Schwab Weighs in on Our Porfolio, and We're Still Not Making the Grade

It’s time once again to review our grades, that is, your Cheap Stocks editor's portfolio as "graded" by Charles Schwab's stock rating system. We ran a similar column 11/18/06, and our grades were miserable.

This is not to denigrate Schwab, or their rating system. We've had a Charles Schwab account for years, and their service has been outstanding. Plus it's natural that their rating system would cater to the more common names, where there's actually data available, and liquidity (unlike many of the names in our portfolio).

Our Report Card
4Kids Entertainment(KDE): D
Avoca Inc (AVOA): NC
Bactolac Pharmaceuticals (BTCP): NC
Biloxi Marsh Lands Corp (BLMC): NC
Cubist Pharmaceuticals: C (underlying Stock) (Jan 2009 12.5 LEAPS-CALLS)
JG Boswell (BWEL): NC
Gallery of History (HIST): NC
Kitty Hawk(KHK): D
Lazare Kaplan Intl (LKI): NC
Maui Land and Pineapple (MLP): F
Pennwest Energy (PWE): NC
PICO Holdings (PICO): NC
Plum Creek Timber (PCL): NC
Sonic Foundry (SOFO): NC
Southwest Water (SWWC): D
St. Joes (JOE): C
Tejon Ranch (TRC): D
Tootsie Roll (TR): C
Vermont Pure Holdings (VPS): NC

Names in italics: Research in previous postings
Names bolded: New to Portfolio since previous report card

In summary, our grade point average is still a D, with 3 C's, 4 D's, 1 F, and 12 incompletes (NC), about the same as last time.

Positions Closed Since Last Report Card:
Jones Soda(JSDA)

Wise Words From Marty Whitman

Marty Whitman's commentary in Third Avenue Fund's quarterly letter to shareholders is a must read, especially if you are wired as a value investor. Marty, who is now in his 80's, does not disappoint with the latest edition.

Here's just a sampling of Marty's wisdom:

A directory of those in the financial community who build great fortunes by avoiding risk:

1. Corporate executives who receive stock options or restricted stock
2. Members of the Plaintiffs' Bar who bring class action lawsuits in order to earn contingeny fees
3. Initial Public Offering ("IPO") underwriters and sales personnel
4. Bankruptcy Professionals: Lawyers and Investment Bankers
5. Money Managers, Mutual Fund Managers, Private Equity and Hedge Fund Managers
6. Venture Capitalists
7. Real Estate Entrepreneurs especially investment builders

Marty goes on to describe each category in greater detail, but in his typical direct and unapologetic fashion, hits the nail squarely on the head.

He goes on to describe how Third Avenue avoids investment risk:
1. Buy Cheap
2. Buy Equity Interests Only in Highg Quality Companies
3. Operate on a low cost basis for shareholders
4. Ignore Market Risk
5. Buy growth but don't pay for it
6. Buy and Hold
7. Don't borrow money, invest without financial leverage

We'd urge investors to read the Marty Whitman's entire Second Quarter Commentary, it is well worth the time.

**The author has a position in the Third Avenue Small-Cap Value Fund. 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 Five Profitable Double Net/Nets

Today we again lighten our constraints, and feature the top five profitable
companies trading at less than two times net current asset value, in order of market cap. And no, we are not getting soft in our old age. Companies trading at less than twice current assets less all liabilities (and preferred stock) typically have very strong balance sheets. Throw in profitabilty, which most net/nets can't claim, and you've got a potentially formidable combination.

While Ben Graham preferred candidates trading at less than 2/3 NCAV, and we've typically focused on those trading at less than NCAV, these companies might be a couple cuts above the typical cigar butt.

Top Five Profitable Double Net/Nets by Market Cap
Ingram Micro (IM)
Mkt Cap: $3.7 billion
NCAV: $2 billion
Mkt Cap/NCAV: 1.85
Price: $21.78
P/E: 15.6

Sycamore Networks (SCMR)
Mkt Cap: $1.18 billion
NCAV: $892 million
Mkt Cap/NCAV: 1.32
Price: $4.21
P/E: 61

Exar Corp (EXAR)
Mkt Cap: $530 million
NCAV: $357 million
Mkt Cap/NCAV: 1.49
Price: $14.76
P/E: 67

Adaptec (ADPT)
Mkt Cap: $452 million
NCAV: $388 million
Mkt Cap/NCAV: 1.17
Price: $3.80
P/E: 15.3

Farmer Brothers(FARM)
Mkt Cap: $340 million
NCAV: $200 million
Mkt Cap/NCAV: 1.7
Price: $21.79
P/E: 65

Farmer Brothers is the only company we've previously covered, and frankly, the others on this list-all tech related- aren't exactly our cup of tea. We are not making a judgement on them, we just typically shy away from businesses we don't understand.

*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 any of these securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks following the date of this post.

4Kids Entertainment Added to the Portfolio

Following our 7/4 piece on 4Kids Entertainment we initiated a position in the company this week.

For the record, our trading policy states that we will not trade securities mentioned on the site for at least 2 weeks from the posting date. This includes long and short positions.

Old News Leads to Big Hits: Mistake of the Day
We were stunned this morning to see hits on our site skyrocket in a very tight timeframe. Since we had not posted any new content since last week, we were puzzled by the level of interest. It didn't take long to find the reason: The Street.COM columnist James Altucher had re-posted a link to our 4/6 piece Why We Closed Our Jones Soda Position in today's edition of his Blog Watch column.

It was very evident that it was an older piece, yet any news on Jones these days garners heavy interest. However, that is not the kind of interest we want here at Cheap Stocks. There is more than enough speculation out there, and the day we begin sensationalizing, is the day we'll close down this site. For good.

We contacted Altucher, who was very gracious. He apologized for the mistake, and immediately withdrew the reference in his column.

For the record, we do not have a position in Jones Soda (JSDA), long or short.

Top Four Profitable Net/Nets by Market Cap

The markets continue to head higher, and although we are not perma-bear doomsday types, we are finding it increasingly difficult to find many names that are all that interesting--do we sound like a broken record yet?. Bear in mind (no pun intended), this is not 2000, and stocks are not trading at obscene multiples, but our definition of value is sometimes rather narrow, and we often have to turn over a lot of rocks to find one gem. There are only so many hours in a day.

With that, this week we bring you a list of the top four profitable net/nets, (aka stocks trading below their net current asset value), in order of market cap. "Profitable" in this case means that a company has a trailing twelve month profit, no matter how miniscule. No rocket science here, but then again, we've never been accused of being rocket scientists. This list should be seen as the beginning of the research process, a raw list of potential ideas that demands much further scrutiny before any decisions are made, not a definitive buy list.

Top Four Profitable Net/Nets by Market Cap:

\*please note, in a previous version of this post, we listed Bel Fuse. Due to a data error (Bel Fuse has two share classes, the market cap we used only reflected one class), Bel Fuse shout not have appeared anddoes not currently trade below its NCAV

Atlantic Coast Entertainment Holdings Inc. (ACEH)
Mkt Cap: $158 million
NCAV: $216
Price: $16.35

Trans World Entertainment Corp. (TWMC)
Mkt Cap: $146
NCAV: $209
Price: $4.69

Bexil Corp (BXL)
Mkt Cap: $30
NCAV: $38
Price: $33.3

Boss Holdings (BSHI)
Mkt Cap: $16
NCAV: $19
Price: $8.08

There you have it. Slim Pickings at best. To put in perspective, the total market cap of these four companies is less than $500 million, and we had to head pretty far down the market cap scale! That being said, proceed with caution. Smaller companies tend to be less liquid, and liquidity issues can be devastating to those not paying attention.

*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 any of these securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks following the date of this post.

This summary is not available. Please click here to view the post.

4Kids Entertainment: A Double Net/Net with Possibilities(KDE)

Admittedly, we were not familiar with this company prior to attending The Value Investing Congress in Hollywood this past May. Thats where Lance Helfert and Atticus Lowe from West Coast Asset Management presented an interesting case, centered on the release of the company's Chaotic card game, which will also have an internet tie-in not unlike Webkinz. If you are not familiar with Webkinz, you probably don't have young children. Nothing more than stuffed animals, along with the ability to go to a website, play games, "buy" things for your stuffed animal, suffice it to say, it is quite the craze.

Crazes come and go, but Helfert and Finch believed this one -Chaotic- could be very big and very profitable. Two delayed release dates later, the few analysts that cover KDE are skeptical at best (not that the analysts are always right).

We've owned companies before that were at the mercy of the whims and fancies of young consumers. Topps (TOPP) is an excellent example, albeit one that was more established, with more recognizable brands and products than KDE.

4KIDS is a tiny company, a microcap with a market cap of just $198 million. Sales, and earnings have been falling, from $99.2 and $11.8 million in 2004 to $71.8 and a loss of $1.7 million in 2006. Revenues are generated from licensing- 44% of 2006 revenue (Teenage Mutant Ninja Turtles, Cabbage Patch Kids), broadcast media and advertising- 23% of revenue, (much of it from the Fox Saturday Morning 8-12 TV slot) and TV and film producton and distribution- 33% of revenue.

Chaos or Chaotic?
Sure, we were impressed by all the promise of the Chaotic brand, but we also recognize that the risk is growing, day by day, delay by delay. The main question from an operational standpoint is: Can management deliver Chaotic? The next question is, of course, if they do finally deliver, will Chaotic resonate with it's audience? Interestingly enough, we are more comfortable with the second question than the first: If management can deliver the product/website, from what we know, we believe it has a good chance of being successful.

The Safety Net(Net)
Delays aside, what really got our attention was the relatively large hoard of cash on KDE's balance sheet, and fact that the company currently trades at just 1.62 times net current asset value.

We are big fans of cash on the books, especially when it is unencumbered by debt, and not likely to be burned through in a hurry. Cash in that situation can create a safety net. While cash alone is rarely a sufficient reason to put a name in your portfolio, when combined with a potential catalyst -Chaotic, in KDE's case- it can be quite the deal sweetener.

The Numbers
Cash & ST investments: $111.6 million
Current Assets: $146.2
Current Liabilities: $24.7
Long Term Liabilities: $.7
Net Current Asset Value: $120.8
Market Cap: $195.1
Market Cap/NCAV: 1.62
Cash and ST Investments/share: $8.47Current Price: $14.82
LT Investments: $3 million

Conclusion
Management has lost some credibility due to the delays in the release of Chaotic and this seems to be reflected in the current price. Theoretically, buyers of KDE at the current price of $14.82 receive in return $8.47 in cash, while paying $6.35 for current operations, along with a call option on Chaotic. Granted, the Chaotic rollout will consume an estimated $15-20 million of the company's cash. Still, this is a compelling story to keep an eye on.

*The author does not have a position in 4Kids Entertainment. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.