogger's take on Steak n Shake. The story has gotten even more interesting since then, and you can read my recent column that appeared on RealMoney and Yahoo Finance.

Since my piece ran earlier this week, the company announced its intention to acquire a small insurance company Fremont Michigan InsuraCorp Inc (FFMH.OB), which was rejected this morning by Fremont.

Stay tuned..

*The author has a positions in Steak n Shake. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.

Top Five Net/Nets to End 2009

2009-12-19T10:10:00.001-05:00

It's hard to believe 2009 is almost behind us, and what a year it has been. Our own Cheap Stocks 21 Net/Net Index is currently flat since it's February 2008 inception. We'd hoped hoped for better performance, but this little index of misfits has performed better than the Russell Microcap Index, which is down about 20% during the same timeframe.

We plan to wind down CS21 once it hits the two year mark, and will replace it with a new net/net index.

We thought that there was no better way to say goodbye to 2009 then with a list of the current top five net/nets in order of market cap. Some of these names may look familiar to you, in fact one of them, Audiovox(VOXX) seems to have had a permanent place on the list.

Top Ten Net/Nets by Market Cap

Imation Corp(IMN)
Price: $8.78
Market Cap: $334
NCAV: $399.3
Cash: $111
P/E: NA
Mkt Cap/NCAV: .84

Movado(MOV)
Price: $9.22
Market Cap: $226
NCAV:$304
Cash: $49.5
P/E: N/A
Mkt Cap/NCAV: .74

Audiovoxx(VOXX)
Price: $7.39
Market Cap: $169
NCAV: $210
Cash: $70.5
P/E: NA
Mkt Cap/NCAV: .80

Opnext(OPXT)
Price: $1.86
Market Cap: $165
NCAV: $196
Cash: $155
P/E: .84
Mkt Cap/NCAV: .84

Axcelis Technologies(ACLS)
Price: $1.26
Market Cap: $131
NCAV: $173
Cash: $41
P/E: N/A
Mkt Cap/NCAV: .76

Merry Christmas, and happy holidays!

*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.

Biggest Net/Nets In Years: One Year Later

2009-11-16T08:25:00.001-05:00

This time last year, our piece Biggest Net/Nets In Years featured an interesting list of names. Truth is, we'd rarely, if ever seen net/nets of this size, and it was the direct result of a free falling market. We thought it would be interesting to review the performance of these companies one year later:

Ingram Micro
Ticker: IM
Price Then: $13.58
Price Now: $18.69
Change: +37.6%

Tech Data
Ticker: TECD
Price Then: $21.47
Price Now: $41.88
Change: +95.1%

Benchmark Electonics
Ticker: BHE
Price Then: $11.77
Price Now: $18.00
Change: +52.9%

USEC
Ticker: USU
Price: $3.90
Price Now: $4.09
Change: +4.9%

Furniture Brands Intl
Ticker: FBN
Price: $4.61
Price Now: $3.61
Change: -21.7%

The average return for these companies was 33.76%. During the same period, the Russell 2000 was up 15.9%, the S&P 500 17.5%, and the Russell Microcap about 10.4%. Hindsight, of course, is indeed 20/20, but the land of the nets/nets continues to be an interesting pond in which to fish.

*The author does not 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.

JG Boswell Fundamentals

2009-11-11T17:37:00.001-05:00

We've reviewed 7 years of data, crunched a lot of numbers for JG Boswell, and have been able to string together seven years worth of summarical fundamentals. Due to the complexity, and growing size of our spreadsheet, we've decided to share just some of the data that will put BWEL's current valuation in perspective.

JG Boswell (BWEL)
7 Year Averages Based on Annual Data:
P/E: 28.6
Price/Sales: 1.61
Price/Book Value: 1.44
Net Margin: 7.52%
EV/EBITDA: 9.88
Dividend Yield: 2.29%
Market Cap: $605 million
Enterprise Value: $722 million

Current Data (2009 Annual)
P/E: 21.5
Price/Sales: 1.4
Price/Book Value: 1.06
Net Margin: 6.56%
EV/EBITDA: 8.45
Dividend Yield: 2.89%
Current Market Cap: $473.5 million
Current Enterprise Value: $630 million

We are also contemplating putting the full seven years of financial statements into excel, and distributing these to anyone willing to submit $100 to our paypal account. We've never charged for anything before, but this will be fairly labor intensive, and we're just not sure it's worth the effort. Cheap Stock readers can be the judge on this one.

If you have any interest, please contact us at:cheapstocks@verizon.net

Many thanks to Tim Eriksen of Eriksen Capital Management, who was kind enough to provide us with some of the earlier Boswell data.

*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.

JG Boswell Update: 2009 Annual Report

2009-11-03T12:00:00.002-05:00

Shares of cotton and farming giant JG Boswell, owner of an estimated 142,000 California acres, and another 30,000 in Australia, are in positive territory year to date in 2009, up 14% excluding dividends. That's still down substantially from $1000 range the Company briefly touched in May of 2008.

The appeal of Boswell (BWEL) is not in its farming operations, which although impressive in their own right, merely represent the current use of assets which might ultimately be much more valuable used for other purposes.

As we've stated several times before, the real gem may lie beneath some of Boswell's land: massive amounts of water that may be worth several billion. ("May" being the operative word. Ultimately, in order for value to be realized, assets must be converted, or have a good probability of being converted into cash. Water is a touchy and political subject, especially in California, and given dire predictions about California agriculture by officials in the new administration.)

The Company held it's annual meeting last month in Pasadena, and we recently obtained a copy of the company’s 2009 annual report. Here are the highlights for the year ended June 2009:

Current Price: $477
Avg 3 month volume: 430
Current Dvd Yield: 2.9%
Quarterly Dvd: $3.50/shr
2009 Revenue: $339.034 million (down 7.6%)
Net Income: $22.15 million (+45%)
Diluted EPS/shr: $22.51 (+46%)
Current Assets: $303.407 million
Cash: $2.066 million
Total Assets: $800.701 million
Current Liab: $282.139 million
Short Term Debt: $158.630 million
Long Term Debt: $0
Stockholders Equity: $444.817 million
Shares Out: 976,301
Book Value Per share: $455.6
Market Cap: $455.61 million
Enterprise Value: $612.18 million
Enterprise Value/California Acre: $4311 (estimated)

2009 revenue fell 7.6% to $339 million, while net income jumped 45% to $22.70 (fully diluted). Boswell ended the year with $158.6 million in short-term debt and no long-term debt. Shares currently trade at book value, and yield 2.9%.

Based on just the California land, we estimate Enterprise Value/Acre to be about $4311, and that ignores any value in the Australian land. We continue to be intrigued by the Boswell story, especially at these prices. Buyer beware, though: Shares are difficult to obtain, information is scarce, and there is little liquidity.

Many thanks to Jack Norberg, chairman of Standard Investment Chartered Inc., of Costa Mesa California, who we consider to be one of the foremost experts on high quality pink sheet stocks. Jack attends the Boswell annual meetings, and has been a great help with data, and as a sounding board on ideas.

We've also been compiling Boswell data for several years now, and will be posting 5 years of fundamental data for Boswell in the near future.

*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.

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

2009-10-29T14:08:00.001-04:00

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
Cash/Share:$2.45
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.

Notes From The Fifth Annual Value Investing Congress Day 2

2009-10-22T07:11:00.000-04:00

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.

Notes From The Fifth Annual Value Investing Congress Day 1

2009-10-21T06:21:00.002-04:00

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

Lazare Kaplan Trading Halt (LKI)

2009-10-09T12:56:00.000-04:00

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.

Gannett on the Move

2009-10-06T08:21:00.002-04:00

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
EV/EBITDA: 5.2
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.

Chromcraft Revington (CRC) Update

2009-10-02T08:04:00.000-04:00

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
Ticker:CRC
Price:$1.60
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.

Cheap Stocks 21 Net/Net Index In Positive Territory

2009-09-26T08:32:00.005-04:00

It's been quite awhile since we published an update on the Cheap Stocks 21 Net/Net Index, an experiment we launched in February 2008. The purpose was to test the waters of net/net indexing--a concept we believe to be quite compelling.

At the time of launch, the quality of net/nets was subpar; not nearly as compelling as the opportunities we saw early in 2009. After the initial year, performance was somewhat disappointing, as the index was down 36%, versus -40% for the Russell Microcap Index.

Along the way, we did alter the rules of the index slightly. Instead of replacing comnpanies that were acquired, or filed for bankruptcy, we simply left the index as is, and any funds from acquisition were left in cash. We decided to take a set it and forget approach to what we believe is the first ever net/net index. The original index value was set at 100.

Along the way two companies, InFocus Corp, and Renovis were acquired, which resulted in cash of $4.59. Another company, Replidyne, merged with Cardiovascular systems, which we left in the index. Surprisingly, there has been just one company that has effectively gone under, Handelman, which is in the process of liquidation, and now represents just .01% of the Index.

Below are the current Index constituents, and their weights. Dominated by Adaptec and The Finish Line, this was one of the pitfalls of a cap-weighted index. Due to the experimental nature of this venture, that was fine with us, for now. Perhaps our next version will be equal weighted.

Current Cheap Stocks 21 Net Net Index Constituents

Finish Line Inc(FINL)27.13%
Retail-Apparel

Adaptec Inc(ADPT)22.17%
Computer Systems

Audiovox Corp(VOXX)8.8%
Electronics

Richardson Electronics(RELL)5.16%
Electronics Wholesale

Cash-4.59%

MediciNova Inc(MNOV)4.21%
Biotech

Anadys Pharmaceuticals Inc(ANDS)4.11%
Biotech

Nu Horizons Electronics(NUHC)4.06%
Electronics Wholesale

Pomeroy IT Solutions(PMRY)3.96%
IT

Ditech Networks(DITC)3.04%
Communication Equip

Parlux Fragrances(PARL)2.27%
Personal Products

Emerson Radio Corp(MSN)1.93%
Electronics

FSI International Inc(FSII)1.80%
Semiconductor Equip

Trans World Entertainment(TWMC)1.61%
Retail-Music and Video

Leadis Technology Inc(LDIS)1.58%
Semiconductor-Integrated Circuits

Tandy Brands Accessories Inc(TBAC)1.39%
Apparel, Footwear, Accessories

Cardiovasular Systems(CSII)1.06%
Biotech

Charles & Colvard Ltd(CTHR).62%
Jewel Wholesale

Chromcraft Revington Inc(CRC).51%
Furniture

Handleman Co(HDL) .01%
Music- Wholesale

Performance
The current index value is 100.32, so the Cheap Stocks Net Net Index is up .32% since its February 12, 2008 inception. During that same period, the Russell Microcap Index is down about 22%.

*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.

Catalyst Investment Research- Nobel Learning Communities (NLCI)

2009-09-15T12:36:00.006-04:00

Steak 'n Shake (SNS) Primer: Cheap Stocks Guest Blogger Series

2009-09-01T06:55:00.007-04:00

Today's post is the first(and hopefully not last)in a series of pieces written by guest bloggers. Today's guest is an investment analyst in the Philadelphia area. I've known him for a few years, and during that time, he's demonstrated an affinity for deep value. He's also been a long-time Cheap Stocks reader. When we first discussed his idea (Steak 'n Shake), I hadn't really ever considered the guest blogging concept. But, I'm happy to try new things here at Cheap Stocks, and give readers the benefit of the insights of others.

Today's guest blogger wishes to remain anonymous. This gave me great pause initially, until I remembered that I'd written this site anonymously for several years. He is also in the process of launching his own site Fresh, and we look forward to reading about his ideas.

The Birth of a Holding Company from the Town of Buffetville
Steak ‘n Shake (SNS)…May I take your order?

Management Direction (from 3Q09 10Q)
New management, during the fourth quarter of fiscal year 2008, enacted a change in strategic direction under which we began to operate in a manner designed to generate cash. Our long-term objective is to maximize intrinsic business value per share of the Company. (Intrinsic value is computed by taking all future cash flows into and out of the business and then discounting the resultant number at an appropriate interest rate.) Thus, our financial goal is to maximize free cash flow and return on invested capital. We regard capital allocation as immensely important to creating shareholder value. Steak n Shake is transforming into a holding company. Its basic premise is to reinvest cash generated from its operating subsidiaries into any investments with the objective of achieving high risk-adjusted returns. Pursuant to a resolution of the Company’s Board of Directors on June 17, 2009, all investment and other capital allocation decisions are made for the Company by Sardar Biglari, Chairman and Chief Executive Officer.

Steak and Shake is a restaurant chain with system-wide sales of $700 Million and 486 units (413 company owned, 73 franchised), which is on the verge of evolving into a capital allocation vehicle.

Mr. Biglari (age 31) gained control of Steak ‘n Shake last year (after a drawn out proxy fight) and has since turned the company around by reducing expenses, curtailing capital expenditures, focusing on core products, and lowering prices --- which has resulted in positive free cash flow and increased guest traffic.

A few bullet points on SNS’s financial position as July 1st, 2009:

• Cash and cash equivalents are roughly $38MM

• Long term debt has essentially been eliminated, which should save roughly $1-2 MM/yr in interest costs (not considering the potential merger with Western Sizzlin (WEST – see Additional Information), which would add to the debt load and interest expense)

• $13.7 MM outstanding on a revolving credit facility at a rate of One Month LIBOR + 350 bps

• Operating expenses have been dramatically reduced from the prior period (Nine months ending July 1, 2008) by about $12 MM (according to Biglari there could be more reductions to come)

• Generated $41 MM in cash from operations for nine months ending 7/1/2009, $13 MM of that was related to income tax refunds that were received during the period

• Operating Cash Flows could approach $25-$30 MM annually going forward

• Maintenance Cap Ex. is expected to be roughly $5-6 MM annually (according to Biglari) as new company store openings will not be taking place

• SNS Market Cap = approximately $318 MM as of 8/28/2009

On top of the attractive financial metrics you have another layer of conservatism with management as they are value oriented, risk averse, transparent, shareholder friendly, and have the utmost integrity. In addition, “free cash flow coupons” will be redeployed to the greenest pastures rather than systematically into the business. This creates an added bonus as intrinsic value can grow at an above average rate.

In addition, SNS owns a lot of its real estate (Land and Buildings for 149 locations, 12 improved properties, and 16 parcels held for sale, carried at around $315 MM excluding improvements and depreciation, Capital lease obligations stand at $132 MM), which helps create a floor for the valuation and leaves the potential for resource conversion opportunities. Refranchising is also an option to generate cash and free up capital as SNS has many company owned restaurants.

SNS has historically generated strong cash inflows, but outflows were mismanaged and reinvested back into the company in the pursuit of sales growth with complete disregard for ROIC. A few years ago SNS was generating roughly $60 MM in operating cash flows, but it was squandered away by prior management.

Many successful capital allocaters started out in a similar way; however, not many had the type of cash flows and assets that Mr. Biglari has at his disposal. If you’re wondering if SNS is a viable business with a “moat” then I suggest you read this article written by Roger Ebert. Mr. Biglari recently said that he was even surprised by the strength of the brand after he took over.

Mr. Biglari’s record with his Investment Partnership (The Lion Fund – reminiscent of the Buffet Partnership) has been impressive and provides a paper trail for his capital allocation abilities. As of 12/31/2008, The Lion Fund (TLF) had outperformed the S&P 500 by 17% annually since inception (2000). One thing to note is that SNS and Western Sizzlin (WEST) represent over 50% of The Lion Fund. WEST has the bulk of its shareholder’s equity invested in SNS and Biglari has the majority of his net worth invested in TLF --- Interests are aligned.
So here you have a sizeable cash flow stream (relative to current market valuation), valuable assets, and an iconic brand in the hands of a capital allocator from the town of Buffetville --- who knows?...maybe good things can happen…

Additional Information:
Western Sizzlin, which was first entity where Mr. Biglari gained control, recently had their AGM. An intent to merge Steak and Shake and Western Sizzlin (Company Structure) was announced the same day. Here are the best notes I could find of the meeting.

Timeline of Biglari’s control endeavors.

Letter to SNS Shareholders (10/21/2008)

NYSE Opening Bell --- Same day as AGM and NASDAQ Stock Market Closing Bell (8/13/2009)

Western Sizzlin Corporation Rings The NASDAQ Stock Market Closing Bell --- Those are WEST shareholders who were there for the AGM in the back.

Sardar Biglari's Speech at the NASDAQ Stock Market Closing Bell

Corner of Berkshire & Fairfax Investor Message Board (They have a category dedicated to discussion about Sardar Biglari, Western Sizzlin, & Steak ‘n Shake)

*The author has positions in Western Sizzlin and Steak'n Shake. 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.

Maui Land and Pineapple Update

2009-08-27T09:39:00.004-04:00

If there's anything we like to cover besides net/nets here at Cheap Stocks, it's real estate, more specifically, company's that own relatively large amounts of raw land, commercial property, or a combination of the two. My portfolio is chock full of these companies, from retailers such as Cabela's, to restauarants (Cracker Barrell, Denny's) to shipping company's (Alexander and Baldwin) to agriculture (JG Boswell and Limoneira), to name just a few.

Over the years, I've also sold out of some names as well. Maui Land and Pineapple is a great example. I continue to follow the company, however, looking for a re-entry point, or making a determination of whether I want to take a new position.

MLP, which owns 24,500 acres primarily in Maui, Hawaii, including 10.6 miles of ocean frontage with 3300 of lineal feet along sandy beaches, has fallen on hard times during the recession. The company recently reported a $54 million loss for the second quarter, which included more than $37 million in writedowns, $21.3 million of which represented a decrease in value of the Company’s investment in the Kapalua Bay resort. Clearly, the downturns in real estate prices and resort visitors has been a double whammy for MLP. The stock now trades at $6.22, down 79% from it's 52 week high of $29.69.

While there is still value in MLP, declining cash ($1.5 million) and debt ($60 million short-term, and $35 million long-term) complicate matters for this $50 million market cap company.

Some recent transactions, however, demonstrate the value of some of MLP's land. In March, the company sold its Plantation Golf Course for $50 million in cash. (It's a somewhat complicated transaction, for more detail, see note 10 in the most recent 10Q).

In March 2007, the Company sold the land underlying the Ritz-Carlton, Kapalua hotel. 49 acres, for $25 million in cash and a 21.4% interest in the Hotel JV. As of June 30, 2009, MLP's stake fell to 15.9% of the hotel, due to cash calls in which MLP did not participate.

A good portion of MLP's land is preserved, including the 8,304-acre Pu‘u Kukui Watershed Preserve, which is the largest private nature preserve in Hawai‘i, and the 3,307-acre Honolua-Mokule‘ia Marine Life Conservation District, both located in West Maui. An additional 2000 acres is used in the oompany's pineapple growing operation.

With a current enterprise value of about $145 million, the EV to acres calculation we are fond of works out to just over $5900. Of course, not all of MLP's land is as valuable as the ocean front property, and this calculation does include the preserved land.

We'll keep an eye on this company, it does have it's share of issues, but is interesting nonetheless. Keep in mind that average trading volume is just 35,000 shares/day, and Steve Case owns nearly 43% of the shares.

*The author does not have a position in Maui Land and Pineapple. 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.

Rising Tide Shrinks the Net/Net Universe: Top 5 by Market Cap

2009-08-12T13:39:00.005-04:00

Without a doubt, the recent market "recovery" off March lows has had a dramatic effect in the land of misfit companies; more specifically, the number of net/nets is falling. This is not at all surprising; we've seen it happen several times before when markets recover.

There are still 140 or so net/nets with market caps greater than $5 million, but those at the upper end of the market cap spectrum are few and far between. Case and point, on February 19th, there were more than 320 such net/nets; 38 of which had market caps above $100 million. Currently, there are just 10 above $100 million.

The top 5 Net/Nets by market cap:

Adaptec
Ticker:ADPT
Price:$2.91
Market Cap:$350
NCAV:375
Market Cap/NCAV:.93
Cash/Share:$3.14

Opnext Inc
Ticker:OPXT
Price:$2.20
Market Cap:$195
NCAV:$200
Market Cap/NCAV:.975
Cash/Share:$1.87

Volt Information Sciences Inc
Ticker:VOL
Price:$8.95
Market Cap:$186
NCAV:$200
Market Cap/NCAV:.93
Cash/Share: $6.99

Audiovoxx
Ticker:VOXX
Price:$7.30
Market Cap:$167
NCAV:$212
NCAV/Market Cap:.79
Cash/Share:$2.73
Note: Audiovoxx seems to be a perennial net/net. Has been on the list for several years.

Silicon Graphics
Ticker:SGI
Price:$5.39
Market Cap:$161
NCAV:$200
NCAV/Market Cap:.81
Cash/Share:$5.82

Stay tuned. There's never a dull moment in the wonderful world of net/nets....

*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.

Back in the Good Old USA; Catalyst Investment Research in the Wall Street Journal

2009-08-07T20:56:00.009-04:00

Your Cheap Stocks editor recently returned from a 10 day mission trip to the Dominican Republic. It was truly an eye opening experience. Thirty Americans and several Dominicans worked to clear a small piece of land, so that a church can be built on the site in the town of Haina. We used axes, shovels, pick axes, and machetes- possibly the greatest tool ever, and a must have in every garden shed- to get the job done. I come back very appreciative of the small things that we take for granted: clean, cold water, ice, toilet paper, a toilet that flushes, you name it. What the Dominicans we worked with lacked in material possessions, and many of the things we don't think we can live without, they more than made up for in their joy. Amazing people. As a side note, machete's were so popular with our group, that 18 brand new ones ($8.00 each) came home with us, in our checked luggage.

Hedge Fund Solution's Catalyst Investment Research in the Wall Street Journal

While I was away, the latest from Catalyst Investment Research (The Hedge Fund Solutions product that I've teamed up with Damien Park on), a special report on recent Steel Partners activity, was featured in the Wall Street Journal print and on-line editions.

Finally,it's back to work, and more regular postings. Stay tuned.

The Return of Lazare Kaplan (LKI)

2009-07-08T13:44:00.005-04:00

Long-time Cheap Stocks readers may recall our many postings on diamond company Lazare Kaplan throughout the years. A perennial net/net, its a company that we owned for a 2 year period until February 2008, when we sold out at around $10. Truth is, we made a little money (26%), but the story had gotten dull, and we were convinced that LKI was just one of those companies that would forever trade below net current asset value.

Interestingly enough, in October 2007, Lazare anounced a bizarre 1 for 101 reverse stock split, followed by the buy out of any shareholders owning less than 1 post-split share, and then by an immediate 101 for 1 forward split. This was intended to reduce shareholder roles to save an estimated $25,000 per year in costs. At the time, we thought that the company was aiming to go dark. That has not happened.

In the months following our sale of LKI, the economy all but imploded, and LKI fell to as low as $1.05 per share, about 10% of our exit price. While a diamond company is not a great place to be during a recession, we were compelled to take a position in March, when the stock was at $1.16. We did so at great peril to our capital, given the company's declining performance, and ample debt.

The latest quarter tells the tale quite well. Revenue fell 49% from the same quarter last year, and LKI lost $3.6 million, or $.43 per share, versus income of $3.3 million, or $.40 per share. Clearly, not many diamonds change hands during a deep recession, when discretionary spending falls dramatically, and retailers become reluctant to carry inventory, especially expensive inventory. The company also has a lot of debt for you average $20 million market cap company (less than $10 million when we took our position): $36 million in short-term, and another $40 million long-term which is due in May, 2010. Although the company ended the quarter with $13.2 million in cash, this is a potentially dangerous situation, and not one that we'd normally get involved with.

But Lazare also has something on the books we believe to be quite valuable: namely an inventory of $125.7 million of rough ($36.6 million) and polished ($89.1 million) diamonds. Furthermore these diamonds are carried at the lower of cost or market. While we typically don't care for net/nets whose current assets are concentrated in inventories (or receivables)for that matter, this is the kind of inventory where we are happy to make an exception.

Of course further success, and company solvency for that matter, is dependent on an economic recovery. While diamond prices are starting to show signs of a recovery, the consumer is not there yet, and Lazare has many challenges ahead.

One little known, but interesting fact about LKI is that Chairman of the Board Maurice Templesman is perhaps better know as Jaqueline Kennedy Onassis' long time companion and son Leon serves as President of the company.

Lazare Kaplan Intl
Ticker: LKI
Price: $2.46
Shares Out: 8.25
Market Cap: $20.3
NCAV: $56.3
NCAV/Mkt Cap: 2.77
Tangible Book Value/Share: $11.46
Average daily volume:15,700

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

Catalyst Investment Research- Lion's Gate Entertainment(LGF)

2009-07-03T17:19:00.004-04:00

Hedge Fund Solutions, LLC's unique investment research product highlights companies that could potentially generate outsized returns due to an activist investor's involvement.

Click here to download a complimentary copy of our latest report, an analysis on Lion's Gate Entertainmnent(LGF).

Annual Subscriptions (a minimum of 24 reports/year) are now available. Please message research@hedgerelations.com if you are interested in more information.

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

Anatomy of a New Net/Net Position: Chromcraft Revington

2009-06-18T13:39:00.002-04:00

Buying net/nets is sometimes an ugly business. It's often hard to justify sinking capital into a business that appears to be headed for the scrap heap. But part of being a net/net investor is knowing the risks inherrent in buying companies that have probably already seen their best days, are thinly traded shadows of their former selves; reduced merely to assets that you believe may worth at least a few times the current price.

Chromcraft Revington is a great example. A member of the Cheap Stocks 21 Net Net Index, the Indiana based furniture maker and distributor has seen sales fall for the past 6 consecutive years, from $214 million in 2002 to just $ 99 million in 2008, a 54% decrease. The company lost $26.5 million last year, or $5.79 per share. In the first quarter of 2009, sales dropped 39% from the same period last year, and the company lost another $3.2 million. Clearly, a bad situation made even worse by the economic environment of the past 18 months.

Greenbackd features an excellent analysis on Chromcraft back in April, making the bearish case. At the time, the company was all but out of cash, and Greenbackd laid out their reasons for exiting their Chromcraft position at $.48. Now trading for $.83, one of the few brightspots in the most recent quarter was the fact that the company raised cash, and ended the quarter with $5.2 million, or $.85 per share, primarily through inventory and account receivable reductions.

While the quarter end cash balance is no reason to jump for joy, if you believe that an economic recovery is under way, Chromcraft may have bought itself some time. Just how long is difficult to say; it depends on the company's ability to cut costs, scale back operations, and is dependent on an uptick in the economy.

What's intriguing about Chromcraft beyond the fact that it has no debt on the books (there are some operating leases, however, a total of $4.4 million through 2012), are the company's other assets. Chromcraft owns a 519,000 square foot warehouse/distribution center in Delphi Indiana, and a 560,000 square foot manufacturing/distribution site in Senatobia Mississippi, for a total of nearly 1.08 million square feet of space. The Senatobia site sits on 100 acres. Granted, probably not the most valuable locations for warehouse space, and commercial real estate is currently suffering, but these assets have value, nonetheless, and are unencumbered by debt.

With current assets of $30.6 million, and total liabilities of $10.3 million, Chromcraft's net current asset value (NCAV) was $20.3 million as as of April 4th, 2009, nearly 4 times market cap. Currently trading at just .25 times NCAV, tangible book value per share is $4.94.

Beyond the risks laid out previously, CRC is a tiny company, with very low trading volume. While we recently took a position in CRC, we did so understanding the risks involved. Proceed with caution.

Chromcraft Revington
Ticker:CRC
Price:$.83
Avg volume: 7,000
Market Cap: $5 million
Book Value per share: $4.94
Shares Out: 6.1 million
NCAV:$20.27 million
Market Cap: $5.08 million
NCAV/Market Cap: 3.99

*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. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks following the date of this post.

Catalyst Investment Research- Enzon Pharmaceuticals

2009-06-13T07:26:00.001-04:00

Hedge Fund Solutions, LLC's recently launched investment research product highlights companies that could potentially generate outsized returns due to an activist investor's involvement.

Click here to download a complimentary copy of our latest report, an analysis on Enzon Pharmaceuticals.

Annual Subscriptions (a minimum of 24 reports/year) are now available. Please message research@hedgerelations.com if you are interested in more information.

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

Catalyst Investment Research- Penwest Pharmaceuticals

2009-06-02T07:09:00.003-04:00

Hedge Fund Solutions, LLC's recently launched investment research product highlights companies that could potentially generate outsized returns due to an activist investor's involvement.

Click here to download a complimentary copy of our latest report, an analysis on Penwest Pharmaceuticals.

Annual Subscriptions (a minimum of 24 reports/year) are now available. Please message research@hedgerelations.com if you are interested in more information.

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

Cheap Stocks Interview: Art Patten, President of Symmetry Capital

2009-05-26T15:16:00.003-04:00

We are fortunate to meet a lot of interesting people in the investment business. Whether it's through the Value Investing Congress, Real Money.com (where I am a contributor), Seeking Alpha, fellow deep value bloggers, or Cheap Stock subscribers, there are a great deal of very smart deep value players out there. We first met Art Patten, President of Symmetry Capital, through this website, and have had several meetings with him since then. His insights into the world of deep value micro-cap investing are very interesting, and his investment philosophy is complementary to what we espouse at Cheap Stocks,

We thought he'd be perfect for the first interview ever published on Cheap Stocks, and recently sat down with him.

1. How would you describe your investment approach and philosophy?

Our general investing philosophy is that market efficiency is not some well defined state, but rather a continuously unfolding process that is impeded by various institutional, structural, psychological and other factors. That provides a suitable foundation for both passive and active styles of investing. In our active investing, we're contrarian and opportunistic. We have a deep value, small/micro cap bias, but there are minimal constraints on what we can own, thus the label on our Opportunistic Portfolio. Since value is a function of the price you pay for something versus the cash flows you expect to receive in the future, we have no problem being a bit eclectic in our security selection. If we come across a story that makes sense, or find one that fits into a larger investment thesis, and the related asset appears to be under valued, we'll try to fit it into our portfolio. We're also public policy junkies, and incorporate a fair amount of top down analysis into our process.

Our business philosophy is to work and invest intelligently, to put clients' interests absolutely first, and to try to do the right thing for capital markets whenever possible. Unlike much of the industry, we don't want to work our tails off (or claim to!) in the pursuit of 100 or 200 basis points of long term out performance, even though the compensation tends to be better. To play that game, you have to be willing to convince your clients pay you an active management fee for index like returns or worse. We won't do that. We won't ask clients to pay us an active management fee to play a loser's game on their behalves. To earn our active management fees, we try to stack the odds of success in our favor as much as possible, which we do by exploiting certain institutional and structural market factors – we're attracted to securities with low or no analyst or sell side coverage, low prices and/or market caps, turnaround stories, a recent emergence from bankruptcy, and so on. Those types of factors will tend to keep large buyers, the financial press, and hot dollars at bay while we do our homework. Ideally, we'll find and invest in things that eventually attract those folks, to whom we'll happily sell once our thesis has played out. We're skittish about momentum and crowd following, and if we aren't the first to the party, we at least try to be early, or join in when no one else is willing to, and leave when it starts to get crowded. That's where we tend to find the fattest, juiciest risk premia. It's risky, but over the long run, we think it offers high relative returns, and attractive risk adjusted returns. Our approach probably limits the scalability of what we do, but that's OK. We love the work, and we're confident that we're doing the right thing, both for our clients and for the investment profession. Until we start facing Warren Buffet's problem of being too big to go fishing in small ponds, we'll stick to our knitting.

2. How have you gone about building Symmetry’s Opportunistic Portfolio?

My professional background is in institutional portfolio design and management, so we're always thinking about the portfolio as a whole, about how any one piece fits with all the others, and what the net effects are likely to be. In normal times, we're relatively concentrated, perhaps 10-20 holdings, but in the fourth quarter of 2008 and the first quarter of this year, we saw so many companies go on fire sale that we ended up with quite a few more than that in the portfolio. We've been careful to avoid becoming closet index huggers. Something still has to look pretty cheap for us to invest. We now have around 50 holdings, including some high yield corporate debt and convertibles. The debt securities make up roughly 25% of the portfolio, and most of them mature in 2010-2013, which made sense to us from a top down perspective. We believe that after one or two years of healthy upside, equity markets will encounter some serious chop. If all goes well with the debt holdings, our clients will have some fresh cash to put to work as that paper matures, with a nice return of principal in the meantime. We didn't expect to have that large of a stake in debt securities, but I'm proud to say that we were true to our active strategy's name – we were very opportunistic in late 2008 and early 2009, which led us to credit as well as equity markets.

3. What is your current macro view on the markets, and how has that manifested itself in the construction of this portfolio?

We think a lot about the policy environment when developing our outlook. We find most comparisons to the Great Depression overblown, primarily because today's global monetary system is so different from the one that existed then. If the world's central banks managed to push the nominal price of gold to $500 or less and keep it there, and if globalization came to a sudden screeching halt, then we would look to the early 1930s for guidance. Until then, we're still in a post World War II economy. We've been saying for some time that we're seeing a repeat of the 1970s, with some early 1980s flavors and a few important differences. In the seventies, harmful economic policies were compensated for with easy monetary policy, which caused domestic business cycle and price level volatility, and fostered marginal investment in faster growing places like Germany, Japan, emerging Asia, and others. The current episode is a lot like that period, but with three important differences – globally tradable goods like commodities are now a much smaller factor in the domestic price level, U.S. demographics are much different, and the U.S. is unwinding a massive credit expansion and debt overhang.

Although primarily remembered as a decade of stagflation, the 1970s was actually a decade of fits and starts, with periods of inflation, deflation, rising and falling employment, and volatile financial markets and business cycles. We don't expect to see the same kind of domestic price level volatility this time around for the reasons I just mentioned, but inflation will take a toll in some parts of the world, especially in areas where tradable goods like commodities are still a large component of spending, and where households, and in some cases governments, are under severe financial strain. We wouldn't be surprised to see more food riots in emerging markets in the years ahead, as we did in 2008. And like the 1970s, we definitely expect to see rising volatility in economic output, worldwide. The dramatic contraction in the fourth quarter of 2008 was a powerful example, and the coming years will be a stark contrast to the “Great Moderation” of recent decades. Volatility will be made worse to the extent that policymakers foster economic uncertainty, as this makes investment decisions that much harder for businesses to commit to. Most importantly, if our tax and regulatory competitiveness continues to decline relative to the rest of the world, we are likely to see another relatively jobless recovery in the U.S. That will tend to work against domestic asset values, including the value of human capital, and it will hamper the country's capacity to fulfill on looming commitments like entitlement spending.

That being said, we think that the actual policies that come out of Washington will be better than is sometimes feared, a sentiment that might have contributed to the rally off of the March lows. However, it remains to be seen whether policy will be constructive or destructive on net. For example, while health care reform is properly described as aiming to reduce a significant drag on business, this rarely leads to a broader discussion about how to make the U.S. a more attractive destination for business investment. And it's all but guaranteed that the cost of government as a percentage of GDP will rise in coming years, perhaps decades, to levels not seen in half a century. The policy outlook becomes all the more important when you consider that the Democratic party looks likely to consolidate its control in coming years. That's another contrast to the 1970s. This is due not only to President Obama's charisma, but also to the Republican party's state of utter disrepair. There is a very high probability that Senate Democrats will expand their super majority in the 2010 elections, which leads us to believe that centrist and conservative Democrats will be the best hope for sound and rational economic policies. If they perform reasonably, the Republican party could wander the political wilderness for some time. So there's going to be an ever present risk of the more economically harmful ideas in the Democrats' tent gaining traction.

As far as actual market data go, it looks to us like we are going to see an unexpectedly strong upswing in GDP in coming quarters, but with significant uncertainty beyond 2010. Our biggest concern, which seems to be more than just a remote possibility, is subsequent waves of credit spasms. We don't expect anything like the post-Lehman environment, but if our jobless recovery prediction works out, there's still plenty of residential, consumer, and credit debt that has to be worked out. That's going to require some significant investments by debt servicing businesses, which might not have a positive net value. It's going to divert a good deal of resources that might have been better invested elsewhere. And without expanding or at least normalizing household incomes, we could see a significant wave of chapter seven filings before everything's said and done. We don't know how the ultimate costs will be shared among banks, taxpayers, and private investors, but without meaningful job growth, this overhang will be a stubborn drag on the domestic economy. In parts of the world where those factors are not in place or not as severe, we expect better economic performance in coming years – not decoupling per se, but countries with competitive economic policies and more attractive demographics should outperform in the years ahead.

In our portfolio, this outlook manifests itself in several ways. For example, we aren't shy about investing overseas, including emerging markets, although we currently do so through USD denominated securities like ADRs. We also think exposure to cyclicals like industrials, technology, and energy makes sense given the state of leading indicators and some of the values we're seeing in our favorite areas of the market. We think commodity producers will see a period of renewed strength, if not this year, then in 2010. And we like having debt securities in the portfolio for the diversification and relative stability they should provide, expected returns on principal from depressed levels, and expected cash flows, which we will put to work as new opportunities present themselves.

4. When will you sell out of a name?

When the market has proven us right or wrong. Because of our portfolio mindset, we will trim a position when it exceeds a specified threshold, or bring it back to weight if it has fallen in value and still makes sense to us, as long as the trading expense makes economic sense. But the decision to close a position out entirely is based upon expected upside relative to potential downside, and importantly, on the opportunity cost implied by expected returns on competing opportunities in our universe. We prefer to invest for the long term, but being opportunistic sometimes entails a shorter holding period. If we're lucky enough to have a story work out in short order, we'll close it out. We also consider hedging when cost effective hedges are available, but that's often not the case with the stuff we buy.

5. What are your current top holdings?

A couple of busted but healing convertibles issued by small energy companies make up about 13% of the portfolio combined, and we believe they still have significant upside. We also have about a 6% stake in Royce's Micro Cap Trust (RMT), which we use as a proxy for the portfolio when appropriate, and when available at a discount to NAV. For example, if a retail client has a marginal amount of cash to invest, and they pay per trade rather than per share commissions, we'll invest in a proxy rather than across multiple portfolio names, as that can generate significant savings for a client. Our largest single equity positions are in Thermadyne (THMD) and Himax (HIMX), at roughly 5% and 4%, respectively.

6. What led you to take positions in Thermadyne and Himax?

Thermadyne is a Saint Louis based global producer of welding and cutting tools and equipment. It's been a long term holding, and a company that I've personally followed since they emerged from Chapter 11 bankruptcy in 2003, after a string of highly leveraged and poorly integrated acquisitions in the 1990s. One of our favorite return recipes is a company emerging from oblivion, completely off of Wall Street's radar, with a product or service that's likely to see reasonable demand or better, and a management team capable of executing a lasting turnaround. Thermadyne definitely meets those criteria in our view, although the shares have taken us on a bit of a roller coaster ride, and they're not without risk going forward. As an industrial company, they are heavily exposed to the business cycle, especially steel demand, and they carry a good deal of leverage, with assets of three times book value, and debt to market cap over five. However, the forward looking market indicators we watch are supportive of a cyclical recovery, and we believe their international sales will continue to grow – they were up 15% in 2008 - and that they should see some benefit from domestic infrastructure expenditures beginning in 2010. Most importantly, their operational trajectory continues to impress us. Since 2004, sales have increased at 7.5% per year, cash flow from operations by an average of $7.75M annually, despite capex rising at 6% per year, and the most recent quarter's free cash flow yield was around eight percent. Performance wise, they still have some catching up to do to with their closest competitors. But at a price to sales ratio of 0.10, and with their current management team, we believe they have plenty of raw material to work with.

Himax is a Taiwan based provider of flat screen video display components. This is a somewhat contrarian play on flat screen demand, highly speculative, in a very competitive industry, and with some complex interrelationships between a key supplier and the CEO, and customers who are also minority investors. We like that the company has consistently invested in R&D in an attempt to expand into other product markets, including projection and other displays. And while the trailing dividend yield is probably not indicative for the coming year, we feel that it does provide meaningful information about management's and the board's dividend philosophy and the likely direction of future dividend policy. The voucher component of the Chinese government's stimulus plan is also expected to be supportive of the industry, although we like the story regardless. We could have bought a stock like Corning (GLW) as a “safer” blue chip play on flat panel displays, but Himax was a better fit for our approach – it's much smaller, and appeared to be more deeply undervalued and offer more attractive cash flows to shareholders – it's also an ADR selling in low single digits, which meant fewer institutional buyers to compete with as we entered the position.

7. Are you seeing any opportunities in the market today, and if so, where?

Nothing like we saw in March, but there are still opportunities. Equities as an asset class are more compelling than they've been in years, and based on early cycle indicators, we think that small cap equities are in a sweet spot. We also think there are still plenty of interesting net-net and real asset ideas out there, as you continue to highlight.

8. What do investors need to know about investing in deep-value micro cap companies?

Be skeptical, do your homework, and know how much you can afford to risk. That last one is really critical. We're careful to assess suitability for individual investors in our Opportunistic Portfolio, as this isn't the kind of approach that people should put all of their assets into. Ideally, people will only invest in volatile securities with surplus funds, funds that exceed their current and future liabilities. If people insist on speculating, being skeptical and doing the homework become even more critical.

*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.

Notes From Day 2: Value Investing Congress West

2009-05-14T07:01:00.003-04:00

William Waller & Jason Stock-M3 Funds
The U.S. Banking Sector: Chaos & Opportunity

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:
• Significantly undercapitalized
• Credit quality still deteriorating
• More bank failures
• Unemployment rate will continue to rise
• Commercial real estate is in trouble
Stock believes that there will be in excess of 150 bank failures in 2009. Stull, he and Waller are still 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 long name Waller and Stock like: First of Long Island (FLIC: $21.00)
• 140% of tangible book
• 11 times LTM earnings
• Excess Capital; 8.5% tangible equity/assets
• 68.5% loan to deposit ratio
• $ 1billion high quality deposits with 1% cost
• Positive credit quality, just .01% non-performing loans
• Hidden value in branch ownership
• Near-term catalyst- R2000 index addition
• Could be worth twice current price

Scott Klein-Beach Point Capital Management
Opportunities in Stressed and Distressed Credit

Beach Point, which has $3.75 billion in assets, specializes in high yield bonds, distressed debt, and other credit related strategies. With the high yield market currently yielding 15-16%, Klein believes that the distressed market is currently offering opportunities of a lifetime.

Despite the acknowledgement that defaults will continue to rise, Klein sees this as a lagging indicator, and believes that continued forced selling of distressed bonds will create continued opportunity in an extremely inefficient market.

According to Klein, the high yield market has gained an average of 35% in the 2 years following monthly declines of 5% or more. Such declined have only occurred four times, with the latest, and most severe in late 2008.
With the average high yield bond trading at 70 cents on the dollar, with an 8% coupon, Klein sees ample opportunity in this area, even if the worst default scenarios we’ve ever experienced (Great Depression) are repeated.

J. Carlo Cannell –Cannell Capital
Hydrodamalis Gigas

Carlo Cannell always manages to surprise, and this Congress was no different. He brought with him a co-presenter Karthik Panchanathan, a graduate student in Biology from UCLA who very articulately presented interesting examples of animals that had become extinct, or were on their way there. Before the audience scratched their head in wonder, Cannell very interestingly tied these situations to companies and industries that had followed a similar path.

Who knew that Hydrodamalis Gigas (the presentation title) is actually the scientific name for the Steller Sea Cow, a huge manatee-like animal that went extinct in 1741? Cannell tied the plight of this animal to that of the restaurant business: both had trouble adapting to environmental changes, the Steller Sea Cow faded into oblivion, and so have many restaurant chains.

The main point of Cannell’s presentation was that the laws of nature also apply to Wall Street, and investors would be wise to look for the “cockroaches” of companies- those that can survive nearly any situation. Look for businesses less prone to predators or extinction, says Cannell

Currently, Cannell finds the following industries attractive: Oil and gas, agriculture, death care, precious metals, energy service.

Whitney Tilson and Glenn Tongue-T2 Partners
An Update on the Mortgage Crisis and a Discussion of Wells Fargo

The conference concluded with Whitney Tilson and Glenn Tongue.

Last year, conference co-founder Tilson and Tongue, his partner at T2, hit the nail squarely on the head with their bleak outlook for the housing and mortgage markets; it was one of those sobering presentations that you hoped would not come to fruition. But it did, and the T2 guys were astonishingly accurate both with their macro views, and list of shorts and longs.

This year they put it in print with their book More Mortgage Meltdown: 6 Ways to Profit in These Bad Times, which was the basis for much of their presentation. If their scenario continues to unfold as suggested, there is much more pain to come in housing land.

The reams of statistics and data they presented seem difficult to dispute, and they put it all in such easy to understand terms that they are well on their way to becoming the de facto experts on the crisis.

All is not lost though, this will not morph into the Great Depression in their view, and they still see opportunities in the markets, both on the long and short side.

Tongue presented the bullish case for Wells Fargo (WFC), which they were short earlier this year. Now they are long WFC:
• Capable of earning $3.35-$4.26/share, $17.1-$20.1 billion net
• Worth $40-$50/share at a multiple of 10-12
• Business has enormous yield spreads
• Buffet bought for his personal account
• The Wachovia portfolio already significantly marked down

Incidentally, waiting for the 10:35 flight back to Philly post Value Investing Congress West has become one of my opportune times to catch up on some reading. Last year, it was David Einhorn’s Fooling Some of the People All of the Time, a VIC giveaway, that I could not put down. This year it was Tilson and Tongue’s just released book (the give- away at his year’s VIC). With all of the confusion about the genesis of the housing crisis, this book is a must-read.

*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.

More Notes From Value Investing Congress West: Day 1

2009-05-13T12:38:00.003-04:00

Zeke Ashton-Centaur Capital Partners
Surviving the Worst Case: Risk Management and Value Investing

A veteran of several Value Investing Congresses, Zeke Ashton provided useful insights into some of the pitfalls that befell value managers in 2008, and how to avoid them in the future.

Aston suggested that there are two approaches to value investing:
1. Home Run Portfolio- Highly concentrated portfolio, where identifying big winners is crucial to success
2. High Probability Portfolio- Less concentrated (15- 30 stocks), where avoiding big losers is critical to success. This approach relies on frequency of winners versus losers.
While Ashton did not suggest that either approach is inherently better, the approach used must be tailored to the risk management approach used by the manager.

Ashton prefers the high probability method, and warns against the following:

• Excessive Concentration
• Excessive exposure to one factor or theme
• Excessive leverage at the portfolio or security level (companies that are too highly leveraged)
• Political Risk- risk of changing laws, tax codes
• Liquidity Risk
• Risk from shorting- avoid blow-up risk

One of Ashton’s favorite ideas is Alleghany (Y), a holding company in property and casualty insurance:
• Long term record of value creation
• $4.1 billion investment portfolio
• Book Value is $277/share, currently trades at $261
• $351 million in share buybacks in 2008, all at below book value
• Fared well in 2008 despite gulf hurricanes, and portfolio damage due to market conditions- book value fell less than 5%
• Believes company is worth 1.5 times book, or $360 per share

Charles De Vaulx- International Value Advisors
A Cautious and Opportunistic Approach to Global Investing: Where Are We Finding Value Opportunities in the World Today?

First Eagle veteran De Vaulx, who left the firm in 2007, recently launched his new firm, International Value Advisors. In 2008, his fund was down just 12%, putting him near the top in terms of performance in a terrible year.

De Vaulx’s philosophy and approach to international investing:
• Cautious and opportunistic
• Firm is owner operated
• “Eat their own cooking” employees have $30 million invested in funds
• Long only across market cap spectrum
• Main objective- to not lose money
• Have high yield exposure

In terms of international investing, De Vaulx believes that:
• The diversification argument is weakening
• The real attraction is that international markets remain less efficient than US markets.
• In terms of accounting, disclosure is more reliable outside the US
• Corporate governance outside the US is weaker; a work in progress

De Vaulx’s current allocations reflect his view that there are greater opportunities outside the US in the equity markets, and opportunities in high yield bonds:

Equities: 33.1% (6.4% US, 15% Asia, 11% Europe)
High Yield Bonds: 34%
Gold: 8%
Cash: 23%
Energy and other: 1%

De Vaulx believes that while the overall outlook remains bleak, pockets of value have emerged. One of his favorite ideas is Nestle, which he sees as cheap and safe, with its food businesses trading at 9 times EBIT.

Brian Gaines-Springhouse Capital
Low Risk Bets in a Risky World

Brian Gaines is a first time presenter at this year’s Congress. Gaines’ fund, which was down 10% in 2008, employs both longs and shorts.

Long attributes:
• 20% maximum loss
• 50% upside in one year
• 5-10 great ideas, 70-90% long, 5-15% positions
• Willing to hold cash
Short attributes:
• 10% loss over time
• 30% upside in one year
• Small positions, 1-3%, bases on opportunities

Gaines is currently finding few ideas in the mid and large cap space, but is finding some small and micro cap names with strong balance sheets. One of his current ideas is Modus Link (MLNK), formerly CMGI.

• Supply chain management company
• $135 mm in cash, $30 mm in venture investments (at cost)
• Specialized packaging (Sandisk is one large customer)
• Largest player in outsourced space
• Has NOL carry forwards of $2 billion
• Currently trading at $4.00, has $4.70 in liquid net working capital
• Gaines believes base case value is $7.00 per share, could be as high as $20.

John Burbank-Passport Capital
China and the US Dollar: “Should We See Other People?”

Burbank stated that China is the world’s marginal provider of liquidity. In fact, China now holds 24% of US government debt. But given the amount of money the US has been printing, and the low interest rates on the debt, China may have better options for its capital beyond the status quo, including:
• Diversification-G8 becomes capital allocators, still dependent on exports
• Invest in itself-support internal growth, less dependence on exports
• Invest in what the country needs- natural resources including iron ore, potash, soybeans, copper and crude oil
Burbank sees little incentive for China to continue to but massive amounts of US Treasuries, and believes that they will indeed begin investing at home. This will allow for:
• Greater stability
• New sources of growth
• Less reliance on imports

Burbank also made the case for gold bullion, and believes that China, which currently holds about 31 million ounces, will be a big buyer of the precious metal.

In terms of other investment ideas, Burbank likes fertilizer companies Mosaic (MOS), and Potash (POT),

In conclusion, Burbank:
• Questions FIAT money
• Believes gold will continue to surge
• Believes there will be tailwinds for natural resources and emerging markets currencies
• Suggests China’s growth will become increasingly independent

Guy Spier-Aquamarine Capital Management
Investing in Global Education-From China to Brazil

Spier began with investment lessons learned in 2008 :
• Pay attention to concentration of risk- credit, geographic, customer
• Pay attention to hidden leverage
• Tangible versus intangible assets
• Importance of proper position sizing
• Always carry lots of cash

Spier ‘s believes that there are tremendous opportunities in for-profit education companies, especially in countries such as Brazil, where four such companies have gone public. Since Brazil does not have a system of community college, and there’s great demand for post-secondary education, he believes companies in this space will prosper.

His favorite name here is Estacio (Bovespa: ESTC3), which currently has 205K undergraduate students. Demand for graduates is high, as more than 19,000 companies are currently recruiting from the school. There may also ultimately be opportunities in India at some point as well. China also looks interesting, and here, he singled out Raffles Education Corp, which has done a tremendous job in training Chinese students to speak English.

David Rabinowitz-Kirkwood Capital
Stock-picking for the Scared and the Ignorants: Notes from an Expert

Atlanta based Rabinowitz focuses on restaurants and retailers primarily, and believes that having industry expertise is helpful in spotting and seizing opportunities. He does not currently own any names in either category, however, because he does not believe that valuations in these sectors are compelling.

Investment Process and Philosophy:
• Focuses on potential downside of an idea instead of upside
• Holds lots of cash
• Very patient, takes his time finding ideas and initiating positions

Rabinowitz favorite investment idea is Lancashire Holdings (LSE: LRE.L) a Bermuda based specialty insurer:
• 1.27 billion market cap
• Founded in 2005
• 86% of business is primary insurance; some reinsurance
• CEO Richard Brindle has a strong track record
• Conservatively run investment book: +3.1% return in 2008
• Short duration (1.8 years), $ 2billion portfolio, most in government bonds, $300 million in corporate, no equities
• Company trades at book
• Has returned 397 million in capital in 2007 and 2008
• Conservative in loss estimates
• 2009 pricing will be up 28-150% on its lines
• Worth 1.5 times book

Jed Nussdorf-Soapstone Capital
In Search of Pricing Power

Another first time VIC presenter, Nussdorf looks for businesses that have pricing power:
• Industries with inelastic demand
• Static or decreasing supply, enabling prices to hold or rise
• Believes that currently there is excess capacity in many industries, where there is little or no pricing power

Nussdorf believes that re-insurance is one of the few industries where demand is up, and there is pricing power. In fact, capacity has actually dropped as insurers suffered through a catastrophic 2008 (third worst year in history), and saw their investment income drop due to terrible market conditions.

Nussdorf likes the following names because of their clean investment portfolios, and low portfolio durations:
• Renaissance RE Holdings (NYSE:RNR)
• Validus Holdings (NYSE:VR)
• Lancashire Holdings (LSE:LRE.L)

*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.

Notes From The 4th Annual Value Investing Congress West

2009-05-13T11:44:00.004-04:00

Over the next couple of days, I'll be posting notes from the Value Investing Congress, which I attended last week in Pasadena. Once again, this was a fantastic conference. I walked away from it with some very interesting investment ideas, as well as cautions about the days ahead. One of the greatest aspects of the VIC is the opportunity to meet other investors and portfolio managers, and to share ideas, perspectives and philosophies. Thanks to Congress founders John Schwartz and Whitney Tilson for once again putting on a first class event.

Fourth Annual Value Investing Congress West Day 1: Part I
David Nierenberg, D3 Family Funds
Not Dead Yet: Surviving Today to Triumph Tomorrow

David Nierenberg, who also appeared at the New York VIC back in October, led off the first day of the Congress. Interestingly enough, today we learned what D3 stands for: David’s Dirty Dogs. Nierenberg is a long-term investor, with an average holding period of 7 years, in the microcap space.

• Takes large stakes, average 10-15%
• Concentrated portfolio of 10 to 12 names
• Average market cap $300 million
• Seeks multiples, not percentages in terms of returns
• Works constructively with management and boards in order to improve companies
• Believes uncertainty does not equal risk of loss
• Looks out longer than the Street is willing to
• Believes leverage is lethal, and generally, will not use

Nierenberg’s presented his top holding, Move Inc (MOVE), in which D3 is the largest shareholder with an 18.4% position. Move Inc operates in the online media space, and owns Realtor.com, and Nierenberg believes that it will be a beneficiary of the decline in the newspaper industry, and a shift to more real estate internet advertising:

• Leading market share in their niche
• New CEO Steve Berkowitz, an industry veteran, who oversaw the buyout of Ask Jeeves, at more than 30 times the price from when he assumed leadership
• Relationship with NATIONAL Association of Realtors
• Recovering from years of bad management, fraud, and a history of losses
• Currently trading at TK, EV of $195 million
• Cash/Short term investments TK million, no LT debt
• Poised to be beneficiary of internet real estate advertising/bottoming housing market
• Company recently filed 13D asking management to reduce share count by 100 million shares
• Has a long-term price target range of $5.80-$14.50
Nierenberg also discussed Move at the last Congress. At the time shares were trading for $1.60, and are up 41% since.

Igor Lotsvin and David Chu- Soma Asset Management
Banks: Have We Seen the Worst Yet?

Newcomers to the Congress, Lotsvin and Chu launched their firm in December 2007, and had strong returns in their first full year (+26.1% net of fees). Their investment process is predicated on:
• Value bias
• Invest across the capital structure
• Long-term bias

Lotsvin painted an extremely sobering outlook for the banking system, credit and housing markets, suggesting that:
• Bank failures will accelerate, the worst of the banking crisis is yet to come
• Foreclosures will increase
• Commercial real estate is the next shoe to drop
• Construction loans will continue to go bad
• FDIC deposit insurance is running on empty ($16 billion left)

They presented the short case for Zion Bank, due to the following:
• Business in several bubble states (CA,NV,AZ)
• Credit deteriorating quickly
• Non-Performing assets grew 50% quarter/quarter
• Reserves are dropping
• Large degree of exposure to construction loans

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

Catalyst Investment Research highlights Chemed (CHE)

2009-05-11T07:32:00.002-04:00

Hedge Fund Solutions, LLC's recently launched investment research product highlights companies that could potentially generate outsized returns due to an activist investor's involvement.

Click here to download a complimentary copy of our latest report, an analysis on Chemed Corp.

Annual Subscriptions (a minimum of 24 reports/year) are now available. Please message research@hedgerelations.com if you are interested in more information.

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

Catalyst Investment Research highlights Former Net/Net Tecumseh Products (TECUA,TECUB)

2009-04-24T11:54:00.003-04:00

Hedge Fund Solutions, LLC recently launched an investment research product dedicated to uncovering undervalued publicly traded companies that could have the potential to generate outsized returns due to an activist investor's involvement.

Click here to download a complimentary copy of our latest report, an analysis on Tecumseh Products.

Annual Subscriptions (a minimum of 24 reports/year) are now available. Please message research@hedgerelations.com if you are interested in more information.

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

Despite Recent Market "Run-up", Still plenty of Net/Nets

2009-04-15T06:43:00.011-04:00

Markets have recently bounced nicely off their March lows, a situation which might typically create a "rising tide lifts all boats" effect. But while the Russell Microcap Index is up more than 30% from March 9th, there are still plenty of net/nets.

A recent, un-scrubbed screen revealed 325 companies with market caps greater than $5million trading below their net current asset value. While that's more than 100 fewer than the 433 we revealed in our March 2nd post, there's still plenty of opportunity in the land of the lost.

Here are the top 5 Net/Nets by market cap:

Ingram Micro
Ticker: IM
P/E: NA
Market Cap: $2.08 billion
NCAV: $2.247 billion
Mkt Cap/NCAV: .93
Price: $12.85
Cash/Share: $4.7

Skechers
Ticker: SKX
P/E: 6.5
Market Cap: $357 million
NCAV: $394 million
Mkt Cap/NCAV: .91
Price: $7.72
Cash/Share: $2.5

Adaptec
Ticker: ADPT
P/E: 49
Market Cap: $335
NCAV: $370
Mkt Cap/NCAV: .91
Price: $2.75
Cash/Share: $.8

Imation
Ticker: IMN
P/E: 7
Market Cap: $336
NCAV: $399
Mkt Cap/NCAV:.84
Price: $8.91
Cash/Share: $2.6

Facet Biotech
Ticker: FACT
P/E: NA
Market Cap: $240
NCAV: $315
Mkt Cap/NCAV: .76
Price: $9.75
Cash/Share: $16.6

*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.

Catalyst Investment Research- Consolidated Tomoka Land

2009-04-09T10:06:00.005-04:00

Hedge Fund Solutions, LLC recently launched an investment research product dedicated to uncovering undervalued publicly traded companies that could have the potential to generate outsized returns due to an activist investor's involvement.

Click here to download a complimentary copy of our latest report, an analysis on Consolidated Tomoka Land.

Annual Subscriptions (a minimum of 24 reports/year) are now available. Please message research@hedgerelations.com if you are interested in more information.

*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.

Rest In Peace, James G Boswell II

2009-04-08T06:57:00.004-04:00

James G. Boswell II, a major focus of the great book on the JG Boswell farming empire entitled "The King of California: J.G. Boswell and the Making of a Secret American Empire" passed away last Friday at age 86. Here's the obituary from the LA Times (thanks to Cheap Stocks reader Scott Hall for this link).

Boswell presided over JG Boswell, Co (Ticker:BWEL), one of the most interesting quasi-publicly traded companies that most investors have never heard of, as chairman, president and CEO from 1952 until 1984. He was still serving on the board of directors at the time of his death.

For more on the company, see our most recent BWEL post.

*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.

Catalyst Investment Research- Avigen Inc

2009-03-25T15:20:00.010-04:00

Two week's ago, Damien Park (of Hedge Fund Solutions and the Activist Investing Blog)and I announced the formation of Catalyst Investment Research, a research product that will combine shareholder activism with deep value fundamental analysis.

Click here to download a complimentary copy of our latest report, an analysis on Avigen Inc.

Annual Subscriptions (a minimum of 24 reports/year) are now available. Please message:research@hedgerelations.comif you are interested in more information.

*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.

JG Boswell Update: 2008 Annual Report

2009-03-19T16:45:00.004-04:00

Shares of cotton and farming giant JG Boswell, owner of an estimated 142,000 California acres, and another 30,000 in Australia, have been hit hard this year, just like most other companies. Shares can now had for $435, (if you can get them that is; average daily volume is just 322), nearly 60% below the 52 week high of $1000.

The appeal of Boswell (BWEL) is not in its farming operations, which although impressive in their 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 of 35,000 acres in Tulare County California which may have a 10 year life. The Eastlake project, a master planned community in Chula Vista, California is near completion.

But, as we've stated several times before, the real gem may lie beneath some of Boswell's land: massive amounts of water that may be worth several billions. ("May" being the operative word. Ultimately, in order for value to be realized, assets must be converted, or have a good probability of being converted into cash. Water is a touchy and political subject, especially in California, and given dire predictions about California agriculture by officials in the new administration.)

We recently obtained a copy of the company’s 2008 annual report, and here are the highlights for the year ended June 2008:

Current Price: $435
Current Dvd Yield: 3.2%
Quarterly Dvd: $3.50/shr
2008 Revenue: $366.494 million
Net Income: $15.31 million
Diluted EPS/shr: $15.57
Current Assets: $205.471 million
Cash: $4.451 million
Total Assets: $729.75 million
Current Liab: $218.678 million
Short Term Debt: $147.261 million
Long Term Debt: $0
Stockholders Equity: $463.349 million
Shares Out: 974,132
Book Value Per share: $475.7
Market Cap: $423.75 million
Enterprise Value: $566.7 million
Enterprise Value/California Acre: $3991 (estimated)

2008 revenue rose 8% to $366.5 million, while net income jumped 9.6% to $15.57 (fully diluted). Boswell ended the year with $147 million in short-term debt and no long-term debt. Shares currently trade at just .91 times book value, and yield 3.2%.

Based on just the California land, we estimate Enterprise Value/Acre to be about $3991, and that ignores any value in the Australian land. We continue to be intrigued by the Boswell story, especially at these prices. Buyer beware, though: Shares are difficult to obtain, information is scarce, and there is little liquidity.

*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.

Announcing: Catalyst Investment Research

2009-03-10T16:29:00.015-04:00

Damien Park, the President and CEO of Hedge Fund Solutions, LLC, a Philadelphia based firm focused on issues related to shareholder activism, and I are teaming up to launch Catalyst Investment Research, a new research product that will combine shareholder activism, with deep value fundamental analysis.

Each report will explore an interesting activist situation with a catalyst event. Damien has built a solid reputation in this area of expertise, and is a frequent speaker at related conferences. He currently offers a free weekly product, Catalyst Equity Research, which highlights current activist situations, and The Offical Activist Investing Blog.

In each case, the research will strive to provide readers with: (1) the activist's investment thesis and analysis, (2) the activist's track record for improving value in targeted companies, (3) the likelihood that the activist investor will achieve their goals in this circumstance, and (4) an in-depth analysis of the company's financial health irrespective of the activist's involvement.

For additional information about the subscription-based product email research@hedgerelations.com.

Click Here to download a complimentary copy

Value Investing Congress West, May 5th and 6th

2009-03-10T07:44:00.005-04:00

I'll be heading back to Pasadena in early May, to attend my fourth session of the Value Investing Congress. This has become the premier forum for value investors; an extremely well-run event that attracts quality speakers, offering compelling insights and actionable ideas. What's more, I've found the presenters to be approachable both during and after the Congress.

There's even more reason to attend this year given the markets implosion. That may sound counter-intuitive, but I believe that there's a great deal of value to be had now, for patient investors. This market has decimated some companies to the point that they've become "stupid" cheap, and there's no better event to gather intelligence from some of the greatest value investors.

The folks at The Value Investing Congress have been kind enough to extend a discount -$100 off the early bird rate for a total savings of $1300- to Cheap Stocks readers. If you are intested in attending, please click here use discount code P09CS1, which will be valid until March 15th.

Hope to see you in Pasadena!

Fertile Environment For Net/Nets

2009-03-02T12:32:00.006-05:00

As the market doldrums continue, hope springs eternal that we will hit a bottom. But, when? Investors continue to receive their daily doses of bad news, continue to see their portfolio balances diminish, and continue to lose hope; all of which is a self fulfilling prophecy of sorts, driving the markets even lower.

The new administration is not helping matters. The hope and optimism we were bombarded with during the campaign has given way to fear, uncertainty, dire predictions if certain legislation is not passed, and an almost complete lack of confidence among consumers and investors alike. There has been no bounce; the S&P 500 is down 30% since election day, and 12% since inauguration day. With all the big spending plans, Mr. Market is signaling fear that the new agenda will not have a positive outcome. Without confidence, without hope that the recession will end and that there are better days ahead, we'll continue to be whipsawed.

Meanwhile, the list of companies trading below their net current asset value continues to rise to levels we have not seen since the tech bubble burst. As of last count there were:
433 companies with market caps greater than $5 million trading below their NCAV, including:
58 above $100 million
24 above $200 million

The difference between what we are seeing now and post tech bubble, is that today's net/nets are of much higher quality then what we saw in the early 2000's. There are dozens of profitable companies, many are loaded with cash on a relative basis, and more than we've ever seen trading below 2/3 of NCAV. In the coming weeks, we'll reveal some of the more interesting names in various categories, starting with:

Top 5 Profitable Net/Nets by market Cap

Tech Data
Ticker: TECD
P/E: 7
Market Cap: $816
NCAV: $1.415 billion
Mkt Cap/NCAV: .58
Price: $16.29
Cash/Share: $7.7

Signet Jewelers
Ticker: SIG
P/E: 4
Market Cap: $641
NCAV: $977
Mkt Cap/NCAV: .66
Price: $7.51
Cash/Share: $.4

OM Group
Ticker: OM
P/E: 3
Market Cap: $450
NCAV: $492
Mkt Cap/NCAV: .91
Price: $14.78
Cash/Share: $8.11

K-Swiss Inc
Ticker: KSWS
P/E: 10
Market Cap: $335
NCAV: $353
Mkt Cap/NCAV: .93
Price: $9.57
Cash/Share: $8.4

Skechers
Ticker: SKX
P/E: 5
Market Cap: $277
NCAV: $303
Mkt Cap/NCAV: .91
Price: $5.98
Cash/Share: $2.5

*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.

Cheap Stocks 21 Net/Net Index Completes First Year

2009-02-13T21:27:00.004-05:00

Last year at this time, we rolled out what we believed to be the first index comprised of companies trading below their net current asset value. It was an experiment to test the notion that "passive" management of net/nets could generate above-market returns.

The CS21 Net/Net Index was down about 36% in its first year, versus -40% for the Russell Microcap Index. Hardly proves our theory about the relevance of applying a scatter gun approach to net/net investing, but we'll continue to let this index run as is rather than rebalancing, in order to judge the results over a longer time horizon.

Just two of the 21 companies in the index were in positive territory during the period, as The Finish Line rose about 80%, and Anadys Pharmaceuticals was up 280%. During the year, one company, Renovis, was acquired, and we decided not to replace it in the index.

We still plan on rolling out an additional net/net index in the near future, and are finding the quality of names much better now than those available at this time last year.

For more on the CS21 Net/Net Index, below is the original post we ran at this time last year.

February 15th 2008

Introducing the Cheap Stocks 21 Net/Net Index: The First Index of Companies Trading Below Net Current Asset Value

We’ve designed what we believe to be the first index of companies trading below their net current asset value. The main purpose of this index will be to track a passive portfolio of net/nets. This index is chock full of small companies many of which have been beaten down, and some of which may not survive. We’ve developed this index primarily as an attempt to gauge net/net performance using a basket approach.

The Cheap Stocks 21 Net/Net Index is a market cap weighted index comprised of companies that met the following criteria at index inception on Tuesday, February 12th, 2008:

•Market Cap is below net current asset value, defined as:
Current Assets – Current Liabilities – all other long term liabilities (including preferred stock, and minority interest where applicable)

•Stock Price above $1.00 per share

•Companies have an operating business; acquisition companies were excluded

•Minimum average 100 day volume of at least 5000 shares (light we know, but welcome to the wonderful world of net/nets)

*Index constituents were selected by market cap. The index is comprised of the “largest” companies meeting the above criteria.

The Index is naïve in construction in that:

•It will be rebalanced annually, and companies no longer meeting the net/net criteria will remain in the index until annual rebalancing.

•Only bankruptcies, de-listings, or acquisitions will result in replacement

•Does not discriminate by industry weighting—some industries may have heavy weights.

Cheap Stocks 21 Net/Net Index Constituents and Weights (%, rounded):

Adaptec Inc(ADPT)18.72%
Computer Systems

Audiovox Corp(VOXX)12.20%
Electronics

Trans World Entertainment(TWMC)7.58%
Retail-Music and Video

Finish Line Inc(FINL)6.30%
Retail-Apparel

Nu Horizons Electronics(NUHC)5.76%
Electronics Wholesale

Richardson Electronics(RELL)5.09%
Electronics Wholesale

Pomeroy IT Solutions(PMRY)4.61%
IT

Ditech Networks(DITC)4.31%
Communication Equip

Parlux Fragrances(PARL)3.92%
Personal Products

InFocus Corp(INFS)3.81%
Computer Peripherals

Renovis Inc(RNVS)3.80%
Biotech

Leadis Technology Inc(LDIS)3.47%
Semiconductor-Integrated Circuits

Replidyne Inc(RDYN)3.31%
Biotech

Tandy Brands Accessories Inc(TBAC)2.94%
Apparel, Footwear, Accessories

FSI International Inc(FSII)2.87%
Semiconductor Equip

Anadys Pharmaceuticals Inc(ANDS)2.49%
Biotech

MediciNova Inc(MNOV)2.33%
Biotech

Emerson Radio Corp(MSN)1.71%
Electronics

Handleman Co(HDL)1.66%
Music- Wholesale

Chromcraft Revington Inc(CRC)1.62%
Furniture

Charles & Colvard Ltd(CTHR)1.50%
Jewel Wholesale

The initial value of the Cheap Stocks Index was 100, as of the close on 2/11/08. Initially, we’ll report the index value on a weekly basis.

*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.

Retail Net/Nets Part II

2009-01-23T07:07:00.005-05:00

The list of net/nets seems to grow longer every day, especially in retail land. This will, in all likelihood, continue as consumers hunker down, retail sales drop further, and market caps suffer as a result. In the end, once the sun comes out again, it's likely that the number of store closing and bankrutpcies will leave the survivors in very good shape. Who on our list of retail net/nets will survive? Very hard to say. We'll leave it at that for now.

Stein Mart
SMRT
Market Cap: $54.2
NCAV: $105.3
Total Debt: $100
Price: $1.28
Cash & Short Term MS: $64.8
Quick Ratio: .6

Shoe Carnival
SCVL
Market Cap: $102.3
NCAV: $133.8
Total Debt: $0
Price: $8.04
Cash & Short Term MS: $9.1
Quick Ratio: .3

Cache
CACH
Market Cap: $26.5
NCAV: $26.8
Total Debt: $4.7
Price: $2.00
Cash & Short Term MS: $25.6
Quick Ratio: 1.6

PC Connection
PCCC
Market Cap: $142.1
NCAV: $153
Total Debt: $4.5
Price: $5.25
Cash & Short Term MS: $46.8
Quick Ratio: 1.6

Tuesday Morning
TUES
Market Cap: $56.6
NCAV: $149.9
Total Debt: $36.5
Price: $1.33
Cash & Short Term MS: $4.9
Quick Ratio: .2

*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.

Retail Net/Nets Part I

2009-01-20T07:45:00.008-05:00

Given the bad retail numbers we've been seeing- December retail sales were down 2.7% well worse than the -1.2% consensus- it's no wonder investors are shunning retailers these days. The problem is, so are consumers, given the crisis in confidence that is gripping our economy.

It's no surprise that there are now several retail net/nets, in fact, more than we've ever seen. Given the dire retail environment, it's inevitable that there will be a great deal of store closings in the next several months, and perhaps some bankruptcies as well. This certainly does not bode well for the smallest of the small, especially those that lack adequate working capital to bridge the recession, are choked with debt, or just can't weather a major pullback in sales.

In the early days of this site, we featured a couple of retail net/nets, Circuit City, and Duckwall Alco (search for these postings). Both had subsequent substantial run-ups. But times were different, and in Circuit City's case, the company at that time had a lot of cash-unlike the company that recently went under.

The risks here are many. If you do plan on "dumpster diving" in small retail net/nets, do so only with extreme caution. If you take a position, consider having a trailing stop-loss in place, which may help protect some of your capital, but is still no guarantee.

We recently had a position in AC Moore, and as the stock price increased, continued to move our trailing stop upward. But we were ultimately stopped out, on one of the many volatile trading days late in 2008. We still made a profit, but unfortunately left quite a bit on the table.

As always, proceed with caution. This is a toxic environment for retailers. We'll break the list into two parts, and run the other later this week.

Current Retail Net/Nets

A.C. Moore Arts & Crafts
ACMR
Market Cap: $29.8
NCAV: $85.1
Total Debt: $30.7
Price: $1.47
Cash & Short Term MS: $46.8
Quick Ratio: .8

MarineMax, Inc.
HZO
Market Cap: $45.1
NCAV: $130.1
Total Debt: $372
Price: $2.44
Cash & Short Term MS: $30.2
Quick Ratio: .2

Perfumania Holdings, Inc.
PERF
Market Cap: $33.9
NCAV: $42.7
Total Debt: $214
Price: $3.78
Cash & Short Term MS: $2.7
Quick Ratio: .3

West Marine, Inc.
WMAR
Market Cap: $124.2
NCAV: 151.5
Total Debt: $29.3
Price: $5.64
Cash & Short Term MS: $6
Quick Ratio: .4

Zale Corporation
ZLC
Market Cap: $91.8
NCAV: $92.7
Total Debt: $368
Price: $2.88
Cash & Short Term MS: $39.4
Quick Ratio: .3

Signet Jewelers Ltd.
SIG
Market Cap: $803
NCAV: 977.3
Total Debt: $613
Price: $9.42
Cash & Short Term MS: $36
Quick Ratio: 1.1

Duckwall-ALCO Stores, Inc
DUCK
Market Cap: $40
NCAV: 67.8
Total Debt: $56
Price: $10.50
Cash & Short Term MS: $5
Quick Ratio: .4

*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.

Looking Outside Our Narrow World of Deep Value

2009-01-19T08:05:00.004-05:00

If you’ve been a long-time Cheap Stocks reader, you no doubt recognize that we focus on a relatively small sliver of the investment universe. Deep Value certainly isn’t the only way to invest, and net nets are not the only relevant deep value investment technique; these just happen to be the areas of the market we find most fascinating. Proper asset allocation is still imperative, something that we both embrace, and practice.

To that end, occasionally we run across a website, newsletter, or book that we see as must-read. We’ve just found such a worthy publication, which happens to focus on proper asset allocation, in a simple, easy to understand, easy to replicate, and inexpensive framework.

Jim Picerno’s (editor of the excellent Capital Spectator website), recently launched newsletter, The Beta Investment Report is perhaps the best of its kind. The inaugural issue is jam packed with practical information about building well diversified portfolios, and the ins and outs of asset allocation. It's refreshing to see that Picerno does not shy away from the great debate brought on by the near crash of most asset classes in 2008, that has shaken many investors confidence in the benefits of diversification.

Picerno, formely a writer for Bloomberg, and Wealth Manager Magazine, is a rarity in the world of journalism these days; a great writer who not only knows his craft, but is also an expert in the subject matter he writes about. His passion is obvious, and it comes through loud and clear in his writing style.

To see for yourself, Picerno is offering the inaugural issue of The Beta Investment Report for free, while a full one year subscription runs $235. Sign us up.

Cheap Stocks 21 Net Net Index Update

2009-01-12T13:50:00.007-05:00

Its hard to believe that our index of net/nets is nearly one year old. When we introduced the index in February of 2008, we did so as an experiment. What was designed as a naively constructed cap-weighted index, CS21 has had an interesting ride.

Since inception (February 12th 2008) the CS21 Net Net Index is down 25.3%, versus -35% for the Russell Microcap Index, the closest benchmark that we can find.

While we are somehat pleased with the results, they are inconclusive at this point. Due to the extreme volatility and market performance during 2008, it was not the best time to make judgement. We'll continue to monitor this index through 2009.

Only 3 stocks in the index have performed positively since inception:
Adaptec (ADPT)
Weight: 18.7%
Performance: +19.29%

The Finish Line, Inc (FINL)
Weight: 7.57%
Performance: +119.58%

Anadys Pharmaceuticals (ANDS)
Weight: 2.53%
Performance: +134.38%

All other members were in negative territory, some more than 80%, including Leadis Technology (LDIS, -82%), Handleman (HDLM, -88%), Chromcraft Revington (CRC, -92%) and Charles and Colvard (CTHR,-83%). That's par for the course in net/net land, in fact bankruptcies are to be expected. While no index members have yet declared bankruptcy, Handelman is in liquidation. One member, Renovis, was bought out earlier in the year. Rather than replace Renovis, we opted to keep that allocation (originally 3.8%) in cash.

We are in the process of designing a new net/net index, and with the choices of available net/nets much more compelling than when we designed CS21, we look forward to unveiling it.

For more on the Cheap Stocks 21 Net Net Index, including constituents and weights, please search this site.

*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.

Premier Exhibitions (PRXI) Battle: Mark Sellers Takes the Fight to Shareholders

2008-12-23T12:41:00.002-05:00

Mark Sellers, Managing Member of Sellers Capital, LLC, which owns 16.3% of Premier Exhibitions, recently sent a letter to current shareholders, seeking support for a slate of four independent directors to fill vacancies on Premier's board.

Sellers, who currently serves on the board, believes that the company is not maximizing shareholder value, and squandering both capital and opportunity. Many shareholders, including yours truly, don't disagree.

You may recall Premier from previous posts. The company is probably most best known as the operator of the successful Bodies: The Exhibition, which features whole and partially dissected human bodies, preserved through a technique called "polymer preservation".

Premier is not without its share of controversy, as demonstrated last February on an episode of 20/20, in which the show questioned the source of the bodies used in the exhibitions. While Premier claims to lease the bodies(all said to have died of natural causes)from a Chinese university, 20/20 suggested among other things that some may have been prisoners, and not all died of natural causes. This caused a firestorm of sorts, and sent shares plunging. The company denied these claims, but there was political fallout.

Perhaps more interesting, is Premier's operation of the traveling Titanic exhibits, and more specifically ownership of 3500 Titanic artifacts. The company is also the salvor in posession of the Titanic, with exclusive rights to recover artifacts from thw wreck site. While the Titanic ownership issue is still in the courts, the most recent rulings have been favorable to Premier.

It's no wonder that Sellers is pushing this fight, as Premier shares are down 86% year to date, and currently trade at $1.50. Currently profitable on a trailing 12 month basis, Premier trades at 11 times earnings, and has $9 million in cash and no debt.

For more on Sellers claims, read the Consent Solicitation Agreement dated 12/18/2008. It's an entertaining read, perhapas not so much if you've been a shareholder during this company's descent.

*The author has a position in Premier Exhibitions (PRXI). 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 Featured on Capital Spectator Inaugural Podcast

2008-12-18T15:49:00.002-05:00

Jim Picerno, editor of The Capital Spectator, perhaps the best site out there primarily devoted to money, economics and oil, interviewed your Cheap Stocks editor for the first edition of his new podcasting series.

If you've got 18 minutes to spare, feel free to give it a listen.

Cheap Stocks Land Review 2008: Part II

2008-12-13T07:55:00.003-05:00

We continue with Part II of of our 2008 Land Review. These are the same companies we featured in last year's column, and not surprisingly, most are down significantly.

(Market Cap and EV are in $ millions)
Scheid Vineyards
Ticker: SVIN
2007 Price: $35.55
2008 Price: $24.05
Change: -32%
52 High/Low: $37/$21.6
Avg Volume: 900
Mkt Cap: 24
Ent Value: 58 (estimated)
Acres Owned: 1800
2007 EV/Acre: $38,889
2008 EV/Acre: $32,222
Location: California
Primary Use: Vineyards
P/E: NM

Tejon Ranch
Ticker: TRC
2007 Price: $41.43
2008 Price: $26.82
Change: -35%
52 High/Low: $44.5/$20.4
Avg Volume: 81000
Mkt Cap: 456
Ent Value: 402
Acres Owned: 270000
2007 EV/Acre: $2296
2007 EV/Acre: $1491
Location: California
Primary Use: Development/Ag
P/E: 92

St Joes
Ticker: JOE
2007 Price: $31.01
2008 Price: $27.21
Change: -12%
52 High/Low: $46.82/$18.8
Avg Volume: 1660000
Mkt Cap: 2510
Ent Value: 2450
Acres Owned: 610,000 (est)
2007 EV/Acre: $3956
2008 EV/Acre: $4016
Location: Florida
Primary Use: Development/timber
P/E: NM

Texas Pacific Land
Ticker: TPL
2007 Price: $43.45
2008 Price: $23.75
Change: -45%
52 High/Low: $55.15/$16.1
Avg Volume: 26900
Mkt Cap: 245
Ent Value: 234
Acres Owned: 963248
2007 EV/Acre: $464
2008 EV/Acre: $243
Location: Texas
Primary Use: Leased for grazing/oil
P/E: 21
Dividend Yield: .8%

Cadiz
Ticker: CDZI
2007 Price: $19.13
2008 Price: $10.94
Change: -48%
52 High/Low: $21.4/$8.02
Avg Volume: 38500
Mkt Cap: 131
Ent Value: 161
Acres Owned: 45000
2007 EV/Acre: $5444
2008 EV/Acre: $3577
Location: California
Primary Use: Water/ag
P/E: NM

Avatar Holdings
Ticker: AVTR
2007 Price: $38.06
2008 Price: $23.39
Change: -39%
52 High/Low: $58.36/$22.24
Avg Volume: 56400
Mkt Cap: 200
Ent Value: 158
Acres Owned: 32000
2007 EV/Acre: $8094
2008 EV/Acre: $4937
Location: Florida, Arizona
Primary Use: Development
P/E: NM

Pope Resources
Ticker: POPE
2007 Price: $41.78
2008 Price: $17.1
Change: -59%
52 High/Low: $44.5/$15
Avg Volume: 12300
Mkt Cap: 79
Ent Value: 86
Acres Owned: 116068
2007 EV/Acre: $2051
2008 EV/Acre: $ 518
Location: Washington
Primary Use: Timber/Development
P/E: 9
Dividend Yield: 5.8% (company just reduced dividend to $.25/qtr, from $.40/qtr)

Potlach Corp
Ticker: PCH
2007 Price: $45.76
2008 Price: $26.19
Change: -43%
52 High/Low: $44.79/$20.29
Avg Volume: 1014000
Mkt Cap: 1040
Ent Value: 1460
Acres Owned: 1700000
2007 EV/Acre: $1461
2008 EV/Acre: $858
Location: Arizona, Idaho, Minnesota
Primary Use: Timber
P/E: 15
Dividend Yield: 8.4%

Mauna Loa
Ticker: NNUT
2007 Price: $3.55
2008 Price: $1.95
Change: -45%
52 High/Low: $4.37/$1.55
Avg Volume: 20500
Mkt Cap: 15
Ent Value: 18
Acres Owned: 2242
2007 EV/Acre: $13381
2008 EV/Acre: $ 8029
Location: Hawaii
Primary Use: Agriculture
P/E: NM

Keenawaw Land
Ticker: KEWL
2007 Price: $217
2008 Price: $205
Change: -5.6%
52 High/Low: $295.1/$200
Avg Volume: 250
Mkt Cap: 132
Ent Value: 132 (est)
Acres Owned: 151805 (est)
2007 EV/Acre: $927 (est)
2008 EV/Acre: $869
Location: Michigan
Primary Use: Timber

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

*The author holds a position in 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.

Cheap Stocks Land Review 2008: Part I

2008-12-09T15:39:00.005-05:00

Last year at this time, we ended 2007 with a review of some of the companies holding one of our favorite assets, land. I thought last year was difficult, but it pales in comparison with the drubbing that these companies suffered during 2008. Some are down more than 70%, and ultimately, this could be an interesting turn-around story.

One data calculation we use is 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)

Wherever possible, we obtained the latest acreage figures for each company. The "Change" figure beneath 2007 and 2008 price do not reflect dividends, where applicable. We'll run Part II within the next week.

Below is Part I, the first ten companies.

(Market Cap and EV are in $ millions)
Alexander and Baldwin
Ticker: ALEX
2007 Price: $52.95
2008 Price: $26.30
Change: -50.3%
52 High/Low: 44.52/20.64
Avg Volume: 202000
Mkt Cap: 1090(million)
Ent Value: 1580(million)
Acres Owned: 89440
EV/Acre 2007: $29,897
EV/Acre 2008: $17,665
Location: Hawaii
Primary Use: Agriculture/development
P/E: 7.6
Dividend Yield: 4.9%

Alico
Ticker: ALCO
2007 Price: $35.87
2008 Price: $35.23
Change: -1.7%
52 High/Low: 50.32/22.34
Avg Volume: 18800
Mkt Cap: 260
Ent Value: 287
Acres Owned: 136605
EV/Acre 2007: $2414
EV/Acre 2008: $2101
Location: Florida
Primary Use: Agriculture/Cattle
P/E:

Biloxi Marsh Lands
Ticker: BLMC
2007 Price: $31.00
2008 Price: $8.45
Change: -72.7%
52 High/Low: 36.25/8.45
Avg Volume: 1300
Mkt Cap: 23
Ent Value: 15.65
Acres Owned: 90000
EV/Acre 2007: $778
EV/Acre 2008: $174
Location: Louisiana
Primary Use: Oil and Gas
P/E: 9.7
Dividend Yield: 11.8%

Blue Ridge Real Estate
Ticker: BLRGZ
2007 Price: $31
2008 Price: $8.50
Change: -73%
52 High/Low: 34/8.5
Avg Volume: 45
Mkt Cap: 21
Ent Value: 51
Acres Owned: 16980
EV/Acre 2007: $5468
EV/Acre 2008: $3003
Location: Pennsylvania
Primary Use: Ski resorts, commercial, development
P/E: NM

Consolidated Tomoka Land
Ticker: CTO
2007 Price: $62.74
2008 Price: $37.7
Change: -40%
52 High/Low: 67.13/24
Avg Volume: 24300
Mkt Cap: 216
Ent Value: 237
Acres Owned: 11270
EV/Acre 2007: $31,565
EV/Acre 2008: $21,071
Location: Florida
Primary Use: Commercial, golf, development
P/E: 16.2
Dividend Yield: 1.1%

JG Boswell
Ticker: BWEL
2007 Price: $1025
2008 Price: $450
52 High/Low: 450/1000
Avg Volume: NM
Mkt Cap: 438
Ent Value: 527
Acres Owned: 172000
EV/Acre 2007: $5,988
EV/Acre 2008: $3,064
Location: California
Primary Use: Agriculture/development
Dividend Yield: 3.1%

Maui Land and Pineapple
Ticker: MLP
2007 Price: $26.62
2008 Price: $8.28
Change: -69%
52 High/Low: 8.28/34.25
Avg Volume: 25000
Mkt Cap: 66
Ent Value: 174
Acres Owned: 25400
2007 EV/Acre: $9,764
2008 EV/Acre: $6,850
Location: Hawaii
Primary Use: Development/Agriculture
P/E: NM

PICO Holdings
Ticker: PICO
2007 Price: $34.16
2008 Price: $23.76
Change: 30%
52 High/Low: 48.24/16.06
Avg Volume: 149000
Mkt Cap: 448
Ent Value: 336
Acres Owned: 460000
EV/Acre 2007: $1054
EV/Acre 2008: $730
Location: Nevada
Primary Use: Water/development
P/E: 15.7

Plum Creek Timber
Ticker: PCL
2007 Price: $45.16
2008 Price: $34.99
Change: -22.5%
52 High/Low: 56/27.33
Avg Volume: 4120000
Mkt Cap: 6000
Ent Value: 8430
Acres Owned: 8000000
2007 EV/Acre: $1231
2008 EV/Acre: $750
Location: 18 states
Primary Use: Timber, some development
P/E: 23.5
Dividend Yield: 4.8%

Rayonier
Ticker: RYN
2007 Price: $45.59
2008 Price: $29.58
Change: -35%
52 High/Low: 26.58/49.54
Avg Volume: 1505000
Mkt Cap: 2330
Ent Value: 3070
Acres Owned: 1916272
2007 EV/Acre: $2,115
2008 EV/Acre: $1,602
Location: several states
Primary Use: Timber, some development
P/E: 16.5
Dividend Yield: 6.5%

During the year, we closed our positions in PCL and MLP.

*The author holds positions in BLMC, BWEL, PICO. 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.

Moore (AC) For Less

2008-11-19T19:09:00.006-05:00

Its hard to believe that less than 3 weeks after our post on specialty craft retailer AC Moore, shares of this net/net are down another 73%. A share can now be had for the change in your pocket. Mr. Market, in his not so subtle way, is telling us that he does not think AC Moore will survive. And its not just AC Moore, by the way, there are a multitude of other companies also being given the scrap heap treatment.

The company recently reported a $7.5 milliom third quarter loss--that's what the headlines say--but this included a deferred tax valuation charge of $4.7 million. That being said, the top line was not pretty, and further evidence of the recession we find ourselves mired in. Sales fell 4.9%, while same store sales fell 9.4% versus the same period last year. This is one of the most challenging environments for retailers in the past 30 years, and will likely to continue to be so until some consumer confidence is restored.

But the market is currently valuing AC Moore at a negative enterprise value (-$1.4 million), theoretically hating the stock to the point that you are being paid to take shares. Now, it's never that simple, but with cash on the books at $46.8 million ($2.30 per share), total debt of $21.6 million, and net cash of $17 million, or $.84 per share, this company's impending demise may be greatly exaggerated.

With a current book value of $9.17, AC Moore trades at just .08 times book. That may not being meaningful given the current environment. But the bigger questions are whether AC Moore has the ability to ride out this storm, and are shares currently worth more than $.77? I voted in the affirmative yesterday, and initiated a small position.

AC Moore
Ticker: ACMR
Price: $.77
Market Cap: $15.6 million
Net Current Asset Value: $85 million
Cash: $46.8 million
Cash/share: $2.3
Total Debt: $29.7 million
Book Value/Share: $9.17

The risks here are indeed great, this stock is liable to be incredibly volatile, and there's always the risk that it could fall to zero. Panic driven markets have driven the price down more than 70% in the past few weeks alone. Stay Tuned.

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

PICO Holdings Update

2008-11-18T05:59:00.003-05:00

PICO reported Q3 revenue of $9.1 million, nearly double same quarter last year, and net income of $533K, up 12%. The bulk of Q3 revenue was from a gain on the sale the company's remaining interest in 30,000 acre feet of water storage capacity, which it sold for $11.7 million.

The company completed the Fish Springs Ranch pipeline project in July, and now has 8000 acre feet of water for sale. PICO also sold it's first acre foot (one water credit) of Fish Springs water for $45,750. Although this project offers the only new source of water available to developers in the Reno area, the struggling Nevada real estate market has slowed PICO's progress.

Still, PICO remains well capitalized, and has ample liquidity ($140 million in cash, or nearly $7.50 per share)to weather this storm. Debt also remains low at $28.2 million, and the company is currently trading at just .82 times book value, and 14 times trailing earnings.

PICO shares are now down 35% year to date and 55% from the 52 week high ($48.24) hit in early September. The drop is primarily related to the major asset repricing we've been experiencing in the markets--that's a nice way of referring to the great "panic" of 2008.

We've seen many companies punished beyond belief by the forced selling we are still experiencing, and believe that this will ultimately provide some of the greatest opportunities of this generation. That's if you have the stomach for it. Stay tuned.

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

Net/Net Indexing: CS21 Net/Net Update; and the Launch of a New Net/Net Index

2008-11-11T06:58:00.005-05:00

When we conceived of and constructed the first index of companies trading below net current asset value (NCAV), we did so knowing that the choices at the time were very limited. The quality of companies that met the criteria were not that strong overall. Few of the names were profitable, and the quality of the typical balance sheet was a far cry from what we are seeing in today's terribly negative landscape.

Still, the index has performed relatively well. As of yesterday, the CS21 Index was down 20% since inception 2/12/08, while the Russell Microcap Index, the closest proxy for our little index of misfits, is down about 32% during the same period.

The whole purpose of indexing net/nets is to spread the risk. Many net/nets are at risk of bankruptcy- that's why they appear to be so cheap- but it is often difficult to accurately assess the posibility of success or failure in the individual names. The winners typically win big, which helps to offset those that ride into the sunset.

In this case, there are just four companies that are in positive territory since index launch. The big winner is The Finish Line Inc (FINL,+190%), which is no longer a net/net (that's what you hope for as an investor), followed by Anadys Pharmaceuticals (ANDS, +42.5%), Parlux Fragrances (PARL, +28.06%), and Adaptec (ADPT, +8.93%). All other members of the index are in negative territory, some very deeply. However, the positive performers helped buoy the index as a whole. Still no bankruptcies, though.

The Next Generation
We are currently designing a second net/net index. This one will focus on profitable names, and should be rolled out in the coming months. Stay tuned.

For a list of all CS21 Net/Net Constituents, please search our site.

*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.

Biggest Net/Nets In Years

2008-11-06T15:00:00.005-05:00

The markets continue to get crushed, and as the dust settles each day, we've seen a broader array of net/nets. We are used to seeing microcaps here almost exclusively, but these markets are revealing some bigger names, many of which are profitable. Can't remember the last time I saw a net/net in excess of $1 billion in market cap. These are extraordinary times.

Ingram Micro
Ticker: IM
Price: $13.58
Market Cap: $2.3 billion
NCAV: $2.36 billion
Cash:$807 million
P/E: 8.3

Tech Data
Ticker: TECD
Price: 21.47
Market Cap: $1.1 billion
NCAV: $1.64 billion
Cash: $468 million
P/E: 8.5

Benchmark Electonics
Ticker: BHE
Price: $11.77
Market Cap: $788 million
NCAV: $822 million
Cash: $341 million
P/E: 9.1

USEC
Ticker: USU
Price: $3.90
Market Cap: $438 milliom
NCAV: $726.7 million
Cash: $358.6 million
P/E: 6

Furniture Brands Intl
Ticker: FBN
Price: $4.61
Market Cap: $228 million
NCAV: $270.3 milliom
Cash: $109.6 million
P/E: N/A

As always, do your own research before proceeding. Companies are often "cheap" for good reasons, or don't turn out to be cheap afterall.

*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.

Rising Tide is Not Lifting All Boats; The case for a New Net/Net: AC Moore (ACMR)

2008-10-29T09:37:00.008-04:00

While yesterday's 10% move in the Dow brought was sigh of relief to many investors, the flotsam and jetsam (aka deep value) is not yet participating. That means that there are a lot of bargains out there, but you still have to be very cautious, and very patient.

Let's face it, retailers are struggling to put it mildly, and this will likely continue at least until the panic menatlity subsides. But we are seeing some interesting situations in retail.

AC Moore
AC Moore (ACMR)is a Berlin, NJ arts and crafts superstore, with 136 locations on the east coast. Currently trading at $2.88, shares have been pounded this year, and are off 83% from the 52 week high. Sound familiar?

This company has also recently joined the ranks of the net/nets, the downtrodden companies we love so much here at Cheap Stocks. We are familiar with the store and concept having used their framing services in the past, (and Mrs. Cheap Stocks has been a frequent visitor to our local store).

While we are not wearing rose colored glasses believing that retail will recover quickly, we like the AC Moore story, because they appear to have the resources to weather this storm. With $45 million in cash and just $20 million in debt, ACMR has burned through $8 million in cash during the trailing 12 months. (A prolonged recession will likely increase the burn rate)

With a current enterprise value of juat $36 million, this company is priced for the scrap heap. Could it ultimately be headed there? Anything is possible. But the concept of these stores is fairly unique (call it a poor-man's Michael's), and it generates 25% of sales from art and scrapbooking (I don't get the whole scrapbooking craze, but that doesen't make it any less real).

I don't like the fact that all AC Moore stores are leased, and that the company does not own its real estate, but still find this a potentially interesting opportunity.

AC Moore
Ticker: ACMR
Price: $2.88
Market Cap: $59 million
Net Current Asset Value(NCAV): $92.5 million
Cash: $45.6 million
Cash/share: $2.25
Net Cash/share: $1.24
Price/Book: .3

*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.

2008-10-25T13:27:00.004-04:00

Armageddon?
It certainly may feel that way in this panic driven market, and your portfolio may be reflecting doomsday, but we will recover. If you are a forced seller, however, the losses are very real.

Of course, the list of net/nets grows by the day, and some of the names have never graced our list. Here's a sample of some of the new net/nets:

Ingram Micro
Ticker: IM
Price: $12.72
Market Cap: $2.11 billion
NCAV: $2.36 billion
Cash: $807 million
P/E: 7

Benchmark Electronics
Ticker: BHE
Price: $9.28
Market Cap: $617 million
NCAV: $761.4 million
Cash: $288 million
P/E: 7.5

Tuesday Morning
Ticker: TUES
Price:$1.75
Market Cap: $73 million
NCAV: $152 million
Cash: $8.6 million
P/E: 5

As always, buyer beware, especially in this market. "Cheap" stocks are often that way for very good reasons, and if conditions persist in the current environment, the fine line between "cheap" and bankruptcy will reveal itself.

Cheap Stocks Premium Content
Our subscriber list now tops 600, and while we will continue to provide some free content, we are considering offering a premium subscription service. This would entail a deeper, more detailed dive into the research topics we currently provide, and would be offered to a limited number of subscribers.

Before taking the next steps, we'd like to gauge interest in a premium subscription service. Please email us @ cheapstocks@verizon.net if you'd be interested .

*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.

2008-10-11T15:12:00.005-04:00

No Safe Havens, but Plenty of Bargains...if you have the Stomach for it....

How do you describe the markets the past two weeks? Did it feel like 1987 all over again? Not really, if only because in 87, as violent as it was, the crash was primarily over in one day. It was like ripping a band-aid off of a cut. Painful, but quick. This time around, it's been more like an endless root canal. Just when you think it may be over, the dentist is back for more.

CS21 Net Net Index Hit Hard
Our index of 21 companies trading below their net curent asset value has been hit extremely hard this past month. Since inception (2/12/08) through 9/16, the index was up 15%, 2000bps above the Russell Microcap Index. As of Friday, it was down 17.5% since inception. During the same period, the Russell Nicrocap Index is down about 30%, so our little index of misfits is still holding up well in that comparison. Quite a drubbing, though.

But the smallest of the small are being hit extremely hard in this market, and there may be bargains galore. The problem is, no one knows when the panic will subside, and panic knows nothing about assets, book values or cash. Panic only knows panic.

Still, we've seen tremedous pullbacks in some intersting names. Here are a handful that we still own, that look even more interesting at current levels. Please note, none of these are net/nets

PICO Holdings(PICO)
Price: $28.99
Off 52 week High: 40%

Cresud ADR(CRESY)
Price: 6.97
Off 52 week High: 73%

JG Boswell(BWEL)
Price: $550
Off 52 week High: 45%

Premier Exhibitions(PRXI)
Price: $1.26
Off 52 week High: 91.5%

I don't know if we've hit bottom yet, it "feels" like we are close, but again there are no rational bounds during a panic. There's plenty of cash on the sidelines, though. Ultimately, some of it will find it's way back into the market. In the meantime, be careful.

*The author has a positions in all 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.

2008-10-02T08:13:00.003-04:00

Cheap Stocks Random Note: New Net/Net

Widely swinging markets typically reveal new net/nets, and a "bigger" player- (not saying much in net/net land)- among the biggest we've seen in the past decade, just hit the radar.

Tech Data
Ticker: TECD
Price: $28.8
NCAV: $1.639 billion
Market Cap: $1.45 billion
Cash $468 million
Total Debt: $422 million
P/E: 10.7

This Clearwater Florida based company distributes hardware, software and networking equipment, and provides services such as training and technical support.

As always, do your own homework before taking a position in any company.

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

2008-09-17T08:38:00.003-04:00

CS21 Net/Net Index Update

In the face of all the turmoil in the markets the past few days, we wanted to give an update on the CS21 Net/Net Index; specifically around performance. The Index closed at 115.05 yesterday, up 15.05% since inception (2/12/2008), and is down 5.4% since Friday. No big surprise here. This index is very volatile, and will continue to be volatile. For its part, the Russel Microcap Index is down 1.7% since Friday, and 5.21% since CS21's inception.

2008-09-03T14:58:00.004-04:00

Profitable Companies Trading Below Net Current Asset Value

As promised, here's the latest list of profitable net/nets. In order to qualify, market cap had to be greater than $20 million, with positive trailing 12 month net income, and the company had to have a "real" operating business. (Therefore, companies such as Zapata (ZAP) and Comdisco (CDCO) did not qualify.) Some of these names, such as Audiovoxx and Lazare Kaplan seem to be perennial net/nets; others are first timers.

Company: AudioVox
Ticker: VOXX
Price: $9.69
Market Cap: $221.46 (million)
NCAV: $242.99

Company: RCM Tech
Ticker: RCMT
Price: $2.71
Market Cap: $34.62
NCAV: $39.29

Company: Nu Horizons Elec
Ticker: NUHC
Price: $4.78
Market Cap: $88.27
NCAV: $131.17

Company: Lazare Kaplan
Ticker: LKI
Price: $7.85
Market Cap: $64.78
NCAV: $71.27

Company: GSI Group
Ticker: GSIG
Price: $4.88
Market Cap: $204.98
NCAV: $264.65

Company:Vicon Industries
Ticker: VII
Price: $5.65
Market Cap: $26.79
NCAV: $26.36*
*reflects increase in price today, company now trades just over NCAV

Company: Flexsteel Inds
Ticker: FLXS
Price: $11.18
Market Cap: $73.52
NCAV: $75.69

Company: Trident Microsystems
Ticker: TRID
Price: $3.05
Market Cap: $186.05
NCAV: $194

Company: Peerless Systems
Ticker: PRLS
Price: $1.87
Market Cap: $33.68
NCAV: $43.67

Company: Gencor Industries
Ticker: GENC
Price: $9.35
Market Cap: $89.88
NCAV: $90.37

Company: Silverleaf Resorts
Ticker: SVLF
Price: $1.87
Market Cap: $71.21
NCAV:$97.46

Company: Tegal Corp
Ticker: TGAL
Price: $3.76
Market Cap:$27.31
NCAV: $30.31

Company: Novacea
Ticker: NOVC
Price: $1.83
Market Cap: $47.33
NCAV: $91.53

There you have it. Once again, all these companies are deep into micro-cap land, so use caution, and do your own evaluation. As a postscript, there were some intriguing names with market caps below $20 million; but these were too small for print.

*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.

2008-09-02T19:09:00.002-04:00

Volatile Markets Reveal Profitable Net/Nets

If you are a deep value investor, market volatility can be your friend; especially if you fish in the net/net pond. Large swings in the markets tend to punish these underfollowed, less liquid and smaller names.

And most investors have become painfully aware about the historically high levels of market volatility we've been experiencing--as measured by daily market movements greater than 1 percent--through endless financial media outlet barrages. In fact the S&P 500 Index has closed plus or minus 1% in 70 out the 170 trading days so far in 2008, or an amazing 41 percent of the time.

Smaller companies have been even more volatile. The Russell Microcap Index, for instance has finished 78 trading days plus or minus 1% so far in 2008; 35 of those days hace been plus or minus 2 percent. Our own Cheap Stocks 21 Net Net Index has finished more than half--86--of its 142 days since inception plus or minus 1 percent.(Yet CS21 Is up more than 25% since inception, but thats another story)

All of this volatility has revealed an increasing number of profitable net/nets; an area of the market that can be very lucrative for those with time, patience and an iron stomach. In fact, our recent search found more than a dozen profitable net/nets, the most we've seen in years. This initial list, however, needs further scrutiny. Once we've completed our research, and confirmed the data, we'll reveal this list in an upcoming post.

2008-08-19T15:06:00.005-04:00

US Air Update

We put our neck out on the line on June 24th with our US Airlines: a Put on Oil? piece. Call it luck (I certainly do), but US Airways, which we referenced in that piece, is up 220 percent since then.

And it truly was all about oil. The inevitable oil pullback has brought many an airlines stock price back too life. Can the run continue? I for one still believe oil prices are headed lower, but the airline bet is now too risky for my blood. I will venture to say that's the last 2 bagger in 2 months time you'll ever read about here.

*The author does not have a position in US Airways. 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.

2008-08-07T06:40:00.003-04:00

Cheap Stocks 21 Net/Net Index: 6 Months Later

Six months after launching the first index comprised of companies trading below their net current asset value, the results have been fairly compelling. However, six months is still far too short a timeframe to draw a meaningful conclusion. In any event, the CS21 Net/Net Index is up 20.62% since inception, while the Russell Microcap Index is down 2.21% during the same period.

When you dig into the underlying index constituents and return experience of each, the results are along the lines of what we expected: a handful of companies with very strong returns, with the majority in negative territory. So it goes with net/nets; some will go under, some will be acquired, some will tread water, while others will be rediscovered by the market, having been mis-priced.

So far, there has been one acquisition, Renovis Corp. Rather than replace this company in the index, we decided to keep the proceeds in cash.

Below are the results to date of the companies comprising the CS21 Net/Net Index:

Company, Ticker, Original Weight, Return

Adaptec, Inc(ADPT),18.7,42.86%

Audiovox Corporation(VOXX),12.22,-0.52%

Trans World Entertainment Corporation(TWMC),7.57,-32.27%

The Finish Line, Inc(FINL),6.26, 337%

Nu Horizons Electronics Corp(NUHC),5.81,-17.19%

Richardson Electronics, Ltd(RELL),5.15, 22.31%

Pomeroy IT Solutions, Inc(PMRY),4.62,-46.62%

Ditech Networks Inc(DITC),4.29,-38.33%

Parlux Fragrances, Inc(PARL),3.92, 65%

InFocus Corporation(INFS),3.84, -15.29%

Renovis, Inc. (acquired 5/5, proceeds held in cash)

Leadis Technology, Inc(LDIS),3.5,-53.64%

Replidyne, Inc(RDYN)3.3,-42.27%

Tandy Brands Accessories, Inc(TBAC),2.93,-32.99%

FSI International, Inc(FSII),2.87,-29.41%

Anadys Pharmaceuticals, Inc(ANDS),2.53, 73.75%

MediciNova, Inc(MNOV),2.31, 9.43%

Emerson Radio Corp(MSN),1.65,-10%

Handleman Company(HDLM),1.7,16%

Chromcraft Revington, Inc(CRC),1.63,-32.29%

Charles & Colvard, Ltd. CTHR,1.5,-46.67%

While we are pleased with the results of this experiment so far, we also realize the potential opportunities in constructing a portfolio of net/nets that is not naively constructed, as this one is.

*The author does not have positions in any of the companies that comprise The Cheap Stocks 21 Net/Net Index. 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.

2008-07-31T17:17:00.003-04:00

Blogger Roundtable

Many thanks to Geoff Gannon of the excellent Gannon on Investing Site for including us in his recent roundtable, with the editors of three outstanding value oriented blogs. Its also great to see Geoff posting regularly again.

2008-07-16T06:29:00.000-04:00

“Dear Bill….”: A Letter to Bill Miller, Manager, Legg Mason Value Trust

Dear Bill,
I hope you are well these days, I understand it’s been a difficult time for you lately, and I’d imagine you’ve had many sleepless nights. I trust that there are better days ahead for you. I hope for your sake, as well as for others who have trusted you with their money, that this is indeed the case.

When I hired you several years ago to manage a nice chunk of my retirement portfolio’s large cap allocation, I did so knowing that our investment philosophies are quite different. We view “value” in very different terms, but that was ok. I understood the differences, and I took the risk. I was actually quite pleased that my company’s 401K plan brought you aboard.

We had a great run, Bill. In fact, your streak began years before I hired you, and I certainly did not expect it to continue forever. After all, how many managers beat the S&P 500 Index 15 consecutive years? You did, Bill. But just like all streaks, yours came to an end. Unfortunately a very abrupt and painful end; more painful than either of us could have ever imagined.

When I hired you, I never dreamed I’d be writing you this letter. But after a great deal of thought, it pains me that I am hereby replacing you as my primary large cap manager. I can no longer take the risk that your investment process is indeed broken, or is no longer effective.

I know, Bill, every active manager hits bumps in the road, and the market environment has been extremely difficult. But your underperformance the past two years has gone way beyond normal market gyrations.

How is it possible that you are down 32% year to date, or 39% over the past year? Looking back, do you think that your positions were too concentrated in financials? Yes, Bill, I know hindsight is 20/20, and I sound a bit like Captain Obvious here, but Bear Stearns, Washington Mutual, Citigroup, Merrill Lynch, Freddie Mac, AIG, Countrywide? Where was your risk control? Was it deep conviction or wishful thinking on your part that financials would turn around? I know that what has transpired over the past couple of years in financials was essentially the perfect storm, but I hired you because I trusted that you’d be able to navigate even the worst market events. I certainly never expected things to turn out like this.

Unfortunately, your recent performance has been so devastating that it essentially renders your 15 year streak irrelevant. Over the past five years, you’ve underperformed the S&P 500 by more than 800 basis points…per year. Over the past ten years, you are under 90 bps per year. You have to go back to 1996 in order to find a multi-year period (through now) that you’ve outperformed. Guess I should have indexed large cap all along. My bad.

Unfortunately Bill, what many investors fail to understand is that average returns are meaningless. What truly matters is the time path of returns, i.e., the order in which returns occur. Your huge losses the past couple years all but wipe out the previous gains your shareholders enjoyed.

Finally, Bill, just a word of advice about where you are spending your time these days. I know you want the Yahoo situation to work out to the advantage of your shareholders, and you do hold a fairly large position in the company (4% of your portfolio). But are you devoting too much time and energy to this?

In closing, I can’t place all of the blame on you. I should have pulled the trigger several % ago. I admit I got too caught up in “Bill Miller: The Legend”.

Bill, best wishes for the future.

Regards,

Jon

2008-07-15T09:04:00.003-04:00

Premier Exhibitions (PRXI) Update

In our last post regarding Premier Exhibitions, we reported that Sellers Capital had recently increased their stake to 10.84%. On 7/10, the day prior to the release of this piece, Sellers Capital filed a new 13D/A, reporting a 15% stake in Premier.

2008-07-11T07:01:00.002-04:00

Premier Exhibitions Update: The Controversy Continues (PRXI)

Premier Exhibtitions can't seem to steer clear of contoversy these days. A few months back, the issue was the source for bodies used within the company's "Bodies...The Exhibition" show (see our March 29th post). Now it's a generally disappointing quarter, and a shareholder calling for action.

Premier Shares fell 17% on Wednesday following a less than stellar earnings release. For the quarter, Premier lost 912K, vs net income of $3.26 million for the same period last year. Revenue increased 34% to $15.2 million, but this was well below estimates, and not nearly sufficient to offset increased expenses.

Costs of goods sold rose dramatically, namely exhibition costs, which more than doubled from $3.06 million to $6.36 million. SG&A more than tripled from $2.54 million to $8.02 million. On the revenue side, management blamed the shortfall on the fact that 13 of the company's 22 exhibits moved during the quarter, which resulted in the loss of 330 "revenue-producing days". Be that as it may, this has led one shareholder to call for change.

Bill Vlahos of Odyssey Value Advisors LLC, fired off a letter to the board calling for the sale of the company, or at least the sale of the Titanic assets Premier owns. Vlahos complained of bloated management compensation, and a strategy that is fraught with too much risk. While we can't determine Odyssey's current stake in Premier, reaction to Vlahos' letter sent shares up 12% yesterday, to $3.8.

While we are also extremely disappointed with Premier's performance both operationally, and from an investment perspective (shares are down 33% since May, and 78% since this time last year), we don't think that now is the time for the sale of the company. While the Titanic assets alone may be worth several times current market cap, a sale at this point would be a sale into weakness. We don't believe that these assets would fetch anywhere near their true value (if they could indeed be sold) given the state of the economy.

We've noted that Seller's Capital continues to gobble up Premier shares, having purchased another 1.19 million recently, and now owns 10.84% of the company. We'll continue to add to our position as well as opportunities present themselves.

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

2008-06-28T07:25:00.002-04:00

Blyth: Punished Value Stock or a Trap?

Home goods company Blyth has fallen on hard times recently, and is down more than 50%in the past year. In fact, the Greenwich Connecticut based company has not traded at its current level since 1995. Unfortunately, in an economic environment where inflation is rearing its ugly head, housing has been in the toilet in many areas of the country, and consumers are feeling squeezed, some businesses will suffer the consequences, as Blyth has.

There’s just not a whole lot of interest these days in a company that operates in the “home expressions” business, which is a fancy way of referring to candles, home fragrances, and decorative accessories. Not exactly a recession proof business. Those are the kind of products consumers will shun long before giving up steak or ice cream.

As recently as May 29th, this was a $20 stock, with a decent 2.7% dividend yield. In fact, this company has been an exceptional dividend grower over the years, with a five year compound annual dividend growth rate of nearly 18%. That’s the kind of company I like, putting their money where their mouth is, taking the ultimate risk of raising the dividend too high, and having to make the unkindest of cuts. I also like these situations because dividends don’t lie (except, perhaps in the case of Allied Capital, where Greenlight’s Capital’s David Einhorn has made a pretty strong case to the contrary), while earnings aren’t exactly always honest.

Blyth’s recent 38% slide since the end of May was partially the result of a poor earnings release, partially due to rough market activity. Sales for Q1 fell 8% to $249.8 million from the same quarter last year, while earnings (excluding onetime charges) fell 52% to $6.5 million. Ex charges of $5.2 million to write off its investment in RedEnvelope, a publicly traded specialty retailer in which Blyth owned a 14% stake, the company earned $1.16 million.

Still, all the bad news aside, of which there is plenty, this may be the case of a company that Wall Street punished a bit too quickly and severely. Despite its near term issues, Blyth still has a very solid balance sheet with $147.5 million in cash and $15 million in short-term investments, or nearly $4.50 per share. Blyth also carries another $21.6 million in long-term investments, but since this includes auction rate securities, we’ll assume, for arguments sake, they have no value. (Blyth does carry long term debt of $155.2 million.)

Currently trading at just .43 times trailing 12 month sales, the market has all but written this company off in the near-term. Recent company guidance suggests full year 2009 earnings in the $1.26-$1.31 range, and cash flow of $90 million. While you should always view such forecasts with skepticism, even a haircut to these numbers should still allow Blyth plenty of room to keep from cutting the dividend.

Of course, the real catalyst here, besides the realization that the punishment has not quite fit the crime, is a pickup in economic activity. No guarantees there.

Finally, I like the fact that Blyth continues to buy back stock, and has reduce shares outstanding 3 million shares in the past year. Only time will tell if Blyth represents true value at these levels, or is just another trap.

*The author has a position in Blyth. 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.

2008-06-24T16:17:00.009-04:00

US Airlines: A Put on Oil?

Having grown up around aviation, (with a father who was an air traffic controller and private pilot) it's always been a fascination. As an investor however, I've typically stayed away from airlines: its just a fundamentally difficult business, to put it mildly. Heavy capital requirements, and typically strangling levels of debt don't mesh well with fuel costs rising at alarming rates. While some, such as Southwest, have a great track record, and seem to really know how to profitably run an airline, that's the exception and not the rule.

When the industry took it on the chin after oil breached $135, and panicky operators announced they'll now charge for baggage, we began to view the industry a little bit differently. While the risks of banktruptcy for some of the players seem to grow with each passing day, perhaps there may be some opportunity, however skewed the risk/reward profile may appear.

We now view the airlines as a way to play the oil bubble. First, this assumes there actually is an oil bubble, as we do. Second, it assumes that you can identify an airline that, save the oil issue, has the chance to survive.

That being said, we've recently initiated a small position in US Airways. With $2.07 billion in cash at the end of Q1 (how much they have burned since is a concern), this company may be able to withstand the pressure from oil for awhile. The company does have $3.1 billion in long-term debt, but the next major maturity is $249 million, in 2013.

Don't get me wrong, this is not based on the notion that oil prices will begin to fall in the next couple of years, because by then, it will be too late. Think of this as a put option on oil, with an embedded expiration; that being US Air's bankruptcy if oil continues it's march skyward.

Don't enter into this one lightly. The risks are incredibly high, and based almost solely on the notion that:
1. oil prices will pull back, and
2. airline stocks will react positively.

*The author has a position in US Airways. 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.