McElvaine Investment Trust 2011 Annual Report

Canadian value oriented fund, McElvaine Investment Trust posted 2011 Annual Report.

It wasn't the best year for the fund, but it is well worth a read for anyone of value orientation.


Disclosure: No position

Curious case of Consolidated Tomoka Land Co

I came across Florida based land and property owner called Consolidated Tomoka Land Company (CTO). CTO owns:

• 11,000 acres of contiguous Daytona Beach land, 
• 25 single-tenant properties, 
• two multi-tenant office complexes (with anchor tenants such as Bank of America Merrill Lynch and Walgreen), 
• subsurface mineral rights to 490,000 acres of land, and 
• 22 billboards.

CTO also operates two 18-hole golf courses in Daytona Beach (known as LPGA International).


CTO's book value is 113.16M or 19.41/shr. At the current price of 29.32/shr, CTO is available at a P/B of about 1.5, which is certainly not cheap by any measure.


In fact, tangible book value is close to 18.79/shr, which makes this company even more expensive.


But digging further into this company I have discovered a hidden asset that is grossly understated on the balance sheet. Specifically, the 11,000 acres of land in Daytona Beach is recorded on the book at around $3900/acre. That isn't a typo. Daytona Beach land, touching the I-95 is on the books for about $4000/acre. (see March 14 investor presentation)

The company's land straddles Interstate 95 for approximately 6.5 miles between International Speedway Boulevard (U.S. Highway 92) and State Road 40.

I see CTO has an hidden asset play which may not go anywhere in the short term. Although, interesting catalyst is already at play (read latest string of press releases), the company is hemorrhaging cash due to their Golf operation. I suspect that this will stop at some point over the next year.

That being said, this organization of just seven employees is quite a simple business to understand. Even if the company never realizes the intrinsic value represented by the land, once the company gets back on the profitability path, market will eventually reward the patient investor.

In the meantime, to wait for that day, CTO pays a nominal dividend of 4¢.

Disclosure: No position, yet

Market Climate Update

Equity markets have risen significantly since the local minima in autumn of 2011. However it is very important to note that this market rise is one of Mr. Market's classic mood swings.

Underlying Problems
Nothing of fundamental nature has changed since the autumn of 2011. The risks still abound. Euro crisis is still a clear and present danger-- albeit European banks are enjoying the vast liquidity injection in form of the ECB LTRO action. It is important to note that Euro zone has a solvency problem, of which a symptom is lack of liquidity.

Providing liquidity brings temporary relief, but this only removes the symptoms until they present themselves again. This is because the underlying problem isn't addressed. The underlying problem is large amounts of debt and an incomplete political union structure.

I believe that it is just a matter of time before the symptoms of the problem are visible again.

As for other risks, there are too many to explain here, but I will just run down my list:

• Unsustainable debt levels in Japan
• Unsustainable debt level at the U.S.
• Chinese economy slowdown
• Immense scale-back of Chinese infrastructure spending 
• Housing at very high valuations in many of the developed economies
• S&P 500 CAPE over 23

Portfolio Strategy
What is an intelligent investor to do in this scenario? With so many dangers on the horizon and the market valuation at relatively high levels, the best thing to do is wait it out. The portfolio strategy I am following is to sell my fully priced positions now to raise cash, which is about 30% of the portfolio.

My particular problem is that the market rise that started late 2011 and into Q1 2012 has raised market value of my positions significantly, but most of them are still not close to my [conservative] fair value measures. Unfortunately, my portfolio businesses have not received any buyout bids in the recent M&A activity.

This is almost exactly the same position I found myself back in 2011 when I posted these two posts.

That tactical move to build up cash in early 2011 helped me deploy it to build sizable position in Bank of America (BAC) when the pessimism enveloped it. I intend to continue to own BAC even after the recent 90% rise, since I believe the real value of this structurally crucial institution is much higher than the market is realizing. That move to cash also helped me average down on some of my other positions.

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