PICO Rising

Since hitting a 3 year low in the sub $29.00 range back in March, shares of PICO Holdings(PICO), which we've called the "Poor Man's Berskshire Hathaway", are up 45% on normal volume with little news.

The company held a call with investors on May 19th-a first for PICO- and perhaps this is another step to take this previously under-followed company mainstream. Certainly, there's more analyst coverage than ever before, and Fidelity taking a stake a couple years back also may have advanced the ball in this regard.

Here are some of the first quarter highlights:
*The Fish Springs Ranch pipleline project is nearing completion. While bad weather delayed completion of the surge tank, the 28.6 mile pipeline passed pressure tests. All other testing should be completed in June. This pipeline will deliver 8000 acre feet of water annually to the northern valleys of Reno, Nevada.

*Company is building water right holdings in western Nevada (Carson City/Lyon County), and have acquired/have option to acquire 4366 acre feet.

*Launched new business in the real estate segment, Union Community Partners, LLC which will acquire building lots in California, where long-term prospects are favorable. Company acquired 40 finished lots, 73 partially entitled lots, and unentitled land (possibly 960 lots), in and near Fresno, CA.

*Sold long-term holding Jungfraubahn Holding AG (Swiss publicly traded company) for $75.3 million, pre-tax gain of $46.1 million (will be booked q2). Estimate compound annual return of 20% during 12 year holding period

*Still owns 456,000 acres of Nevada land (712.5 square miles)

*$85 million in cash, $29 million debt as of 3/31/08

*Company reported net loss of $1.6 million for the quarter.

We continue to hold PICO shares, and believe this is still an excellent water play, with a variety of additional assets thrown in at a discount, and perhaps for free.

The company has vastly improved its website, and quality of information provided, including presentations and the recorded shareholder call. Its well worth a look if you want to learn more about this seemingly confusing array of assets.

*The author has a position in PICO Holdings. This is neither a recommendation to buy or sell any 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.

Who Ate All the Ice Cream?: The Hidden Inflation Factor

Like many Americans, our household enjoys a dish of ice cream now and again, but rising milk fat prices, and the commodity run-up in general has pushed carton prices skyward. We continue to buy the frozen treat, but have adopted the "only on sale" rule.

So, last week, when your Cheap Stocks editor was accused of single handedly devouring an entire container of Edy's, I had to remind my accuser of the following: What used to be the standard half gallon container was downsized a few years ago to 1.75 quarts. Hardly noticeable. But now, it seems as though the standard has shrunken even further, to 1.5 quarts. This, is noticable, at least it is to me. My accuser quickly apologized.

This is perhaps the worst kind of inflation: Inflation by "Deflation". The price stays the same, but the package gets smaller. Have not seen it this bad since the early 1970's.

Ice cream is certainly not the only product undergoing "package resizing". Many economists deny that inflation is back, but in this case, the consumer is the expert.

JG Boswell Update (BWEL)

Shares of cotton and farming giant JG Boswell, owner of an estimated 142,000 California acres, and another 30,000 in Australia, have bounced around quite a bit this past year, from $760 in June to $1175 in November, closing last week at $980. The stock still trades "by appointment", so if you don't like illiquidity, this company is not for you.

The appeal of Boswell (BWEL) is not in its farming operations, which although impressive in their own right, merely represent the current use of assets which might ultimately be much more valuable used for other purposes.

The company continues to develop its Yokohl Ranch project, a master planned community of 35,000 acres in Tulare County California which may have a 10 year life. The Eastlake project, a master planned community in Chula Vista, California is near completion.

But, as we've stated several times before, the real gem may lie beneath some of Boswell's land: massive amounts of water that may be worth several billions. ("May" being the operative word. Ultimately, in order for value to be realized, assets must be converted, or have a good probability of being converted into cash. Water is a touchy and political subject, especially in California)

We recently obtained a copy of the company’s 2007 annual report, and here are the highlights for the year ended June 2007:

Current Price: $980
Current Dvd Yield: 1.43%
Quarterly Dvd: $3.50/shr
Revenue: $338.958 million
Net Income: $13.96 million
Diluted EPS/shr: $14.20
Current Assets: $203.038 million
Cash: $3.891 million
Total Assets: $645.909 million
Current Liab: $150.506 million
Short Term Debt: $88.272 million
Long Term Debt: $0
Stockholders Equity: $450.221 million
Shares Out: 974,105
Book Value Per share: $441.65
Market Cap: $954.6 million
Enterprise Value: $1038.98 million
Enterprise Value/California Acre: $7317 (estimated)

Based on just the California land, we estimate Enterprise Value/Acre to be about $7300, and that ignores any value in the Australian land. We continue to be intrigued by the Boswell story. Buyer beware, though: Shares are difficult to obtain, information is scarce, and there is little liquidity.

*The author has a position in JG Boswell. This is neither a recommendation to buy or sell any 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.

A Brief Review of David Einhorn's book: "Fooling Some of the People All of the Time"

One of the tangible things (and there were also a multitude of valuable intangibles) we walked away with from the Value Investing Congress West was a copy of David Einhorn's new book "Fooling Some of the People All of the Time". A long wait at LAX before a Wednesday night redeye back to Philly left plenty of time to crack open Einhorn's 379 page work. Unfortunately, once I started reading, I could not put it down.

Einhorn presents a very detailed account of financial shenanagins happening within Allied Capital, a midcap darling of the high yielding, rising dividend "subculture". Seems that, among other transgressions, the investment company was very reluctant to mark down securities (primarily debt)on its balance sheet that were impaired. Instead of being marked to market, these were "marked to fantasy".

What you will find within the pages of this book will blow you away. This is a tale of deceit, fraud, misrepresentation, cloak and dagger antics, millions and millions of wasted taxpayer dollars, and an unbelivable amount of effort expended by Einhorn and others to bring it all to light. Unfortunately a mounting pile of evidence still falls on deaf ears--far longer than you'd imagine in the post-Enron, Sarbanes Oxley world of today.

Einhorn often takes his lumps in the press for being a hedge fund manager and short seller, (which comes with the territory), and he's been short Allied for years. But don't let that cloud your judgement as to his motives for writing this book: all profits from it's sale, as well as any from his Allied short positon are going to charity.

Einhorn's attention to detail is one of the great attributes of this book, plus he's got a great "voice". This book may go down as one of the classic financial forensics books of our time. CFA wannabe's would do themselves a great service by giving it a read--its a great testament to the propensity of many a modern day analyst to stop well short of the in-depth analysis many aspire to provide.

The Allied Capital story is not over yet, but thanks to David Einhorn for having the guts to bring us in on what's transpired to date. Of course Allied Capital will tell you a much different story--I'm waiting for their book.

I've never met David Einhorn, have never spoken with him, just traded a few emails. (we tangled over a piece we published on St. Joe's back in August. Einhorn believed his analysis had been misquoted, and we subsequently published his response). But I could not walk away from this book without believing that Einhorn has a great deal of character. The fact that he's a hedge fund manager, or profits from short sales does not diminish that character.

*The author does not have a position in Allied Capital, long or short. This is neither a recommendation to buy or sell any 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.

Value Investing Congress West: 2008

We're just back from another excellent Value Investing Congress in Pasadena. A lot of great speakers and great ideas; some a bit contoversial. Rather than go into detail, there's a summary of the events on the Value Investing Congress blog.