• Companies with a business that has fundamentally changed with the events of the past two years. For the purposes of this exercise, I am assuming this could be the reason why the share prices are depressed and may not return to their pre-recession levels. Therefore I have discarded them.



• Those companies with businesses that remain fundamentally intact, but are suffering from the reduced economic activity that accompanies a recession. If these companies can survive the recession, then it may be a matter of "just add water" or in this case "economic activity" for their share prices to recover to pre-recession levels.
  

Many of the companies in this later group are trading at 10% to 20% of their pre-recession levels. If it took 5 years for the effects of the recession to dissipate and the share prices to return to their pre-recession levels - it could still be a nice return. I can afford to be patient.

Over the next few weeks, I will make a few postings about some of the companies I have identified. I hope you find them useful and I would love to hear your comments if you think I am way off base.

To kick things off, let's start with TravelCenters of America (TA). It traded between $40 and $47 in mid 2007 and is now trading for between $4 and $5.

This business is fairly simple to understand. You have probably seen them on the highway. The provide gas and food to travelers with a special focus on truckers. In fact, they have a whole range of services to make a trucker's life better ranging from the basics like showers to large-scale parking lots to truck repairs.

In a recession you would think the number of trucks on the road transporting goods would fall off and adversely affect a business like TravelCenters of America and you would be right. Here is what management said in their latest 10Q:

"We believe the same site fuel sales volume decrease resulted primarily from a decline in trucking activity attributable to the significant decline in economic activity in the U.S. throughout 2008 and continuing into 2009, particularly the declines in the shipments of durable goods, including new home building supplies, as well as a decline in imports into the U.S. that are transported by truck combined with increased fuel conservation efforts by truck operators throughout 2008 and continuing into 2009 as a result of the historically high cost of fuel in 2008."

"We believe the same site nonfuel revenue decrease reflects decreased customer traffic in our travel centers as a result of many of the factors affecting our fuel sales volumes, and also resulted because our customers have reduced discretionary spending as a result of the recent U.S. economic recession." 

These comments ring true to me. Encouragingly, things seem to be improving. Their year to date volume reduction was 10.4% compared to only 3.6% for the September quarter:

"On a same site basis for our company operated sites, fuel sales volume decreased by 159.5 million gallons, or 10.4%, during the nine months ended September 30, 2009, compared to the same period in 2008." 

Versus

"On a same site basis for our company operated sites, fuel sales volume decreased by 18.0 million gallons, or 3.6%, during the three months ended September 30, 2009 compared to the same period in 2008."

Recent reports from trucking companies like Con-way (CNW) indicate that they are also seeing volumes increase:

"The demand environment in the Truckload segment also appears to be strengthening. We saw an unusually strong amount of activity in December and the January bid cycle showed firming in pricing with some early bids coming back with low single digit increases. A number of signals would seem to indicate that a recovery is beginning to take hold in the truckload market. After what we've been through in the last year, that's very encouraging."

If other trucking companies are experiencing similar improvements in activity, then that can only be good for TravelCenters of America (TA). If trucks are moving they need fuel, servicing, and repairs. Their drivers need food and drink.

You might want to do some further due diligence by looking at comments from other trucking companies like YRC Worldwide (YRCW), Fedex (FDX), United Parcel Service (UPS), etc. But for me, I am satisfied that the recession would have caused a significant drop in business and that the business will probably come back as the economy recovers.

The next question is, can TravelCenters of America (TA) survive until the economy does recover. The good news is that over the past three quarters the company has reported - the cash flow has been about break even.

The screenshot from Yahoo shows a combined $40 million positive cash flow over the 3 quarters. But there are two adjustments you need to make:

1.       Add $5 million capital they invested in a related insurance company, and

2.       Subtract $45 million in rental payments they deferred (This rent was expensed on the P&L, but the payment was deferred under an agreement with the landlord. I will discuss this rental deferral further below)

Make those two adjustments and you end up with an adjusted Net Cash Flow of zero through what has been a terrible economic time. If they were not burning cash during 2009, then I think they can hang on till the recovery arrives and makes them profitable.

Another strength of the company is its cash position. TravelCenters of America (TA) had $185 million in cash on its balance sheet at the end of September. $90 million of that is earmarked to pay the deferred rent referred to above by July 1st 2011. So a more realistic cash figure after deducting the payment of the deferred rent is $95 million (compare this to the market capitalization of around $80 million).

Some people see this deferred rent liability as a negative, but I do not because it appears they can afford to repay it when due. In fact, I view this "rent deferral" arrangement as a positive because it shows they have a supportive landlord.

I had a look at their competitors to see if there were any major changes that would negate the benefits of a recovery. The wildcard is the bankruptcy of a competitorcalled Flying J Inc and what will become of its business. Other competitors include Pilot Travel Centers (who may purchase Flying J), Loves Travel Stops, The Pantry (PTRY), and Susser (SUSS).

My view is selling gas and diesel will always be a highly competitive business. I do not think this fact has changed since the company's shares traded at $47 in mid 2007 and I do not expect it to change in the future. Therefore it does not adversely affect my belief that as a recovery comes to the economy, a recovery may come to the share price of TravelCenters of America (TA).

Other Possible Weaknesses to be aware of

Percentage payments based on revenue or gross profit.

The company has a number of arrangements where it has to pay a royalty or management fee based on certain revenues or profits. An example might be the fast food franchises like Subway and Popeye's Chicken (AFCE) that operate in some of their centers. Paying these franchisors a percentage of gross is standard business practice. In fact, these fast food brands could encourage people to pull into the travel center. Plus they are a variable cost rather then a fixed cost - this gives the company more flexibility in tough times. You need to decide if you think the negative is offset by the positive.

They do not own their travel centers

The company has long term leases on their travel centers from what appears to be a supportive landlord. When it comes down to it, they are a retailer of gas, diesel, food, etc. Most retailers rent their real estate - so this does not concern me overly.

Related Parties

This is something I would like to see cleaned up as it is too complicated to make the true motivations of all parties transparent. This quote from their 10Q says it all:

"We were formerly a 100% subsidiary of Hospitality Trust and currently Hospitality Trust is our principal landlord and owns 1,540,000 of our outstanding common shares.  One of our Managing Directors, Barry Portnoy, is also a Managing Trustee of Hospitality Trust and is the Chairman and majority owner of Reit Management & Research LLC, or Reit Management, our management and shared services provider.  Thomas O'Brien, our other Managing Trustee, and our President and Chief Executive Officer, is also an executive vice president of Reit Management.  Andrew Rebholz, our Executive Vice President, Chief Financial Officer and Treasurer, is a senior vice president of Reit Management.  In addition to providing services to us, Reit Management also provides services to Hospitality Trust.  As of September 30, 2009, we owned a 16.67% share of Affiliates Insurance.  The other shareholders of Affiliates Insurance Company are Reit Management, Hospitality Trust and three other companies to which Reit Management provides management services, and all of our Directors are also directors of Affiliates Insurance."

All three of these possible weaknesses were there in mid 2007 when the shares traded at $47. So if we are comparing like with like, they cancel each other out anyway.

Conclusion

Ask yourself these questions:

1. Will people continue to need to stop on the highway to buy fuel, food, and services?
2. If so, are the volumes likely to recover to the mid 2007 levels?
3. If so, is there any reason why TravelCenters of America (TA) would not also recover to those mid 2007 levels in the long term?
4. If you paid $5 for a share today, would you be happy with the return on your investment if the price grew to $20 or $30 or $40 over the next five years?

I hope you find this an interesting prospect. Verify and double check my reasoning to make sure it is sound. Do the research yourself to determine if this company should be part of your portfolio.

Related Stocks:  AFCE, CNW, FDX, HPT, PTRY, SUSS, TA, UPS, YRCW

Once most of its revenue came from the USA. Going forward their major markets are likely to be China and India. UTSI has exited some businesses that were not working to focus on their core businesses that are strategically important. According to their SEC filings, they are:

• "Multimedia Communications-Focused on development and market opportunities in IPTV solutions and Wireless infrastructure technologies.
• Broadband Infrastructure-Focused on our portfolio of broadband products.
• Handsets-Focused on mobile phone business with continued focus on the PAS and CDMA handset market, as well as data cards markets. 
• Services-Focused on providing services and support of our Broadband Infrastructure and Multimedia Communications product lines."

The company recently said:

"UTStarcom is the IPTV market share leader in both China and India.

UTStarcom's RollingStream® IPTV system provides customers with advanced video services such as interactive television, digital signage, mobile TV and distance learning programs. UTStarcom has announced IPTV deployments with Bharti Airtel, BSNL/Aksh, Mahanagar Telephone Nigam Ltd. (MTNL)/Aksh and United Telecoms Limited in India; China Unicom and China Telecom in China; Sri Lanka Telecom in Sri Lanka; Softbank in Japan, Brasil Telecom in Latin America and Markwell in Taiwan.

UTStarcom is the market share leader in India's broadband market.

UTStarcom's broadband solutions enable the deployment of IP-based, high-speed Internet, voice, data and multimedia services over wireline and optical networks for service providers such as Bharat Sanchar Nigam Ltd. (BSNL) and United Telecoms Ltd."

Plus they have just announced distribution arrangements in the South American market - another huge growth region.

I can believe it is sensible to exit some businesses to focus on businesses that are important to your core business strategy going forward. Unfortunately it makes it hard for me to get an accurate read on how the business is currently travelling, which is why I think this company is a bit of a gamble - and should carry a discount until future visibility improves - but if you can pick it up at the right price, why not.

Yahoo shows the company with

• a market capitalization of $286 million
• no debt.
• $290 million in cash and short term investments on their balance sheet as at June 30^th 2009.

So it looks to me, that the amount I spend to buy a share today is covered by cash and short term investments. Since UTSI has no debt, it is sort of like everything else comes for "free". So what could we get for free?

• $170 million in real estate
• The 10Q filed on August 7^th with the SEC says "the estimated fair value for the Hangzhou facility to be approximately $170 million at June 30, 2009, or approximately $8 million greater than the carrying value."
• IPTV market share leader in China.
• IPTV market share leader in India.
• Broadband market share leader in India.
• Exposure to these verticals in other developing markets

So is UTStarcom (UTSI) a falling star or a shooting star? I placed my bet and bought some of their shares.

But there are a lot of reasons why you may bet the other way:

• Why didn't the businesses they exited work?
• If they couldn't get those businesses to work, why should we believe these will?
• Changed structure of business makes it difficult to ascertain the company's likely performance going forward.
• The company has lost a lot of money in the past, how do we know they will not do so in the future?

I was prepared to put those concerns aside because - to put it bluntly - with the market leadership positions the company says it holds in strategic verticals in massive markets like China and India - either this management team will make it work or somebody else will. I am betting that somebody else would be prepared to pay enough for these strategic positions to give shareholders a return on the company's current share price.

Which way are you going to bet?

Related Stocks:  UTSI

According to Yahoo, Acorn (ATV) have a market cap of $110 million dollars, but are sitting on $139 million in cash.

Apart from buying a dollar for 80 cents, there are many other things to like about Acorn. But first let me briefly tell you what they do.

Acorn (ATV) are in the business of selling stuff to Chinese consumers. They claim to be one of the largest TV direct sellers in China both in terms of revenue and air time purchased. Acorn also sell through a nationwide distribution network, catalogs, third-party bank channels, outbound telemarketing center and over the web. In short they are learning the best ways to sell to Chinese consumers and I think that in itself is valuable intellectual property that gives Acorn (ATV) lots of opportunities.

A negative is they lost money last year, but based on the 2009 guidance they confirmed in August, they are expecting a strong return to profitability this year:

"Given the Company's strong financial results for the first half of 2009 and positive outlook for the remainder of the year, Acorn reaffirms its guidance for 2009 of net revenue in the range of $310.0 million to $350.0 million, and net income attributable to holders of ordinary shares, excluding share-based compensation expenses and investment income, to between $14.0 and $16.0 million, in line with the Company's statements in May 2009."

So we are looking at buying a dollar for 80 cents and getting a 15% return in terms of net income this year.

Not bad - but that is not what I like most about Acorn (ATV):

China - During these tough economic times, China has remained an engine of growth. With its traditional export markets doing it tough, it is going to look more and more to its domestic market (the consumers Acorn (ATV) sells to) to drive its growth in the future. In other words, the Chinese government is going to be encouraging Acorn's target market to buy more stuff.

Currency - Over the long term, I think the Chinese currency is going to continue to strengthen against the US dollar. This will compound the profits generated by Acorn (ATV) for US investors i.e. the profits they generate in China will be worth more US dollars because of the exchange rate movements.

Hidden Asset - They also have an investment in a company that produces software for share traders. With the Chinese stock market being what it has been, I can understand that being very popular. From what I gather, Acorn (ATV) used its distribution channels to sell the share trading software into the marketplace but government regulations now prevent that. Last Quarter they sold part of their holding for a handsome profit - but if you listen to their earnings call, you will realize they are holding on to a large chunk of equity in the company to cash in on when this software company has its IPO. How much is that worth? I do not know - but it could be a nice bonus.

Share buy backs and special dividends - According to the earnings call, they had been buying back shares (why wouldn't you when you can buy $1 in cash for 80 cents) but stopped because the market was thin and it had the potential to artificially inflate the share price. They were questioned on this during the call and the possibility of paying a special dividend to shareholders was also raised. You really need to listen to that conference call to get the context of this. I do not want to overstate it or understate it. Take the time and listen to it. For me, I liked what I heard - although I think some of the questioners could have done a much better job nailing this down.

Thin market - If the market is so thin that a share buy back drives up the price, won't the same thing happen when the good news about the company starts to get out. Lets face it, there is little research done on this company, not even on the investment blogs. That will change as the company's success grows and with luck the price will respond.

US Listing - I want exposure to the Chinese marketplace, but I feel more comfortable doing so with companies that are traded on the US stock market - at least I know they will be subject to some well known US regulations. Their CEO and auditors should take those regulations seriously.

All of the above are great - but they are not what I like best about this company.

So you want to know what I like best?

You have probably heard the saying that it is not the best product that conquers the market, but often the best marketers. Well Acorn (ATV) is a company with strong marketing capabilities that is increasing its focus on proprietary products - their marketing strength could establish market leaders that then can be spun off - as they are talking about spinning off their investment in the share trading software company I mentioned above.  Remember China is a developing market and tomorrow's market leaders are being born and marketed today. A spin off every few years on top of their organic growth could supercharge the returns on Acorn's (ATV) shares.  

Reading their earning report, they already have a few possibilities in their stable:

"Ozing, the Company's electronic learning product and Meijin, the Company's electronic dictionary, continued their recovery, benefiting from the Company's returned focus to building propriety branded products. In the second quarter 2009, sales in Ozing reached $8.1 million from $2.8 million in the same period in 2008. The increase in sales for Ozing also included the addition and growth from the Company's touch reader product series, which was introduced in the third quarter 2008. Sales for Meijin in the second quarter grew 12.4% to reach $1.8 million from $1.6 million from the second quarter 2008. Growth in sales of our Ozing and Meijin products was driven by increased advertising time, improved technology, competitive pricing and consolidated distribution channels."

I like the company and have invested. Check it out yourself - you may like it as well.

Related Stocks:  ATV

1. the owner and licensor of the largest group of sofabed specialty retail stores in the United States,
2. the largest specialty retailer of leather furniture in the United States,
3. the licensee of two Ashley Furniture HomeStores, and
4. $6 million in cash?

No, that is no misprint - you get all that for less then a $4 million market capitalization.

You are still waiting for the catch - aren't you?

Check it out for yourself. The company is Jennifer Convertibles (JEN). I think it would cost more then $4 million to build their brand.

Not surprisingly, they have been hit hard by the recession, but they seem to have a good chance of surviving it. They are closing some unprofitable stores and cleaning up some "related party" issues that should position them well for an up turn in the economy.

Their CEO, Mr. Greenfield, said on Tuesday July 14:

"We are still very optimistic about the future. When either the economy begins to strengthen or our new marketing initiatives take hold, we have positioned ourselves to quickly resume sales momentum with a highly efficient  infrastructure and a very competitive product mix. Our Ashley division continues to grow, producing about 15% of revenues and increased profitability from the second fiscal quarter."

I am a believer, I purchased their shares yesterday for 54 cents each - a significant discount to the 85 cents cash per share they held on May 30th.

Before I close I want to tell you a little about their "cleaning house" with respect to a related party matter. It seems they purchased inventory from a related party (I am always suspicious of these sorts of arrangements - scared they are skimming off profits for the related parties. You need to read the 10Q for yourself, it is a little unclear to me. I think they are saying "Caye" is the related party - but I may have misunderstood - so double check for yourself.). But it seems they are unwinding that arrangement. Their July 14 press release said:

"On July 10, 2009, the Company entered into a letter agreement with Caye, the major supplier for the Company, pursuant to which it agreed to pay down its debt to Caye by approximately $400,000 in exchange for Caye releasing their security interest in all of the Company's assets and terminating all obligations under the Credit Facility. In connection with the release, the $1,000,000 that was required to be maintained by the Company in a restricted deposit account is unrestricted and available for operating purposes. In exchange for this release, Caye has provided the Company with $500,000 of trade credit. Neither Caye nor the Company will incur any termination costs or penalties as a result of the termination of the Credit Facility.

During January 2009, the Company began a transition from Caye to the Chinese
supplier which currently manufactures approximately 95% of the merchandise ordered through Caye. On April 13, 2009, the terms of this agreement were restated to provide, effective August 1, 2009, vendor terms of 150 days without interest for up to a balance of $10,000,000 in purchases though September 2010. There is no security interest connected with this extension of credit and certain terms will be reviewed October 31, 2009.

Commenting on the changes to the Credit Facility, Mr. Greenfield said, "We are extremely pleased with the terms of this new credit facility. We have been able to release $1,000,000 that had been restricted which now can be used for general
corporate purposes, extend the terms for payments, and reduce potential interest expense, all without encumbering our assets. This should provide additional liquidity during this difficult economic period."

There are other related party matters that the company is still involved in that I would like a lot more transparency and preferably unwound:

1. As at May 30th 2009, they were owed $3.6 million by a related party. Why? When will this be repaid? What security does the company have? How did it come about in the first place?
2. There are 19 licensed stores owned and operated by a related company on a royalty free basis. Why is the related party not paying a royalty?

Another interesting note from the company's press release was:

"We have retained the investment banking firm of TM Capital Corp. to assist us in the evaluation of our strategic alternatives."

This could indicate that they are looking at ways to increase shareholder value. With the market cap at less then $4 million - I would think one of those alternatives would be to take the company private.

As I said above, after weighing the pros and cons, I decided to buy.

What do you think?

Related Stocks:  JEN

But the question has been when and how. Like I, you have probably heard of that Chinese proverb that goes something like "never try and catch a falling knife".

Over the past weeks, news has slowly filtered out that residential real estate sales have either bottomed or are in the process of bottoming (and we all hope that news is right). This news has motivated me to action, albeit cautious action.

I have had a look at the home builders like:

Toll Brothers (TOL)

DR Horton (DHI)

Hovnanian (HOV)

Pulte (PHM)

etc.

But I find it hard to understand the competitive advantage of one over the others. So I turned to suppliers and found myself in a similar situation.

If you are feeling the same way, you may be interested in taking a look at Market Leader (LEDR). They supply software products and services to real estate agents, teams, and brokers.

Now as you can imagine, these real estate agents, teams, and brokers have been doing it tough over the last little while which has adversely affected Market Leader (LEDR). Even with the recent pick up in housing sales, I understand their commissions are still falling.

But as the saying goes, nothing happens unless a sale is made. If the housing market is to recover sales will pick up, so will real estate broker commissions, and so (I hope) will the revenues for Market Leader (LDR).

They have competitors like Move Inc. (MOVE) who run realtor.com etc.that you may want to check out as well.

Personally I felt LEDR was a better place for my money though.

LEDR has approx $2.30 in cash per share and I was able to purchase my shares yesterday for $1.87. Plus they have this software business with revenues of around $30 million a year.

Yes they are making losses - not huge when compared to their pile of cash - and I expect they will become nicely profitable as the real estate market recovers.

There is no debt or refinancing to worry about.

As I said, to me it looked like a safe way to get some exposure to a recovery in the residential real estate market. Have a look - you may like it as well.

Related Stocks:  DHI, HOV, LEDR, MOVE, PHM, TOL

So what was your answer? $5, $10, $50, $100, $1000, $10,000, more?

Now write that number down on a sheet of paper beside you - because we are going to come back to it later.

Go on write it down - you are not allowed to read further till you do.

Now let me tell you why that number is important. Today as I was trolling through the market looking for companies that had very little debt and had more cash then their market capitalization - I stumbled across MGT Capital Investments Inc (MGT).

At March 31st, they had $33 million dollars cash, no debt, and a market capitalization of $11 million. So effectively, it looks like you can buy a $1 for 33 cents.

Interested?

Dig a little deeper and it turns out they have two subsidaries:

Medicsight PLC and

Medicexchange Ltd

Medicexchange is an online community for radiologists. Without going into depth, I think we all understand how valuable a good vertical market community portal can be. I will let you check out www.medicexchange.com and decide its value for yourself.

Medicsight PLC is in fact a company listed on the London Stock Exchange under the symbol MDST (MDST:LSE). I understand MGT own's 55% of MDST and it has a market cap of GBP21 million.

At today's exchange rate, that is USD$35 million

That calculates their 55% share to be worth USD$ 19 million. Remember MGT's market cap is only $11 million.

So if you totally disregard Medicexchange and just look to either the cash or market value of MGT's investment in Medicsight - there is a nice margin of safety.

That might be enough for you to decide to buy. But have a closer look at Medicsight - it is a company you may think of investing in directly, but I think it is cheaper to do so through MGT.

According to their website, Medicsight has software that helps detect cancer in markets like:

Colon cancer - The second most prevalent cancer in Western countries

•940,000 cases occur annually

•655,000 deaths annually

•if detected early, 90%of patients live at least ten years

Lung cancer - The most common and deadliest of all cancers

•1.3 million cases annually

•Lung cancer accounts for 17.8% of all global cancer deaths

•85% of patients live at least five years if detected early

How does the software work. It seems it is similar to CAD/CAM software in that it analyzes the images from CT scans to detect cancer early. On their website, you will see they have a lot of clinical data in support of their claims and their products have been approved for use in several major countries.

My basic understanding is the technology lets a radiologist detect cancer with a "virtual" colonoscopy rather then the real one. I presume this would, from the patient's point of view, be much more pleasant then a traditional colonoscopy. From the patient's, insurer's, government's point of view - probably a lot more cost effective as well.

Now back to that number you wrote down.(You did write it down, didn't you?)

The amount you would pay for a "virtual" colonoscopy over the real thing.

Mutliply it by the 940,000 cases of colon cancer that occur annually.

How big was the number you came up with?

Now how many patients would be screened and not found to have cancer - twice as many, ten times as many - you decide?

Do the calculation again and you are getting an idea of the potential size of this one vertical.

Plus they seem to have good distribution with a number of major manufacturers of radiology equipment including Toshiba (TOSBF.PK).

Geographic markets include North America, Japan, EU, China, Canada, Korea, Australia and Brazil. (Medicsight’s Colon software has now been approved in Europe, Canada, Australia, China and Brazil, with US and Japanese approvals application is progress.)

Here is what Medicsight say about their product pipeline"

"Medicsight has realised the massive opportunity in the development of CT software solutions and potential for CAD. It will now plan to launch Liver and Lung Disease Management Software solutions in 2009."

So there you have it. Buy MGT at a 66% discount to the cash MGT had on its balance sheet at March 31st - that should protect the downside - and get what may become an integral part of screening for cancers like colon and lung as the upside.

Now it is not all roses, to me it seems it has taken them a lot longer then they anticipated to commercialize the technology. A technology company not delivering on time - wouldn't be a first - so you may be prepared to forgive them and have a punt as I was.

The other thing that bothered me was this ownership information from MSN Money:

Why do I not see reasonable levels of Mutual Fund ownership? Is MSN Money wrong? Do the mutual funds see a red flag?

With only 5% insider ownership, has management forgotten about creating shareholder value? Is that why the share price is so low? If their is only 5% insider ownership, then I guess it would not take a big investment for someone to focus managements mind more on shareholder value?

What are your thoughts?

Related Stocks:  MGT, TOSBF

If you like this strategy then this stock may appeal to you - especially since people say there are a lot of gold miners in Hollywood.

Ascent Media Corporation (ASCMA) sells the equivalent of picks and shovels to the entertainment industry:

"The Creative Services segment serves motion picture studios and their
international divisions, independent television production companies,
broadcast networks, cable programming networks, advertising agencies,
creative editorial companies, corporate media producers, independent
owners of television and film libraries, and media distribution channels."

with

"technical and creative services necessary to complete principal
photography into final products, such as feature films, movie trailers
and TV spots, documentaries, independent films, scripted and reality
television, TV movies and mini-series, television commercials, Internet
and new media advertising, music videos, interactive games and new
digital media, promotional and identity campaigns."

and

"The Content Services segment provides facilities and services
to optimize, archive, manage, and reformat and re-purpose completed
media assets for global distribution via freight, satellite, fiber, and
the Internet, as well as the facilities, technical infrastructure, and
operating staff necessary to assemble programming content for cable and
broadcast networks and to distribute media signals via satellite and
terrestrial networks."

Yahoo Business Summary

Regardless of if a movie is a hit or not, the movie studios still need to pay companies like Ascent Media Corporation (ASCMA) for the creative and content services. These services are the "picks and shovels" movie studios need to produce gold.

Instead of the big swings in revenue and profits depending on the success or failure of a movie - these "picks and shovels" should produce a much more predictable revenue stream - a lot less risk because I understand they get paid regardless of if the movie is a blockbuster or a flop.

Their revenue tops $500 million a year, so it is a significant business. On the downside, their bottom line was hit by the writer's strike last year.

Now I must confess I was not looking for "picks and shovels" companies when I stumbled across Ascent Media Corporation (ASCMA) - I was looking for companies that had little or no debt and sold for less then the cash they had on the balance sheet.

I was able to buy ASCMA at $27.62 a share, while at March 31st they had $23.95 a share in cash on hand:

To put it another way, their market capitalization was $390 million and their cash on hand was $337 million.

That means after deducting cash on hand, you are paying a little over $50 million for a $500 million revenue business. That sounds like a deal to me.

A quick sanity check to make sure I am not crazy. The following mutual funds own shares in Ascent Media Corporation (ASCMA):

I also noted a number of these funds were "value" funds and that several had increased their shareholdings.

By way of background, Ascent Media Corporation was spun out of Discovery Holding Company (DISCA) (DISCB) which is the leading provider of non-fiction entertainment in the world. Through The Discovery Channel, TLC, Animal Planet, The Travel Channel, Discovery Health Channel, nine other emerging networks in the U.S., and over 85 separate international network feeds, DCI reaches more than one billion cumulative subscribers around the globe and is one of the world's most recognized television brands.

With the spin off, ASCMA also inherited a dual class share structure described on the companies website as follows:

"How many series of common stock does Ascent Media Corporation have outstanding?

We have two series of common stock outstanding:

• our series A common stock trades on NASDAQ under the symbol ASCMA
• our series B common stock is quoted on the OTC Bulletin Board, under the symbol ASCMB.

What is the difference between the series A and series B common stock?

• The series A stock (ASCMA) has one vote per share, while the series B stock (ASCMB) has ten votes per share.
• The series B stock is convertible at any time on a one-for-one basis for series A stock. The series A stock is not convertible or exchangeable.
• The series A stock is broadly held and actively traded; the series B stock is held by a relatively small number of holders and thinly traded.

How many shares of Ascent Media Corporation stock are outstanding?

As of October 31, 2008, Ascent Media Corporation has 13,399,099 Series A and 659,732 Series B shares outstanding."

I do not like these types of multi-class share structures as a general rule, but it was not enough of a negative in this case to stop me buying the shares.

The other lingering concern I had was to do with the diversity of their client base. How dependent are they on their former parent? I would really like to know how much of their revenue came from other media companies like:

News Corp (NWS)

Walt Disney (DIS)

Time Warner (TWX)

Viacom (VIA)

General Electric (GE) - owners of NBC and CNBC

Related Stocks:  ASCMA, DIS, DISCA, DISCB, GE, NWS, TWX, VIA

Anyway back to the subject at hand.

With the recession biting, you have probably read about the sales of cell phones and consumer electronics slowing:

"The faltering economy produced dismal mobile-phone sales at the end of last year, leading to heightened competition among phone makers, according to a few recent analyst reports. Mobile-phone sales reached 314.7 million units in the fourth quarter, down 4.6 percent from the same quarter a year earlier, Gartner said on Monday."

Gartner Inc. (NYSE: IT)

"In the first half (2008), mobile handset shipments were around 14 percent year to year. In the second half, the third quarter slowed to 8 percent, before falling to a negative 10 percent rate for the final quarter of the year - due in part to the slowing economy. "Sheer fear sapped the confidence of consumers, enterprises and corporate users across the board," said Jake Saunders, Asia-Pacific Vice-President of ABI Research."

ABI Research

Unfortunately for Forward Industries (FORD), this means people buy fewer carrying cases and covers for their cell phones as well. You see Forward Industries (FORD) are manufacturers of carrying cases and covers for cell phones and their sales have fallen off a cliff.

But now the recession is easing, the new Apple (NasdaqGS: AAPL) iPhone has been released (I love mine), and the new Palm (NasdaqGS: AAPL) Pre is on the market - maybe, just maybe, Forward Industries (FORD) will see their sales start increasing again.

Reading between the lines, I guess they were to dependent on one customer and have found their margins squeezed during the recession - but what is a sales team for if it is not to find more customers.

So I am going to assume they can get themselves back into a profitable position - or at least a break even position where they are not burning cash.

Cash - that is what I wanted to tell you about.

Forward Industries (FORD) has $2.39 is cash per share, very little debt, and I was able to pick up their shares for $1.58. That means I got a 33% discount on the $2.39 cash backing their shares had at March 31st.

Ok, they may have burnt a little cash since then, but I am betting I still got a nice discount - with the cell phone carry case business thrown in for free.

And how much could the shares be worth if they managed to fix their core business. Well in 2006 investors were prepared to pay over $20 a share:

Finally a quick sanity check - do any professional fund managers hold the stock. A quick look at the major shareholders revealed CALPERS (CALIFORNIA - PUBLIC EMPLOYEES RETIREMENT SYSTEM) and BRIDGEWAY FUNDS INC - ULTRA SMALL COMPANY FUND both held shares.

So I thought I would try my luck, take the 33% cash discount and buy some of these shares.

Related Stocks:  AAPL, F, FORD, IT, PALM

But basically it is why I bought Heelys. At March 31st they had $2.39 cash for each share and now you can buy a share for $1.88 or 20% off.

Plus they have a pretty cool product that a lot of kids like that you effectively get for free. Basically Heelys are shoes with removable wheels in the heel that kids can scoot around on. You've seen them - walk, run, then roll.

In fact the product was so cool, the share used to trade for over $30 back in 2007

Maybe the company could have been managed better, the recession certainly did not help, but is the business really so bad they need to pay people to take their business off their hands?

I do not think so. I think they are one of those things that will be the craze with kids every few years. They have patent protection, so the market should not be flooded with knock offs. So next time the craze comes around - I would be thrilled if the price climbed back near those 2007 levels.

They have tried to take Heelys to the teen market - the skate and surf crowd. It seems to me in better times, this may be a nice bolt on acquisition for a company like Quicksilver (ZQK). Indeed it is less then a year ago that Skechers (SKX) offered to pay $5.25 a share for Heelys (HLYS) - that is almost 3 times the current price.

Now Heelys (HLYS) is not the only shoe company to find itself in this position. Remember Crocs (CROX) used to trade above $80 and is now less then $4.

So maybe the problems are not just company specific, but a reflection of the economy and industry. But Crocs (CROX) is not trading at less then cash value.

Just to double check I was not totally mad, I had a look to see what mutual funds they have as shareholders. Fidelity has two of their funds invested in Heelys - Fidelity Small Cap Opportunities Fund and their FIDELITY ADVISOR VALUE STRATEGIES FUND - so I guess they see some hope for the company as well

Now all this does not mean that management will not have burnt through some of that cash since March, they probably have, but I am hoping not too much.

Related Stocks:  CROX, HLYS, SKX, ZQK