Cheap Stocks Annual Review

Here is our first annual Cheap Stocks review. Some of the companies we presented did well. In all, 14 were up, and 8 were down during the holding period. The average holding period return was 24.6 percent. Keep in mind, this is simply an average of each company's holding period return. It is not time weighted, and is for illustration purposes only.

Company(Ticker)Report Price,Report Date,Current Price (12/23/05),%inc(dec)

Duckwall Alco (DUCK) 17 12/5/2004 23.05 35.6


GIII Apparel (GIII) 6.3 12/10/2004 12.91 104.9


Avoca Inc (AVOA) 2760 12/22/2004 4500 75.7


St Joes (JOE) 63.85 12/29/2004 70.31 11.5


JG Boswell (BWEL) 600 1/8/2005 625 6.3


PICO Holdings (PICO) 20.95 1/25/2005 33.9 61.8


Hanover Foods (HNFSA) 90.5 2/22/2005 113.05 24.9


Tootsie Roll (TR) 30.99 1/28/2005 29.31 -1.4


Tejon Ranch (TRC) 46.81 2/15/2005 40.01 -14.5


Discovery Partners (DPII) 3.36 3/17/2005 2.65 -21.1


Nu Horizons Elec (NUHC) 7.03 3/30/2005 10.22 45.4


Inforte (INFT) 3.33 4/23/2005 3.87 16.2


Zapata (ZAP) 8.42 5/11/2005 6 -28.7


Silverleaf Resorts (SVL) 1.3 6/3/2005 4.08 213.8


3COM (COMS) 3.33 7/18/2005 3.79 13.8


Six Flags (PKS) 7.2 8/28/2005 7.56 -5


Maui Land & Pineapple (MLP) 33.16 9/7/2005 34.29 3.41


Plum Creek Timber (PCL) 38.83 9/17/2005 37.05 -3.6


Bob Evans (BOBE) 22.75 10/9/2005 23.84 4.8


Trans World Entertainment (TWMC) 6.35 11/2/2005 5.98 -5.8


Jones Soda (JSDA) 4.88 11/12/2005 5.22 7.0


Blair Corp (BL)41.2 11/19/2005 39.75 -3.5




Average Holding
Period Return 24.6

Taking Our Lumps
We blew it with Zapata Corp (which the author owns). Despite being asset rich and slowly being converted into cash with the sale of Safety Components, and possibly Omega Protein, shares are down nearly 29 percent since our initial report. Still, we hold the shares.

Taking Praise
Silverleaf was up sharply, and we still don't know exactly why. Sure, the company reported solid 3rd quarter results, and is reducing debt, but shares have more than tripled since our report. The author does not own this one....sadly.

Into The Future
2005 was a great year for this site. We look forward to providing compelling research and investment ideas in 2006. Heck. We might even consider launching a micro cap fund....someday

**The author has positions in the following stocks mentioned in this report: TR, TRC, JOE, BWEL, AVOA, PICO, ZAP, MLP, PCL. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

Merry Christmas from Cheap Stocks

We hope you enjoy this most blessed time of year. We thank you for visiting our site the past twelve months, our hits are up substantially from this time last year.

Cheap Stocks Annual Review
Next week, we will publish our first annual Cheap Stocks review. We'll tell you where we were right, where we went wrong, and we'll put it in terms of returns.

Skiing Anyone? Part II of II
Blue Ridge Real Estate
Ticker: BLRGZ
Price: $38.50
Avg Volume: 200
Shares Out: 2.39 million
Market Cap: $93 million

The Fundamanentals
Total revenues for 2004 were $17.375 million, down from 2003s $18.2 million. Net income was $6.25 million in 2004, which included a gain from discontinued ops of $12.4 million before tax, versus 2003s net loss of $879 thousand. Ski operations generate more than half of company revenue, but has generated an operating loss for the company the past couple of years. Furthermore, ski revenue is on the decline, to $9.74 million in 2004 from $12.3 million in 1998.

Clearly, if there is significant value within Blue Ridge, its not for earnings, or sales growth. If anything, the potential value is in the company's assets. Many value players (ourselves included) sometimes get hung up on the potential value of an asset, ignoring the fact that if value is not being unlocked through current operations, it may never be. We don't know if thats the case with Blue Ridge. We are intrigued by the company's land holdings, and want to be impressed by the ski operations. We're just not sure what it's all worth. How's that for honesty?

Kimco Realty
Of interest to us is the fact that major real estate player Kimco Realty owns more than 1.3 million shares, or more than half of Blue Ridge.

Conclusion
An interesting combination of real assets, we're just not sure how to value it. We'd like to see the ski operations start generating a profit, and stop the revenue slide. Keep in mind, this issue is very thinly traded, and not liquid.

*The author does not have a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

Skiing Anyone? Part I of II
Blue Ridge Real Estate
Ticker: BLRGZ
Price: $38.50
Avg Volume: 200
Shares Out: 2.39 million
Market Cap: $93 miilion

Ever wondered what a ski resort is worth? I never had until I ran across this small pink sheet company a few years ago. Blue Ridge Real Estate is one of the largest landowners in the Pocono Mountain region of Northeastern Pennsylvania, with a total of 19740 acres, 13951 of which are held for investment, and 5124 for development.

Each share of Blue Ridge is actually a unit, representing one share of Blue Ridge, and one share of Big Boulder Corp.

Here is a list od the companies assets:

Big Boulder Corp- Big Boulder ski area, a total of 925 acres including a 175 acre lake, and the Mountain's Edge Restauarant

Jack Frost Mountain Co- Jack Frost ski area, 473 acres, lift capacity of 13200 skiers per hour, lodge with food service, cocktail lounge, ski shop

Real Estate Management
1.Oxbridge Shopping Center-Richmond, Virginia, 14.37 acres, 127801 square feet of retail space, 78 percent occupied
2.Couresy Commons Shopping Center-East Baton Rouge, Louisiana,9.43 acres, 67755 square feet of retail space, 83 percent occupied
3.18689 acres in the Poconos-most of which is leased to hunting clubs
4.Sewage treatment plant,-serving resort housing at Jack Frost
5.Sports Comples at Jack Frost
6.The Stretchmembers only fishing club
7.Northeast Land Co-101 acres. 2 residential properties

Whats it worth?
First of all, land in the Poconos is plentiful, and it has never taken off to the extent that other resort areas have. This land is not, for example, in the same class as St. Joes Corp's land. But we still wonder, what this package of assets is worth.

Just valuing the land on an Enterprise Value/Acres basis gets you about $5000 per acre: $100 million EV/19740 acres. This is far too simple a calculation, but at least gives perspective.

The ski resorts last year generated revenenue of about $10 million, and showed an operating loss. Could the ski resorts be worth one times sales? That includes 1400 acres encompassing ski areas, and all the equipment.

What are the other assets worth? What do the fundamentals look like for Blue Ridge? What major Real Estate company owns a majority of Blue Ridge Shares? We'll try and answer these questions next week when we present part II.

*The author does not have a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

Update: Zapata Corp
Ticker:ZAP
Price:$6.31

An interesting announcememt today from Zapata. Seems that the company has decided to sell it's 58 percent stake in Omega Protein (Ticker: OME). This on the heels of the sale of the company's stake in Safety Components (Ticker:SAFY), which put nearly $50 million into company coffers. With Omega's current market cap of $160 million, Zapata's stake is worth about $93 million, although a large stake discount might apply. What we don't know, however, is Zapata's cost basis in the shares. What are the Glazer's (owners of a majority of ZAP) up to? With no operating businesses remaining, what will they do with the cash? As a shareholder, I am getting concerned. Both Omega (+8%) and Zapata (+5%) were up today on the news.

Please see our prior Zapata posts.

*The author has a position in Zapata. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

Update: Silverleaf Resorts
Ticker:SVL
Price: $2.89
Mkt Cap: $106.8 million
Avg volume: 103,500
P/E: 4.7

Shares of Silverleaf Resorts have more than doubled since our intial report on June 3rd. At the time, the small timeshare resort company was trading below its NCAV. The run-up in price is very recent, and we can't identify the catalyst. According to a December 1st, Reuters story the compamy was unaware of any reasons for the increase in volume, and stock price movement.

Third Quarter earnings
We might have understood the stock reacting positively to third quarter results, but those were released November 1st, one month ahead of this recent price action. Total revenue was up 30 percent to $62.3 million, net income more than doubled to $12.9 million, and vacation interval sales were up 14 percent. Furthermore, notes payable and capital lease obligations fell more than $50 million since year end 2004. This company appears to be getting its financial house in order.....at least its trying to. Please see our earlier posts (2 part series 6/3/05 and 6/10/05) for more on this company, including the risks.

Our Next Report
Next week we'll publish research on a small pink sheet company which owns two ski resorts, and a nice chunk of land in the northeast.



*The author does not have a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

Update
Zapata Corp
Ticker: ZAP
Price:$6.06
Market Cap:$116 million
Avg Volume: 7500

When we last reported on Zapata Corp, the company had announced the sale of its interest in Safety Components (Ticker:SAFY) for $51.2 million, or $12.30 per share. While we were disappointed with the sale price (SAFY trades in the $15.00 range), we understood the reasons for the lower sale price: SAFY does not have much liquidity, and Zapata's large stake in the company necessitates a discount.

In any event, we now have more details about the sale, and specifically of tax consequences to Zapata. The original purchase price of the Safety shares was $47.8 million. According to Zapata, after adjusting for transaction costs and tax basis changes, this will result in a taxable gain of just $292,000. Good news for Zapata shareholders (not that there has been much good news lately, as reflected by the sliding stock price).

Current Analysis
As of 9/30/05, and not reflecting the Safety Components sale, Zapata had $38.1 million in cash, and $14.7 million in long term debt. After recognizing the sale, Zapata should have approximately $85.4 million in cash.

Current cash (9/30/05): $38.1
Safety Sale: $47.8
Taxes on sale: $ .3

Approximate Cash: $85.4

If you have followed the Zapata story, you'll recall that their major asset is a 58 percent stake in Omega protein (ticker:OME), the leading provider of fish oil. Omega, currently trading at $6.00 per share (mkt cap $150 million), has been sliding as a result of damage to their processing facilities in the Gulf region, due to hurricane Katrina. Omega reported poor results for the third quarter (a 6.1 million loss, versus $1.8 million in income for the same period last year), and faces disruption to its operations well into this year. The company claims that insurance will cover damages to their facilities, but it is unclear how long this will eat into their top and bottom line.


Sum of the parts valuation
The following is a sum of the parts valuation for Zapata, considering Zapata's net cash (cash minus debt, and its stake in Omega.) We completely discount any remaining Zapata assets in this valuation. First, since Omega Protein is consolidated into Zapata's financials, we need to back out Omega's cash, represented on Zapata's balance sheet:

Zapata's Cash: $85.4
less Omega's cash: $10.5
less Zapata LT debt: $14.7

Net Cash: $60.2 million, or $3.15/share

Stake in Omega: $87 (150*58%) or $4.55/share

Total: $7.70/share

Of course, a discount might also apply in the Omega stake. Applying a 20 percent discount, for instance, reduces the valuation to $6.79/share.

Conclusion
Your editor has been disappointed in Zapata. While still holding shares, and believing it is worth more than the current price, problems at Omega are having an effect on the stock. If Omega were to emerge from recent issues, and traded at $10 per share, for example, the effect on Zapata's value is considerable. Wishful thinking? You bet. We value investors employ a lot of that....sometimes to our detriment.

*The author has a position in Zapata. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

Blair Corp- Update
Ticker: BL
Shares Out: 3.94 million
Market Cap: $162 million
Price: $41.2
Avg Volume: 30,000
P/E: 22
Dvd Yield: 1.5%

We thought it was time for a brief update on Blair Corp, the small Warren, PA based catalog and internet clothing retailer. Blair was another of the companies on your editor's list of below NCAV companies in a 2002 article published in a major personal finance magazine. While Blair is not currently trading below its NCAV it still was when we started this site in 2003, and was one of our first Cheap Stocks posts.

Since then, shares of Blair are up about 90%, not including dividends. What really caught our attention was the fact that the company recently bought back more than half of its outstanding shares. What does that tell you?


The Fundamentals
2004 fiscal year sales were $540.8 million, down from 2003’s $625.5 million, however, the decrease was primarily due to a divestiture. Net income was $14.9 million in 2004, for a net profit margin of 2.7 percent, versus income of $14.5 million in 2003, and a 2.3 percent net margin.

For the third quarter of 2005, Blair reported sales of $98.1 million, and net income of $1.4 million, down from $107.1 million and $2.9 million for the same quarter last year. The company attributed the decline to the sale of its Crossing Pointe catalog, weaker than expected response to its letter mailings, asset sales, and tender offer related expenses (the company bought back 4.4 million shares @ $42 per share).

After the stock buyback, the company has just 3.94 million shares outstanding, so these shares are getting tougher to come by. The balance sheet is not as strong as it once was. The company spent much of its cash hoard ($50.5 million at year end 2004), and took on debt ($143 million at end of third quarter, listed as short term notes payable)in order to finance its tender offer.

Going Private?
The tender offer, announced last May, and completed in August, has us thinking that this profitable company might ultimately go private. Rigorous regulatory issues, such as Sarbanes Oxley, can weigh heavily on small companies such as Blair. The following is the company's explanation of the tender offer, from a May, 2005 press release:

As a result of this tender offer, two of Blair’s major shareholder groups, Loeb Partners Corporation and Santa Monica Opportunity Fund L.P., have each separately agreed to enter into “standstill” agreements with Blair and tender all of their shares. As part of the standstill agreements, the two groups have agreed they will not attempt to exercise any control over management of Blair, they will vote in accordance with the board and management of Blair, and they will not acquire any additional shares of Blair for a period of five years.

“Blair will not accept Loeb’s recent offer to acquire the company,” said John Zawacki, president and CEO, Blair Corporation, “but will instead go forward with the repurchase of more than half of our shares. We believe the interests of our shareholders, a fundamental priority of the Board, are best served by this stock tender buyback and the entrance into standstill agreements with two of our institutional investors. We are very pleased to reward our long standing investors and are convinced that Blair’s dedication to our core customers and our independence as a Warren- based company will maximize shareholder value for many years to come.”

From the company's perspective, this move seems like a takeover defense, or effort to retain control of the company. That's probably true, but Blair might still be on the way to going private. The question is, can you make any money if that happens? We'll leave that question open.

*The author does not have a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

A Growth Stock? Out of my element…Lessons learned..and more


Jones Soda Co
Ticker: JSDA
Price: $4.88
Market Cap: $105 million
Shares Out: 21.4 million
P/E Ratio: you don’t want to know
2004 Revenue: $27.54 million
2004 Net Income: $1.33million

This is not the typical company we research here at Cheap Stocks. We are not oriented toward growth stocks; we wish were, but we just are not wired that way. We gravitate toward deep value plays, and Jones is far from deep value. So why dedicate valuable Cheap Stocks real estate toward a company trading at more than 100X earnings? Because this company reminds us our greatest investing mistake, Hansen(Ticker: HANS, $67.39).

You may have seen our March 7, 2005 column regarding our Hansen adventure (click on Hansen to see). The short version is that your editor purchased shares in the $3.5 range a few years back, watched the company trade sideways, and below, saw it ultimately hit $10, and sold. Nice gain, right? Fast forward, the now trades at more than $67, and that’s after a 2 for 1 split. Effectively, your not-so-bright Cheap Stocks Editor left more than $60000 on the table, by not holding onto the original 500 shares of Hansen. I know, I know, you should never look back after a gain, but it’s difficult not to. Truth be told, it’s a wonder I held the stock until it hit $10, it’s doubtful I would have ever held it to the current level.

Back to Jones…..
Jones Soda Co sells it sodas (under the Jones Soda Co. and Jones Naturals labels), teas and energy drinks in 41 states, and Canada. You may have seen there distinctive looking bottles sold in supermarkets, at premium prices (in my eyes, anyway) and other stores, these feature interesting flavors, and ever changing labels, submitted by consumers. The company has also made a name for itself at Thanksgiving, selling a soda assortment that includes such flavors as turkey and gravy, and mashed potato (no joke, check it out on their website). I’ve also noticed a growing presence in Target Stores, where Jones sells 12 packs at somewhat inexpensive prices. Inroads into a major chain such as Target make this an intriguing story.

The Fundamentals
It ain’t cheap. There’s no other way to say it. At about 140 times trailing 12 month EPS, 2.8 times sales, and 19 times book value, this company should not be within 10 feet of the words “Cheap Stocks”. But, however, we at Cheap Stocks are warming up to the idea of paying up for rapid growth in certain cases, and this company may fit the bill…..We have to at least be open to the possibility.

Jones 2004 fiscal year sales were $27.45 million, up nearly 37 percent from 2003’s $20.1 million. Net income was $1.33 million in 2004, for a net profit margin of 4.8 percent, up from 2003’s $324 thousand, and 1.6 percent. Through the third quarter of 2005, net sales are $32.4 million, up sharply from $21.1 million for the same period last year. Earnings, however, are down, $720,000 for the first three quarters of 2005, versus $1.245 million for the same period in 2004.

The company does not have much to speak of in the way of assets ($9.7 million in total assets, $303 thousand in cash) nor does it carry much debt either ($116 thousand in LT debt). This explains the high price to book ratio, but also the company’s very high returns on capital and equity (more than 60% for each).

The Risks
Trading at such high multiples (to nearly everything imaginable) it appears that there is a great deal of growth priced into the stock. Still, trading below $5, the stock well off it’s high of about $8. While we are impressed by the company’s exposure in Target, we believe that the agreement expires in 2006, and are not aware of renewal prospects. Finally, the beverage market is extremely competitive, shelf space is difficult to secure, and margins are typically low.

Conclusion
While we don’t currently own Jones, we’ll be following the story, and perhaps looking for an entry point. A continued presence in Target, continued innovation in flavors and packaging, and growing brand recognition would all be pluses for this company. We’d imagine a great deal of price volatility moving forward. Finally, it is conceivable that ultimately, a bigger player takes Jones out.


*The author does not have a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

Trading Below Net Current Asset Value:
Trans World Entertainment Corp
Ticker: TWMC
Price: $6.45
Current P/E: 11
Shares Out: 31.9 million
Market Cap: $208 million
Net Current Asset Value: $215.4 million
Average daily volume: 115,000
*All Data as of market close 11/1/05

Trans World entertainment is an Albany, New York based specialty retailer, operating a chain of 810 stores, selling music, video, video home system products and games in 46 states. 249 stores are free standing, operating under the“Coconuts Music and Movies”, “Wherehouse Music and Movies”, “CD World”, “Streetside Records”, “Spec’s Music”, and “Second Spin” brands, while 560 are mall based, operating under the “FYE, For Your Entertainment” brand. The company also operates one Planet Music store. Music (CD’s, mainly) accounted for 55 percent of 2005 sales, Video products represented 29.2 percent, while Games and other represented 15.8 percent. (Before we go any further with this report, this company is not a potential real estate play, as 809 of the stores are under operating leases)

We recently identified this as a profitable company trading below NCAV. (Finding a company trading below NCAV that isn’t profitable is relatively easy. Those that are simultaneously generating a profit are few and far between.)

We are not typically crazy about retailers here at Cheap Stocks, especially those in highly competitive spaces, such as Trans World. However, discovering a retailer trading below NCAV is quite rare. One of our first postings when we started this site focused on Circuit City, at the time, cash rich, and trading below its NCAV, also in a highly competitive retail segment. Circuit City subsequently had a nice run-up. We are not making a comparison between the two companies, however.

The numbers
Fiscal year 2005 sales were $1.365 billion, up slightly from 2004’s $1.33 billion. Net income was $41.8 million in 2005, versus income of $23 million in 2004. Net profit margins were 2.8 percent in 2005, up sharply from 2004’s 1.4 percent.

…..And Now For The Bad News….
Companies often make the NCAV list because their price, and hence market cap fall, sometimes dramatically. It’s not typically a case of net current assets rising. In Trans World’s case, the company has taken a hit recently, falling from the $15 range this past spring, to the current $6 level. Why the drubbing? The company has been lowering earnings guidance significantly. Back in May, the company announced earnings expectations of $.85-$.90 per share for the year (ending 1/06). By July, their expectations fell to $.80-$.85. In August, the company lowered guidance again, to $.65-$.70. Last month, the company lowered guidance yet again, all the way down to $.25-$.30. Trans World attributed the latest news to weakness in music and DVD sales, and the lack of any strong new releases. Can it get any worse? It certainly could, given this company’s recent pre-announcement record.

The balance sheet
As of 7/30/05, the company had $50.9 million in cash and $20.9 million in long-term debt (including capital leases). Current ratio stood at 2.22, while quick ratio was .38. All in all, a decent, but not great, balance sheet. (If you’ve read our NCAV reports in the past, you know how much we here at Cheap Stocks love cash, and dislike debt in our NCAV companies)

The NCAV Calculation (in millions)
Current Market Cap: $208
Current Assets: $484
Current Liabilities: $218
Long Term Liabilities (primarily LT debt) $40
Net Current Asset Value: $215
NCAV/Market Cap: 1.03

Institutional ownership (greater than 2 percent)
Morgan Stanley: 10.3 %
Dimensional Fund Advisors: 9.2 %
Barclays Global Investors: 4.8 %
LSV Asset Management: 3.5 %
American Century Investment Management: 2.1 %
AX Rosenberg Investment Management: 2%


Conclusion
We are not crazy about the highly competitive business in which Trans World operates. While the current assets are highly concentrated in inventory- which must be moved in order to realize sales/profits- that is par for the course with a retailer. Otherwise, the balance sheet is decent, with net cash of $30 million, or about $1 per share. The company’s constant negative earnings guidance announcements are troublesome. The question is whether all the bad news, and none of the positives, are currently reflected in what appears to be a cheap current price. Only time will tell, but this is one worth watching.

*The author does not have a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

Top 20 Market Cap Companies Trading Below Net Current Asset Value

A few weeks back, your Cheap Stocks editor stated that he was having trouble identifying any compelling companies trading below NCAV. While that sentiment has not changed radically, this weeks report will identify a list of companies currently trading below their NCAV. Keep in mind that, unless stated, no judgements are being made on these companies. Many NCAV companies bear that distinction with good reason: they may be near death. You may notice one familiar name on this list, Discovery Partners (DPII), which we reported on several months back. That stock is down about 15 percent since that report.

Company(Ticker), Mkt Cap, NCAV
UTSTarcom(UTSI), 646.5, 677.9

Audiovoxx(VOXX), 305.8, 341.2

InFocus(INFS), 130.3, 183.6

Discovery Partners(DPII), 74.7, 86.9

Lazare Kaplan(LKI), 71.7, 81.2

Corgentech(CGTK), 70.3, 86.1

Axonyx(AXYX), 56.3, 62.1

Network Engines(NENG), 50.6, 51.1

Pharmos Corp(PARS), 37.7, 49.2

Concord Camera(LENS), 34.1, 58.4

Remec Inc(REMC), 32.7, 121.2

IntraBiotics Pharmaceuticals(IBPI), 31.9, 48.3

Adams Golf(ADGO), 31.1, 31.4

First Aviation Services(FAVS), 30.1, 32.5

Strategic Distribution(STRD), 29.6, 42.3

Coast Distribution System(CRV), 27.1, 27.8

Sport Chalet Inc(SPCHB), 23, 29.2

Cadus Corp(KDUS), 21.3, 24.4

Enesco Group(ENC), 19.6, 37.5

Catalytica Energy Systems(CESI), 19.5, 22.2


There you have it. A lot of very small names on this list. One of the more interesting ones is electronics manufacturer Audiovoxx, which was trading below its NCAV 3 years ago, and was referenced in a story I published then. At the time, VOXX was trading around $4 a share, and subsequently had a very nice run up, knocking it off the NCAV list. Now, its back on the list, at a much higher price ($13 range).

As always, be very cautious with these companies. Many of them may be here for good reason.

*The author does not have a position in any of the stocks mentioned in this report. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

Bob Evans Farms
Ticker: BOBE
Price: $22.75
Mkt Cap: 799 million
Enterprise Value: $1064 million
Dvd Yield: 2.1 %
Total Restaurants: 683
Owned Restaurants: 516 (includes property)

As I noted a few weeks back, one area we’ve started to research is restaurant chains that actually own their locations. These days, many lease their stores. In light of the recent Sears-Kmart deal, which was largely real-estate focused, and similar chatter about Toys R Us and even McDonald’s, we’ve got our eyes open for similar situations, albeit on a much smaller, “Cheap Stocks” kind of scale.

You’ve probably heard of Bob Evans Farms, a casual dining chain that owns and operates 591 Bob Evans Restaurants in 21 states in the Southeast, Midwest, and Mid-Atlantic. They also operate 92 Mimi’s café’s primarily in California and the west, and have a food products business as well. All Mimi’s locations are leased, but 516 Bob Evans Restaurants are owned by the company. That is where it may get interesting.

I’ve only been to Bob Evans once. It was somewhere in the middle of Pennsylvania, the day after our wedding, and my new bride and I were on our way to Philadelphia airport. The food was fine as I recall, although she was feeling sick, and didn’t eat much…..(I guess that’s what being married to your Cheap Stocks editor can do to a girl…) In any event, since then, I’ve passed many Bob Evans, and those that I’ve seen have mostly been near major highways.

Now, we don’t claim to know where each owned restaurant property is located, or what these properties are worth in their local markets. We just found it interesting that a $1 billion (enterprise value) chain owns so much real estate. In fact, if you divide enterprise value by owned restaurants, you get just over $2 million. Is each Bob Evans property worth $2 million? Probably not, but we really can’t say. Still, it’s an intriguing situation.

Fundamentals

It’s not a great story fundamentally, but the chain is profitable. Although total sales grew 21.9 percent to 1.46 billion in 2005, same store sales for Bob Evans Restaurants fell 3.6 percent. The company opened 37 new Bob Evans and 11 new Mimi’s during the year, accounting for the sales increase. The company earned $37 million in 2005 for a 2.5 percent net profit margin (not even close to McDonald-like margins), down from 2004’s $72 million and 6 percent net.



Operating Segments

The food products segment (Owens sausage, Bob Evans brand products) accounted for 18.5 percent, or $260.9 million in 2005 revenue, versus 20.7 percent, or $248.4 in 2004. Operating margins are not spectacular for either business, 4.7 percent for restaurants in 2005, and 3.4 percent for food products, versus 9.7 and 7 in 2004.

Costs

For restaurants, the number one cost of doing business is labor and benefits costs, which represented 40.9 percent of sales in 2005, and 39.6 percent in 2004 for Bob Evans. Next up is the cost of materials, which represented 25.9 percent in 2005, and 24.4 percent in 2004. The long and short is that rising labor costs, and growing materials costs (rising fuel costs don’t help matters) are not good for the restaurant industry. Throw in an economic slowdown, and people don’t eat out as often.

Expansion Plans

The company plans to open 20 new Bob Evans and 15 new Mimi’s in fiscal year 2006, along with plans to remodel 50 Bob Evans, and rebuild another 14.

Conclusions

We are not crazy about the restaurant sector right now. We also don’t see Bob Evans as a powerhouse brand in the industry. A niche player, maybe. A good marketing campaign might work wonders. What we do find intriguing, however, is the fact that this company is asset rich, and we of course, mean the real estate. We don’t currently have a position in Bob Evans, but will follow their progress.

*The author does not have a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

Update:
Zapata Corp
Ticker: ZAP
Price:$7.02

You may recall our May 11 report on tiny Zapata Corp, a holding company which owns significant stakes in two publicly traded companies, Omega Protein, (ticker:OME)and Safety Components Inc, (Ticker :SAFY)and has a nice amount of cash on it's balance sheet. The main reason we liked the company was because in our minds, (however small they may be) buying Zapata shares was the cheapest way to gain exposure to Omega Protein, whose fish oil business we like.

On September 26th, Zapata announced that it has sold, subject to shareholder approval, its 77 percent stake in Safety Components to a private equity investor, Wilbur Ross, for $51.2 million, or $12.30 per share( by our calculation, but we don't yet have all the details.) At the time of our May research piece, Safety was trading at $14.95 per share, and most recently traded on the OTC Bulletin Board at $14.00. While we are disappointed with the sale price, it reflects a discount because Zapata's stake is large, and Safety Components has little liquidity. Such discounts are somewhat customary, and in some cases, quite larger. We don't know all the details of the deal yet, but will update the sum of the parts valuation summary we produced in May, once they become clear.

In any event, the news has had little effect on Zapata, which is down 20 percent since our May report. We still hold Zapata shares, and will be quite interested to find out how Mr. Glazer, as in Malcolm Glazer, 51 percent owner of Zapata, will utilize the proceeds.

*The author has a position in Zapata. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

Where Have all the Stocks Trading Below Net Current Asset Value Gone

When we started this site, the focus was primarily on Ben Graham's concept of investigating companies trading below their NCAV. (Actually, Graham was more stringent than we are, preferring stocks trading at 2/3 or less of their NCAV.)If you hadn't noticed, it's been quite a while since we featured an NCAV company. The truth is, your editor is not finding that many of interest these days, and I'd rather focus on other areas of value (at least what we here at Cheap Stocks consider to be value), than fill space with the lastest NCAV company that is nothing more than a cigar butt with no puffs left.

When I started researching and writing about NCAV companies in the late 90's, early 2000, there were many promising examples. In 2001/2002, there were literally hundreds of examples, some that ultimately rewarded shareholders well. But during certain periods, there just aren't many worth mentioning. But that can change very quickly. We'll keep looking.....

What are we working on now?
One fascinating area (to us anyway)is trying to identify creative real estate plays. You know we have an affinity for companies with land holdings, but this is a little different. Remember the Sears/K-mart story? It was all about retail locations owned by Sears. The same with Toys R Us. McDonald's also had a nice run-up a few months back when it was suggested that the company's owned restaurant sites might be worth a great deal more than the market price reflected.

We started the research a few months back, trying to identify similars situations. Our research, which is still in the initial phase, is focusing on the retail restaurant sector. At this point, we have identified one restaurant chain, a small cap, of course, that happens to own most of its locations. You've no doubt heard of this company. We hope to publish our initial piece on this company (which we don't own) next week.

Plum Creek TimberTicker: PCL
Price: $38.83
Market Cap: $7.14billion
Enterprise Value: $8.7 billion
Dividend Yield: 3.9%
P/E: 23.5

As I sit writing this week’s column, it’s a beautiful day in western Pennslvania, where we are visiting this weekend. As I gaze out over my in-laws beautifully treed property, I am reminded of something my father-in law told me a few years back. It seems that a tree cutter stopped by one day, walked the property (4 acres), and promptly offered him in the neighborhood of $3 thousand for 5 or 6 trees on his property. Funny, I thought, don’t they usually charge you to remove trees from your property? This sounded like a beautiful arrangement. But these weren’t just any trees, they were red oak and ash, more highly sought after than your run of the mill pine trees. But that certainly got me thinking.

Demand for lumber has been strong in this country, thanks to a housing and building boom. Will that trend continue into the near future? Maybe, maybe not. We are guessing that it will slow down, but then again, we are not economists. But timber happens to be Plum Creek’s business, and the company owns a whole lot of land.

You might think that Plum Creek Timber is a little too much on the beaten path for our tastes. Afterall, much of the research we do here at Cheap Stocks is on tiny companies most people have never heard of. But we felt compelled to put in our two cents about Plum Creek. You know how much we love land.

Plum Creek owns a vast amount of timberland in the US, 7.756 million acres, to be exact, according to the company's website. Here's the breakdown by state/acre:

Montana-1,301,000
Arkansas-940,000
Maine-928,000
Georgia-896,000
Missippippi-859,000
Florida-578,000
Louisianna-533,000
Wisconsin-514,000
Oregon-285,000
South Carolina-210,000
Washington-161,000
Oklahoma-132,000
West Virginia-115,000
Alabama-103,000
North Carolina-76,000
Texas-50,000
Idaho-39,000
New Hampshire-33,000
Michigan-3,000

Total:7,756,000

How Much land is 7.8 million acres?
I'm glad you asked. If you recall from past postings, one square mile is 640 acres. So 7.8 million acres is 12,188 square miles, or an area 110 miles by 110 miles. Thats a lot of acres, trees, and ultimately, lumber. Don't get me wrong, I'm not suggesting Plum Creek's lumber is worth anywhere near the handful of red oak and ash trees on my father-in laws property I mentioned earlier. But, having some exposure to lumber in your portfolio is not a bad idea.

More than timber
The company estimates that out of its 7.8 million acres, 1.3 million are "higher and better use timberlands" which may have residential or recreational uses.

Enterprise Value per Acre
Based on an EV of $8.7 billion
Acreage of 7.756 million

EV/Acre= $1,121

Other Businesses
Timber accounted for $694 million of the company's 2004 revenue of 1.528 billion

Other revenue was from:
Real estate:$303 million
Manufacturing(wood products):$518 million
Other(natural resources):$13 million

The bottom line
In 2004, the company earned $339 million, up from 2003's $192 million. The company's tax burden is light (just 7.4 % of income in 2004) because part of the company has REIT status. This is a very profitable company.

Conclusion
This company is not a high flyer. Your editor purchased some shares several weeks ago in the $35 range, not expecting rapid price expansion, but the stock is up 10 percent, mainly because of Katrina, and growing demand for lumber. Don't expect that to continue. What you can expect though, is a nice, 4 percent dividend, exposure to timber, a solidly profitable business, and some nice acreage.

*The author has a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

A Pineapple Company? Clyde, are you crazy?

Maui Land & Pineapple Co
Ticker: MLP
Price: $33.16
Market Cap: $244 million
Enterprise Value: $255 million
Shares Out: 7.23 million
2004 Revenue: $153 million
2004 Net Loss: $.383 million

So, your editor is not crazy after all. There’s more to this company than the $80 million in pineapples they sold in 2004. Actually, pineapples don’t seem to be a very lucrative business for this Hawaii based micro cap-the segment produced an operating loss of $11.3 million in 2004-and sales were down sharply from 2003’s $100.5 million.

Maui Land operates in two other significant segments, besides the yellow fruit: Resort, and Development. Avid Cheap Stocks readers didn’t have to read past the company’s name in order to understand our interest in this company. You’ve already read past postings about Tejon Ranch (California), St. Joes (Florida), PICO Holdings (Nevada), Avoca (Louisiana), JG Boswell (California), and know our fascination with companies holding land. We’ve been building a portfolio of these over the past few years, and Maui Land is the latest addition.

Resort segment: Kapalua Land Company
Nine Miles of Hawaii Beachfront
Part of Maui Land’s 28,200 acres include 22,800 in West Maui, including Kapalua Resort a golf community, which borders the ocean, and boasts 3 beaches, 2 hotels, 3 championship golf courses, 10 restaurants, and 700+ single family homes and condominiums. Oh, did I mention the 9 miles of beachfront property? This segment had operating revenue of $49 million in 2004, and an operating loss of $1.6 million

Development segment
This segment is responsible for the company’s construction, sales and development activities. Revenue for 2004 was $24 million, operating income was $12.7 million

The Land
Of the company’s 28,200 acres, about 5000 (as best we can tell, this is an estimate) are used in the pineapple business. While it’s difficult to estimate what that land and business are worth, we’ll assume the pineapple business is worth .5 times sales. Based on $80 million in 2004 sales, that would value that segment at $40 million. (Keep in mind, this is a guesstimate, as much as we love eating pineapples, we’ve never attempted to value a pineapple operation before.)



Calculations


Backing out $40 million from the company’s current enterprise value:
Enterprise Value: $255
Pineapple Business: $40

Rest of company: $215

EV/Acre calculation
This is a calculation we’ve grown fond of here at Cheap Stocks. In this case we’ll calculate the EV/acre for the non-pineapple land first:

Rest of Company EV: $215
West Maui Acreage: 22,800 acres

EV/Acre: $9429 (actual)

Alternatively, if we use the entire amount of company acreage, not stripping out the pineapple business, we get the following:

Enterprise Value: $255
Total Acreage: 28,200

EV/acre: $9042 (actual)

Buying Hawaii Property Sight Unseen.
We’ve never even been to Hawaii, let alone seen Maui Land and Pineapple’s property or operation. Nonetheless, we were impressed by the numbers. Nine thousand and change per acre for Hawaii land seems like a no-brainer (Did we mention 9 miles of beachfront property?). But, you need to consider the source. We are crazy about land (in certain cases that is) here at Cheap Stocks. That being said, please consider the following: Maui Land’s sales have been relatively flat for years, and earnings are inconsistent at best:

Revenue/Net income (loss) in millions
2004: 153/ (.383)
2003: 151/ 6
2002: 148/ (5.7)
2001: 166/ 7.6
2000: 141/ .452
1999: 147/ 4.7

We encourage you to do your own research. There is other exposure available to Hawaii land in the form of a publicly traded company, namely Alexander and Baldwin (NASDAQ: ALEX). That’s another company we’ve been interested in over the years, they have some nice land holdings, and a profitable shipping business. But we missed the boat (no pun intended) on that one. Now trading in the $50 range, we passed on it in the teens a few years back. Certainly a more high profile name than Maui Land & Pineapple, and worthy of further research. Keep eating pineapples!

*The author has a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

Most Importantly
Our hearts go out to all of the hurricane victims. We pray for those who have lost loved ones, their homes, and at least temporarily, their everday lives. We've had far too many reminders in the past several years just how fragile life is.

Gas Price Optimism
Your Cheap Stocks editor was surprised to see regular gas selling for $3.29 this morning on his way to work,(yes, I do have a real full-time job, as much as I'd like to give Cheap Stocks my full-time attention, but so far no one has offered to pay for the content, and I have several mouths to feed!) at the same station, that just 12 hours earlier was selling it for $2.79. Unbelievable.

But unlike many other pundits I've heard waxing eloquently on the subject, I believe this is a very short-term phenomenon. The longer term outlook (next 20 years) may be a different story as far as oil is concerned, but this is not time to panic. Tell that to Ed Rendell, our esteemed governor, who apparently has mentioned gas rationing in our great state of Pennsylvania. Way to go Ed. Want to create a panic? A run on gas stations? Hoarding? Keep talking.

A Not So Great Adventure
Six Flags Inc
Ticker: PKS
Market Cap: $670 million
Price: $7.20

Avid Cheap Stocks readers know how much your editor thrives on land related stocks, even those that are indirect plays. There is one company in particular that I’ve followed for years, but could never commit to. For good reason. As it turns out Six Flags Inc has gotten a lot of press lately. But we here at Cheap Stocks, are staying away from this one.

I really wanted to like this company. They own 30 amusement parks. That’s right, 30 cash generating machines. At least I thought they should generate lots of cash-if you’ve ever taken your kids to one of these parks, you’ll know what I mean.

Not this company, though. They’ve lost money year after year—they are usually profitable the second and third quarter each year as this is a seasonal business, but that is not enough to make up for losses the rest of the year. Much of the problem is that the company is swimming in long-term debt to the tune of more than $2.4 billion. That translated into $195 million in interest expense in 2004, down from 2003’s $215 million.
The company’s debt to equity ratio is nearly 4. Not a pretty capital structure. All this translates into an Altman’s Z score that indicates this company may be a candidate for bankruptcy if something does not change.

Enter Washington Redskins owner Daniel Snyder, who last week offered $6.50 per share in a tender offer bid aimed at tripling the stake that Snyder controlled Red Zone LLC has in the company to about 35 percent. That drove shares of Six Flags into the mid $7 range. But Thursday, the company announced that it opposed to Snyder’s plan, and will instead put itself up for auction. Good luck Six Flags. Good luck current common stockholders. We are staying on the sidelines.

If you want exposure to the amusement park arena, there’s always Walt Disney (Ticker:DIS). You may also want to take a look at Cedar Fair LP (Ticker: FUN), a seemingly well run and profitable company paying a dividend. The antithesis of Six Flags?


Real Estate Update

Your editor was at it again this week. If you’ve read about my real estate investing adventures—in publicly traded companies such as JG Boswell, St. Joes, Avoca, PICO, and Tejon Ranch—you won’t be disappointed in our coverage over the next several weeks. Two companies added to the portfolio, one giving exposure to Hawaii, the other to 8.1 million acres of timber in more than 20 states. Stay tuned.

Random Thoughts From Your Vacationing Cheap Stocks Editor

It's been the summer of the vacation for your editor. Two extra weeks due to a job change...relaxing at the Jersey Shore, and becoming surer of a mini real estate bubble...here, anyway.

On Long Beach Island, rentals are down any where from 15 to 25 percent this year. Why? People can't afford, (or don't want to afford) to come here. Home prices are through the roof, and those who bought with the hopes of renting out their new purchase were in for a shock this year. Homes purchased within the past few years can't rent for nearly enough to cover costs. Buyers who stretched themselves in the hopes of renting out their homes for the entire summer at X, were only able to rent for half the summer at Y. We foresee this leading to some quick sales. It's not necessarily a huge bubble about to burst, but perhaps a pricing adjustment.

Oil
For the first time in several years, we did not pre-pay for our heating oil this year. Just seemed high at $2.19 a gallon. It's even higher now, with oil in the mid to high 60's per barrel. Rather than pre-pay, we'd decided to invest the $1000 or so we'd spend into an energy related investment. In this case, the Vanguard Energy Fund. Call it a hedge. Only problem is, you editor still has not gotten around to making the transaction. Maybe when oil hits $55.

St. Joes Corp
After hitting the mid 80's, St Joes has pulled back to the $75 range. Still like and own this one, but have initiated a trailing stop. May have gotten ahead of itself. See the archives for our research on this company.

Zapata, Omega Protein
Interesting WSJ piece on Omega protein (60% owned by Zapata, also a company we own, and featured a few months back)and the battle between sport fisherman, conservationists, and Omega. Looks like limits may be coming for Omega's Menhaden harvest in the Chesapeake. Seems that stripers and other large fish feed on Menhaden. While limiting Omega's Chesapeake catch is not a good thing for the company, that is not the only place they fish. Stay tuned.

3COM:
Value Stock?
Ticker: 3COM
Price: $3.33
Market Cap: $1.28 billion
Cash: $844 million

Can’t believe this week's report focuses on a tech company, and no, it does not trade below its net current asset value. Too much sun, Clyde? No, sometimes we find potential value plays in strange places. Plus, we like to mix it up here a bit at Cheap Stocks.

You probably all remember networking company 3COM, yet another tech darling whose bubble burst along with many others in late 2000, and early 2001. This stock traded as high as $25 (adjusted for splits) and is now $3.38. But it’s all relative, right? Just because a company once fetched $25 per share, and is now just 1/8 of that amount does not mean it’s cheap. Maybe it’s only worth a buck, and market forces, being as inefficient as they are, were mistaken to price the stock at even $10, let alone $25. So what caught your editor’s attention? To be quite honest, the company recently appeared on the recommended list of the Oxford Club,an institution whose investment intelligence has been outstanding, in my opinion anyway.

That recommendation was the catalyst to begin researching 3Com. What I’ve found is a company that has lost money for eleven straight quarters. Sales have been in a free-fall since 1998, but appear to finally be leveling out. Not quite a pretty picture.

There are two things, however, that I like about 3COM. Several insiders have been buying in the low to mid 3 range. These purchases were reported in April, and are not related to option exercises. (In July there were several option related transactions, as well). The other thing I like about this company—and this dovetails with the insider buying—is the fact that the company has $844 million in cash and marketable securities on its balance sheet, no debt, with a current market cap of $1.28 billion. Buying shares at the current price of $3.33 gets you $2.20 in cash. Theoretically, you are buying the business for $1.13

The risks are great, however. Can the company turn around toward profitability? Fourth quarter 2005 sales were down 4 percent from the same quarter last year, while full year sales were down 7 percent, from $699 million to $ 651 million. Despite a treasuree trove of $844 million in cash, how quickly will the company burn through that? Cash is king, but it evaporates quickly when you are not profitable.

It appears as though Wall Street has all but given up on this company. The majority of analysts covering 3Com rate it as a hold or sell. We like that here a Cheapstocks, in light of the cash balance and insider buying. Wall Street is often wrong. While we are not buying yet, we are interested.

*The author does not have a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

Pension and Post Retirement Obligations:
Do your homework

Before you purchase that large cap stock you are interested in, do yourself a favor: delve into the readily available information regarding that companies defined benefit pension, and post retirement healthcare obligations (if applicable). For some companies, this will not change your mind, or reveal any red flags. But for others, this may(should) be the factor that scares you away from becoming an owner.

Three weeks ago, my brother in-law and I were talking about General Motors, a company near and dear to our hearts if only because three of our combined four grandfathers worked there. He remarked that his grandmother, who had never been a GM employee, received post-retirement benefits from the automaker for many years longer than her husband had actually worked for the company; not an uncommon situation these days, the result of which is bringing with it costly consequences.

Companies which have defined benefit pension and post-retirement healthcare plans made commitments to their retirees. Whether based on years of service, or other factors, these employees were promised benefits (in some cases) for life. Now, through a combination of factors which include increased life expectancy, more costly healthcare, lackluster investment returns, and challenging business conditions (among others), some companies are feeling the squeeze. Ultimately, as a shareholder, you will suffer too if companies you own need to cough up additional funds to support these plans.

Doing your homework
There is a great deal of information available to investors these days in order to assess these situations. In fact, disclosure of pension/post retirement assets, liabilities, funded status (whether the company has enough pension assets to meet liabilities, (the buzzwords are ”overfunded” or “underfunded”), assumptions about what the company believes the return on plan assets will be, as well as a current breakdown of how the money is allocated, is required by the SEC. You can find all this information, and much more, in company’s 10K(annual) filings. ( There is some data also available in the 10Q (quarterly) filings, but it is typically not as detailed.)

General Motors
Suffice it to say, that GM’s pension and postretirement liabilities are of mammoth proportions. The company lists three separate categories of obligations (all listed in the 10K): US Pensions Benefits, Non-US Pension Benefits, and Other Benefits(post-retirement healthcare).

Benefit Obligations
As of 12/31/04, GM calculated the following as the current obligation for each plan. This is often referred to as the Projected Benefit Obligation, or PBO, and represents the present value (PV) of benefits owed, for service performed in the past.
US Plan: $89.384 billion
Non US Plan: $18.056 billion
Other Benefits: $77.474 billion
While these amounts may seem staggering, they need to be taken in context. GM does have invested assets in each plan to meet liabilities, but it’s the comparison of the plan assets and benefit obligation which is meaningful.

Fair Value of Plan Assets
This represents the amount of invested assets in each plan, which is used to meet plan liabilities.
US Plan: $90.866 billion
Non US Plan: $9.023 billion
Other Benefits: $16.016 billion

Funded Status
Here is where the rubber meets (or doesn’t) the road. This is calculated by subtracting the Fair Value of Plan Assets from the Benefit Obligation. A negative number means the plan is under-funded, while positive means that its over-funded.
US Plan: $1.502 billion (over-funded)
Non US Plan: ($9.033) billion (under-funded)
Other Benefits: ($61.458) billion (way under-funded)

While the US Plan looks healthy due to the fact that it’s over-funded, it’s downhill from there. The Non US plan is significantly under-funded relative to the size of plan assets, and the Other Benefits category—in this case post-retirement healthcare—is simply in deep trouble.

General Motors must make up the difference over time—remember, the company made a promise to its retirees. The question is not whether the company can meet these obligations, but rather at whose expense. This should raise significant concerns to current and prospective shareholders, who will be footing the bill.

Health care for retirees and current employees are substantial to the point that they allegedly add more than $1500 to the cost of each vehicle produced! This at a time when GM’s market share has been dropping.

Optimistic Expectations
Perhaps the most alarming aspect of GM’s situation is the company’s own expectations for the three plans investment returns. (Expected Return On Plan Assets, 2004)
US Plan: 9.0%
Non US Plan: 8.4%
Other Benefits: 8.0%

While these projected returns seem achievable on the surface, in the context of GM’s asset allocation strategies, they are overly optimistic, at best. Typical disclosure of defined benefit asset allocations includes the past three years return assumptions, along with a breakdown of investments by Equity, Debt, Real Estate, and Other. Some companies provide more detail.

GM’s Asset Allocations/b>
US Plan:
Equity: 47%
Debt: 35%
Real Estate: 8%
Other: 10%

Non US Plan:
Equity: 61%
Debt: 31%
Real Estate: 8%
Other: 0%

Other Benefits:
Equity: 41%
Debt: 48%
Real Estate: 2%
Other: 9%

Keep in mind, I have no argument with the companies asset allocations, per se. I believe they have made efforts to build better risk adjusted portfolios, and in some cases have reduced plan return expectations over the years. For instance the US Plan’s expected return is down from 2002's 10 percent, while the same for the Non US plan is down from 8.8 percent in 2002, and 8.5 percent in 2003. However, GM raised the expected return for Other Benefits from 7 percent in 2003 to 8 percent in 2004, and that’s where the trouble is.

The question is, whether its conceivable that GM’s plans can achieve the expected returns given the respective asset allocation? Can the “Other Benefits” plan realistically expect to return 8 percent with 48% of the portfolio in fixed income securities? (We are assuming that the expected return for 2005 is the same as 2004, the 2005 expected return has not yet been disclosed) An 8 percent return on a portfolio which has half it's assets in fixed income securities, given a rising interest rate environment?

Here at Cheap Stocks, we believe it will be difficult for GM to meet the expected return figure, making an already bad situation--a severely under-funded post retirement healthcare plan--even worse. GM needs to change the asset allocation, lower the expected return, or both.

We are not picking on General Motors, its simply an example. There are many other companies with pension issues. However, we are concerned about the company's future. Besides a looming pension-postretirement crisis, the companies market share is falling. They are slashing prices by offering everyone the employee discount. Surely, they will move inventory with this plan, but will lose money in the process. Several years of 0 percent financing also come with a cost, especially as rates rise. The company is also struggling to come to terms with the unions on health insurance cuts for current employees. Stay tuned

We hope you will perform similar analysis on other companies of interest that have defined benefit plans. We'll consider doing more analysis on the subject.

Postscript
Despite the negative tone of this piece, your author has a soft spot for the company. My grandfather Clyde worked for General Motors for 38 years, until 1975. During World War II, his plant in Ewing, New Jersey was transformed into an airplane manufacturing plant--they built the Avenger there, the same plane George H. W. Bush was shot down in. They, like many others, were part of the Greatest Generation, contributing to a common cause, one which helped win our freedom. Here's to you, Clyde, happy 98th birthday. We miss you dearly.

CHEAP STOCKS
Semi-Annual Review

We thought it would be interesting to take a look back at all the companies we’ve issued reports on since this site was re-launched in late fall 2004, to see how they have performed....warts and all. (See archives for company reports)

Company Ticker Report Date Report Price Current Inc(Dec)
Duckwall Alico (DUCK) 12/5/04 17.00 20.97 19%

GIII Apparel (GIII) 12/10/04 6.30 8.37 30%

Avoca Inc (AVOA) 12/22/04 2760.00 4125.00 62%

St. Joe’s (JOE) 12/29/04 63.85 82.04 29%

JG Boswell (BWEL) 01/08/05 600.00 640.00 8%

PICO Holdings (PICO) 01/25/05 20.95 27.75 33%

Hanover Foods (HNFSA) 02/22/05 90.50 118.00 31%

Tootsie Roll (TR) 01/28/05 30.99 31.03 2%

Tejon Ranch (TRC) 02/15/05 46.81 53.07 13%

Discovery Partners (DPII) 03/17/05 3.36 3.02 -11%

Nu Horizons Electric (NUHC) 03/30/05 7.03 6.40 -9%

Inforte (INFT) 04/23/05 3.33 3.53 6%

Zapata (ZAP) 05/11/05 8.42 6.20 -26%

Silverleaf Resorts (SVLF) 06/03/05 1.30 1.46 12%

Average Holding Period Return: 14.21%

The return figures presented are not scientific, they are merely the holding period returns per company; they are not annualized. One thing you will notice is that all of the companies with negative returns are from research issued within the past three months. This brings to mind one of the most important points when it comes to investing in the type of securities we follow here at Cheap Stocks: Your time horizon cannot be short. Patience is the name of the game. That does not mean that you should hold onto a losing position forever in the face of deteriorating financials or conditions. Patience should not give way to irresponsibility.

Furthermore, if you believe in the NCAV philosophy, or the other deep value concepts we’ve written about, it’s very important that you not invest too much in any given name. Consider building a portfolio of companies over time. Diversification is still a prudent concept, even in our Cheap Stocks realm.

Companies are often “cheap” for good reason. Our mission here is to identify those that we believe are undervalued, and overlooked. We won’t always be right. Thanks for reading.

**The author has positions in the following stocks mentioned in this report: TR, TRC, JOE, BWEL, AVOA, PICO, ZAP. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

Company Update:
Avoca Inc: AVOA
Price: $4150/$5000
Current Yield: 8.43%
Shares Out: 8,057 (actual)
Market Cap: $33.4 million

Avid CHEAP STOCKS readers may recall our piece on Avoca Inc, a tiny New Orleans based company which owns 16,000 acre Avoca Island. Our 12/20/04 report Off The Beaten Path:Micro-Cap Value Strategy
Going Private: Getting Around Filing with the SEC and Avoiding Sarbanes- Oxley in the Process referred to this royalty trust, and the company's decision to initiate a reverse stock split, in order to reduce shareholder roles, and avoid filing with the SEC. Your editor went onto explain his rationale for buying a pre-split stake in this seldom traded company.

Fast forward 6 months and I am still holding Avoca. The bid ask has risen to 4150/5000, and that excludes the $350 dividend mentioned in the original report....no gloating here, mind you, this is a tiny company, which rarely trades. If I wanted to sell tomorrow, I'd have trouble finding a buyer. But still, I like this company, which derives most of it's revenue from gas leases.

My point in revisiting Avoca is because of the company's first quarter financial statements that I received in the mail last week. Hats off to Avoca. Remember, they no longer have to file with the SEC, and don't have to send shareholder's reports either. Now if only JG Boswell (ticker BWEL) would afford me, a shareholder, the same luxury. JG Boswell, which now trades at $640 per share, is a $500 million company. It is not required to file either, but getting information as a shareholder is next to impossible. But, thats my problem. I knew what I was buying into.


In case you are wondering about Avoca's results, the company generated $1.09 million in revenue, and had net income of $680 thousand, or $84.46 per share in the first quarter, down from $1.29 million, $771 thousand, and $95.63 for the same quarter last year. The shortfall was due primarily to a major gas well being offline from December until May(31 percent decrease in production). An increase in gas prices (33 percent)helped close the gap. You editor is hanging on to this one.

Silverleaf(SVLF): Part II

First of all, let’s get one thing straight. We here at Cheap Stocks are not seers, we can’t see into the future, and we don’t believe in short-term trading (or maybe we’re just not good at it). The fact that Silverleaf is up 13 percent (to $1.50) since last weeks report is a coincidence. Now that we have that out of the way, here is Part II of last weeks report.

Recent Events
• In June, 2004, the company exchanged nearly $25 million of its 6% senior subordinated debt maturing in 2007, for the same amount of 8% senior subordinated debt due in 2010, and a cash payment of $271 thousand. Conceivably, this buys the company some time to get its house in order, but if it does not, it simply delays bankruptcy.
• In July 2004, the company purchased 500 acres of land on route 7 in Berkshire County, Massachusetts. This land was formerly the Brodie Mountain ski resort, and is within 25 miles of the company’s Oak N’Spruce resort in South Lee Mass. The company estimated future development of the site would allow for up to 324 units, or the equivalent of 16,848 one-week vacations.
• Restructured loan facility in July, 2004, reducing amount from $35 million to $25 million, while extending due date to March, 2009. In same transaction, paid off $5.4 million term loan, and added $10 million revolving loan.
• In October 2004, acquired 48 two and three bedroom units on 4.8 acres in Davenport, Florida, (near Orlando, Disney World) for $6 million. Received approval from the state to sell 16 of those units.
• In March, 2005, sold the water distribution rights and waste water treatment facilities for eight of their resorts for $13.2 million.
The company has obviously been very aggressive in its efforts to restructure debt, divest of some assets, while attempting to further the core business.

The NCAV Story (in millions)
Current Assets: $324.8
Current Liabilities:$11.5
Long Term Liabilities: $230
NCAV: 83.3
Market Cap: 55
NCAV/Mkt cap:1.5x

Balance Sheet Quality
While the company currently has $8.3 million in cash, the bulk of current assets is comprised of accounts receivable ($194 million) and inventory ($113 million). On the liability, side notes payable ($195 million) and Senior subordinated notes ($35 million) represent the majority. This is not a great balance sheet. In fact, in some respects, its downright scary. Why? As we’ve stated before, we prefer current assets of NCAV companies to have relatively large components of cash, and to be a little lighter on the receivable and inventory side. Receivables need to be collected in order to have true value, and inventories need to be sold. There are no guarantees either of this can be done, so we discount the stated value. On the liability side, the company is carrying a lot of debt, and as well all know, debt eventually needs to be repaid. One interesting feature of Silverleaf’s debt, however is that is “backed” by receivables from customers.

That’s right, the company offers financing to buyers of its timeshares. As of 12/31/04, the company held promissory notes from more than 34,000 customers, in the principal amount of $250 million. That portfolio of notes had an average yield of 15.1 percent, and a weighted average cost of 6.8 percent. Hence, the company makes money by borrowing money, then loaning it to customers. In 2004, the company generated $37.8 million in interest income and $17.6 million in interest expense. The company essentially backs its loans with receivables from customers. This can be risky business. Despite the fact that there is a large spread between what the company pays its lenders, and what it’s customers pay the company in terms of interest rates, this situation can go awry. Lenders have covenants on loans that companies must adhere to, and loans to customers are virtually worthless if customers can’t or won’t pay.

In 2004, the company had an allowance for doubtful accounts of 21.1 percent of the amount receivable (up from 20 percent in 2003). Essentially, that means the company expects to collect only 4 out 5 dollars it loans to customers. There is a lot of risk here, much of it driven by the fact that Silverleaf does not verify customer credit history. This explains why the average yield on the portfolio notes is 15.1 percent.

Off Balance Sheet
Silverleaf also has a wholly owned, off balance sheet subsidiary Silverleaf Finance, which had notes receivable of $84.5 million at year end 2004.

Conclusions
No doubt there is a great deal of risk here. Silverleaf is highly leveraged, and dependent on the ability to keep its lenders happy, while collecting loan payments from customers who may have terrible credit. On the positive side, the company has taken strides improve its balance sheet by restructuring debt, continues to build its core business through the acquisition of additional properties, and has been profitable for five straight quarters. First quarter 2005 sales were up 30 percent to $42.1 million from the same quarter last year, while net income was up slightly to $2.52 million from $2.34 million. I would caution readers to read the company’s most recent 10K and 10Q reports before buying shares in this company. We at Cheap Stocks are cautious on this one, but intrigued just the same. We’ll continue to follow this story.

Trading Below Net Current Asset Value, and real estate related? A CHEAP STOCKS Dream (Or Nightmare)?
Part I of II
Silverleaf Resorts
Ticker: SVLF
Price: $1.30
Market Cap: $48 million
Average Daily Volume: 52000
P/E: 4
NCAV: $77.2 million

It sounds too good to be true. A company trading below its net current asset value, with real estate exposure. Avid readers of our research know from past postings that if there’s one thing we like better than NCAV companies, it’s companies with exposure to land. Here at Cheap Stocks, we were excited upon discovering this tiny timeshare developer. But the more research we did, the more wary we became. Caution is the name of the game with this company we decided….But isn’t it always with NCAV companies?
Silverleaf, a Dallas Texas based company, owns 12 timeshare resorts in Texas, Missouri, Illionos, Georgia, Massachusetts, and Florida. This company has seen it’s share of tough times in recent years; at one point, it had more than 20 timeshare resorts.(More on that later)

For an overview of the company, the following is taken directly from the company’s 2004 10K report:

The principal business of Silverleaf Resorts, Inc. (“Silverleaf,” the “Company,” or “we”) is the development, marketing, and operation of “drive-to” and “destination” timeshare resorts. As of December 31, 2004, we own eight “drive-to resorts” in Texas, Missouri, Illinois, and Georgia (the “Drive-to Resorts”). We also own four “destination resorts” in Texas, Missouri, and Massachusetts (the “Destination Resorts”). In February 2005, we obtained approval to operate a fifth destination resort in Florida, which was acquired in October 2004. Also in 2005, we reclassified one of our Drive-to Resorts in Texas to a Destination Resort.
The Drive-to Resorts are designed to appeal to vacationers seeking comfortable and affordable accommodations in locations convenient to their residences and are located near major metropolitan areas. Our Drive-to Resorts are located close to principal market areas to facilitate more frequent “short-stay” getaways. We believe such short-stay getaways are growing in popularity as a vacation trend. Our Destination Resorts are located in or near areas with national tourist appeal and offer our customers the opportunity to upgrade into a more upscale resort area as their lifestyles and travel budgets permit. Both the Drive-to Resorts and the Destination Resorts (collectively, the “Existing Resorts”) provide a quiet, relaxing vacation environment. We believe our resorts offer our customers an economical alternative to commercial vacation lodging. The average price for an annual one-week vacation ownership (“Vacation Interval”) for a two-bedroom unit at the Existing Resorts was $9,671 for 2004 and $9,510 for 2003.
Owners of Silverleaf Vacation Intervals at the Existing Resorts (“Silverleaf Owners”) enjoy certain distinct benefits. These benefits include (i) use of vacant lodging facilities at the Existing Resorts through our “Bonus Time” Program; (ii) year-round access to the Existing Resorts’ non-lodging amenities such as fishing, boating, horseback riding, tennis, or golf on a daily basis for little or no additional charge; and (iii) the right to exchange a Vacation Interval for a different time period at a different Existing Resort through our internal exchange program. These benefits are subject to availability and other limitations. Most Silverleaf Owners may also enroll in the Vacation Interval exchange network operated by Resort Condominiums International (“RCI”). Our new destination resort in Florida is not under contract with RCI; however it is under contract with Interval International, Inc., a competitor of RCI.

Silverleaf traded as high as $29 1/8 back in 1998, but has since fallen on hard times. In 2000, losses started mounting, and the company’s credit rating was slashed. In 2001 the company cut back sales and marketing efforts, and had to negotiate extensions of its credit facilities. Amid a cash crunch, there were doubts that the company could continue as a going concern. In June 2001, Silverleaf's common stock was delisted from the NYSE and it began trading on the OTC market. In May, 2002, the company exchanged nearly $57 million of its 10 ½ percent senior subordinated notes for $28.5 million in 6 percent senior subordinated notes, and 65 percent of the company’s outstanding stock. Clearly, a company in deep trouble. In May, 2004 Silverleaf was off the OTC, and onto the OTC Bulletin Board. This does not sound like a great story; sounds more like a company on the road to bankruptcy.

Fast forward to 2005, and Silverleaf is showing signs of life, having turned a profit for 5 straight quarters (note the current P/E ratio of 4). Silverleaf has shed some assets, but picked up some new ones as well (mainly land). Stay tuned for Part II of this report which we’ll run next week. We'll explore some of the more recent events, go into detail about the risks inherrent in this company, as well as get into the NCAV components and calculation.

*The author does not have a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

Company Update
Zapata Corp
Ticker: ZAP
Price: $6.7

Shares of Zapata, which we featured in last weeks report, are down 20 percent since then. That's right, a 20 percent drop in one week. There has been no news on the stock though, and the trading volume has been below average, so the sky is not falling. Your editor is holding his shares.

As of last weeks report, Zapata was trading at a 14 percent discount to the value of it's holdings in Omega Protein, Safety International, and cash. Today, that discount is 38 percent.

Please see last weeks report for more on this story. Volatility is sometimes the name of the game with some of the stocks we research here at Cheap Stocks. You definitely need a strong stomach. But we still believe the true value of Zapata will ultimately be unlocked. It just may be a wild ride.

Valuing Zapata Corp:
A different way to play “Oil”
Ticker: ZAP
Price: $8.42
Market Cap: $161.1 million
Shares Outstanding: 19,132,520
Average Daily Volume: 24000

Zapata, a small Rochester NY based holding company, was co-founded by former President George Bush in the 1950’s, as a traditional oil and gas company. Bush was out of the business by the mid 1960’s, and by the 1990’s the company was out of the oil and gas business. Well, technically they were still in the oil business. Just not the type of oil we are dependent on to heat our homes, and propel our cars. Zapata, you see, got into the fish oil business. That’s right, fish oil. Oh, and they are also in the airbag fabric business. They also own the majority of a failed internet business. What a combination.

Your editor stumbled onto Zapata a few years back when the company was trading below its net current asset value; even had occasion to talk about the company on WBBR radios “The Money Show”, in a segment I did on the NCAV concept. What piqued my interest at the time (besides the NCAV story) was the company’s ownership interest in Omega Protein, an interesting little company that had a solid balance sheet, nice earnings prospects, and happened to be the market leader in it’s business. Omega has been on my watch list for years, but it was only recently that I pulled the trigger, and took a position in the stock. But I didn’t buy it the conventional way. I found a cheaper way (in my mind, anyway). I bought Zapata, and now own Omega Protein indirectly. More on why, later.

Omega Protein-Fish Oil Titan
Zapata’s exposure to fish oil is through it’s 58 percent stake in Omega Protein(Ticker:OME). Omega harvests menhaden, (an oily fish found on the gulf and mid-atlantic coasts in the US) and turns it into fish oil (a dietary supplement), fish meal, animal feed, and other products. Fiscal year 2004 net income was $3.2 million (down from $5.8 million in 2003) on sales of $119.65 million (up from $117.93 million in 2003). Of note is the fact that at year end 2004, Omega’s assets included 66 fishing vessels and 32 aircraft. Currently trading at $6.34, the value of Omega shares held by Zapata is $97.3 million.

Safety Components International (Ticker: SAFY)
In September, 2003, Zapata acquired a 54 percent stake (2.6 million shares)in airbag fabric manufacturer Safety Components, for $58 million. Less than a month later, Zapata acquired another 1.5 million shares for $16.9 million, and currently owns 79 percent of the company. Safety earned $10.25 million in 2004 (up from 2003’s $8.2 million) on sales of $247.9 million (flat versus 2003’s $247.1 million). Currently trading at $15.05, the current value of Zapata’s stake is $43.4 million.

ZAP.COM-Shell company
Although barely worth mentioning, Zapata also owns 98 percent of Zap.com, Zapata’s failed internet venture, which currently has no business operations. Still trading for $.10 a share, the company’s stake is worth $5 million, based on recent trading. The company’s only major asset is the $1.79 million in cash on it’s balance sheet.


Sum of the parts valuation
Zapata currently has 19,132,520 shares outstanding.
Omega Protein: 24,964,609
Safety Components: 5,370,147

Zapata’s share of each company:
Omega: 58 percent (or approx 14,500,000 shares)
Safety Components: 79 percent (or 4,242,000 shares)

Each share of Zapata represents:
.76 shares of Omega
.22 shares of Safety Components

Cash Hoard
Zapata also has $65.4 million in cash on its balance sheet (as of 3/31/05). Since the financials of both Omega and Safety are consolidated into Zapata’s financial, we adjust that cash balance by subtracting out both company’s cash, to avoid double counting:

Zapata: $65.4
Omega: $27.7
Safety: $8.3

Net: $29.4 million

Putting it all together:
Each share of Zapata represents:
$1.54 in cash ($29.4 million/19.1325 million shares out)
$4.78 in Omega shares (Omega price of $6.29*.76)
$3.29 in Safety Shares (Safety price of $14.95 *.22)

Total: $9.61
Current price of Zapata: $8.42

Discount to calculated value: 14 percent

The caveats/the risks
First off the 14 percent “discount”(based on my calculations) may not be as compelling as it seems. Since Zapata owns such a large chunk of each company, a discount to market value might apply. That’s how a private valuation firm might view it, anyway. I don’t see it that way for Omega Protein. Safety Components is a different story though. There is little trading in the stock, and a lack of marketability discount might apply.

As I stated earlier, my main reason for buying Zapata was because it was the cheapest way that I could have exposure to Omega Protein. While I am a big believer in the company, Omega has its own measure of risk. The company is dependent on a successful fishing season, and if company harvests of menhaden are low, the stock will suffer, as it has in the past year (the stock was trading as high as $11.80 in mid 2004). This, following is from the companies 3/31/2005 10Q:

During 2004 and 2003, the Company experienced a poor fish catch (approximately 18% and 11%, respectively, below expectations and a similar reduction from 2002), combined with poor oil yields. The reduced fish catch was primarily attributable to adverse weather conditions and the poor oil yields due to the reduced fat content of the fish. As a result of the poor fish catch and reduced yields, the Company experienced significantly higher per unit product costs (approximately 15% increase) during 2004 compared to 2003. The impact of higher cost inventories and fewer volumes available for sale will be carried forward and will adversely affect the Company’s earnings through the first and second quarters of 2005.

Your editor believes this news is already priced into the stock. Only time will tell.

Last Words
While there is some institutional ownership in Zapata, Malcolm Glazer controls more than 51 percent of the company. So basically, shareholders are only as good as the decisions Malcolm makes. One bright note, the company recently underwent an 8 for 1 stock split in April. Liquidity was an issue in the past, we’ll see if this helps.

*The author has a position in Zapata. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

Is Value Dead? Again?

For the past five years, value has trounced growth. The S&P 600 Smallcap Barra Value Index, for instance, is up an average of 13.1 percent per year during the past five years, versus just 5.4 percent for the S&P 600 Smallcap Barra Growth Index. For the past year, however, the gap has narrowed, with value barely beating growth (7.68 percent versus 7.62 percent). Are the days of value outperforming growth coming to an end?

The folks at Tweedy Browne & Co. recently sent a sobering letter to shareholders, which announced that both of the company’s funds, Tweedy Browne American Value, and Tweedy Browne Global Value will close to new investors on May 4, 2005. “What’s the big deal” you may wonder? Funds close all the time, usually because there’s too much cash coming in, and not enough places to put it and maintain the funds objective, right? True as that may be, in Tweedy’s case, it’s the stated reasons for closure that have this value investor scratching his head.

The letter quotes fund manager Chris Browne saying:

“Current stock market levels worldwide present few investment opportunities selling at an attractive discount to intrinsic value. Moreover, certain holdings of both Funds have risen to levels of full value in our view, resulting in both funds being net sellers of securities”.

As a long-time shareholder of Tweedy Browne American Value, and believer in the firm’s investment process, that statement is scary.

The fact that Tweedy can no longer find investment ideas that fit its stringent criteria, may mean that value is dead, at least Tweedy’s definition of value. While their honesty is refreshing—and I believe these guys always tell it like it is, a rare virtue in this industry—I can’t help but question whether to cut and run. Afterall, if they can’t find any suitable investments, does that translate into lackluster returns for these funds in the next couple of years?

Chris Browne’s comments continue:

“Since the collapse of the technology, media and telecommunications bubble in 2000 wrung out the grossly inflated excesses of the so-called growth sectors of the market, the more mundane value stocks have risen to levels at or near their private market values. The result is that the price difference between the most expensive and the least expensive stocks is narrower than we can recall in more than 30 years. Current cash levels at both funds provide more than enough “dry powder” to take advantage of buying opportunities when they present themselves. At the present time, having no limits on allowing new investors into the Funds could excessively dilute existing Funds shareholders’ investments in a limited pool of cheap stocks.”

To put Browne’s comments into perspective, thirty years takes us back to the mid 70’s, not a great time for investors. Browne’s words are certainly disheartening.

For those of you who are not familiar with Tweedy Browne, this firm once served as Ben Graham’s brokerage firm. They are true dyed in the wool value investors, seeking to buy firms well below intrinsic value: companies trading at low price to cash flow, low price to book, low P/E ratios, low price to sales ratios. They like management to have a stake in the company, and that insiders are buying, not selling. The Investment Research and Reports section of their website is a must for anyone interested in value investing. One report entitled "What Has Worked In Investing" provides excellent insight into the company’s investment philosophy, and even discusses one of the topics this site is devoted to—companies trading below their net current asset value.

The author has had a position in Tweedy Browne American Value for years, and continues to add to it on a monthly basis. The fund is not a high flyer, but provides decent risk adjusted returns. For the past 5 years through March 31, the fund has averaged 5.45 percent per year versus (3.16) percent for the S&P 500. That’s a spread of more than 8 ½ percent.

I think I’m coming back to my senses. Value isn’t dead, value never dies. Maybe it’s on hiatus. When it returns, the boys at Tweedy will pounce. I’m keeping my Tweedy Browne American Value shares. Thank you (managing partners) Chris Browne, Will Browne, John Spears, Tom Shrager, and Bob Wyckoff for your honesty. We need more like you in this industry.

Inforte Corp: Not Quite Below NCAV, but close, and compelling
Ticker: INFT
Price: $3.33
P/E: NM
Market Cap: $37 (million)
Net Current Asset Value (estimated): $31
Average daily volume: 38,000

Inforte is a Chicago based consulting company, specializing in customer management, business intelligence and analytics and operational stratregy. In 2004, according to the company’s 10K, the top 5 clients represented 39 percent of total revenue, while the top 10 represented 56 percent. Clients include NASA, Cadbury Schweppes, Guardian Life Insurance, Sony Pictures, and Vodafone, among others.

Not Quite Below NCAV
Our initial research recently identified this company as trading below its NCAV. But after further research, we determined that the reason it appeared on our screen, is because the company recently paid a special cash dividend of $1.50 per share (or $17.3 million in total), which is reflected in the company’s price and market cap, but not in the company’s latest financial statements. Confused? There is a simple explanation. Companies file quarterly reports, so any transactions affecting the financial statements that are done between quarters don’t show up until the next quarterly filing. Meanwhile, transactions that effect price, such as a dividend, are reflected immediately. So, while Inforte’s price and market cap (an integral part of the NCAV equation) have dropped because of the dividend payment, it’s most recent balance sheet data (another integral part of the NCAV calculation) has not yet been adjusted. Feel free to e-mail us at Cheap Stocks if this still does not make sense.

The Numbers
Fiscal year 2004 sales were $50.5 million, up 35 percent from 2003’s $37.4 million. Net loss was $560 thousand in 2004, versus net income of $1.75 million in 2003. However, 2004’s net loss included an after tax loss of $1.3 million, so income from continuing operations was $.07 for 2004 versus $.16 for 2003. First quarter 2005 sales were down 21 percent to $9.5 million, from the same quarter last year ($12.1 million). Sales declines were due to the loss of a significant client, however, there was no surprise here. Management guidelines for sales were met.

The Balance Sheet
As of 3/30/05, the company had $46 million in cash and short-term marketable securities, $6.1 million in long-term marketable securities, and no debt. If we subtract the $17.3 million special dividend payment-we are assuming it was paid out of cash and short-term securities-that leaves $34.8 million in cash and securities, or $3.04 per share. Keep in mind that the stock is trading at just $3.48. All in all, this is a strong balance sheet.

The NCAV Calculation (in millions)
As we stated above, this company is not trading below it’s NCAV, but here’s the calculation, anyway
Current Market Cap: $37.1
Current Assets: $40 (estimated, after paying special dividend)
Current Liabilities: $9
Long Term Liabilities: $0
Net Current Asset Value: $31
NCAV/Market Cap: .84

The Street/Institutional Ownership
Currently, just two analysts are covering this company. There is however, some institutional ownership.
Fidelity: 9.7%
Dimensional Fund Advisors: 8.3 %
Bank of America: 8.1%
Royce & Associates: 6.8 %
Vanguard: 1.7%
Bridgeway Capital: 1.6%
(Several Others are at or below 1%)

Conclusion
2004 showed nice sales growth for this company. However, as 2005’s first quarter displayed, one of the risks here is the dependence on a handful of clients. Lose one or two, and sales will take a hit. On the positive side, Inforte’s balance sheet is rock solid, and offers a great deal of downside protection. If you purchase the stock at todays closing price of $3.33, you are theoretically buying $3.04 in cash and securities, and getting the business, and its other assets for $.29. That’s the kind of story that we like here at Cheap Stocks.

*The author does not have a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.