Key Statistics*
Mkt. Cap: $122.3M
P/E: 11.14x (FYE 9/29/2009)
EV/EBITDA: 7.47x
Yield: 5.5%
Operating Margin: 9.13%
ROE (ttm): 21.59%
Analyst Coverage: Dean Haskell of Morgan Joseph & Co. Inc.- PT of $45.00; 2009 EPS estimate of $2.93; 2009 Revenue estimate of $162.74M.
* Source: Yahoo! Finance

Profile*
Ark Restaurants Corp., through its subsidiaries, engages in the ownership and operation of restaurants and bars, fast food concepts, catering operations, and wholesale and retail bakeries. As of September 29, 2007, it operated 23 restaurants and bars, including 7 facilities located in New York City; 4 in Washington, D.C.; 5 in Las Vegas; Nevada; 2 in Atlantic City, New Jersey; 3 at the Foxwoods Resort Casino in Ledyard, Connecticut; and 1 in the Faneuil Hall Marketplace in Boston, Massachusetts, as well as 24 fast food concepts, catering operations, and wholesale and retail bakeries. The company was founded in 1983 and is based in New York, New York.
* Source: Yahoo! Finance

INVESTools (SWIM), according to their most recent 10-k calls themselves "a leader in investor education," helping users achieve their goals by using the "INVESTools method." The company consists of four subsidiaries including ZiaSun, Telescan, and SES Acquisition Corp., and Prophet Financial Systems. INVESTools recently acquired retail broker Think or Swim, rated highly by Barron's (.pdf), for what that is worth.

I am initiating coverage of Morningstar, Inc. (MORN) with a buy rating and a price target of $72.00. Since going public in 2005, the company has put up double digit earnings and revenue growth, while doubling its assets under advisement from a year ago to nearly $81.5 billion. Favorable secular trends and a business model that achieves operating leverage will allow for further growth going forward. An economic moat is provided by the company's branding, unique content, and deep databases that are time consuming and difficult to replicate.

Even though the US domestic economy looks like it is slowing down, many larger mega-cap companies can now be thought of as truly global organizations who happen to be head quartered in the United States, and fundamentals in global markets remain strong. At the same time, economists see the Federal Reserve lowering rates in the Fall to ease possible job market woes. An easing of US interest rates will only serve to support this bull market.

Gateway has significantly lagged the S&P 500 and the Dow Jones Computer Hardware Index, has had poor returns on assets and equity, has not realized any value creation through the acquisition of eMachines, and will struggle to compete against more heavily capitalized, efficient competitors. Gateway’s management does not look shareholder friendly, either. Nonetheless, Gateway has 3 key assets that should make it attractive to a strategic buyer if the company was sold.

Destruction of Value

As Heelys were a popular gift for children this holiday season, it's not too surprising to see the company post 4th quarter earnings that beat Wall Street numbers handily. Net income for the fourth quarter of 2007 increased 700 percent to $11.5 million from $1.4 million the prior year, while earnings per share increased to 44 cents per share from 6 cents per share in the prior year period. The Street was looking for earnings of 28 cents per share.

The Short Case: Analyst’s estimates of growth are overly optimistic. According to Capital IQ, growth for this year is forecasted at 20.7% for this year and 22.5% for the next 5 years. Heelys is expected to have earnings per share of $1.67, with around 83% of their earnings coming from 4th quarter holiday sales in 2007. This leaves little room for error, and it is questionable if Heelys was creating shareholder value to begin with. Cash flow from operations in 2006 was -$2,180,000.00, and Free cash flow for 2006 was -$2,573,475.00.

On March 5th, Third Point, LLC purchased 8.6 million shares in PDL Biopharma. The intent of this transaction is explained in Item 4 of the 13-D as follows:

On March 5, 2007, the Management Company sent a letter to Mark McDade, Chief Executive Officer of the Company, and to the Board of Directors of the Company, expressing disappointment and concern over the Company's high rate of spending and, in the view of the Management Company, the Company's significant underperformance. In the letter, the Management Company urges that the Company cut costs and not pursue additional acquisitions. The Management Company communicated its belief that pipeline development and cash flow generation are not mutually exclusive and that, accordingly, the Company should reduce its spending to focus on essential product development and research. The Management Company has offered to work with management to streamline the Company's cost structure and asset base as soon as possible, in an effort to allow the cash generating ability and value of the Company to be developed and made apparent to shareholders. (Third Point LLC 13-D PDLI)

Moreover, Syneron is a highly profitable business that generates strong free cash flow. In fiscal 2005, the company generated nearly $30 million in owner’s earnings and had net margins of 27%. The main value driver behind Syneron is their low cost structure and extremely low tax rate on operating income of 2%, compared to the corporate tax rates of competitors of approximately 35%. I calculated a $42 stock price from my DCF model, and gave myself a 20% margin of safety to arrive at a conservative estimate of value at $34.00 per share, using a discount rate of 17%. If you would like to see my DCF model, it is available upon request via e-mail.

Background

1. Reverse Mergers
2. Specialty Acquisition Corporations
3. Dutch auctions

Summary: The Yen is currently undervalued, and should appreciate relative to other currencies. Nevertheless, speculators continue to implement a Yen carry trade, artificially pushing down the value of the Yen in the near term, and earning a profit on the spread between Japanese interest rates which are at .5%, and interest rates in other markets such as the United States, which are currently at 5.25%. This is a distortion of fundamental reality, and eventually markets will reflect the true value of the Yen sooner or later.

Background: Japan experienced strong deflationary pressures following the collapse of its asset market bubble that lasted from 1986-1990. During this period, the land around the palace in Tokyo was worth more than all the real estate in California at the time. Japan’s economy recovered during the 1990’s, and saw a growth of +50% in the Nikkei in 2006.

Spinoffs have historically outpeformed the market for a variety of reasons. This often occurs because the stock is not widely followed after heavy institutional selling is not based on the stock's investment merits, thus creating a pocket of market inefficiency for us to exploit. Additionally, management in many cases is given strong incentive to perform with a large portion of the newly created entity's stock allocated to management. Often times in spinoffs the new company has debt from its parent layered on its capital structure, which creates a leveraged finance type opportunity. By buying at a margin of safety, we can create an asymmetrical risk reward scenario.

In fact, Idearc shares several of these characteristics common in spinoffs. Its market capitalization is only a billion dollars, which makes it far smaller than Verizon, and has forced large institutions, regulated by investment charters that say they can only invest in large capitalization stocks, to sell. A large portion of Idearc's shares, approximately 40% of the float, have been allocated to management tying their compensation to their performance, and giving them strong incentive to do a decent job for shareholders. It also has been given a large amount of Verizon's debt, which has created the leveraged finance type play I mentioned above, and will enforce managerial discipline.