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We described our investment in Celebrate Express (BDAY) in August 2006, in which we concluded:

The stock was already a busted IPO and had traded down to the $13 range when we began to research it. Our work intensified in June when the company reported disappointing earnings and dropped further, and we eventually began accumulating a position beginning in early July continuing into August in the low $12 range (it closed August at $13.05).

Our investment thesis is simple: this is a classic case of a good business in a niche that is too small to support a public company, so its value as part of a larger company is substantially more than its value as a stand-alone business. Thus, we believe the company should be sold.

Many small public companies are in a comparable situation, but few boards and management teams want to sell “their” company. This was in fact the case at Celebrate Express until two activist shareholders, Ken Shubin Stein of Spencer Capital and Stephen Roseman of Thesis Capital, got involved. Thanks to their efforts and, in part, to our support (though, to be clear, we are not acting as a group with them), the company added them to the board and, not coincidentally, on August 21st “announced that the Board of Directors has retained Cowen and Company, LLC to conduct, in conjunction with management, a thorough review of the Company's strategic alternatives to maximize 145 E. 57th Street, Suite 1100, New York, NY 10022 shareholder value, including a potential sale of the Company.” In other words, the company has begun an auction process, which we expect will be successfully concluded in the not-too-distant future.

We are aware that other investors have, on occasion, incurred losses by following activists into similar situations, but we have done a great deal of work to gain a high degree of conviction that there is genuine value embedded in this business and that there are a number of buyers willing to pay quite a bit more than the current share price. Time will tell if we are correct.

So far, we have been dead wrong on this investment. The company has continued to struggle and, likely as a result, was unable to sell itself and recently shut down the auction process and will apparently go forward as an independent public company.

With the core of our investment thesis (that the company would quickly be sold) gone, why haven’t we exited this position?

Simply put, we believe the stock price already reflects the bad news and more. It closed March at $8.89 (as of close April 29th, it had risen to $9.09), yet the company has more than $4/share in net cash on its balance sheet ($1.25/share of which will be dividended out to shareholders in the near future). In addition, despite various operational issues, Celebrate Express has a core group of repeat customers (thanks to the company’s compelling value proposition), is essentially break-even on an earnings and free cash flow basis, and we have confidence that it can be turned around, thanks in particular to the two top-notch activists on the board.

Full Disclosure: Long BDAY.

Source: Celebrate Express: $4 Cash Per Share, Essentially Break-Even