As usual, here are a few value investing ideas from the past few weeks:

Retail Holdings (RHDGF)

This is an outstanding and well-researched writeup from the SumZero analyst community. RHDGF is an undervalued stock on a sum-of-parts basis, with significant near-term catalysts to unlock shareholder value.

It seems to be a favorite of many prominent value investors and bloggers and was recently featured by Jae Jun of Old School Value.

Aberdeen International (AABFV.PK)

Although technically from a few weeks ago, I just came across this post from Baskerville Capital on Aberdeen International, a Canadian investment company traded at more than a 50% discount to its Net Asset Value.

The company has initiated a stock buyback program, a possible catalyst for increasing the share price.

While the stock has appreciated since the original article, the author’s valuation spreadsheet is included, allowing investors to make their own calculations with new assumptions.

The GSI Group (LASR.PK)

A mainstay on Weekend Values, AAOI has another well researched post on a post-bankruptcy reorganization with The GSI Group.

The market is valuing the business based on historical sales figures, even though recent results show a marked improvement in most operating metrics.

The equity committee has done a tremendous job of increasing its ownership in the company post-reorg, and new management will have an opportunity to right the ship going forward.

Mirant Corp. (MIR)

The Manual of Ideas publishes well-research investor newsletters, and recently posted a potentially undervalued stock in Mirant (MIR).

Using industry metrics such as EV / Generating Capacity, the article argues that both companies are selling for substantially less than similar competitors.

Investing Papers of Benjamin Graham

In addition to their always impressive stock analysis and valuation work, Valuehuntr has put together a very impressive compilation of original Benjamin Graham papers. The father of value investing, Graham’s writings and books have influenced most of the great value investors.

These papers were not published in either of Graham’s well-known books and will make for awesome reading for any serious value student.

Disclosure

No positions.

Iteris Inc (ITI) reported fiscal second quarter results last week, building upon a solid first quarter.

The Sensor business remains on the upswing after an extremely difficult prior year, while Transportation Systems remains depressed due to uncertainty around governmental budgets.

Sales Highlights

Net sales and contract revenue for the fiscal second quarter was $14.1m, a 5.2% decrease compared to the year-ago quarter. Revenues within the Transportation Systems segment declined 18.5%, a slight moderation from the 19.3% decline in the previous quarter.

The Transportation Systems segment is contract-based through local, state, and federal governments. It therefore is highly dependent on government funding and can be highly volatile.

The future outlook for this segment is dependent on the passage of a new long-term Federal Highway Bill, which elapsed in 2009 and hasn’t been re-authorized. However, according to the company’s CEO, Abbas Mohaddes:

“While the second quarter’s Transportation Systems revenue decreased, we expect this segment to contribute to our growth over the coming periods. This market is showing signs of increasing traction, as evidenced by new allocated federal and local funds for transportation projects resulting in expanded requests for proposals”

Overall, total revenues were basically flat compared to the prior year, but the company has improved its product mix towards higher margin products, leading to a significant increase on the bottom line.

Segment Breakdown

Overall, gross margins were 44.7% compared to 44.2% in the prior year quarter. Iteris managed to control expenses, reducing them slightly to $5.3m, a 1.9% decrease.

Balance Sheet

The company continues to generate significant free cash flow, evidenced by the increase in the cash balance to $12.3m as of September 30, 2010, compared to $10.4m on September 30, 2009, an 18% increase.

In the same period, long-term debt decreased by 30.8% to $2.05m, and the company has a $12m unused credit line.

However, the company does have a significant amount of intangibles and goodwill on the balance sheet, a possible yellow flag. The latest goodwill impairment test showed the Transportation Systems segment was assessed at only 10% above its carrying value.

Further declines in this segment could force Iteris to write down its investment, a scenario that needs to be monitored closely.

Outlook

During the quarter, the company announced a 5-year extension with DAF Trucks, N.V to continue offering Iteris’s LDW system as a factory installed option on its heavy trucks.

In addition, Valeo, ITI’s marketing partner, announced a new contract with an OEM car company to offer Iteris’s lane departure warning (LDW) system as an option on two additional vehicles.

The LDW systems are currently only available on four Infiniti models, so this is a positive step towards returning to profitability in the Vehicle Sensors segment.

Final Thoughts

Joel Slutzky, one of Iteris’s directors, had entered into a 10b5-1 trading plan starting in July to sell 8000 shares per month for the next year, a total of 96,000 shares.

There are many reasons why an insider would sell stock (negative outlook on the business, cash flow, taxes, etc), but I generally view disclosed trading plans over a set period of time as primarily diversification plays.

(i.e. if an insider had a negative short-term outlook, he or she would sell a lump of shares right away rather than spread them out over an entire year)

In this latest release, Iteris disclosed that Mr. Slutzky had canceled his share sales entirely after only four months, or 1/3 of the original plan.

Could this be a positive sign for the upcoming quarters? It remains to be seen…

Disclosure

Long ITI

Terra Nova Financial Group Inc (TNFG) is another liquidation investment that recently completed a sale of substantially all of its assets.

Following the asset sale, TNFG will formerly dissolve the company and liquidate remaining assets, with estimated total distributions to shareholders of between $0.95 to $1.07 per share.

With the stock trading at $0.94, the high-end of this range represents a possible return of almost 14% in only a few short months.

History

Terra Nova is a registered broker dealer based out of Chicago. The stock has languished since the internet bubble popped back in 2000, and the company has a storied history – it was investigated for failing to maintain adequate procedures regarding automated trading in client accounts in 2008.

Most recently, TNFG was linked to the unusual trading action in Proctor & Gamble stock during the flash crash in May 2010.

On June 16, 2010, the company announced that it would sell 100% of its membership interest to Lightspeed Financial, Inc. for a total of $27.6m.

The purchase would be payable with an initial cash payment of $22.6m, followed by a $5.0m promissory note due within six months of closing.

After the sale, TNFG’s only assets would consist of cash that would be distributed to shareholders as part of the dissolution and liquidation of the company.

The transaction required approval by the company’s shareholders along with regulatory clearance (a voting agreement for approx. 44% of shares agreed to vote for the asset sale, almost ensuring the vote would be approved)

Timeline

On September 15, 2010, Terra Nova announced that the asset sale was approved at a special meeting of shareholders.

On October 20, 2010, the companies announced the formal completion of the asset sale for the agreed-upon price of $27.6m.

According to the press release,

“TNFG expects to make an initial distribution of cash soon after the closing of the sale of Terra Nova Financial and the dissolution of TNFG, with a further distribution being made in connection with the expected liquidation of TNFG following receipt of cash payment on the Lightspeed promissory note. “

Based on these results, the initial cash distribution should be announced and distributed very soon, likely sometime in late November or December.

Final distribution should occur by April, although possibly several months sooner if TNFG can finish clearing out all trades and obligations.

Liquidation Value

While the company hasn’t released audited financial statements breaking down the account values for its liquidation estimates, management currently estimates that shareholders will receive cash distributions between $0.95 and $1.07 per share.

With 25.05m share outstanding, the full purchase price of $27.6m would translate into a per share price of $1.10 – obviously there will be additional liabilities and expenses to wind down the company but management’s estimates look reasonable.

Return Scenarios

Note: These return scenarios do not account for transaction and commission costs, which could significantly affect the return calculations.

Risks

In any liquidation, the biggest risk is an inaccurate estimate of the total amount of distribution proceeds, causing a capital loss on the workout. The transaction could also get held up in legal or regulatory hurdles which could significantly delay distributions, potentially by years.

The risk in TNFG’s case is mitigated since the company expects to distribute a large portion of cash early in the process, allowing an investor to put that money to use elsewhere.

Specific to this transaction, there is also a risk that Lightspeed backs out of the final promissory note, although I view this scenario as remote.

Conclusion

The TNFG stock liquidation presents a solid risk/reward scenario for investors looking for special situations investments or workouts.

I have made several assumptions regarding the timing and amount of the initial distribution – modifying these assumptions will significantly affect the annualized return on this investment.

By buying now, investors are getting an (almost) free call option to roll the dice for future gains.

I’m adding TNFG to the Value Uncovered portfolio at Friday’s closing price of $0.94.

Disclosure

Long TNFG