market folly

We're posting up notes from the 2014 Value Investing Congress in New York. Next up is John Lewis of Osmium Capital who presented 2 ideas: E-plus and Rosetta Stone (RST).


John Lewis' Value Investing Congress Presentation

Osmium: concentrated (85% top 10), $100 mm - $1 bn market cap, 2-4 year hold

In the office has Wall of Fame and Wall of Shame

The Osmium 8 of how to create value, assess the quality of the business and understand incentives/cap structure
(1) Low valuation: low to MSD OCF multiple
(2) Can it continue to produce cash flow
(3) Double barrel deployment: reinvest in the business and buy back shares to create value
(4) Porters 5 forces
(5) User experience/LT client relationships
(6) Quality attributes 10%+ pre-tax margins, decent ROIC
(7) BS strength
(8) Management ownership

One-pager case studies VITC Vitacost- sold to Kroger for 50% gain
ZIPR Zip realty sold to Realogy for 90% gain
LOV Spark Networks- on-going engagement


First Idea: ePlus (PLUS)

A long term compounder in the IT space
High margin revenues, very sticky, low valuation 40% discount to peers 
Debt has to be adjusted for non-recourse piece
Have been repurchasing shares
Diverse customer base
Will grow revenues with existing and new clients as they sign up new partners 


Second Idea: Rosetta Stone (RST)

Two activists now involved
Very seasonal, high margins
Lots of capital to reinvest
Really nice educational institution products suite
New acquisitions in EU  Stock is very cheap, one of the cheapest software stocks
Problems: no strategy to create value (sounded like too much R&D), no urgency, no segment reporting (consumer vs. education), seasonal (consumer is all Q4, education Q3)
SOTP is $20-$35 based on Osmium, CEO's own estimates and Private Equity buys in the space.
Cheap even with Consumer at zero.  

Q&A: Free apps? They made a freemium product acquisition so they are in that. Berlitz is still making good money (language instruction is not dead).


Be sure to check out the rest of the Value Investing Congress presentations here.