In short, I find the shares to be highly undervalued, and if only management were to return the hoards of cash to shareholders, LENS could easily be worth $8-9 per share in a pretty short period of time. Yes — that cash return catalyst is an apparent long shot, yet I still think the margin of safety is more than sufficient to offset the risk of continued thumb-sucking on the part of management.

That said, I will assert that I think it’s time for a change in the approach to running this company. There is simply no excuse for the struggling stock price given its significantly higher intrinsic value, and the hard underlying asset values. I’d encourage shareholders (including CEO Ira Lampert, other company executives, and MT Trading) to seriously consider strategic financial alternatives, and responsible uses of cash in order to unlock value.

Since the company has no operations, and no intentions to revamp any going concern business, this $21 in cash will likely be distributed as a liquidating dividend within the next year,, or so. The stock, though, trades for a mere $16.45, which effectively offers a cool 25% profit. Given the tax treatment of liquidating dividends as capital gains, the after tax profit still represents a very respectable annualized gain by my estimates.

There is a time-value risk that the funds sit in escrow for a while longer than expected, as well as a risk the firm runs into liabilities that it must cover with the escrowed cash. Someone with more legal expertise than I could probably better size up these risks by checking the escrow and acquisition agreements.

The thesis is as follows: several of the builders are trading at mere fractions of book, largely due to the fact that investors anticipate plenty more write-offs of inventory, consisting of unsold homes, and land, going forward. This inventory comprises the vast majority of these companies’ tangible asset values, so it naturally makes sense that discounts to book are largely due to fear that the asset values are overstated. Normally I’d simply buy, and hold such cheaply priced companies, but the truth is that I haven’t a clue where housing prices are headed in the future, or how much in charges to inventory the builders will take.

For starters, as largely a franchiser (the company only operates a few stores itself), Nathan’s has been generating allot of cash for years, and has low capital expenditure requirements. A few weeks ago, at some 12x cash flow (it’s now around 15x), it was available at a great price.

Revenue has been compounding at a steady, albeit low clip of around 7%, but operating margins have improved from 13% to over 18% since 2003. It has no debt, and returns on average equity using cash flow, rather than earnings, have been a respectable 15-20% in recent years.

What were the stocks? Well, the baby blunder (130% opportunity cost) is a well known electronic retail outlet called RadioShack (RSH) that when I was looking at it about a year ago was experiencing problems with same store sales, stiff competition from big box outlets, and on top of it all, had a CEO who lied about his college education and ultimately had to resign. The stock was pummeled to a dirt cheap price, but what I noticed looking at it was that it still generated heaps of cash and great returns on capital. When the company announced a restructuring plan, I figured that its still respectable store footprint, cash generation, and new leadership would make for a moderately easy improvement in the business, which would translate into huge returns on the stock given that it traded at what I considered 50% of its intrinsic value (something like 9X free cash for a multiple analysis).

My reasoning was simple, the sprawling firm has some premier properties, trades at what I consider unjustifiably low valuations, sports a strong dividend yield to provide downside risk protection, and has garnered the sponsorship of a few well-respected value guys, namely someone I consider a Graham and Doddsville superinvestor, Eddie Lampert.

Given that I don’t have many extraordinarily knockout ideas right now, and had some cash that could have been put to work, I felt this was a safe place to park some dough with the added benefit that a catalyst (breakup, anyone?) could send the shares significantly higher. My back of the envelope calculations put a break-up value at somewhere between current prices, and a whole lot more. This highly scientific reasoning is coupled with the fact that Citigroup sports solid returns on equity, respectable — albeit modest — growth for a behemoth its size.

Of course hype, short-term results, and pumped up demand for product often blind market participants to long-term business ramifications and actual shareholder value creation. But on the other hand, world-changing innovations which started as hypes and were derided as fads have gone on to make fortunes for owners. So what’s the deal on the heels of the iPhone’s much-awaited debut, and is AAPL overbought, or underestimated?

The industry is in a bit of a bubble, some say, that will burst within the next few months, or even years. Nonetheless, I think this may be a good time to by RAIL, since the bearishness on the industry going forward in the short-term has left the stock under-appreciated and poised to break out over the next few years, as coal has become a more long-term viable and growing business.

Here are some things that I like about the company:

Language barriers are a problem, so I won’t fault the company for this, yet. I still think the opportunity, if nothing lurks beyond the surface, is interesting and enticing. I bought a small chunk of stock weeks ago, and have seen a nice return following the 5% stock buyback announcement. I don’t think it’s all that great news, given that the company has been massively dilutive in its issuance of lots of shares, and often at cheap prices (not a spectacular sign).

Yet, the multiples are still dirt cheap (less than 65% of my estimated book value, and at a P/E multiple that will make you salivate), and I figure it’s worth the calculated risk given the small stake, and possibly large upside. The verdict is still out on whether the business model is sustainable, but the downside risk exposure of massive failure in the operations of the business anytime soon is virtually nil.

I’ve done a bit of research on the two companies over the past week. The big picture is not hard to see as both companies are dominant franchises in the credit rating business, each with around a 40% market share. The competitive advantages are easy to spot. Investors seek a reputable source for information as important as the creditworthiness of an investment, and, as such, firms have an effective mandate to pay the rating fees for coverage. In a sense, they “signal” the creditworthiness and financial standing of the company and, as a result, lower its cost of capital.

Because both companies are so heavily entrenched in the capital markets, investors and firms alike are willing to pay up for ratings. Ratings firms do not, then, compete on price. Rather, they compete on quality, reputation, flexibility in product coverage, and geographic extent. The fact that both firms cover companies all over the world provides a common metric for any investment, and confers yet another competitive advantage over would-be entrants into the field who would have to play catch up. Both firms sport high margins, and the benefit of pricing power (the best hedge against inflation, might I add).

The company operates as something of a monopoly/duopoly in its bulk freight rail transportation business. With around a 49% market share in the regions in which it operates, BNI has only one real competitor, Union Pacific (UNP). The fragmented non-bulk trucking industry competes with BNI for business, but it’s hard for it to match the company’s success transporting bulk freight loads for which there is simply no other cost effective way for them to be moved.

Furthermore, if you think someone can come along and duplicate the miles of track laid by BNI and the huge capital expenses necessary to compete, think again. Not surprisingly, then, the company earns respectable returns on equity, and sports respectable margins. And while it appears highly leveraged, it has predictable operating performance to cover interest payments.

Most of the books out there are great for picking up on the important stuff regarding the financial qualities Buffett seeks in a company - profit margins, high return on equity, low debt, hefty cash flow, etc. But there’s a problem with just about all of the information out there: It tries to distill Buffett’s investing prowess into a formula that anyone can use by plugging in numbers. But it’s far from that simple.

During the class, Dr. Werner instructed students on the intuition behind the Capital Asset Pricing Model and, in general, did a darn good job of teaching (and my brother can’t say enough how great a teacher he is). But that’s not what grabbed my attention.

I wanted to make some important clarifications:

1) I am not actually recommending a naked short position on SWIM. You’ll note from the opening statement and the parenthetical note in the article that I personally never short stocks. It’s risky business, and my regular readers are aware, and my new visitors should know, that I never really advise it. It was largely for “effect” in the post, and I should have made that clearer from the start. My apologies.

Mr. Barba is the CEO of SWIM, and writes the following:

The company is making absurd promises (see "Avoiding the Charlatans") that students who attend its seminars and use its pricey software will destroy the market in no time. Some of the testimonials even make claims of outrageous 800%+ profits in just two weeks! The software and “education” are based on a system of just “following the red and green arrows” that indicate by technical signals when to buy and sell.

That’s it. No research, no bothersome accounting to learn, no money to start, no problems!

1. Are you a value investor?

But they got into trouble by overestimating their income from interest only strips, which are the coupons from mortgages dealing only with interest and not principle. They sold them to other PR banks but had an off balance sheet agreement in which they guaranteed payment. Hence these were not true sales and so the accounting was improper.

I’ll keep the reasons brief and in list form:

Investors sent the shares down almost 10% on the announced losses and declining sales before the company rebounded Friday with a 3%+ gain.

Personally, I think that while the 0.60/share loss seems like “bad” news despite the improvement year over year, the thesis that LENS is first an asset play before anything else remains the same. The company continues to trade at around half of book value, and, reassuringly, has bolstered its cash position and cut inventory.