market folly

At the Value Investing Congress this past May, Guy Gottfried of Rational Investment Group pitched two stocks.  We wanted to post up his presentation (we've also posted up notes & presentations from all other VIC speakers as well).

Gottfried presented the investment case on Holloway Lodging (TSX:HLR.un) and Trans World Entertainment (TWMC) in early May.  Since then, shares are up 30% and 47% respectively.  Gottfried will also be presenting investment ideas at the upcoming Value Investing Congress in New York City in October and MarketFolly readers can receive a discount here with code: N12MF7.


Thinking Small: Scouring for Bargains in a Hot Market

- Common traits: misunderstood businesses (changed but market hasn't yet caught on), demonstrably undervalued, insiders have a lot of skin in the game, catalysts.

First idea - Holloway Lodging (TSX:HLR.un)

-  Canadian hotel REIT based predominantly in Western Canada.  Was at $2.80 at the time of the presentation ($53mm market cap, $165mm EV).  12.5% cap rate and 5.5x FCF and NOI/FCF on the rise

- Multiple catalysts.  Forced to undergo debt recap to address upcoming debt maturity - recap completed in January, diluted equity by over 90%.  Despite dilution, recap greatly enhanced margin of safety: LTV fell from 79% to 56%, implied cap rate actually increased.

- Dilution mitigated by huge decline in stock price - fell 65% to 70% on news of recap, traded under $3.00 vs $150 (split-adjusted) before recession.

- Historically mismanaged but prior management forced out along with recap.  Massive insider buying: two industry insiders bought nearly 50% of stock on the open market immediately following recap as former bondholders dumped their shares.  Industry insiders: Geosam - successful activist/control investor in Canadian small caps.  Temple - fellow Canadian hotel REIT

- Serious takeover candidate, Temple most likely buyer given geographic fit in their portfolios.  Catalysts other than takeover - share buyback, dividend resumption (suspended dividends in 2009, could yield 5% at 43% payout ratio).



Second idea - Trans World Entertainment (TWMC)

- Retailer of music, video and related entertainment products.  At time of presentation, closed at $2.25, $74mm market cap, $34mm EV.  Profitable net-net: traded at just 53% of net-net working capital yet actually makes money.  1.7x EV/FCF.

- Average net cash in past 4 quarters equal to half the stock price, at most recent quarter-end cash actually exceeded stock price.

- CEO Higgins founded firm in 1972, owns 51%, has been big buyer of stock, tried to take it private in 2008 (couldn't after credit markets froze)

- Business in structural decline but Higgins has run it admirably - closed 60% of stores in past 5 years, returned company to profitability after string of losses.  Excellent fallback strategy: 80% of leases expire by 2013 and 97% by 2015;  if company fails to sustain profitability, can shut down nearly entire store base and monetize tremendous amount of working capital

- Hidden asset: owns Walgreens in South Beach, conservatively worth 61c per share (27% of stock price).  Significant NOLs: $175mm federal, $310mm state

- Main catalyst: company either becomes consistently profitable (which will be a major surprise to market) or continues aggressively closing down stores, freeing up a boatload of cash; either way shareholders win


Embedded below is Guy Gottfried's presentation from the Value Investing Congress:




His picks are up 30% and 47% respectively over the past 3 months.  To hear Gottfried's next investment ideas at the Value Investing Congress in New York City in October, you can take advantage of Market Folly's discount to the event by clicking here and using code: N12MF7.