Mohnish Pabrai speaking with Richard Ivey School of Business

On February 15, 2012, Mohnish Pabrai gave a presentation at the The Ben Graham Centre for Value Investing (Richard Ivey School of Business, University of Western Ontario). This presentation is in the form of a video conference and isn't the highest visual quality, but it is still is a gem for any value investor.

If you aren't aware of Pabrai and his track record, his bio is as follows:

Mr. Pabrai is the Managing Partner of the Pabrai Investment Funds. Since inception in 1999 with $1 Million in assets under management, the Pabrai Funds have grown to $600 Million in assets under management in 2011. The funds invest in public equities utilizing the Munger/Buffett Focused Value investing approach. A $100,000 investment in Pabrai Funds at inception in 1999 would have been worth $809,800 as of March 31, 2011 – an annualized gain of 19.5% (versus 3.3% for the Dow).

Mr. Pabrai has been profiled by Forbes and Barron’s and appeared frequently on CNN, PBS, CNBC, Bloomberg TV and Bloomberg Radio. He has been quoted by various leading newspapers including USA Today, The Wall Street Journal, The Financial Times, The Economic Times and The Times of India. He is the author of two books on value investing, The Dhandho Investor and Mosaic: Perspectives on Investing. The Dhandho Investor has been translated into German, Chinese, Japanese and Thai. Mohnish was the Founder/CEO of TransTech, Inc. - an IT Consulting and Systems Integration company, which was founded in 1990 and sold in 2000. TransTech was recognized as an Inc. 500 company in 1996. Mohnish is the winner of the 1999 KPMG Illinois High Tech Entrepreneur award given by KPMG, The State of Illinois, and The City of Chicago. He is an active Member of the Young President's Organization (YPO). He is also the Founder and Chairman of the Dakshana Foundation (www.dakshana.org) which has sent over 200 impoverished kids to the IITs in India so far. Mohnish strongly believes in a balanced life between work, family, and personal time.

Full Disclosure: None

Passing over Micropac Industries (MPAD)

On Jan 30, Whopper Investments introduced a very simple business to his readers. I must say, I was intrigued. I researched it a bit more, starting always with the balance sheet.

The book value is 18.67M, with no debt. There is a line of credit, which has not been tapped and appears to be used by the company for liquidity crunches that may arise in their business. This tells me that management is careful and not cavalier.

Micropac has 10.06M in cash (55% of book), and the NCAV is approximately 17M.

My conservative liquidation value estimate is 14.73M.

With the current market cap of 13.54M, Micropac (MPAD) is selling under liquidation value! This should excite any Graham style value investor.

I must say that it did peak my interest too. However, I wouldn't be true to Graham and Dodd, if I didn't look for margin of safety.

Let us dig deeper. Company supplies components for OEM parts for the US military and NASA. US DOD and NASA are 76% of revenue. With US government [eventually] deleveraging there is a significant risk of loss of revenue. In fact, there has been a gradual decline in revenue over last 6 quarters. With stable costs, the income is being squeezed.  This could be due to competition or weakness in the defense sector-- it is hard to tell. In either case, this isn't good news.

I tried to see what gives Micropac the competitive advantage, and I couldn't find anything significant. Micropac own no patents, or exclusive licenses or franchises.

Micropac is making money and has enough for a rainy day (not even using the line of credit), but they might be in for a slow bleed as revenue declines.

Another thing that bothers me about this company is the 75% ownership by the 82 year old Heinz-Werner Hempel. This tells me that there is no quick catalyst on the horizon.

At current market price, I believe there isn't enough margin of safety to justify purchase of this, otherwise, fine company.

I love the simplicity of this organization and have placed it on my watch list. I will closely look at it again if Mr. Market gets even more negative and starts selling it close to absurd levels, such as 50% of NCAV.

Full Disclosure: No position.

Urbana Corp: Some discounts are just unwarranted

Over the last year, much has been written on the value blog circuit on Urbana Corporation (TSE:URB and TSE:URB.A). Instead of repeating what these dedicated value investors and bloggers have written, I will try to stand on their shoulders.

It is very obvious that Urbana sells at a discount to net asset value (NAV), which the company diligently publishes every single week-- extra points to Urbana for transparency. Using that data, I have charted the Price to NAV ratio over last two years.

Over this two year period, the median discount has been 68.3%.

As of this posting, the discount is hovering close to 50%. The reasons for this may be two-fold. (1) Financials are being sold off on the wide market. Since Urbana book is mostly financials, there is a mark-to-market pressure and then the additional pressure of this organization being a financial itself. This sounds absurd, but Mr Market is known for that. In a round about way, this can be justified by the Mr Market; "If the big US banks are selling at 50% to 70% discount to tangible book, what is the point of giving any premium to this tiny Canadian financial firm called Urbana." Furthermore, (2) According to 2010 annual report, some big institutional holder had to sell off to meet redemption requirements. This forced selling has kick started a vicious circle. It is clearly visible in the growing spread, while the NAV has been fairly flat over the same period.

The upside in Urbana at current prices is significant, but it is important to look at the downside before an intelligent investor is infatuated by the upside. After researching Urbana's history and regulatory filings, I have the following risks outlined.

• Urbana paid or pays too much for a security because their universe is limited to financials, especially in the emerging world and exchanges.
• There is disincentive to hold cash for long periods of time because of the management fee structure.
• Management is not fully aligned to the shareholders (they make more income, the bigger the portfolio)-- see blog article by Saj Karsan.
• Management doesn't prove to be an effective capital allocator in the long run.

In spite of these risks, the discount to book is unwarranted. It is especially unjustified because the management has a 10% share buyback in effect. This is a good capital allocation move and will make up for a portion of the risks outlined above.

Disclosure: I am an owner of Urbana Corp at the time of this writing

EACOM Timber Corporation: First Look

Here are my notes from a cursory analysis I did of this business. It is traded on the Canadian venture exchange under the symbol ETR. All numbers below are in Canadian dollars.

• Current price .075/shr -- i.e. 7.5 cents
• NCAV: 0.111/shr
• Book: 0.31/shr
• Current discount to NCAV: 67%
• Had a fire at a plant, lost everything there, but insurance covered it, minus a deductible. Will see that impact in Q4 numbers
• Receivables cover 40% of current assets-- very high!
• Inventories cover 46% of current assets-- very high!
• Not much cash on hand for a rainy day
• Management has been relying on equity raising and credit facility
• Cash flow positive because of equity raising done in April, 2011
• 19% shareholder dilution was done
• I don't like the over reliance on sizzling overpriced Canadian housing manufacturing sector

This one truly is a cigar butt style investment. It is selling close to Graham's famous 66.6% of NCAV. But there may be hidden value here in terms land and timber ownership-- I need to investigate that some more.


Frankly, I am not impressed with the balance sheet and cash flow statements. But, if I can find hidden value on the balance sheet, the stated book value would be a gross understatement of the actual book value.


Does this look like an interesting opportunity to the readers of this blog?


Full Disclosure: None

Opportunities exist when perception overpowers fundamentals

The following is a perfect example from Buttonwood, where sophisticated investors (such as pension funds) make irrational decisions. This particular one relates to their fear of bad optics, i.e. how they will be perceived by stakeholders if they had to report losses due to well known, long running problem.

A hedge fund manager told me at lunch today that meetings with clients often started with the question "What's your fund's exposure to peripheral European sovereign debt?"  The right answer to that question is, apparently, zero. If this attitude is common, hedge fund managers will avoid the asset class as an easy way of keeping their clients sweet. Nor do the clients want the managers to short the asset class, lest the Europeans come up with a deal at the last minute.

These clients are not sinister, top-hatted capitalists but ordinary pension funds afraid of some embarrassing loss in their portfolio. Their fear imposes a constraint on the people who look after their money. A similar process has happened at money market funds. Which fund manager wants to risk telling the clients they have lost money because of an exposure to Greek or Italian debt, stories that are all over the headlines?

Fear is often more powerful than greed.

 As a long term investor, you can take advantage of this fear, and carefully select businesses to add to your portfolio. These days, plenty of opportunities exist in European equities, Japanese equities and American financials and housing sectors.

Disclosure: None

Canam Group: Significantly inconsistent market pricing

What's wrong with this picture?

When a company is selling at low price-to-earnings ratio, it is usually safe to assume that the market has sufficiently discounted the future. Specifically, the market likely foresees significant decline in the earnings and earnings power.

If the same company is also selling for half the book value, then it can be assumed that market foresees future events to harm the balance sheet, either through major losses and/or significant negative cash flow.

If the market is right about the valuing the company at low price-to-book ratio, then the debt holders of the organization can also be expected to suffer a loss. Consequently, the debt holders should be expected to demand a higher premium from the company, in the event of a default.

However, that is not entirely the case in Canam Group's (TSE:CAM) situation-- the first two arguments are true, but not the third.

Canam is currently selling for under 5 times average earnings. This business is also available in the market at more than 50% discount to book value. However, the debentures (traded on the Toronto Exchange under the symbol CAM.DB) are hardly below par, while the stock has dropped significantly during the same time.

This can only mean that Mr. Market is overreacting to the recent bad news (i.e. dividend suspension) on the equities front, but is relatively calm on the fixed income front. The debt holders must not be actually worried about the balance sheet, otherwise they would have sold off the debentures to discount the expected future. Hence, the low price-to-book valuation on the common stock is likely due to short term irrationality rather than anything else.

As a value investor with a longer term horizon than the market, this sort of inconsistency can be an opportunity for significant gains in the near future.

Disclosure: I am an owner of Canam Group at the time of this writing.