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Posts Tagged ‘Zale Corporation (NYSE:ZLC)’

Zale Corporation (NYSE:ZLC) has released its results for the quarter to January 31, 2009. After reviewing the results, we have significantly reduced our original estimate for the company’s liquidating value since we initiated the position at $4.82 on December 3, 2008. Our initial analysis of ZLC’s balance sheet was overly optimistic. We’ve now applied more dour assumptions to ZLC’s results and, as a result, we’ve decided to close the position.

We started following ZLC believing it to be an undervalued asset situation. With former Chairman of the SEC turned activist investor, Richard Breeden of Breeden Capital Management LLC, holding two seats on the board, we thought it looked like a reasonable opportunity. At its $4.82 closing price on December 3, 2008 the company had a market capitalization of $154M. We estimated ZLC’s liquidation value at that time to be around $243M or $7.63 per share. After reviewing ZLC’s Q2 financial results and applying more dour assumptions for the value of the assets in liquidation, we now believe there is a risk that ZLC has no value in liquidation.

The value proposition updated

Set out below is our summary analysis of the balance sheet (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):

zlc-summary-2009-q2Conclusion

At its $1.35 close yesterday, ZLC has a market capitalization of just $43M. When we started coverage in December last year, ZLC traded at $4.82 and had a market capitalization of $154M. Our ZLC position is down a punishing 72% on an absolute basis. The S&P 500 Index closed at 848.81 on December 3, 2008 and closed yesterday at 764.90. That’s a return of -9.9% for the index and means we’re off 62.1% on a relative basis, which is still very disappointing. The simple fact is that this was an unforced error. Our original analysis of ZLC was overly optimistic. We’ve been applying more dour assumptions about the recovery values of assets in liquidation to our most recent analyses. If we had been applying the more dour assumptions at the time we made our original assessment of ZLC, we would not have initiated the position.

[Full Disclosure:  We do not have a holding in ZLC. 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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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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