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Oftentimes I’ve witnessed, on a plethora of investment message boards, the prideful touting of various posters annual/aggregate returns in relationship to the markets; on occasion including myself. Covestor has become a vehicle for investors to provide a basis for their boasting with intangible evidence, again, myself included. Therefore, I decided to use my self as an example with this experiment to show that, to a large degree (IMO 100%), what is stated as the ‘Covestor Return Since Inception’ does not represent the ‘Actual Investment Return Since Inception’.

The main reason for this inaccuracy is that Covestor does not weigh the Aggregate Return based off of how much capital was invested into the portfolio, rather, it weighs the Aggregate Return based off of total account value appreciation/depreciation over time, as well as other factors, completely disregarding any invested capital employed. This is a fundamental flaw in rudimentary accounting.

I’ll use my Covestor linked Brokerage Account as my example. I have four Brokerage Accounts – one in which I set into service a few days ago. From the four accounts I own I chose one of them to link to Covestor.

This account was started on November of 2007 with a meager $500 capital investment. my Annual reporting period for this account will always be in November. The total Invested capital for the fiscal years are as follows:

November 2007: $500.00 (Starting Capital Structure)

November 2008: $4,133.79

November 2009: $1,449.72

As of November of 2008, my Covestor Brokerage Account had a Portfolio Value of $1,627.47. OUCH!!! During that period, I invested $4,633.79 and lost $3,006.32 of that capital; an annual return (loss) of (64.88%). Without making any excuses and without the need of doing so – recessions are clearly difficult periods.

For the following period, I invested an additional $1,449.72 of capital into the business. This now brings the Total Invested Capital as of 2009 to $6,083.51.

As of November of 2009, my Covestor Brokerage Account had a Portfolio Value of $23,922.26. With Total Invested Capital now being $6,083.51, my Actual Annual Return for the period ending Nov. 2009 was 293.23%.

2008 Annual Return (loss): (64.88%)

2009 Annual Return (loss): 293.23%

Since the amount of capital I infuse into my portfolio is at variable times, the correct way to weigh the aggregate return is:

i = (FV/PV)^1/n – 1

i= rate of return, FV= Future Value, PV= Present Value, N= time

Another way to state this equation is:

i = (n)Root of (FV/PV)

i = 2nd Root 3.93

or i = (3.93)^.50 – 1

Either equation gives the ending result:

98.30% averaged annual return over a 2 year time period.

My Covestor account states that my Return Since Inception is 658.21% and 877.84% with Cash included. Obviously this data is incorrect as is the case with nearly every (I believe all) portfolio’s linked and especially ‘not’ linked to the Covestor platform.

Although 658% & 877% are much prettier numbers and ones that ‘have’ given me Delusions of Grandeur in the past as well as seeing other Covestor members often suffer from this ill repute, it is not the correct number nor is its method for arrival a correct process in determining the Aggregate and Annual Return.

Therefore, it is clearly possible that someone being listed on the Covestor Rankings in position #100 to have an ‘Actual’ Aggregate and Annual Return of a much higher percentile than the individual who is ranked #1; because #100 may have only invested a small amount of his capital once and never added to it again. #1, on the other hand, may have invested capital into his portfolio on a regular basis and in large quantity.

I encourage all to investigate their own portfolio’s and arrive at the proper and correct returns. You may find a number that you are more than happy with, such as I have, without the need of hyperbole.

“You don’t know who’s swimming naked until the tide goes out” – Warren Buffett

“I’m wearing underwear” – Jim Hodges

All the best,

Jim

* As of December 22nd, 2009: Averaged Annual Return = 115.39%

Here is the 2009 Annual results of operations which include adjustments to book.



Completely disregarding any adjustments to the non-cash impairment charges and accounting for only what the company ’stated’ as Net Income and assuming the company will not grow in future years (0% growth rate), ASFI is trading at a very attractive price.

In regards to today’s earnings release.

Here’s the breakdown. As of September 30th, 2008 the company had $84.93 Million in outstanding debt due to their revolving credit line (refer to page 18 of Q3). As of Q3 2009, the balance owed on that account was $35.54 M. According to the current SEC filing released today, they have paid off the entire amount. So, they spent $35.54 of cash doing so.

They also paid off $3.6 Million (that is included in the $35.54 M) by taking a $6 M loan. Therefore, they paid off $35.54 M in total but added $6 M of new debt after doing so.

Their previous Total Liabilities were $144.89 Million. Deduct from that amount $35.54 Million then add back $6 M and we come to a new Total Liabilities of $115.35 M.

The company reported that in the 4th quarter alone they had a negative Net Income of -$79 M which was due to a $137 M non-cash impairment charge in that quarter which brings their stated EPS to -$5.55 for the 4th quarter.

Since the impairment charge didn’t require a physical exchange of cash, it really doesn’t reflect the actual cash that the company made. So, if we add back the $137 M to the -$79 M that was reported, we find that the company actually made a $58 M Net Income profit which equates to $4.06 per share.

There’s one last factor. The company also states that they received a $49 M tax benefit. This item is also a non-cash transaction as the IRS doesn’t actually send them a check for $49 M but rather gives them a credit. $49 M divided by the current outstanding shares equals $3.43 per share (49 / 14.27). Since this transaction requires no physical cash, we deduct it from the $4.06 EPS and we come to an actual cash earnings of $0.63 per share for Q4.

In a previous post, I wrote that Asta’s actual cash earnings for the first 9-months were $1.46 per share. Add $0.63 to that and we find that Asta’s actual cash EPS for fiscal year 2009 was $2.09 per share.

Regardless if the general investing community realize this information or even understand it, it is correct and it’s why I am not worried if the market price jumps around tomorrow morning as it probably will. The company produced actual cash earnings nearly identical to fiscal year 2005. In 2005, the company wasn’t taking any impairment charges or receiving non-cash tax benefits therefore the comparison between today and then is accurate. In 2005, Asta traded on average for $25 per share. A very similar market price to what I’ve said for months now that Asta should be trading for now if it were correctly valued. When will this value be realized? As value investors we never know but we do know that it will happen eventually.

Here are some interesting hour long video's produced by the PBS television series
'Frontline'. 

1. Bernie Madoff
2. The Warning
3. Breaking The Bank
4. Close To Home

Gannett

The #1 reason GCI has been diminishing in market price is due to GOODWILL. In a business purchase, this represents the excess of amounts paid over the fair value of tangible and other identified intangible assets acquired net of liabilities assumed. It is also the amount of market value items such as brand, reputation, and customer service.

In 2007, before the recession, GCI’s Goodwill was valued at $10 Billion. When the recession happened, everything in the market place lost value; which makes perfect sense considering what is and has happened. When people lose their jobs, they lose value that impacts their wallets. Same goes for Goodwill during a recession. When a person loses his job, however, that doesn’t mean that he’ll never have value as an employee again. Eventually, he’ll have another job and the value of his bank account will grow. Same goes for Goodwill. When the market recovers, and it will, the value of a companies brand, reputation, and customer service will be worth more than what it was worth when it experienced macroeconomic difficulties.

In 2007 and previous to 2007, for many years GCI valued its Goodwill 3.5 times the amount it is currently valued at. A couple points to mention why a company would value its Goodwill in 2007 to be $10 Billion and then in 2009 to be $2.8 Billion is A) GAAP accounting law requires a company to value Goodwill on an annual basis based off of ‘projections’ that directly correlate with current economic conditions. So, #1 they are forced to do it. B) the company receives a substantial tax benefit by depreciating the value and claiming an income tax loss. So, #2 they want to do it because they benefit from it.

Before the recession and for many years previous to the recession, the Goodwill value was between $9 and $10 Billion. If we added that Goodwill back into the assets of the business, here is what the Book Value of the firm would, and in my opinion should, look like:

Full Year ending Dec. 2007: $39.26 per share (before Goodwill was written down).
Full Year ending Dec. 2008: $36.94 per share (after Goodwill was written down 5X less than 2007).
Quarter Report March 2009: $36.59 per share
Quarter Report June 2009: $36.95 per share

The Book Value of GCI reported by the company for the period, June 2009 was: $6.43 per share.

I propose, based off of more information than just this, that the TRUE Book Value of GCI is $36.95. I believe the Intrinsic Value of GCI is much higher; around $65 per share.

By identifying the cause, defining the cause, the reasons for the cause, and the benefits to the company, we can quickly see that indeed we are holding a position in a company that is going to pay off tremendously for us in the future.

Premier Exhibitions

This posting will be short and to the point. My good friend PlanMaestro has written extensively on Premier Exhibitions (PRXI). If you would like to know more about the company and what they do, I suggest you view his blogs here. The purpose of my writing is to show that many value investors, including well known ones, have made a mistake with PRXI.

The famous investor, Mark Sellers, gave his reasons for investing in PRXI and becoming one of the largest shareholder of the company. His reasoning included:

“In 1994, Premier was granted salvor-in-possession status by a federal court for the Titanic, which sunk in 1912 in 12,500 feet of water off the coast of Newfoundland.

Because of the court ruling, Premier has the exclusive right to recover artifacts, data, and images from the Titanic site. After several expensive dive expeditions over the years, Premier has amassed the largest collection of information and artifacts from the Titanic (in fact, it has pretty much the only legal collection of Titanic artifacts because no one else is allowed to explore the shipwreck site). The company tours the world with these artifacts, exhibiting them in museums.

This is the “hidden asset” part of the company. The market value of these artifacts is in the hundreds of millions of dollars (for example, the Titanic has 3m rivets and Premier has been offered $10,000 for just one rivet!) We feel that if Premier were to sell the artifacts, it would get a cash infusion equal to 25-50 per cent of its current market cap and still not lose much revenue because it could continue to exhibit some of the items under an exclusive licence agreement with the buyer.”

An interesting observation is that he mentions Premier was offered $10,000 for one rivet and that the company has 3 Million rivets. He goes on to say that the market value of these artifacts is in the hundreds of millions of dollars.

Where Mr. Sellers made his mistake was in his presumption that Premier OWNS the artifacts. Premier was granted salvor-in-possession status BUT during the granting, the judges ruling on the case explicitly stated that Premier does not own the 5,900 artifacts or the wreck itself.

So why did Premier turn down the $10,000 offer for just one rivet? Simply because it wasn’t theirs to sell. Mr. Sellers didn’t do his homework and incorrectly valued the business based off its assets, which technically aren’t theirs. This goes to show why it’s so important not to buy a stock just because your favorite investor buys the stock. Sometimes they are wrong.

So how is the proper way to go about valuing the business? In my professional opinion, it is to value all future cash flows of the business. Currently, Premier hasn’t fared very well at making a buck. Total Operating Expenses have increased as a margin of revenue from 33.32% in 2007 to 64.94% as of 2009. The COGS of their merchandise alone in relationship to how much revenue the merchandise item creates has increased from a 17.15% margin in 2007 to 39.81% in 2009.

Premier has been increasing their spending at the same time as bringing in less revenue. After I finished my valuation of the company, I believe the fair market value of the firm is $0.26 per share. The company is currently trading for $1.16 per share.

A final point to mention is: over the news wire last night, an article stated that Premier has gone back to court to try and claim ownership of the titanic. This action also proves that Premier does not own the assets they claim that they do on paper. Many reports have came out, including the link I’ve provided, that believe the judge will rule against them but allow them to continue displaying the artifacts they’ve collected for profit.

Finally, Mr. Sellers may not be the kind of value investor one thought he was after learning all the facts.

Additional information regarding the ownership of titanic assets:

The actual court document that proves without question that Premier Exhibitions DOES NOT own the artifacts from the Titanic or the Titanic itself.

“Following a hearing, the district court entered an order dated July 2, 2004, in which it (1) refused to grant comity and recognize the decision of a French administrator awarding RMST title to the 1987 artifacts, and (2) rejected RMST’s claim that it should be awarded title to the artifacts recovered since 1993 under the maritime law of finds. R.M.S. Titanic, Inc. v. Wrecked & Abandoned Vessel . . .believed to be the R.M.S. Titanic, 323 F. Supp. 2d 724, 744-45 (E.D.
Va. 2004).”

Fox News

Guardian News

UPDATE: After reading the above court document thoroughly, it appears that the French ruling of all artifacts that were collected by Premier prior and up to 1987 were upheld by U.S. court. There’s a BUT though. When the French granted ownership to Premier of those artifacts, Premier had to agree to NEVER sell those artifacts or dispose of them in any way. Regarding all artifacts salvaged after 1987, U.S. Courts ruled that Premier could have exclusive salvage right to them but DID NOT grant Premier ownership of those artifacts.

This information reveals that Premier, regardless of being granted ownership of the artifacts up until 1987, can not sell those artifacts under any conditions. Therefore, the asset related to the Titanic artifacts have no material value to the shareholders of PRXI.

TRID Market Report

TRIDENT GRAPHIC

TRID’s Tangible Book Value decreased 8.26% from last year balance sheet results. Regardless, the Tangible Book Value is valued at $3.05 per share compared to last year’s results of $3.50 per share. The difference in per share price is -12.88%. Today’s price fluctuation ended down at -12.65%. The interesting thing to make note of is that the starting price, before the -12.65% decline in today’s price, is the previous days $2.45 closing price. Had the -12.65% decline started at the actual value of the firm, today’s stock price would be and should be $3.05 per share.

TRID is currently 29.84% undervalued to its tangible book value which excludes items that bring very little revenue, if any, during a sale. These items include: Building and leasehold improvements of $19.47 Million, Software of $3.93 Million, & Furniture and Fixtures of $2.28
Million.

Building and leasehold improvements such as fixing a light bulb, replacing the furnace filter, & laying down new carpet are items that can’t be sold for obvious reasons. #1 little value can be found in them and #2 the building is not owned by the company and is not theirs
to sell.

Software have no value and often times legally cannot be sold since they are copyrighted by the companies that created them. Most often, the license to own a copy of the software doesn’t extend past the original purchasers of the software. Besides this, software is often outdated relatively soon due to more efficient products entering the market on a semi-annual basis.

Furniture & Fixtures have little value and have the same outcome during a sale as the rummage sales one can see on a weekly basis across America. Often times the items are overpriced by a corporation and are used to such an extent that no value can be derived from them.

As a going concern, TRID’s cost of doing business had a direct influence on their bottom line. In the past, the cost of doing business accounted for 52.32% of Revenues in 2007 and 53.47% of Revenues in 2008. It cost TRID 69.21% of Revenues for 2009. A 15.74% increase in costs. If we were to use last years percentile of 53.47% COGS and applied it to their 2009 Revenue of $75,761,000, we’d see the large difference. The resulting amount of $40.51 Million tells us that had TRID kept its costs of doing business down, they could have benefited by adding $11.92 Million to their bottom line. That’s a fair amount considering the Market Capitalization of TRID is $150.51 Million. $11.92 Million accounts for 7.92% of their overall Market Cap.

In an earlier article I wrote on my website (ValueInvestorToday.com), I wrote that the semi-conductor industry was down -31.7% overall. TRID’s revenue’s have been much worse.

Operating Expenses for 2009 were down -15.45% from the previous year and without reading the annual shareholder letter or managements annual overview, I’m certain that this was something the company exercised a majority of their time on. But, if we dig deeper into the past years, we find that in 2007 the Operating Expenses were nearly identical to this year’s. Meaning, in 2008, the company had such an increase in expenses that any decrease in subsequent years is something that it isn’t worth value to the shareholder. In 2007, TRID’s Expenses were $88.96 Million compared to this years expenses of $85.57 Million. A decrease from normal operating expenditures of only 3.81%. Hardly anything to make note of.

An item on the Income Statement of the business that we haven’t seen in past years added to the further loss in overall income. TRID lost $8.94 Million in short term investments. This tells us that the CFO isn’t doing his job very well especially given the fact that the money was lost during a period of time when the overall market has increased.

Regardless of the coming merger, TRID is swimming in rough waters mainly due to Managements inability to operate competitively. Also, regardless of this bleak opinion regarding their going concern operations, TRID is undervalued by 29.84%. The merger should instigate optimism, even if its only for a short period of time.

Equity Risk

I sold my position in VXGN today. To sum it up, an activist group of value investors initiated a proxy fight in order to liquidate the company then, recently, the VaxGen company decided to merge itself with another pharma company that was in a worse position financially than VaxGen themselves. This was a classic case of throwing good money after bad.

In the following days, two law firms filed a class action lawsuit on the shareholders behalf against VXGN for breaching their fiduciary responsibilities. In response, the activist group of investors have been selling off their 13% stake in the company and dropped the proxy fight. They are exiting out the door.

Why? VaxGen was made up of mostly cash, approximately $33.2 Million. After deducting their total liabilities, they were worth $0.83 per share, however, they had no immediate debt so the chances of them being released from much of their long term liabilities was high and therefore their cash, after deducting TL, was most likely higher. On the day VaxGen agreed to a merger with Oxigene, the company was selling between $0.70 – $0.72 per share. OXGN will issue 15.6M common shares in exchange for all outstanding VXGN common shares. For each VXGN share held, VXGN shareholders receive 0.4719 OXGN shares. At the time of the deal, OXGN was trading for $1.37 per share which makes each share worth $0.65. Today, OXGN is trading for $1.26 per share making each share now worth only $0.59.

VXGN’s net-net value, without their hard assets, was a conservative estimate of $0.83 per share and they were trading as high as $0.72 per share the day the merger was announced. Yet, they agreed to sell their entire business, including their hard assets, for $0.07 per share less than what they were even trading for on the day of the agreement and $0.18 per share less than what their cash after deducting all liabilities was even worth.

Did VaxGen break their fiduciary responsibilities? I believe they have and so does two law firms; Howard G. Smith & Levi and Korsinsky, LLP. Both firms have fired off a class action lawsuit against VaxGen. Ever since, VXGN has been plummeting in market price and value. Regardless of the outcome of litigation, it is going to cost VaxGen large amounts of money to defend themselves and the $33.2 Million cash appeal that they originally had will be greatly diminished. It could cause Oxigene to step out of the deal or it could cause VaxGen to not be able to fulfill the agreement because of a lack of funds.

In any event, none of this helps an investor. So what have I learned from this situation? I have a simple answer: That a Margin of Safety works and is the most important investment concept ever created. Even though VXGN dropped -23.61% in market price over the last few days, I was able to sell at a profit. In a normal economic environment, it was a profit that would often times beat the S&P 500. Had I not purchased using a substantial Margin of Safety on top of my already conservative valuation, I would have lost a large percentage of my investment.

Incidentally and comical to note, the BETA of VXGN is 0.97 which means it is less ‘risky’ than the overall market. For anyone that believes in BETA or the Efficient Market Hypothesis, this is just one example that BETA amounts to nothing more than hogwash. It has absolutely nothing to do with risk and is incorrect regarding volatility.

To sum it up:

1. The Margin of Safety works and is your best tool to avoid risk of loss.

2. When the group that helped to sway your investment decision runs for the exit doors, it’s a good idea to follow them – quickly.

3. Always read the SEC filings. If I hadn’t read ALL the SEC filings, and on a daily basis, I would have been like 90% of all the investors who lose money.

4. Everything about BETA is hogwash.

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