Wednesday, May 30, 2012

Why I Am 13D-ing Sitestar.

There are a lot of things that are correct with Sitestar... hence, I decided to allocate a good bit of my personal and my family's investable funds towards it's common stock as an investment. After buying a good amount of the shares that have traded since last June and going out to Virginia to do research on the company, it has come time to file a 13D with the SEC. Is everything right with Sitestar? No. Virtually every company has issues of some sort. It is my hope that through this post, future posts, and all my interactions with the company, that I will be able cast a light not only on the items that should be honed, but to also shed light on all the good things that the company seems to be doing. In this, I am offering an opinion about a company where I represent the second largest shareholding entity.

As my 13D will say when filed with the SEC, I have purchased the shares for investment purposes because I believe the company to be undervalued. As I have spent the majority of my working years in real estate, I do have some suggestions and perspective that I think will be helpful for increasing the intrinsic value of the company- hence, the 13D, rather than a 13G. Please be sure to check out my disclosure/disclaimer at the end of the article.

One of the first items that comes to mind is that Sitestar is (and has been) out of favor. Since I posted on them a while back, I have received  numerous emails and comments, few of which have been overly positive. Generally, it seems that people are thrown for a loop when they see that an internet company with what seems to be a dying business, is allocating cash flows towards real estate. Don't get me wrong, it's a fair point. As highlighted in my first post on the company, from what I could tell almost a year ago through internet searches, the CEO, Frank Erhartic, has a history of investing in real estate. For example, he and his wife Julia, own the building that Sitestar uses for it's headquarters.

It also appeared that they had several houses that they owned as rental units. As a landlord, I know from personal experience- you learn a ton on your first few houses. Effectively, when they moved shareholder's money into real estate, I felt that we were getting said education for free.

A few months after I started really getting into the company, I decided that I wanted to look at the real estate and pull deeds on the various parcels. So, my Uncle Bill (who is also a landlord, with significantly more property than SYTE) and I took a 7 hour drive and paroozed around central Virginia for a few days. At various courthouses, we pulled and printed every legal document that we could get our hands on that had anything to do with the company. As an interesting side note, due to how you search for documents in Virginia databases, I was able to print everything that came in as a search result without really looking at it. I did so so that I could review the items later as we were pressed for time. As such, I now inadvertently have a copy of Frank and Julia Erhartic's marriage certificate... upon this realization, Bill and I both got a pretty good chuckle. What I thought was good a good research practice, quickly turned into me feeling like a stalker. Eeeek.

When going through the deeds we found that there didn't appear to be any recorded liens on any of the properties that the company owned- just like their filings have implied. We also found out what I had suspected in my first post on the company- the Assessor's website data wasn't necessarily correct in regards to the prices that the company paid for the various pieces of real estate that the company owns... my hunch that I spoke of in a previous post where I said "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 " turned out to be correct... They have been purchasing properties for significantly less than the assessed amounts. Here are some examples from that post, with the deeds scanned below:

Here is the screen shot that I took a while back of said data. Matching the addresses on the site with the Tax ID numbers on the deeds. The way that I read said deeds and info is as follows:

Greggin Dr, had an Assessor's sire sale price of $187.5K. On the deed, it was sold to Sitestar (as is indicated by the "considered amount") for a paltry $45K.

5460 Clearwood had an Assessor's site sale price of $173K. On the deed, it was assessed for $172.6K and a sale price to Sitestar of $97,074.

3719 Janney Ln had an Assessor's site sale price of $155.5K. On the deed, it was assessed for $155.5K eliminated a loan on the property for a whopping $169.5K, ans was sold to Sitestar for $113.6K.

This seemed a bit fishy to me... I knew that the considered amount on the deeds were the equivalent of the sale price, but, I was curious as to why the sale price on the deed mismatched the sale price on the county's web page. So while fact checking, I called the County Assessor's Office to find out. They told me about a problem with the GIS system software and I even got word of this article in the local paper that explained the problem! Here is the relevant snippet and a screen shot of the article (italics, bold, and underlining are mine):

The recordation tax is based on either a property's sale price or its assessed value, whichever is higher. Until recently, the sales price was almost always the higher of the two — so the county was able to just stream that figure straight to its GIS site. But that changed when the housing bubble burst a few years ago, resulting in occasions where a property sold for well below its assessed value.
"It's only become a problem in the last maybe two years, when the sales prices started going under the assessments," Assistant County Administrator Diane Hyatt said. "Before it never showed up because the sales prices were always higher than the assessments."
As a result of the shifting housing market and software glitch, people have found numerous cases where the county's GIS site lists the sale price of a property as much higher than what the buyer actually paid.


Moving along to the actual properties, these were the first 2 that that we came to in our travels:

Both seemed like nice pieces of real estate. The first still had some work to be done, but, it appeared that it was in the process of being painted and such.

While driving from the 2nd house on my list to the 3rd (just a few blocks away), we drove by the picture on the left... I first noticed the yellow sign, as it had been at one of the previous houses (pictured above) that we looked at. I didn't know about this particular address being owned by Sitestar, but I wanted to check it out and get some pictures, nonetheless. Upon jumping out of our rental truck, I saw that there was also an info box. I remember thinking "That's cool, I will get to see the specifics on this property." When I opened the box, I found the following 2 stapled sheets of paper:

Sometimes, it's better to be lucky than good. This was definitely one of those times.

That's right. In January, I found out that Sitestar had it's hand more in the pocket of the Virginia real estate market than I originally thought... In fact, the picture of me smiling by the treasure chest of a flier box is an understatement as to how I felt about that we had just stumbled upon. But there was one problem. When I got back to Kentucky and pulled the info on the properties on the sheet, they were not under Sitestar's name, which was a bit confusing to me... I had previously noticed months before that the company had owned a house with an entity called BCK Properties (the property on Showalter). And yet again, BCK came up as the owner of a few of the parcels that SYTE had for sale. In a brief conversation with the CEO talking with the CEO, I asked about this. Erhartic explained to me that they buy some of the properties with other entities, in a sort of partnership and then split the proceeds accordingly. This confirmed what I already suspected when talking to a worker after I walked through one of the houses that was being repaired... When asking him about his job and such, he made mention of the "group" that Frank is a part of that buys real estate together... In fact, here is a video I took of the house. It had the wiring ripped out, so, they were fixing the problem. It really didn't strike me as that big of a deal, as I am pretty used to seeing copper vandalism.

When I went into their HQ, there were cables strewn EVERYWHERE behind a partition that had various modems and such, which, I took as a good sign for an internet service provider. A whole lot of people seem to be worried about an ISP branching out into a polar opposite type of business. I am not concerned for a few reasons. As stated earlier, when I originally started buying shares of the company, I knew for fact, that the CEO (and his Realtor wife) have a significant amount of experience in real estate, as they have seemed to have successfully invested in housing in the past. Next, we are at a time when buying real estate, even if they mess up (which, I don't believe is happening) and get a less than good deal on it, probably won't hurt the company too bad over the long run... For me, with the company trading at a significant discount to book value, I get even more safety.

My overly simplified way of looking at the situation, is if the company is buying real estate for, say, .70 cents on the dollar, and if I bought shares of the company for say, 1/2 of tangible book, I am essentially buying that real estate for .35 cents on the dollar. If they overpaid by 20% (which, based on the rents I think they can get out of them, I am pretty sure is not the case) I am still getting the real estate for less than it's worth.

They are also diversifying their investments not only in higher end houses, but, there is also some commercial space, the pictured one above had paint, tables, ladders, and maybe some other tools in it and might have been a store house for the renovation projects. The company is also buying lower and middle range housing. Regardless of location, the theme is common: Erhartic seems to be buying most all of the real estate for  significantly less than it's worth. In the most recent quarter, the sales that the real estate unit garnered indicated that as well. When taking into consideration how much they invested to repair the sold properties, the cost of revenue was ~78%. Looking at what the company has left, I think that there will be higher margins to come in the future.

There are some houses that we went to which the company had actually sold. Below are some examples and another that is in the same area, that the company presently owns (I added in a panorama of one to show the neighborhood). The addresses with attached Zillow links and the consideration amounts, are 4965 Showalter Rd with a Zestimate of $106.2K, a sale to SYTE and BCK of $85.7K and a sale to an individual of $110.5K in Sept of 2011. 1924 Greenwood Rd has a Zestimate of $188.3K with a sale to SYTE of $138.2K, then a sale to an individual for $180K in January 2012. Lastly 1652 Brandon Avenue has a Zestimate of $202.2K vs a sale to SYTE of $126K. Furthermore, the rents that Zillow estimates the company could get (which make pretty good sense, based on what we saw) have the ability to be substantial. This may make for an opportunity for the company to create a revenue stream in the future. Sitestar also has historically paid much less than Zillow estimates, which as a rule of thumb (since Zillow can screw up), makes me quite happy. The properties all seemed to be in excellent condition.

Moving along from the real estate side of things, check out the legal proceedings from the 10K... it looks like the company is getting ready to have a touch more than 5% of it's shares canceled due to a spat with former management- I view this as a share repurchase that the company pays almost nothing for! You can check out the specifics of the case at this website.

The company is also cutting costs. Just take a look at executive expenses from some recent filings...
Frank R. Erhartic, Jr., President, CEO and Director, earned a salary of $13,000 and $93,308 for the years ended December 31, 2011 and 2010, respectively.  He received no other compensation.  Daniel Judd, CFO and Director earned a salary of $46,642 and $45,200 for the years ended December 31, 2011 and 2010, respectively.  He received no other compensation.  Julia E. Erhartic, Secretary and Director, earned a salary of $6,000 and $13,000 for the years ended December 31, 2011 and 2010, respectively.  She received no other compensation.
I take it that Frank is trying to make his money from the company from both the equity line that it occasionally uses, as well as through rental payments that the company makes.
The Company leases its corporate headquarters located at 7109 Timberlake Road, Suite 201, Lynchburg, VA 24502 from Frank R. Erhartic, Jr., a stockholder of the Company pursuant to a lease agreement entered into on November 23, 2003. Pursuant to the lease agreement, the Company pays Mr. Erhartic rent in the amount of $48,000 per year. The lease agreement expires on November 1, 2013. Mr. Erhartic also is owed varying amounts on a line of credit he has with the Company and on occasions he draws down his line of credit to take advantage of investment opportunities that arise from time-to-time.
It seems that the company is not using realtors to sell houses, but, rather the CEO of the company (his cell phone number is on the flyer). In the most recent 10K, it was stated that he received no other compensation from the company, other than interest on the loan, rent from HQ, or the $13K in salary, so, there should be some cost saving there that others in the market won't have the advantage of. It seems that Frank has set up a nice real estate business.

With the company being so geographically concentrated in their real estate holdings (basically, within 2-3 counties in Virginia), employment numbers in the area come to mind of some importance. Well, here they are. While they weren't that bad to begin with, the economy in the area is showing signs of improvement- a good point for the residential real estate market.

So, what did buying the shares needed to throw me over 5% of outstanding shares, at the company's present price, which has been hovering around $2 million dollars, buy me? For starters, I got well more than the market cap in owned real estate, which seems to be worth well more than was paid. There seems to be very little in the way of debt since the company has not been paying on a note from the USA Telephone acquisition. As I pointed out before, the company will likely owe less than the stated amount (and potentially, nothing) once the matter is settled. Additionally, I was able to purchase part of an internet business that is presently cash flowing. when it does eventually die off, I would imagine that the company would be able to sell off the remaining customers to a bigger operator, impair the goodwill on the books, and have a some sort tax asset (though, am not sure as to the extent). If they decide to keep it, then they may be able to acquire a dying industry at favorable, discounted prices, from distressed operators- giving Sitestar further economies of scale. Add into this that the company doesn't historically use an overabundance of leverage and I think that investment risk goes down.

Are there problems or things that could be better? As with any investment, sure. It might be interesting to see some of the houses get fixed up and moved quicker. I would like to know if they are maximizing potential tax assets through the usage of 1031 tax exchanges on the properties that they are selling (such as has been done with Consolidated Tomoka-Land Company). I would love to see a reverse share split happen- greater transparency with the company through the form of an annual meeting would be nice as well. I would be absolutely ecstatic to see an expansion of the company's share buyback program. But for now, I really like the company and have open buy orders.

On a more personal level, in my home area, the real estate market is really hard to acquire things at attractive prices unless you are paying cash without having to pay virtually anything in interest on said cash. If I do happen to find a deal that is overly good (and, they do come around if you look), then I can get a large amount of leverage on the property- often, for more than I buy the house for (funds to fix it up with), and not tie up my own capital. Thus, freeing it for other investments or uses. Since Sitestar essentially represents the cash buyers that are keeping me from being up to my eyeballs in the Lexington, KY real estate market and they are trading at a significant discount to book value (making their real estate even cheaper for me to buy) I am more than happy to allocate funds their way. The significant discount that they trade at to what I think their intrinsic value is, is in my mind, a form of levering my indirect investment in their owned real estate.

Disclosure/Disclaimer: I, various members of my family, and our family investment club are long shares of Sitestar. I have no position in or against CTO. This article is nothing more than my opinion and thoughts as to why I invested in the company. I assume that all I say is accurate, however, I am human and do screw up. Due to how the company owns and buys it's real estate, I may have messed up in posting pictures of properties that the company owns, or, owns part pieces of real estate through an investment group. While I have open buy orders, please remember that I have the right to change my position at any time. Always do a ton of your own research before even contemplating anything that I say, do, write, or so much as think about.

Sunday, May 27, 2012

Darts, Efficient Market Hypothesis, and Facebook.

In my post a few days ago about the crazy prices that people were (and are) willing to pay for Facebook's common stock (Jeff Mathews had a good piece on it too), I off handily said something about throwing darts at a Wall Street Journal and thinking that the stocks the darts landed on would probably be better bets than Facebook. Given that hedge fund managers are furious about what happened, I thought that I would bring some light hearted humor to the situation that is apparently going to cost the various market makers and/or the NASDAQ a hefty sum of money.

That's right- last Wednesday, one of my buddies and I went to one of our favorite pubs (which was surprisingly empty) to do a little experiment... I figured that what I off handedly said in reference to a contest inspired by a flawed book would make for an interesting thought exercise. We would throw darts at the Wall St. Journal, see what they landed on, and compare the results to that of Facebook's stock over various intervals of time.

Each of us got 3 darts and beer of choice. Luke made the throws for his 3 stocks first.

His stocks were General Dynamics (GD) at a price of $64.55, Braskem S.A. (BAK) at a price of $11.10, and Hospira (HSP) at a price of $32.65.

And now, for my throws.


My first 2 throws landed on Whiting Petroleum Corp. (WLL) at a price of $46.23 and what we thought was to a bit to close to call between Sara Lee and SanoFi ADS. As such, I decided to get the unbiased opinion of one of the drunks at the bar, who ended up being quite insistent that my dart had landed slightly more towards Sara Lee (SLE) at a price of $20.84. For my last dart, it was was as if the godfather of value investing- Ben Graham himself, had guided my dart from beyond the grave to land on the B shares of Berkshire Hathaway (BRK-B) that were fetching a price of $79.80... you just can't make that stuff up.

Honestly, I don't know much about any of the stocks other than Berkshire Hathaway and a touch about Sara Lee... though, after briefly looking at each of their financials (I didn't read any 10Ks), I would think that I would be much happier owning any of the stocks that the darts chose than I would be by owning Facebook (FB). And that says a lot, as these are all companies that I would generally stay away from! For clarification, the WSJ was quoting closing prices for Monday, May 21st, 2012 and on that day, Facebook's closing price was $34.03. It's a price that while ~$8 dollars per share lower than the highs it hit just the trading day before, represents a company trading at seemingly sky-high multiples of nearly every financial metric in existence.

The great thing here, is that this is a total experiment. As Warren Buffett has said, investing is like a game of baseball where no strikes are called. I have very little knowledge of any of these stocks, and as a result, am implicitly taking a pass by not owning ANY of them. Even if Facebook stock somehow shoots to the moon (it would take a more than a 500% gain to compete in market capitalization with Apple), I won't give a damn, as I wouldn't have been comfortable owning the stock from the get go- I simply don't understand it well enough to justify the purchase price. The same is true for the 6 stocks we randomly selected... actually, I take that back- I wouldn't mind owning Berkshire.

So where will each of the stocks be in a year? Who knows... but it will be fun to watch. Just for the sake of entertainment, I will say that 4 out of 6 of the companies will do better than Facebook over the next few years. Regardless, I will feel like I ended up winning because at the end of the evening, not only did I not own Facebook's stock, but what was meant to be a few beers and an uber-geeky hour of darts turned into a night of drinking and a pretty good Heartless Bastards show.

Disclosure/Disclaimer: I have no financial position in any regard to any of the entities mentioned. I reserve the right to change any of my positions at any time. This is not advice of any kind, is solely my own opinion, and is obviously for entertainment purposes. Always do a ton of your own research in regard to anything that I say, do, write, or so much as even think about.

Saturday, May 26, 2012

A Bad Time To Sell Needles...

From NPR (and MIT). Drugs may start to be injected by jets of air, rather than by traditional needles.

It seems like it could be getting ready to be a bad time to be a company that manufactures needles...

The Dow Jones Industrial Average Vs. Penny Stocks...

Nate over at Oddball Stocks has come up with a hell of a post as usual. He had apparently gotten a ton of questions about the safety of penny stocks in terms of de-listment or value recognition. Since he is a fan of the Walker's books (which, I also really like), he decided to do some research that through his own admission is un-scientific. Here is what I found fascinating:

Penny stocks from 1999 (13 years)
Out of 167 listed companies 63 are still listed.62.2% of the penny stocks had some sort of value realization event either positive or negative.
The results are interesting, it would seem that an investor who wants an external event to realize value would be better served buying exchange traded stocks and avoiding unlisted and pink sheet stocks altogether.
So what are some of the ways value was realized for these companies?  I didn't follow up on all of the companies that I had marked as no longer trading, it would have taken too much time.  I did follow up on some, of the 194 I probably followed up on 30-40 companies.  Most of the time I found their fate through a simple Google search.  Here are some of the terms I jotted down in relation to their final fate: liquidated, bought out, went private, bankrupt, purchased by parent.

When comparing this directly to the Dow Jones Industrial Average components of 1999 it doesn't seem that results are going to be that much (if any) better. For example, the average today stands at $12,454.83 which is roughly 16.35% higher than it stood the when the components were adjusted in November of 1999 (it's price level was $10,704.48) Several of the companies were acquired (SBC Communications), changed their name (Allied Signal took on Honeywell's name, but, is no longer a component), or spun off (Philip Morris International coming from Altria, which if still together, probably would be a component).

Several of the 1999 components have been HUGE investment disasters: General Motors, Citi, and Eastman Kodak come to mind. Others, such as Dupont or Coca-Cola moved little so as to kind of averaged things out. Whereas a few, such as Exxon Mobile, did extraordinarily well, being balanced out by the near 50% pounding taken by International Paper. Some of the components that are currently listed, such as Hewlett-Packard probably stand a good chance of being kicked out at some point in the near future. Then, there are the companies aren't even included in the Dow, just because of how the index calculates it's pricing... the idea that there isn't some way for Apple and Berkshire Hathaway to be included in the index that is meant to more or less mirror the health of the US economy is patently absurd. It seems to me that all one would have to do is divide both the price and the momentary changes in price of Berkshire Hathaway by say, 20,000 to get it to a price that would be similar to most other DJIA companies before plugging the stock into the calculation formula. It seems to me that this would be child's play given what needs to be done to the divisor over time.

Getting back on track...

What's to be gathered from this very unscientific look at the DJIA? Just because a company is one of the index's components doesn't mean that it is a safe, good, or even bad investment. Are penny stocks or dark companies inherently less risky that DJIA component companies? Not necessarily- a lot of pink sheet companies are fly by nights, ripe for manipulation, and outright frauds. However, if you pick through enough of them, there are some real gems out there and I would rather be an owner of those companies than virtually anything that is on the Dow... such as Western Lime that Nate mentioned in his writeup.

Disclosure/Disclaimer: I have no financial position in any regard to any of the entities mentioned. I do use a lot of the products and services that they produce and offer. I often invest in small and illiquid companies that are often referred to as "penny stocks". I reserve the right to change any of our positions at any time. This is not advice of any kind and is solely my own opinion. Always do a ton of your own research in regard to anything that I say, do, write, or so much as even think about.

How Government Home Loans Screw The Defaulter.

A while back, I wrote a piece called "How Government Home Loans Screw The Public." I used a home loan that my friends received as an example and then openly wondered how the federal government could ever economically justify lending out money at rates that a bank could never really compete with, thus, likely making the loans unprofitable for taxpayers. This recent article in the WSJ points it out how they can manage getting their principle back in the event of default...

Apparently, when a borrower defaults and the house is sold, the USDA can bypass the legal system AND state consumer protection laws in order to garnish wages and government entitlements that the borrower receives. Since the loans that the USDA makes are often made in poorer, impoverished, rural areas (like Mt Sterling where my previously mentioned friends bought their home) it raises the certainty that the borrower is on a form of government assistance, thus, making repayment of the delinquent amount a virtual certainty. While it is a good thing that the taxpayer is is likely to be made whole as a result of losing money that was lent out, it is terrible that the agency uses such an iron fist in getting their way or even guaranteed/originated the bad loan in the first place. Not only do borrowers have no idea that this is a risk of something that could happen to them, but it puts the 'privatish' lending sector (referencing Taleb) on a completely different playing field than what is essentially their competition- the USDA lenders. It almost seems like there is one branch of the government saying "you really need this assistance to buy (insert program here), because you are so poor." Then, another branch of what is essentially the same entity, comes to them and says "because you are so poor and can't afford this house that we lent you the money to buy, we are going to take what we are giving you, making you even poorer."

If Mr. Market is a manic depressive, then the dueling federal agencies are the embodiment of multiple personality disorder...

Thursday, May 24, 2012

Some Thoughts...

Here is a scattered post that hopefully, Seeking Alpha WON'T pickup, as it isn't really on anything concrete, but rather, me bouncing some thoughts off of readers. This will likely come off as scattered, and the positions don't make up nearly as much of my portfolio as the postings on them would likely suggest. Regardless, feel free to email me with any thoughts.

I think that it is unfortunately apparent that Mark Sellers' once very enthusiastic opinion of Premier Exhibitions will likely not come to full fruition- which isn't a big deal... everyone makes mistakes. In the article (which I found through a great blog called Variant Perceptions), Sellers talked of using a DCF to get a value of $20 and the value being as much as $50 "in a few years". He also stated that he thought that the company could sell off all of it's Titanic related material for 25-50% of it's market cap, which was roughly $450 million... So, basically, he was figuring that the assets were worth $112.5mm-$225mm before the last expedition.

Moving on to today, I think that it is interesting to look at the language that the company used in it's most recent conference call (the italics and underlining are mine):

I want to be clear that our Board is committed to monetizing the Titanic assets. And we intend to do so in a tax efficient, judicious and disciplined manner, recognizing the appraise value of the artifacts and the intrinsic value of the other Titanic assets. In addition, when a transaction is completed, we do intend to direct substantially all of the net proceeds to shareholders..." -Samuel Weiser, Interim CEO, President, and Director.

It just might be that the company is trying to subtly say something to it's shareholders... Am I speculating by owning PRXI stock? To an extent, yes. However, as I have noted before, I am ok with it as a small amount of my portfolio, as the risk reward ratio seemed very intriguing to me at the time that I bought a large number of my shares (being in the $2.teens). I can't say that I'd blame anyone for sitting on the sidelines though.

As a side note, it is awesome that Sellers likes and brews good beer. The finance industry and the rest of the world could use more people like that.

As for SUPERVALU, it is no secret that the stock price continues to get pummeled on an almost daily basis... While I have gradually been buying the stock (and LEAPS) for a long enough period of time that it almost seems like I have slit my wrists on a falling knife, it perfectly illustrates to me why I don't generally like the idea of using margin, since the short term nature of stocks can be quite volatile despite this particular instance with the company's continual improvement in tangible book value. For a lot of trading institutions, margin requirements have arbitrary price rules that apply to margin maintenance requirements- check out the literature from Zecco and TDAmeritrade on the matter. Between that and the company having lost it's place in the S&P 500 I don't think it would be a stretch of the imagination for there being some further crazy fluctuations in the price due to rebalancing of funds, ETFs (there may be some more left to work out?), and even people's margin accounts getting called.

As an example of this sort of forced selling, on April 30th, the day that SVU got kicked out of the S$P 500, almost 60 million shares traded hands, whereas it generally sees volume in the single digit millions. Put another way, if the shares that got traded on that day were all unique, which, don't get me wrong, is pretty unlikely, more than a quarter of the company was traded in a single day and the price only went down by ~2%. If that isn't enough craziness, as of April 30th, 88.55mm shares were sold short. That equates to nearly 42% of all the company's shares! As a percent of float, that is approaching Sears like numbers... But, the difference here, is that SVU has a much larger float that SHLD; if you look at Sears shorted shares as a percent of shares outstanding, the percentage drops from 52.5% to 9.9%.

Then, there is the other side of this sword, where there could be glut of forced buying. It seemed like that was the direction that things were going in for a handfull of days after they last reported results that certainly weren't overly disappointing. Mr. Market had other thoughts though.

When you think about it, the whole situation is pretty mind blowing.

Regardless, low prices can be the friend of the VALU investor... get the pun? ;)

Disclosure/Disclaimer: I and various members of my family (who have some accounts that I manage) are long shares and/or options of PRXI and/or SVU. I reserve the right to change any of our positions at any time. This is not advice of any kind and is solely my own opinion. 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, May 23, 2012

That Last Little Bit Of Ketchup.

That's right, there is a new coating that will let you get all the ketchup out of a glass bottle...

One has to wonder what this will do to Heinz and other food producers. Will it make them sell fewer units of product because people will use more of the product they generally throw away? Will it cause some companies to gain a little bit of market share by having an advantage over others (that will soon be replicated by everyone else)? OR, will no body use it it all, because it would be too cost prohibitive to be worth adding into the production process.


"Condiments may sound like a narrow focus for a group of MIT engineers, but not when you consider the impact it could have on food waste and the packaging industry. 'It's funny: Everyone is always like, "Why bottles? What's the big deal?" But then you tell them the market for bottles—just the sauces alone is a $17 billion market,' [MIT PhD candidate Dave Smith] says. 'And if all those bottles had our coating, we estimate that we could save about one million tons of food from being thrown out every year.'"

Disclosure/Disclaimer: I have no financial position or interest in or against, in any regard, to any of the entities mentioned. This is not advice of any kind and is solely my own opinion. Always do a ton of your own research before contemplating doing anything that I say, do, write, or so much as think about.

Tuesday, May 22, 2012

Facebook's (un)reliable Data & A Duped Public.

In the video at the end of this post, it is highlighted that Facebook may have hinted to institutional investors and analysts that it's revenue wouldn't be what everyone thought. I really have to question why people who were paying such a crazy multiple of virtually every metric in existence for Facebook's stock during it's IPO are getting outraged by some revenue growth estimates being cut without them knowing. Don't get me wrong, lying is immoral. However, when stepping back and taking what I thought was a pretty objective view of the matter, it wasn't as if it was hard for me to stay away from the Facebook IPO... After all, that's what looking for a margin of safety keeps you away from: being overly reliant on growth models that may or may not hold up... Here is a snip from that write up:

"...lets say that everybody in the world magically had a computer with internet access- presently, 6.8405 billion people. Now, lets also assume that they all develop the same usage as our present average monthly Facebook user and that companies were willing to pay Facebook the exact same amount for advertising as they presently do per user... Facebook would then generate $25.4466 billion in ad revenue (don't get me wrong, is impressive, but, still not up to Google standards). If the company can keep the same margins of earnings related to the revenue (presently, ~21.2%: based on $3.154 billion in ads, which is slightly less than their total revenues, and $668 million in earnings for the A and B shares) then you are looking at a company that would earn just under $5.18 billion dollars a year. 
Now, in what I don't think is a stretch to call an "overly rosy scenario" if the company is at that point valued at $75 billion, the stock would have a P/E ratio of ~14.5. If the company is valued at $100 billion, then the P/E ratio would become ~19.3. At that point, there would be very few ways for Facebook to justify a P/E that was at that level, unless you thought that they could juice margins, people will start spending a whole lot more time on Facebook (even though on page 3 of the prospectus, the company boasts that users upload 250 million pictures to the site PER DAY), we find an alien life form that would want to use the site, advertisers pony up more money for advertising on the site, or a few other various reasons..."

If I had screwed up in my valuation of the company and been duped into buying the stock, then, maybe I would be angry too. But seriously, why would anyone be able to sleep very well at night owning a company where they paid prices that reflect one of the greatest growth rates that could possibly happen? Furthermore, with advertisers such as GM pulling away from Facebook ads, we aren't exactly sure as to what is going to happen with the company in the near term... Are the analyst revisions really a surprise!? As best I can tell, there is absolutely no discount in the price of this stock to justify virtually any amount of risk associated with the company.

Regardless, institutional investors and hedge funds probably shouldn't be privy to information that the public isn't. However, this is an instance where the public that "got deceived" should have been intelligent enough to think something to the effect of "Do I really want to pay what is approaching 30x the revenue that a company generated in 2011 for a piece of the Facebook pie?"

If they would have done that, then, it would have saved them a ~25% haircut in just a touch over 2 days. A few more 25% haircuts and I would likely be willing to go long the stock. Until then, I could throw a dart at the Wall St Journal and probably be happier with investing in whatever the dart hits, rather than Facebook. Can the stock preform well in the future? Sure. However, I wouldn't be thrilled to own it.

Disclosure/Disclaimer: I have no financial position or interest in or against, in any regard, to any of the entities mentioned. This is not advice of any kind and is solely my own opinion. Always do a ton of your own research before contemplating doing anything that I say, do, write, or so much as think about.

Wednesday, May 16, 2012

Deregistering To Earn More...

Here, we see an article about a bank in New York that is symptomatic of the numerous companies have begun deregistering their stocks so that they can have a rosier economic future.


Between legal and accounting fees, being a public company costs Empire State Bank roughly $10,000 a month.
But, the bank took steps to end those expenses Monday, when it filed papers to deregister its common stock. Once the Securities and Exchange Commission processes the bank's papers — which takes about 90 days — Empire State will no longer have to file quarterly or annual reports or proxies.
The move should help drive profits at the three-branch bank, which has struggled with lackluster performance. Empire State, founded in 2004, on Monday reported a loss of $54,000 in the first quarter, down from a quarterly profit of $38,000 a year before.
Costa was only able to deregister because of President Barack Obama's Jumpstart Our Businesses (JOBS) Act, signed into effect early last month.
Companies with more than 300 shareholders had previously been barred from deregistering, precluding his bank from doing so, Costa said.
The new law ups the threshold to 1,200 shareholders, Costa said.

This is a great way for small companies to become more profitable. While the intrinsic value of the businesses should go up with these sorts of transactions, a lot of people are scared to death to own the stock of a non reporting company. Certainly, this could make liquidity go down for the companies, and thus, their share prices could lag with an absence of buyers. If markets over-react to the downside, there could be some great opportunities.

Disclosure/Disclaimer: I have no position in regard to the company mentioned. I reserve the right to change any of my positions at any time. This is not advice of any kind and is solely my own opinion. 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, May 15, 2012

Dataram Revisited...

The very first post that I ever made on this blog was about a company called Dataram that was at the time, trading for a discount to it's liquidation value.

Later, I decided to send them a letter, asking them to repurchase stock at levels where the company was trading for less than it's net cash. In their response, they basically thumbed their noses at me by saying "thank you... for sharing your insight to the market, business and Dataram."

Since then, it has become apparent that the company has totally failed to implement their plan involving "The use cash and the creation of more cash..." On the day that I sent my original letter, the company had roughly $16 million dollars in cash and virtually no liabilities. Over the course, their tangible book value has shrunk to being measured in the single digits of millions of dollars... and that is AFTER they issued over $3 million in stock and sold off some patents!

Later, the company came in danger of being delisted this, share price suppression being symptomatic of just how terrible the decisions are that the company has made.

Now, the company has taken on debt that it never needed to, has little in the way cash, has desperately sold off patents to raise cash, and now, is buying back up to 1 million shares of stock at uninteresting prices. I assume that this is in an attempt to keep it's listing... The problem, is that the company is doing this repurchase at a time when the business seems to be trading at a price that isn't really very compelling compared to it's intrinsic value. From the article linked to, here is a snippet:

Marc Palker, Dataram CFO said, “The Board of Directors recognizes the stock is undervalued and this buyback is one of several alternatives that executive management is continuing to pursue to increase shareholder value”.

When I suggested it should repurchase shares, it was trading for far less than it's liquidation value, and thus, would have gotten a much better deal by buying back it's stock at that time. DRAM is first class example of a company that has decided to repurchase shares at exactly the wrong time after passing up a perfect time to do so. Frankly, I have little faith in the company.

I was able to avoid some of the run up in price, the impending collapse, then slight recovery by selling off my shares; after all, it was apparent that the company was hell bent on destroying shareholder value through troublesome acquisitions. I learned a lot through the process too... There is an importance when looking at net-nets; I would argue that you need to figure out what management is going to do with the assets of the company. It doesn't take much work at all and can make any basket of stocks a lot safer. John, over at Shadow Stock is a person who does a great job of creating a net-net basket, that throws out a lot of the crap that is out there.

Disclosure/Disclaimer: I have no position in regards to DRAM. I reserve the right to change any of my positions at any time. This is not advice of any kind and is solely my own opinion. 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, May 14, 2012

Sometimes It's Best To Take A Pass #4.0: Walking Away From A Few Million Dollars... Part 1.

That's right. I just walked away from a couple million dollars... and I couldn't be happier. Let me explain, in what will be a 3 part post.

First, let's rewind to roughly 2.5 months ago. At something like 2AM, I was emailed about an apartment complex in my home state's capital that was reduced in price from $2mm to $365K. From what I could tell, it had obviously been boarded up for a long time and would likely need a lot of work. The whole thing was interesting to me, sheerly from an observational standpoint, as well as from the fact that I have a history of buying some of the shittiest looking pieces of property in the world, fixing what ailes it- generally just cosmetic stuff, and then selling or renting them out (generally followed by a healthy refinance). Since my great uncle has more than a few rent houses in the county that this complex was located, in addition to the fact that he likes to look at various real estate deals, I figured that he would find it of interest too- so, I shot him an email with the property info. Like me, he was very curious about the complex. After he emailed me back, a text message to my Realtor and 2 hours later, the 3 of us met in Frankfort with the listing agent to take a look around the 126 unit complex. As you can see from the screen shot of Google Maps below, the thing was absolutely huge. The main building was literally the length of a football field.

Upon entering the largest of the 3 buildings, containing 86- 1BR apartments, we quickly saw what was pictured above: that there was extensive damage to the facility... based on the price, that wasn't a surprise. Wiring had been torn out, copper piping was destroyed, and ceiling tiles were strewn about the floor like dead soldiers on a battlefield. Not only had the 3 inch copper pipe that supplied water to the whole building been cut out (which is freaking huge stuff to find for an active plumbing system in Kentucky...) and a whole lot of the copper wiring in the hallways was gone. However, there was still a good amount of copper in the electrical panels and nothing had been ripped out of the walls.

When walking through the building with a host of flashlights in hand, we discovered that the copper water pipes inside of the individual units had very little damage to them... Other than the connectors for the hot water heaters, virtually all of the copper was intact. This meant that hooking everything up would be a bit time consuming, but relatively easy. Basically, the whole of the building was a jigsaw puzzle that we would pay licensed plumbers and electricians ~$45 bucks an hour to fix. Overall, not a terrible problem to have. These were the problems that everyone coming into the building would freak out about, but, were not a problem.

The next thing that we noticed was that the building was well insulated. While the outside temperature was about 80 degrees on a late February day, we needed jackets inside of the building... when looking for holes in the drywall to see what kind of insulation it had, there were very few that were big enough to let us know much. When on the 3rd floor, we walked under an attic access point and felt hot air billowing out, almost as if from a turkish bath... again, another decent sign as to the craftsmanship that went into the building.

After this, we we focused on the fact that the main building had a sprinkler system. Again, we were reassured that when all the systems were in proper working order, that the building would end up being very safe. We also noticed that almost all of the window AC units had been stolen or destroyed in an effort for copper vandals to get their next fix... One of the AC units had only a single cut in it- the looter seemed to have gashed himself rather badly and bled pretty profusely as he fled from the scene.

It also seemed that in various instances, the vandals had "set up shop" so to speak in the various hallways of the building where there was still working electricity for them to see the full extent of their destruction. The truly ironic part, is that a lot of why they had lost power, was due to their own vandalism when cutting out copper wiring.

Despite the extensive copper vandalism, most of the appliances remained and seemed to be in decent enough shape. A lot of them were old, but the appliances (just like the plumbing problems) were easily fixable by knowledgeable people, and could be cleaned up with very little expenditure. Literally, the picture of the stove on the left was the worst one in the place... If you gave me an hour and $20 dollars for cleaning supplies and new burner pans, I could have the thing so clean and shiny that you would be willing to eat off of it you had never seen the "before" picture of it. Off the cuff, we figured that we could pay a squad of cleaning ladies ~$10 bucks an hour and they would average anywhere from 2-6 appliances an hour, depending on how dirty they were.

As we continued through our discovery of the main building we continued seeing things that we liked that would scare most people away. All of the drop ceilings had been ravaged and left for dead on the floors, creating a terrible mess. A few units smelled of grease, animal, and likely human urine- these are several of the smells that often mean that there is money is to be made on a piece of property. We ran across dingy clothing, used needles, bent spoons (for freebasing), used condoms, and fly tape where insects were practically begging to squat for real estate.

Moving on to the other 2 buildings, we saw that the damage was pretty similar, but due to the scope of the project necessary to get them up and going, they would obviously be the ones that we brought online first. One consisted of a total of 12- 2BR units and the other had 28 efficiency apartments. Both had 2 floors, firewalls, but no sprinkler systems.

There were other things that we liked... All of the showers were stalls and there were virtually no bathtubs. We surmised that because of this, the complex was probably elderly housing at one point and that it seemed like a great use to put the property back to. This would be especially true as none of the utilities were separated and any buyers would be footing the bill. While a lot of people are scared of paying utilities, we figured that we would be able to control the costs through various redundancies in our systems, hedging, and that we would be protected by the ridiculous margins that we should be able to get... Aside from that, we immediately thought that with the elderly, we could give them a flat rate for rent and their utilities that wouldn't change on a monthly basis, and that would do wonders for them, since most are on a fixed income. With the baby boomers not getting any younger, we figured that this had the potential to be a win win for everybody involved since we figured we could rent the units out very affordably.

After surveying the property, we saw that there was yet even more that we liked: abandoned buildings in the area... and from cyclical industries nonetheless! A car dealership was amongst them. As the economy would rebound and the apartment complex came online, the area would likely come up again. If that wasn't enough, the houses around it were all pretty nice- the property was certainly in a middle class neighborhood, consisting of people that had generally lived there since the sub-division was built... Generally, with these types of properties, the neighborhood that it sits in brings the area down... that was not the case here. The neighborhood brought the property up!

After my uncle and I got a chance to talk about the situation, we decided that despite our never having done business together (other than founding a small family investment partnership), we would form an LLC and buy the complex... We offered $385K for the complex, simply to come in  right above the asking price; just enough to out bid the people that would say "WOW! $365K?! SURE, I'll take it for that!" But wouldn't be so much as to make us overpay. It took a week for the bank's legal council to sign our contract as he was in the hospital, but, they got back with us and at that point we had 21 days to determine that the property would meet our "intended use" as per the contract we sent them.

We were raring to go. The from the instant that we had a good idea that we were buying the complex, we started the processes of lining up financing, meeting with a plethora of inspectors, and even more contractors. This was no doubt going to be a long and arduous process to the buildings up and operational... After all, this complex alone would account for ~2.5% of the rental units in Frankfort! We were chomping at the bit to get the ball rolling.

More to come...

Disclosure/Disclaimer: I and various members of my family (who have some accounts that I manage) are generally long real estate and investments based on real estate. I ultimately did not buy the complex that I am speaking of. I reserve the right to change any of our positions at any time. This is not advice of any kind and is solely my own opinion. 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, May 13, 2012

Eating Lobster.

One thing that will never cease to amaze me is how much something matters just because it's scarce. Here, we learn that a crustacean was spared a hot tub style death because it was rare. 

I for one, enjoy eating lobster. One of the best weeks of my life was spent in Maine, where, best I can tell, they eat lobster as frequently as we in Kentucky eat fried chicken... Anyway, I wouldn't think twice about eating virtually any lobster (so long as it was properly cooked), let alone just because it was calico. That said, if someone paid up for it, I would totally eat something else to spare it...

That said, maybe I could potentially be the guy who ate a tulip that was worth a ton of money, because he thought it was an onion (despite that I have read elsewhere that the story was likely made up).

Tuesday, May 1, 2012

What Do I Like About Ron Paul?

What do I like about Ron Paul? I like that he doesn't hide behind bastardized tag lines. I like that he isn't a trust fund or 'change' that we can believe in. I like that he says realistic things to the effect of "well, practically speaking, we probably won't win, however, theoretically it is possible... Regardless, we will continue on and discuss the things that we think are best for the country."

Irrespective of political leanings, one has to respect the lack of spin, honesty, and kurt discussion that he embodies. If there is anything that we need, it's more honesty and openness in political debates.

Why I Missed (but am now swimming to) The Boat Of PRXI

Something that I have discovered by doing this blog is that I end up eating my own words a lot; which is actually one of the reasons why I like to write on here. It is really nice to be able to see how I was thinking in the past. As such, here is a snippet from an unpublished post on why I once thought that I would likely never own Premier Exhibitions... From April of 2009:
While owning the Heritage pattern by Pfaltzgraff that my parents gave me as a 'thank you' for moving out of their house; I personally prefer to use Gladware and the plastic boxes that Chinese food comes in for most of my food holding needs... As such, I don't get why people would actually pay money for some dishes that were put on a poorly constructed mammoth of a ship, which have been ruled to be owned by Premier Exhibitions. It seems to me that there is no moat for the assets and that public opinion could wane at anytime-no one cares about syringes from the Lusitania and it isn't like that someone can make another blockbuster about the a sinking ship for a while. (Edit: this would have been really cool though...)
Ultimately, it wouldn't shock me if there is a ton of upside. Certainly, if the company just trades for the estimated value of the Titanic assets that it holds, then there is a nice run up left in the stock. I know that the guys over at Complete Growth love this company (as well as a lot of other smart people), but I have to sit this one out for some stuff that I know is cheap, rather than this company which I think is cheap.

Ultimately, it seems that I did make the right decision by passing on PRXI at the time and going long select other companies, rather than PRXI, whose catalyst was quite far off at the time... Despite this, I feel that the past few weeks have created an interesting situation for the stock. Do I purport to have any special insight on the value of the Titanic assets? Not really. What I will say is this: traditional logic (not mine) could argue that it makes sense for people to be snatching up assets that are typically viewed to be inflation hedges- say, artsy things. It also seems as if people are bidding "priceless" asset prices through the roof. Additionally, there was recently a telegraph that wasn't even on the Titanic that sold for $27.5K, a set of 3 rivets (that were part of what caused the ship to sink) and some glass sold for $12.5K, some medals that were given to people that tried to rescue survivors have sold for thousands of poundsPeople even care about authenticating money that passengers were carrying when they were aboard the ship...

If that isn't crazy enough, a billionaire is reconstructing the ship in China so sale the seas! Cruise ships ain't cheap and I think that the potential prospect (which, don't get me wrong, I don't place great odds on of happening) of some of these artifacts making their way onto that ship, would be quite interesting and profitable for all parties involved. For example, I would think that there would be some rich ass hole (insert any occupation that you don't like here) out there that would relish the idea of getting to pay an exorbitant amount of money to eat food off of dish ware from the original Titanic, while cruising around on the 2016 reconstruction. I don't know that's the sort of monetization would be in the vein of the preservation that the US Courts would approve of, but, surely you get my tongue in cheek drift...

The key thing to remember here, is that the Titanic holds a place in the public's mind like no single painting ever has. I obviously missed this 3 years ago when I thought that there was no moat for the assets, despite their not being able to be reproduced and holding a place in the public's mind. To illustrate this point, I will pose a few questions: how many people would pay $30 bucks to see a few thousand Titanic artifacts? How many people would pay a dollar to see a telegraph that the Titanic sent? How many people would pay $10 dollars to see a single painting that sold at auction for $50 million dollars? As such, the Titanic assets, if viewed strictly from a cash flow basis (which, when dealing with single pieces of art/artifacts, then scaling up, gets difficult if not impossible to do) there seems to be a fair chance of these recovered dishes retaining their value as a whole and not exponentially depreciating down when not sold as individual pieces... Former execs at the company thought that the exhibition rights could be quite lucrative as well. Throw in that you are going to have some bidders that don't care about return on invested capital and you have a real possibility that these assets could do very well at auction (OK, so the Federal Government may not be bidding, but, I still thought it was a funny link).

There are also the salvage rights, which, I would imagine the high bidder would want simply so they can control the supply of any future artifacts. If the appraised price of $189 million has any bearing on what the salvage rights should be worth, then they are likely quite valuable. The few expeditions that the company did yielded costs that are a fraction what the assets have the potential to be worth, even if the auction price ends up being 1/2 the 2007 appraised value! I view the salvage rights as a hidden asset that the market may not be fully realizing the potential value of.

Looking back, would someone have been willing to invest, say, $200 million dollars to own the Titanic movie franchise that has generated over $2 billion in ticket sales? Obviously the answer is yes, given that the budget for the film was over $200 million. The whole of the franchise has actually been nothing but free advertising for more than a decade for the assets owned by PRXI and any future cash flows that the artifacts will provide... It is interesting to think that these assets were appraised for less than the budget that went into making the blockbuster film, but, economically, it isn't a surprise- movies are not bound by being shown in a single location.

Getting to the point, after following the company for something like 4 years, I finally bought some  shares as the risk reward ratio is very intriguing to me at this moment, which when combined with the ~$123 million market cap, makes me more than willing to speculate on the fate of the auction. Would I do as I have been known to, and put more than 1/2 my portfolio in this stock? Hell no. But like SVU, do I think that it deserves a small place in my holdings? Why yes, yes I do. I have no idea if the stock will go down like the Titanic or shoot through the roof, but, I would imagine that we will have an answer sooner, rather than later, and I am willing to place a wager on it- annualized returns on this one will likely look great or wretched. Anytime that value guys (who are probably the only owners of the company anyway) start selling out of fear or for other reasons, the contrarian's contrarian in me gets really excited. As has been said before, either the assets are undervalued or they are not. I am betting that they are, in relation to the market cap of the company... If I am wrong, well, it is a risk that I am willing to take.

Given that there are a lot of value investors out there that have been discussing PRXI, I am surprised that there hasn't been any discussion as to what will happen to the cash from this auction. Everyone seems to like this company for the assets being auctioned off. I personally don't really like the business of traveling exhibitions and frankly, have my doubts that Mark Sellers- the company's chairman, really likes it either. This seems to leave a huge cash dividend or Premier becoming a holding company with a glut of permanent capital in it: a hedge fund manager's wet dream (Mark Sellers anyone?). If that is the case and the auction tanks, even after taxes and commissions, the company won't be trading for a whole lot more than book value... A book value that will largely be made up of cash, of a company that doesn't have the worst cash burn that I have ever seen... Ultimately, not a terrible position to be in.

Disclosure/Disclaimer: I and various members of my family (who have some accounts that I manage) are long shares of PRXI and SVU. I reserve the right to change any of our positions at any time. This is not advice of any kind and is solely my own opinion. Always do a ton of your own research in regard to anything that I say, do, write, or so much as even think about.