Issuu on Google+

Value-oriented Equity Investment Ideas for Sophisticated Investors A Monthly Publication of BeyondProxy LLC  Subscribe at manualofideas.com “If our efforts can further the goals of our members by giving them a discernible edge over other market participants, we have succeeded.”

Investing In The Tradition of Graham, Buffett, Klarman Year IV, Volume VII August 1, 2011 When asked how he became so successful, Buffett answered: “We read hundreds and hundreds of annual reports every year.”

Top Ideas In This Report Crimson Exploration (Nasdaq: CXPO) …………………. 46

MEMC Electronic Materials (NYSE: WFR) …………………….. 70

Thomas Properties Group (Nasdaq: TPGI) ………………….. 90

UNDERAPPRECIATED BALANCE SHEET VALUES ► Screening for companies with strong asset values ► 20+ companies profiled by MOI research team ► Proprietary selection of three candidates for investment ► Plus: Superinvestor holdings update ► Plus: Exclusive interview with the Chanticleer team ► Exclusive interview with Paul Johnson of Nicusa Capital

Also Inside Editor’s Commentary ……………….. 4 Superinvestor Update ………………. 7 Exclusive Interview: Chanticleer …… 9 Exclusive Interview: Nicusa ……….. 14 Screening for Asset Value Bargains 17 20 Investment Candidates ………… 22 Favorite Value Screens ……………106 This Month’s Top Web Links …….. 115

About The Manual of Ideas Our goal is to bring you investment ideas that are compelling on the basis of value versus price. In our quest for value, we analyze the top holdings of top fund managers. We also use a proprietary methodology to identify stocks that are not widely followed by institutional investors. Our research team has extensive experience in industry and security analysis, equity valuation, and investment management. We bring a “buy side” mindset to the idea generation process, cutting across industries and market capitalization ranges in our search for compelling equity investment opportunities.

Balance sheet bargains mentioned in this issue include Arbor Realty Trust, A.C. Moore Arts & Crafts, AEGON, Alvarion, Aegean Marine Petroleum, Alliance One, ARC Wireless, Avatar Holdings, Aircastle, Asia Pacific Wire, Asset Acceptance Capital, Books-A-Million, BIDZ.com, Bluegreen, Constellation Energy, Chromcraft Revington, Coast Distribution, CSS Industries, Catalyst Paper, Crimson Exploration, Crexus Investment, Dover Downs Gaming, Ditech Networks, DryShips, Deswell Industries, Diana Shipping, Duckwall-ALCO, Dynegy, Exceed Company, Eagle Bulk Shipping, Callaway Golf, Excel Maritime, Frisch’s Restaurants, StealthGas, Gencor Industries, Giga-tronics, General Maritime, Genco Shipping, GTSI, Hastings Entertainment, Hardinge, Heelys, Hutchinson Technology, Hallwood, Integrated Inside:Electrical, InfoSonics, Ingram Micro, Imation, Investors Title Company, LJ International, Kimball, Coca-Cola FEMSA, Key Tronic, Kobex Minerals, Lakeland Industries, Exclusive Interview with Manhattan Bridge, Meade Instruments, MEMC Electronic Materials, MikeNorthstar Pruitt, Realty, Matthew Miller Myriad Pharma, NeoPhotonics, NeuroMetrix, Overseas Shipholding, Parlux Fragrances, and JoePenson KosterWorldwide, of Paragon Shipping, Platinum Underwriters, Radian Group, Republic Airways, Chanticleer Holdings RELM Wireless, Star Bulk Carriers, SigmaTron, Skechers, SkyWest, Spherix, Searchlight Minerals, E.W. Scripps, Taitron Components, TAT Technologies, With compliments Tandy Brands, Tecumseh Products, Tegal Corp., Tsakosof Energy, Thomas Properties Group, Tree.com, TSR, Tuesday Morning, TheTorm, Manual of Ideas Universal Corporation, USEC, Vicon Industries, and more. (analyzed companies are underlined)

Copyright Warning: It is a violation of federal copyright law to reproduce all or part of this publication for any purpose without the prior written consent of BeyondProxy LLC. Email support@manualofideas.com if you wish to have multiple copies sent to you. © 2008-2011 by BeyondProxy LLC. All rights reserved.


Value-oriented Equity Investment Ideas for Sophisticated Investors

Interview with Mike Pruitt, Matt Miller, Joe Koster We have had the pleasure of interviewing the trio behind Chanticleer Holdings — Mike Pruitt, Matt Miller and Joe Koster. Chanticleer is a value-oriented firm that trades over the counter (ticker CCLR). For reasons that should become apparent in this interview, Chanticleer’s principals have gained quite a following in the value investing community despite the firm’s relatively small size. The Manual of Ideas: Tell us a little about your backgrounds and the history of Chanticleer Holdings and Chanticleer Advisors. What goals did you have at the outset, and what operating principles have guided you since then? Pruitt/Miller/Koster: We actually started Chanticleer Holdings in 2005 when Mike’s previous business efforts were finishing-up and he was looking to launch a firm that would manage capital and make investments with a value mindset. To help get started, he decided to hire two graduating finance students from his alma mater, Coastal Carolina University, with the help of his former finance professor Dr. Gerald Boyles. Mike certainly has the years of the team! He graduated in 1984 and has been an entrepreneur and fundless sponsor of small private equity and venture capital investments for a number of years. Prior to Chanticleer, Mike was the CEO of an AMEX-traded company called RCG. Joe and Matt graduated in 2005 with high academic honors, having already been bitten by the value investing bug, and joined with Mike in June of that year to launch Chanticleer Holdings. Chanticleer Holdings, the public company, started out as a business development company and eventually converted to a holding company as we realized that was a better fit for what we wanted to accomplish. Our goal at Chanticleer Holdings is to make investments in or acquisitions of operating businesses with our own capital and to also manage outside capital for other investors via our subsidiary Chanticleer Advisors.

“We set out to develop a track record under the compensation model of no management fee and an incentive fee of 25% of the profits above a 6% hurdle.”

Our first effort at managing outside capital at Chanticleer Advisors was the original Hooters investment we structured in 2006. Then on January 1st of 2007 Chanticleer Advisors launched a fund dedicated to public equities that was and still is modeled after the partnership Warren Buffett ran before he was running Berkshire Hathaway. We named the fund Chanticleer Investors II and set out to develop a track record under the compensation model of no management fee and an incentive fee of 25% of the profits above a 6% hurdle. We realized it was going to be a tough hill to climb, but the general environment and our lack of a track record before starting has made the fund raising a little slower than we had hoped. Our results though have been decent and we try to be open and honest in our quarterly letters so that people can really understand how we think and operate. We hope that will eventually lead to additional assets, but in the mean time we focus on simply running the best operation we can. MOI: We read that Mike’s friendship with the late Hooters chairman and fellow Coastal Carolina alumnus Robert Brooks played a key role in your involvement with Hooters. What is Chanticleer’s economic stake in Hooters, and what is your vision for growing that prized asset going forward? Chanticleer: It really goes back to how we got started. Mr. Brooks, who was actually a Clemson graduate, was a big donor to Coastal who lived and worked in Myrtle Beach. He became Mike’s close friend and eventually Mr. Brooks asked Mike if there was anything he could do to help him get the new company

© 2008-2011 by BeyondProxy LLC. All rights reserved.

SUBSCRIBE TODAY! www.manualofideas.com

August 1, 2011 – Page 9 of 117


Value-oriented Equity Investment Ideas for Sophisticated Investors

off the ground. Mr. Brooks had never had outside partners before, but he and Mike agreed that a good structure would be for Chanticleer to invest in a convertible note issued by Hooters of America, and then for Mike to use his previous expertise to perhaps help take Hooters of America public one day. We all went down to the corporate office in Atlanta for our due diligence and then, on a handshake, Mike and Mr. Brooks agreed to a price and general structure. We put in some of our own holding company capital and also raised some outside funds. Unfortunately, Mr. Brooks died shortly after the deal closed. As part of the investment, Chanticleer had the right of first refusal if the business was ever to be sold. To make a long story short, the business was eventually put up for sale to settle Mr. Brooks’ estate, and we brought in some great private equity partners to get the deal done. We rolled our investment into the equity of the new company, and Mike has taken a seat on the Board as part of the deal. In addition to Mike helping in any way he can while serving on the Board, we also plan to grow the brand in international markets through Chanticleer Holdings. It is a great brand that we think will do well all over the world, and we are seeing the truth in that as we’ve just recently opened our third store in South Africa. We have a great operating partner there, and all three stores have opened to great fanfare. MOI: As a publicly traded company, Chanticleer Holdings is on the radar screen of many value investors. However, the company’s small size makes it difficult to get involved in a meaningful way. Have you considered raising additional equity within Holdings, or are you focused primarily on expanding the assets managed by your Advisors subsidiary?

“[Hooters] is a great brand that we think will do well all over the world, and we are seeing the truth in that as we’ve just recently opened our third store in South Africa.”

Chanticleer: We think about this quite a bit and have raised a little additional equity along the way. We can’t get into too many details being that we are public, but we’d be willing to raise more equity if we can find the right things to put that equity into. In 2008 we actually had an opportunity to acquire two Hooters franchisees that was disrupted by the financial crisis. We are always looking and, as one might imagine, some new opportunities have come up with the name recognition that came with having our name attached to the Hooters of America deal. But as for specifics, we can’t really go into much more. As far as Chanticleer Advisors goes, we are continually trying to raise assets in the quarterly openings we have for our fund. We’ve done pretty well in terms of performance, though it has been with a small amount of capital which currently amounts to just $2.5 million. We think so far we’ve proved to be better allocators of capital than accumulators of capital! Fortunately, over that period of time we’ve focused on our process and on generating results and we think we are much better investors now than when we started our fund nearly five years ago. Of course, that doesn’t guarantee our returns will be better, but we’ve learned a lot over the past few years and hope that some of that is reflected in how we’ve evolved. Our quarterly letters in our opinion really do a good job of presenting that evolution. MOI: Warren Buffett has in the past provided guidance to shareholders on how to go about valuing Berkshire. Without providing specific numbers, could you tell us how one might think about the various components of value at Chanticleer Holdings?

© 2008-2011 by BeyondProxy LLC. All rights reserved.

SUBSCRIBE TODAY! www.manualofideas.com

August 1, 2011 – Page 10 of 117


Value-oriented Equity Investment Ideas for Sophisticated Investors

Chanticleer: At this point, second round venture capital stage is probably a better description of Chanticleer Holdings the public company than Berkshire Hathaway! The main drivers of the business are the restaurant operations and the asset management business. We think we’ve figured out what works and what we can do well, but we still need additional scale on both sides of the business. And we’re not sure a precise value can be put on those businesses at this point because they are still much smaller than we hope they will ultimately become, but the basic valuation process would be to look at the potential earnings stream of the two sides of the business in addition to the assets on our balance sheet. Most of the shareholders that we keep a more ongoing dialogue with have really invested with us because they wanted to make a bet on Mike and the team he’s assembled. We hope we are still in the early stages of what turns out to be a long and successful journey. MOI: You have generally focused on finding and investing in underfollowed small- and micro-cap public companies in the U.S. and elsewhere. What are the key criteria you use when evaluating a potential investment? Chanticleer: The key criteria are those most value investors will be familiar with: circle of competence, conservative balance sheet, management team with aligned interests, strong and predictable profitability and returns on capital, and most importantly, a great price. At the end of the day, we are really looking for incredibly cheap investment opportunities where the ratio of intrinsic value to price is high and the potential for growth in intrinsic value is significant. We spend time trying to figure out why something might be undervalued. Although just being small and underfollowed might be the reason, the investment world is too competitive to take that reason for granted. Trying to understand why something might be cheap makes us work to gather more information that will hopefully keep us from overlooking things that are both important and knowable. It also serves to help identify any potential catalysts that might reduce the discrepancy between price and value. We do an extensive amount of work before deciding to make an investment, which often involves industry analysis, historical analysis, management calls and company visits.

“We spend time trying to figure out why something might be undervalued. Although just being small and underfollowed might be the reason, the investment world is too competitive to take that reason for granted.”

© 2008-2011 by BeyondProxy LLC. All rights reserved.

One of the goals with all that work is to develop what we regard as a unique insight. In our upcoming letter we write, “We like to ask ourselves whether or not we have a unique insight. If the answer to that question is ‘No,’ or ‘I’m not sure,’ then perhaps we’re no better off than a weekend golfer challenging Tiger Woods to a high-stakes match.” Despite us all being avid golfers we obviously have no business attempting such a challenge, and we likewise are ill-advised to invest without what we describe as a unique insight. MOI: How do you generate investment ideas? Chanticleer: We read a lot, pay attention to what other people we respect are buying, follow stock idea websites, watch for insider purchases, but we generate most of our ideas by running screens in Capital IQ. Even though it is a pricey service for a small fund, we realized in the beginning that we could get a big edge with a powerful screening tool and the ability to quickly filter results to try and find attractive things. What we have found is that especially in the small and micro-cap space, you have to turn over a great number of rocks to find something truly interesting and Capital IQ helps in that regard.

SUBSCRIBE TODAY! www.manualofideas.com

August 1, 2011 – Page 11 of 117


Value-oriented Equity Investment Ideas for Sophisticated Investors

MOI: In a recent letter you discussed your views on holding cash. If we understood correctly, you stated that a modest cash position (10-15%) would likely have strategic reasons, i.e., enable you to snap up bargains should the market decline, while a larger cash position would likely reflect a dearth of compelling opportunities. How much cash have you held recently, and what does this say about your outlook for the economy or the market as a whole? Chanticleer: We ended the second quarter with just under 20% in cash. It has been considerably higher over the last 18 months, but we’ve actually put about 27% of our total current capital to work over the last six months, largely because we’ve found five new ideas that we thought were extremely compelling. Four of those investments were in companies based outside of the U.S. As it relates to the economy, we think debt matters the same way it matters to people and corporations, and for that reason we think economic growth will be slower, and the lofty corporate profit margins that prevail today are at risk. But as value investors, we don’t invest based on that thesis and we think about these things in relation to how they could affect both current and prospective investment ideas. We focus on valuing individual companies and think about how that value could change under a number of different economic and market environments. The Seth Klarman quote about worrying top down but investing bottom up is an apt one for us as well, although we try and do quite a bit of worrying from the bottom up too, especially since we run a fairly concentrated portfolio. MOI: When assessing a company’s discount to intrinsic value, do you find discounted cash flow analysis helpful or do you rely primarily on values that are readily ascertainable on a company’s balance sheet? What kind of discount to intrinsic value do you typically look for?

“…if we feel confident that a company has a sustainable competitive advantage, we worry a little less about the downside protection of the tangible net assets on its balance sheet.”

© 2008-2011 by BeyondProxy LLC. All rights reserved.

Chanticleer: We focus both on the cash flows and the balance sheet. It really depends on the investment. We’re just looking for extremely compelling value any way we can find it. We think it is extremely important to be careful when using tools like a discounted cash flow analysis. It naturally has the ability to convey significant precision, when in fact it is only as powerful as the inputs, which in our opinion are often imprecise. With that said, however, if we feel confident that a company has a sustainable competitive advantage, we worry a little less about the downside protection of the tangible net assets on its balance sheet. But if it is a company in a highly competitive industry and there isn’t something that differentiates it from competitors, then we pay a lot more attention to making sure we have downside protection on the balance sheet. As we mentioned previously, we are looking for significant discrepancies between price and intrinsic value. In most cases we are looking for situations where we are reasonably confident intrinsic value can grow meaningfully and we are buying that business at half of what it conservatively ought to be valued. Our stated goal is to produce results which over an adequate period of time outpace a simple index by at least 3% a year. If we find growing companies at half of what they are worth and that gap closes over an adequate period of time, our results should at least achieve our goal. We have been fortunate to have exceeded our goal since inception, despite a down year in 2008, as our compounded rate of return exceeds that of the Russell 2000 by approximately 15% and the S&P 500 by approximately 17%. SUBSCRIBE TODAY! www.manualofideas.com

August 1, 2011 – Page 12 of 117


Value-oriented Equity Investment Ideas for Sophisticated Investors

AKITA Drilling (Toronto: AKT.A) An Underappreciated Balance Sheet Value and One of Chanticleer’s Largest Holdings The following is an excerpt of an in-depth write-up by Matt Miller of Chanticleer. Read more at http://bit.ly/nSsLkp While there are many unique aspects to the company, the one that immediately jumps out at a potential investor is the company’s balance sheet. In atypical fashion, the company is debt free. In an industry which freely borrows to support rig construction, that is rare.  AKITA is in the process of converting many of their drilling rigs, mostly deeper though some shallow, to pad rigs. Pad rigs are more mobile rigs which allow for an assembly line-like drilling of prospects. Right now there is quite the demand for these rigs, which stands in stark contrast to the market for traditional rigs in western Canada.  As with any capital intensive business, depreciation is a significant factor. For instance, over the last ten years depreciation has represented, on average, 15.2% of AKITA’s revenues and 17% of its total costs. This makes the assumptions which drive depreciation quite important. What is particularly interesting and illuminating when it comes to assessing management is that the company depreciates its rigs over 2,000 operating days (the company does also depreciate five rigs over 3,600 days). According to my work, this is far faster than most drillers in the industry.  AKITA is currently trading at approximately 80% of tangible book value. Given the company’s aggressive depreciation rates, it is safe to assume that the tangible value of its assets is at least book value. I think there is a case to be made that it is significantly more than stated book value. In his 2009 shareholder letter, Mr. Ruud, the company’s CEO noted: “As well, the carrying value for the Company’s fleet was only $142.2 Million ($3.7 Million per rig). Although an evaluation of replacement cost for AKITA’s fleet has not been performed, management is confident that the cost to replace the Company’s fleet is significantly higher than its carrying value.”

© 2008-2011 by BeyondProxy LLC. All rights reserved.

MOI: What are your views on portfolio concentration, leverage, and the use of short selling or exotic securities? Chanticleer: Like many value investors, we believe one should concentrate on one’s best ideas, so we run a fairly concentrated portfolio in our fund. Our top 10 holdings typically make up 60-75% of our total assets, though it has occasionally been more concentrated than that. Right now our largest holding is approximately 14% of our capital. We don’t use leverage in our fund and, for the most part, try to only invest in companies we believe are conservative with their balance sheets. We don’t sell short, although we have nothing against it and think it can add a lot of value. It just doesn’t fit our temperament, and we think we’re better off looking for more long ideas, especially since there are so many areas to look at when looking at small and micro-cap companies. We also do not look at any exotic securities. We may be old fashioned, but we think being good long-only stock pickers is where our sweet spot is. MOI: What is the biggest mistake that keeps investors from their goals? Chanticleer: We’re not sure we could boil it down to a single thing, but we do think that the single biggest category of mistakes revolves around psychology. The literature is pretty well documented in the field of behavioral finance and economics, but things like overconfidence, the endowment effect, and willingness to fall for a good story are recurring patterns. For the noninvestment professionals, we find it interesting how some people can spend so much time buying certain things like a house or car but then spend so little time trying to understand the things or people in which they invest. It pays to spend your time and complete the required work before you commit precious capital. Perhaps one psychological item of note that keeps people from reaching their goals is that many people feel like they have to be doing something. We only act when we find something compelling to do and if we don’t have anything attractive to invest in, we just hold cash and keep looking. It is so easy to just be buying or selling something in the public markets, but you actually don’t have to do that. MOI: What books have you read in recent years that have stood out as valuable additions to your investment library? Chanticleer: The two that have really stood out to us this year are The Most Important Thing by Howard Marks and Boombustology by Vikram Mansharamani. Howard Marks is one of our investing heroes, and basically having him lay out his investing philosophy in the order he deems best is pretty special. And with Boombustology, we really like how Vikram Mansharamani uses ideas from different disciplines in describing the cycles of boom and bust. We also liked Ed Easterling’s Unexpected Returns and look forward to reading his new book soon. One of our favorite quotes from Howard Marks is, “In my opinion, there are two key concepts that investors must master: value and cycles.” We think a lot of value investors — especially when starting out — put all their emphasis on current value and current business conditions without thinking enough about cycles and how they affect business and investment results. All three of the books we mentioned taught us something about investing cycles, which was something we had previously not paid enough attention to. SUBSCRIBE TODAY! www.manualofideas.com

August 1, 2011 – Page 13 of 117


Exclusive Interview with Chanticleer Holdings