Archive for September, 2009

It’s been a big week for VaxGen Inc (OTC:VXGN). On Tuesday last week the “VaxGen Full Value Committee” nominated five director candidates to the board. Then on Thursday BizJournals.com reported that VXGN’s “failed AIDS vaccine” was “successful in a new trial that combined it with another failed vaccine in reducing the risk of becoming infected with HIV.” The stock ran on the news, prompting VXGN to clarify yesterday that it “retains an option to obtain the exclusive right to manufacture, commercialize, and further develop the HIV vaccine candidates in the U.S., Europe, Japan and other countries that are members of the Organization of Economic Cooperation and Development” but “has no rights or obligations to manufacture or develop the vaccine candidates unless and until it exercises this option.”

We’ve been following VXGN (see our post archive here) because it is trading at a substantial discount to its net cash position, has ended its cash-burning product development activities and is “seeking to maximize the value of its remaining assets through a strategic transaction or series of strategic transactions.” Management has said that, if the company is unable to identify and complete an alternate strategic transaction, it proposes to liquidate. One concern of ours has been a lawsuit against VXGN by its landlords, in which they sought $22.4M. That lawsuit was dismissed in May, so the path for VXGN to liquidate has now hopefully cleared. The board has, however, been dragging its feet on the liquidation. Given their relatively high compensation and almost non-existent shareholding, it’s not hard to see why.

BA Value Investors had previously disclosed an activist holding and, in a June 12 letter to the board, called on VXGN to “act promptly to reduce the size of the board to three directors; reduce director compensation; change to a smaller audit firm; terminate the lease of its facilities; otherwise cut costs; make an immediate $10 million distribution to shareholders; make a subsequent distribution of substantially all the remaining cash after settling the lease termination; distribute any royalty income to shareholders; and explore ways to monetize the public company value of the Issuer and use of its net operating losses.”

Another group led by Spencer Capital and styling itself “Value Investors for Change” has also filed preliminary proxy documents to remove the board. In the proxy documents, Value Investors for Change call out VXGN’s board on its “track record of failure and exorbitant cash compensation”:

VaxGen does not have any operations, other than preparing public reports. The Company has three employees, including the part-time principal executive officer and director, and four non-employee directors. Since the Company’s failed merger with Raven Biotechnologies, Inc. in March 2008, the Board has publicly disclosed that it would either pursue a strategic transaction or a series of strategic transactions or dissolve the Company. The Company has done neither. In the meantime, members of the Board have treated themselves to exorbitant cash compensation. Until July 2009, two non-employee members of the Board were paid over $300,000 per year in compensation. The principal executive officer will likely receive over $400,000 in cash compensation this year.

VXGN is up 41.7% since we initiated the position. At its $0.68 close yesterday, it has a market capitalization of $22.5M. We last estimated the company’s liquidation value to be around $25.4M or $0.77 per share. VXGN has other potentially valuable assets, including a “state-of-the-art biopharmaceutical manufacturing facility with a 1,000-liter bioreactor that can be used to make cell culture or microbial biologic products” and rights to specified percentages of future net sales relating to its anthrax vaccine product candidate and related technology. The authors of a letter sent to the board on July 14 of this year adjudge VXGN’s liquidation value to be significantly higher at $2.12 per share:

Excluding the lease obligations, the net financial assets alone of $37.2 million equate to $1.12 per share. The EBS royalties (assuming a 6% royalty rate and a $500 million contract as contemplated by NIH/HHS and EBS) of $30 million and milestones of $6 million total $36 million of potential additional future value (based clearly on assumptions, none of which are assured), or $1.09 per share. Adding $1.12 and $1.09 equals $2.21 per share.

The entry of the VaxGen Full Value Committee into the proxy contest will certainly make the next meeting an interesting spectacle, and, with any luck, we will see a liquidation of VXGN soon, either at the hands of the present board, by Value Investors for Change or the VaxGen Full Value Committee. We believe VXGN’s rights to the AIDS vaccine should make little difference to the outcome of the proxy contest.

The press release announcing the nomination is set out below:

Contact: Steven N. Bronson

Telephone: 561-362-4199 ext 4

The VaxGen Full Value Committee Nominates Five Highly

Qualified Candidates to Replace Current VaxGen Board

Boca Raton, FL, September 22, 2009 –(Business Wire)–The VaxGen Full Value Committee (Committee) today reported that, on September 17th, it delivered to VaxGen Inc. (VXGN.OB) a solicitation notice for the nomination of five highly qualified director candidates to reconstitute the board of VaxGen at the upcoming 2009 annual meeting.

Members of the Committee, which currently consist of BA Value Investors LLC, a private investment firm founded by Steven N. Bronson, and ROI Capital Management, a registered investment advisor managed by Mark T. Boyer and Mitchell J. Soboleski, collectively own 13.7% of the outstanding common stock of VaxGen. The Committee expects that, if elected, its nominees will work to–

1. Return capital to VaxGen’s shareholders, including an immediate distribution of $10,000,000 in cash;

2. Negotiate a termination of VaxGen’s real property lease, which is out of all proportion to the Company’s needs and constitutes a serious drain on the Company’s resources;

3. Explore ways to monetize VaxGen’s value as a “public shell,” including the utilization of the Company’s substantial net operating losses; and

4. Protect for the benefit of shareholders royalty payments receivable as a result of the sale of VaxGen’s intellectual property.

The VaxGen Full Value Committee is dedicated to maximizing value for all shareholders. After the Company’s failed merger with Raven Biotechnologies, Inc. in March 2008, the Board publicly disclosed that it would either pursue one or more strategic transactions or, failing to do so, dissolve the Company. The Company has done neither. Instead, members of the VaxGen board of directors have been paid compensation in amounts that the Committee believes are exorbitant, considering that the Company has no operations and is continuing to burn cash and cumulate losses. Since 2008, over $300,000 annually was paid to each of two non-employee directors serving on the strategic transaction committee of the Company’s board. It was only after Mr. Bronson’s letter to the board in June 2009 that the Company announced that it was discontinuing the compensation to the two outside board members for service on this committee. The Committee is committed to eliminating this type of board conduct.

Certain information concerning the Committee’s nominees follows.

Steven N. Bronson. Mr. Bronson, age 44, is the President of Catalyst Financial LLC, a privately held full service investment banking firm, and has held that position since September 1998. Mr. Bronson also serves as an officer and director of 4net Software, Inc., Ridgefield Acquisition Corp. and BKF Capital Group, Inc.David E. Castaneda. Mr. Castaneda, age 45, is the President of the Market Development Consulting Group, Inc. (MDC Group), a management consulting firm he founded in 1991 to offer expertise in corporate finance, corporate development and investor relations. From January 2004 to October 2007, he was Vice President Investor Relations for Cheniere Energy, Inc.

Leonard Hagan. Mr. Hagan, age 56, is a partner at Hagan & Burns CPA’s, PC in New York and has held that position since 2004. Mr. Hagan is also a director of 4net Software, Inc., BKF Capital Group, Inc. and Ridgefield Acquisition Corp.

Mark Boyer. Mr. Boyer, age 52, has been the President and a Director of ROI Capital Management, an investment advisor, since July 1992.

E. Steven zum Tobel. Mr. zum Tobel, age 42, is the founder, director and shareholder of First American Capital & Trading Corporation, a wholesale institutional specialty brokerage firm. He has been with First American Capital since 2002.

The press release clarifying the rights to the HIV vaccine is set out below:

VaxGen Congratulates HIV Prime-Boost Vaccine Study Collaborators and Clarifies Commercial Rights

South San Francisco, California — September 25, 2009 — VaxGen, Inc. today congratulated the Thai Ministry of Health, the U.S. Army, Sanofi Pasteur and VaxGen’s licensee Global Solutions for Infectious Disease (GSID) on the encouraging results demonstrated in the RV144 clinical trial. The top-line results of the placebo controlled study in 16,000 Thai volunteers were released today, and according to the sponsors of the trial, demonstrated that the vaccine regimen reduced HIV infection in a community-based population by 31.2% compared with placebo. The full results of the clinical trial have not yet been released by the study sponsors. The vaccine regimen tested in the study combined a priming vaccine developed by Sanofi Pasteur (ALVAC® HIV vCP1521) and GSID’s boosting vaccine (AIDSVAX® B/E).

In January 2006, VaxGen granted to GSID a worldwide license to research, develop, manufacture, register, use, market, import, offer for sale, and sell its HIV vaccine candidates, including the AIDSVAX B/E vaccine. VaxGen retains an option to obtain the exclusive right to manufacture, commercialize, and further develop the HIV vaccine candidates in the U.S., Europe, Japan and other countries that are members of the Organization of Economic Cooperation and Development. This option is, however, subject to an option held by Genentech, Inc. to commercialize HIV vaccines in North America. VaxGen’s option may be exercised during a period immediately following the filing of an application for marketing approval (i.e., a Biologics License Application with the U.S. FDA, or equivalent). VaxGen has no rights or obligations to manufacture or develop the vaccine candidates unless and until it exercises this option. If VaxGen exercises its option, it will owe royalties to GSID and be required to reimburse 50% of GSID’s development expenses. If VaxGen does not exercise its option, it will be entitled to receive royalties for sales in the above-mentioned countries. VaxGen is not entitled to royalties on sales in developing countries as defined in the agreement with GSID. VaxGen believes it will not receive any payments under the agreement, if ever, for many years.

Substantial additional research and clinical development will be required to clarify the public health benefits of this outcome. The vaccine combination tested in Thailand was developed based on the strains of HIV that circulate in that country. Separate versions of the vaccine may have to be developed for HIV strains that predominate elsewhere in the world, including Europe and North America. “We are very pleased that this clinical study has yielded encouraging results, and may provide significant new scientific insights into the future development of effective HIV vaccines,” said James P. Panek, VaxGen President. “However, we believe potential commercialization of such a vaccine remains many years away.”

[Full Disclosure:  We have a holding in VXGN. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]


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Cadus Corporation (OTC:KDUS) is an interesting play, but not without hairs on it. First, the good news: It’s trading at a discount to net cash with Carl Icahn disclosing an activist holding in 2002, and Moab Capital Partners disclosing an activist holding more recently. At its $1.51 close yesterday, the company has a market capitalization of $19.9M. The valuation is straight-forward. We estimate the net cash value to be around $20.6M or $1.57 per share and the liquidation value to be around $23.2M or $1.77 per share. The liquidation value excludes the potential value of federal and New York State and City net operating loss carry-forwards. It’s not a huge upside but it’s reasonably certain, and we think that’s a good thing in this market. The problem with the position is the catalyst. It’s a relatively tiny position for Icahn, so he’s got no real incentive to do anything with it. He’s been in the position since 2002, so he’s clearly in no hurry. That said, he’s not ignoring the position. He last updated his 13D filing in March this year, disclosing an increased 40% stake. He’s also got Moab Capital Partners to contend with. Moab holds 9.8% of the stock and says that it “has had good interaction with the CEO of Cadus, David Blitz, and feels comfortable that he will structure a transaction with an operating business that will generate significant long-term value for Cadus holders.” KDUS could end up being a classic value trap, but we think it’s worth a look at a discount to net cash, and two interested shareholders.

About KDUS

From the most recent 10Q:

The Company was incorporated in 1992 and until July 30, 1999, devoted substantially all of its resources to the development and application of novel yeast-based and other drug discovery technologies. On July 30, 1999, the Company sold its drug discovery assets and ceased its internal drug discovery operations and research efforts for collaborative partners.

At June 30, 2009, the Company had an accumulated deficit of approximately $34.9 million. The Company’s losses have resulted principally from costs incurred in connection with its research and development activities and from general and administrative costs associated with the Company’s operations. These costs have exceeded the Company’s revenues and interest income. As a result of the sale of its drug discovery assets and the cessation of its internal drug discovery operations and research efforts for collaborative partners, the Company ceased to have research funding revenues and substantially reduced its operating expenses. The Company expects to generate revenues in the future only if it is able to license its technologies.

The value proposition

KDUS is a relatively simple value proposition. It’s $21M of cash, and $3.1M in Bank of America Columbia Strategic Cash Portfolio (more on this below) against total liabilities of around $0.03M (that’s ~$27,000). We’ve set out the valuation below in the usual manner (the “Book Value” column shows the assets as they are carried in the financial statements, and the “Liquidating Value” column shows our estimate of the value of the assets in a liquidation):

KDUS Summary

Bank of America Columbia Strategic Cash Portfolio

We are not treating the Bank of America Columbia Strategic Cash Portfolio as cash. The asset has some issues, best described by this passage from the 10Q:

On December 10, 2007, the Fund notified the Company that conditions in the short-term credit markets had created a broad based perception of risk in non subprime asset-backed securities causing illiquidity across the market which led to extreme pricing pressure in those securities. The Fund also notified the Company that it is primarily invested in such securities, that it will begin an orderly liquidation of such securities, that unitholders would no longer be able to redeem their units in the Fund and that the Fund would redeem its units as it liquidated its investments. The Fund also began to value its securities based on market value rather than amortized value for purposes of determining net asset value per unit. The Fund has continued to pay interest monthly. The Company reclassified its investment in the Fund from cash equivalents to short-term investments. Through December 31, 2008, the Fund redeemed 19,445,459 units held by the Company for $18,787,142, which redemption was $658,317 in the aggregate less than the cost of such units. From January 1, 2009 to June 30, 2009, the Fund has redeemed an additional 2,314,849 units in the Fund for $1,934,798 which redemption was $380,051 in the aggregate less than the original $2,314,849 cost of such units. At June 30, 2009, the Company still owned 3,793,032 units in the Fund which was recorded on the balance sheet at $3,135,321. Such 3,793,032 units had a net asset value of $3,306,385 at June 30, 2009. The Fund has advised the Company that the balance or most of the balance, of the Company’s investment in the Fund will be redeemed by December 31, 2009. However, there can be no assurance as to when the redemption will take place or as to the net asset value at which the Company’s investment in the Fund will be redeemed.

We’ve applied a 20% discount to the Strategic Cash Portfolio, which is an additional discount to that applied by KDUS. This may be too conservative, but that is the only way that we feel comfortable.

The catalyst

Carl Icahn filed an amended 13D notice on March 12 this year, indicating an increased 40% holding in KDUS. Moab Capital Partners also holds around 9.8% of KDUS. Said Moab of its KDUS position in the August 16, 2007 13D:

The Reporting Persons have purchased the Shares in open market transactions because in their opinion, the market has not given full appreciation to Cadus’ cash balance, net operating loss carry-forwards and future prospects. Based on publically available information, as of 8/16/07, the company currently holds cash, equivalents and investments in marketable securities of $25.4 million and has significant federal and New York State and City net operating loss carry-forwards. The current market capitalization stands at $23.1 million, a 9% discount to the cash and investments on Cadus’ balance sheet. Moab feels the loss carry-forwards should also be ascribed market value. Cadus is cash flow positive and the share count has not increased in over five years. Moab has had good interaction with the CEO of Cadus, David Blitz, and feels comfortable that he will structure a transaction with an operating business that will generate significant long-term value for Cadus holders.

Moab’s purchase prices – between $1.86 and $1.76 – are higher than the current trading price of KDUS.

Despite these promising sentiments, a catalyst in KDUS is probably not imminent. We believe the position will require some patience for the following reasons: First, KDUS is controlled by Icahn and represents a very small part of his empire. He’s got no real immediate impetus to unlock the value. The play is probably Icahn selling his stake to another investor looking for a shell, or Icahn vending into KDUS some other business. You’d have to be brave / insane / a little of both to buy from Icahn usually, and doubly so in this instance given that he’s got no reason to sell. Second, it’s illiquid. Average volume is close to nada: 900 shares were traded on Friday and 6,500 were traded on Thursday. Even a small retail investor could make the entire market for a day or so. Finally, KDUS is a fairly well known position in the industry. It’s viewed as a stock that has been stagnant for years and unlikely to go anywhere because Icahn is too rich to care. We’ve heard that investing in KDUS is a “right of passage for would-be shell buyers.” Consider yourself warned.


Despite the foregoing misgivings, we’re reasonably comfortable with a position in KDUS for several reasons:

  1. The value. We’re primarily attracted to KDUS’s cash and liquidation values. While it’s not a huge upside from here, it’s downside is very limited. With slightly higher interest rates, KDUS will also likely return to cash flow positive territory.
  2. While Icahn is obviously not seeking an immediate resolution of the position, he controls an asset with a value not yet fully recognised by the market. If a worthwhile transaction materializes like Marley’s ghost before Scrooge’s eyes, we’re prepared to bet that Scrooge will buy us the biggest turkey in the poulterer’s shop. But it won’t happen this Christmas.

KDUS won’t ever be a 10 bagger, or even a double, but it’s got 20 – 30% in it. In an overheated market, that’s good enough for us. For these reasons, we’re adding it to the Greenbackd Portfolio.

KDUS closed Friday at $1.51.

The S&P500 closed Friday at 1,044.38.

[Full Disclosure:  We have a holding in KDUS. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]

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The Official Activist Investing Blog has published its list of activist investments for August:

Ticker Company Investor
ADPT Adaptec Inc. Steel Partners
ANR Alpha Natural Resources Duquesne Capital Management
BARE Bare Escentuals Sandler Capital Management
CAMD California Micro Devices Corp Gamco Investors
CITZ CFS Bancorp Financial Edge Fund
DCS Claymore Dividend & Income Fund Bulldog Investors
FCM First Trust Four Corners Senior Floating Rate Income Fund Bulldog Investors
FPU Florida Public Utilities Co Energy Inc
FRZ Reddy Ice Holdings Inc. Avenir Corp
GBNK Guaranty Bancorp Patriot Financial Partners
GCS DWS Global Commodities Stock Fund, Inc. Western Investment
HBRF.OB Highbury Financial Inc. North Star Investment Management Co
HFFC HF Financial Corp Finacial Edge Fund
KFS Kingsway Financial Services Inc Joseph Stillwell
MRVC.PK MRV Communications Boston Avenue Capital; Spencer Capital
NUF Nuveen Florida Quality Income Municipal Fund Western Investment
PXD Pioneer Natural Resources Southeastern Asset Management
RATE Bankrate Inc. Coatue Management
RUSS.OB Whitney Information Network Inc Kingstown Capital Partners
SBSA Spanish Broadcasting System Inc Attica Capital Partners
SCSS Select Comfort Clinton Group
SNG Canadian Superior Energy Palo Alto Investors
SNS Steak & Shake Co The Lion Fund
SPA Sparton Corp Lawndale Capital Management
TMNG The Management Network Group Mill Road Capital
TXI Texas Industries Inc. Shamrock Activist Value Fund
VXGN.OB VaxGen Inc. Boston Avenue Capital; Spencer Capital
VXGN.OB VaxGen Inc. Steven Bronson; Mark Boyer
XOHO.OB XO Holdings Inc Amalgamated Gadget

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We’re back from the Hedge Fund Activism and Shareholder Value Summit with some great new ideas. We still think it’s hard to find value in this market, but we’re revved up about a handful of positions. We’ll be rolling them out this week, so stay tuned. It’s amazing what some fresh perspectives can do. We’ll also be updating our open positions: VXGN in particular has seen some action over the last week, and is up substantially on big volume.

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We’ll be in San Diego next week for the Hedge Fund Activism and Shareholder Value Summit. If you’re going too, and you’d like to catch up, we’d love to hear from you. You can reach us at greenbackd [at] gmail [dot] com.

We’ll be posting intermittently next week, but we’ll be back to our regular schedule starting from Monday, 28 September. Hopefully we’ll have some new insights to share.

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We’ve decided to exit our position in OrthoLogic Corporation (NASDAQ:CAPS) at its $0.90 close yesterday. We opened the position at $0.60, so we’re up 50% on an absolute basis. The S&P500 Index closed at 752.83 on February 27, the day we opened the position, and closed yesterday at 1,068.76, which means we’re up 8.0% on relative basis.

Post Mortem

We started following CAPS (see our post archive here) because it was trading below its net cash value and Biotechnology Value Fund (BVF) had a 13.42% holding. It was an unusual holding for us because BVF’s holding is passive. Further, CAPS is a development stage company spending its cash on the development and commercialization of two product platforms: AZX100 and Chrysalin® (TP508). Ordinarily, we wouldn’t have entered a position like this, but we did so because we’d had some success in the past with BVF, particularly with our AVGN position. As BVF’s holding in CAPS is passive, BVF seems to be betting on the return from the product platforms and doesn’t view it as a liquidation play. We have no insight into the value of those product platform assets, so our holding in CAPS is purely on its cash value. As the share price is now near the reduced net cash value, we’ve decided to exit. CAPS might still be a boomer for BVF, but we can’t assess the risks properly, so we’re out.

[Full Disclosure:  We do not have a holding in CAPS. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]

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We’re struggling to find value in this market. We’ve got a handful of interesting plays on the watch screen, but we don’t want to overpay and they don’t seem to come down, so we’re stuck. In the last two days alone, the stocks in our watch screen are up an average of 9.6%, when we want each to come down between 10-15% (or more). It’s frustrating, and it’s prompted us to wonder if the market is getting a little expensive.

The S&P500 is now up 56% from its March 9 low. That’s a big rally, but as this dshort.com chart demonstrates, big bear market rallies are not unusual (click chart to enlarge):

Four bad bears 91509

Hans Wagner of Trading Online Markets has an excellent analysis of the S&P500 P/E ratio today. According to the article, the historical P/E ratio for the S&P500 has a median of 15.7. Today, it stands at 139, which seems – ahem – quite high. Why so high?

Even with the recovery in the markets since the lows in March, the S&P 500 PE ratio remains very high as the trailing four quarters of earnings is so low. According to data from Standard & Poor’s on the S&P 500, as reported earnings for 99% of all reporting companies, creates an S&P 500 PE ratio of 122.41 as of June 30, 2009. The trailing four quarters of earnings was $7.51. Two years ago the as reported earnings for the S&P 500 companies was $84.92 for the quarter ending on June 30, 2007. The S&P 500 PE ratio was 17.70. This plunge in earnings is what caused the S&P 500 PE ratio to rise so high.

So is the market going higher? Hans has some interesting thoughts:

Using the December 2009 quarter the earnings forecast $39.35 and a PE ratio of 30 gives us a target price for the S&P 500 index of 1,181. On Friday September 11, 2009, the S&P closed at 1,044. A PE ratio of 25 gives us an S&P 500 index of 984. If the S&P 500 PE ratio remains between 25 and 30, we should see the S&P 500 index climb to a range of 1,146 to 1,375.

This examination of earnings and S&P PE ratios is telling us to expect a higher S&P 500 index throughout 2009, as long as the PE ratio remains in the 25-30 range. Whether this is correct, depends on several factors. First, are the earnings forecast correct? Investors should monitor earnings expectations throughout the year, looking for any changes either up or down. The estimates for all of 2010 are higher now than they were in June, indicating S&P is expecting a more robust recovery.

Time to crack out the Santana Champagne? Maybe not:

Yale University Professor Robert J. Shiller, author of Irrational Exuberance: Second Edition uses a modified PE ratio that smoothes out the volatility in the ratio. The denominator of this modified ratio is average inflation-adjusted earnings over the trailing 10 years. Shiller calls this modified ratio “p/e10.” Using this data the modified ratio “p/e10” produces a PE ratio of slightly over 15, which is very close to the median of 15.7. In December 2007, the beginning of the current recession, the “p/e 10” was 25.95. Since markets tend to cycle above and below the median, we should expect the “p/e 10” to fall further before turning back up.

Using December 2009 trailing four-quarter earnings of $39.95 times the median PE ratio of 15.7 gives us an S&P 500 index of 627. This gives us a range for the S&P index of a high of 1,375 assuming an S&P PE ratio of 30 to a low of 675 with a PE ratio of 15.7, the median.

And in sublime understatement:

The risk is to the down side.

So, if forecast earnings of $39.35 materialize and the S&P 500 P/E ratio remains between 25 and 30, we should see the S&P 500 index between 1,146 to 1,375. If, on the other hand, we use the median P/E ratio of 15.7, the S&P 500 index sinks to 627 – lower than the March 9 low of 666.79.

When might we return to the bear? We don’t know, but we like a contrary indicator. Yesterday Ben Bernanke called the U.S. recession “very likely over.” With the high priest of finance going long, we think it might be time to ring the bell and call the top. We want to hear what you think. Are we there yet, or is the market going higher? Nail your colors to the mast and place your bets in the comments before the close today. We need a closing price, a date and a reason. We’re taking 1,052.63 and September 15, 2009 based on our Bernanke Indicator. The winner gets the adulation of Greenbackd readers and the inaugural Greenbackd Gizzard-Squeezer Gong.

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Our friends over at Hedge Fund Solutions LLC – Damien Park, who writes The Official Activist Investing Blog and Jon Heller, who writes Cheap Stocks, have officially launched Catalyst Investment Research. This product seeks to identify undervalued publicly traded companies that have the potential to generate outsized returns due to an activist investor’s involvement.

A recent study conducted by April Klein and Emanuel Zur on shareholder activism found that stock prices of companies targeted by activist investors earn 10.2% average returns during the period surrounding an activist’s ownership disclosure and an additional 11.4% abnormal return during the following year.

Hedge Fund Solutions’ research team analyzes every activist investment disclosure filed with the SEC and finds the best investment opportunities with a near-term catalyst for value improvement.

Catalyst Investment Research™ singles out companies with extraordinary value potential where activist investors have taken sizeable investment positions and are pressing management to unlock hidden pockets of value. Each research report examines the activist’s investment thesis, their track record of success in previous interventions and the likelihood that the activist will be instrumental in boosting value in a short period of time.

The research team also examines the fundamental value inherent in the target’s business to determine if the company is truly trading at a discount to its intrinsic value.

We believe that Hedge Fund Solutions’ unique combination of Park’s and Heller’s views on value creates a powerful investment opportunity and, ultimately, can generate outsized investment returns. They’ve had some success to date. Damien repost that companies HFS has examined have gained as much as 250% in value within three weeks of our research being issued. See HFS’s performance to date.

Companies and individuals interested in subscribing to the Catalyst Investment Research™ report can begin by requesting a free 1-month trial at Hedge Fund Solutions’ website.

If you’d like more information about this research product, or about Hedge Fund Solutions, please contact Damien Park at 215-325-0514 or email Damien at dpark@hedgerelations.com

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A guest post today from Jim Hodges on Fansteel Inc (OTC:FELI). Jim is a deep value investor who also invests in Philip Fisher-style growth stocks when he can’t find value in Ben Graham NCAV’s. At 19 he was the youngest registered insurance agent in North Dakota’s history. He reports that he’s had a monstrous 683.44% return thus far for 2009, a 27.85% return for 2008, and returned 11% in 2007. He tells us that he was one of the original followers of this site, and presently operates the ValueInvestorToday website. Investing is as much a passion as music. He’s a full-time musician who has toured with Rascal Flatts. Here’s his take on FELI:

A few times I have been asked how do I go about selecting a stock for investment purposes. This dissertation is to explain in a condensed fashion how I do this as well as to fully prove to proponents of the Efficient Market Hypothesis that their theory that stocks are always correctly priced is erroneous.

The company: Fansteel Inc. (OTC: FELI)

Fansteel recently announced an amendment to effect a 7,500 to 1 Reverse Split of all issued and outstanding Fansteel Common Stock.

Fansteel does not need a proxy to go through with this motion. All they needed was an agreement from the major shareholders of the company.

The proposals were adopted on September 3, 2009 by the written consent of the holders of 2,388,730 shares of Common Stock, representing a 70% interest in the issued and outstanding Common Stock and were submitted to the Secretary of the Corporation on or about September 4, 2009. In other words, nothing is standing in the way of the Reverse split from happening.

The Effective date of the transaction will be 20 days following the distribution of this Information Statement, as required by applicable federal securities laws. This information was distributed on September 9th, 2009 making the transaction to occur on or after September 29th, 2009.

Fansteel’s amendment is for the purpose of diminishing the interests of their current shareholders. They want more control of the company and most likely are interested in taking the company private.

So, what’s in it for me?

For every shareholder who owns fewer than 7,500 shares before the Effective Date (September 29th, 2009), each shareholder will receive $0.35 per share for each share they own and no longer be a shareholder of the company. For each stockholder who owns 7,500 shares or more before the Effective Date will receive 1 share for each 7,500 it held before the Effective Date and $0.35 in cash per each such share that would result in a fractional share.

Currently, Fansteel is trading for $0.21 per share which is a 66.67% discount to what a shareholder will receive.

Are the markets efficient? I think a reasonable person can answer that question with logic for himself.

Why am I sharing this information and not purchasing shares for myself? Taxes are important in the overall valuation of your aggregate returns. I am currently 100% invested into companies that I believe are in a financial sound position and I have no interest in paying at least a 15% tax to take them out. This investment is a simple one and one that someone who isn’t fully invested, such as I am, to consider.

[Full Disclosure:  We do not have a holding in FELI. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]

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The board of Ditech Networks Inc (NASDAQ:DITC) has agreed to nominate Lamassu Holdings’ representatives, Alan B. Howe and Frank J. Sansone, to be elected to the board at DITC’s next annual meeting. It seems that the board’s concern in nominating Howe and Sansone was that they not participate in any “withhold the vote” campaign or disparage the board. It’s a big win for Lamassu, and it appears their letter writing campaign was successful. The stock is now trading at a premium to our estimate of its liquidation value, which value is continuing to deteriorate, so we’re exiting the position. The stock is up from our initial $0.89 to close Friday at $1.75,which is an absolute return of 96.6%. The S&P500 closed at 788.42 when we opened the position, and closed Friday at 1,0472.73, which means our outperformance over the S$P500 was 64.4%.

Post Mortem

We started following DITC (see our archive here) because it was trading below its net cash value with an investor, Lamassu Holdings LLC, disclosing a 9.4% holding in November last year. Lamassu had previously offered to acquire DITC for $1.25 per share in cash. At that time, Lamassu said that it “[anticipated] its due diligence requirement [would] take no more than two weeks and there [was] no financing contingency.” Lamassu then nominated two candidates for election to the board “who [were] committed to enhancing shareholder value through a review of the Company’s business and strategic direction.” Lloyd I Miller III subsequently disclosed a 5.9% holding. Miller came out in support of the director candidates nominated by Lamassu as “candidates who [were] independent of management.” Miller said he sought “to encourage greater attention to corporate governance by all members of the Board of Directors.”

Lamassu then initiated a pointed letter campaign aimed at DITC’s board. In the first letter, Lamassu accused DITC management of “spending as though Ditech Networks has money to burn, adding to the amount of money you have already lost for shareholders during your tenure,” “aggressively [overstepping] the bounds of good corporate governance” and “clearly [violating] your fiduciary responsibility.” In the second, Lamassu claimed that the “decisions of this board [had] shown a pattern of director entrenchment characterized by prioritizing the interest of its members in the face of poor results at the expense of the shareholders” and called for shareholders to “receive ample representation on the board.” The campaign was succesful, and DITC agreeing to nominate Lamassu Holdings’ representatives for election to the board. The stock is up from our initial $0.89 to close Friday at $1.75, which gives the company a market capitalization of $46M. We last estimated the net cash value at around $32.2M or $1.23 per share and the liquidation value at around $43.4M or $1.65 per share. With the stock at a premium to the liquidation value, and that liquidation value deteriorating, we’ve decided to exit the position for a 96.6% gain.

The proxy statement for DITC’s 2009 annual meeting of stockholders more fully describes the agreement between Lamassu and DITC thus:

The Board of Directors currently has seven members. There are two directors in the class whose term of office expires in 2009. Both of the directors currently in serving in this term will not be standing for re-election. The Board of Directors has nominated two new persons to fill these positions. The two nominees, Mr. Alan B. Howe and Mr. Frank J. Sansone, are not currently directors of Ditech. The nomination of each of Mr. Howe and Mr. Sansone was recommended by a securityholder. If elected at the annual meeting, each of the nominees would serve until the 2012 annual meeting and until his successor is elected and has qualified, or until the director’s death, resignation or removal.

On September 2, 2009, Ditech and Lamassu Holdings L.L.C. and certain of its affiliates (collectively, “Lamassu”), entered into a letter agreement in which Ditech and Lamassu agreed that each of Mr. Howe and Mr. Sansone would be nominated to be elected to the Board of Directors at this annual meeting. In addition to the nomination of each of Mr. Howe and Mr. Sansone for election to the Board of Directors, the letter agreement also provides that:

• If Mr. Sansone is unable to serve as a director at a time when Lamassu owns at least 5% of the Ditech common stock, Ditech will appoint a replacement director designated by Lamassu and reasonably acceptable to Ditech Networks;

• Mr. Sansone and any replacement director will sign a conditional resignation from the Board of Directors, which may be accepted by the Board of Directors in the event that Lamassu’s beneficial ownership of Ditech common stock falls below 5% of the outstanding Ditech common stock;

• Lamassu will vote all of the shares it beneficially owns in support of the slate of directors nominated by the Board of Directors at this annual meeting of stockholders (and will not support or participate in any “withhold the vote” or similar campaign, or support any other nominees other than the slate of directors nominated by the Board of Directors);

• Lamassu withdrew its previously announced notice of its intent to nominate directors with respect to this annual meeting of stockholders;

• For a period ending 90 days from the date of this annual meeting of stockholders, Lamassu will not (i) make any public statement regarding Ditech, the Board of Directors or any of Ditech’s officers, directors or employees, except for the press release attached to the agreement or as may be required by law, or (ii) disparage Ditech, the Board of Directors, or any of Ditech’s officers, directors or employees, in any manner, including in any manner which could be harmful to Ditech or its business, the Board of Directors or its reputation, or the business reputation or personal reputation of any officer, director or employee of Ditech.

[Full Disclosure:  We do not have a holding in DITC. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]

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