As usual, a few of the best value investing links from the past two weeks:

Noble Corp. (NE)

Thesis Overview. When the Deepwater Horizon disaster occurred back in April of last year, the stock prices of BP and RIG were obviously hit very hard.

Other offshore drillers in the industry were affected as well, whether or not they had exposure to the GoM. It was a classic case of an extreme event that provided a buying opportunity for value investors.

Rational Walk does a great job of describing the evolution of his investment thesis in NE.

Since the buying opportunity back in May/June, the business has went through several major changes including a large acquisition and near-term industry headwinds that caused a re-examination of the thesis (and eventual sale).

Apex Minerals (AXM:Australia)

Thesis Overview. One of the best blogs for reading about obscure stocks all over the globe, AdventuresInCapitalism does a good job of explaining his sale rationale for a small miner in Australia. The original investment thesis showcases some very detailed due diligence, and the thesis seems to have played out along the proposed lines.

However, the company announced a rights offering at only one penny, which would cause significant dilution for existing shareholders unless they participate.

Mining is a very tough business (both to operate and to invest).

Netflix (NFLX)

Thesis Overview. Netflix has been one of the most popular stocks in our weekend values series, due to the fascinating amount of research and back and forth among management, long investors, and hedge fund managers.

Throughout the back and forth, the stock has kept rising, causing a painful situation for many of the shorts.

Whitney Tilson, the famous hedge fund manager, posted his rationale for closing out his short position. Overall, I think the entire saga shows the danger of valuation-based shorts.

C-Com Satellite Systems (CMI.V)

Long Thesis. C-Com is a satellite broadband company trading on the Toronto Stock Exchange. The company went public in 2000 and has been profitable since 2005, earning very high returns on capital.

The company is trading around 25% higher than book value, with EV/EBITDA of 2.8x and EV/FCF of 4x, both extremely cheap. Even better, the stock has $0.17 in net cash on the balance sheet. Insiders own approx. 35% of shares outstanding.

However, as pointed out in the article, technology can change extremely quickly and obsolescence is a big risk. Investor relations are also less-than friendly.

Macquarie Infrastructure Company (MIC)

Long Thesis. Macquarie is a holding company with a diverse set of operating businesses with high barriers to entry. The holding company is highly leveraged, but enjoys a FCF yield of 13%.

Part of the company’s covenant agreement limits the amount of cash flow that can be returned to shareholders. As operating results continue to improve, Macquarie will be able to pay out significantly more in dividends, potentially starting in the 1H of 2011.

Using a sum of parts valuation, the current share price reflects the valuation of only one of the operating businesses (IMTT), potentially throwing in the other 3 significant business units for free.

It is a complicated but well laid out thesis.

Suggestions

If you have links or suggestions to detailed analysis from other value investors, please drop me a line using the Contact Form.

I’m always open to ideas from other investors, especially for a thoughtful and well-researched investment articles.

Disclosure

No positions.

Last week, NOOF reported earnings for the Q3 2011 fiscal quarter. Despite mixed results, the stock responded positively to the news, ending up 2.44% on the day.

The stock had run-up almost 17% leading up to the announcement, and the momentum has continued since then.

I think most of the bad news has already been priced into the current stock price.

Going forward, domestic results should continue to show signs of stabilization and the balance sheet should continue to beef up via margin improvement and cost savings from the upcoming move.

Financial Results

Revenues for the quarter jumped 23% to $14.2m from $11.5m in the same quarter last year. This is the first quarter in quite a while that has shown a measurable increase (last quarter’s results showed mostly flat revenue figures)

The majority of the increase was in the Film Production Segment, as the company completed one of its producer-for-hire arrangements. However, the increase in revenue was not without costs, as the company’s COGS increased by approx $3m, leading to much lower margins.

The segment did manage to return to profitability in the quarter, reporting an operating profit of $0.3m to draw almost break-even through the first 9 months of fiscal 2011.

The Transactional TV segment continues to stabilize, with revenues down 3% compared to the prior year quarter. NOOF’s international expansion is progressing in both the VOD and PPV channels and will continue to be the key source of growth.

Through the first 9 months of 2011, revenues were $37.8m compared to $35.3m in the same prior year period. International sales now make up 15% of total revenues compared to an 11% share last year, growing 51%.

Operating income through the first 9 months was $0.6m compared to $3.7m in 2010. The decrease was primarily due to an asset impairment charge of $0.6m, increased costs associated with the upcoming location move, and a shift in sales towards the lower margin segments.

The balance sheet remains rock solid, with $14.7m in cash and working capital of $21.3m. The company extended its $5m line of credit until Dec 2011.

Due to the large D&A expense, the company continues to generate solid FCF.

Conference Call

On the international expansion:

“Within this transactional TV segment, we continue to have success with our international expansion. We are now distributing content in over 28 countries”

“we are continuing to experience a growth trend within our international distribution, and are currently generating approximately $1.5 million per quarter from this international revenue.”

On the profitability of the Film Production segment:

“We’re focusing our efforts within this segment on the profitable components of the business, which has allowed us to take advantage of reducing the segment’s overhead and improve margins, which should become visible in fiscal 2012.”

On the upcoming location move and equipment upgrades:

“By executing our equipment upgrades to current with the relocation, we expect to realize cost savings and minimize the operating risk that goes with such major upgrades. We originally expected to begin construction in fiscal year 2012, but due to timing and additional cost saving opportunities, we are beginning the relocation in Q4 fiscal 2011.”

Conclusion

There is no doubt that the company has run into some problems outside of the main business segment, leading to the writedowns over the past 2 years. However, it looks like management is now focused on profitability headed into fiscal 2012.

(The financial statement notes also show that the co-Presidents of the Film Production segment were let go in September/October last year. Hopefully this means that the bad decision making and poor results are behind them)

Going forward, management is very bullish on the cost saving potential of the new facility. There are upfront costs for such a move, and the company expects to realize those costs in the next two quarters.

Combined with the heavy equipment investments (which were needed anyways), these costs will continue to depress profitability for the next two quarters but should pay off in the long-run.

This faith is reflected in continued institutional support, with Baker Street Capital continuing to buy up shares at a rapid pace.

Since disclosing an initial 6.3% position on Dec. 21, 2010, Baker’s recent 13D/A filing shows that the stake has grown to 7.9%, with almost 200k shares recently purchased north of $2.00.

Despite the recent run-up in price, the stock still trades at very low multiples (EV/EBIT – 4.01 or EV/FCF – 2.7 based on 5yr averages).

Disclosure

Long NOOF

In Part I, I detailed my entry into the value investing discipline with a focus on dividends, free cash flow generators, and CROIC.

Here is the next (although likely not the final) chapter in my investment philosophy.

Special Situations or Workouts

Influenced again by Fwallstreet, along with Joel Greenblatt’s book You Can Be A Stock Market Genius (one of the best investing books out there), I began looking for workouts and special situation investments.

These are event-driven events, such as merger arbitrage, going private transactions, self-tender offers, spin-offs, and liquidations that are often overlooked by the broader market because of their unique characteristics.

They are a nice supplement to a traditional value investing portfolio, and can provide nice returns, especially on an annualized basis.

I completed my first successful merger transaction, picked up free money as an odd-lot investor in several tender offers, and saw through a microcap going private transaction.

I continue to keep an eye out for new transactions in this space, but have gradually put less emphasis on these plays.

In many cases, upside is limited due to the nature of the event (such as a fixed price for a tender offer), and the downside can be extremely painful.

Also, when the stock market is on a big upswing, I’d rather put workouts on the back burner and try to find undervalued stocks with much higher upside on an absolute basis.

NNWC – Getting the Business for Free

In addition to DCF, EPV, and other valuation methodologies, one of the simplest involves finding businesses that are trading at a discount to their Net Current Asset Value (NCAV).

This is an investing philosophy that goes directly back to Benjamin Graham’s teachings.

According to Graham, picking up businesses that are selling at a significant discount to their net current assets (once all liabilities have been subtracted out), will provide a basis for solid returns.

Even better, some stocks even trade for less than their Net-Net Working Capital (NNWC), an even more conservative estimate of liquidation value.

In the depths of the recession, many solid if unspectacular businesses were trading for less than the net cash on their balance sheet – basically, you were able to buy the cash at a discount and get an entire business for free!

My most successful investment on ValueUncovered, CHBU, was a microcap that was trading at a large discount to net cash.

This is one of my favorite investing methods, but suffers from a lack of qualifying companies during a booming market.

Venturing into the OTCBB and PinkSheets

My new favorite!

As the market continues to heat up, fewer and fewer businesses in the broader market have a large enough margin of safety to satisfy my requirements. I’ve started delving into the world of nanocap stocks trading off the major exchanges, the tiny of the tiny.

One of the core tenants of value investing is finding situations that are being missed by the rest of the market.

Logically, the tiniest stocks – the ones that are too small for Wall Street and the major fund managers – are often the ones trading at the largest mispricings.

While there are many scams, other stocks in this category are hard-working family-owned businesses that have been around for generations. Many of them moved off the major exchanges due to the high costs of compliance, and yet continue to published audited financial statements and communicate with shareholders.

Along with this transition, I’ve also found that I’ve greatly simplified my valuation methodology.

Rather than get caught up in analyzing growth projections or worrying about discount rates, I look for businesses trading at a low multiple of free cash flow or operating income. A solid (and simple!) balance sheet certainly helps to provide downside protection.

More importantly, I search for catalysts – an event, announcement, or influence that catapults these small unknown stocks towards reaching their true intrinsic value.

The importance of catalysts cannot be understated in the microcap world. Otherwise, many can languish for years, still trading at a discount but slowly eroding any margin of safety.

In my view, the thrill of finding a situation that is being missed by the rest of the world is unparalleled!

Conclusion

The good news is that many of these investing principles are not mutually exclusive.

• I still calculate CROIC for the microcap .PK stock I’m doing due diligence on
• I still stumble on liquidations and small workouts with substantial margins of safety on the OTCBB
• I still keep an eye out for chances to invest in profitable net-net’s
• I still find stocks that are one catalyst away from multi-bagger territory

Traditionally, I used stock screeners to find stocks that matched my criteria.

However, I haven’t found an accurate screener for stocks trading on the Pink Sheets (if you do, please let me know!).

So investing in this space requires more legwork and discipline, but I believe it has the potential for the most rewards – there is a reason that Buffett guaranteed he could make 50% per year with a small portfolio.

With that in mind

I’m going through every Pink Sheets stock one-by-one.

I’m through several thousand so far with a few hundred left to go.

Gotta be some value in there right? 🙂

Disclosure

No positions.