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Archive for the ‘InFocus Corporation (NASDAQ:INFS)’ Category

Greenbackd Portfolio Q1 performance and update

March 1, 2009 marked the end of Greenbackd’s first quarter, so we thought we’d take the opportunity to update you on the performance of the Greenbackd Portfolio and the positions in the portfolio, discuss some changes in our valuation methodology since our first post and outline the future direction of Greenbackd.com.

First quarter performance of the Greenbackd Portfolio

We get many questions about the content and performance of the portfolio. We had originally planned to report on a six-monthly basis, but we have now decided to report on a quarterly basis so that we can address these questions on a more frequent basis. Although it is still too early to determine how Greenbackd’s strategy of investing in undervalued asset situations with a catalyst is performing, we’ve set out below a list of all the stocks we’ve included in the Greenbackd Portfolio and the absolute and relative performance of each at the close on the last trading day in our first quarter, Friday, February 28, 2009:

greenbackd-portfolio-performance-2009-q13The absolute total return across the current and former positions as at February 28, 2009 was -3.7%, which was +7.0% higher than the S&P500’s return over the same periods. A negative return for the first period is disappointing, but we are heartened by the fact that we outperformed the market by a small margin.

You may have noticed something odd about our presentation of performance. The S&P500 index declined by 18.0% in our first quarter (from 896.24 to 735.09). Our -3.7% performance might suggest an outperformance over the S&P500 index of +14.3%. 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. 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, we have had the opportunity to refine 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. We’re not yet ready to send it into space, but we believe our analyses are now qualitatively more robust than when we started and that has manifest itself quantitatively in better performance (more on this below).

The two main differences between our early analyses and our more recent ones are as follows (these are truly cringe-worthy, but that’s why we undertook the exercise):

  1. We didn’t take account of the effect of off-balance sheet arrangements and contractual obligations. This caused us to enter into several positions we should have avoided, including BGP and VVTV.
  2. We were using overly optimistic estimates for the recovery rates of assets in liquidation. For example, we started using 50% of Gross PP&E. We now use 20% of Net PP&E. We now apply Graham’s formula as the base case and deviate only when we believe that Graham’s formulation doesn’t reflect reality.

The effect of these two broad errors in analysis was to create several “false positives,” which is to say that we added stocks to the portfolio that wouldn’t have passed our current, more rigorous standards. The performance of those “false positive” stocks has been almost uniformly negative, and dragged down the performance of the portfolio. As an exercise, we went back through all the positions we have opened since we started the site and applied our current criteria, which are more stringent and dour than our earlier standards. We found that we would not have opened positions in the following eight stocks:

  • BRN (-13.1% on an absolute basis and +4.9% on a relative basis)
  • BGP (-10.8% on an absolute basis and -21.6% on a relative basis)
  • COBR (-17.1% on an absolute basis and +3.6% on a relative basis)
  • HRT (-25.3% on an absolute basis and -9.7% on a relative basis)
  • KONA (+87.8% on an absolute basis and +81.9% on a relative basis)
  • MGAM (-24.2% on an absolute basis and -5.0% on a relative basis)
  • VVTV (-25.0% on an absolute basis and -23.1% on a relative basis)
  • ZLC (-72.0% on an absolute basis and -61.1% on a relative basis)

It seems we got lucky with KONA, but the performance of the balance of the stocks was wholly negative. The performance across all stocks listed above was -12.5% on an absolute basis and -3.9% on a relative basis. Excluding these eight stocks from our portfolio (i.e. treating the portfolio as if we had not entered into these positions) would have resulted in a slightly positive absolute return of +0.7% and a relative performance over the S&P500 of +12.5%. This is a compelling reason to apply the more dour and rigorous standards.

We like to think we’ve now learned out lesson and the more dour and rigorous standards are here to stay. Set out below is an example balance sheet summary (for Chicago Rivet & Machine Co. (AMEX:CVR)) showing our present base case discounts from book value (circled in red):

example-summary-2

Readers will note that these are the same base case discounts from book value suggested by Benjamin Graham in the 1934 Edition of Security Analysis, more fully described in our Valuing long-term and fixed assets post under the heading “Graham’s approach to valuing long-term and fixed assets.” Why we ever deviated from these standards in the first place is beyond us.

Update on the holdings in the Greenbackd Portfolio

Leading on from our discussion above, four of the stocks we picked using the initial, overly optimistic criteria no longer meet our more stringent standards but haven’t yet been removed from the portfolio. We’re going to take our medicine now and do just that. To make it clear, these stocks aren’t being removed because the value has deteriorated, but because we made a mistake adding them to the portfolio in the first place. As much as we’d like to treat these positions as void ab initio (“invalid from the beginning”), we’re not going to do that. We’ve made a full accounting of the impact they’ve had on the portfolio in the First quarter performance of the Greenbackd Portfolio section above, but we don’t want them affecting our future performance. The stocks to be removed from the Greenbackd Portfolio and their absolute and relative returns are as follows:

  • BRN (-13.1% on an absolute basis and +4.9% on a relative basis)
  • HRT (-25.3% on an absolute basis and -9.7% on a relative basis)
  • MGAM (-24.2% on an absolute basis and -5.0% on a relative basis)
  • COBR (-17.1% on an absolute basis and +3.6% on a relative basis)

We’ll provide a more full discussion of where we went wrong with these stocks at a later date, but suffice it to say for present purposes that all were errors from the second bullet point in the Greenbackd’s valuation methodology section above (i.e. overly optimistic estimates for the recovery rates of assets in liquidation).

There are fifteen stocks remaining in the Greenbackd Portfolio:

Eight of these positions (ABTL, ACLS, ARCW, CAPS, CRC, CRGN, NSTR, and VOXX) are trading at or below our nominal purchase price and initial valuations. The remaining seven positions (AVGN, DITC, IKAN, MATH, NENG, NTII, and SOAP) are trading above our intial purchase price but are still at varying discounts to our valuations. We’ll provide a more full update on these positions over the course of this week.

The future of Greenbackd.com

We are going to trial some small changes to the layout of the site over the next few weeks. We’ve already made the first change: the newest comments now appear at the top of the list. We’ll also be amalgamating some pages and adding some new ones, including a page dedicated to tracking the portfolio with links to the analyses. We’re also considering some options for generating income from the site. At the moment, 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. More than 80% of the stocks that are currently trading at a premium to the price at which we originally identified them (NTII, SOAP, IKAN, DITC, NENG, MATH and AVGN) 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). 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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InFocus Corporation (NASDAQ:INFS) has released its results for the fourth quarter and full year ended December 31 and they are, frankly, nothing short of horrific. As always, Greenbackd’s concern is primarily for the state of the balance sheet and the liquidation value of the company. Here, the news is bad:

Balance Sheet

Total cash and restricted cash as of December 31, 2008 were $33.4 million, a decrease of $36.9 million from the end of the third quarter. The reduction in cash was primarily driven by changes in working capital, the cash loss from operations and settlement on foreign exchange hedges. Inventories at the end of the fourth quarter were $38.5 million, an increase of $8.1 million compared to the third quarter of 2008.

We generally don’t pay too much mind to earnings. We welcome it when earnings fall off a cliff and drag stock along for the ride because it creates opportunities for investors like us who are focused on the balance sheet. We do, however, take issue with a management burning through more than half of a company’s cash in quarter, especially when that cash is set alight in the “settlement on foreign exchange hedges.” An investor cannot have any confidence in a management that, confronted with cash losses from operations, not only neglects to fix operating cash flow but finds a new way to lose money. Remember INFS’s adoption of a poison pill “to help ensure … our Board of Directors is able to conduct its review of strategic alternatives without the threat of coercive takeover or control tactics that do not offer shareholders a fair premium”? Surely that argument is at an end now. Management has failed. It’s time for Nery Capital Partners to bayonet the wounded and put INFS’s stockholders out of their misery.

When we started coverage in December last year, INFS had a market capitalization of $25.6M. We estimated its liquidating value to be more than 80% higher at $46.7M or $1.15 per share. With Nery Capital Partners and Miller pushing the company to enhance its stock price, we believed INFS to be an attractive opportunity. That seems to have been a mistake. We don’t have a full 10Q / 10K to review, so we’ve adjusted our earlier model based on the information in the press release attached to the 8K (described above). Based on that incomplete information, we estimate that INFS’s liquidation value could now be as low as $8M or $0.20 per share. Given that INFS closed yesterday at $0.37, our reason for holding the stock is gone. Accordingly, we have to close out the position. We opened it at $0.63, so our INFS position is down 41.3% on an absolute basis. The S&P 500 Index closed at 873.59 on December 12, 2008 and closed yesterday at 833.74. That’s a return of -4.6% for the index and means we’re off 36.7% on a relative basis. In all, a bitterly disappointing outcome.

If you have the stomach for it, you can read a summary of the whole sorry tale below. Looking back, it seems that there were a number of portentous steps taken by management that should have tipped us off:

After we opened our position on December 12 last year, INFS announced that it would “restructure.” We wrote that management “believes it will achieve profitable operations with an 18% gross margin target and operating expenses in the range of $10-11 million per quarter.” We noted that projections about future profitability often don’t turn out as projected, saying:

They are made by managements deaf to what the market is telling them about the company. As a result, we are much more interested in the company’s plans to unlock the value in the assets. On that front, the news is mixed.

INFS has previously announced that it had retained an investment banking firm to provide “advisory services.” The new announcement says that these advisory services include “advice concerning unsolicited offers from outside sources expressing interest in purchasing the Company.” This is a positive development. The bad news is that the company has suspended the stock repurchase plan, which is slightly disappointing. We say “slightly disappointing” because a buy back of 4 million shares over a three year period does not have a meaningful effect on the per share value, so cutting it makes almost no difference. It does show, however, that management is ignoring obvious value-enhancing opportunities for stockholders.

There was a brief glimpse of light when we read a report that a group of “high-powered executives,” including INFS’s co-founder Steve Hix, wanted to buy the company if they could get financing. The executives planned to save INFS from the “New York sharks” who wanted to liquidate the company for a quick profit. Said one of the group:

We’ve got some whispers that there’s a guy in New York looking at buying 50 percent of this company, and he’ll liquidate it. We are scared. We don’t want that to happen to this company. We’ve been working for nine months on a way to save it.

Nery Capital, presumably one of the “New York Sharks,” then upped its stake to 12.2% of INFS’s outstanding stock. It seemed we might be in a competitive bid situation, which would have been very good news for stockholders as it often presages a fully valued offer for the company.

Unfortunately, the news then took a decided turn for the worse when INFS’s management adopted a poison pill, which it euphemistically described as a “Shareholder Rights Plan.” We wrote that calling such an abomination a “Shareholder Rights Plan” was pretty galling when its effect was to take rights away from shareholders and deliver them to management. We were also unhappy with the suggestion that the board were the ones to determine what was “in the best interest of [INFS] and its shareholders” and how much of a premium was “fair” given the level at which the stock languished (when we wrote that, the stock “languished” at $0.78, more than 100% higher than the level at which it languishes today).

Tuesday’s results announcement is just the final nail in the coffin. We care little for the tumble in earnings. We do care that the company has burnt through more than half its cash in a single quarter in pursuit of “foreign exchange hedges.” We’ve lost what little confidence we had in management’s ability to put shareholders first. That wouldn’t ordinarily cause us to exit a position. The accelerating destruction of value is, however, too much, and we’ve closed out the position.

[Full Disclosure:  We have a holding in INFS. 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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InFocus Corporation (NASDAQ:INFS) has just announced that its board has amended INFS’s bylaws and adopted what it euphemistically calls a “Shareholder Rights Plan.” The company’s press release reads:

Effective today, if any person or group acquires 15 percent or more of the voting power of the Company’s outstanding common stock without the approval of the Board of Directors, there would be a triggering event causing significant dilution in the voting power of such person or group. The Plan may be terminated by the Board at any time.

In what is clearly a response to Nery Capital upping its INFS stake to 12.2% of the oustanding stock, one “right” will be distributed for each share of INFS common stock outstanding as of the close of business on January 18, 2009. In the press release, Bob O’Malley, INFS’s CEO, says:

The amendment to our Bylaws and the adoption of a Shareholder Rights Plan will help ensure that the previously appointed independent committee of our Board of Directors is able to conduct its review of strategic alternatives without the threat of coercive takeover or control tactics that do not offer shareholders a fair premium. Neither the Plan, nor the amendment to our Bylaws is intended to prevent an offer that the Board concludes is in the best interest of [INFS] and its shareholders.

INFS’s adoption of the poison pill is a disappointing step for management to take. Calling this thing a “Shareholder Rights Plan” is pretty galling when its effect is to take rights away from shareholders and deliver them to management. The suggestion that the board are the ones to determine what is “in the best interest of [INFS] and its shareholders” and how much of a premium is “fair” is just a joke given the level at which INFS’s stock languishes. We also  have a problem with the use in the press release of such emotive language (“the threat of coercive takeover or control tactics”).

We’ve been following INFS because it is a deeply undervalued asset situation with two activist investors, Nery Capital and Lloyd I. Miller, III, pushing the company to “improve [INFS]’s financial condition and increase shareholder value” (see our first post here). The company’s adoption of a poison pill is a negative development for stockholders. Hopefully it is not a precursor to management handing the company to the second potential bidding group, which includes INFS’s founder Steve Hix, because they don’t want to see it fall to the “New York sharks.” INFS management has now set itself a high bar for the “review of strategic alternatives.”

Perhaps INFS management has read an early copy of the magazine Corporate Board Member’s January issue titled “How to Icahn-proof your board.”

Head nod to commenter Chad, who seems to be doing most of the heavy lifting around here while we’re asleep at the wheel.

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Nery Capital has increased its holding in InFocus Corporation (NASDAQ:INFS) according to its most recent 13D amendment filed January 5 this year.  Nery Capital now controls 12.2% of INFS’s outstanding stock, up from 11.2% at its last filing on December 5, 2008.

We’ve been following INFS because it is a deeply undervalued asset situation with two activist investors, Nery Capital and Lloyd I. Miller, III, pushing the company to “improve [INFS]’s financial condition and increase shareholder value” (see our first post here). A second potential bidding group, including INFS’s founder Steve Hix, emerged last year to fend off the “New York sharks,” and we think that is a positive development for stockholders (see our last post here).

INFS is up 28.6% to $0.81 since we started following it, but we see the liquidating value 42% higher at $1.15 per share, so we will continue to hold it.

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The Official Activist Investing Blog has published its list of activist investments for December (the investments with links are to our latest update at the time of this post):

Ticker Company Name Activist Investor
ACLS Axcelis Technologies Inc Sterling Capital
AEPI AEP Industries KSA Capital
ARS Arris Group Shamrock Activist Value fund
ATML Atmel Corp. Microchip Technology
AVGN Avigen Inc Biotechnology Value Fund
BCSB BCSB Bancorp Financial Edge Fund
BIOD Biodel Inc Moab Partners
CAMD California Micro Devices Corp Dialectic Capital Management
CKEC Carmike Cinemas Mark Cuban
CPWM Cost Plus Stephens Investment Management
CRXX CombinatoRX, Incorporated Biotechnology Value Fund
CTO Consolidated Tomoka Land Co Wintergreen Advisers
DANKY Danka Business Systems PLC DCML LLC
DDS Dillard’s Inc. Barington Capital; Clinton Group
DIN DineEquity Inc Southeastern Asset Management
DPS Dr Pepper Snapple Group Trian Fund
DUSA DUSA Pharmaceuticals SRB Management
DVD Dover Motorsports GAMCO
ESIO Electro Scientific Industries Nieremberg Investment Management
FIC Fair Isaac Corp Sandell Asset Management
FSFG First Savings Financial Group Joseph Stilwell
GGP General Growth Properties Pershing Square Capital
GLOB.OB Global Med Technologies Victory Park Capital
HIFN Hifn, Inc Adaptec, Inc
ICGN ICAgen, Inc Xmark Opportunity Partners
INFS InFocus Corp Nery Capital Partners
ITP Intertape Polymer Group KSA Capital Management
JAVA Sun Microsystems Southeastern Asset Management
JTX Jackson Hewitt Tax Service Shamrock
KANA.OB Kana Software KVO Capital Management
KFS Kingsway Financial Services Joseph Stilwell
KONA Kona Grill Mill Road Capital
LAQ The Latin America Equity Fund City of London Investment Management Co
LCAV LCA-Vision Inc. Stephen Joffe
MAG Magnetek Inc Riley Investment Management
MATH.PK Mathstar, Inc Salvatore Muoio; Zannet Opportunity Fund
MGAM Multimedia Games Dolphin Limited Partnership
MGLN Magellan Health Services Shamrock
MOVE Move Inc. Nierenberg Investment Management
MVCO Meadow Valley Corp Carpe Diem Capital
NDD Neuberger Berman Dividend Advantage Fund Western Investment
NTMD Nitromed Inc Deerfield Capital
OFIX Orthofix International Ramius Capital;
OPTV OpenTV Corp. Discovery Equity Partners
ORNG Orange 21 Costa Brava Partnership
PHMD PhotoMedex, Inc. James Sight
PIF Insured Municipal Income Fund Bulldog Investors
PPCO PenWest Pharmaceuticals Perceptive Advisors
PRXI Premier Exhibitions, Inc Sellers Capital
RDC Rowan Companies Steel Partners
RHIE RHI Entertainment Baupost Group
RIVR River Valley Bancorp Davee Thomas
SLRY Salary.com Cannell Capital
SLTC Selectica, Inc Versata
SUG Southern Union Co Sandell Asset Management
SUTM.OB Sun-Times Media Group Inc. K Capital
TIER Tier Technologies Inc Discovery Equity Partners
TLGD Tollgrade Communications Inc Bradford Capital
TMI TM Entertainment & Media Bulldog Investors
TRGL Toreador Resources Nanes Delorme Partners
TRMA Trico Marine Kistefos AS
TXCC TranSwitch Corp Brener International Group
TXI Texas Industries Southeastern Asset Management
WBSN Websense Inc Shamrock
WEDC White Electronic Designs Corp Wynnefield Capital
WOC Wilshire Enterprises Bulldog Investors
WRLS Telular Corp Simcoe Partners

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Welcome back to Greenbackd and happy new year for 2009. We hope that you had a good break. There have been a number of positive developments in the companies we discussed last year. Set out below is an update on those positions we had open in the Greenbackd Portfolio at the close of 2008:

  • Trilogy has increased its stake in ABTL to 7.4%. ABTL is up 18.6% since our first post but we are maintaining our position because we think it’s still worth 50% more.
  • BVF has endorsed the MNOV offer for AVGN. AVGN is up 20% since our first post but we are holding on because we think the merger presents an opportunity for AVGN’s stockholders to receive around $1.20 per share in cash (almost 60% higher than AVGN’s $0.78 close Friday) and the possibility of “an extraordinary, uncapped return” if MNOV is successful post-merger.
  • BRN has filed its September 10Q and we believe that its liquidation value has increased from $6.52 per share to $6.91 per share. The stock is up 41% since our initial post. We still see the liquidation value some 40% higher than BRN’s Friday close of $4.95, so we will maintain our position.
  • CRC is down 6.3% from our initial post. Other than the retirement of the CFO, we have no other news to report. With CRC in a liquidity crisis, the retirement of the CFO is a worrying development. That said, we see CRC’s liquidation value at around $2.45 per share, which is more than 450% higher than its Friday close of $0.43, so we propose to maintain our position.
  • A group of “high-powered executives” plan to save INFS from “New York sharks.” The stock is up 15.9% to $0.73 since our initial post. Its liquidating value is still some 58% higher at $1.15 per share and so we are maintaining the position.
  • We’ve closed our position in KONA for an 88% gain in 18 days.
  • A new activist investor has filed a 13D for MATH and is lobbying the company to liquidate. MATH is up 17.7% since our first post but it’s still trading at half its liquidating value and a little more than half its net cash backing, so we’re maintaining our position.
  • ZLC is off 16.8% from our initial post. We’ve estimated its liquidation value at $7.63 per share, which is still 90% higher than its $4.01 close Friday, so we are maintaining our position in ZLC.

Although it is still too early to determine how Greenbackd’s strategy of investing in undervalued asset situations with a catalyst is performing, we’ve set out below a list of all the stocks we’ve included in the Greenbackd Portfolio and the absolute and relative performance of each. This is the standardized format we propose to adopt to track Greenbackd’s performance at 6-monthly intervals:

Current holdings (As at January 5, 2009)

greenbackd-portfolio-current-holdings-performance

Former holdings (As at date of our closure of the position)greenbackd-portfolio-former-holdings-performance

The absolute total return across the current and former positions as at January 5, 2009 is 14.2%, which is 8.4% higher than the S&P500’s return over the same periods. As we discussed above, the holding periods 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.

We look forward to bringing you the best undervalued asset situations we can dig up in 2009.

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According to the Portland Business Journal, a group of “high-powered executives” plan to save InFocus Corporation (NASDAQ:INFS) from “New York sharks” who want to liquidate the company for a quick profit. The group, which includes Steve Hix, INFS’s co-founder, wants to buy the company if they can get financing. The group says its strategy, which entails expanding beyond projectors, could save the company. Said one of the group:

We’ve got some whispers that there’s a guy in New York looking at buying 50 percent of this company, and he’ll liquidate it. We are scared. We don’t want that to happen to this company. We’ve been working for nine months on a way to save it.

We’ve been following INFS recently (see earlier posts here, here, here and here) writing that it is a deeply undervalued asset situation with two activist investors, Nery Capital Partners and Lloyd I. Miller, III, pushing the company to “consider the views expressed by its shareholders and pursue new alternatives to increase shareholder value.” We see a second bidding group as a positive catalyst.

Hat tip to commenter Steven.

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