Value Investing Congress: David Einhorn on St. Joes

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

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

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

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

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

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

*The author has no positions in any of the securities mentioned. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.

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

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

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

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

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

Adaptec Inc(ADPT)
Weight: 18.72%
Computer Systems


Audiovox Corp(VOXX)
Weight: 12.20%
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

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

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

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"

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)

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)

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)

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?

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...