How to invest

Written by

Jae Jun

Let’s try an interesting experiment in 2012. I don’t know whether this has been done before, but I’ve set up a voting system where you can submit a short analysis (max 350 characters) of any stock.

You can then vote up or down a submission. Depending on the numbers of submissions and votes, the top 10 stocks will be tracked in a portfolio for 2012 and beyond.

This is where we get to see whether a community portfolio will outperform an individual portfolio or the index.

You can copy and paste a URL of a good stock analysis if you wish. Just make sure to minimize the URL via bit.ly

Go submit your best idea and vote for others by clicking this link.

Click the image to go to the page.

I’ve gotten the ball rolling with DACHA which I voted down just to be fair.

Voting will remain open for a week, or until I get enough samples.

Be sure to tell your friends about it. Share it on Facebook or Twitter.

This will be a fun experiment.

Jae Jun

OSV Portfolio Performance

As you can see, I’m having a tough time of it this year. YTD I am down 4.6% which is more than 10% behind the S&P500 and Russell 2000. It’s times like this I’m glad that I can say that “past performance is not an indication of future performance”

For the second quarter of 2011, my portfolio was -7.19% compared to break even for the S&P500 and -1.61% for the Russell 2000.

The reason for such negative performance stems from my biggest holding in HHC and GRVY, weakness in commodities and a value stock continuing to get hammered.

As this is a portfolio overview, I won’t be getting into specific numbers for every company I discuss as I am just writing this off the top of my head.

Biggest Holdings

Two of my biggest holdings are HHC and GRVY. These two stocks alone make up 27% of my portfolio but I am not concerned at all about the recent drops.

Howard Hughes Corp (HHC)

Since the spinoff from GGP, HHC continues to support the theory that spinoffs make great investment opportunities. Insiders have been snapping up shares and they own a big chunk of it. Both residential and commercial land sales have been ticking up. The real estate market still hasn’t fully recovered but HHC is being active in acquiring high quality property along. Undervalued assets on its book make it a nice hold.

Gravity (GRVY)

GRVY has been a big disappointment so far. The release of their flagship game RO2 has once again been delayed to Q4 of 2011. This is probably the third time the game has been delayed since I have owned the stock, and is the cause of the price drop. Down 15% QTD.

With that said, the upside still remains. All these delays are related to business risk but the fact remains that the company is still profitable, they have been adding new titles and if  you look at the quarterly numbers, game subscriptions are increasing as well as revenue from mobile gaming which is a huge industry nowadays.

The company is still a net net.

A net net stock with low capital expenditures and operating profits is the the type of company I am willing to wait and bet on. It hasn’t been easy waiting these past couple of years, but the hardest thing to do in investing is to just stay still.

The latest game delay only caused a price drop of 6%. If it was any other company you would have seen the stock crash at least 20%, but GRVY offers a huge margin of safety which is also why I continue to remain strong on this company.

Weakness in Commodities

Although the market has rallied, commodities did not follow suit. I do not invest based on macroeconomics, but I just can’t ignore the ultra low interest rates, increasing trade deficit, national debt and a weakening dollar that should have a big impact on the prices of commodities over the next few years.

Commodities bring with it huge amounts of volatility, but by focusing on the mid to long term, I’m betting that my exposure to commodities will be a profitable one in the end.

Yukon Nevada Gold

This junior gold miner is the biggest loser and a hindrance to the portfolio at the moment being down 47.3% as of end of Q2. In Q2 alone, YNGFF has fallen 32.65%. Ouch.

I must have gone over the investment thesis for YNGFF about 5 times the past few months in order to determine whether I was missing out on something with the huge volatility and price drops witnessed by the stock. The conclusion each time has been that price is a tool and not an indicator of the company. This was confirmed by a press release stating that the company was not aware of any business activity that could materially affect the stock prices in such a fashion.

I mentioned in previous posts that YNGFF needed capital to update and winterize its facilities, and with the winter forcing YNGFF to halt operations, the company was unable to create enough cash from operations to fund the maintenance and upgrade plan.

In need of capital, management allowed its existing warrant holders to exercise at a 18% discount. You can’t blame these holders for immediately selling upon exercising.

The short term for YNGFF is stomach churning, but if management is able to achieve the stated goal of 150k ounces by end of 2011, I expect the stock price to lift off beyond $1.00 easily, and that is an understatement.

Value Stocks getting Crushed

Aeropostale (ARO)

Down roughly 30% in Q2 and 7% in June. Definitely not an investment that will work out in the near future but with the value of the stock, it’s a position that I am willing to hold and wait for. The latest drop came due to a rise in cotton prices which has affected the bottom line.

ARO isn’t the best clothing retailer out there and given the chance, I would jump at the opportunity to buy BKE, but with ARO trading below $20 and the value metrics it offers, ARO is going to be on my hold for three years and see. Given the positive FCF and health of the company, the company isn’t one that I am worried about going bankrupt.

My performance is under performing but based on margin of safety and the upside each holding offers, I’ll be able to get back in the game with a few big jumps.

Books a Million (BAMM)

I sold the position completely. The reason for buying the position to begin with was based on the fundamentals, consistency and because traditional books stores are hated by everyone.

While I don’t believe traditional brick and mortar book stores will disappear, I have succumbed to the conclusion that the industry will become smaller and BAMM will not be able to achieve returns on equity sufficient enough to maximize value.

In other words, BAMM has become a value trap. It is trading at 50% to book value, but the worsening economics and declining profitability will slowly erode the value of the stock down to where it is trading today.

The author of an article on seekingalpha does an excellent job working through all the fundamentals, but my conclusion is that this is a value trap.

I wouldn’t be surprised to see tiny losses more often now when the company reports quarterly.

OSV Passive Model Portfolio

Now time to update you on how my passive model portfolio is doing.

2011 YTD Performance Graph: +15% Price Return

2011 Q2 Performance Graph: Approx -2.5%

The model portfolio fell quite a bit this quarter as well. I removed KIRK, CMTL, BOLT and HPOL from the list in the quarter and added RIMG, DLB and LXK based on fundamentals.

Remember that this is a purely fundamentals based passive portfolio. I just ran it through the stock valuation software, checked the fundamentals, dwelled on the value based on the business position and industry and then added it to the list without much hesitation.

The performance is still doing fantastic. YTD, the price return is +15%.

As I am the one that selects which stocks to add, the model portfolio result seems to indicate that my current investing behavior includes emotion and hesitation which is affecting my overall decision and performance.

Since inception, the portfolio is up about 53% compared to the S&P 500 return of approx 20%.

OSV Passive Model Portfolio Holdings

(click to enlarge)

Disclosure: Long HHC, GRVY, YNGFF, ARO

Jae Jun

At the end of April, the OSV portfolio remained flat at 2.72% YTD total return. Markets are resilient and performing well. The year isn’t over yet and my portfolio has near term catalyst that should propel the performance if it plays out as expected.

This update will be short as I’ll provide more up to date updates int he May review.

Old School Value Stock Portfolio Performance

Transactions in April

• Sold GGP – Reduced my stake in GGP by half to move the money into HHC.
• Bought HHC – Bought after full year earnings disappointed Wall Street.
• Sold BOLT – Sold out completely. Don’t see much value in new acquisition SeaBotix.
• Bought DLB – A company that I’ve had on my watchlist for 3 years. Not a value stock, but a GARP stock I am comfortable with. Great business, strong moat, margins and continuing to expand into growing industries such as mobile devices.

Yukon Nevada Gold (YNGFF)

Definitely the toughest stock pick since VVTV. In March YNGFF tumbled down 10%. As mentioned in previous monthly updates, YNGFF is in desperate need of cash to continue the improvement to its mining facilities.

Originally, cash from operations would have been enough to handle the required working capital, but with the extremely cold winter this year, YNGFF went idle. Meaning, no cash generation. Thus the solution was to lower the warrant exercise price causing a sudden increase in selling pressure.

So what now? Well, nothing. The overall thesis of YNGFF has not changed. I have yet to see failure or success by YNGFF. Until then, price is a tool and not a guide.

Retail Holdings (RHDGF)

The biggest gainer in April helping to offset a lot of losses was RHDGF, up 25%.

No significant news broke for the price to jump that much other than a brief letter to shareholders discussing 2010 results. If you read the letter you’ll see why.

Read the letter now.

Disclosure

Long GGP, HHC, DLB, YNGFF, RHDGF

2011 1st Quarter Stock Portfolio Performance

Positive for the year, but lagging behind. Not concerned as my portfolio contains some clearly undervalued but illiquid stocks, making short term performance difficult to judge.

What’s with Mr Market?

First quarter is out of the way, and with the events that have rolled out in just the first three months alone, I am left scratching my head at how the market is doing so well. While Mr Market obviously feels optimistic, I remain on the cautious side and hesitant in adding new or big positions.

Had you told me at the beginning of the year that three major international events (Egypt, Japan, Libya) would be taking place, I would have concluded that buckets of opportunities would exist. Looking at where we are now, Mr Market has recovered and moved on from all three major events.

As the market continues on up, it is times like these where sitting and waiting patiently is one of the hardest things to do.

Retail Holdings (RHDGF)

Throughout the first quarter, I have mostly been monitoring positions and adding on drops.

One such addition in March was Retail Holdings (RHDGF). RHDGF announced that it had decided not to pursue the sale of its Bangladesh subsidiary citing “turbulent equity market conditions”.

This news brought the stock down 16% and goes to show how inefficient the market is when it comes to international micro cap stocks. Despite the cancellation of the sale, the value of the company remains the same yet it went on sale for a few days before returning to a somewhat more reasonable level.

Even at the current price at $15.70, RHDGF is undervalued by as much as 40%. With the CEO owning 20% of the company, special dividends distributed between 2007 to 2009 and management stating that they are looking to monetize assets and return it to shareholders, you have a very shareholder friendly management who understand the value of their business seeking to unlock the value.

(I mentioned this on the old school value facebook page by the way)

Here are two excellent analyses of RHDGF.

• Sum Zero analysis of Retail Holdings
• Dollars for Thirty-Cents: Retail Holdings N.V.

Meruelo Maddux Properties (MMPIQ)

This bankruptcy special situation investment sure is taking many turns.

Greedy management is now sneakily requesting an amendment to the Plan or Reorganization in which they will be able to appoint all seven board members, effectively hoping to eliminate any non insider influence. Debtors are voting to accept the request as it will only benefit them if equity holders disappear.

I bought more MMPIQ when it dropped to 40c and will be sending a letter to the Judge ASAP objecting to such amendment requests.

If you are a shareholder of MMPIQ, send your letter to the judge ASAP and speak up. Here is a sample letter.

Books-A-Million (BAMM)

BAMM is having an awful year so far with the falling out of the traditional book retailer sector. Borders group has filed bankruptcy and the perception for brick and mortar bookstores is not getting any better. But it leaves me to think that it has been overdone.

BAMM still remains profitable on a full year basis and consistent . Despite a slowdown in the fourth quarter, BAMM should be able to able to produce FCF above $15m when the annual report comes out. On this basis, BAMM would be trading at a P/FCF of 4. Flipping it over, the FCF yield is 25%.

At $4, the valuation is becoming ridiculously low. Even with zero growth, given the level of consistency and the health of the company, BAMM should be at a minimum of $6. That’s a potential 50% gain from current levels.

But with such negativity surrounding the entire sector, it will take a couple of years before the value becomes recognized or even accepted by the market.

Gravity Co (GRVY)

The year end result shows that revenue and subscription revenue decreased primarily from Rganarok Online. But the decline has been expected for many years, which is why GRVY has been acquiring games in order to further diversify their income.

The effect of this can be seen if you compare the non consolidated financial statement with the consolidated. The addition of the new games is offsetting Ragnarok’s decreasing revenue and better still, GRVY remains in excellent financial health. However, with the acquisitions, the once clean financial statement has now become messier as extra entities make their way into the consolidated financial statement.

Cash has obviously gone down with the new game purchases but overall the balance sheet remains healthy with no long term debt.

Intangibles has increased 28% which is a large jump. Should any of the newly acquired games fail, expect intangibles to written down.

A cause for concern is that accounts receivables increased 32% and accounts payable jumping 70%. While it is too soon to be alarmed at such increases, it does require monitoring.

The other big news to anticipate in the second quarter is the long awaited launch of the sequel to Ragnarok Online. This is the big catalyst that I have been waiting for. Thankfully, the current price offers a solid downside protection with an even bigger upside.

Brief Notes

BOLT: Additional information on their new acquisition is out. Seabotix looks like an interesting company but at the moment, it won’t add too much to BOLT’s operation. Now that i have the new details, I’ll be looking to unload BOLT at the right price.

YNGFF: Dropped significantly lately and the company successfully converted existing warrants. The deal wasn’t the best for the company but it certainly is MUCH better then further diluting shareholders to raise capital. It looks like the company was in desperate need for cash but once they complete winterizing the mining facilities, production can go on all year round without any downtime during the winter season.

Gold is not likely to drop any time soon and at $1400/ounce,  YNGFF will be a very profitable investment in the future. Will take at least 1 year before production can be achieved and to see the levels that I am expecting.

RDI: Land on the balance sheet remains hugely undervalued. A simple waiting game. Selling at book value but the land value understates current worth.

Disclosure: Long RHDGF, MMPIQ, BAMM, GRVY, BOLT, YNGFF, RDI

Old School Value Stock Portfolio Performance

Portfolio Movers

• YNGFF up 15%
• MMPIQ up 36%
• HHC up 17%
• SUNH up 18%

After a big drop last month, YNGFF has recovered somewhat. Recall that I said that the drop last month was not due to any fundamental reason. With mining stocks, many speculators and traders are involved and without news during the winter when operations have frozen over, these same speculators are the ones that continue to sell causing prices to drop.

I was never a gold bug, but from what I am seeing, gold prices will remain at these levels for quite some time, making the potential cash flow of YNGFF very attractive and undervalued at the moment.

MMPIQ was also up early in the month. Not sure what the reason for the run up was but with the fair value around $0.90, it is not time to sell yet. Thanks to Planmaestro for the work he has put into this distressed security.

HHC has been one of the best performing spinoffs, up over 65% since the spinoff. SUNH also has been doing well after the spinoff. Although investing in spin offs has become more well known, the returns are still favorable as the institutions who hold spinning off companies must adhere to their rules of selling tiny sized positions.

Overall, everything was up along with the markets in Feb.

February Transactions

Bought ARO

The decision to buy ARO was something I was sitting on for a while.

As I already briefly outlined in the best mid cap stocks article, ARO was one of the three that made it based on current valuation and fundamentals. ANF and AEO may be premium brands compared with ARO, but there is no premium over ARO in terms of operations.

The price should meet intrinsic value as the economy continues to improve.

Bought ITI

A microcap traffic management company that has been on my watchlist for a while thanks to a great write up by Value Uncovered (full analysis here).

With the 3rd quarter earnings report, ITI took a goodwill impairment which reduced EPS, but not cash. I took the chance to buy a small position on the drop. I am expecting the intrinsic value to be slightly above $2.

Sold CCME for 15% loss

Finally, the big news for Feb. I sold out of my CCME position completely.

The problem I find with CCME is that there is far too much noise. There is good work being done by individual investors, but the majority is noise, so I stopped listening to everything and stopped checking prices even on the day I sold. Luckily my sell trigger was met on the very next day when Global Hunter released their latest report.

Somebody told me that the probabilities of winning this CCME bet was too good to pass by, but that’s exactly why I sold. I do not agree with or like those probabilities.

Buffett’s 2010 annual letter also hit home the lesson.

It’s easy to identify many investment managers with great recent records. But past results, though important, do not suffice when prospective performance is being judged. How the record has been achieved is crucial, as is the manager’s understanding of – and sensitivity to – risk (which in no way should be measured by beta, the choice of too many academics).

The risk with CCME is the possibility of losing everything. The longs are saying that is not possible, but the truth is, it is possible with every investment. CCME has it worse in my opinion.

If you hold CCME, don’t let me influence your decision. That’s the last thing I want to do.

Great News

On a lighter note, my wife and I introduced a 5th child into our lives by sponsorship. Bladimir is a 5 yr old boy from Bolivia.

I will have to put Bolivia on the list of countries I need to visit. If you come from or live in Bolivia, let me know. I’ve got lots of questions to ask you

Oh if you joined recently and do not understand why I’m suddenly talking about children, read our movement page.

Facebook

Don’t forget to visit the Old School Value facebook page.

Disclosure

Long all except sold positions.