Plain English: How to Rewrite an SEC Disclosure – Geoff Translates

SEC reports are wordy. Here’s an example. The before paragraph is part of Birner’s 10-K. The after paragraph is my translation.

Before

The Company may see increased costs or lower revenue arising from health care reform. 

In March 2010, Congress passed, and the President signed, the Patient Protection and Affordable Care Act. This act may have a significant impact on health care providers, insurers and others associated with the health care industry, including the Company. The Company is currently evaluating the impact of this comprehensive act on its business. Federal and state governments may propose other health care initiatives and revisions to the health care and health insurance systems. It is uncertain what legislative programs, if any will be adopted in the future, or what action Congress or state legislatures may take regarding other health care reform proposals or legislation. In addition, changes in the health care industry, such as the growth of managed care organizations and provider networks, may result in lower payments for the services of the Company’s managed practices.

After

New Health Care Laws Can Hurt Us

In March 2010: the United States passed the Patient Protection and Affordable Care Act. This big, new law affects health care companies like Birner. We are evaluating its impact. We do not know what new health care laws governments will write. And we do not know how our industry will react. When we know, we will tell the SEC. Read our SEC reports to stay up to date.

TweetPosted on Wednesday, September 22, 2010

Michael Burry: Letters to Investors – Asperger’s

Michael Burry is the guy with Asperger’s and a glass eye in Michael Lewis’s The Big Short. In 2005: Burry got Goldman Sachs and Deutsche Bank to build credit default swaps so he could short subprime housing. He made a ton of money for his investors. Joel Greenblatt was one of them. Burry read You Can Be a Stock Market Genius. He “hated the title but liked the book.” Burry didn’t know Greenblatt. And Greenblatt only knew Burry from his posts on a stock message board. Burry’s writing made a better impression than Burry ever could. When Greenblatt met Burry he gave him $1 million to invest.

Blogs like Greenbackd and Street Capitalist dug up Burry’s past. Now you can read Burry’s message board posts and letters to investors.

I read Burry’s letters to investors. He’s a lot like early Warren Buffett. The difference is Burry had 40% cash in Q4 2001. Early Buffett never had that much. But early Buffett never saw those P/E ratios.

What’s the similarity?

Illiquidity. Benjamin Graham, Warren Buffett, and Michael Burry love illiquid stocks. In Q3 2001 Burry said he owned stocks where a 2,500 share sale could “torpedo” that stock’s market value. He also mentions a stock that “rarely trades”. Buffett says the same thing in his partnership letters.

During the subprime short: Burry took his 4-year old son to a psychologist. She diagnosed the son and his father with Asperger’s. Burry was in his 30s when he was diagnosed. I was 17.…

Barnes & Noble: ISS Endorses Burkle – Opposes Poison Pill

Proxy advisor ISS endorsed the Burkle party and its proposal to amend the poison pill in the Barnes & Noble (BKS) board election:

 …based on BKS’ deteriorating operating performance, poor shareholder return, less-than-enthusiastic analyst recommendations, inadequate…disclosure on a very large related-party transaction…and significant concerns about unusual pay practices, we believe the dissidents have demonstrated a compelling case that change in the BKS board is warranted.

Of modern Wall Street’s sins, the one Benjamin Graham would never forgive is listening to a proxy advisor.

The institutions that are listening are hearing static. Glass Lewis endorsed Riggio. ISS endorsed Burkle. Here’s what Barnes & Noble said: “While ISS has a track record of supporting dissidents, we believe its analysis is flawed and not in the best interest of our shareholders.”

While that sentence is flawed – what’s the word “while” doing in there – we get their point. Is it true? Does ISS have a track record of supporting dissidents? No. ISS has a track record of supporting dissidents more than Glass Lewis. But both advisors usually support management. Glass Lewis supports dissidents 20% of the time. ISS supports dissidents 40% of the time.

When ISS and Glass Lewis recommend voting for the same party, that party usually wins. What about a split decision? ISS and Glass Lewis have disagreed 21 times since 2006. Management won 33%. Dissidents won 43% outright and 14% in part. 10% were settled before the vote.

All splits were: Glass Lewis for management; ISS for dissident.…

Birner Dental Management Services: One of my Favorite Stocks

Would Benjamin Graham buy Birner Dental Management Services (BDMS)? No. But I would.

Birner’s tangible book value is negative. Not a problem for Warren Buffett. But a huge problem for Benjamin Graham.

I like tangible assets. But I like cash earnings more. Birner’s 10-year average real free cash flow per share (adjusted for the current share count) is $1.95. Slap a Shiller P/E of 15 on $1.95 and you get an intrinsic value of $29.25.

The stock trades at $16.75. Why?

The market is pricing the wrong earnings. Over the last 3 years, Birner averaged $1.11 per share in reported earnings. Free cash flow averaged $2.25 a share.

Birner is trading at a P/E of 8. Not 15. Why?

Some states ban corporations from buying dentist offices. So instead of buying dentist offices, Birner signs 40-year management contracts. The company amortizes the contracts over 25 years. This accounting fiction subtracts $1.33 a share in earnings from Birner’s income statement. It does nothing to free cash flow.

Buying dentist offices for 8 times cash earnings is a good deal. What makes buying Birner a great deal is what Birner does with the cash. It pays dividends and buys back stock. The dividend yield is 4.78%. Birner bought back stock in each of the last 10 years.

If you buy Birner at $16.75 a share, you could get 50% of your purchase price returned in dividends and buybacks in 5 years.

That’s not a promise. It’s a guess. Just like accrual earnings.…

Ark Restaurants: One of my Favorite Shareholder Letters

Benjamin Graham wasn’t known for his shareholder letters. Warren Buffett is. Some great CEOs don’t write great letters. And a great shareholder letter doesn’t guarantee great results. All a shareholder letter does is tell investors what the CEO is thinking, not just quarter to quarter, but year to year. Maybe it attracts investors who think in years instead of quarters. I don’t know.

I do know most shareholder letters suck. Here’s one that doesn’t.

Dear Shareholders:

This was a difficult year. Our defenses for an uncooperative economy are limited. We can and did lower our payroll expenses taking care not to impair services. We achieved a balance primarily through a reduction in hours worked by hourly employees, salary freezes and the elimination of overtime and bonuses. The dollar reduction was less than hoped for in part due to mandated increases in minimum wage for a substantial number of our employees. Some other costs, such as food, liquor and linen purchases, are variable and reduced in proportion to revenue declines. Percentage rents do reduce with decreased sales but fixed rents are just that, fixed. Other operating expenses did not decline as a category. In fact, this year utilities and insurance premiums remained stubbornly high and legal expenses became significant as we were in litigation on three matters. General and administrative costs decreased marginally.

Most companies use a dozen pages to say in legalese what Michael Weinstein says in one paragraph of plain English.

Read Ark Restaurants (ARKR) Shareholder Letter…

Amazon Kindle: Anatomy of an E-Reader – What Geoff Spends

Amazon Kindle came out November 2007. I didn’t get mine till January 2008. Since then I’ve spent $1,672.91 on 170 e-books. That means I spend $50.69 a month on e-books. I also spend $49.97 on three newspapers and $16.94 on six short story mags. My total spending on e-reading material is $117.60 a month.

Business Books: 12 You Might Have Missed – Geoff’s Picks

Geoff,

I think that you mentioned that you might do a post about books that you have read.  I would definitely be interested in that topic.  I will read anything on investing, but lately, most of the new (to me) stuff that I can find is business biographies. I would love to see a list of business books that you have read and liked.

Sincerely,

Hugh

Here are 12 I’ve read and liked. These are not my favorites – though The First Tycoon and The King of Cash are up there – but they’ve all got nuggets buried in them a lot of folks miss.

1. Benjamin Graham: The Memoirs of the Dean of Wall Street
2. Distant Force: A Memoir of the Teledyne Corporation and the Man Who Created It
3. The King of Cash: The Inside Story of Laurence Tisch
4. Hetty: The Genius and Madness of America’s First Female Tycoon
5. The First Tycoon: The Epic Life of Cornelius Vanderbilt
6. Losing My Virginity: How I’ve Survived, Had Fun, and Made a Fortune Doing Business My Way
7. Of Permanent Value: The Story of Warren Buffett
8. Baruch: My Own Story
9. Bernard M. Baruch: The Adventures of a Wall Street Legend
10. What Goes Up: The Uncensored History of Modern Wall Street as Told by the Bankers, Brokers, CEOs, and Scoundrels Who Made It Happen
11. The Death of the Banker: The Decline and Fall of the Great Financial Dynasties and the Triumph of the Small Investor
12. Confessions of an Advertising Man

Kenneth Cole: Iconix Wants to Buy – Brother Runs Company

Bloomberg reports Iconix (ICON) wants to buy Kenneth Cole (KCP):

Designer Kenneth Cole is in talks to sell the shoe and clothing company he founded to Iconix Brand Group Inc., the licensing company run by his brother Neil Cole, according to two people with knowledge of the matter.

Kenneth Cole and Iconix are both asset light companies. Would Benjamin Graham buy Kenneth Cole? Probably not. Benjamin Graham liked his earning power backed up by assets. Kenneth Cole is asset light and earning power heavy.

Kenneth Cole’s 10-year average real free cash flow per share (adjusted for the current share count) is $1.18. Slap a Shiller P/E of 15 on that $1.18 and you get $17.70. Kenneth Cole has a clean balance sheet. It has $4.67 a share in cash and investments. Current assets are $2.52 a share more than total liabilities. That means at least $2.52 per share of those cash and investments is surplus. Add the company’s $17.70 a share in earning power value to its extra cash of $2.52 and you get an intrinsic value of $20.22. A buyout price of $20 sounds fair. The stock trades at $16.75. That’s a 20% return if Kenneth Cole is sold for $20.

The downside? It’s hard to come up with an intrinsic value estimate under $15 unless you think 2008-2009 sales are the new normal. Fashion is fickle. It’s not my thing. But 10-15 years of solid cash earnings, the buyout report, and the family connection make Kenneth Cole interesting.…

ou Can Be a Stock Market Genius: Best Investment Book Ever

I love Benjamin Graham. But if I had to hand you one book to tell you how I pick stocks, it wouldn’t be The Intelligent Investor. It would be You Can Be a Stock Market Genius.

Why? Because Joel Greenblatt doesn’t talk personal finance. He doesn’t talk bonds. He doesn’t talk portfolios. He just says diversification is overrated and starts picking stocks.

The next 250 pages are case studies. Greenblatt tells you how he found a stock, the situation it was in, why he bought it, and how much money he made.

Benjamin Graham is value investing’s Old Testament. Warren Buffett is its New Testament. And You Can Be a Stock Market Genius is our Gospel of Mark. It doesn’t repeat sayings or rehash dogma. It just tells stories. The case studies read like the present tense. You feel like you and Greenblatt are analyzing the stocks together.

It’s a cheap book. Amazon sells the paperback for $10. The publisher is Simon and Schuster’s Fireside. It’s sitting in my bookcase right now, shelved with a $50 hardcover from Wiley. It looks like it belongs one shelf down squashed between Raymond Chandler and Ross MacDonald.

The pulp pages, urine yellow cover, and Ron Popeil title turn off a lot of investors. I was one of them. I wouldn’t touch it in a bookstore. I needed to read Amazon reviews and hear from value guys. Tariq Ali of Street Capitalist loves it too.

He should. It’s the best investment book ever written.…

Barnes & Noble: Glass Lewis, Egan-Jones Endorse Riggio and Poison Pill

Proxy advisors Glass Lewis and Egan-Jones endorsed the Riggio party and its poison pill in the Barnes & Noble (BKS) board election.

Of modern Wall Street’s sins, the one Benjamin Graham would never forgive is listening to a proxy advisor.

“Glass Lewis’s analysis concludes that Mr. Burkle and his nominees have not offered a compelling plan or strategy to build value at Barnes & Noble and that his proposed amendment to the company’s shareholder rights plan could enable Burkle to team with Aletheia to acquire control of the company without providing shareholders a control premium.”

Glass Lewis is wrong on the people and the pill.

Without the pill: neither Burkle nor Riggio could take control without paying a premium, because each party blocks the other and too much stock is sold short. The poison pill doesn’t block a creeping takeover. It blocks a Northern Pacific mad dash to 50%.

Ron Burkle is one of America’s best investors. In You Can Be a Stock Market Genius, Joel Greenblatt calls Stephen Bollenbach a “financial whiz” and a big reason why he bought stock in Host Marriott. None of the Riggio party other than Len is impressive. If the proxy advisors endorsed on merit alone it would be: Burkle, Bollenbach, and Riggio.

Instead they break with common sense and endorse a barely independent board (Judge Strine’s words), an ineffective compensation committee (Glass Lewis’s words), and a poison pill at a company with a staggered board.

The Barnes & Noble polls close September 28th.…