Tweedy Browne Company has compiled a booklet of empirical research demonstrating which investment strategies have produced exceptional returns. It is well worth a read:
"What has worked in investing" by Tweedy Browne
SG
Saturday, October 3, 2009
Friday, September 4, 2009
Monarch Services – Undervalued Liquidation Play (OTC: MAHI)
Monarch Services is an undervalued asset play with a plan to liquidate and distribute remaining assets to shareholders. The company used to be in the publishing business producing a magazine called “Girl’s Life”, the rights to which have now been sold in exchange for a promissory note of $600000. Other assets included a restaurant business, “Peerce’s Plantation”, which has now been sold, and real estate adjoining the restaurant property. The company has not kept up to date with its regulatory filings due to the fact that it anticipates legal and accounting fees of up to $250,000 to accomplish this task.
In April 2008, the company published an 8-k report stating future business plans and containing pro forma financial statements for the year ended April 2008.
8-K
Analysis of these exhibits reveals cash balance of $698000 and remaining liabilities of $36000. There are also $941000 worth of assets held for sale, which consist of the housing (referred to as “GLPM”) and land real estate (referred to as “GLPP”) connected to the restaurant property. The company spent $479000 in administrative expenses between April 2007 and 2008.
Since April 2008 there have been several developments; namely the sale of the GLPM property for cash value of $560000 less $38000 closing expenses. Also, the company is in discussions with Baltimore County over the sale of the GLPP property for $624000 and is expecting closure in November 2009. The sale price could be substantially less than this value.
Also, the promissory note received in exchange for the sale of Girl’s Life magazine has substantially been written down to 0, implying the expectation of complete default. There is still the probability of receiving some denomination on this note although the value is probably negligible.
The $698000 cash balance was increased by $522000 due to the sale of GLPM, giving a pro forma balance of $1220000. Adjusting for a possible discount in the sale price of the GLPP property, 75% of the offer price is $468000. Assuming payment in cash, the balance increases to $1688000. Expenses in the year are likely to be less then the 2007-2008 period when the company spent $479000 in administrative expenses. However, in order to err on the conservative side, assuming there is no decrease in expenses the cash balance will be reduced to $1209000. Subtracting the $36000 in liabilities, the estimated cash available to the equity holder will be $1173000, calculated conservatively.
The current market value of Monarch Services: $891791.
Estimated cash available for distribution: $1173000.
This implies a substantial discount from realizable value. The possible gain is 32% in a few months, with no correlation to the overall market, if the November 2009 closing date is correct.
In April 2008, the company published an 8-k report stating future business plans and containing pro forma financial statements for the year ended April 2008.
8-K
Analysis of these exhibits reveals cash balance of $698000 and remaining liabilities of $36000. There are also $941000 worth of assets held for sale, which consist of the housing (referred to as “GLPM”) and land real estate (referred to as “GLPP”) connected to the restaurant property. The company spent $479000 in administrative expenses between April 2007 and 2008.
Since April 2008 there have been several developments; namely the sale of the GLPM property for cash value of $560000 less $38000 closing expenses. Also, the company is in discussions with Baltimore County over the sale of the GLPP property for $624000 and is expecting closure in November 2009. The sale price could be substantially less than this value.
Also, the promissory note received in exchange for the sale of Girl’s Life magazine has substantially been written down to 0, implying the expectation of complete default. There is still the probability of receiving some denomination on this note although the value is probably negligible.
The $698000 cash balance was increased by $522000 due to the sale of GLPM, giving a pro forma balance of $1220000. Adjusting for a possible discount in the sale price of the GLPP property, 75% of the offer price is $468000. Assuming payment in cash, the balance increases to $1688000. Expenses in the year are likely to be less then the 2007-2008 period when the company spent $479000 in administrative expenses. However, in order to err on the conservative side, assuming there is no decrease in expenses the cash balance will be reduced to $1209000. Subtracting the $36000 in liabilities, the estimated cash available to the equity holder will be $1173000, calculated conservatively.
The current market value of Monarch Services: $891791.
Estimated cash available for distribution: $1173000.
This implies a substantial discount from realizable value. The possible gain is 32% in a few months, with no correlation to the overall market, if the November 2009 closing date is correct.
Wednesday, August 19, 2009
Aberdeen International (AAB) - Value Opportunity
Aberdeen is an international asset management company. They have been primarily focusing on equity investments in resource-based companies around the world. The company has been repurchasing shares. The value to be found here is based on balance sheet numbers. The company is trading at a discount to its investment portfolio:
Market Value of Aberdeen Intl: $24M CAD
Market Value of Equity Portfolio @ April 30 2009: $37M CAD
The company may be undervalued in the market because of an unfortunate and complex situation in which a $10M loan made to South African mining company Simmers and Jack may not be repaid . Even with no value attributed to this loan the equity is still undervalued. As per the debenture agreement, the company is supposed to receive a 1% net smelter royalty from Simmers and Jack, which they have in fact been paying. This royalty is held as a long-term asset and is valued at $38M on the balance sheet. I believe this is a bloated number due to the fact that the company used a 5% discount rate, which would imply a risk-free return. In fact, Simmers and Jack has proven that any dealings with them are not risk-free by refusing to repay the $10M loan. I am inclined to say that the smelter royalties " are worth more then 0" from a conservative stance. The company also owns several other assets which may end in defaults, but are not truly material in terms of their value.
There are warrants outstanding for 42M shares expiring in 2012, which may be another reason for the undervaluation. The warrants are currently valued at only $2M by the market. The total value in the market is therefore $26M. Which is still less then the portfolio of securities. I am going to say that the warrants offer a much better vehicle for capital appreciation, due primarily to their lower relative price (8 cents a share vs 27 cents for common) and the time interval till expiry.
Disclosure: I own warrants and shares issued by AAB.
Market Value of Aberdeen Intl: $24M CAD
Market Value of Equity Portfolio @ April 30 2009: $37M CAD
The company may be undervalued in the market because of an unfortunate and complex situation in which a $10M loan made to South African mining company Simmers and Jack may not be repaid . Even with no value attributed to this loan the equity is still undervalued. As per the debenture agreement, the company is supposed to receive a 1% net smelter royalty from Simmers and Jack, which they have in fact been paying. This royalty is held as a long-term asset and is valued at $38M on the balance sheet. I believe this is a bloated number due to the fact that the company used a 5% discount rate, which would imply a risk-free return. In fact, Simmers and Jack has proven that any dealings with them are not risk-free by refusing to repay the $10M loan. I am inclined to say that the smelter royalties " are worth more then 0" from a conservative stance. The company also owns several other assets which may end in defaults, but are not truly material in terms of their value.
There are warrants outstanding for 42M shares expiring in 2012, which may be another reason for the undervaluation. The warrants are currently valued at only $2M by the market. The total value in the market is therefore $26M. Which is still less then the portfolio of securities. I am going to say that the warrants offer a much better vehicle for capital appreciation, due primarily to their lower relative price (8 cents a share vs 27 cents for common) and the time interval till expiry.
Disclosure: I own warrants and shares issued by AAB.
Sunday, August 9, 2009
Hudson Highland Group (HHGP) – Value Opportunity
Hudson Highland group is a specialized staffing agency. They provide permanent and contract based staffing solutions. Hudson was spun-off from Monster Worldwide in March 2003. That being said, the staffing industry is neither the most exciting industry nor is it unsatisfactory. The near term industry outlook is volatile, however, the longer term outlook is stable; people will always need jobs, just like they have in the past. For that reason I believe that HHGP’s past earnings record is sufficiently representative of the future to use it as a guide. As of right now the stock has a 51 M market cap and is trading at $1.93 per share.
First and foremost, the balance sheet in the recent quarterly report shows 46 million of cash and 11 million in borrowings. This leaves 35 million in net cash. Right away you can separate that cash from the operating business. If you take the cash value out of the market cap you are left with a value of 16 M for the operating business. This is far too low and I will show why.
The income account has been muddled up the past few years due to all sorts of reorganization expenses and acquisition integration expenses. The value of the company should be determined based on a valuation of each of the separate segments. The regional segments are Hudson Americas, Hudson Europe and Hudson Asia Pacific.
SEGMENT VALUATION
Hudson Europe and Hudson Asia Pacific are both satisfactory businesses that are profitable, even in the current climate. The loss reported as earnings is primarily a result of reorganization and losses suffered by Hudson Americas. The different segments should be valued separately.
I will allocate corporate overhead expenses roughly based on percentage of revenue basis for the purpose of valuation. Corporate overhead of 30 M is allocated as follows:
-Hudson Americas: 25% = 7.5M
-Hudson Europe: 37.5% = 11.25M
-Hudson Asia Pacific: 37.5% = 11.25M
I believe that the 2008 results are at minimum representative of the company’s long-term earning power because of the difficult climate. In other words, earnings going forward are likely to average at least as good as 2008 results.
Hudson Europe earned roughly 14 M in 2008 after adjusting for reorganization expenses and goodwill impairment charges. After deducting corporate expenses, after-tax earnings for Hudson Europe are roughly 4 M. Since the business has in fact grown over the last 5 years I’m inclined to use a satisfactory multiple of about 8. This gives the segment a value of 32M.
Hudson Asia Pacific earned roughly 14M in 2008 as well after adjustments. After corporate expenses income after-tax is roughly 4M. The valuation here is similar to Hudson Europe and I will also use a multiple of 8. This gives the segment a value of 32M as well.
Hudson Americas earned roughly -0.4M in 2008. After corporate overhead expenses the segment lost about 5.6M after-tax. This is not a horrible result considering the environment. Of course, if the segment were to continue losing money, it would have no going-concern value. Because Hudson Americas is borderline profitable I am inclined to say that the segment is not valueless. If it were trading in the market alone it would probably be valued based on current assets plus a premium for the prospect of profitability. At worst, I’d say this segment is worth 0, however, there is an embedded option which gives the chance for significant upside if the segment becomes profitable.
TOTAL VALUE
The total equity value is net cash + Hudson Europe + Hudson Asia Pacific + Hudson Americas. This calculation results in a value 35M + 32M + 32M + 0M (with possibility of upside) = 99M. At the current market cap of 51M this stock is trading at 50% of it’s value, leaving a wide margin of safety as well as a probably large gain.
US DOLLAR HEDGE BONUS
In addition, deriving the majority of sales overseas, the company is pretty good hedge against the US dollar which is likely to decline over the next 10 years.
Disclosure: I own shares of HHGP.
First and foremost, the balance sheet in the recent quarterly report shows 46 million of cash and 11 million in borrowings. This leaves 35 million in net cash. Right away you can separate that cash from the operating business. If you take the cash value out of the market cap you are left with a value of 16 M for the operating business. This is far too low and I will show why.
The income account has been muddled up the past few years due to all sorts of reorganization expenses and acquisition integration expenses. The value of the company should be determined based on a valuation of each of the separate segments. The regional segments are Hudson Americas, Hudson Europe and Hudson Asia Pacific.
SEGMENT VALUATION
Hudson Europe and Hudson Asia Pacific are both satisfactory businesses that are profitable, even in the current climate. The loss reported as earnings is primarily a result of reorganization and losses suffered by Hudson Americas. The different segments should be valued separately.
I will allocate corporate overhead expenses roughly based on percentage of revenue basis for the purpose of valuation. Corporate overhead of 30 M is allocated as follows:
-Hudson Americas: 25% = 7.5M
-Hudson Europe: 37.5% = 11.25M
-Hudson Asia Pacific: 37.5% = 11.25M
I believe that the 2008 results are at minimum representative of the company’s long-term earning power because of the difficult climate. In other words, earnings going forward are likely to average at least as good as 2008 results.
Hudson Europe earned roughly 14 M in 2008 after adjusting for reorganization expenses and goodwill impairment charges. After deducting corporate expenses, after-tax earnings for Hudson Europe are roughly 4 M. Since the business has in fact grown over the last 5 years I’m inclined to use a satisfactory multiple of about 8. This gives the segment a value of 32M.
Hudson Asia Pacific earned roughly 14M in 2008 as well after adjustments. After corporate expenses income after-tax is roughly 4M. The valuation here is similar to Hudson Europe and I will also use a multiple of 8. This gives the segment a value of 32M as well.
Hudson Americas earned roughly -0.4M in 2008. After corporate overhead expenses the segment lost about 5.6M after-tax. This is not a horrible result considering the environment. Of course, if the segment were to continue losing money, it would have no going-concern value. Because Hudson Americas is borderline profitable I am inclined to say that the segment is not valueless. If it were trading in the market alone it would probably be valued based on current assets plus a premium for the prospect of profitability. At worst, I’d say this segment is worth 0, however, there is an embedded option which gives the chance for significant upside if the segment becomes profitable.
TOTAL VALUE
The total equity value is net cash + Hudson Europe + Hudson Asia Pacific + Hudson Americas. This calculation results in a value 35M + 32M + 32M + 0M (with possibility of upside) = 99M. At the current market cap of 51M this stock is trading at 50% of it’s value, leaving a wide margin of safety as well as a probably large gain.
US DOLLAR HEDGE BONUS
In addition, deriving the majority of sales overseas, the company is pretty good hedge against the US dollar which is likely to decline over the next 10 years.
Disclosure: I own shares of HHGP.
Saturday, June 6, 2009
Forced conversion of Canadian income trusts creates attractive opportunity
The other day I had a pretty good idea. It is similar to the thesis for investing in spin-offs and re-organization securities.
The government of Canada recently implemented a tax law that removes the preferential tax treatment of income trusts, which were previously untaxed at the corporate level. Without the preferential tax treatment, financially, these "businesses" are better off under the corporate structure. And as of 2011 they must all be converted to the corporate structure.
These trusts were typically held because of their high annual cash distributions yields. When these trusts convert to the corporate structure they will either cut the dividend drastically in order to keep cash in the business or change to growth oriented model in which the dividend is cut completely. What happens here is that all the pension funds, insurance companies and dividend mutual funds that had owned units in these trusts are forced to dump the units because they must hold income paying securities. The forced selling causes downwards price pressure and the price becomes disconnected from the underlying value of the company. This is an attractive purchasing opportunity; eventually the market will weigh the proper value of the company and will be reflected in the per unit price.
SG
The government of Canada recently implemented a tax law that removes the preferential tax treatment of income trusts, which were previously untaxed at the corporate level. Without the preferential tax treatment, financially, these "businesses" are better off under the corporate structure. And as of 2011 they must all be converted to the corporate structure.
These trusts were typically held because of their high annual cash distributions yields. When these trusts convert to the corporate structure they will either cut the dividend drastically in order to keep cash in the business or change to growth oriented model in which the dividend is cut completely. What happens here is that all the pension funds, insurance companies and dividend mutual funds that had owned units in these trusts are forced to dump the units because they must hold income paying securities. The forced selling causes downwards price pressure and the price becomes disconnected from the underlying value of the company. This is an attractive purchasing opportunity; eventually the market will weigh the proper value of the company and will be reflected in the per unit price.
SG
Friday, June 5, 2009
Being right for the wrong reasons -- XTENT Inc. (XTNT)
On May 15 XTENT Inc filed a preliminary proxy form stating the company's intention to liquidate and distribute all remaining assets to shareholders. The estimated liquidating distribution was 0.11 to 0.40, quite a wide margin. I bought this stock on May 17 for 0.30.
A look at the table stating how these numbers were estimated showed that the only major divergence was in a category called "Total estimated liabilites and reserves". A footnote stated that this category "Includes (i) approximately $0.7 million and $0.9 million in the high and low estimates, respectively, in accounts payable and accrued liabilities, (ii) approximately $0.5 million and $5.3 million in the high and low estimates, respectively, reserved in connection with resolution of pending and potential litigation, claims, assessments and related obligations and liabilities." Reading this I proceeded to attempt to find what the 5.3M liabilities consisted of in order to weigh the probability of these 2 estimates. The balance sheet showed only 1.76M total liability, plus a reference to commitments and contingencies.
A look at commitments and contingencies showed that most of the liabilities were based on payments that XTENT would have to make IF CERTAIN MILESTONES WERE MET. Since the company was liquidating these milestones were not likely to be met. There were also license agreements for minimum royalty payments, none of which added up to 5.3M. I could not find a scenario under which the company would be required to pay out that much in liabilities. Therefore, I thought the distributions were likely to come in at the higher end of the range, and I purchased the stock.
The estimated distributions did not include sale of any intellectual property rights, which I thought was also a highly likely scenario because they had recently received CE Mark approval for a system in March 2009. I figured that I was paying absolutely nothing for this option, since the normal distributions were likely to come in higher then 0.30.
On June 4th the company announced that it had received FDA approval for its stent system and the stock jumped up to 1.60 and then to 2.10. I averaged somewhere in between for a total return of 490%
In this instance I was right but for the wrong reasons. I'll gladly take the earnings.... but it is unlikely to be repeated.
SG
A look at the table stating how these numbers were estimated showed that the only major divergence was in a category called "Total estimated liabilites and reserves". A footnote stated that this category "Includes (i) approximately $0.7 million and $0.9 million in the high and low estimates, respectively, in accounts payable and accrued liabilities, (ii) approximately $0.5 million and $5.3 million in the high and low estimates, respectively, reserved in connection with resolution of pending and potential litigation, claims, assessments and related obligations and liabilities." Reading this I proceeded to attempt to find what the 5.3M liabilities consisted of in order to weigh the probability of these 2 estimates. The balance sheet showed only 1.76M total liability, plus a reference to commitments and contingencies.
A look at commitments and contingencies showed that most of the liabilities were based on payments that XTENT would have to make IF CERTAIN MILESTONES WERE MET. Since the company was liquidating these milestones were not likely to be met. There were also license agreements for minimum royalty payments, none of which added up to 5.3M. I could not find a scenario under which the company would be required to pay out that much in liabilities. Therefore, I thought the distributions were likely to come in at the higher end of the range, and I purchased the stock.
The estimated distributions did not include sale of any intellectual property rights, which I thought was also a highly likely scenario because they had recently received CE Mark approval for a system in March 2009. I figured that I was paying absolutely nothing for this option, since the normal distributions were likely to come in higher then 0.30.
On June 4th the company announced that it had received FDA approval for its stent system and the stock jumped up to 1.60 and then to 2.10. I averaged somewhere in between for a total return of 490%
In this instance I was right but for the wrong reasons. I'll gladly take the earnings.... but it is unlikely to be repeated.
SG
Friday, May 15, 2009
Read This Letter to Buffett!!
One of the major questions I always had while learning about Warren Buffett and reading his annual reports, was why he suddenly switched from investing in Graham type companies to the "great" companies he now speaks of. Some say it is Munger's influence, and I think it partly is. But I think another reason is because he simply had too much money to put to work in Graham type plays. I was always nervous investing in small, problematic companies even after I'd read Graham because it really doesn't make much logical sense. But the fact is, these companies are just simply more undervalued then the "great" companies that you can sometimes buy at a small discount to value.
This was the proof I needed:
Dardashti Letter to Buffett!!
SG
This was the proof I needed:
Dardashti Letter to Buffett!!
SG
Tuesday, April 28, 2009
Seth Klarman - Shareholder Letters
Came accross a link to Seth Klarman's letters to shareholders from 1995-2001. Particularly interesting, is the breakdown of his portfolio allocation and returns. Also, he talks in great detail about the frothy market environment of the late 1990's. It's always interesting to see what strategies these experienced veterans are employing and how they turn out in different types of markets. Sadly there is no letter in this compilation from a year where there was a bear market. Anyways, here is the link:
Klarman Shareholder's letters 1995-2001
Thanks to distressed debt investing for this compilation.
SG
Klarman Shareholder's letters 1995-2001
Thanks to distressed debt investing for this compilation.
SG
Wednesday, April 8, 2009
Neose Technologies (NASDAQ:NTEC) Liquidation
I took a position earlier this year in Neose Technologies after they had announced their intention liquidate. They were a development stage biotech company that had not been profitable since inception. I took the position after they announced that they had been able to find buyers for their 2 patents. I essentially thought this situation was a low-risk scenario, ie. heads I win a lot, tails I don't lose much. In their filing for the asset sale they described their intention to distribute proceeds of the sales to shareholders of record. Their was a table showing management's estimates of what the payoff would be. Essentially, the payoffs ranged from $0.36 a share to $0.52 a share. The stock was trading at $0.35.
An analysis of the estimated distribution table showed that the only thing the amount of the final payoff depended on was the company's ability to either renegotiate their office lease, or sublet the lease. I thought either of these situations were highly likely, and therefore the expected payoff could be closer to $0.52 rather then $0.36.
On March 24th NTEC announced their initial distribution of $0.33 a share. Shareholder's on the last date of record will have received this amount plus the remainder when all liability claims are settled. Management's estimate is still between $0.36 and $0.52 a share. Even if the payout comes in at the lower end of the range my position will still be profitable.
UPDATE
I sold my shares after the stock transfer books closed on the OTC market for .12 a share. I received in total .33 + .12 = .45 on a .35 investment. My return was 29%.
These opportunities are great because they have no correlation to market activity and can help lift a portfolio in a bear market.
SG
An analysis of the estimated distribution table showed that the only thing the amount of the final payoff depended on was the company's ability to either renegotiate their office lease, or sublet the lease. I thought either of these situations were highly likely, and therefore the expected payoff could be closer to $0.52 rather then $0.36.
On March 24th NTEC announced their initial distribution of $0.33 a share. Shareholder's on the last date of record will have received this amount plus the remainder when all liability claims are settled. Management's estimate is still between $0.36 and $0.52 a share. Even if the payout comes in at the lower end of the range my position will still be profitable.
UPDATE
I sold my shares after the stock transfer books closed on the OTC market for .12 a share. I received in total .33 + .12 = .45 on a .35 investment. My return was 29%.
These opportunities are great because they have no correlation to market activity and can help lift a portfolio in a bear market.
SG
Monday, April 6, 2009
Forgent Networks (ASUR) - Arbitrage Opportunity
Forgent networks (NASDQ: ASUR) will be undergoing a going-private transaction. All holders of less then 750 shares will be cashed out at $0.34 per share, approx. 126% premium to today's price of $0.14. The transaction is still in it's preliminary stages and a definitive vote date has not yet been set. Probability of success is quite high as the stock will be forced to de-list, due to NASDAQ requirements, if the company is not voluntarily taken private. If the company is forced to de-list it will still have to incur expenses associated with regulatory reporting, whereas if the transaction is approved it will no longer have to file the required regulatory materials. Since the going private transaction is the more favourable of the alternatives, it can be expected to be approved.
SG
Disclosure: I own ASUR
SG
Disclosure: I own ASUR
Subscribe to:
Posts (Atom)