idea #25 ebay? yes, ebay.

Something about the idea of owning eBay stock is unattractive.  Online auctions are silly.  Will the fad will wear off?  Will another competitor kill them?    Ebay surprised analysts a little bit with their 4th quarter and analysts have moved their earning's estimates up.   What is the right price to pay for a debtfree, "tollbooth" style internet business that offers a great value proposition to clients in any economic climate?   Merrill calls it "defensive e-commerce," yet they rate it a "hold" with a $28 price target.   The company is bringing in over $2 per share in cash, and it's sitting on nearly $4 per share in cash, with no debt.  So the big questions are: (1) Is their service here to stay? (2) will they pursue another money losing investment like SKYPE?    Ebay will start showing up on Magic Formula style screens with their almost 20% ROA and 13x p/e ratio (the sale of skype hit their earnings this year).  Plus, Magic Formula doesn't care about margins or financial leverage, 2 areas that eBay would compare favorably with others.  Here's a  big name,  high margin, unleveraged, stable cash cow trading at under 20x sustainable earnings.  Those qualities are unusual.  Someone on VIC wrote up eBay when it was at it's bottom of $12ish back in December, 2008.  They argue it has a nice moat.  You don't find stocks with "moats" and have fat profit margins that trade at 10x earnings and have no debt (as it did, it has since doubled). Will Google start online auctions?  Can eBay's empire be dismantled?  What is their 25% share of Craigslist worth?  At the rate eBay is bringing in the cash, they can buyback the company every 9 years... I'd buy a quality business with a 9 year payback if I could be sure that management will reinvest wisely.  I think they're being fairly punished for their Skype sale.  Tech investors don't care about valuation, they're too worried about topline growth.  Value investors aren't used to seeing value in headline stealing technology names that used to be high flyers.

idea #24 Sunoco

In 1998, there were 168 million shares of Sunoco stock outstanding.  Each share cost you $40 and it would earn you $1.50.  Back then, they had 5 main refineries and company-wide capabilities to process 760,000 barrels of oil per day.  Not much has changed.

Nowadays, there are only 116 million shares outstanding.  The stock costs you a lot less ($26) and will still earn you… the same $1.50 (estimates for 2010).  They still have the 5 main refineries and are capable of processing 910,000 barrels of oil per day.   Their capital structure has shifted to partially explain the share quantity change... now they have $2.4 billion in long term debt, a decade ago they had $940 million...but their debt cost them only 5% after tax now vs. 7% a decade ago. 

Meanwhile, the number of cars on the road has steadily increased by an average of 1.4% since 1960.  Three years ago Bush said the reason oil prices were skyrocketing was because of refinery shortages.  The market has certainly responded... apparently the market over-responded.  Now, they are shuttering refineries.   At the time of Bush's words, Sunoco stock traded at $70+ per share and was booking $7+ per share in earnings (10x p/e ratio! how cheap is that?!?).  The cashflow from operations is as volatile as the share price, in excess of $2 billion during peak years, and back down to the $500 million range recently.  Still, at $500 million it's substantially higher than the periods I reviewed a decade ago ($300 - $400). 

The entire refining industry is on hold:

From Tina Vital at S&P:
"U.S. demand for refined products fell by more than 3
million b/d from the peak in February 2008 to the
trough in June 2009 on a global economic
slowdown, and according to the International
Energy Agency (IEA), a minimum of 2 million b/d per
year of new refining capacity worldwide is slated to
come on stream between 2009 and 2014. With
pending changes in the U.S. vehicle fleet and
greenhouse gas (GHG) legislation, we believe U.S.
gasoline demand has peaked and will decline
through 2030, while U.S. distillate (including diesel)
demand will increase."

Sum it all up...

In 1998, Sunoco stock traded at 26x earnings and yielded 1.25%.  I'm pretty sure I was getting at least 4% in my money market account at Schwab.  At the time, I could've also bought a 10 year treasury that yielded 5.5%.  

In 2007, The world loved refineries.  Sunoco stock traded at 10x earnings and yielded 1.5%.   I think I was probably getting 3% on my money market account.  A ten year treasury yielded 4.5%  

Now, a single share of Sunoco stock is cheaper than ever ($26) and buys the largest claim *ever* on the same bunch of refinery assets, it yields 2.3%, ten year U.S. treasuries are 3.5%, cash yields zilch.  Sunoco doesn't look so bad.  Not great, but not so bad.   It may not be the bottom but it ain't the top.

idea #23 cybx

I found this from AAII's "Fundamental Rule of Thumb Screen".  This one only screened so well because they posted a one time tax benefit that boosted EPS by $1/share.  Despite that, they are still cheap looking given their guidance to double revenue in 5 years.  They are growing into Japan.  They have a focused, simple, and easy to understand business model.

They have neat technology with a significant competitive advantage; they make a pacemaker device to control epilepsy.  It is recognized as an effective treatment when drugs and surgery don't work.  It is less recognized for it's positive "side effect," increases in awareness and improved mood.

Trading at 17x sustainable earnings, 17x operating cashflow.  Buying back convertible debt.  It looks like a great growth stock.  I doubt it will ever get too cheap... if it does it will be for some scientific reason that I likely won't figure out until I've lost all my money.

idea #22 PC Mall, MALL

I was toying around with a concept for screen to find a company that has "managers with guts."  What companies got off their butts and bought back bucketloads of their own shares at just the right time when the market collapsed in March of 2009?  At the time most every stock was absurdly cheap but most investors were scared stocks would just keep getting cheaper... cheap, cheaper, cheaper, cheaper still was the way it went.  Mr. Market was screaming that the end of the world was near.  Any company that stepped up to the plate and "eliminated partners" was doing something massively accretive to the remaining shareholders, even though the remaining shareholders might not feel the effects for years to come.  So, it turns out that out of 8000+ companies, PC Mall was one of the gutsiest.  They bought back over 400k shares near the market low, and near their 52-week low of $3.70.  They eliminated 3.2% of the shares in one single quarter.

As with anything I see problems with owning this stock:  The CEO owns 17% of the company.  He gets paid too much.  $1 million dollar/year salary & bonus is too much for a company with a $60 millioin market cap.  Expressed another way, his compensation works out to be 8 cents a share, every year.  The most recent quarter, the operating cashflow was negative and inventory ticked up, as did shares outstanding.  Insiders are selling.  Earnings' history is not stable.

The stock is cheap relative to history, trading at .7x book value when it normally trades at 1.5x. 1.5x book value is expensive for the below average return on assets (low 2-3%).  A big discount to book value is appropriate for these assets.  A longtime VIC favorite, ePlus, is kind of a pc supplier and it is cheap.  It has stayed cheap for a very long time, which doesn't bode well for PCMall. 

On the bullish side, supposedly we're in the midst of a PC upgrade cycle... a big positive trend for the computer industry.  Windows 7 is acceptable to the market and people are upgrading.  Intel, Western Digital and numberous PC suppliers are doing well.

In a nutshell, I don't know what kind of catalyst will make this stock go up but they are producing cash and they are buying back shares so there's probably a lot worse places to be sitting right now than on some mall shares.  I have shopped at PcMall and see no sustainable competitive advantage in their business.

My PC Upgrade cycle
Discount to book value (what is BS?)
Lot of buybacks in 3/31/09 quarter
earnings discount

idea #21, LIFE PARTNERS, LPHI

Life Partners would be a screaming Magic Formula buy with it's high ROA and low P/E ratio, except for the fatal flaw that it's a financial stock.   It's growing fast and paying a big dividend. LPHI popped up on an AAII screen.  They are "life insurance policy dealers."  If you want to sell your life insurance, they will find a buyer.  Everybody wins.  The buyer is uncertain of the end return on the policy, the seller takes a discount to the potential final value in exchange for cash now (and to not have to keep paying on the policy).  Life Partners makes money putting the 2 together.  It's arguably a very necessary service for our society.  Baby boomers want their money now, not when they die.

A quick look reveals that the CEO (age 66) owns over 50% of the company and gets a very high salary for such a small company.  The company is involved in numerous lawsuits and subject to bad publicity from unsatisfied investors...  afterall, people are living longer now.  They are the only publicly traded company in this "highly fragmented" space.  Interestingly, they finance their operations by direct investment so they sailed through the financial crisis without a hitch.  Investor demand went up, people wanting to cash in policies went up.  It was a beautiful thing.
 
Government regulation is a risk.  There is a licensing process to deal these insurance policies, i.e. Consumer Protection Licensing  .  "The consumer protection-type regulations arose largely from the draft of a model law and regulations promulgated by the National Association of Insurance Commissioners (NAIC).  At least 40 states have now adopted some version of this model law or another form of regulation governing life settlement companies in some way.  These laws generally require the licensing of providers and brokers, require the filing and approval of settlement agreements and disclosure statements, describe the content of disclosures that must be made to insureds and sellers, describe various periodic reporting requirements for settlement companies and prohibit certain business practices deemed to be abusive."   I wonder if this organization could shed light on other, non-life insurance settlements.

Of particular interest in their standard "risks" disclosure in their 10k is something that is conspicuously absent.  Insurance companies have to make good on the payment when the insured person dies.  AIG could default, major insurers default, etc.  That is a real risk and it is not mentioned.  Is the risk so inconceivable that it doesn't have to be disclosed?   I called their investor relations number and spoke to Andrea.  She said that if major insurance companies default then you will have a lot more to worry about than your investment in a life insurance policy.  So it appears that to them, that risk is inconceivable.

 

Interesting, high roa biz
Listen to conference call to learn about default risks associated with insurance companies.

Listen to how it holds policies on balance sheet

Life Partners looks cheap, and like the last idea, some of the discount is likely because of the controlling interest (& very high salary) of the CEO, Pardo. 

idea #20 Broadview Institute BVII

This came up on some screens for it's high ROA and low p/e.  It's in the "private education" sector, and lots of these businesses have been coming up on screens.  Same old story, valuation is attractive because of their uncertainty over student loans.  I decided to give this particular name a closer look.  I hoped it might have some competitive advantage that the bigger, more established players do not have, or that it's focus was on a higher growth area.  It's historical revenue growth has been higher than the big players because it focuses on nursing/medical.  It's "cohort default rates" are very low.  It sounds like a winner.

While all that is attractive, the valuation doesn't seem to justify that it trades only a few hundred shares a day and insiders own 60% of the shares.  There are plenty of insider interdealings noted on their proxy.  Maybe they will sell to Coco or Devry but otherwise it will be hard to let market forces make this stock more expensive if good corporate governance is absent.
 

idea #19 Tidewater (TDW)

Tidewater came up on a "defensive Graham" AAII screen.  Someone wrote it up on VIC in late 2006 as a short.  On the surface, I like that it's shown 3 years of disappointing shareholder returns, all the while posting nice earnings.  It has a moderately high ROA and low P/E.  It's trading at around $45 and the lowest it hit during the financial crisis was only $33. 

The VIC writeup's thesis was that earnings were temporarily too high and that the share price should fall to $30ish, 12x normalized earnings of $2.50 per share.   I think the writer's perspective is wrong on a couple of fronts;  It's hard to find stuff, even if it is cyclical, with attractive balance sheets and reasonable earnings multiple.  12x unleveraged earnings is cheap. And 2nd, his perspective on normalized earnings has proved to be too low.  Even given the fact that their shipping contracts are for 18+ months (which the original author might have missed), I still think they can earn $4 over the long term.

The company is in promotional mode.  They just did an investor presentation that argued "vessel retirements are higher than replacements" so prices will likely stay high.  This is the exact same issue the short thesis was focused on in 2006.  The thing that impresses is me is that prices stayed high throughout recession and commodity collapse, thus I'm understanding the $4 normalized earnings.  This company has low fixed costs, and high variable costs.  It would be nice to own if you could get it really, really cheap.  I think it's current price is a little cheap.  Based on the screens, I think it's likely to get a little more expensive.  Global warming is a farce, drill baby drill?

Buy this type of strong balance sheet & good asset investment when OSV dayrates collapse.  Right now, they are strong. 

idea #18 World Acceptance Corp (WRLD)

World Acceptance Corporation came up on multiple screens.  It has high roa, buying back shares, too.  The share price is at a 52 week high.  I know statistically all these things likely mean the price will only go higher in the near term but their business makes me queasy... 84% of their loans outstanding are repaid with additional loans, i.e.  "payment in kind" type of refinance.  They charge the poor suckers who borrow from them anywhere from 25% to 215%, whatever the state maximum will allow.  The loans are unsecured.  The borrowers are repeat customers who borrow the most during the holiday season.  Rumor is that the new administration is going to crack down on consumer finance providers.  I guess these factors explain the valuation (it appears attractive, even though it trades at a 52-week high).  Credit card companies are having to lower their max rate, maybe WRLD will, too.

The more I read the more I actually like their business.  They're marketing all sorts of other things to their core customers; tax prep, insurance, and even electronics good.  They are near their customers (thus they pay low rent and have low fixed costs).  I don't know how to value their ongoing business but a valuation of their assets are easy: for $40/share you are buying $20 worth of loans to poor people.  You are getting an established business that lends to poor people, and up to now has thrown off quite a bit of cash to buy back shares.  They have low overhead.  I like this business and management appears to be smart so I will wait for it to go back down to $10 (half of all the loans) or $20, just the value of the loans.  I won't hold my breath but $40 is too much of a premium.

idea# 17 synt

AAII Muhlenkamp screen, T.Rowe Screen
High ROA
reasonable valuattion

Syntel has some very attractive attributes when you look at it's history as a company:  The return on assets is consistently 20-30%.  Right now, you don't pay much of a premium for them.  Their profit margins are increasing and they have a strong balance sheet.  The stock pops up on multiple screens for value, magic formula and even growth.  There appears to be an imminent let down that is discussed, a loss of 17% of revenue from a joint venture, and soft guidance of only a low $2ish.  Management is selling their positions down.  They filed an S3 in September to sell 5 million shares.  That, and the fact their business is unpopular anti-American offshore call-centers, explains the attractive valuation.

Another concern is that this company could be making the nasty transition from "growth darling" to "you're not so special/value" stock.  They don't buy back shares.  They pay an inconsistent and small dividend.  It's hard to see upside.  Will call centers in India trade at the premium they may deserve?  Short interest is around 800k shares, which is down significantly from 3+ million.   There was obviously a strong bear case a year ago.  One source said it had to do with key employees leaving the company.

idea #16 the Pantry (PTRY)

I was attracted to this idea because it came up on some screens:
John Neff and Earnings upgrade -AAII screen
CHEAP multiples
earning's surprise in most recent quarter
Investor exhaustion - 3 years of disappointing returns for equity holders.

The Pantry is a chain of c-stores in S.E. US.  They acquired many properties during peak real estate bubble years.  Acquisitions were expensive.  They didn't issue many shares to pay for the acquisitions, instead they did issue bonds and convertible debt.   According to my analysis, they'll need $122 million a year for 2010 and 2011 to meet their debt obligations.  They'll need $247 in 2012 (or likely just $122 million and they issue a lot of shares for the convertibles).  They'll need $122 million in 2013 and $272 in 2014.   It's an aggressive payback schedule giving this idea significant downside.  Operating cashflows have averaged $160 million per year for the last 7 years.  Their most recent quarter's cash flow from operations won't be good enough to make their debt repayment schedule work, as it was only $21 million. 

Analysts don't seem to talk about a default as even a possibility. I guess because they are sitting on $179 million in cash as a buffer (no near term liquidity issues) for bad quarters, and the debt is secured by hard assets, they'll likely be able to refinance if they need to.  I think their debt is manageable but it is close to being too much. 

Assets that they acquired might be at the end of their life.  They recently shut down gas stations that needed their tanks replaced because it was not economical.

This is the opposite of what I want to see. I want a company that acquired cheap assets with expensive shares, now holding expensive assets with cheap shares. These guys acquired expensive assets with debt and now have cheap shares... because of the debt overhang.

idea #15 hallmark financial

This was an excellent VIC writeup about an insurance company in Dallas/Ft.Worth area that was, until recently, 70% held by a Texas hedge fund, NewCastle.  The hedge fund faced redemptions during the financial crisis.  It distributed the shares to their partners.  The writer assumes the stock is weak because the partners in the hedge fund sold their shares as they received them.  That is a good explanation for a stock being weak for non-fundamental reasons.

HALL's 7 year average p/book ratio is 1.25x, now it's .8x.  The writer makes the case that their assets are really safe, no mortgage debts, etc.  It compares them to 30 or so other insurance agencies, and by all accounts it is cheaper.

I read more about the CEO's style.  He was trying to build the insurance business for the same reason Buffett did so, to have access to more capital to invest.   He is a value oriented manager.  He doesn't mind owning small, thinly traded stocks... which was one of the reasons his fund suffered.  He is a low profile fund manager.  He has a long term track record in the high teens. 

Looking at a financial history of HALL, He has doubled the book value per share over the last 7 years.

I'm seeing a lot of cheap insurance companies.  The general bear argument against owning insurance is that the low cost of capital has made insurers less risk averse and their pricing power, which used to come in cycles, is not coming back as strong, for as long of periods.

What I like most about this idea is that there is a fund manager who runs the company and eats his own cooking.  Yes, he's said he's trying to grow it but for a "value" oriented manager to destroy capital for the sake of growth would be sacrilegious.

idea #14 contango

Contango was written up on VIC recently.  It has no debt, $54 million in cash and PV-10 pretax reserves worth $1.4 billion, or $90/share.  It's well managed by a charismatic CEO who built the company from nothing.  He appears to understand the plight of the average stock investor.  He defended the share price with personal, and substantial corporate buybacks, during the financial crisis. Actions like that warm my heart.  He seems to really understand how to build value.  He's also a self-proclaimed stock trader (which I like).  If there is one natural gas company that you must follow, I'd argue that Contango should be on the list of contenders. 

Why it's trading at this kind of discount on the heels of all their success?  I heard a rumor that the government isn't issuing anymore offshore drilling licenses.  There are pleny of macro reasons to be bearish on natural gas.  Still, it seems cheap and I love this company.  The other thing that bothers me about Contango is the off balance sheet arrangements.  He developed them before Enron blew up and spoke highly of how they contained risks.  Since Enron, he stopped talking about them. He no longer refers to them as off balance sheet arrangement to contain risk.  I don't think any of them could come back to bite shareholders but I'm not sure what they do other than to make the company look really clean.  I wonder if they somehow make his netbacks higher.  I have seen this before in Canada where producers take profits from processing gas and apply them to their own production, thus making their margins look better.  I wonder if something
like that could be happening at Contango in one of their arrangements. 

I saw so much craziness in the natural gas industry during the last leg down in the market, that I'd have to be nuts to buy anything that wasn't an obvious screaming bargain, reinforced by insider buys, in such a calm environment.  I'm just not excited about buying because (1) he's selling and (2) the company is looking squeaky clean, just too perfect.

idea #13 Intel

I noticed the market headlines about Intel trouncing the street's estimates.  I am clueless when it comes to semiconductors, but c'mon?  Intel trades at under 14 earnings estimates. By my estimation, they have a staff of 20,000 of humanity's smartest computer nerds.  They give them free reign to make the most advanced microchips on the planet.  Aside from that, I notice many superficial reasons to be bullish on Intel in the near term:

- earnings surprise
- cheap relative to 7 year average p/s, p/e, p/b
- buyback
- decent long term average roa
- appears to be changing capital structure in favor of equity holders

Intel spends over $5 billion a year on R&D that is immediately expensed against earnings, yet, they still trade at under 14x next year's earnings (earnings average around $5 billion, same as R&D). 

They are spending $5 billion per year (it's actually growing) to innovate, create, etc.  They hire computer engineers from top schools and they empower them to do their thing.  Imagine, if the average engineer costs $250k per year to keep (including office, lab, salary, etc.), that gives them a staff of 20,000 bonafide computer nerds working on new products.  They have around 80k employees so my guess for staff nerds might not be far off. 

A few months ago I was awestruck when I saw the CEO of intel on Charlie Rose; not because of his personality but because of Moore's law and the outlook for his business.  He was talking about his retirement plans (at least 5 years out) and how Moore's law will stay in effect under his watch at Intel. 

From Wikipedia:

Moore's law describes a long-term trend in the history of computing hardware, in which the number of transistors that can be placed inexpensively on an integrated circuit has doubled approximately every two years.

The capabilities of many digital electronic devices are strongly linked to Moore's law: processing speed, memory capacity, sensors and even the number and size of pixels in digital cameras.  All of these are improving at (roughly) exponential rates as well.  This has dramatically increased the usefulness of digital electronics in nearly every segment of the world economy.  Moore's law precisely describes a driving force of technological and social change in the late 20th and early 21st centuries. The trend has continued for more than half a century and is not expected to stop until 2015 or later.

The law is named after Intel co-founder Gordon E. Moore, who introduced the concept in a 1965 paper.  It has since been used in the semiconductor industry to guide long term planning and to set targets for research and development."

So, my next iPhone will have a 9 megapixel hd quality video camera with a 128 gig hard drive.  Will consumers want a 9 megapixel iphone that can process data at supercomputer speeds?  Will they want 3d interfaces that are silky smooth and intuitive?   Will software engineers come up with applications for the device?  Yes, and I can see myself paying $200 for that. 

Ok, back to reality now.  Like most analysts, Merrill Lynch's analsyst completely missed the revenue for this quarter and INTC's bullish outlook.  Because of the outlook, she was pretty much forced to up her target price by $1.50 to $23.  She kept a "neutral" stance citing that share prices usually under perform after 2 consecutive quarters of inventory builds.  If your going to say that share prices are correlated to inventory builds then I'll need to see a lot of data to support that.  She didn't provide much data.  I shot her off an email:

Hi Sumit,

I am a Merrill Lynch customer.  I read your reports on Intel.

If I read the most recent one correctly, you are maintaining a neutral position because of 2 consecutive quarters of inventory builds.  I understand how building inventory can be negative and can predict weak sales & weak margins in the future.  That is definitely something to be concerned about.  However, unless I read this wrong, and you have more data than you're showing, the sample period you chose is statistically too small for anyone to make a prediction about the stock price.

Furthermore, of the 3 time periods illustrated, one of the time periods doesn't prove your point (Jan 06).  Of the 2 remaining incidences, one has to ask if inventory builds were a result of higher inventory dollar value or really more unsold units?  How were profit margins in the past?  An inventory build on the heals of expanding margins is not bad.

Anyway, something to consider,  I always enjoy your writeups.  I know analysts often can anchor their expectations and miss upside.  They look for anything they can to justify a position that turned out to be wrong (your soft revenue outlook) and miss obvious stuff like record buybacks, historically low p/sales, p/earnings, etc.

Good luck,
Chris G

------------

I'm not holding my breath for a response.  This could be a classic example of the behavioral finance issue known as "anchoring" that I mentioned in my email.  Regarding inventory, according to intel the units in inventory were the same as always, they just cost more because it's fancy new technology that cost more.  I have no idea if they're telling the truth.

I look back at intel's earnings and cashflow history and I'm surprised at how volatile and cyclical it is.   This pains me.  I'm reminded that it's a cyclical, capital sensitive technology stock.  Despite their incredible R&D budget, no one knows if they'll become the next Kodak.  Afterall, Kodak wasn't skimpy with their R&D.  Then again, maybe the bumpy earnings are a sign that management just tells it like it is and doesn't try to smooth (not likely).

I read tech gurus who predict weakness for Intel.  They have a fundamental argument with their business plan.  They think that fancy software that is capable of distributed processing will make Intel's faster chips not worth it since consumers can just buy a bunch of cheap cpus and string them together instead of buying the latest greatest big fast one.  If that's true, then nobody told AMD shareholders because their stock looks pretty ill.

What makes me want to buy Intel for my daughters account is the 2.6% dividend, the massive buybacks that are taking place, and the $5 billion r&d spend they get little credit for.  If they keep taking 10% of the shares off the market every 5 years there won't be a lot of Intel left for her when she grows up (same reason I like walmart).  What makes me want to buy the stock in my own account *for a trade* is the P/E, P/S and P/B ratio and the earnings surprise. 

What makes me want to pass on this idea all together is that it's a technology stock.  Things in this business change so fast it's impossible to predict the future.  I have no edge, or advantage in buying.  It sure does look like a neat business, though.  $5 billion per year on R&D... that $1.50/share, 1/15 the market cap, 20,000 of humanities smartest people leveraging technology to make the world a better place.

Ok, back to dreamland.  If you're the CEO of Intel and you see the end of Moore's law coming, what do you do?  In the oil & gas industry, when they run out of drilling ideas that have high returns, they go and drill coalbed methane, or they pile on to the latest shale play.  What do chip makers do when they can't keep doubling the speed of their microchips? 

idea #12 ABERDEEN INTERNATIONAL INC, aab.to

Aberdeen was originally written up on VIC in Aug 2008 at 40 cents per share because it was trading at a discount to NAV ($1 or so).  They are a small investment bank that specializes in junior gold & precious metals mining.  They helped Desert Sun grow from nothing, to eventually be taken over by a large miner.  It was a huge success for them.  The stock collapsed at end of 2008 as one of their largest holders, RAB, liquidated (restructured).   It's nice to buy when you know someone else is selling indiscriminately for non-fundamental reasons.  I am glad I paid attention to that posting on VIC.
 
I found the warrants strangely attractive.  The strike price is around their current NAV ($1) and they don't expire until the middle of 2012.  Like Desert Sun warrants, they provide upside for very little downside, but that downside is permanent loss of capital (rather severe) if you hold too long.  Black Scholes calculations indicate the warrants are way overpriced but BS is notoriously bad for longer dated options.

The company has 30 holdings in the junior resource sector, they hold tons of warrants in those positions.  Most of those positions are penny stocks.  There is all sorts of interdealings with them.  Management is on the board on many of them.  Many have no reserves.  Many of them will fail. 

Positive attributes:
management is incentivized for their success,
they are cheap,
they are controversial,
management has hit some big homeruns in the past (70-bagger). 
they are not pumping the shares, website hasn't been updated in ages

Negatives:
letting the share price collapse during the financial crisis (regardless of who sold) is going to prevent investors from taking a meaningful position.
Not as concentrated a portfolio as I would like to see
Lots of legal issues
Lots of Venture Exchange exposure

This is firmly in the "wait and see" category.  Examining the 30 holdings might lead to some interesting ideas.  Shorting the warrants against the underlying might make a good trade someday.

Omega Underwriting, Idea #11

This is a holding company that underwrites insurance with lloyds.  It's lead underwriter, John Robinson, suddenly quit because of a disagreement with CEO (relatively young CEO & CFO, CEO appointed in 2002).  John Robinson owns 7% of the company and has a good reputation for years of successful underwriting.  He is 55.

Large, no-nonsense shareholders are circling management and demanding Robinson be put back in charge of underwriting.

The valuation is compelling.  Nothing is wrong with business per se, it's trading at a slight discount to book value (cash, cashlike investments held as a security for it's underwriting).  Premiums are at a cyclical high.  And, most compelling to me, and not mentioned in the VIC writeup, are some insider buys.

obvious positives:

good corporate governance... stuff is happening with activists & management

management seems to be worried about their jobs, they're discussing situation with large shareholders.

even one of the directors they're trying to boot is buying shares.

they pay a big dividend

trades at less than cash & cashlike investments

It didn't tank at all during financial crisis. 

John Robinson owns shares.  Real skin in the game.

Risks & Issues:
- I'm not sure I can explain the current weak share price. 
It seems like the share price should be a little higher.
The reasons for the weakness are (1) they recently raised capital and are increasing their lloyd's capacity and (2) their legendary risk analyzer is out of the picture.   I guess those reasons are good enough.

- didn't look at comps
I'm taking the VIC write-ups word about how it trades relative to peers.

- John Robinson went from lead underwriter to head of risk management, 6 months before he quit.  Maybe he wants to quit?  I guess he wouldn't be buying if he wanted to quit.  Maybe he is restricted on his buying/selling.

idea #10 Dover Downs Gaming & Entertain (DDE)

Dover Downs is a giant entertainment & gambling center in Dover, Delaware.  It came up on value screens for multiple reasons: 

3 years investor exhaustion
share buybacks
cheap based on trailing earnings
cheap, close to book value
management cut their own salaries and has lots of skin in the game.

The reason it is cheap is because they have revolving loan that is coming due in parts, $25 million of which is due next year, then $25 million each year following(approximately).  It looks like they may have trouble  raising funds from operations.  Their cashflow from operations is barely $25 million per year.  They used the revolver to buyback shares (from what i can tell).  It looks like they pulled an RH Donelly (RIP!).

Other negatives:

they have a defined benefit pension plan that I can't figure out
"controlled corporation" CEO owns over 50% of stock.
State has been squeezing their gambling profits by asking for more royalties.

I can't figure out if one should be long or short this.  The revenues and gross margins have held up nicely over time. 

idea #9 Corinthian Colleges (COCO)

Coco was written up on VIC.  Private colleges have been written up many times.  They are controversial because of how heavily they are regulated and their tenuous relationship with regulators who determine their funding. 

Private colleges are incentivized by the government to create academic programs that result in their graduates getting jobs.  Their continued funding is contingent on graduates repaying loans. 

In that sense, a private college's business is to figure out what industries will be hiring in the future (where there are "needs"), create a curriculum to address those needs, recruit students who will want to fill those jobs, teach them how to do the job, help them get the job, and make sure the students repay their government loans. So long as most of the students repay their loans, the private college can stay in business, as more students will be able to borrow to attend. 

They are suffering because some students aren't repaying loans and some of their schools are at risk of losing the ability to receive government loan money.  Coco is the parent company.  They have hundreds of independent schools that must each qualify.

These days, it seems the government's sole purpose is to keep people working.  It's hard to imagine a more efficient way of stimulating job growth than by loaning money to students to help them become more employable.

So, you have private schools who recruit, train and place workers wherever there are job opportunities.  Ironically, their stock is suffering because of worry over funding, which is a result of past students being unemployed, which is a result of high unemployment.  And you have the federal government, who's politicians want to get re-elected and want more employed people paying taxes.  Policians are also suffering because of high unemployment.  Are the regulators really going to cut funding for a program that could directly effect unemployment? 

Positive Attributes:
-counter cyclical business
-Royce owns it
-insider buys
-attractive current valuation
-heavily shorted, short story is well-known
-shows up on some AAII screens.

negatives:
- used growth by acquisition strategy.  Put on hold in 2005, recently made an acquisition
- The funding lag from federal dollars.  If they trained a lot of graduates who are now not paying their loans back (because of high unemployment) they will lose accredidation and not be able to borrow from the federal government.
Unemployment is the cause for their current woes, but unemployment is also the incentive for fixing their woes.  Unless they are failing to teach correctly, or allocate human capital correctly.
- no doubt analysts who are more hooked into this are seeing less enrollment.  VIC argues that coco is most sensitive to title IV funding.

Idea #8 POOL corporation

I came across POOL corporation while screening for stocks that have experienced negative returns for 3+ years.  Among the list of these losers, Pool had some positive attributes that made me want to look further at it:

- three years of investor losses, investor exhaustion, magnified by broad market recovery.  No one wants to own a loser when the market is rallying.   

- 70% to 80% of revenue is non-discretionary maintenance related.  This stock is treated like a recreational/discretionary stock but it sells stuff that is absolutely required if you own a pool. 

- Revenues, margins and operating profits took a hit during recession but cashflow increased.

- Stock price is 60% off of all time high, yet earnings off 30% and cashflow is currently at an all time high.

- shrinking shares - they are buying back shares consistently & rapidly

- by far the largest company in the pool supply business

- Huge cashflow.  Pool installations are down 75% in the last few years yet cashflow is at an all time high.  Pool installations aren't as relevant as market thinks. 

- Hidden earnings.  Latham Acquisition Corp (unconsolidated subsidiary) clouds earnings by 59 cents in most recent quarter.

Negatives:
I don't understand what competitive advantages a distributor can have.
They have few hard assets underlying balance sheet
They are just a distributor, can't home depot beat them if they wanted?
very competitive market, no moat
A history of growth by acquisition

idea #7 CBMX

Combimatrix is a biotech company in Irvine.  It's been the subject of 2 vic writeups.  The first VIC writeup talked more about their products.  The second vic writeup focused on the cash from a legal settlement.

The company is not profitable but it has developed some successful product lines that are by themselves profitable and growing (albeit slowly).  It is attempting to sell them.  They almost had them sold last august before the markets crashed.  As it stands, their R&D budget is killing their operating profits and they're burning cash.   

The most recent writeup on VIC estimates there is a 95% chance CBMX will receive $30+ million in a lawsuit, leaving the company with around $6/share in net cash.  The author estimates their remaining products being worth between $2 and $7 per share.  The company's history is particularly ugly because of all the equity & warrants issued to raise capital, supposedly to withstand the lawsuit process, but it looks like the PHDs running the company want to keep the lab open anyway they can.

The lawsuit;  They won the lawsuit in 2008.  The loser appealed and put up a bond for the entire amount.  The appeal hearing consists of a 15 minute oral argument, to take place on feb. 2, 2010 in Pasadena.  The vic writeup goes into detail on why the appeal will likely favor CBMX. 

Big negative to me:  The 44 year old boss is PHD who gets paid $400k-$800k per year in salary and bonuses, he owns 160k shares (2.6%).  Based on that, I'd say he's incentivized NOT to sell.  He will milk this thing forever.  He'd much rather get his minimum $400k salary as long as possible than a one-time $1 million (assuming $8/share) for his shares.  I don't see him wanting out or trying to maximize shareholder value.  I see him taking the cash and using it to keep the lab open and his paycheck covered.

idea# 6 basket of turkish banks

My dad read a book saying Turkey will be a fast growing country in the next century.  I looked at the ishare and the biggest bank is called Akbank.  Prevailing wisdom is that when looking at emerging markets, start with the banks, since they have immature bond markets the banks often are the bond holders and profit the most from growth.  

Akbank has a very pretty CEO.  She appears to be a descendant from the original owner.  Her family owns 40% and foreign investors own quite a bit.   I don't like it so far and I'm about to stop looking.  This is so far out of my circle of competence that I should be ashamed at myself for even thinking about it.  Family in the biz is not my thing, either.

I'm not going to stop looking.  I found a research report by Merrill comparing Turkish banks.  It lists 8 banks.  3 are rated buys.  I still like the idea of buying a bank in an emerging market since they make a ton of money originating deals, they make money holding money, they make money all the different ways.

Maybe there is some value in turkish banks.  The average turkish bank trades at a 9x multiple of earnings for 2009 whereas all the other emerging market banks in this report traded in the 10-20x range.  Maybe owning 3 banks would be ok.   I don't see any catalysts for when they might get more expensive, or explanations for their cheapness. 

Idea #5 Humboldt Capital

"In every cycle the gas industry drills itself into bankruptcy"

I recommended Humboldt Capital on April 2, 2008 to VIC because I thought it was really cheap.  My original thesis was based on the idea that they were really more like a closed end fund trading at a discount to their publicly traded assets, and to make it more compelling, the publicly traded assets they held were also trading at a discount to their net audited reserves.  If you (hypothetically) consolidated those discounts, you were getting a lot of stuff for free.

It has gotten cheaper, but didn't do as bad as it appears.  It's paid out some dividends and the CAD$ has appreciated.  I have dutifully watched the quarterly reports and once or twice I even called them up to ask questions.   Over time, the discounts have persisted and the underlying stock values have shrunk.  They have managed to pay out a dividend or two, and they do buy back shares. 

From my original phone call I learned the CEO is old and wants to retire.  I thought that was a great catalyst to end this thing.  However, he keeps buying/increasing stakes in companies that he follows.  It appears he winding down some smaller positions and building up bigger positions (concentrating).  They originally had 2 analysts on staff to follow their companies, both of which they let go.  They still have a full staff of administrators.  They share offices with their largest holding, Diaz Resources, and share staff with them, too.

The most intriguing thing I heard in one of my phone calls was how they were selling their juniors into the liquidity crisis.  They said they were trying to preserve capital.  It appears, they raised cash during the crisis.  To me, this is borderline embarrassing.  They had too much cash going into the crisis, now they have even more cash?  I don't know what to make of this other than maybe the CEO is fully invested in the stock and manages it like his portfolio (and he's a chicken). 

To add to that confusion, when I read the management's quarterly report, it reads like a generic trade journal's assessment of the world economy.  It is bland and obvious.  If management is trading like they're writing then they will never get ahead because they nail consensus thinking.  I hope they put more work into all the microcap names they hold.   

Lastly, their DIAZ presentation talked about "selling texas gas assets when prices recover," which is not very encouraging.  They don't talk much about internal operations (as they should). 

They  have a lot of interesting microcaps, 59% of their portfolio is foreign oil & gas microcaps.   It's interesting to use their holdings as a starting point for ideas.  You'd hope that for a tiny speculative play to make it into their portfolio that Humboldt would have at least done a tiny bit of due diligence on it, giving you a starting point for looking at company that at least isn't a complete scam.  Then again, this strategy might be better employed on a company that takes more concentrated positions and has a better success record.   

idea# 4 SIGA

This entry comes from a highly rated vic idea. It's not a value investment but it does have a compelling risk/reward proposition and it was rated a 6+. Siga, the company, has a smallpox antidote.  It's not just a vaccine, it's an anti-viral treatment that also vaccinates. 
-------------------
Critical biological agents.  Category A - The U.S. public health system and primary health-care providers must be prepared to address varied biological agents, including pathogens that are rarely seen in the United States. High-priority agents include organisms that pose a risk to national security because they

    * can be easily disseminated or transmitted person-to-person;
    * cause high mortality, with potential for major public health impact;
    * might cause public panic and social disruption; and
    * require special action for public health preparedness

Category A agents include

    * variola major (smallpox);
    * Bacillus anthracis (anthrax);
    * Yersinia pestis (plague);
    * Clostridium botulinum toxin (botulism);
    * Francisella tularensis (tularaemia);
    * filoviruses,
          o Ebola hemorrhagic fever,
          o Marburg hemorrhagic fever; and
    * arenaviruses,
          o Lassa (Lassa fever),
          o Junin (Argentine hemorrhagic fever) and related viruses.
-------------------------

SIGA's drug for treating Smallpox:
Drug Name:        Tecovirimat [USAN]   
Search Term:      ST-246
Description:      A potent and specific inhibitor of orthopoxvirus replication.

Once you are infected with smallpox, you want to get some of this drug as fast as possible. 

----------------------

SIGA developed ST246 with the U.S. government and the U.S. gov't is in the process of buying it because smallpox is such a threat.  They've already bought some.  They're in talks to buy over $450 million worth.  If they fulfill order, it could mean at least $10/share in cash profit for SIGA... just the initial order.  It has ongoing maintenance portions, too, and other countries will likely want to stockpile it.  So, the upside of $30/share is reasonable.

Shareprice is off from it's recent $10 year high because the government modified their "rfp" the day after an offering of shares closed.  The timing looked bad.  Management denies they knew it was coming and thinks the change in rfp isn't particularly bad.  They're downplaying it.  The rfp was modified partially to include a competitor, Chimerix CMX001.

Poking around, it looks to me like st-246 is the best drug.  It was developed from the bottom up, instead of an adaptation to make an old drug, cidrofovir, tolerable.  In early RFPs it appears that the government was specifically asking for ST-246 by the way they posed questions, as if the RFP was a necessary step in getting the 1.7 million doses.  Obviously, the government has to go through a long process to buy something that may cost the taxpayer $450 million.

Both drugs have been tested on humans.  The competeting product, chimerix cmx001, is a form of cidrofovir anti-viral medication.  Cidrofovir is a general anti-viral.  The basic form of cidrofovir is toxic in large doses, Chimerix adapted it to be more tolerable.  Chimerix is a private company working on various viral disorders like HIV, with Cidrofovir as a starting block.

The "near term" value issue that makes this compelling trade is that they just did an offering ($7.35/share).  Analyst coverage can't begin for a couple of months.  The people who participated in the offering are disillusioned because the day after it closed some bad news came out (gov't RFP that could include CMX001).  VIC author thinks the investment banks that handled the deal will be shamed into somehow pumping it when the window opens and they can begin analyst coverage.

Billionaire Ronald Perelman bought a bunch of stock at $6.25.  He started investing in the company in 2003.  The VIC writeup says he is the CEO's boss at another company so it is thought that he has a good understanding of the entire situation.

I can't get motivated to buy a bunch more because CMX001 really might be the spoiler.  It looks like the gov't could buy all or half CMX001.   I also sense that SIGA isn't trying to do the best thing for shareholders.

None of the insiders at SIGA are selling but a high up phd from Palestine just stepped down.   I don't know why? 

I had fun playing around on this government website where the chain of RFPs exist:
https://www.fbo.gov/?s=main&mode=list&tab=list
It's interesting to see our tax money at work.  It's an elaborate form of government due diligence.

Why this stock is worth $2 or $10 I don't know.  I see how it could be worth over $30 but I don't know how to handicap the odds.  I'll buy a little and keep an eye on the RFPs. 

idea #3 NGPC

NGPC has been written up on VIC twice when commodities and
energy prices were trending higher, pre-2008. 
Both ideas centered around the NAV of the underlying assets, some of
which had public markets.  Both write-ups said
NGPC should trade at a slight premium based on (1) reputable management with access to small/midsize companies and (2) that it will pay higher yields as they become fully invested.  At the time, they were holding a large % of treasuries. They compared them to similar BDCs (not
necessarily in the energy market).    They argued that investors
weren't fully aware of BDCs and their unique tax advantages, so no one was paying attention.

 
The real bear case is that they have high expenses, similar
to a hedge fund, structured like 2/20 fees, and the investments they pursue don't pay enough to over come the expenses if even one of their portfolio investments doesn't pan out.  Overall, their fees including administration and incentives have averaged between 5% and 8% of
total assets per year.  That is a lot of headwind of expenses to push so I tend to agree that they don't deserve to trade at a premium unless perfect results from their investments are guaranteed, and/or they can make more than their targeted yields.  Their "targeted yields" on their investments are high (15% or so), and they do say all the right
things about being highly selective in choosing what they invest in (they buy 1out of 30 ideas they look at), but 1 bad investment brings the averages down,and they've had bad investments. 

 
If they make 25 investments with their capital and 1 investment is a complete failure, then it drags their returns down 4%.  Each failure takes it down 4%.   A huge negative event in the energy markets would take down more than 1 or 2 of their investments, whereas huge positive events wouldn't offer the investor much more return. 

 2 additional things
turn me off about this investment that don't get mentioned in VIC world:

 

They
have a lot of analyst coverage.  
Why do they have so much coverage? 
they have hinted they want to raise more capital, and indeed have
raised capital.  The bigger the
fund, the more money they make. 
Raising capital means selling shares to public.  To sell shares to public you need
coverage.  I don't want to be sold
stuff.  That being said, they are
incentivized to get this stock trading close to book value or higher so
they can rightfully keep raising capital. 
   

  

Natural
Gas Partners, the reputable company that started them, is a private equity
company that feeds the BDC fund most of the opportunities, (NGPC, the
tradeable BDC holds mainly bonds of these private companies).  I'm sure there are a lot of plusses to
them having the relationship with NGP, as their name and reputation may be
worthy, but we'll ever know where management's true allegiance lies since
NGP doesn't report.

 

 

 

Question remains:

 

Abandon this name entirely because of high expense fees.   It'll never be a great long term asset. 
It's not a great business, prone to blowing up.  While
their targeted ROI is high, it will not be consistently achievable.  

 

Or

 

Keep paying attention to it because of their unique access
to a certain market, experienced management team and consistent dividend.  There is much to be learned from listening to
their conference calls.  The guy is dry,
but candid.  Paying attention to their
nav and their market price will likely lead to more gains.  Don't buy anywhere near their nav or when
they are fully invested.  The investment
bankers covering this stock know more than me.