Imation (IMN) is a consumer-focused technology firm with leading market share in removable storage products, such as recordable DVDs. The company has a strong balance sheet and owns the widely recognized Imation and Memorex brand names. Trading well below book value and in line with “net net” working capital, the shares strike us as simply too cheap to ignore.

Company Description and Thesis

This morning, Berkshire Hathaway (BRK.A) announced the acquisition of railroad Burlington Northern Santa Fe (BNI) for a transaction value of $44 billion and an equity value of $100 per share in cash and stock. Read the public announcement (pdf) and coverage by Bloomberg and Reuters.

Profile of Burlington Northern Santa Fe (BNI)

We recently conducted an exclusive interview with Professor Max Otte (.pdf), one of the leading proponents of value investing in Europe's academic finance establishment. The interview with Max Otte, Professor of Corporate Finance at the Fachhochschule Worms in Germany, sheds light on the peculiarities of investing in Europe and provides worthwhile advice for value-oriented investors. The full interview follows.

The Manual of Ideas: Tell us a bit about your path to becoming an investor. How did your academic pursuits shape the kind of investor you have become?

Want to get live news alerts from UK companies in your email inbox? Looking for latest financials on German stocks? Confused about the share ownership of an Italian firm? No problem! After reading this article you should be equipped with some basic tools to help you navigate through various European countries in your quest for good investments. And the best part about it: Most of the resources we present here are absolutely free.

To start off, a user-friendly stock screening tool is available at Digital Look. Although sign-up is required, the screens are free to use. The site allows screening for stocks in eleven European countries, including the major markets of the U.K., Germany and France. Once a few companies are identified from the screen as potential targets, which country each company is domiciled in largely determines what resources are available for further research.

In a Q2 letter to investors, dated July 13th, respected value investor David Einhorn of Greenlight Capital states that at the end of the second quarter, "the five largest disclosed long positions in the [Greenlight] Partnerships are Arkema, Criteria Caixa, Ford Motor Company debt, gold, and Pfizer."

Einhorn has owned French chemicals company Arkema (ARKAY.PK) and Spanish investment group Criteria Caixa for some time. Greenlight has also owned other Europe-domiciled companies in the past, including French auto maker Renault (RNSDF.PK) and Austrian Post, which was named a top monthly stock pick in the recent issue of European Value Report.

The latest issue of 10x45 Bargain Hunter (.pdf), published on October 4th, presents the results of a proprietary Manual of Ideas stock screen for potential activist targets. The list includes 45 companies, nine of which are new additions to the list. In order for a company to join the list, it must have a strong balance sheet that could be recapitalized or liquidated to achieve activist value creation; and insiders must own less than 20% of the shares, implying an inability to exercise voting control over the company. Here are the newcomers to the screen results:

• Semiconductor equipment provider Axcelis Technologies (ACLS) joins the list in first place, based on a ratio of "net net" current assets to market value of 1.3x, making ACLS a Ben Graham-style bargain stock. We calculate "net net" current assets as current assets minus total liabilities. A ratio of 1.3x suggests that the liquidation value of ACLS may exceed the company's market value, potentially attracting the interest of activist investment funds.
• Biotech drug developer Myriad Pharmaceuticals (MYRX) joins the list in second place, as the company has net cash of $169 million versus market value of $135 million. Insiders own virtually no shares of the company, making Myriad vulnerable to activist shareholder action.
• Communications equipment provider Radvision (RVSN) joins the list in 12th place. Radvision shares recently tumbled to a market value of $115 million, only $8 million above the company net cash balance. The stock price decline came on the heels of Cisco's announcement that it would aquire video conferencing company Tandberg. Radvision provides such technology to Cisco, with the latter Radvision's largest customer.
• Specialty steel product maker Universal Stainless & Alloy (USAP) joins the list in 30th place. The shares trade at 0.8x price to tangible book value, and the company has 19% of its market value in net cash. "Net net" current assets account for two-thirds of USAP's market value, making the company a potentially interesting recapitalization candidate.
• Biopharma company Progenics Pharmaceuticals (PGNX) joins the list in 34th place. The shares trade within 10% of their 52-week low, reflecting the stock's lack of participation in the recent stock market rally. With a market value of $155 million and more than $100 million of net cash, the shares could attract the attention of activist investors familiar with the biopharma industry.
• Cancer drug discovery firm Infinity Pharma (INFI) joins the list in 36th place. While the company is losing money as it advances its drug development pipeline, management has stated that the company has sufficient liquidity through 2013. INFI has a market value of $152 million versus a net cash position of $150 million.
• Zoran Corp. (ZRAN), a provider of digital solutions for application in the digital entertainment and imaging markets, joins the list in 42nd place. The company recently posted strong sequential revenue growth in key business segments and returned to positive cash flow generation. With 63% of the market value in net cash, the company may be in a position to aggressively repurchase shares, thereby boosting shareholder value on a per-share basis.
• Semiconductor equipment company Rudolph Technologies (RTEC) joins the list in 43rd place. The company's Q2 revenue growth exceeded guidance, but investors continue to shun the stock. RTEC has one-third of its market value in net cash and nearly two-thirds in "net net" current assets.
• FInally, fabless semiconductor company Sigma Designs (SIGM) joins the list in 44th place. With one-half of market value in net cash and an enterprise value-to-revenue multiple of 0.9x, the shares appear quite cheap. The company may be in a position to boost shareholder value by using excess liquidity to repurchase shares or pay a one-time cash dividend.
  

Disclosure: No positions

The current issue of the 10x45 Bargain Hunter (pdf file) stock screening report, published on September 19th, includes a table of the Top 45 "Magic Formula" Stocks, based on trailing operating income.

This magic formula screen is based on a methodology advocated by Superinvestor Joel Greenblatt, author of The Little Book That Beats The Market. In a nutshell, the magic formula approach seeks out companies that are both "good" and "cheap."

James Grant, editor of Grant's Interest Rate Observer, argues in a Wall Street Journal editorial that the economic recovery is likely to surprise — on the upside. Grant invokes historical experience in making the point that "the deeper the slump, the zippier the recovery." He cites economist Michael Darda's research, which shows that "the last time a recession ravaged the labor market as badly as this one has, the years were 1957-58 — after which, payrolls climbed by a hefty 4.5% in the first year of an ensuing 24-month expansion."

Grant also notes that "[t]his time out, the fiscal stimulus is likely to measure 10% of GDP, monetary stimulus 9.5% of GDP, for a combined pick-me-up equivalent to 19.5% of GDP." This represents unprecedented stimulus, introducing a wild card into attempts at forecasting the economy. We reckon that if the government wants to revive the economy, it can do so with the sheer determination to print and spend money. "Print and spend" may indeed be the new "tax and spend." The consequences of this behavior could be more dangerous than than slump we have gone through over the past year or so.

Yale President Richard Levin sent the following endowment update to Yale alumni yesterday afternoon:

We explained in our messages to the community last December and February that we did not want to overreact to the downturn in financial markets by making reductions that might later prove unnecessary if markets recovered quickly. Thus, the budget reductions we undertook eliminated most, but not all, of the deficits previously forecast for the years ahead. These forecasts assumed that the June 30, 2009, value of our endowment would be $17 billion. Although the publicly traded portion of our endowment declined no further in value between December and June 30, we continued to incur losses in the value of our illiquid investments in private equity and real estate. The precise final results for the 2008-09 fiscal year are still being compiled and will be announced later this month, but it is clear that we will report a June 30 value of the endowment of approximately $16 billion. Only a small fraction of our endowment is invested in publicly traded securities, so the recent stock market rebound has not had a substantial effect on that number. The bulk of our endowment remains invested in illiquid assets, which have not begun to recover their value.

One of the favorite screening methods of contrarian investors is to search for companies whose stock prices have underperformed the broader market. In the screen presented below, we highlight stocks that have underperformed year-to-date in 2009 (through September 4th).

In order to minimize the occurrence of companies in financial distress as well as those posting large losses, we limit the screen to companies with no net debt and profitable operations (either based on the trailing twelve months or analyst estimates of the next twelve months). This narrowing of the field should result in a superior list of companies that may have been sold indiscriminately by investors, despite a strong balance sheet and decent operating results.

By Zain Griffith

It pays well to work at Abercrombie & Fitch (ANF), especially if you’re CEO Mike Jefferies. According to a report recently cited by The Deal, Jefferies received $71.8 million in total compensation in 2008—making him the 10th highest paid CEO in the U.S. My initial reaction to the report was to check the company’s recently filed DEF 14A to determine whether this large sum was correct.

The current issue of the 10x45 Bargain Hunter (pdf file) stock screening report, published on August 23rd, includes a table of the Top 45 "Magic Formula" Stocks, based on current consensus estimates of this year's earnings per share. This "Magic Formula" screen is based on a methodology advocated by Superinvestor Joel Greenblatt, author of The Little Book That Beats The Market.

Here are 10 'magic formula' companies that deserve a closer look:

Guy Spier of Aquamarine Capital is a noted value investor and speaker on investment management. Guy’s willingness to share his insights with fellow value investors reminds us of Buffett’s penchant for sharing his wisdom with those eager to benefit from it. Last November, Guy spoke on global value investing at the Darden Value Investing Conference in Charlottesville, Virginia. This past May, he was at the Value Investing Congress in Pasadena, California, making a case for global for-profit education providers Estácio (Brazil: ESTC3) and Raffles Education (Singapore: E6D). Earlier this month, Guy presented at the Value Investing Seminar in Molfetta, Italy, highlighting an opportunity in London Mining (Oslo Axess: LOND). His speech was entitled, Navigating Between Fear & Greed Using Checklists.

On The Investment Process

The Manual of Ideas: Your fund has outperformed the market indices by a wide margin since inception, posting a cumulative net return of 115% from September 1997 through June 2009, compared to cumulative returns of 9% for the Dow Jones Industrial Average, 0% for the S&P 500 Index and -13% for the FT 100. Do you use short-selling or leverage in the portfolio and how concentrated is your fund typically?

Vitaliy Katsenelson, director of research at Investment Management Associates and author of the book Active Value Investing, recently published a thought-provoking presentation on making money in range-bound markets. We found the following takeaways particularly noteworthy:

• Investors typically describe markets as either bull or bear markets, ignoring the fact that markets are often "cowardly lion" or range-bound markets. In fact, the "bear markets" observed over the past century were actually range-bound markets that included both upward and downward moves in equity prices, ultimately leaving prices roughly flat over multi-year periods.
• The past decade has been characterized by a range-bound market, in which volatility has been high but market indices have ultimately remained rather flat over nearly ten years.
• Katsenelson argues that cycles in range-bound markets are not caused by the usual suspects, i.e., the economy, earnings growth, interest rates or inflation, but rather by one key factor: valuation.
• Katsenelson also observes a "tight" relationship between interest rates and P/E multiples by analyzing historical data from 1960-2006. Not surprisingly, periods of low interest rates justified higher P/E multiples, while higher interest rates led to P/E multiple compression. Somewhat surprisingly, however, Katsenelson also shows that the relationship between interest rates and P/E multiples was "extremely weak" from 1900-1960.
• A common feature of range-bound markets is modest earnings growth accompanied by P/E multiple compression, leading to low or no growth in stock prices. P/E multiple compression is at least in part caused by market psychology. The latter trumps both interest rates and inflation in terms of driving stock prices in the short term. Interest rates and inflation play a role in determining the length and extremes of market cycles.
• We may be in a range-bound market, as valuations are still high and earnings growth is likely to slow. If earnings decline materially, we may enter a secular bear market.
• Stocks outperform bonds over long periods of time, but they do not outperform materially in range-bound markets. The latter necessitate a "buy and sell" approach rather than a "buy and hold" approach to investing. Investors can earn excess returns by timing individual stocks based on their valuation rather than by timing the market.

For more information on Vitaliy Katsenelson's writings, visit ActiveValueInvesting.com.

Well-regarded fund manager Peter Hodson of Sprott Asset Management presented a compelling investment case for Gravity Co. (GRVY) in an interview with Canada's Business News Network on August 6th. Hodson's argument is in line with the thesis presented in a recent issue of Downside Protection Report.

Gravity is a Korean software company, developing massively multiplayer online role-playing games ((MMORPG)). Despite the company's recent profitability inflection point, the shares continue to trade roughly in line with net cash and investments. While the shares have appreciated considerably this year, they remain undervalued and still trade at a price that is lower than two years ago. Gravity's valuation compares favorably to public companies such as Shanda Interactive Entertainment (SNDA), Giant Interactive Group (GA), NetEase.com (NTES), Perfect World (PWRD), and The9 Limited (NCTY).

The recently released semi-annual report of The Fairholme Fund (FAIRX), a mutual fund managed by respected value investor Bruce Berkowitz, reveals some noteworthy portfolio changes during the fund's second fiscal quarter ended May 31st.

Berkowitz significantly boosted the fund's ownership of Hertz Global Holdings (HTZ) during the period, from 30.0 million shares at the end of February to 46.4 million shares at the end of May. Hertz shares rose sharply during the period, suggesting that Berkowitz was likely adding to his position at higher prices. The shares have continued their upward climb since the end of Fairholme's fiscal Q2, rising from $6.85 per share on May 29th to $10.93 as of August 7th. The rapid ascent of Hertz shares likely reflects investors' changed perception of the company's ability to service its considerable debt load, which amounted to roughly $9 billion, net of cash, at the end of June (most of the debt is used to finance Hertz's large inventory of rental vehicles). Hertz's earnings remain depressed, but analysts estimate that profitability will recover somewhat, to $0.33 per share, in 2010.

The current issue of the 10x45 Bargain Hunter stock screening report, published on August 9th, includes a table of the Top 45 "Magic Formula" Stocks, based on current consensus analyst estimates of next year's earnings per share. This "Magic Formula" screen is based on a methodology advocated by "superinvestor" Joel Greenblatt, author of The Little Book That Beats The Market.

In a slight departure from the screen popularized by Greenblatt on the website MagicFormulaInvesting.com, the 10x45 Bargain Hunter screen featured below screens for stocks based on next year's earnings rather than earnings for the trailing twelve months. The use of forward earnings may be advantageous, as a screen based on trailing earnings would likely include many companies whose recent performance has been strong but whose prospects are weak. On the other hand, a screen based on forward EPS runs the risk of including companies with "stale" analyst estimates of such earnings, i.e., companies whose earnings estimates may have to be revised downward. Nonetheless, we find the screen shown below to be a useful tool for value-oriented investors seeking to uncover "good" companies trading at low prices.

Yale economist and financial commentator Robert Shiller, author of Irrational Exuberance, deserves credit for predicting the bursting of the housing bubble. Shiller has frequently lamented the increasingly speculative nature of U.S. housing -- and rightfully so.

Most recently, in a Bloomberg interview on August 5th, Shiller pointed out that the U.S. housing market has become more speculative and more unpredictable over the past decade. Despite Shiller's criticism of the speculative nature of residential housing, Shiller recently moved to capitalize on this trend via two newly launched exchange-traded vehicles.

Steve Mandel of Lone Pine Capital and Jim Chanos of Kynikos Associates expressed starkly different views on the investment merit of for-profit education providers at this year's Ira Sohn Investment Conference. Mandel has disclosed holdings in Apollo Group (APOL) and Strayer Education (STRA), while Chanos has presumably sold short shares in those companies or other for-profit education providers, such as ITT Education Services (ESI), DeVry (DV), Career Education (CECO), Corinthian Colleges (COCO), and Capella Education (CPLA).

Top activist investors typically look for companies that can unlock significant shareholder value through a specific corporate event, such as a sale, liquidation or recapitalization.

Activists scour the investment landscape for companies that are not controlled, i.e., firms in which senior executives and directors have a relatively small percentage of the overall shareholder vote. This allows aggressive outside investors to pressure corporate incumbents to take the actions required to bring about positive change. If insiders refuse to maximize shareholder value, skilled activists may be able to remove them through a proxy contest or an outright acquisition of the company via an unsolicited tender offer.