I recently sold Freightcar America (RAIL) for $35.51 per share. FCA was a mistake that I held onto because I felt that it became really cheap over the past year. One thing that I noticed in the most recent annual report is that FCA’s market share declined from 81% a few years ago to 70% last year. A few other rail car manufacturers are starting to get into the market. One big risk is when the coal railcar industry does well, it's easy for the major players to enter the market and take market share away from FCA.

One of my reasons for investing was that FCA benefited from the growing shipments of coal in the United States and shipments internationally. We have more energy units in coal reserves than Saudi Arabia has in oil. Coal is also the cheapest source of power. Even with the harmful environmental consequences of current coal fired power plants, many countries have already developed clean coal technology. However, FCA is not a good way to play the future prospects of coal. The best way would be to buy the major rail operators such as Union Pacific (UNP) or Burlington Northern (BNI) (now being acquired by Berkshire Hathaway (BRK.A)). Railroads are 4 times as efficient as trucks and it's nearly impossible to lay down more tracks. So there is no threat of competition. Railroads are a royalty on consumption and energy use. Railroads are a much better way to play coal then FCA.

I purchased shares in Horsehead Holdings (ZINC) back in March at $4.23 per share and I recently sold my investment at $11, making a 160% return on my money in six months.

I invested in Horsehead because it was trading for $150 million with $123 million in cash and a net current asset value of $150 million. I was buying at 40% of book value and the replacement value of the facilities is over one billion dollars.

I attended Mohnish Pabrai’s annual meeting in Huntington Beach California last Saturday. I thought Mohnish did an awesome job as usual. I’ve been lucky enough to get to know Mohnish over the past few years and I grateful that he is so willing to share his ideas with others. Mohnish is both a friend and mentor. I admire his investing abilities and I also find him to be a very genuine person who like Buffett, is always having a good time and cracking jokes.

Here are my notes on the Pabrai Funds 2009 Annual Meeting in Huntington Beach California:

Nicholas Financial (NICK) had a good first quarter because of a drop in loan losses. Nicholas is able to make highly profitable loans while a lot of its competition is hurt. The company has only a fraction of the debt to equity ratio of its peers but because of its unique lending strategy and its ability to make an ROE of 20%+ in a normalized environment, I believe the company is worth at least $12 per share.

Nicholas Financial reported net income of $2.3 million for the three months ended June 30, compared to net income of $2.1 million last quarter and $1.6 million in the first quarter of 2008. Revenue for the just-ended quarter was $13.7 million, compared to $13.1 million a year earlier.

Horsehead Holding Corp. (ZINC) is a producer of zinc and zinc-based products, with production and recycling operations at six facilities in five states. The company along with its predecessors has been operating in the Zinc industry for over 150 years.

Horsehead is currently trading for $145 million with $123 million in cash on the balance sheet and no debt. Book value currently stands at $358 million. The net current asset value is $150 million.

In late November, I purchased shares in Footstar at $2.8 per share. In January I received a $1 dividend as part of the company’s liquidation. In the 4th quarter the company received $53 million from Kmart for the remaining inventory and reduced the market price of their headquarters building to $12 million from $19 million. The current carrying value on the balance sheet is $6.2 million. In addition, 4th quarter earnings came in at the high end of my estimate at $25 million.

Last week, I sold my shares for $2.63. In 3 months I made a 30% return on my investment in Footstar. I purchased Footstar because I believed that the company would be able to distribute at least $4.5 per share as part of their liquidation. After accounting for the recent dividend and the operating results for the 4th quarter which were better than I had estimated they would be, the company estimates it will distribute $2.65-$3.45 per share to shareholders.

Here is an update on the investments in my portfolio and my thoughts on third quarter earnings.

K-Swiss (KSWS):

Footstar (FTAR.OB) is a liquidation play with tangible equity of $82.1 million ($3.84 per share) and an expected liquidation value of at least $96 million ($4.5 per share). This compares to the current stock price of $2.8. I see a very low chance of getting less then the current stock price, with the upside being a 40% return in less then a year.

Footstar runs the footwear departments in 1,383 Kmart and 833 Rite Aid (RAD) stores. In March 2004, due to poor acquisitions, accounting problems and then liquidity issues, Footstar went into bankruptcy. In February 2006, the company emerged and paid creditors in full. While in bankruptcy in 2005, after years of litigation, the contract with Kmart was amended. Originally set to expire on December 31, 2012, the contract now expires on December 31, 2008. After the contract expires, Footstar will liquidate.

K-Swiss (KSWS), Inc. engages in the design, development, and marketing of athletic footwear for sports use, fitness activities, and casual wear. It also markets apparel and accessories under the K-Swiss brand name. In 2001 K-Swiss acquired Royal Elastics.

K-Swiss was founded in 1966 by two brothers dissatisfied with the tennis shoes in the market. The two Swiss brothers developed the K-Swiss Classic.

For background Information please read my prior posts on RAIL:

• My original thesis for investing in FreightCar America from July, 2007.
• My August, 2007 update.

FreightCar America (RAIL) released earnings on Monday, sending shares down 23%. It missed analyst estimates by 32 cents, reporting a loss of 8 cents a share, compared with estimates of 24 cents. FCA had its IPO in early 2005 at $19 per share and in 2006 the stock was at $78 at the peak of the secular boom in coal car orders.

Background:

The retail industry has been hit hard as investors anticipate a recession. American Eagle’s (AEO) stock is down nearly 50% in the past year and a half. The disappointing negative same store sales figures for the first few months of the year sent the stock tumbling. January same store sales were down 12%, February’s same store sales were down 4%, and in March, they were down 12%. For the first quarter, same store sales declined 6%; net income was down 44% and operating margin declined from 18.9% to 10.1%.

Backround

On April 17, 2007 Pinnacle (PNCL) and Delta (DAL) signed an airline services agreement for which Pinnacle would fly 16 CRJ-900 jets for Delta. The CRJ-900s began being delivered to Pinnacle in December of 2007. Currently it has 9 of 16 planes in operation. On June 10th Pinnacle announced that Delta wants to exit the contract citing poor on time performance. Pinnacle will have to take the planes out of service by July 31. I have a few observations to make about this development:

A friend sent me a video of a speech given by Seth Klarman at the Columbia Business School in 2006. Klarman’s hedge fund the Baupost Group has done over 20% a year since he founded the firm in 1983, with only one down year. Also, Seth Klarman’s book Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor is one of the best books I’ve read on value investing. It’s currently out of print and selling for about $1,600, but I got a copy through my library’s intra-library loan program.

Of all the articles/speeches/interviews of value investment managers this is one of the best speeches I’ve ever watched. Klarman discusses how he made over 5 times his money investing in Enron debt, what his investment principles are, his thoughts on the investment management industry, why he doesn't go short and why he uses derivitives.

Nicholas Financial (NICK) purchases sub prime automobile loans from car dealers in the south eastern U.S. through its branch office network. The company also makes direct loans to current or former customers. Direct loans made up about 7% of loans originated during 2006.

NICK has 47 branch offices, 19 are in Florida. Before opening a branch office, NICK will study the market to determine if its strict underwriting criteria will be successful in that market. The branch officer will attempt to establish relationships with local automobile dealers. Their goal is to have each new branch contributing $300K in pre-tax income within 3 years. It takes 12 months for a new branch to earn a monthly profit and about 18 months to recoup start-up costs.

The majority of the company's business is to its top 10 customers. These included many of the major railroad shippers (Norfolk Southern, BNSF, Canadian Pacific, CSX and Union Pacific) and financing companies; the remainder are major utilities. The company maintains long range customer relationships with these companies and the chances of one of their customers moving their business to a competitor is low because of the high costs of switching manufacturers.