Wednesday, August 31, 2011

Rosewood, Guitars, and Federal Seizure...

The US Government is now in the vintage guitar seizing business...


Others in the guitar world aren't so upbeat. Attorney Ronald Bienstock says the Gibson raids have aroused the guitar builders he represents because the Lacey Act is retroactive. He says they're worried they might be forced to prove the provenance of wood they acquired decades ago.

Nice. So, let's say somebody has a guitar that was their grandfather's, and they go out of the country with it... Should they have to prove that it was their grandfather's? How would you prove that it was a family heirloom? A receipt? Hell, I have a ton of instruments and receipts for few of them... A lot of them are old, and, I have no idea if they have some type of illegal wood in them. Does this mean I should be locked up if one of them has a component that my government says is bad? Personally, I don't think so.

I find it interesting that this act involving guitars are retro-active, but, ones on guns (which, I presume, are involved in more deaths than guitars) have historically not been. For example, when the last assault weapons ban was passed in the US, there was nothing wrong with selling high capacity magazines or even owning them, so long as they were old... But, the manufacture and sale of new high capacity magazines was prohibited. After the law sunset under George W. Bush (one of the few things he didn't botch up), Americans could again buy 33 round magazines for our Glock hand guns, 100 round drums for our M16s, and 75 round mags for our AK-47s.

While I think that both the Lacey Act and the last assault weapons ban are pretty terrible pieces of legislation, it would be nice if our leaders would actually think when it comes to making laws.

Sunday, August 28, 2011

Thursday, August 25, 2011

Buffett and BAC

This article almost perfectly mirrors my own thoughts on Buffett buying in to BAC.


Do you remember a time when you were a child and and you wanted to do something but your mom prevented you from doing it? Then, you responded, “Mom, but John is doing it. Why can’t I do it?” Your mother responded, “If John jumped off of the top of a building, would you follow him?” What a great lesson this has been for me.

Unfortunately, the majority of people never learned this lessons that their mothers tried to teach them. Instead, they keep following others, refusing to think for themselves. However, this time around, they are too old to have their mothers follow them around and prevent them from doing stupid things like giving their wealth away by selling dirt cheap stocks just because other people are selling them. It becomes even more ridiculous – they graduated from following other people to following brainless computers who are responsible for many of the trades on the exchanges...

If you think that Bank of America is a good investment at these price levels, then buy. If you think it is a bad investment, then don’t buy it. But don’t blindly follow other investors. Remember to do your own thinking. Bank of America will succeed or fail with or without Buffett’s involvement. He does not run the company and is nothing more than an outside investor...

Disclosure: None. This is not advice of any kind. This is not a recommendation of any kind. I have received nothing to write/post these notes. Always do a ton of your own research in regard to anything that I say, do, write, or so much as even think about.

Wednesday, August 24, 2011

The Fool and SVU.

From here:

SUPERVALU (NYSE: SVU ) -- avoid it
Going against the very compelling case fellow Fool Jim Royal made in favor of SUPERVALU last week, I see a drastically different outlook. This is one case where a large short ratio, currently 20% of the float, serves as a stern warning to future shareholders.

SUPERVALU is a work in progress, and for the most part, I prefer to avoid such companies in sectors with razor-thin margins. SUPERVALU's 2012 guidance calls for a 1.5% to 2.5% decline in same-store sales. Also, during its most recent quarter, gross profit dipped from the year-ago period and net cash flows fell to $245 million. Despite a plan to reduce debt, the company still carries $7 billion worth of crippling debt.

Even worse, SUPERVALU was forced to slash its dividend in half when its business turned unprofitable. Though it still yields over 5%, with cash being funneled to pay down debt and a strike looming in Southern California, don't look for that dividend to improve any time soon.

So, with the company having reduced cash flow in the past year, when accounting for debt payments and such (adding them back in), they are still trading at under 3x cash flow... Not exactly what anybody would call expensive.

In addition, it seems that the comments on the short ratio are only comments that care about other people's thoughts on the company, not the author's own (which, arguably, should be all that matter when investing). While I am aware that the company may do poorly and may even have to re-organize (though, I view this as VERY unlikely), I do think that the prospects for the stock are stupendous- especially when comparing operational results to the market cap. After all, this isn't Bank of America (which, may well be hugely undervalued) where we don't know the value of the tangible book... It is pretty cut and dry with SVU. It may have a TB that is negative, but, it is one that is improving significantly...

Disclosure: I own LEAPS of SVU. This is not advice of any kind. This is not a recommendation of any kind. I have received nothing to write/post these notes. Always do a ton of your own research in regard to anything that I say, do, write, or so much as even think about.

Biglari and Cracker Barrel.

Here, Sardar Biglari talks about the reporting of Cracker Barrel... Here, Cracker Barrel responds.

I will say that it is fortunate for all parties involved that Cracker Barrel took the high road, and didn't personally attack Biglari, saying something to the effect of "the allegations are baseless, and he is a corporate raider... blah blah blah..."

Instead, CBRL addressed the issue at hand in a civil way. Except for one thing... They didn't address the company's CEO offering to disclose the inside information to Biglari and not the other shareholders.

Personally, I am shocked that the company would offer to show the information to Biglari, but not the rest of the shareholders (as long as Biglari's accusation is true, which, I have no reason to think it isn't). And honestly, I think that Biglari has a good case for why the info should be disclosed. What I will add, though, is that while more info is a great thing, I do wonder what the ultimate intent is. Is this an effort to get the company to lower the footprint of the retail store? What about expanding it? I think that will prove to be a hard mix to mess with, as, I don't believe that you can look at margins and revenue figures, and figure out how they interact with one another... It almost seems like a take it or leave it scenario. Let me explain...

Having frequented the company's locations virtually my whole life- whenever on family vacations and such, I can't imagine the locations being much different than they already are... My family generally loves going through the retail store as much as they like the food (and, I have watched them do it at multiple CBRL's in the same day!). All this said, I don't see how having a larger retail area would help operations (for existing units), and I don't see how a smaller one would do much either. Though, I may be missing something; which more reporting could let us know... I have a feeling that the mix is what makes the company so attractive to consumers, though. While my family is kind of weird, I can't imagine that we are so different that an observation of CBRL's mixed operations isn't viable... Furthermore, if a new concept CBRL was build, and it was markedly different from the others (say, with no retail space), I would imagine a lot of disappointment on the motorist's part.

Despite my disdain for touristy merchant crap, if it weren't for the retail store, I would imagine that my family, and a lot of other southerners, would be a lot more likely to eat at Bob Evan's, rather than Cracker Barrel. But, that is merely a guess. One interesting scenario, which, I don't know the practicality of, would involve the spinning of the retail assets, and effectively leasing 1/2 or so of the restaurants to the other entity... Far fetched (and, I fully admit, is unlikely), but, an interesting concept to think of the logistics of.

With all of this said, I won't be a bit surprised if Biglari has a set of board seats in the next year... Even if he doesn't, the cash flows that the company is capable of generating are impressive, to say the least.

Disclosure: I have no positions in or against any of the securities mentioned. This is not advice of any kind. This is not a recommendation of any kind. I have received nothing to write/post these notes. Always do a ton of your own research in regard to anything that I say, do, write, or so much as even think about.

Steve Jobs, Value Stocks, & Being A Heartless Bastard.

It's official. Steve Jobs is no longer the CEO of Apple. This is no doubt a very sad day, as it is likely due to his deteriorating health... Honestly, my deepest of sympathies go out to Jobs, his family, and his friends.

With this said, the stock is down 5% in after hours trading. It does make me wonder what will happen to it in the coming days and weeks. While I don't like the situation that Jobs is in, I have no qualms with the idea of making money as the result of the markets reaction to such news. Likely, if the company drops much below 10x earnings, I will probably buy stock and/or LEAPS.

I do wonder what will happen to the company's huge cash hoard in the event that Jobs is no longer involved in the company... Furthermore, with Jobs as chairman, I wonder if he will push to deploy the cash in the near term.

It seems to me that we have a company that has products that people actually like (against, say RIMM) which might be getting into extreme value territory. Then again, Motorola used to have products that people loved, and we know what happened to them... They were broken up by Carl Icahn, with 1/2 the company being sold to Google. While this probably won't happen to Apple, there are a lot of variables at play here, some of which could greatly effect the company and others, that won't.

With all of this said, if I were forced to bet on things, I would say it would be strange to imagine a world in which Google won't dominate almost everything... In fact, I won't be a bit surprised if the company will eventually be split up (anti-trust style); it seems to me that it is quickly becoming the Standard Oil of our time. 100 years ago, oil was to be the basis of our growing economy, internet search is the basis of our future (as far as company products go, I use Google more than anything else; actually, I am probably one of the few people that they lose money on). After all, they control my phone, email, calender, blog, and internet browsing... which when combined, take up the bulk of my time; often, more so than I even sleep.

Then again, I used to say this about Wal-Mart... And now, my thoughts seem juvenile, at best.

Speaking of Wal-Mart, it will be interesting to see what Apple does, versus what Wal-Mart did, in the years after their founder stepped down.

Regardless, there are a lot of variables here and the screwd investor should make effort to monitor the situation. If nothing else, it will be an intellectually stimulating situation to watch unfold- no matter how unfortunate it is. In spite of the lengthy post about how AAPL stock might collapse, I won't be a bit surprised if it doesn't- I have no idea what other people will do with the new information. A few weeks ago, one would have thought that if Treasuries were down graded that they would have fallen in price, not gone up! Maybe a similar situation will hold true for Apple.

Disclosure: I have no positions in or against any of the securities mentioned. This is not advice of any kind. This is not a recommendation of any kind. I have received nothing to write/post these notes. Always do a ton of your own research in regard to anything that I say, do, write, or so much as even think about.

Does the Internet Make You More — Or Less — Connected?

A great article from NPR, which pretty closely mirrors my own thoughts on the matter...


The Internet has had a dual effect on the level of connectedness I feel with the people I know in my offline life. On one hand, the basic communication tools now available make distance almost a non-issue. My conversation with Mordy that led to this post took place over instant messenger where we communicate nearly every day – far more often than we ever did before the Internet, even though back then, we were only separated by a few blocks, not a few thousand miles.

On the other hand, when I am actually with my friends and family, I find myself (and increasingly, my companions) distracted by a smartphone that's either the object of my gaze or being fingered in my front pocket....

The only time I really experience any self-reflection these days is when my computer sleeps and my screen goes dark.....

That's the Internet's reverse placebo effect: you feel as though you were missing something important before you signed up for the latest service. It's a drug for an ailment you never had...

Cracking Gold...

Apparently, people are saying that the gold trade is cracking...


It was fun while it lasted, but it looks as though the gold trade is finally unwinding. The precious metal booked a record high close just two days ago, settling at $1,891.90 an ounce on Monday. Today it took a fast and furious 5.6% dive to close at $1,757.30/oz; it's biggest single-day drop since March 2008.

While I don't have much of an opinion on the price movements of gold, I have long been critical of owning it. That said, I won't be surprised by anything that happens in the gold markets...

Disclosure: None. This is not advice of any kind. This is not a recommendation of any kind. I have received nothing to write/post these notes. Always do a ton of your own research in regard to anything that I say, do, write, or so much as even think about.

Wednesday, August 10, 2011

Apple, Exxon, And Bank of America.

Apple is now larger than Exxon (by market cap) and can now use it's current assets and buy more than 2/3 of Bank of America... which has more than $1 trillion dollars of deposits. If Apple and Google would form a partnership, they could basically pay cash for all of Bank of America's common stock at it's closing price today.

Who would have ever thought that would happen, just 10 years ago, when "i" anything was only something in Steve Job's and some geeky Apple engineers' minds, and "Google" was probably more known as a number, than a search engine...

Crazy, but fun times to live in. :)

Disclosure: None. This is not advice of any kind. This is not a recommendation of any kind. I have received nothing to write/post these notes. Always do a ton of your own research in regard to anything that I say, do, write, or so much as even think about.

Tuesday, August 9, 2011

Notes (& Thoughts) From The 2011 Syms Annual Meeting...

Disclaimer: These come from my hand written notes of the meeting. I can not give any assurance as to the absolute accuracy of the notes, as I am human; I may have not heard something correctly, interpreted something the wrong way, or, may be mis-remembering something. With this said, I have strived to to my best with the accuracy of this post.

The meeting was held at 1 Syms Way, in New Jersey. Upon walking into the headquarters of Syms, I was greeted by a table of ladies who were checking people in to the meeting. I was asked for identification and proof of ownership of shares; pretty standard fare for meetings like this. After presenting the info, I was told that I would have to leave my cell phone an any other electronic device that I possessed at the table, as they were not allowed in the meeting. After removing my phone battery, I reluctantly left my phone at the table.

I am disgusted that the company did this. I think that it is pathetic that they treat the owners of the business in such a way. After all, I personally own more of the company than all of the board of directors combined (when you exclude Marcy Syms)- which isn't hard... If you have more than $1,000 dollars worth of Syms stock, you too own more of the company than the board of directors (per the latest proxy) owning a minuscule 100 shares... I wonder if they were treated in such a hostile manner.

At the meeting, there were roughly 35 people in attendance, plus the board. There were several posters displayed that more or less said: "No recording devices, comments will be limited to 3 minutes, disruptions will be asked to leave, and no written materials may be distributed."

To put it lightly, I the mood of the room was tense.

After the go around that involved the voting and business portion of the meeting, it was adjourned, with all matters that were up to vote passing. After this, as with most annual meetings, there is a Q&A session for shareholders.

Marcy Syms read a prepared statement, in which she expressed her view that company sales were dissapointing, with "progress being neither fast nor considerable enough." She went on to more or less say "while the economy isn't an excuse, high gas prices have put our customers in a bind." I found it somewhat unfortunate that the company couldn't capitalize on rising gas prices. It seems to me that if people are feeling a pinch in their wallets, it would be prime time for a discount retailer such as Syms, to take business away from Macy's, JCPenney, Saks, and the like.

Moving along, Ms. Syms proclaimed that there had been some hard lessons learned, and as a result, the company was working to change merchandising and brands, while bringing in new talent. Furthermore, they were working to reduce back office expenses and infarstructure costs (reducing distribution related jobs as previously talked about on this blog, citing this story, have gone a long way). She expressed the view that inventory management would help company results, as well. It does seem by my being in the Trinity store for the 3rd time in 3 years, that they are reducing inventory levels (check out this album). Furthermore, there is some scaffolding around the neighboring building that they acquired a few years ago. Additionally, there has been an "x" spray painted on the front of it... It may mean nothing, and I have yet to check permits in the city, but, something may be happening to the crown jewel of Syms' real estate.

I was dissapointed that Ms. Syms stated that she would not comment on the exploration of strategic alternatives and simply advised shareholders to read the Risk & Management sections of the company's public filings... Syms expressed her discontent with the (at the time) pending lawsuit against the company by saying: "due to the pending litigation against the company, answers to questions will likely be brief."

There was an older gentleman there that asked a few questions in regards to the opening of new stores in the area, which, apparently Syms investigated doing, but didn't follow through with due to worries of cannibalizing sales of their other stores. He also had several back and forths regarding the cost of rescheduling the meeting (apparently, around $2K) but ultimately seemed to be little more than a wordy gadfly. I am always astonished at how people can get up in arms, as was the case here, over a paltry $2 thousand dollars. The real problem, is that Syms likely broke the law with not giving enough notice of the meeting, which came after making the original date to far from the 2010 annual meeting. Furthermore, I am a lot more concerned about the company's $200 million+ in real estate that is presently being under utilized... but, I needn't digress.

There were a few Syms family members in attendance, who expressed their disdain for the way that Marcy Syms was running the company. Additionally, there was some sparring over the separation of the family, some things that Marcy Syms said roughly 2 decades ago in her book (which, is in my opinion, vital reading if you are looking at the company; it made me realize that Marcy isn't the idiot that news reports and message boards would have you think, actually, it is quite the opposite!), and the control of the various estate's common stock (which, apparently, each of the grandchildren got 5% of). I am under the impression that part of the dissent is due to how Marcy controls the company in such a way that it has caused a riff in the family. Based on this and the general mood of the meeting, I gather the impression that Marcy Syms may be looking for a way out. After all, already being a millionaire who has worked her whole life, she is nearing the age where it might be time for her to move on to her next (and less contentious) project.

After that exchange, Andrew Sole, the managing member of Esopus Creek had a tense back and forth with Maryc Syms, asking "How much control has been ceded since A&M were retained by the company?"

Syms then read a long prepared statement that didn't address the question at all. After this, Sole said what everybody in the room was thinking, which was more or less "that is obviously a prepared remark and it doesn't answer my question... How much control of the company has been ceded to A&M?"

Seeming to sense that Sole wasn't going to be satisfied with anything short of a straight answer, she said "I have not ceded any..." Which, came to me as no surprise. Furthermore, I wouldn't expect it of her.

Sole then asked another question: "When was Alvarez and Marshall retained and how many of their employees are working in the company?"

Marcy, living up to her previous promise of brevity, replied with "April, 3."

There was a bit more back and forth between Sole and Syms, due to the strange wording of the answer, but, ultimately, it came out in such a way that the company retained A&M sometime in April, that there are 3 employees working with Syms.

A representative of Franklin Resources asked if the NY Post report of the company only reviewing bids for the whole company was true. Marcy responded with "We have not limited the scope of strategic alternatives." This was a relief to hear.

And there you have it, that's pretty much all that happened at what can be called the most tense annual meeting since the time I ventured to Chigago for the Motorola meeting where Carl Icahn attempted to get board seats (the first time... the one that he lost).

Overall, it seems that the company is fighting tooth and nail to keep it's cards to it's chest. However, in light of losing the most recent court case it seems that they are failing; which I view as a big net positive for shareholders. Furthermore, while the tone of the meeting was very tense and there were some heated exchanges, I view this as a net positive for the stock, but, a negative for the people involved. Surely, anytime that people don't get along, it is unfortunate. However, sometimes, if one of the parties wins, there can be gains. It seems that Syms is losing the legal battle, and as a result, has less ground to stand on than ever before. In fact, if losses at the company continue, I can make a strong argument that the company will be more in play for a sale than ever before; a net positive for shareholders.

With all of this said, I am more confident of things going well for shareholders than at any point in the past. While I don't know what is going to happen, I have feeling that something should happen. Even if the company goes temporarily insolvent, my investment should be more than protected by the plethora of real estate that the company owns; so, it seems like a "heads I win, tails, I don't do badly" type of scenario- especially when I consider that I was lucky enough to have my average purchase price be in the low 7 dollar range.

There is blood in the water and it seems as if the dam is beginning to show signs of wear.

Like this post and want to learn about a shareholder meeting of a company that you own some stock of, but, don't have the time or interest to attend? Check this page out, shoot me an email (ragnarisapirate[at], and maybe we can work something out...

Disclosure: I am long shares of Syms. This is not advice of any kind. This is not a recommendation of any kind. I have received nothing to write/post these notes. Always do a ton of your own research in regard to anything that I say, do, write, or so much as even think about.

Sunday, August 7, 2011

Buffett & Buying Back Stock...

Here, Warren Buffett almost perfectly highlights my views on not only selling a stock despite it's undervaluation (for example, if you have a better place for the proceeds) as well as that of a company buying back it's own stock when it is cheap.


"Well most of them are. But in the end our price is figured relative to everything else so the whole stock market goes down 50 percent we ought to go down a lot because you can buy other things cheaper. I’ve had three times in my lifetime since I took over Berkshire when Berkshire stock’s gone down 50 percent. In 1974 it went from $90 to $40. Did I feel badly? No, I loved it! I bought more stock. So I don’t judge how Berkshire is doing by its market price, I judge it by how our businesses are doing.


I think if your stock is undervalued, significantly undervalued, management should look at that as an alternative to every other activity. That used to be the way people bought back stocks, but in recent years, companies have bought back stocks at high prices. They’ve done it because they like supporting the stock…"

Disclosure: None. This is not advice of any kind. This is not a recommendation of any kind. Always do a ton of your own research in regard to anything that I say, do, write, or so much as even think about.

Friday, August 5, 2011

The Insanity That Is Market Volatility.

The recent turbulence in the financial markets has spurred a lot of people to thinking and saying a lot of different things about stocks... Certainly, the downturn of a market often sinks the price of all stocks-regardless of quality. Value stocks often have a sick way of becoming more of a value.

This has made a lot of investors move to cash, which seems to further the problem of a falling market.

However, every security that I own could likely liquidate, even in a bad market, for more than it is trading at. They generally sit on a glut of cash (so, I don't really feel like I have to, since I essentially own said cash), they generally earn or are getting ready to earn a nice bit of money, AND they will likely be able to weather most any storm that comes their way.

So, this leads me to the question: "Am I going to sell off any of my significantly undervalued dollar bills, in the hopes of buying them back at cheaper prices?"

Unless I have a better place to put the money, my answer is "Hell no!". I certainly don't have any way of saying with any authority or accuracy that I know how the stock market will preform... What I do know is this: the analysis I have made of the situation of each of my owned securities is an analysis that I am comfortable with, regardless of the price that Mr. Market offers me for my stocks. Furthermore, a few percentage points difference in the price of the Dow does little to effect my mood.

As such is the case, I will likely re-allocate funds from other areas (such as my rental business) to these and other stocks that I watch. This is especially true if their price/intrinsic value gets deeper into the levels that already make me froth at the mouth.

The prospects for Nevada Gold alone, nearly numbs me (in a good way!). In light of the fact that at last reporting of results for the state of Washington, well over 1/2 of the card rooms in the state lost money, there will likely be further industry consolidation. Due to the set up and discipline of Nevada Gold, the industry could consolidate right into their arms... Which would be freakishly profitable for the company.

While I don't think that the company is fairly valued, let's assume it is, and base that assumtion on the earnings that they just posted. Going forward, if they manage to get juice just a single million dollars in additional earnings out of their 10 card rooms (which seem to have a lot of room to run), casino, or buy it via acquisition (how the company is, and has been growing), and then assign a 1o multiple to it, that is essentially a 50% increase in the market value of the company. This doesn't even begin to value any future management contracts, mega acquisition, or their development project (all of which, they talk about in in their conference calls). For me, this is not a bad way to place a bet, especially when the markets are going to shit...

EDIT @ 2:08 PM: When writing this, I walked off for a little bit, and didn't check out the gyrations of the stock market... Apparently, it went from being nicely down, to being marginally up, in a matter of just a few hours. Go figure. It just highlights my point that market volatility is a crazy thing!

Disclosure: I am long shares of IBAL.OB, UWN, SYMS, and SYTE.OB (all of which, I linked to various write ups of). This is not advice of any kind. This is not a recommendation of any kind. Always do a ton of your own research in regard to anything that I say, do, write, or so much as even think about.

Tuesday, August 2, 2011

The Specialist's Dilemma.

From here (a great, latticework-esque piece):


This is what I call the Specialist’s Dilemma. The stronger your competitive position, the more vulnerable you are to eventually being disrupted and replaced.

Let me explain further. Out of the universe of companies that have strong competitive moats, many of them have advantages originating from the niches they occupy. (Which can lead to barriers like economies of scale, brand attachment driven by habit, and being ahead on the learning curve.) These advantages are durable only as long as the niche itself remains viable. In other words, the more specialized a company’s dominance is, the stronger its advantages are — but the higher the odds of the niche itself eventually disappearing. Not disappearing due to competitors within the industry, but due to the niche being completely destroyed and replaced by something else. The timing of when this happens partially depends on the “clockspeed” of innovation within the industry (more on that in my last post).

Syms Court Ruling

Syms was ordered in court yesterday to turn over it's books to Esopus Creek Advisors.

This is great news for shareholders... It is getting us one step closer to the company realizing it's full value.

Disclosure: I am long shares of SYMS. This is not advice of any kind. This is not a recommendation of any kind. Always do a ton of your own research in regard to anything that I say, do, write, or so much as even think about.

Monday, August 1, 2011

Sitestar: The Cigar Butt That Isn't.

When Warren Buffett describes cigar butts, he describes them with the following:

“If you buy a stock at a sufficiently low price, there will usually be some hiccup in the fortunes of the business that gives you a chance to unload at a decent profit, even though the long-term performance of the business may be terrible. I call this the ”cigar butt” approach to investing. A cigar butt found on the street that has only one puff left in it may not offer much of a smoke, but the “bargain purchase” will make that puff all profit.”

This is a description that is given to a company that is dying and has no real prospects for changing... Sitestar is an evolving company; one that is able to juice cash flows out of the future of it's historical technology business. Using these cash flows, it is re-allocating funds into real estate, it's own undervalued common stock. As a result, the company may look like a cigar butt, but, in all actuality, could not be much further away from that!

Is It Really An Internet Company?

Sitestar, while having an internet service business that may be dying, is a company that is super cheap. I say this, because the while revenues on the technology side of things are getting gradually lower, the company is nimble in it's ability to reduce expenses. Looking at this document, we can see that as a % of revenue, costs remain pretty steady, despite a huge drop off in revenues. Really, the company can continue having it's revenue drop, which has slowed considerably, and still do quite well... Regardless, looking at the sheet, we see that things are not nearly as dire at the share price reflects.

The Misleading Income Statement...

Basically, even at the recently run up price of 2.5 cents/share, Sitestar is trading around 2x the previous year's earnings.

"But WAIT!" You say... that can't happen! I looked at the income statement, and they have lost money for a while.

Yeah, that's right, but, when we look at the cash flow and balance sheets, we see that those accounting losses are just that: accounting losses, that are not indicative of the real earnings of the business. In actuality, these losses are due to amortization and such; a lot of their business is intangible (customer lists) which lose accounting value on the balance sheet very rapidly and in turn, make earnings look a lot worse than they actually are (and, essentially, shield the company from paying taxes on some gains). When looking at this, it is important to determine if the reduction in the book value of the previous acquisition is offset by that of the earning power of the acquired business. Certainly, given how much Sitestar has earned in the past 2 quarters, it seems that is the case...

How long can this last? Well, I will be frank with you: I have no idea. But, I am confident that the company will be able to generate owner earnings for a decent period of time from the internet business due to it's nimble nature (which is pretty well reflected in the sheet that I linked to above. Furthermore, as the company acquires other customer lists and other internet companies, operational efficiencies will take place.

A potential forgiveness of debt...

One thing that I noticed with the company, is that they have a ~$900K note payable to USA Telephone, which, if you look at the original purchase agreement, was supposed to be paid off in 36 monthly installments. Yet, there has been very little paid on it in the past few years (see Note 6 and Note 6). It seems that this is due to USA Telephone not delivering on all that they said they would in the purchase agreement (you can read about the original purchase in this filing, and some others). I view it as being quite likely that a lot of this debt will be written off of the books, if not all of it... This would greatly increase the company's book value and financial footing.

Moving To Real Estate...

What I do know, is this: the company is moving it's cash flows into an asset that I generally love- residential real estate (I am, after all, a small time landlord). Lets take a look at the language used in the last 10K:

Pursuant to the approval of the board of directors, the Company’s management believes that it is in the best interests of the Corporation to implement a program to purchase (“Purchase Program”), as investments, real estate with the Company’s surplus cash flows. Any real estate purchased pursuant to the Purchase Program will be held as investment until such time or times as the Board of Directors, in its discretion, may deem advisable to sell or otherwise dispose of the property.

The current real estate market presents the unique opportunity to acquire properties at deep discounts from assessments with the potential for substantial profits. Management evaluates property as it becomes available with respect to the market value versus what it can be acquired for, in addition to other conditions that could affect the resale value. Renovations are made as needed to maximize the market appeal and value prior to listing for sale.

Management believes that there is sustainable cash flow potential for the near future in real estate and is actively pursuing the program. As of the balance sheet date, December 31, 2010, the Company has invested approximately $515,000 in surplus funds and is continuing the investing process. Management has determined that the Purchase Program will not impair the Company’s capital, cash flows or operations.
Since that point, the company has been allocating money into real estate like crazy. At the close of the quarter before last, they owned $1.378 million in real estate, at the close of last quarter, they owned $1.695 million in real estate all of which, appear to be unencumbered by looking at their SEC filings. Additionally, it appears to be a mix of commercial and residential properties located in various parts of Central Virginia... While it isn't disclosed in the company's financials, I was able to track down a good bit of the real estate, and find out what Sitestar paid for it.

Here are some addresses with various property info: I cannot stress enough that I am not sure if this is what the company owns... there is a possibility that there have been other businesses set up which use the name that these properties show up under. Sitestar may have bought their properties under a different name... I do not know for sure. As a result, no assurance can be given to the reliability of this information in any regard towards Sitestar: simply put, I don't have access to the company's books and have not looked at the deeds!

Roanoke County (a screen shot of the info below):

3606 Bunker Hill Dr
Assessed at: $139K
Date Purchased: 2/24/2011
Bought for: $139K

5306 Dresdin Cr
Assessed at: $172.9K
Date Purchased: 4/4/2011
Bought for: $173K

2818 GBoldreggin Dr.
Assessed at: $187.4K
Date Purchased: 3/14/2011
Bought for: $187.5K

3719 Janney Ln.
Assessed at: $155.5K
Date Purchased: 1/26/2011
Bought for: $155.5K

5460 Clearwood Dr.
Assessed at: $172.9K
Date Purchased: 4/4/2011
Bought for: $173K

10271 Ivy Ridge Rd.
Assessed at: $219K
Date Purchased: 2/11/2011
Bought for: $218.8K

4812 Moore Rd.
Assessed at: $151K
Date Purchased: 2/3/2011
Bought for: $151K

City of Roanoke

Assessed at: $210.7K
Date Purchased: 4/28/2011
Bought for: $0- it appears that it was some sort of a transfer or property exchange, where Sitestar took it back with a lender or traded property for it? Without looking at the deed, it will be hard to get an idea. It is on the government pages as being co-owned with BKC Properties, whatever that entity is...

Assessed at: $134.8K
Date Purchased: 2/17/2011 (again, co-owned with BKC Properties)
Bought for: $85.7K

Assessed at: $232.7K
Date Purchased: 11/19/2010
Bought for: $231K

1510 Rivermont Ave.
Assessed at: $224.9K
Date Purchased: 4/28/2011
Bought for: $64K

Total Amount Spent (with adding in nothing for the Cove Rd property): ~$1.58 million dollars. So, that leads me to think that they spent roughly $100K on the Cove Rd property, or, that they have some sort of reduced % ownership of the properties that they own with the entity known as "BKC Properties". While this may be a Sitestar entity, I simply don't know.

Additionally, in regard to the amounts paid for the properties, I have not looked at the deeds, but, they may have been purchased at lower prices, when considering a number of factors: they could have been short sales, the company could have received cash at closing from the seller, to get the sale price up, but, keep out of pocket expenses down, the company could have made a stipulation in the contract that the seller made a lot of repairs to the property, the list of possibilities could go on and on.

A lot of times, people try to keep the assessed values of properties kept higher than they paid for them, so as they are not reassessed at a lower value, since prospective buyers have a bias against paying more than something is assessed at. Additionally, when making it look like you paid more for a property on government tax records, it makes prospective buyers think they are getting a better deal than they actually are... adding a tag line of "being sold under county assessment makes a buyer feel good. Plus, if a buyer sees that you paid 1/2 what you listed it for, they are likely going to low ball you. Furthermore, Julie Erhartic, is on the board of directors, wife of the CEO, and a Realtor, is likely doing a good job of acquiring assets and navigating the straights of game theory real estate negotiation for the company. Furthermore, it isn't like the Erhartics don't have experience with real estate, they own several pieces in the area (some are in Roanoke), here are just 3 of the ones that they own in Lynchburg. One of which, is actually Sitestar's headquarters, which they lease to the company.

In regards to any money that they have spent on fixing up the properties, it is hard to tell by looking at the companies financials if it would have been accounted for as an expense, or, added to the cost basis- as based on when the property is put into use, and the nature of the repair, it should be added to the cost basis or expensed. Again, without actually looking at the company's books or actually seeing the progression of the properties, it is hard to get a feel for.

One thing that I am pretty sure of, especially when considering how the company has historically allocated capital, is that the properties will at a minimum tread water for the company/have been purchased at a fair value, but will ultimatly likely do well for them.

Share Repurchases!

In other capital allocation related news, the company repurchased 500K shares of stock last quarter and another 150K shares the quarter before that (see note 3). When you look at their history for stock repurchases, they have done so in an aggressive manner... Basically, in the past 6 months, the company has repurchased just a hair under 1% of their own common stock.

If that isn't enough for you, we see here that over the past 3 years, they have repurchased a glut of their own stock. AND, they repurchased it at prices that were significantly higher than where shares are presently trading at. While it is obviously preferential to buy shares at a lower price, this gives us an idea as to the willingness of the company to continue and expand it's repurchase program. Arguably, the company did a good thing by repurchasing shares even when they were trading north of 10 cents each, as they were not exorbitantly priced at the time; in addition to the fact that management had no way of knowing the stock would trade down.

In conclusion...

So, here is a company that is trading not only below book value, but, for less than tangible book value, and is has been earning a nice chunk of money relative to it's market cap. Furthermore, it appears that their internet business, while losing revenue, is very nimble in it's ability to reduce expenses as revenues decrease. With a significant amount of the company's expenses able to be covered by rents on real estate (which, seems to be a worse case scenario) we get the future of the technology business for free, which still has a lot of intangibles and goodwill to burn through, which gives us some preferential tax treatment...

Sitestar, even despite the recent run up in price, appears to basically selling for it's liquidation value, if you value all of the internet business at absolutely nothing and discount the real estate, which they seemed to get a fair market price on (and I would assume have been investing money in improving the condition of). Furthermore, you get all the future cash flows of the internet business and the appreciation of real estate for free...

Disclosure: I am long shares of SYTE.OB. This is a small and relatively ill-liquid security, so, it is likely to be considered risky. This is not advice of any kind. This is not a recommendation of any kind. Always do a ton of your own research in regard to anything that I say, do, write, or so much as even think about.