It must be April Fools Day…

That was my first thought upon reading my Wall Street Journal this morning, specifically the story on page A3, entitled “FTC Deals Setback to Whole Foods”. But I checked, and my WSJ is definitely dated June 6, 2007. So there must be another explanation.

It seems that our esteemed Federal Trade Commission has decided to block Whole Foods Markets Inc (WFMI) $565 million acquisition of Wild Oats Markets (OATS). Apparently the FTC is very concerned that the new entity will monopolize wheat germ, organic produce, tofu, and you name any of the other healthy products these stores sell. Wow, thanks FTC, for trying to protect us. I can’t imagine how tyrannical this newly formed entity would be, forcing the poor, healthy consumer to shell out many times the going rate for grass-fed beef, and buckwheat pancake mix.

To think that this acquisition could create a health food monopoly detrimental to the consumer is utterly ridiculous. FTC, we still operate in a free market, and with relatively low barriers to entry, a successful monopoly in this area would be highly unlikely.

To make matters worse, here is a quote from Jeffrey Schmidt, Director of the FTC’s Bureau of Competition, printed in the Journal article:

“If Whole Foods is allowed to devour Wild Oats, it will mean higher prices, reduced quality, and fewer choices for consumers. That is a deal consumers should not be required to swallow.”

Are you kidding me? That’s the same kind of flawed logic, and misinformed view of free market economics that stopped the proposed Staples-Office Depot merger from occurring several years ago. Thank goodness the FTC put a stop to that merger. We’d no doubt have pencil and pen shortages if that deal had been blessed.

Perhaps Mr. Schmidt and company at the FTC need to bone up on the intensely competitive and low margin retail food market (WFMI's net profit margin was a whopping 3.6% in 2006; OATS had a net loss), or better yet, free market economics. To that end, I’d suggest spending a few hours with my former economics Professor, Dr. Hans Sennholz. He’d set them straight in short order.

I’ve never been to a Whole Foods store, and I‘ve never been to a Wild Oats store. I’ve never evaluated or owned stock in either company, and lets face it, I’m not the poster child for healthy eating. But I can spot the flawed logic in this decision from a mile way. FTC, spend your time (and our tax dollars) on something worthwhile.

*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 these securities. All information provided believed to be reliable and presented for information purposes only.

Thanks Cheap Stocks Readers: 283 Subscribers, 10000 Hits

After hovering just under 10,000 hits/months for the past quarter, we finally broke through the 10,000 hit level in May. Thanks to our growing list (283) of subcribers for making this little website a worthwhile pursuit. We are passionate about research and investing, and appreciate our readers interest.

Viewing PICO Holdings through Pink (Sheet) Colored Glasses

You can tell a lot about a manager by the securities in which he invests, and that being said, this week we take an off the beaten look at PICO holdings. PICO has recently become a darling of the investment world as the focus on its water business goes from the underground to the mainstream. (Fidelity taking a stake and a push from a major newsletter provider will tend to turn the spotlight on you)

You don’t hear a great deal about PICO’s insurance subsidiary, Physicians Insurance Co of Ohio. Currently in run-off, Physicians does not write any new policies, but must still settle claims of existing policies. The company generates revenue and pays claims from its investment portfolio. Typically, this contributes income to PICO, as the portfolio generates more income than the liabilities consume.

From PICO's website:

Administering our own “run off” also provides us with the following opportunities:
we retain management of the associated investment portfolios. After we resumed direct management of our insurance company portfolios in 2000, we believe that the return on our portfolio assets has been attractive in absolute terms, and very competitive in relative terms. Since the claims reserves of the “run off” insurance companies effectively recognize the cost of paying and handling claims in future years, the investment return on the corresponding investment assets, less non-insurance expenses, will accrue to PICO. We aim to maximize this source of income; and
to participate in favorable development in our claims reserves if there is any, although this entails the corresponding risk that we could be exposed to unfavorable development.

Thanks to the Schedule D filing, as reported to the NAIC, and available on Bloomberg, we were able to take a gander at Physician’s portfolio as of 12/31/06. The most striking thing about this $69 million+ portfolio was that some of the names are high-quality pink sheet(or OTCBB) companies, including the following:

Bank Utica NY (BKUT)
JG Boswell (BWEL)
Case Pomeroy (recently acquired)
Farmers & Merchant/CA (FMBL)
Hanover Foods (HNFSA)
Laaco (LAACZ)
Limoneira (LMNR)
Ohio Savings Finl (OHSF)
Queen City Investments (QUCT)

While we make no specific judgement on these companies (we do currently own BWEL, and have reported on HNFSA in the past), we find it interesting that PICO management continues to find value in some interesting places. This is one of the reasons we were attracted to PICO in the first place.

The stock has had a nice run up since the market pullback and private placement in February, but may be a bit ahead of itself. As we mentioned earlier, after going unrecognized for years, there has recently been a PICO frenzy of sorts. The focus is on water, the “new oil”, and while we believe there is a great deal of value there, we would not be surprised to see the shares pull back a bit in the short-term.

Other Random PICO Notes
Going Mainstream

For their part, a couple of equity research firms have joined the party. In a May 11th research report Merriman, Curhan and Ford analysts Jesse Herrick and Brion Tanous suggested that PICO is fairly valued in the $58-$64 range. ThinkEquity Parnters recently initiated coverage, and analyst David Edwards rated the stock a “buy”, with a $59 target. As a shareholder, we like those numbers…but still believe the stock may getting ahead of itself.

Major Departure
Chairman Robert Langley, half of the dynamic duo (CEO John Hart, is the other half), recently announced his retirement, effective 12/31/07. He will remain on the Board through at least 2008. It remains to be seen how this will effect PICO, but suffice it to say that this management team, whether or not you believe they are grossly overpaid, has made some brilliant moves (Hyperfeed aside) over the years. Stay tuned as PICO names a successor. I’d be happy to throw my name into the hat.

*The author has a position PICO, and BWEL. This is neither a recommendation to buy or sell these securities. All information provided believed to be reliable and presented for information purposes only.

Value Investing Congress West 2007: Recap
As I sit in LAX waiting for our redeye back to Philly, my wife somewhat annoyed that I’d rather write than talk (she just peered over my shoulder, saw what I wrote and now she’s really annoyed…I deserve it), I am reflecting on the excellent Value Investing Congress that ended earlier today (May 9th) in Hollywood.

The Congress, held twice a year, once in NY, and once in CA, is the ultimate gathering (besides Berkshire Hathaway’s annual meeting) of cheapskates, defined as those of us in the investment world who seek to pay as little as we can for a company, with a built-in margin of safety. We are a fickle bunch.

Hats off to Value Investing Congress founders John Schwartz and Whitney Tilson. Two class guys who are well on their way to orchestrating perhaps the best value conference out there. They assembled an excellent slate of speakers, and put on a world class conference.

Here are some of the highlights of the conference:

*Monish Pabrai, with an excerpt from his new book The Dhando Investor. I read this book in one sitting, poolside at the Renaissance Hollywood, just after the conference ended. Pabrai is a natural, and his track record demonstrates this.

*Carlo Cannell, from Cannell Capital, with a somewhat offbeat, and perhaps un-actionable, but still interesting and thought provoking presentation on of one of the new hot markets, Vietnam. Cannell discussed his adventures visiting, and investing in Vietnam, and the potential bargains that exist as this still Communist country begins to see its equity markets come to life, and state owned monopolies are put into public hands. Unfortunately, much of the audience was left with the question; “How do I get exposure?”, a question which unfortunately did not have much of an answer.

*Newcomer Zeke Ashton of Centaur Capital Partners, and his excellent discussion “How Concentrated Should Your Portfolio Be?” Your Cheap Stocks editor was thrilled to hear Ashton mention the concept that our website was built on: Companies Trading Below Net Current Asset Value. Just like us, though, Zeke is not finding many viable candidates these days. Ashton also discussed four actionable ideas , all micro or small caps.

*Robert Hagstrom (What was he doing at a value conference???) discussed “Growth Investing in a Value Based World”. The author of 3 Warren Buffet related books is not exactly a value investor, and proved as much in his discussion of why Amazon will be going through the roof. Still, Hagstrom is an excellent speaker, gave a great presentation, and it never hurts to hear from the other side (growth).

*Legend Bob Rodriguez was on fire, and unapologetic, taking on everything from Morningstar’s tax efficiency calculation to impatient shareholders who never read shareholder letters.

*Whitney Tilson’s discussion of Berkshire Hathaway’s intrinsic value ($150,000 per A share, by Tilson’s calculation) was excellent, and shows why Whitney is an up and comer in the value world.

All in all, this is a great conference, and the east coast version will take place in November. Visit the Value Investing Congress website for more details. See you in November.

The Pickings are Getting Slimmer

Man, we sound like a broken record, and for that we apologize. But we still aren't finding many net/nets these days. As the Dow sets new highs, and the Nasdaq gets back to half of it's peak level, the cupboard housing companies trading below net current asset value is bare. Be that as it may, this week, we list the top five net/nets, by market cap:

Audiovoxx (VOXX)
Atlantic Coast Entertainment Holdings (ACEH)
Zapata Corp (ZAP)
MedicNova Inc (MNOV)
Glu Mobile (GLUU)

Regular readers may recognize Audiovoxx and Zapata, they seem to be perennial net/nets. Each of the others, however, are new to the list.

*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.

Investor’s Beware: Wide Bid/Ask Spreads and Market Orders are a Dangerous Combination
As investors, we love to see our stocks heading up (if we are long, that is). I was pleased on 5/1 to see tiny, sometimes troubled, and always mysterious historic document provider Gallery of History (HIST) spike upward about 30%. About time I thought. Finally, the market is catching on to the story: A company that will never make any money, whose major shareholder has not done the company any favors, but whose inventory of historic documents may be worth substantially more than the company’s enterprise value, let alone carrying value.

Upon further inspection, however, this 30% spike actually represented one single 100 share trade. Subsequently, the bid/ask spread headed downward significantly, and it was clear that the price spike was a phantom, created by an eager investor who placed a market order on an illiquid security. Never a wise course of action.

A company such as HIST, with a tiny market cap of $11.5 million, average daily volume of just 2000 shares, and most recent bid/ask spread of 1.91/2.19 is a poster child for one of the small investor’s best friends, the limit order. Placing a market order in a security with such tiny volume, and large spread will just set up the unsuspecting investor for disaster. Who wants to purchase a stock worth $2.00 for $2.75, only to see the next trade at $2.00? And it happens more often than you might imagine.

So, our unknown buyer of 100 overpriced shares of HIST is automatically out 30% of his or her money, granted, that’s less than 50 bucks in this case. But what if that order had been for 1000 shares or 5000 shares? Illiquid security buyers beware. Use limit orders, be aware of bid/ask spreads, be cognizant of the average daily trading volume, and how large your intended trade is compared to average volume. If you set a limit order, and the order is not filled at your price, either try again another day, or reevaluate what you want to pay for the stock.

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

Cheap Stocks featured in WallST.net Podcast
Today, your Cheap Stocks editor was interviewed by Dennis Olson of WallSt.net . The podcast lasts about 10 minutes, and we certainly appreciated the opportunity to get some airtime.