National Research Corporation (NRCIA/B)

National Research corporate does surveys for healthcare-related organizations.  The operating business has grown around 14%/year over the last decade.  Its CEO is obviously a Warren Buffett fan and (in my opinion) has higher integrity than Buffett.

Recently, National Research has performed a recapitalization that has created an A and B share structure.  There is some uncertainty as to the relative economic interest between the two share classes.  The B shares should be worth anywhere from 6X to 1X that of the A shares if voting rights and illiquidity are ignored.  This is a huge range.  Because of the uncertainty over the relative value of the two share classes, there are two different possible trades:

1. Arbitrage.  Go long the B shares and short the A shares.  One could make the argument that the B shares have 6 times the economic interest of the A shares.  On top of that, the B shares have higher voting power so they should trade at a slightly premium (though in practice it could trade at a discount due to illiquidity).
2. Go long the B shares.  National Research is a well-managed company run by a CEO with unusual integrity.

*Disclosure:  Long NRCIB, no position in NRCIA.

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Selwyn Resources (CVE:SWN) update

Selwyn Resources is being taken over by activist investors who will likely liquidate the company.  Originally the proxy argued that Selwyn would be able to distribute a 10 cent/share dividend.  Because Selwyn trades at 0.8/0.85 cents, the return may be attractive.  However, the company burns through a lot of cash and there may be complications to actually liquidating the company.  As well, there is a healthy dose of drama.

*Disclosure: I am long Selwyn.

Mining Mania

I used to assume that large mining companies would not chase projects with negative returns.  This is a dangerous assumption that I need to rethink.  I’m starting to realize that most large miners regularly chase projects with poor return.  Or, they engage in business decisions that don’t make a lot of sense.  I shouldn’t rely on the due diligence of senior mining companies when trying to value the assets of a junior.

Here’s my analysis of various large mining companies and why they are crazy.

Pinetree Capital (PNP) update

I’ve sold out of Pinetree at 45 cents/share and above.  While it still trades at a discount to the market value of its assets, Pinetree’s management is truly awful as discussed in my previous post on the company.

GameStop (GME) – A buggy whip manufacturer

GameStop is a leading bricks and mortar retailer of video games. This business is in a slow decline due to online competition.  The short thesis is simple… and quite subjective.  Online delivery of video games offers more value than physical delivery of games.  It’s cheaper, more convenient, and the copy of the game can’t get damaged or lost.  In my opinion, it’s inevitable that most video games will be distributed over the Internet.  GameStop’s revenues and profits will be a fraction of what they are today.

Unfortunately, predicting GameStop’s future revenues will be incredibly difficult as there isn’t a historical precedent to base predictions on.  Inflection points are hard to predict precisely.  However, GameStop’s high valuation provides some margin of safety.  If GameStop makes $400M after-tax annually (this is a little generous) and has a market cap of $6B, then its P/E ratio is 15.  That P/E ratio is too high if GameStop’s revenues were to shrink to a fraction of what they are today.

Miller Energy Resources (MILL) – This company is awful

Miller Energy is an independent exploration and production company that is mostly involved in breathing new life into old oil and gas assets.  It has many of the characteristics of an ideal short:

1. The company has been very unprofitable over the past several years.  In most years the company was GAAP unprofitable.
2. The company likely will not make money in the future.
3. The company has debt (some at 18%) so the short thesis will play out faster.
4. Insiders are overpaid.
5. The company trades at a large premium to the market value of its assets.

Unfortunately, I am not the only person in the world that thinks this stock is a great short.  Roughly 29.2% of the float is sold short and the interest on the borrow is roughly 5%.

Armanino Foods of Distinction (AMNF)

Armanino is a company that makes a variety of frozen prepared foods for the food service industry.  It is a wonderful company that has enjoyed years of growth and high returns on capital.  This company trades on the pink sheets and deregistered its shares in 2005.

P/E ratio: 15.4 (according to Google Finance)
Market cap: $46.82M
Share price growth over past 10 years (annualized, excluding dividends): 18.5%