AVCA CEO/CFO buy more shares

I continue to sit on a fair amount of cash, which is the overwhelming vast majority of my total net worth. I also continue to own a select few equities: Advocat (CEO and CFO recently purchased more stock...very encouraging), ARI, Zunicom, and RELM. All trade at attractive multiples, have conservative amounts of net debt, and are misunderstood or ignored. I am happy to be an owner in each of the companies. Looking at these companies differently, you can consider putting your money into an online savings account like ING or HSBC at 3%. With recent fed cuts, pretty much any bank product looks really unattractive at the moment. Assuming that the business models don't fall apart, I am currently earning substantially above 3% by investing in the 4 stocks mentioned above, without taking on much risk (as the companies aren't extensively levered). I'll spare you the math, but when a company that prints money trades at an attractive multiple comes across your screen, why pass it up? Problem is, I've been finding very few of those companies recently so despite the low yield I am earning on my cash I'll be patient until the right opportunities come my way. Although the markets have come down a little I still believe there's more room to the downside. There will come a time in the near future (I believe) when the markets will be on a fire sale and all the levered hedge funds that exist today won't have the money to buy anything. That's when I'll make my move!

ARIS update

I continue to own ARIS. I admit that I started buying this a titch too early, with my first trade occuring at $1.90/share in March of 2007. Since then, I have substantially reduced my cost basis and am comfortably in the black. These upcoming quarters will be easy to beat(I am primarily referring to comparisons vs. last year's quarters, which were weighed down by 1-time costs...consensus numbers are probably stale, from what I can tell. I don't know if I'd put too much faith in such a small-side research shop, anyway! Besides, ARI paid 21st Century to initiate coverage. I won't be taking advice from 21st anytime soon, to say the least!). In order to really look at this correctly, you have to look at not FY2007 numbers (7/31/2007) but on a go-forward basis, which the company is guiding to at least $3M in EBITDA. Earnings on a go-forward basis are probably closer to $.40/share. With close to $0 Net debt it looks great at 4.3x EBITDA, compared to the 8.5x that ProQuest sold a similar-type business to Snap-On. The 4.3x EBITDA looks even better when you consider the recurring-revenue type business the company has.

Competition update

Now that we're a couple of weeks into the competition I thought I'd give an update on the results so far. It isn't too late to join and the competition ends April 30th. To view the results click here

The Purpose of ValueInvestingPlanet.com

As you've noticed, I've integrated my blog with the new site. I've decided to host this blog, which contains all my past postings, at the new site. The following is an overview of the site: I created valueinvestingplanet.com with the idea to help professional value investors connect in real time with others. As a professional investor myself, I've learned that good investment ideas don't just happen but can be generated through effectively networking with the right people. In my case, my network has been invaluable in not only helping me generate ideas but with questions I have about taxes and how to value special situations, among others. I wanted to extend my network and therefore created valueinvestingplanet.com with the intent to help others do the same. This is a side-project separate from my dayjob and features will be added as appropriate. I don't edit content (I don't have time!) but leave it up to the users to manage their own networks and filter out spammers, etc. So far, this method seems to be working.
There are other networking websites that are geared towards investing and I encourage you to check them out (just do a quick google search and you'll come up with at least a few). V.I.P. is a bit different in how it operates. No application is required to join and we won't drive you to use our trading platform (I don't plan on adding one either). Also, I believe you'll find more credible research than you'd find from message boards as you have full control over who's in your network and who isn't. Users can create a closed network (invitation-only), semi-private (new members have to be approved by the moderator of the respective group), or public. To-date, most of the groups on this site are private groups and you won't be able to find them through a search (that's the point of being private, right?). If you don't have an established network of your own, try creating a public group.
My background, as I've alluded, is investing. In addition, I am the author of valueinvestingplanet.blogspot.com. (I am in the process of hosting the blog on a separate section of this website and as I write this it isn't quite ready.)
I hope you like the site. If you have any questions about me, the site, or any sort of feedback you may have you can email me at admin@valueinvestingplanet.com.

The Mano-A-Mano Stock Competition

There are fantasy stock sites and then there's the Mano-A-Mano stock competition I am hosting at http://www.valueinvestingplanet.com/groups/mano-a-mano. The grand prize for picking the best performing stock is $1,000. Second place can get $600. There's a twist: depending on how many people sign up for the competition, the prizes can be much greater as ALL entry fees will go to fund the grand payout, which will happen at the end of the 3-month competition. You can enter as many times as you'd like. Full details of the competition are posted in the link I referenced above. Good Luck!

New idea posted

I've posted a new idea to the new site. While the majority of the users on the site have been able to access valueinvestingplanet.com just fine, there was a bug in my code that prevented a small amount of users from actually seeing the blog entries for the groups. I've corrected that bug. Here is the group link where I have my new posting: http://www.valueinvestingplanet.com/groups/valueinvestingplanet

Stock screener updated

I am very pleased with the results to date from the new site. While there aren't a lot of public or moderated groups on the new site (mine being one of them) there have been numerous private groups created, suggesting that people transitioning to the new site are doing so with their own established networks. For those that don't have networks you can set up a public group (or a moderated one) and invite people to join.

For those that haven't made it to the new site yet I encourage you to give it a try. I think it is a happy medium between existing resources: with message boards (i.e. Yahoo) on the one side and sites like valueinvestorsclub on the other. We all know the flaws of message boards and VIC gives you delayed information, unless you submit an idea to the moderator; most of which (so I hear) get rejected. (One of those rejects was mine on UST, which subsequently went up 60% a couple of months thereafter. I guess that wasn't good enough for them or something but I'm not bitter.)

In order to help with the transition I will be posting updates periodically on this site. If you've already transitioned to the new site, no worries: there won't be anything of real substance on this "blogspot" site. Instead, I'll provide a link to the new site.

Now that I can post attachments and files more easily I will be doing so and plan to let users do the same and share files within their group(s). I updated my stock screener today and thought others might be interested. It can be found here.

Introducing Valueinvestingplanet.com

I realize that this is the 30th time I've apologized for not posting as frequently as I've wanted. Truth is, I've been busy with a new website, valueinvestingplanet.com. I've yet to find an effective way for investors to share information freely but without the clutter you'd typically find on message boards; hence, I created V.I.P.. I've transferred my blog to the new site and this will be my last post at the .blogspot address. The new address is http://www.valueinvestingplanet.com/groups/valueinvestingplanet. (Registration is free.) The site is somewhat barebones and I plan to add features "as we go". If you have any suggestions for new features or have problems registering you can email me at admin@valueinvestingplanet.com.

Enjoy!

Updated results

Thought I'd make a quick update on my results YTD and have posted them here. Results to-date have been driven by Addvantage, which was a big winner for me. Also, Isaac put in a bit of a contribution. I've also added to my puts by a small amount including a new position against the Brazil ETF. I view my puts as one investment and haven't beaten myself up too much over having very poor results in any particular put. I view it as a dollar-cost averaging of sorts. When the mkt has a run I choose another put. Therefore, I am not just banking on any particular mkt to fall but am making a broader bet that something will fall, although I do believe that mkts are connected and that if one market falls many others are likely to follow (read: Long Term Capital Management scenario of sorts).

One thing I should point out is that I began my portfolio at the beginning of the year and the $ amount has grown remarkedly due to my overall conservative persona (I stash away a large amount of what I make). That has led to two things: My current position in AVCA is MUCH bigger than my AEY position ever was (on a $-basis and not necessarily %-terms). Being just over flat on AVCA vs. a huge gain on AEY has brought my overall portfolio results lower; much lower. Also, I have a large amount of cash on the sidelines (relative to my overall portfolio). Also, I have no position in UPG; its just something I follow due to its connection with Zunicom.

"I don't care if the fed cuts rates" What?

I've been catching up on my blogs this weekend and notice quite a few sites are quoting Buffett on what he said recently (and what he's pretty much always said) regarding watching the fed. I agree and disagree. Here's why you shouldn't care if the fed cuts rates: it shouldn't matter to your current positions whether the fed cuts rates or not. Unless there is an arbitrage situation around rate cuts (I know people who can do this but its way over my head), trading off of rate cuts in and of themselves is ridiculous. But here's why you should care: a year or two from now is when the economy and companies really start feeling the effects of rate cuts (from what I've heard...correct me if I'm wrong....it's an 18-month lag or so). At any rate there is a lag effect. Inflation and growth don't pick up/dropoff immediately but takes some time after a fed cut or increase. Stocks usually get an immediate boost or experience an immediate fall but over time generally follow what's going on in the economy. My future buying (and shorting) opportunities depend on what the fed is doing now so the fed's action cannot be ignored. True, my decision to sell AEY had absolutely nothing to do with fed cuts. It simply reached what I feel is full valuation. Same can be said about holding Advocat or even my puts on the market. The recent cuts are only delaying, and even potentially amplifying, the fallout from bad decisions by many people: consumers buying houses they couldn't afford, private equity levering up companies to the yin-yang, and even traders levering up to speculate on the next LBO candidate. Housing prices have just started to come down and while subprime is just a small percent of the overall housing market in and of itself, as defaults rise so will inventory of homes, which pushes down housing prices for everyone. Oh, did I mention that a large part of consumer spending has been driven by people borrowing against the value of their homes?

Long-term Holder, part II

As an addition to my prior post on an optimal holding period I never understood why Warren Buffett prefers to hold stocks indefinitely. His favorite holding period is forever, as he says. I don't understand it. Don't get me wrong! I'm not trying to pull a Mark Carhart/Ray Iwanowski-esque move nor would I want to put that sort of jinx on myself (for background Carhart and Iwanowski run Goldman's Global Alpha fund. Yes, the one that's down a large amount this year. A while back they ripped on Buffett in a Bloomberg Markets magazine and are now probably feeling a bit foolish themselves). Buffett is one of the smartest investors around. He's a billionaire for a reason. I believe his best days were back when he was running his partnership and probably even into the early years at Berkshire. He had flexibility then. He wasn't encumbered by billions that needed to be put to work. His style has clearly changed and he's admitted so much himself. (To see what I mean, compare a recent Berkshire annual report to the early Buffett Partner letters. I have a link to Jim Chuong's website with the Partner letters. I highly recommend them.) I make the point because a lot of early investors mistakingly follow Buffett as he is now and not how he was. It was a mistake I made early on. I looked for great companies and worried about price later. I believe it should almost be the opposite. Every company has a price. When you buy something, you must demand that you pay far less than what it is worth. The more conservative the better. As for your holding period it should be only until that asset reaches fair value. After that, what is there to gain? Why not take that money and reinvest it in another asset that is more substantially undervalued? Always taking taxes into account you have to decide between the best course. This is my argument against a long-term holding period just for long-term holdings sake. This is also behind my rationale for my decision to sell AEY at this point. I believe there will be better opportunities to come and I sold AEY at a very good price. It may or may not be the peak of AEY but taking into account the risk of it going back down to $6 I believe I made the best decision. Time will only tell.

Sold AEY

I finished selling off AEY. Ended up with a 170% gain in less than a year (after trading costs). I bought the shares Dec. 29th, 2006 for $2.77/share and sold some at $8 and then some more today at $9.15. Not bad but hope I can keep it up. At this point I have higher expectations for AVCA but we'll see how it turns out.

On another note, I am dissapointed w/ the 50 bps rate cut that happened this week. I feel that the Fed is just bailing out those that made bad decisions; overlevered homeowners and homeowners who ignored the fact that their adjustable rate will reset one day, private equity that made bad deals (and are now trying to get out of them) and overlevered hedge funds. This is absolutely ridiculous! Meanwhile, the Fed believes inflation is under control. Well, it isn't. Reading through transcripts of some major restaurants and fast-food chains I get the strong sense they will be raising prices. Just one example: Cheese costs are killing the pizza guys. A rate cut at this point is just delaying a bad thing and possibly making the situation worse. I hope people default on their mortgages and get their houses taken away. I hope private equity gets screwed. I hope all those overlevered hedge funds go out of business. It may sound reckless of me but a correction every once in a while is needed to keep the economy in check. The Fed should let the markets do their thing! 'nuff said!

Volatility...what?

I love volatility. It creates opportunities. In fact, I can't wait for the market to tank so I can put more money to work. It will give me the opportunity to load up on AVCA and some other names that are on my radar screen. So why does the market dislike volatility so much? It's because, for the most part, investors/speculators/what have you's are fully (or close to) invested. While I can't guarantee that my holdings will not decline substantially (which I hope they won't!) when my dreams of market turmoil come true I believe the opportunities created in such a situation will dramatically outweigh any short-term paper losses. Wait a couple of years when the market rebounds and that strategy will be proven, as loads of academic research have proven during many decades over. Stay flexible for the real opportunities that will soon be coming!

What is a long-term holder?

Something I've never quite understood, and feel free to explain this to me, is how or even why people claim to be long-term holders. The way I see it every company has a business value and a stock value; Oftentimes, these are equal. Oftentimes, they are not. What I don't understand is that almost every investor/trader/speculist out there claims to be buying whatever it is they are buying because the stock value is below that of the company (read: intrinsic value). Why is it, then, that people claim to be long-term holders? Why not just hold it until stock value = company value? One thing is taxes, of course. However, most will claim that when they speak of "long-term" they mean much greater than the one-year threshold whereby your capital gains taxes drop dramatically. If your stock reaches full valuation and you will have no tax advantage (or any other) then why continue to hold it? What does having a 3-5 year holding period mean? Seeing this in funds' marketing materials is meaningless and even anti-smart (read: dumb).

I need a girlfriend (and Zunicom (ZNCM))

My idea of "fun" these days is reading 10-K's during Labor Day weekend. I need a girlfriend....

....On another note, I recently added Zunicom to my portfolio. Please note that it has a mkt cap of a puny $7.5M; for those that think they're "too big and too cool" for this then you might want to move on to a larger idea.

The rational underlying this is that it has a negative enterprise value for a company that currently is doing pretty much nothing and has a net cash position (including notes receivable). In addition, there is somewhat of a hidden asset on the balance sheet in their 40% ownership of publicly-traded Universal Power Group (UPG). This, of course, will fluctuate as the price of UPG fluctuates but can be hedged out of the equation if you desire. For my purposes I have not shorted any UPG as, on a valuation basis, it may actually be pretty decent. I must admit, though, that I have not dug through UPG's statements to know for certain. For now, I will leave this portion unhedged.

Admittedly, Zunicom is in a dying industry. Ever been in a business center at a hotel? ZNCM essentially provides the software behind some of that. They are in about 350 hotels but that number is declining as hotels are adding wireless and internet capabilities to each room, rather than to a single business center. Probably not a good business in and of itself as it is burning cash (on a pro-forma basis, excluding the UPG results). In a year, however, they will start receiving principle payments on some debt from UPG itself, which will turn a cash burner into a cash generator. On my numbers, they could generate $750K to $1M in cash per year for 4 years, after which the notes will be paid off.

How I think about this: The company holds a $9.2M position in UPG, has a net cash position of $6.4M, including the notes receivable and preferred stock, is burning some cash. As it stands the EV should be roughly (9.2+6.4=15.6) 15.6M as I see it, maybe a little less. However, the current EV is a negative $8.2M, leaving for a possibly large upside. This excludes their NOLs. As I am writing this I am almost falling asleep so if I've double-counted somewhere or missed something in the write-up please let me know.

Ticker request

Hey, if anyone has access to Factset I would greatly appreciate it if you could send me a list of all tickers that are listed on the U.S. exchanges (you can do this through the universal screening app). I am updating my screen and believe doing this in Factset is much easier than through Bloomberg but I could stand corrected. Unfortunately, I don't have Factset.

valueinvestingplanet@gmail.com

oooh, how I learn

In my original post to Advocat I mentioned something along the lines of management being not so smart. I was wrong. In fact, at this point I am leaning the other way. For those who followed the drama, Todd Robinson lost his case and is taking some sort of sabbatical. My guess is that he was going to go on vacation whether he won or not. His letter that he sent to a few of us was very telling of his character. I never felt comfortable supporting him and am glad he did not get his way as he probably would have tried to sell his properties to AVCA. For those interested in the letter you can email me at valueinvestingplanet@gmail.com.

Back to my original point. It became more clear to me about the ability of management on their most recent conference call a few months back, given their comments around valuations regarding potential acquisitions. All will be told, however, when (or even if) they acquire someone. I still believe a buyback is their most compelling option at this time. I'm still learning about them but just wanted to clear up my position as it stands at the moment.

I got what I wished for....

In my last post I reviewed my results and stated something along the lines of wishing I'd gotten more contribution from my puts. That came true. Unfortunately, it came at the expense of Addvantage to some extent. It's still handily positive, but sucks when it gets walloped in a short amount of time. I'm still happy holding it, though.

On another note, I added to Advocat given the fall today. Insiders purchased a bit of stock a few months ago at higher levels than that which I was able to purchase today so I feel somewhat encouraged.

Overall, I've got a lot of cash so I'm happy with the increased volatility of late. It gives me more opportunities. I'll be hunting this weekend for some fallen microcaps of late and I'll keep you posted should I find a new idea. (For those who just started following this blog I limit myself to small and microcap names so as not to create a conflict of interest with my current employer.)

Isaac and results

I closed out my position on I.C. Isaacs. I didn't do it because I feel that it is now overvalued. Quite the opposite. I made 14.5% after commissions in a short time so I decided to take some short-term profits. While I still feel that the stock is extremely undervalued there will be volatility in the short-term. Their CEO left recently and the company really hasn't found its strategy. I believe they will continue to miss numbers in the short-term so I figured, why not take some short-term gains and buy it again when it dives?

On another topic I recently updated my results page. I am up 23% YTD vs. the Dow at 11.6% and the S&P 500 at 9.5%. Contributing the most was obviously Addvantage Technologies which racked up around a 100% gain in 6 months. Not bad, but I'd like to see a more even contribution from some of my puts (currently represent about 24% of my overall portfolio) which so far have been negative....really negative. With the market reaching these highs the puts will probably be underwater for a while. I can handle that.

http://spreadsheets.google.com/pub?key=pwqST289klpu0tBGv8RDEPQ

Comments about my puts

Some readers have contacted me about my position in puts as I've made no mention of them previously. First and foremost, I wouldn't recommend options as a core strategy and people should use them only if they are experienced and are comfortable with the idea that they could expire worthless. As a value investor committed to not losing money this seems like an oxymoron. Viewed in the context of risk/return I believe it is acceptable (at least for me). You may first notice that to date I haven't done particularly well with the puts. I believe, however, that there will shortly come a time when the options will be much more valuable than the market is currently quoting them. These days, everywhere I look I see analyst reports with embedded LBO models. The idea that many "investors" are hoping, or even expecting, their holdings to get bought out at 10x EBITDA, or more in many cases, brings to mind the "greater fool" notion. Further, financing these deals with leverage upon leverage isn't going to bode well in the end. The days of historical low volatility will one day come to an end, be it tomorrow or at some point further down the road.

Portfolio update

For full disclosure, which I believe my readers deserve, I will regularly show my performance. While I won't show how much I've invested in each position (for confidentiality reasons) the overall performance of the portfolio and of each individual position will give you at least some idea of my weightings.

Unfortunately, blogger won't let you copy and paste stuff easily, so here is a link.

New things brewing and an update on AVCA

I've been tinkering with a new idea on changing the format of the blog. I plan on announcing the overhaul within a few weeks; once I have the time to fully implement the changes. In short, this will hopefully help to align my interests w/ those of my readers. The problem stems from the donations not quite keeping up with my recommendations. While I've received many generous donations from regular readers I know there's more people reading this blog out there and the viewership has been growing steadily. Thank you to those that have donated. For those that have made money from this site I remind you to consider donating as that will motivate me to continue w/ this forum.

In other news there has been some news on Advocat. For background, AVCA management pushed up the date of their annual meeting to, seemingly, make it practically impossible for activists to nominate their own director(s). However, Todd Robinson filed a proxy statement that effectively asks shareholders to stop AVCA from holding the early meeting to give time for some new nominees, including Todd and 2 others. While I don't know the full intentions ofTodd, I believe it is a better alternative than where we sit now with the situation. I don't know if I'd give my full support to Todd & company at this point, given that I don't quite know the full intentions of Todd. I recommend other shareholders vote to stop the meeting from happening so soon until we can find out the full intentions of Todd & company and then make a more informed decision at a later date. We have nothing to gain by voting in favor of current management. According to Amit at Kinnaras the activist group has a backing of about 45% of the shares, which Kinnaras recommends support Todd's push.

For further background on AVCA please email me at valueinvestingplanet@gmail.com and I'll get you a copy of Kinnaras presentation, which sums up the company quite nicely.

Regards,

Spreadsheet

Shot down

I was planning on a post of a small company that manufactures electronic components. It is extremely small but appears really cheap. However, I don't believe the potential return is substantial enough to pursue so I won't post it. As this blog is reserved for my best ideas I will pursue different names at this point. Will keep you posted!

Any guesses on my next idea? (Hint: it's cheap!)

Nothing new to report but am working on another small cap trading below book. The purpose of these tiny little updates is to inform readers that I haven't died but am working on an idea and that they should check back sooner rather than later.

-Spreadsheet

ISAC

I.C. Isaacs. That's my pick. As I said, it is very small...roughly $12M but looking at a chart of their stock lately, the market cap was much larger just a few months ago....in fact it was 6x larger as recently as Nov.

I admit, from a fashion perspective, the company isn't the most attractive thing on the planet as they are the lincensee of the once-popular Girbaud clothing. I don't know anyone who wears the brand anymore. I haven't worn Girbaud since I was 12, I think.

Valuation-wise, it trades at 5x TTM earnings but the value of the company extends beyond their operating business. For instance, they own 110K sq. feet of office and distribution space in Maryland and Delaware. First and foremost, I am no expert on real estate nor claim to be one. But a quick check on the value of space in those states on google has space selling for $100/sq. foot, maybe even higher. This would mean the real estate alone is worth $11M. Property is carried on their books for $8M or so.

While I have a decent size position in this name I am being opportunistic as the shares have been very volatile. I bought at a great price and am happy with my position but if someone wants to sell for lower than my basis, I'll be a happy buyer. Patience, grasshoppa!

Another small, tiny one but WAAAAAY too undervalued

I can't help myself. When I see something blatently undervalued I have to go after it almost no matter how small it is. In this case, its really small and really undervalued. I've finished w/ half my work on the name but just want to let my readers know that another idea is in the making. Will post the idea ASAP...perhaps this weekend.

AVCA anyone?

Shares of AVCA have been down and I've been picking them up. If you're not familiar with the story, send me an email and I'll shoot you over some slides prepared by a fund that's heading up a bit of activism on the name. valueinvestingplanet@gmail.com

While I don't have time to write a lengthy piece here's the short story: trades at a discount to peers, not-so-smart management (which will hopefully be resolved by the activist). At this price, I believe the negatives are well-priced into the stock. For additional info, check out the post on seekingalpha.com by Kinnaras.

Happy searching!

Apologies, again....well, sort of!

My apologies (again) for not updating my posts as frequently as I'd like. I had an interesting idea but haven't been able to buy it at quite the right price as it's moved up a little. The shares trade infrequently. If it drifts down, I'll do a write-up and let my readers know as soon as it does. In the meantime, I don't want to put the idea out now as I want to limit my recommendations. Were I to post all my ideas that are only so/so, then this site would be chock-full of ideas that are only going to perform so/so. Concentration of your best ideas, I believe, will lead to the best long-term results. My goal is to make a site of my best ideas so I plan to post on ideas only when the price is right.

Speaking of writeups, Addvantage Technologies (AEY) surged on December quarter results (FY ends 9/30, so Dec. is their 1Q). As AEY has been my only true writeup so far, I hope there will be many more to come that turn out as good as AEY. Those that bought on the writeup (Jan 3, 2007 would have been your entry at $2.71 if you bought immediately after the post) are up 34%; not bad for a 2 month holding period.

Recurring revenues: a preview of what's to come

I anticipate a new writeup for mid-next week but it depends on how much time I'll have to complete the research on the idea. While I've listened to some conference calls, have read up on the company and have some sense of the valuation, I need more time to give some thought to the idea, to put it on paper numerically, and learn about the industry in general. I realized, though, the value of having a recurring revenue stream. From what I've gathered so far, this particular company rarely loses a customer to a competitor. While depending on your existing customers for revenue in such business model can sometimes lead to complacency within a company, which in turn creates problems down the road in terms of not innovating for your customers, not having to go out and spend money on ad dollars creates a lot of savings for shareholders. Further, there is evidence this company is at least trying to fully serve their customers' needs, so I'm not too concerned at this point of them losing large amounts of customers to a more innovative company (if one exists).

While a writeup is not guaranteed at this point on the company I have in mind, (I'm not going to waste my time nor yours w/ a company that I don't think is worth our time taking a position in -- long or short --) I believe the valuation is attractive and hope to have everything put together by midweek for all who read this.

What has worked in investing (Tweedy, Browne)

I just replaced a previous link with one which I believe will be more relevant to value investors out there. While I'm not going to mention the prior link nor the reasons why I replaced it, the new one is a link to Tweedy Browne's study on various academic-type research on investing. It's an excellent read and summarizes a bunch of different studies that, while proven to outperform the market, many investors fail to follow (or follow for a short period and then drift to other methods that offer seemingly short-term success).

ADDvantage Technologies Group Inc. (AEY)

As I mentioned in a previous post a small stock has come under pressure from at least one large holder I can identify that has sold at least part of their position. ADDvantage Technologies Group, Inc. (AMEX: AEY) has a $28M market cap and $21.4M of debt (including $12M of preferred stock that is 50/50 owned by Dave Chymiak, the Chairman, and his brother Ken, the CEO). Further, Dave and Ken Chymiak own 23% and 20%, respectively, of the company’s common stock. Once you factor in some other institutional names that own this stock (including Barron Partners at 34.2%) the float becomes very small, which makes AEY almost impossible for large institutional accounts to own. However, smaller accounts and individual holders should have no problems trading in this stock, with roughly 60-90,000 shares traded daily.

So why is AEY’s stock, at $2.79, off from their $9 52-week high? The seller in question is Millenium Group, reducing their position from 3.9% of the total outstanding shares in May, 2006 to 1.5% as of their mid-December 2006 13D filing. While this may seem small, 3.9% represents almost 19% of the stock not owned by the trio of Dave, Ken, and Barron. As far as I can guess, Barron was liquidating their position at around $5/share and more likely at $4, given the jump in volume just before they filed an updated 13D in December. As I mentioned before, these can create large opportunities for value investors, as evidenced by AEY’s very tasty valuation.

Well, enough about technicals. AEY is the largest distributor, by inventory, of new and refurbished cable tv equipment. AEY most often is the second-source of supply for cable operators in need of equipment. For example, if Scientific-Atlanta and Motorola are out of stock of a certain piece of equipment, Time Warner and other cable operators will often depend on ADDvantage’s large inventory of products to fix the problem. Due to the bankruptcy of Adelphia (6.4% of FY2005 revenue) and a few non-cash items the company’s earnings suffered in FY06. While the loss of Adelphia is a negative in terms of reducing their customer count, it has created an excellent opportunity for ADDvantage, which I suppose some are looking at as a risk. In mid-September, 2006, AEY purchased 83,034 Scientific Atlanta and 16,889 Motorola cable boxes at a cost of $38-$48/box, including necessary investments to fix them up to sell them. According to management, they can sell the boxes for $100-$115 each, representing a juicy markup. The risk, however, is that the AEY gets stuck with the boxes in light of new cable regulations set to pass in July, 2007 requiring the separation of the security feature that will allow end users like you and me to walk into Best Buy to and buy our own box. I believe these concerns are unjustified as there are other opportunities for them to sell these boxes outside of the U.S.

While there are some related-party transactions between the Chymiak’s and AEY, including some real estate transactions, I believe AEY’s valuation speaks for itself. In fact, AEY trades at paltry 5.4x LTM EBITDA and 7x LTM earnings.

As always, do your own research before taking a position in this or any stocks which I discuss.

Large sellers creating opportunities

If you were to look at the S&P/DOW/Nasdaq, etc., etc., etc. you would think no sellers existed these days. For the majority of stocks, that statement is probably true as the market reaches new highs and a report in Barrons online recently stated that people are going long call options on their favorite names so they won't miss out on any rallys.

While that may be true for a lot of the names that I have come across in my professional career these days, in my personal account I have come up with at least one stock that has been hurt by selling pressures, as I will detail I hope this weekend in a company in which I will post on this site. Without giving away the name (as I haven't finished buying) this stock trades at very low multiples for a business that won't be dissappearing anytime soon (at least in my opinion). While academics claim of efficient markets I disagree; markets can at times be very irrational especially in the small cap area. The key is to look at the situations with a rational and independent mindset. Also important is to be quantitatively oriented in your approach; you must demand to be compensated while you wait for the stock to appreciate. I won't go into the details on this point now but this may or may not include dividends.

Check back throughout the weekend as I expect to post the writeup soon.

Link to Buffett Partnership Letters is not working

A regular reader informed me that the link to the Buffett Partnership Letters is not working. Apparently, Chuong has taken down his website or moved it as none of the links I have work. Please email me for the letters. They are well worth it and will give you insight into Buffett's mentality when he wasn't encumbered with mountains of capital that now prevents him from involvement in the stocks that made him who he is.

Also interesting are Ben Graham's partnership letters, which I also have. I recommend reading Buffett's letters first but that is my opinion.

I'm happy to send them to any and all who want them. Just email me at ValueInvestingPlanet@gmail.com.

To get Buffett's letters, put "Buffett Letters" in the subject line.
To get Graham's letters, put "Graham Letters" in the subject line.
To get both the Buffett and Graham Letters, put "Graham and Buffett Letters" in the subject line.

A bit about comments on this site

As it stands now, I currently have power to accept/decline all comments on this site. Don't get the wrong idea. All legitimate comments will be approved, even if they are negative. Just as long as the comments are related to the topic or site. What will not be approved are comments that are obviously spam and are senseless promotions of someone else's website, including promotions for penis enlargement pills and things of that nature. (I'm all stocked up for the year on those anyway ;) )

In fact, please tell me your thoughts and have the willingness to tell me when I'm wrong. Comments of that nature, even if they are negative, will not be deleted. I believe one of the worst traits that many investors carry nowadays is a cocky attitude. Let me know when I'm wrong. I'd rather know so that I can correct my thinking now or, at the very least, re-think my entire position.

It's been a while...but it's been good

Well, it's been a while since my first couple of posts and I apologize for anyone that has been expecting more from me. Anyone who knows me well knows that I don't have much to say. When I do I make it known.

What's my style, you might wonder? Well, I try not to approach an investment idea with any pre-judgements and I try to rely on my own research and not on the opinions of others. Hence, reading 10-K's and Q's before I even look at analyst ratings/reports helps me to enter a situation with no pre-conceived notions. Perhaps regular readers of this column (granted, this is just my 3rd post, so I highly doubt there are any regular readers out there) have a different approach. This approach suits me and has worked for me in the past.

Case-in-point is portfolio pick UST, which nearly hit $53 on Friday from when I began buying back in December at $37/$38. I've been quite pleased with the 40% move in the less-than one-year time period. My thesis was simple: the company was trading in-line w/ tobacco peers yet the market for snuff was growing while that for cigarettes was in a decline. I felt that any concerns over potential litigation had been well-priced into the stock at that point as, again, it traded in-line with RAI/MO, which have been slaughtered with litigation. The litigation risk, I concluded after further reading on the subject, was far below that of cigarettes. Further, core brands Copenhagen/Skoal continued to have a very loyal customer base despite the encroachment by lower price-point brands. Even famed value-investor Larry Robbins at Glenview Capital (a value guy I respect despite our disagreement on this stock) was short the company. I found his interview on Value Investor Insight (subscription required, although it's well worth it) insightful, but a bit misguided. My own month-plus of reading 10-K's, Q's, conference calls, thinking, re-reading, talking to the company and customers, re-thinking, and plugging in the numbers disagreed w/ that of Robbins and the reports of the street analysts I had read. I soon made the position our largest holding and it worked out well.

Although not every position will work out well for even the most talented investor being able to think independently in this business is critical to market-crushing returns. As evidence of this I was introduced a few months ago to a fellow "value" investor that turned out not to be such. This friend of mine runs a modestly-sized hedge fund of his own here in the city after he worked for a well-known investment firm. Throughout our 1-hour discussion, which occured I mind you after the market was closed, all he could fixate himself on was his bloomberg terminal and sending in trade-tickets for anything from software makers to well, you name it. However, not a single one of those orders would be what I would call a "high-conviction" idea. Literally, he'd read a just published headline on his terminal and then send the buy/short order to his broker in the hopes he could beat every other momentum guy to the after-hours trade. Granted, although value takes on many forms this was definitely not one of them, as he would like to think. Rather, he was caught in the market.

Lesson, if any? Do your own thinking, reading, re-reading, and then think some more. Most importantly, remember to focus and know what you own. If this limits you to just a few names, so-be-it. Go for the big returns, not for the low-single-digit returns that my friend was chasing.

Buffett Partnership Letters

Jim Chuong of Chuong Investment Management runs a great site and not to mention a decent fund, which has swamped the S&P since his fund's inception in 1998.

One of the most useful links on Jim’s site contains the Buffett Partnership letters, found here. In addition, he provides a link to the Graham-Newman Partnership letters, found here, where Buffett worked before beginning his own partnership. The partnership letters are informative and provide a deeper view of how Buffett ran his partnership early on. Highly recommended reading.

All Value, All the Time

This is my first post of what I hope to be many to come. This site was created to help me formalize the myriad of ideas I have floating in my head and to archive my investment ideas. Comments are welcome and donations even more so.

Although Warren Buffett described growth and value as joined at the hip I disagree somewhat, at least in how that simple statement is worded and often interpreted in the press. Value is purchasing something that's worth $1 for 50 cents. True, all else equal, I would prefer Company A over Company B if A is growing and B isn't. On the other hand, B can still be a bargain if a declining market (read: terrestrial radio, newspapers, check printers) has caused sell-side analysts to downgrade and investors to flee. Likewise, growth can be had at any price and many choose to play the "greater fool" game, basing their investing (read:speculating) decisions not on the calculation of an intrinsic value but on the hopes they can unload their shares to someone else for a higher price at some point in the future. In other words, a company doesn't have to be growing to be a value and not all growth investors are looking for value when they make a purchase. The only requirement for a value stock that needs to occur is a fundamental disconnect between what the business is selling for and what a rational investor calculates it is worth, with the intrinsic value significantly greater than the current market price, using reasonable assumptions and not some other metric that is based upon momentum, following the crowd, etc.

Expanding this "hip" quotation that is found in Berkshire's 1992 letter to shareholders, you'll find it slightly easier to understand. "...Growth is always a component in the calculation of value, constituting a variable whose importance can range from negligible to enormous and whose impact can be negative as well as positive.” This helps to understand that value can be had in no-growth names. The essence of value investing, in my view, isn't about growth but to be fearful when others are greedy and greedy when others are fearful.