Festival of Stocks #28

Welcome to the twenty-eighth Festival of Stocks. The Festival of Stocks is a weekly blog carnival dedicated to highlighting the best recent posts on stock market related topics.

I am proud to present this week’s best entries to the Festival of Stocks. The articles are listed by category. The stock tickers are linked to Yahoo Finance. I have included my post “Against the Topps Deal” among the links below.

This week I decided to do things a little differently. Several of the best blog posts of the last week happened to be on the same topics. Rather than attempting to fight the tide and admit inferior posts in their place, I decided to embrace the idea of multiple posts on the same topics. As a result, you will find an occasional panorama of punditry among this week’s selection. Of the festival’s seventeen posts, three are on Jack Bogle’s new book, two are on the Topps deal, and two are on stock buybacks. Of course, there is also the usual handful of posts on specific stocks you’ve come to expect from each week’s festival.

On the right side of your screen, you’ll see a survey asking what total annual return you expect from the S&P; 500 over the next ten years (if you don’t see it, please go here). The survey isn’t an ad. It’s part of a project I’m working on for the blog. Please take the time to vote, as I’ll incorporate the results of this survey into some of my future posts.

If you have an investing blog of your own, you can copy the poll and present it on your own site. The more diverse the places the poll is presented, the better the results will be.

Thanks for humoring me.

Enjoy the festival.

Market Commentary

Falling Out the First Storey Window By Value Discipline
In his first post back after a month long absence from the blogosphere, Rick discusses the February 27th fall in Shanghai and the U.S. market tumult that followed – a one day drop he likens to a fall out of a first storey window.

Bogle’s Book

Book Review: John Bogle’s Little Book of Common Sense Investing By Value Blog Review
Steven sets the record straight regarding exactly what Bogle does and doesn’t say in his new book. Everything on Value Blog Review is written with new investors in mind – and this review is no different. Steven explains why Bogle’s latest title is the first book a new investor should read.

The Little Book of Common Sense Investing – Book Review By The Confused Capitalist
Jay finds himself in the unusual position of describing how a book can be like Chinese water torture – but in a good way. His point is simple: Bogle’s constant, logical beating of the indexing drum, accompanied by simple arithmetic and quotes from famous value investors and B school professors, makes it “all but impossible to dismiss” the case for index funds.…

Survey: Annual Total Return From S&P; 500 Over Next Ten Years

What annual total return do you expect from the S&P; 500 over the next ten years? That’s the question being asked in the poll on the right of your screen. It’s not an ad. In fact, it’s part of the wider discussion on market valuations and future returns I began in my normalized P/E series.

For now, I’m conducting a survey of investing blog readers. You’re reading an investing blog (this one) so you qualify. Please take the time to answer the poll.

If you have an investing blog of your own, you can copy the poll and present it on your own site. The more diverse the places the poll is presented, the better the results will be.

I’m not looking for accurate predictions here. I’m just looking for honest expectations. There are no wrong answers; so, there’s no reason to be influenced by how others have voted.

I’ll incorporate the results of this survey (and another related survey) into some of my future posts.…

Festival of Stocks Reminder

Don’t forget I’m hosting the Festival of Stocks, a blog carnival dedicated to highlighting bloggers’ best articles on stock market related topics. So, please start sending in your submissions now. The best of them will appear here on Monday.

You can submit an entry by using a standard form. Or, you can just send me an email.

Send in a Submission…

Against the Topps Deal

In my earlier post entitled “Topps to be Acquired by Eisner and Others“, I said that I would look over the company’s financials. I did and what I found is quite interesting.

Actual Offer

First, you need to forget the $9.75 a share number you’ve seen reported as the offer from Tornante and Madison Dearborn. Topps (TOPP) has $84.87 million in cash and no debt. So, the $9.75 a share offer from Eisner et al. includes the acquisition of $2.19 per share in cash.

The offer for Topps’ operating business is $7.56 a share not $9.75 a share. When investors calculate standard valuation ratios such as price-to-earnings, price-to-sales, and price-to-book, they need to use the $7.56 a share number rather than the $9.75 a share number, because the utility of these ratios is in comparing an operating business to the price paid for that business.

For instance, although it first appears that Eisner et al. are making an offer that values Topps at over 100% of sales, this is an illusion. The offer values Topps at almost exactly one times sales – in fact, slightly less than one times sales.

Furthermore, Topps is expected to increase sales in the years ahead, because of certain favorable developments (brought on in part by management’s recent actions) that seem to have improved the outlook for the industry. I’ll address the issue of a “turnaround” later.

For now, it’s important to note that Topps’ current sales levels are not especially high – in fact, sales are roughly where they were in 2001.

Use of Cash

In that year, Topps spent close to $30 million to repurchase 2.81 million shares at $10.39 a share. Six years later, the entire company is set to be sold for $9.75 a share.

To be fair, Topps had more cash in 2001 than it has today. The difference in cash and investments is theoretically large enough to account for the $0.64 a share gap between the price at which Topps was enthusiastically buying in 2001 and the price at which Topps is now planning to sell itself. Regardless, this repurchase record betrays the fact that Topps’ board accepted an offer even they don’t believe to be substantially greater than what long-term shareholders will (eventually) be able to sell their shares for in the open market.

If that last statement is untrue, then either the 2001 repurchases were a negligent misuse of almost $30 million of company cash or unforeseeable events that occurred during the intervening years have permanently impaired the value of the business.

Which is more likely? Is management wrong now? Was it wrong then? Or, have circumstances conspired against the company?

If the 2001 repurchases were the error, perhaps they were an excusable error.

However, Topps’ long history of squandering cash is inexcusable. Almost exactly six years ago, Topps had $158.74 million in cash. Today, the entire company is being sold for $385.4 million dollars.

Over the last several years, Topps has spent far more …

Value Investing News: Top Stories

An excellent resource I’ve mentioned before is Value Investing News. If you’re ever short on reading material – or just looking for financial news with a decidedly value bent, stop by Value Investing News.

Here are the top stories from last week:

1. Another Buffett Wannabe
2. Note to John Bogle: Give Value Investors More Credit
3. The New Domtar: The Upgrade is Not Just On Paper
4. Finding Value In Microsoft
5. Friendly’s Higher; They Hired a Banker
6. Large Take-Two Investors Group To Nominate 6 to Board
7. Friendly Dissidents Use billboards to Press Views
8. Biglari Sends New Letter to Friendly Ice Cream Shareholders
9. The Inside Story of a Wall Street Battle Royal
10. Everybody Wants To Go To Heaven, But Nobody Wants To Die

Visit Value Investing News…

Topps Removes Dissident Directors from “Go Shop” Process

I’ll have a full post for you on the Topps (TOPP) deal tomorrow.

For now, I’ll just report today’s developments. The board blocked dissident directors Arnaud Ajdler and Timothy Brog from monitoring the company’s “go shop” process which allows Topps to solicit better bids for forty days.

Here are excerpts from the 8-K filed today:

At the March 5, 2007 Board meeting at which the Merger Agreement was approved, the Board concluded that the presently constituted Ad Hoc Committee, which consists of Messrs. Ajdler, Brog, Feder and Greenberg, would be charged with the responsibility of monitoring Topps’ progress with the go-shop process, and would report developments from time to time to the full Board. The Board made this judgment notwithstanding the fact that Messrs. Ajdler and Brog voted against the Merger Agreement because the Board understood that their primary objection to the Merger Agreement was that, in their view, an inadequate process had been conducted to permit the Board to enter into the Merger Agreement (a view with which the other directors strongly disagree).On this basis, the Board believed that Messrs. Ajdler and Brog, together with Messrs. Feder and Greenberg, could adequately represent the best interests of Topps’ stockholders during the go-shop process.

On March 6, 2007, Mr. Ajdler delivered a letter to the Board in which he registered his opposition to the Merger Agreement, alleging that the process that led to the Merger Agreement was flawed because the Board “did not shop the company.” He also stated that he intends to “actively solicit votes and campaign against the transaction.” Mr. Ajdler was widely quoted to this effect in various news publications, including The Wall Street Journal and The Daily Deal. Mr. Brog also made public statements to the effect that he opposed the Merger. In an article that appeared in The Daily Deal on Friday, March 9, 2007 (which was subsequently filed by Mr. Ajdler with the Securities and Exchange Commission), Mr. Ajdler stated: “At this point, we want to kill the deal, take the company over, improve the margins and create value, and then possibly sell the company.” He also indicated that if stockholders reject the Merger, he intends to nominate additional candidates to the Board in an effort to gain a majority.

Given the publicly stated opposition to the Merger Agreement of Messrs. Ajdler and Brog, including Mr. Ajdler’s stated intention to acquire control of the Board without buying the Company, the Board met on Tuesday, March 13, to reconsider whether Messrs. Ajdler and Brog could adequately represent the best interests of the Company’s stockholders. At the meeting, the Board appointed Messrs. Feder and Greenberg to monitor day-to-day developments during the go-shop period and made clear that the Ad Hoc Committee no longer has such authority. In addition, the Board created an Executive Committee consisting of Messrs. Feder, Greenberg, Mauer, Nusbaum and Shorin. The Executive Committee has been vested with the full power of the Board to the extent permitted by the Delaware General Corporation Law,

20 Questions for Jay Walker of The Confused Capitalist

Jay Walker’s passion for investing was kindled in 1996 when he was given a modest amount to invest, and within a couple of years of studying, had written his own book, “The Brink’s Truck Burst Open on Wall Street! A Holistic Approach to Finding The Easy Money In Common Stocks”. Jay began writing The Confused Capitalist in early 2006. He’s Canadian (as his spelling attests).

Visit The Confused Capitalist

1. Are you a value investor?

Yes. However, I think that almost all investors consider themselves value investors. It seems to be a popular delusion – perhaps I suffer from it too!

2. What is value investing?

Value investing is buying a physical asset or perceived income stream at some level below its true value. Like Warren Buffett, however, I don’t think you can really separate “growth” and “value” investing. They are inextricably entwined.

3. What is your approach to investing?

I try to invest about 50% to 70% of my portfolio in areas that I think are favourable to my strengths (my circle of competence is financially-related companies) and that market is weak at pricing correctly (under-explored areas of the market, like small and micro-caps).

I achieve some level of diversification, however, by using ETFs or ETF style investing for the balance of my portfolio. On that side, I tend to focus on sectors that pay and grow dividends regularly, as the market still hasn’t really priced those correctly. I’m also not afraid to use leverage-type stocks/ETFs on this side of my portfolio.

4. How do you evaluate a stock?

I have a process that I go through that I illustrate on my small/micro cap blog; an example is located here.

I can usually discard most stocks I scan fairly quickly, especially since in the small and micro cap field there’s so many poor quality stocks. However, the better ones have to make it through the aforementioned process. This usually takes at least several hours, once I’ve determined it appears to be a suitable candidate. This process also helps me hold a stock longer, as I can truly consider whether my investment thesis remains intact at various times after the initial investment.

5. Why do you buy a stock?

Because I perceive that the risk/reward is favourably skewed towards buying this stock. Typically, I have to perceive the potential gain over the next year as 20% or better. Using 20% as a benchmark helps me to establish my margin of safety.

6. Why do you sell a stock?

It’s usually because I perceive that another stock holds a better chance of achieving that minimum 20% gain. Then, I usually pick the stock with the weakest future risk/reward ratio to eliminate from my portfolio.

7. What investment decision are you most proud of?

Buying American Oriental Bioengineering (AOB) in the summer of 2005 at under $2/share. It was growing its earnings at better than 50% annually, and the PE was only nine; it more than doubled within a couple of …

Festival of Stocks: Send in Your Submissions

I mentioned Value Investing News in my last post. That site also happens to be the home of the Festival of Stocks, a blog carnival dedicated to highlighting bloggers’ best articles on stock market related topics.

Last week, George of Fat Pitch Financials hosted the Festival. He selected my post “On Posco, Berkshire, and Buffett” as his personal favorite.

This week, I’ll be hosting the Festival. So, please start sending in your submissions now.

You can submit an entry by using a standard form. Or, you can just send me an email.

Send in a Submission

Visit the Festival of Stocks

Visit Value Investing News

Visit Fat Pitch Financials…

On Rights Offerings and Western Sizzlin

George of Fat Pitch Financials just wrote an excellent account of his experience investing in Western Sizzlin (WSZL) through a rights offering. He sold the shares, because he had bought them for his special situations portfolio. However, he also gives his thoughts on the company and its Chairman, Sardar Biglari.

As you know, Biglari has been embroiled in a battle over Friendly’s (FRN). It seems he’s winning and shareholders in Western Sizzlin are profiting from that victory.

George’s account is a good read for those interested in rights offerings and for those interested in Western Sizzlin.

Friendly’s shareholders might want to read it as well.

Visit Fat Pitch Financials

Related Reading

The Week of Activist Investors

Friendly’s CEO Resigns; Largest Shareholder Requests Seats (my 9/29/06 story on Biglari and Friendly’s)…

20 Questions For Investing Bloggers

Regular readers know I have an ongoing series of posts asking the same twenty questions to different investment bloggers. I designed the questions to work well with different bloggers and different styles of investing, while still leading the discussion down a familiar (and hopefully fruitful) path.

So far, six bloggers have had their answers appear on this site. You can read any you missed by clicking on the links below:

20 Questions for Bill Rempel (a.k.a. No DooDahs)

20 Questions for MarketWizWannabe of RVB’s Market Musings

20 Questions for George of Fat Pitch Financials

20 Questions for John Bethel of Controlled Greed

20 Questions for Robert Freedland of Stock Picks Bob’s Advice

20 Questions for Joe Citarrella of Joe Cit – Intelligent Investing

I’m always looking for more bloggers to answer these questions. If you write an investing blog, or read one you find especially insightful, please send me an email with the URL of the blog.…