Greenlight Capital and Pershing Square Q2 Letters

Here are the Q2 letters from David Einhorn and Bill Ackman, who are actually quite good friends. It is interesting to see how their approaches differ with regard to the structural risks the U.S. is still facing:

Greenlight Capital Q2 Letter to Shareholders

Pershing Square Q2 Letter to Shareholders

And It Doubles...

Arctic Glacier Income Fund (AG.UN) mentioned here yesterday, issued a press release last night at around 7:30:

Arctic Glacier Income Fund announced that its U.S. subsidiary, Arctic Glacier International Inc., has reached agreement with the U.S. Department of Justice. The agreement settles all charges related to allegations that three former employees conspired with a co-conspirator company from January 2001 through July 2007 to allocate packaged ice customers in southeastern Michigan and the Detroit metropolitan area. Arctic Glacier initially entered into this market in 2005 when it acquired shares of certain companies in that market. Because it acquired shares it assumes liability for such practices and conduct in those predecessor companies. Under terms of the agreement, Arctic Glacier International Inc. agreed to plead guilty and to pay a fine of US$9 million, payable in instalments over the next five years. Arctic Glacier has also agreed to cooperate with the DOJ's ongoing investigation of other companies and individuals. The agreement remains subject to court approval.

The shares opened up 120% this morning.

Unfortunately, I did not have a position. This is just another example of why it makes sense to bet against the crowd.

The entire company is now trading at $156M in the market. Average cash flow has been about $30M for the past 4 years. If you take out tax they will have to pay once they convert over to a corporation, whenever they decide to do it, they are likely to produce $24M of cash. Therefore, the stock still looks cheap at 6.5 times. The packaged ice industry is the type of stable industry you would expect to be trading closer to 13 or 14 times.

SG

Stocks On My Radar

Although I have not had much time recently to do any in-depth analysis, here are some stocks that appear to offer interesting characteristics and the potential for an attractive buy price:

World Color Press – Previously, “Quebecor World”, in the printing business. The company emerged from bankruptcy protection on July 21, 2009. It entered bankruptcy largely due to financial issues rather then fundamental business problems. The common stocks of recently reorganized companies sometimes offer attractive buying opportunities due to selling pressure by previous debt holders. Reorganization information is at this link (including management projections):

World Color Press - Plan of Reorganization Documents

Arctic Glacier Income Fund - Recently cut their dividend. They are now the subject of US Department of Justice Antitrust investigation. The accusation is that Arctic Glacier and its peers in the packaged ice industry had been avoiding competing with each other in the same geographical market. One of their competitors the Home City Ice Co. has already plead guilty and is facing a fine of between $24M and $48M USD. Arctic Glacier is a larger company and is likely facing a fine larger than that if proven guilty. The stock is trading at approx. 2 times avg. cash from operations valuing the entire company at about $69M CAD. It looks like this might be too low even given the antitrust investigation and warrants further investigation.

AG Growth International – What a horrible name for a corporation…Sounds like something out of my grandmothers’ mutual fund portfolio. That aside, the company makes agriculture equipment and grain storage products. They have recently converted from an income fund to a corporation via reverse merger, which may be a cause for undervaluation. I don't know anything about the agriculture industry, but the shares look cheap based on how much they are on track to earn this year. Revenue for the first 6 months of 2009 vs. 2008 is up 34%, partly due to price increases. 3rd quarter is usually strongest for their seasonal business.

TVA Group Inc. – Trading at 6.5 times LTM Earnings. They are a francophone media company operating in 3 businesses: television (conventional and specialty), publishing and movie distribution. They are the market leader (about 56% market share) in the francophone conventional television market and are expanding into the more profitable specialty channel industry (currently 8% market share). Recently purchased Sun TV is losing about $6M after tax, and may be written off soon which will result in earnings increasing by about 10%. A rebound in the publication segment could produce comparatively large gains in earnings based on recent margin expansion in this business segment. The distribution business operates as a sort of "option" and can produce large gains depending on if any blockbuster films are released in a given year. The subordinated voting structure is a potential risk. One person I talked to suggested that the management might be depressing the stock price in attempt to buy the entire company cheaply. It is possible but it seems like they would be doing many more things wrong if they were trying to depress the stock price, rather then booking record revenue like they did in 2008. They have repurchased about 10% of their shares in the last year and have filed an issuer bid to repurchase another 5%. My feeling is that 6.5x earnings is much too low. For instance, competitor Astral Media trades at 12x.

Other stocks looking cheap at first glance:
- Clublink Corp.

I'd like to mention again that I have in no way done in-depth analysis on any of these stocks besides TVA Group. Thus far, they are just things I am looking into.

Disclosure: The above is in no way an offer or recommendation to purchase or sell securities. I own shares in TVA Group Inc.

SG

Margin of Safety - Updated Link

I received several requests stating that the Margin of Safety link was broken. Here is an updated link:

Seth Klarman - Margin of Safety

SG

The Extraordinary Share Performance of Shell Companies

Thanks to The Manual of Ideas and Greenbackd for this link.

Here is some research that shows that shell companies have a 48.1% 3-month abnormal return after a reverse takeover is consummated:

October 2009 — Empirical Finance Newsletter on The Stock Price Performance of Shell Companies


Note: The above is not a recommendation nor a solicitation to purchase securities.

SG

Updated Version of Tweedy Browne's "What has worked in investing"

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