Friday, July 31, 2009

Rand Paul Fundraiser in NYC

To all my readers in the NYC area, if you are interested in hearing some of what Rand Paul has to say, in person- he will be your way on August 5th.

Here is a link to the event on facebook (it does cost a small amount of money):

The details:
Wednesday, August 5, 2009
7:00pm - 9:00pm
Webster Hall
125 East 11th (bet 3rd & 4th ave)
New York, NY

Unfortunately, I won't be able to make it to Manhattan for this, but should be at the WEST annual meeting. :)

Also, there is gonna be a money bomb for Rand on August 20th. If you have yet to and are a supporter, go to and sign up (as I did a while back)! The goal is to get him a million bucks. Here is a link to the progress so far- the goal is to get 10,000 supporters to pledge $100 bucks to the campaign, so that we can get him $1,000,000 dollars in a single day.

Wednesday, July 29, 2009

The Virtue and Patience of Owning a Business

As any business owner will tell you, it takes a lot of time, patience, and a strong stomach to last long. Paul Sonkin, the manager of the Hummingbird Fund (plus a few others) and his stake in Dewey Electronics takes this description to a whole new level. Sonkin is a co-author of one of my favorite books on value investing and Dewey makes military electronics and commercial snow making machines.

Earlier in the month, in an SEC filing, Sonkin became a beneficial owner of more than 10% of Dewey Electronics. Formerly, he had acquired more than 5% of the company towards the end of 2005. In that time, there have been anti-war sentiments, reduction of troop levels in areas of conflict, and a recession (which has to of eaten into the snow machine business; despite global warming :D).

The company does own it's 49,200 sq ft manufacturing facility that sits on 90 acres of land; free and clear, which is no doubt on the books less than it is worth. On the books for a mere $1 million dollars, it has been depreciated since 1981. Here is a view of it:

View Larger Map

The company entered into a contract to sell 7 acres of their land for 205K, which sits across the interstate from their main facility, in May of 2008. While the sale of the land is subject to the approval of the Highlands Council and other state agencies (thanks to the Highlands Water Protection and Planning Act). When I called the tax department of the borough to find out what the property's tax assessment was, they told me that is was assessed in 2005 at just over $5.4 million.

The company does have a pension liability, which seems to be significantly underfunded (though, not by a large nominal amount of dollars) since the company is expecting a growth rate of 7.5% for the assets of the liability. This estimate is quite rosy, since the company has a ROE of 1.75% for the past year-which would suggest that the company is either overestimating their pension returns or that they are in the wrong business, since they could more than quadruple their ROE by managing their equity as if it was a pension fund!

To further put this into perspective, Sonkin's position in the company is just over 127K shares, or, put another way, is roughly ALL of the shares that have traded hands in the past 15 months! Obviously, Sonkin has to be sure of his bet, due to the liquidity issues at hand. This, in addition to the under performance of the investment in respect to the broader market; at some point that has take a toll on your investors and investment ego...

Another interesting point about Dewey, is that the company derived over 80% of last years revenue from 2 products; a 2 and 3.5KW generator for armored military vehicles. While I am sure that their products are top rate, it seems to me that military equipment is something that has the potential to change a bit more than I like... granted generators and guns are pretty basic, and once you get some that work, they work for a long time (the Colt 1911A was used as the standard sidearm of the army for many decades and is still one of the best handguns ever designed; the AK-47 has a similar story); though, this company will have to be mothballed or evolve like crazy if they lose their contracts.

Personally, I would love to be an owner of the business- at least, if I could own more than 1/2 of the company. Right now, I don't understand what kind of catalyst there could be to bring the stock to full value, though, the prospect of their land, less all liabilities being worth more than the stock is pretty enticing at the moment. From where I sit, the company should either liquidate, which I doubt will happen (due to management owning a ton of shares) or it will keep on keepin' on with it's low levels of ROIC. Due to low/spur-attic income levels and crazy credit markets, I highly doubt that much could be done to monetize the company's real estate without the company ceasing to exist-but I have been wrong on this sort of thing before.

Disclosure: I have no position in Dewey/Do your own research before buying any sort of security I talk about/This is not investment advice/Yadda Yadda Yadda...

Thursday, July 16, 2009

The Flip Side of Health Care Being a Right.

Here is Ron Paul talking to Aaron Task at the Yahoo Tech Ticker about the current health care legislation that is before the congress.

Now, let's take a step back and assume that the majority of Democrats are correct in their belief that health care is a right... what could this mean if we inverse the idea?

Without a doubt, the first thing that comes to my mind, is that someone must preform a medical treatment, in order to fulfill your right to receive it. Since it is your 'right' to get treatment, someone, somewhere, effectively becomes your slave; who has been coerced into doing something that they may or may not have done in the first place. Granted, there are people out there that do this sort of thing for free (say, Doctors Without Borders), yet, I get the feeling that there isn't enough altruism to go around.

It is unfortunate that the masses of people are attempting to tell doctors (who are certainly in the higher 1/2 of the intelligence spectrum) how to run their practices, who they can (or can't) treat, what medicines to use, and how much their time is worth.

Think about it.

Saturday, July 4, 2009

The Tax Protesting Companies and Government Intrusion

Here is an article on that highlights Amazon's (and others) efforts to go against states levying taxes on their services. No surprise here, but, it is great that companies are banding together to fight for their own interests, against this sort of marketplace disruption ( which ultimatly makes us less efficient of an economy). In the event that legislation of this nature would pass in all states, it would make big box book sellers more competitive, thus, wasting a tremendous amount of resources and time belonging to the consumer.

Here is a brief synopsis: Every time that I buy something on Amazon, I not only save a trip to the book store (sometimes multiple ones, if they don't have what I want), but I also get the option of buying the book- used from some mom and pop used book store; on the cheap too! In addition, I am able to get all sorts of reviews on books and a great recommendation list from the website. I can also add items I want to a centralized wish list, where, people can gift me things that I actually want, rather than guessing at it. The list of advantages goes on and on...

In the spirit of it being my country's independence day, I will also throw out an anti-tax/anti-regulation thought: 'If people so vigorously oppose taxing and regulation of anything related to the internet (which seems to be how the public thinks), then why would they support the taxing and regulation of anything else?'

It seems to me that we don't need regulation to protect me from, since, if they screw up, I will go to some other on line vendor. This being the case, why would I need protection from the evil oil conglomerates (pollution being a property issue), Wal-Mart, or even food producers (both similar to AMZN)? While certainly, we need some government to keep us from killing each other (to quite literally protect life, liberty, and property), it does seem that we have way too much intervention...

To highlight this, let's take a look at the first 15 minutes of my day: using the alarm on my cell phone to wake up, I just paid direct taxes at times; once for the power the phone uses and the other for the usage fee of the cell service (which controls the phone's clock)... I get out of my bed, of which, it is a crime for me to remove the tag of. I then shower, brush my teeth, and take a vitamin; the government regulates that, too- water quality, water company ownership, and the FDA regulating the toothpaste and vitamin. God only knows the amount of regulation that is dealt with if I choose to eat breakfast that morning...

Really, it's pretty absurd.

Happy 4th of July. To any readers in England; thanks for putting up far too little of a fight roughly 230 years ago ;-)

Thursday, July 2, 2009

CEO/President/Chairman Pay at Steak 'n Shake & the Opinion of the Masses...

Recently, as many of you know, Sardar Biglari got a pretty big raise for his role at Steak 'n Shake. While not making any money in director's fees, not getting stock options, and not having a contract, he is still going to be the recipient of $900K/year. Being Chairman of the Board, Biglari has a fiduciary duty to the shareholders- to oversee management and set a profitable direction for the company. As CEO and President, his duty is to run the company effectively and profitably. He has done these things quite well.

Now, let's examine the facts:

1) The company had generated a ton of cash and paid off a chunk of debt.
2) The company is no longer in danger of being close to insolvency.
3) The company has introduced new (and popular) products that have helped snap 14 quarters of negative same store sales.
4) The company has become much leaner from an operational view, helping profitability.
5) There are several members of management and the board now gone, who had presided over a flawed 'expansion at all costs' policy.

First and foremost, the issue of executive pay has garnered a good discussion at the level headed value investing community Corner of Berkshire and Fairfax. My big surprise however, are the comments and commentary surrounding an article in the IndyStar. I wonder if any of the people (including the journalist) even read the 8K, which told of the raise and of the company paying off it's credit line (to the tune of $12 million) with Prudential. That action alone makes the once distant possibility of a share repurchase/dividend/acquisition a very likely development in the next year. It is also a good sign of the company *surprise* being managed rationally.

From reading the comments on the article, it seems that most of the people are angry over the pay raise in relation to hourly employees not seeing 'their share' of the company's good fortune. I surmise that the servers at the chain are doing better than they were last quarter; same store sales are up which means that they are most likely getting more in tips. If the tips are paid in cash, the additional money would probably be more significant, since they probably won't claim the wages at tax time. I fail to see how this is a bad deal for anyone, including diners, who are enjoying new and relevant products (despite some service issues- which are improving).

Not surprisingly, I am astonished at the stupidity of people that lambast a guy for making $900K (even though he turned around a restaurant chain based in their state, which brings them tax revenue), but don't seem to care that California is issuing 3,733x as much in IOU's JUST THIS MONTH! (that link comes curtousy of S. Parsad). Our priorities as a nation are really screwed up. I guess that having a gut reaction to a hot issue is easier than thinking.

On a calmer note; as much as I hate speculating on the matter, I'm betting that Biglari wouldn't have taken the raise if there were not some good news coming our way- and soon, at that.

Disclosure: Long SNS