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Archive for the ‘Liquidation Value’ Category

Sub-liquidation value ten baggers

Posted in About, Greenbackd, Liquidation, Liquidation Value, Net Current Asset Value, Net Quick Stocks, tagged , , , , , on August 5, 2009| 12 Comments »

Bespoke Investment Group (via The Reformed Broker) has a list of the biggest gainers for 2009. It should come as no surprise to regular readers of Greenbackd that a number of the stocks are former sub-liquidation value plays (most of which we missed):

Little ten baggersWe opened a position in VNDA and got a great return. We lost our nerve with BGP and missed out on a great return. We completely ignored ATSG, DTSG, SMRT, RFMD, PIR and CHUX although all appeared on our NCAV screen at some stage earlier this year. A little more evidence that diamonds can be found if you dig through enough trash.

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Marty Whitman discusses Graham’s net-net formula

Posted in About, Liquidation Value, Net Current Asset Value, Net Quick Stocks, Net Quick Value, Stocks, tagged , , , , on July 28, 2009| Leave a Comment »

In the following video, legendary value investor Marty Whitman discusses Benjamin Graham’s net-net formula and his adjustments to it. We’ve previously covered those adjustments here, but we’ve added the video because we think it’s quite amazing to see the great man explaining his rationale for making them. The highlight, from our perspective, is this gem:

We do net-nets based more on common sense. As, for example, you have an asset – a Class A office building – financed with recourse finance, fully tenanted by credit-worthy tenants; That, for accounting purposes, is classified as a fixed asset, but, given such a building, you pick up the telephone and sell it, and really it’s more current than K-Mart’s inventories, for example, which is classified as a current asset. 

 Enjoy the rest of his wit below:

 

 

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Blank checks: Fertile fishing grounds for liquidation value investors

Posted in Activist Investors, Liquidation Value, Net Cash Stocks, Stocks, tagged , , on July 22, 2009| 8 Comments »

In Blank Checks Firing Blanks (Breakingviews.com via NYTimes.com), Lauren Silva Laughlin and George Hay write about the recent performance of blank check companies, otherwise known as special-purpose acquisition corporations or SPACs. Blank checks are shell companies that raise money from the public in order to acquire a business the identity of which is not known at the time the capital is raised. The trick is that a deal must be consumated before a certain date or the funds must be returned to the investors.

Many of the blank checks raised in 2007 are running out of time to complete an aquisition. While some 2007 SPACs did manage to seal a deal, it seems most were unable to do so because of the turmoil in the markets and were forced to liquidate:

About 40 of 66 SPACs that started in 2007 have been liquidated or will probably end up being liquidated, according to SPAC Research Partners.

It turns out that those SPACs forced to liquidate have outperformed those that actually completed a transaction:

And SPACs that sat on cash and safe investments have actually outperformed those that did deals. Take the GSC Acquisition Company, established by GSC Group, a debt-focused investment firm. The SPAC’s bosses tried to acquire Complete Energy, a power producer. But the deal wasn’t completed in time, and GSC Acquisition was liquidated last month.

Investors received around $9.80 a share in cash, just shy of the $10 they paid in its initial public offering two years earlier.

Investors in SPACs that did deals haven’t been so lucky. Shares of Aldabra 2 Acquisition Corporation, for instance, have plunged more than 75 percent since that SPAC bought Boise Cascade’s paper, packaging and transportation business and changed its name to Boise Inc. in February 2008.

From a deep value investor’s point of view, SPACs present an interesting investment opportunity. The value analysis is simple enough: Most trade at a discount to net cash. The difficulty is in assessing which will actually return the cash and which will spray it away on an acquisition. In making such an assessment, it helps to have a large activist investor sitting on the register. Cue Daniel Loeb and Third Point LLC. Third Point’s most recent 13F filing shows a number of SPACs in Loeb’s portfolio, including the following (via Market Folly):

  1. Liberty Acquisition Holdings (LIA): 11.75% of Loeb’s portfolio
  2. Victory Acquisition Corp (VRY): 5% of Loeb’s portfolio
  3. Trian Acquisition (TUX): 4.95% of Loeb’s portfolio
  4. Triplecrown Acquisition (TCW): 4.35% of Loeb’s portfolio
  5. Global Brands Acquisition (GQN): 2.4% of Loeb’s portfolio
  6. Global Consumer Acquisition (GHC): 1.8% of Loeb’s portfolio

We haven’t looked at any of these in detail, but they might present a happy hunting ground for the liquidation value investor. We’ll return to these stocks if there’s further turmoil in the market.

[Full Disclosure: We do not have a holding in any of the securities listed above. 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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AVGN merger with MediciNova back on the table

Posted in Activist Investors, Avigen (NASDAQ:AVGN), Biotechnology Value Fund, Greenbackd Portfolio, Liquidation Value, Net Cash Stocks, Stocks, tagged , , , , on July 21, 2009| Leave a Comment »

Avigen Inc (NASDAQ:AVGN) is back in negotiations with MediciNova, Inc. regarding a proposed acquisition of AVGN by MediciNova. The consideration for the deal is AVGN’s “net cash liquidation value plus $3 million” and “a contingent payment right for a specific product program milestone payment associated with Avigen’s Assignment Agreement with Genzyme Corporation, potentially subject to certain adjustments.”

We started following AVGN in December last year (see archived posts here) because it was a net cash stock and specialist biotechnology investor Biotechnology Value Fund (BVF) was pushing it to liquidate and return its cash to shareholders. Despite BVF’s failure to remove the board, we continued to maintain our position in AVGN because BVF won a number of important concessions from the board that made AVGN a much more attractive stock than it was when we started following it. The stock price reflects this: AVGN closed yesterday at $1.32, up 103.8% from our $0.65 purchase price. We last estimated the net cash liquidation value at around $34M or $1.14 per share. Including the $3M from MediciNova would increase that value to around $37M or $1.24 per share. We believe that there is a reasonable chance that AVGN will yield more than its current $1.32 share price when the “contingent payment right” capturing the near term payments from Genzyme is taken into account. AVGN shareholders also have an option-like exposure to any value in AVGN’s AV411 assets and program, although we cannot estimate the value of this with any certainty.

The press release from AVGN regarding the business combination with MediciNova is set out below:

MediciNova and Avigen Confirm Understanding for Key Terms for a Business Combination

SAN DIEGO and ALAMEDA, Calif., June 25, 2009 (GLOBE NEWSWIRE) — MediciNova, Inc., a biopharmaceutical company that is publicly traded on the Nasdaq Global Market (Nasdaq:MNOV – News) and the Hercules Market of the Osaka Securities Exchange (Code Number:4875), and Avigen, Inc. (Nasdaq:AVGN – News), a biopharmaceutical company, today announced that they have confirmed their understanding of certain key terms for a proposed acquisition of Avigen by MediciNova that would combine the companies’ broad neurological clinical development programs based on ibudilast (Avigen’s AV-411 and MediciNova’s MN-166).

MediciNova and Avigen currently contemplate that the terms of the merger would provide that Avigen shareholders receive consideration approximating Avigen’s net cash liquidation value plus $3 million. Avigen shareholders would be able to elect to receive this consideration in cash at closing or to receive a convertible security by which that cash consideration may be converted into MediciNova stock at a conversion price equal to the greater of $4.00 or a mutually agreeable volume-weighted average price of MediciNova common stock. At the end of 18 months, any unexercised convertible securities would be paid out at their cash value. This would allow shareholders of both companies the opportunity to participate in the future value created by combining the companies’ product portfolios. In addition to the consideration above, all Avigen shareholders would receive a contingent payment right for a specific product program milestone payment associated with Avigen’s Assignment Agreement with Genzyme Corporation, potentially subject to certain adjustments.

Yuichi Iwaki, M.D., Ph.D., MediciNova’s President and Chief Executive Officer, said, “We are excited to announce this important step towards a potential acquisition of Avigen and believe that the proposed merger presents clear advantages for the shareholders of both companies, most notably, the ability to more fully take advantage of the opportunities that the ibudilast compound and analogs provide in a variety of indications and markets. We look forward to finalizing definitive documentation as expeditiously as possible and to presenting this transaction for shareholder approval in due course.”

“Avigen believes the proposed merger on the terms currently contemplated would be in the best interests of our shareholders and we intend to continue to negotiate with the goal of reaching agreement on all of the terms and presenting it to our shareholders for approval in the third quarter of 2009,” commented Andrew Sauter, Avigen’s Chief Executive Officer, President and Chief Financial Officer. “We believe that combining our ibudilast programs, AV411 and MN-166, would enhance the global development potential for the compound in a range of neurological indications, including Multiple Sclerosis, neuropathic pain and drug addiction.”

The understanding reached by the parties is nonbinding and subject to definitive documentation and due diligence. The closing of any proposed merger would also be subject to customary closing conditions, including required shareholder and regulatory approvals and the absence of material adverse changes. MediciNova and Avigen are not legally obligated to continue discussions regarding the proposed transaction on the terms described herein or on any other terms. No definitive agreements have been reached, and there can be no assurances that definitive agreements will be successfully negotiated, that the proposed terms will not be revised or that the proposed merger will be completed.

[Full Disclosure: We have a holding in AVGN. 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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Forward Industries Inc (NASDAQ:FORD)

Posted in Activist Investors, Forward Industries Inc (NASDAQ:FORD), Liquidation Value, Net Cash Stocks, Stocks, Trinad Management, tagged , on July 20, 2009| 4 Comments »

Forward Industries Inc (NASDAQ:FORD) is a new position for us. We haven’t deviated from our love of deep value (it’s trading at a discount to net cash and liquidation value), but there’s no obvious catalyst in the stock at this stage. Management appears to be considering a “strategic transaction” of some kind, although this might include an “acquisition or some other combination.” At its $1.44 close Friday, FORD has a market capitalization of $11.4M. We estimate the liquidation value to be around 60% higher at $18.7M, or $2.60 per share. Trinad Management did have an activist position in the stock, but has been selling recently and only one stockholder owns more than 5% of the stock. We’re attracted to it because it looks cheap, and we think the elements are in place for a catalyst to emerge, so we’re adding it to the Greenbackd Portfolio.

About FORD

FORD designs, markets, and distributes “custom-designed, soft-sided carrying cases and other carry solutions products made from leather, nylon, vinyl, and other synthetic fabrics.” The cases and other products protect “portable electronic devices such as medical devices and cellular phones.” It sells directly to original-equipment-manufacturers in Europe, the “APAC Region,” and the Americas and to retailers and distributors in the United States, Canada, and Europe. It has been in operation since 1961.

The value proposition

FORD has been confronted with blustery headwinds over the last four years. FORD management write in the most recent 10Q (for the year ended March 31, 2009) that “deteriorating economic conditions, rising unemployment, tight credit markets, and heightened uncertainty in financial markets” has “adversely impacted discretionary consumer spending, including spending on the types of electronic devices that are accessorized by [FORD’s] products. [FORD’s management] expect this challenging business environment to continue in the foreseeable future.” Revenues are down from $50M+ in 2005 to less than $20M this year. The drop in net income has been even more precipitous, from a profit of $12M in 2005 to a loss of $1.1M in the most recent quarter, bringing the loss for the last 12 months to around $1.9M. Despite this, FORD still had around $19M of cash and equivalents at the end of March (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):

FORD SummarySummary balance sheet adjustments

We’ve made the following adjustments to the balance sheet estimates (included in the valuation above):

  • Cash burn: We’ve got no real idea about FORD’s prospects. Its cash burn over the last 6 months has been around $0.8M. That was made up of a net loss of $1.3M, reduced by $0.6M for non-cash items, and changes in working capital items of $0.1M. Accounts payable decreased $0.6M, which had the effect of contributing to the net cash used by operating activities. If we assume, as management has, that the company will face a similarly tough operating environment over the next 12 months, we estimate cash burn of around $2M.
  • Off-balance sheet arrangements: According to FORD’s most recent 10Q, it has no off-balance sheet arrangements.
  • Contractual obligations: FORD’s contractual obligations are minimal, totalling $0.6M.

After making the adjustments above, we estimate FORD’s liquidation value at around $18.7M or $2.60 per share.

Possible catalysts

FORD’s President and Acting Chairman, Mr. Doug Sabra, said in the letter to FORD shareholders accompanying the notice of annual shareholders’ meeting, that in 2008 “management began to implement operational and strategic initiatives in order to put [FORD]’s business on a stronger, more sustainable footing. …  This past August we retained an outside consultant to assist us in vetting possible partners for a strategic transaction.” It seems that the “strategic transaction” might include a “possible acquisition or other combination that makes sense in the context of [FORD’s] existing business, without jeopardizing the strong financial position that we have worked so hard to build.” FORD’s focus on a “strategic transaction” is a positive, in our view, although our vast preference is for a sale of the company, buyback, special dividend or return of capital over an acquisition.

Any transaction will require the consent of FORD’s board. While it has a free float of around 92%, the company’s so-called “Anti-takeover Provisions” authorize the board to issue up to 4M shares of “blank check” preferred stock. From the 10Q:

The Board of Directors has the authority and discretion, without shareholder approval, to issue preferred stock in one or more series for any consideration it deems appropriate, and to fix the relative rights and preferences thereof including their redemption, dividend and conversion rights.

Conclusion

At its $1.44 close Friday, FORD is trading at a substantial 60% discount to its $2.60 per share liquidation value and $2.16 per share net cash value. While there’s no obvious catalyst in the stock at this stage, management’s consideration of a “strategic transaction” is a positive. The risk to this position is management spending the cash on an acquisition. We think a far better use of the company’s cash is a buyback, special dividend or return of capital. Another concern is Trinad Management exiting its activist position in the stock. Those concerns aside, we’re attracted to FORD because it looks cheap at such a discount to net cash. We’re adding it to the Greenbackd Portfolio.

FORD closed Friday at $1.44.

The S&P500 Index closed Friday at 940.38.

Hat tip PP.

[Full Disclosure:  We do not have a holding in FORD. 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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Greenbackd Portfolio Q2 Performance and Update

Posted in About, Autobytel (NASDAQ:ABTL), Avigen (NASDAQ:AVGN), Axcelis Technologies Inc (NASDAQ:ACLS), Ditech Networks Inc (NASDAQ:DITC), Greenbackd, Greenbackd Portfolio, Liquidation Value, MathStar Inc (OTC:MATH), Network Engines Inc (NASDAQ:NENG), Neurobiological Technologies Inc (NASDAQ:NTII), Northstar Neuroscience Inc (NASDAQ:NSTR), Rackable Systems Inc (NASDAQ:RACK), Soapstone Networks Inc (NASDAQ:SOAP), Stocks, Vanda Pharmaceuticals Inc (NASDAQ:VNDA), VaxGen Inc (OTC:VXGN), tagged , , , , , , , on June 1, 2009| Leave a Comment »

Update June 16, 2009: SOAP has announced that it proposes to liquidate. See our post below.

Update June 3, 2009: We’ve pinned this post to the front page. Any new posts between now and July 4th will appear below this post.

—

June 1, 2009 marked the end of Greenbackd’s second quarter. It’s time again to report on the performance of the Greenbackd Portfolio and the positions in the portfolio, discuss the evolution of our valuation methodology and outline the future direction of Greenbackd.com.

Second quarter performance of the Greenbackd Portfolio

The second quarter was nothing short of a blockbuster for the Greenbackd Portfolio, up 74.2% on an absolute basis, which was 52.8% higher than the return on the S&P500 return over the same period. A large positive return for the period is heartening, but our celebration is tempered by the fact that it is difficult to avoid a good return in a market that rises 25.0% in a quarter. Our Q1 performance was -3.7% (see our first quarter performance here), which means that our total return since inception (assuming equal weighting in each quarter) is 67.8% against a return on the S&P500 of 11.6%, or an outperformance of 56.2% over the return in the S&P500.

It is still too early to determine how Greenbackd’s strategy of investing in undervalued asset situations with a catalyst is performing, but we believe we are heading in the right direction. Set out below is a list of all the stocks in the Greenbackd Portfolio and the absolute and relative performance of each from the close of the last trading day of the first quarter, Friday, February 28, 2009, to the close on the last trading day in the second quarter, May 29, 2009:

Greenbackd Portfolio Performance 2009 Q2You may have noticed something odd about our presentation of performance. The S&P500 index rose by 25.0% in our second quarter (from 735.09 to 919.14). Our +74.2% performance might suggest an outperformance over the S&P500 index of 49.2%, while we report outperformance of 52.8%. We calculate our performance on a slightly different basis, recording the level of the S&P500 index on the day each stock is added to the portfolio and then comparing the performance of each stock against the index for the same holding period. The Total Relative performance, therefore, is the average performance of each stock against the performance of the S&P500 index for the same periods. As we discussed above, the holding period for Greenbackd’s positions has been too short to provide any meaningful information about the likely performance of the strategy over the long term (2 to 5 years), but we believe that the strategy should outperform the market by a small margin.

Greenbackd’s valuation methodology

We started Greenbackd in an effort to extend our understanding of asset-based valuation described by Benjamin Graham in the 1934 Edition of Security Analysis. (You can see our summary of Graham’s approach here). Through some great discussion with our readers, many of whom work in the fund management industry as experienced analysts or even managing members of hedge funds, and by incorporating the observations of Marty Whitman (see Marty Whitman’s adjustments to Graham’s net net formula here) and Seth Klarman (our Seth Klarman series starts here), we have refined our process. We believe that what started out as a pretty unsophisticated application of Graham’s liquidation value methodology has evolved into a more realistic analysis of the balance sheet and the relationship of certain disclosures in the financial statements to asset value. Our analyses are now quantitatively more robust than when we started and that has manifest itself in better performance.

Tweedy Browne offers some compelling evidence for the asset based valuation approach here.

Update on the holdings in the Greenbackd Portfolio

There are eleven stocks remaining in the Greenbackd Portfolio:

  1. VXGN (added March 26, 2009 @ $0.48)
  2. DRAD (added March 9, 2009 @ $0.88)
  3. ASYS (added March 5, 2009 @ $2.78)
  4. CAPS (added February 27, 2009 @ $0.60)
  5. DITC (added February 19, 2009 @ $0.89)
  6. SOAP (added February 2, 2009 @ $2.50)
  7. NSTR (added January 16, 2009 @ $1.91)
  8. ACLS (added January 8, 2009 @ $0.60)
  9. MATH (added December 17, 2008 @ $0.68)
  10. ABTL (added December 11, 2008 @ $0.43)
  11. AVGN (added December 1, 2008 @ $0.65)

The future of Greenbackd.com

We are taking a brief vacation. We’ll be back full-time after July 4th, always reserving the right to post interesting ideas in the interum and update our open positions. If you’re looking for net nets in the meantime, there are two good screens:

  1. GuruFocus has a Graham net net screen ($249 per year)
  2. Graham Investor NCAV screen (Free)

Greenbackd is a labor of love. We try to create new content every week day, and to get the stock analyses up just after midnight Eastern Standard Time, so that they’re available before the markets open the following day. Most of the stocks that are currently trading at a premium to the price at which we originally identified them traded for a period at a discount to the price at which we identified them. This means that there are plenty of opportunities to trade on our ideas (not that we suggest you do that without reading our disclosures and doing your own research). If you find the ideas here compelling and you get some value from them, you can support our efforts by making a donation via PayPal.

We look forward to bringing you the best undervalued asset situations we can dig up in the next quarter.

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Trilogy’s offer for ABTL expires full of sound and fury

Posted in Activist Investors, Autobytel (NASDAQ:ABTL), Liquidation Value, Stocks, Trilogy, tagged , , , on May 20, 2009| Leave a Comment »

Trilogy, Inc’s $0.35 per share tender offer for Autobytel Inc (NASDAQ:ABTL) expired yesterday without Trilogy purchasing any shares. Trilogy has sent a letter to the board saying that it will “continue to evaluate [ABTL’s] business, its cash position, and its operating performance” and has called on the board to communicate to its shareholders the break-up value of Autobytel, such that shareholders can determine if that is the best course to maximize value.”

We started following ABTL (see our post archive here) because it was trading at a substantial discount to its liquidation and net cash values and Trilogy had filed a 13D notice disclosing a 7.4% holding. Trilogy had also launched a tender offer for ABTL at $0.35 per share, which was at our estimate of ABTL’s $15.4M or $0.34 per share net cash value, but at a substantial discount to our estimate of ABTL’s $24.3M or $0.54 per share liquidation value. When Trilogy launched its offer, we wrote that we believed that $0.35 per share was only the opening salvo and a higher price was possible if the board terminated the rights plan poison pill. The board rejected the offer out of hand and Trilogy did not make a further offer before the initial offer expired.  The stock closed yesterday at $0.46, which is at a substantial premium to Trilogy’s offer price and suggests the market may be anticipating a second offer. The stock is up 6.8% since we started following it in December.

Trilogy’s letter to the board of ABTL on the expiry of the offer is set out below:

May 19, 2009

Autobytel Inc.

18872 MacArthur Boulevard, Suite 200

Irvine, California 92612-1400

Attention: Mr. Jeffrey H. Coats, President and Chief Executive Officer

Ladies and Gentlemen:

We have reviewed Autobytel’s response to our recently expired tender offer. We are disappointed in Autobytel’s categorical refusal to engage us in discussions that may result in improving shareholder value. You have made it clear that you are not willing to negotiate. Given that, we elected not to increase our tender offer price and allowed the tender offer to expire unchanged.

In addition, we find Autobytel’s accusation that we have used confidential information in conjunction with our tender offer to be wholly irresponsible and baseless. It is difficult to comprehend Autobytel’s objective in making such an accusation.

We have noted that the Board believes the break-up value of Autobytel is “substantially in excess of the offers made…during the sale process”. We ask that the Board communicate to its shareholders the break-up value of Autobytel, such that shareholders can determine if that is the best course to maximize value.

We further note that Autobytel’s stock traded approximately 7 million shares during the tender offer. This is significantly in excess of normal trading volumes and provides evidence that shareholders do want liquidity.

We will continue to evaluate your business, its cash position, and its operating performance. We have noted your views regarding your cash position. We do agree that maintaining and growing cash from operations is important.

The automotive business continues to announce bad news daily. Dealerships are consolidating and the viability of key manufacturers is uncertain. We believe that now is the time for Autobytel to preserve as much shareholder value as possible. We cannot negotiate if the Board is unwilling. Accordingly, we elected not to extend our offer.

Regards,

Trilogy Enterprises, Inc.

Sean Fallon

Senior Vice President

[Full Disclosure:  We do not have a holding in ABTL. 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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Amtech Systems Inc (NASDAQ:ASYS) Q1 10Q update

Posted in Activist Investors, Amtech Systems Inc (NASDAQ:ASYS), Liquidation Value, Stocks, tagged , , on May 15, 2009| Leave a Comment »

Amtech Systems Inc (NASDAQ:ASYS) has filed its 10Q for the period ended March 31, 2009.

We started following ASYS (see our post archive here) because it was an undervalued asset play with a private investor disclosing a substantial holding. The private investor, Mr. Richard L. Scott, disclosed a 7.0% holding in July last year and Mr Scott has continued to purchase stock. As of February 17 this year, Mr. Scott holds 9.1% of ASYS’s outstanding stock. The stock is up 47.5% since we opened the position to close yesterday at $4.10, giving the company a market capitalization of $36.7M. We initially estimated the liquidation value to be around $40M or $4.40 per share. After reviewing the 10Q, we’ve maintained our estimate of the liquidation value at $40M, and slightly increased our estimate of the the per share liquidation value to $4.47 because the company repurchased around 144,ooo shares in the last quarter.

The value proposition updated

ASYS is generated positive operating earnings of $1.5M in the six months to March 31, which is encouraging. The summary of our estimate for the company’s liquidation value is set out below (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):

ASYS Summary 2009 3 31

Conclusion

At its $4.10 close yesterday, ASYS is trading at a little under 10% discount of our estimate of its value in liquidation. Given that it has continued to generate positive operating cash flow and earnings in a difficult operating environment, we think ASYS represents very good value at a discount to its liquidation value. The stock traded over $5.00 last week, but we elected to hold on because we believe that ASYS should be worth more. Management seem to have recognized that the stock is too cheap, and have taken the right steps by authorizing a $4M stock buy-back, and repurchasing 144,000 shares in the last quarter. Our only criticism is that the buy-back could be bigger and more stock should be bought back. This is a very small criticism, and ASYS has the option to increase the buy-back in subsequent quarters if the stock price continues to trade at a discount to liquidation value. We don’t know anything about Mr. Scott, but we like to see large stockholders increasing their stakes when the stock price drops. We think ASYS is very good value, and that’s why we’re maintaining our position.

[Full Disclosure:  We have a holding in ASYS. 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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Marty Whitman’s adjustments to Graham’s net net formula

Posted in About, Greenbackd, Liquidation Value, Net Current Asset Value, Net Quick Stocks, Net Quick Value, Stocks, tagged , , , , , , on May 4, 2009| 11 Comments »

Long-term readers of Greenbackd might remember our initial struggle to apply the net net / liquidation formula described by Benjamin Graham in the 1934 Edition of Security Analysis in the context of modern accounting. Putting aside our attempt to include and tweak the discounts to PP&E (kind of like fixing the smile on the Mona Lisa), most embarassing was our failure to factor into the valuation off-balance sheet liabilities and contractual obligations. The best thing that we can say about the whole sorry episode is that we got there in the end and we’ve been applying a more robust formulation for the last quarter. With that in mind, we thought it was particularly interesting to see the Financial Post’s article, Veteran tweaks Graham’s rule to find bargains (via Graham and Doddsville), which details the refinements legendary value investor Marty Whitman makes to Graham’s net-net formulation.

According to the article, Whitman makes the following adjustments to Graham’s 90-year old formula:

  • Companies must be well-financed

First and foremost, companies must be well-financed in keeping with the core tenet of Third Avenue’s “safe and cheap” method of value investing.

The goal is to own companies that are going concerns, not ones destined for liquidation. This difference is a crucial point of distinction between the focus of equity investors, who are often wiped out in liquidation, and bond investors, who have rights to the assets of a company in liquidation.

  • Whitman includes long-term assets that are easily liquidated

The second adjustment is to the assets themselves. Graham and Dodd focused exclusively on current assets when calculating liquidation value whereas Whitman includes long-term assets that are easily liquidated.

For example, roughly one third of long-term assets of Toyota Industries Corp. are investment securities, including a 6% position in Toyota Motor Corp. (TM/TSX), says Ian Lapey, portfolio manager at Third Avenue and designated successor to Whitman on the Third Avenue Value Fund.

These securities are therefore included in Third Avenue’s calculations of net-net.

Closer to home, oil and gas producer Encana Corp. (ECA/ TSX) has proved reserves of oil and natural gas that are not included in current assets, says Lapey.

“They are liquid in that there is a real market, current commodity prices notwithstanding, for high-quality proved reserves of oil and gas.” Encana is a top holding in AIC Global Focused Fund, sub-advised by Third Avenue and managed by Lapey.

  • Adjust for off-balance sheet liabilities

The third adjustment is the inclusion of off-balance-sheet liabilities. Here, U. S. banks’ structured investment vehicles readily spring to mind.

  • Include some PP&E

The fourth and final adjustment to Graham and Dodd is the inclusion of “some property, plant and equipment” for their liquidated cash value and associated tax losses that often produce cash savings.

Hong Kong real estate companies, such as top holding Henderson Land Development Co. Ltd. (0012/HK),are required to mark property values to market prices, so liquidation values are easily ascertained.

“In most time periods, the market for fully leased office buildings is quite liquid,” says Lapey, justifying their inclusion in net-net calculations of these companies.

The article also discusses one of Whitman’s current positions, Sycamore Networks Inc (NASDAQ:SCMR):

Sycamore Networks Inc. (SCMR/NASDAQ) is the most compelling example of a net-net situation in the United States offered up by Lapey.

The telecom equipment company has more cash — US$935-million in all — than the total value assessed to it by the market, in light of its US$800-million market capitalization and US$38-million in total liabilities.

“We feel that there is value to their technology that is being recognized by some of the large telecom carriers,” says Lapey of Sycamore Networks, but he acknowledges its current weak earnings power. Lapey is also attracted to the one-third of outstanding share ownership by management because it presents an important alignment of their interests with those of Third Avenue, who are by and large passive investors.

These large valuation discounts in the market are reassuring words for investors from the one of the finest practitioners of Graham and Dodd.

“We are holding these companies trading at huge discounts,” says Lapey, “and if these companies were to sell assets or sell the whole companies we think the result would be a terrific return for our investment.”

As we discussed in our review of our first quarter, we started Greenbackd in an effort to extend our understanding of asset-based valuation described by Graham. Over the last few quarters we have refined our process a great deal, and it’s pleasing to us that we already include the adjustments identified by Whitman. We believe that our analyses are now qualitatively more robust than when we started out and seeing Whitman’s adjustments gives us some confidence that we’re on the right track.

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Three ghosts of bear markets past

Posted in About, Greenbackd, Liquidation Value, Stocks, tagged on April 15, 2009| 4 Comments »

You may have noticed that the frequency with which we post new ideas on this site has slowed somewhat over the last month or so. Our earlier ideas are generally up substantially, but that’s nothing to crow about given that the market as a whole, after falling 56.8% from its peak, is up 24.4% from its trough. Anyone who thinks that the bounce means that the current bear market is over would do well to study the behavior of bear markets past (quite aside from simply looking at the plethora of data about the economy in general, the cyclical nature of long-run corporate earnings and price-earnings multiples over the same cycle). They might find it a sobering experience.

CalculatedRisk has an ongoing series of graphs from Doug Short showing how the current bear market compares to three other bear markets: the Dow Crash of 1929 (1929-1932), the Oil Crisis (1973-1974) and the Tech Wreck (2000-2002) (click for a larger version from dshort.com via CalculatedRisk):

four-bad-bears

The current bear market has been deeper and faster than either the Oil Crisis or the Tech Crash, but it really pales into insignificance beside the Dow Crash of 1929 (maybe not insignificance, but you get the picture. If this was the Dow Crash of 1929 we’d have another third to go). We’re not sure what one can deduce from the graphs, other than several big (>20-30%) rallies in the middle of a bad bear market is nothing unusual and there’s no obvious price behavior that heralds the end of a bear market. We think it’s worth keeping in mind.

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