Picture of me with Mohnish Pabrai & David Lau

I was looking through a BRk Meeting photo album of David Lau's and found this picture of me with him and Mohnish Pabrai, there's also one with Joe Koster, you can find them here:

With Mohnish Pabrai

With Joe Koster

In the second one I look a little strange, my pants were too long ;-)

Overstock CC Notes

Here are my notes to the Overstock (OSTK) conference call I think is still undervalued, and this great quarter porves they are turning around. Any notes are in italics

• Revenue 201 mln up 27%

• Fullfillment partner growth 33%

• 17.3% gross margins

• Gross profits up 37%

• Marketing expenses up 33%

• Technology and SG&A down 6%

• Operating expenses down 9%

• Expenses up 6% w/o restructuring Though a lot of this is D&A, and CapEx has been falling

• Repurchased 5% of outstanding shares at $10.81 per shares Great return on those already, may have bought on the same day I did ;-)

• 3rd consecutive quarter of positive EBITDA, $3.5 mln vs. -$8.3 mln last year which is an OK measure b/c D&A is artificially high

• On ttm basis OCF became positive, $27 mln vs -$12 mln

• $90 mln in cash and marketable securities

• SEC said break-down revenue more and estimate on expected arrival date

• NO OTHER ISSUES surprisingly, and SEC approved their partner revenue accounting

• CapEx will be falling off, D&A will go away for most part

• Wish they had purchased more shares

• Brisk revenue growth acceleration He likes the word brisk now appearently, said it twice

• “We told you it would turn around by contribution, then gross profit then by revenue… gross profit growth at 37%, contribution at 41%, that’s what we want to see.” I like how none of the journalists who said they were crap have argued against this, proof Byrne is not crazy!

• Operating expense grew faster than revenue growth, then it got under after exiting the ‘inferno’

• In Q4 2006 cc said, “Contribution is going to be close to 10%. It is going to be far better than it has been.” It’s now at 9.8%, in a quarter with super bowl commercials

• All about generating contribution dollars

• Contribution dollar growth comes on essentially same revenue, just doubled efficiency on marketing

• Had built expense structure for $2 bln company, needed to get to a $800 mln company, %down from 30% to 19.5%, a lot is still D&A and this will be dropping a lot

• Probably $10 mln in CapEx this year

• D&A dropped about $8 mln this year may make them GAAP profitable

• Said, “We’re spending a lot of time to become more profitable. And we are willing to make some trade-offs between lower growth and higher profitability.” Now EBITDA has gone from -$15 mln to $3.5 mln in two years, This is what happens when you focus on an already good business, that 'any idiot can run.'

• Done what they said they would do, restructured the business

• Gone from OCF of -$40 mln+ to $27 mln now, in two years

• Inventory turns to 27x up from >10, maybe 30x is normalized. 6.8x on direct basis, turning inventory twice as fast as used to, can grow that business without growing inventory, so w/o more capital this means even though direct business (which is selling inventory from warehouse) doesn't have high returns relative to the partner business they can still get higher returns than they had because of this vast improvement

• Huge inventory liquidation, comfortable with amount of inventory now

• GMROI 695% ttm Investopedia says this is: "An inventory profitability evaluation ratio that analyzes a firm's ability to turn inventory into cash above the cost of the inventory. It is calculated by dividing the gross margin by the average inventory cost and is used often in the retail industry."

• 2005 AMEX customer service not in top 200

• 2006 number 4

• 2007 number 4, now above Nordstrom

• Net Promoter Score at all time high at 73%, even people who contact customer service at 28%, three times average company this is from The Ultimate Question: Driving Good Profits and True Growth

• Launched Overstock Cars I think this has potential to become a big grower

• Auctions adding tailwinds in earnings, expect more in next six months

• International expect to launch in June or July Also huge potential

• Community tab

• New tab this quarter

• Prime Broker suit, in second round of discovery

• Rocker & Gradiant, has progress, Judge lifted discovery stay, will begin trading documents

• Think Rocker’s libel suit is bogus and they will not win

• In a good place with litigation

• Bear Sterns may have been brought down by illegal naked short selling

Quick Update

A combination of immense studying and staying after school with my laptop screwing up for the second time in as many months has stopped me from posting at all in the past week, and will slow the amount of posts for the time being.

I will try to start posting regularly again as soon as possible, but may only post a few times in the next few weeks, but look forward to some long posts.

-Mike

Right Price Checklist: Conclusion

· Business, and an Explanation of the Checklist
· Moat
· Management
· Financials
· Valuation

The final part of the series, I've decided to put off the psychology post until I have time to learn more and know what I'm talking about, is the conclusion.

I believe there are three crucial factors to apply in your conclusion:

• Margin of Safety
• Why it undervalued
• Catalyst

Conclusion

Margin of Safety

Margin of Safety is at the top of any value investing strategy.

It's a very easy to understand concept: when buying shares in a company make sure they are worth more than you are paying.

The thing most debatable about margin of safety is how much of is needed. To guarantee future profits I like to look for companies that poseses a 40% margin of safety between the current price and value, but for truly great companies I'd pay up to 80%, with the intention of holding them for a very long time.

Why is it Undervalued?

This question is usually found in the investigation of the company, but it needs to be restated in words, so an analyst can easily find how it will be changed.

This can be as simple as a company missing earnings or as extremely strange as a CEO reporting that Gross Margin will be down, even if that is extremely obvious and not something that one should worry about.

Catalyst

Many value investors choose to ignore this. I think it is one of the most important parts of investing, and making sure you haven't found a value trap.

These are usually easy to find, what will make the stock price reach the company's value? this can be as easy as continuing earnings growth, or more complex like a competitor raising its prices.

Buy or Sell

The last decision is when an analyst sums up all his research and decides whether to buy or sell.

To run a truly concentrated portfolio, I would suggest not buying a company unless the business is great and can be proved so by the financials, the management can run the business and allocate capital without the need of debt and there is a high margin of safety between the stock price and value.

Also, I advise holding 15 or less stocks, and even if a company passes all the above tests if it doesn't possess a good catalyst to propel the stock price in the coming years, I would pass on it.

Blockbuster

Margin of Safety

For this I will use two values, the value form Pabrai's multiple and Matt Richey's DCF.

The value form Pabrai's multiple was: $50.58 this is a margin of safety of just 13%.

The lower case scenario gave a value of $64.75, and the middle case gave $90.69, though it was $72 with a 12% discount rate. This present margins of safety of: 32%, 52% and 39%.

I'd say the range of values is from $50.58 to $72, so the margin of safety is from 13% - 39%, because best Buy dominates its industry and continues to repurchase shares I think this is sufficient.

Why it's undervalued

Best Buy reached a high of $52.29 in December, after that some funds sold their stake and in February it reduced guidance for this year and fell to $39.87, since then it's creeped up a little to $43.83 where it stands now.

Catalyst

I believe Best Buy has a few catalysts:

• Future earnings growth propelled by battles between HD and Blu-Ray and its continued market share gains as Circuit City falls off the planet or is bought by Blockbuster
• Share repurchases

Buy or Sell

This is a hard one for me, I will continue to examine AXP and some special situations at which I'm looking, and decide whether Best Buy has better potential than these, but for investors looking to find a good undervalued company I believe Best Buy is worthy.

The author owns no shares of Best Buy, this article, in no way, is a recommendation to buy or sell any securities.

Joe Koster Interview, Part Deux

In January of 2007 I posted an interview with Joe Koster, an analyst for the firm where I had interned over the summer.

Since then Chanticleer earned 68% net to investors in 2007, by mining for micro-cap value stocks and doing intensive research and scuttlebutt, and the stock Joe mentioned in the first interview,Tandy Leather, is down over 65%.

Right Price Investing: In the last interview you talked about Tandy as one of the companies in your portfolio, and valued it in the $8.50-9 range, a lot has happened since then and it's currently trading below $3 per share, where do you value it now?

Joe Koster: We think the value is north of $6 for sure.

We think it will still be worth $8-10 once they get back to a more normal environment, although the time frame for getting there may be pushed back a bit. At the time of our first interview TLF was at about $7.80 per share, so I mentioned the margin of safety wasn't really there.

We got interested again when we though it was a fifty cent dollar, about $4.25-$4.50. It is now trading for book value which we think is solid, will still make a few million dollars in a tough environment, and you get a free option on the 51% of mineral rights they are entitled to on the land they own but don't use for operations. Management is great and the current price certainly looks attractive

RPI: So in short what has happened to Tandy's business to cause it to be abnormal right now, and how soon will they fix it?

JK: It really has just slowed down, like many other retail/consumer related businesses. They had put some infrastructure in place for growth and when growth slowed, the infrastructure ate into the profits a bit.

In 1996-1998, sales were down 10%, 10%, and 13% in those three years. Operating income for those years was $(305,700), $1,189,067, and $845,625 on sales of about $28mm, $25mm, and $22mm.

So although I can't give you a good estimate as to when sales will pick back up, I can say that I am pretty confident they'll continue to make money, grow intrinsic value by some amount, and that by buying around book value, I consider to a Mohnish Pabrai type of investment -- heads I win, tails I don't lose much.

RPI: You interviewed Pete Bevelin, author of Seeking Wisdom, and link to a lot of articles about mental models on your site, how would you recommend an individual investor learn to use mental models and then apply them?

JK: I am of course still early in the process myself, but I've found that it is amazing how they find their way into daily life once you've learned some of them.

For example, I think about Robert Cialdini's models in his book Influence all the time. After interviewing Mr. Bevelin, I read Charles Darwin's autobiography and got a vivid picture of a model that is useful for analysts.

Charles Darwin went through great effort to collect facts (through direct observation) and look for disconfirming evidence before he published a theory. He spent 20 years collecting facts before he published his thoughts in what became his most famous work, Origin of Species.
That model of intense fact finding before the theory is basically just the scientific method, but it became very vivid when I read Darwin's autobiography.

My recommendation would be for those new to the mental model/latticework/Munger process would be to read Poor Charlie's Almanack and let that take you to the next destination.
Different people may be more curious about certain disciplines and choose to start that process in different places, but as Mr. Munger and Mr. Bevelin have mentioned, psychology is very important. As for ways to apply mental models, if Charlie says checklists are the best way, that is probably the way to go.

RPI: As mentioned in the last interview Chanticleer does a lot of scuttlebutt before investing, do you believe this is possible for individual investors, if not what is the main thing you look at to gauge management’s integrity?

JK: I read somewhere that Seth Klarman once had (or maybe still has) a race horse named Read the Footnotes. I think the name of that horse is really great advice for individual investors, since very few actually do read the footnotes.

Most of the scuttlebutt we do is on the small companies we're looking at and although we find it useful, we know that we also have to be careful because company management usually has a rosy picture of where their company is heading and you don't want to let that attitude influence your objectivity. It is not a bad thing that they have that attitude, it is just important to be aware of it.

For individual investors who don't talk with management or do other scuttlebutt, I think they can get great insight by following the paper trail: What is the management team's track record? What have they done with the cash? Do they do what they say they're going to do? Are their interests aligned with shareholders? I think the answers to questions like these can go a long way in determining integrity.....and then buy with a big margin of safety just in case!

RPI: You have amassed a huge store on Amazon, are there a few less well-known books you would recommend to readers?

JK: Sure:
· Seeking Wisdom: From Darwin to Munger, 3rd Edition by the previously mentioned Peter Bevelin is really great.
· Competition Demystified : A Radically Simplified Approach to Business Strategy by Bruce Greenwald is one of the best $5.49 values you can find, in my opinion.
· The Long Tail: Why the Future of Business is Selling Less of More by Chris Anderson was really great,
· As was Fortune's Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street by William Poundstone.
· It is probably on the best seller list, but I highly recommend Isaacson's biography on Einstein.
· I just bought Speculative Contagion: An Antidote for Speculative Epidemics by Frank Martin and although I'm saving it for the plane trip to Omaha, I have read his last couple of annual letters and I think that it is going to be a great read.

For more from Joe, check out his blog and Chanticleer's site.