Are you clueless about the stock market? Or perhaps better, could you admit to being clueless? For myself, as much as I purport to know about businesses, the stock market frequently baffles the mind. Reflecting the investing world’s immediate hopes, fears, beliefs, and dreams, the movement of prices seemingly offers a window into the shallower parts of our soul. Even for the seasoned observer, the market’s waves of euphoria and despair cast him reeling for clues–a narrative, a story–that can explain and predict its moves.

In the midst of the storm, Mariusz Skonieczny of Classic Value Investors offers the interested observer a map—Why Are We So Clueless about the Stock Market? (Investment Publishing, 2009)

In the past, we’ve profiled a handful of microcap companies (FNET, KSW, LIMC, RMCF), either with discernible competitive advantages, particularly rational management, or an imminent catalyst for unlocking shareholder value.

We continue in that vein today by profiling Tucows, Inc. (TCX), an ICANN-accredited internet domain registrar based in Toronto that manages email services and over nine million web domains. Through its subsidiary Butterscotch.com, it also owns one of the oldest and most popular software download sites on the Internet. At present, its principal shareholders include: Lacuna, LLC, which controls 17.7% of outstanding shares (as of 3/23/09), Diker GP LLC (13.7%), and Fertilemind Capital Fund I, LP (5.7%).

It is our daily habit to take a stroll through the recently filed Schedule 13Ds and 13Gs. On rare occasions we uncover a viable investment with an activist pushing to catalyze sedentary management. On rarer occasions we find agitated investors angling for a fight.

In the recent 13D filing for Peerless Systems Corporation (PRLS), its Chairman Timothy Brog expresses some frustration with Highbury Financial’s (HBRF.OB) current Board and management:

What’s the old bromide—never judge a book by its title? In the case of Christopher Mayer’s Invest Like a Dealmaker: Secrets from a Former Banking Insider (Wiley, 2008), my mind conjured up understuffed chairs in a sleepy room filled with Donald Trump, Wallace Wattles, and a confused Hank Paulson. Perhaps my imagination runs further than others.

In truth, Invest Like a Dealmaker is less about deals, secrets, and banking insiders, and instead a readable and useful introduction to valuing companies and uncovering undervalued securities. Author Christopher Mayer, who edits two newsletters Capital and Crisis and Mayer’s Special Situations for Agora Financial, surveys the analytic tools used by prominent investing gurus and peppers his text with interesting tales of underappreciated characters in the field.

On May 15th, the Board of XTENT, Inc. (XTNT) announced that it had approved a plan of dissolution. Since liquidations often involve significant uncertainty—particularly concerning distribution timelines—I have found them a fruitful place to look for market inefficiencies. Prior to the announcement, the stock traded at about $1 per share, a price which valued the company at $23.3 million. After the announcement, the stock plummeted to .30 per share, or about $7 million.

Looking through XTENT’s financial statements, one could find relatively meager resources, no sources of revenues, lavish operating expenses, and a host of off-balance sheet liabilities. In fact, in the first three months of the year, the company burned $9.9 million of their $20 million in current assets on operating expenses (remember—no revenues). As of March 31, 2009, the company had $12 million in cash left to burn.

Some recent fussing over Google (GOOG) has followed from an unlikely source—the Berkshire Hathaway (BRK.A) annual meeting. During a Sunday press conference, Charlie Munger quipped that “Google has a huge new moat. In fact I’ve probably never seen such a wide moat.”

Unfortunately, Charlie’s brevity and the reporters’ lack of curiosity leave the reader to surmise what he really means. Warren Buffett kindly filled a bit of the gap when he added that Google’s search-linked advertising is “incredible.”

For the investor with limited resources, success not only depends on how many rocks she turns over, but also the probability that those rocks reveal treasures. Better to flip a hundred rocks at Sutter’s Mill than a million at the Hudson River.

Of course, one must mine the terrain that she commands. Following Buffett’s advice, one should always begin within her circle of competence. But when opportunity arises, how and where should the circle expand?

Is investing more art or science? Cash flow analysis and industry assessment submit to quantitative measures. Yet, economic moats and management’s rationality less so. The most successful investors use both quantitative and qualitative assessments to find undervalued businesses, though the former is certainly the standard route. For most, investing is primarily a science.

Ostensibly, Malcolm Gladwell’s book, Blink: The Power of Thinking without Thinking (Back Bay Books, 2005), is not a book about investing. Being interested in the human mind making judgments, Gladwell highlights situations in which rational, well-considered judgments are more inaccurate than reactive, non-reflective judgments. Peppered with memorable, illustrative anecdotes, Blink contrasts scientific rationality with the aesthetic, to see which more reliably guides us to make correct decisions (spoiler: it’s not an either/or).

eBay (EBAY) filed its first quarter 10-Q at the end of April, and the stock price launched. With two highly lucrative toll-booth businesses—brokered sales and payment services (Paypal)—and an exceedingly low price (briefly selling below $10 per share earlier this year), it caught our attention earlier this year. Though we haven’t found the recent decline in eBay’s GMV (gross merchandise value) concerning, we do continue to worry about eBay’s capital allocation, its managerial compensation, and its emphasis on favoring high volume sellers (see our previous analysis of pretended problems, potential problems, and rejoinders).

Regarding capital allocation, eBay repurchased no shares in the first quarter, despite seeing its lowest share price since early 2001. And true to habit, eBay entered a definitive agreement to acquire Gmarket Inc. after the first quarter closed, in April. Over the years, eBay’s management has clearly preferred acquisitions to share repurchases, and not all of the acquisitions have been prudent uses of capital (see e.g., their recent sale of Stumbleupon back to its founders for less than their purchase price). Though it is possible that Gmarket at 27x trailing earnings is a better investment than eBay’s own shares at 13x trailing earnings, the former clearly anticipates robust growth that may not materialize. In my view, buying Gmarket rather than eBay’s own shares is the riskier route.

Spring is the season for annual reports, and many executives use the occasion to spin a few tales about business in the year past. Though ostensibly these are letters from management to the boss—that is, the owners—far too many seem to take their storytelling lessons from the habits of evasive, guilty teenagers. On rare occasions one finds an honest, clear assessment of the year’s work, and such candor is impossible to miss. For the investor, the spring season is one for assessing the pen of management, in order to discern trustworthy and honest stewards of capital.

Of course, candor from management has almost become an endangered species in recent years. Rittenhouse Rankings Inc. has followed this trend with its annual CEO Candor Scores, and in 2007, found that in shareholder letters “confusing and misleading statements or “dangerous fog,” increased 66 percent… up from 39 percent five years ago.” Instead of providing an impartial and clear analysis of successes and failures, more and more executives speak their Orwellian language, using “words to describe ‘the truth we want to exist,’ rather than facts.” And the point here is not merely pedantic, for Rittenhouse Rankings argue that “high candor scores and rankings reveal high quality leadership, cohesive corporate cultures, more reliable accounting and superior financial performance.”

Through the rambling course we’ve taken on this blog, we’ve highlighted a few businesses with wide economic moats. Some offer products that satisfy basic and enduring needs; others sell a commodity product—like insurance or suit liners—but with the lowest cost structure in the industry. Elsewhere, we've seen wide moat businesses with a network advantage that makes their service difficult to replicate—like Craigslist or eBay (EBAY).

However, I am increasingly persuaded that the caliber and experience of management is the most important criterion for determining the width of an economic moat. Given today’s rapid pace of innovation and competition, even the best businesses will require excellent strategic decision-making and creative problem-solving to survive and thrive. As we saw in Only the Paranoid Survive, competitive forces could have sunk Intel (INTC) had Andrew Grove not boldly broken their old habits. If such crisis points arrive even more frequently for business managers of our future, a strong case can be made that strong management is the best tool for widening a business’ moat.

Rumors and news about eBay (EBAY) are popping onto the business newswire these days. Whatever they’re sizzling in their pan, it smells and looks like a new recipe. For a corporation with two excellent, high margin, wide moat businesses—auctions and Paypal—shareholders would welcome and do deserve a “dish” with better capital allocation in the years ahead.

So what’s the news? For one, Skype’s founders want to buy their creation back, though eBay denies that they’re close to a deal. Also, today, StumbleUpon’s founders disclosed that they had brought their baby back home, which they had sold to eBay for $75 million two years ago. And lastly, eBay appears close to purchasing a 34% stake in Korean online auction operator Gmarket.

A stock represents an ownership stake in a business. But why should that stake ever be worth anything? In the worst cases, imprudent management funnels future earnings back into unprofitable endeavors and overpriced acquisitions, and your stake could become worthless. In the best cases, prudent management deploys capital where it can provide productive returns—either by growing the business organically, making acquisitions, paying dividends, or repurchasing its outstanding stock.

In recessionary periods, attempts to grow a business organically often do not meet with immediate success. However, if a recession depresses the market value of your business, buying back temporarily cheap shares becomes an interesting—albeit fleeting—opportunity.

Moody’s Corporation (MCO) is “a provider of (i) credit ratings and related research, data and analytical tools, (ii) quantitative credit risk measures, risk scoring software, and credit portfolio management solutions and (iii) securities pricing software and valuation models” (10-K from 3/2/09). They operate their business in two segments—Moody’s Investor Service (MIS), which primarily rates debt securities in the global capital markets, and Moody’s Analytics (MA), which provides “quantitative credit risk scores, credit processing software, economic research, analytical models, financial data, securities pricing software and valuation models, and specialized consulting services” (10-K from 3/2/09).

The foremost competitor for MIS is Standard and Poor’s, owned by McGraw-Hill Companies, though Moody’s also shares the ratings market with Fitch, Dominion Bond Rating Service Ltd. of Canada, A.M. Best Company Inc, Japan Credit Rating Agency Ltd., Rating and Investment Information Inc. of Japan and Egan-Jones Ratings Company.

Much toil and time is given to the study of markets and businesses. New insights can be interesting; the characters we encounter entertaining; and the bargains rock bottom. For the rainmakers out there, the latter are likely most useful, as every field needs a periodic downpour.

Yesterday it was the bondholders of Nova Chemicals Corporation (NCX) that got the rain, as their $250 million in outstanding 7.4% medium-term notes were paid in full (cusip: 669936AA4). On the surface, the event may not strike you as noteworthy, but the story gets more interesting when you realize that these very bonds were trading at 58 cents on the dollar during the week of February 16th. Worried that Nova would not be able to pay these notes off or obtain the requisite financing by April 1st, buyers left Nova’s market deserted. Despite a book value of $750 million at December 31, 2008, the equity sellers on February 20th valued the company at less than $150 million.

[Today, we have a guest author, Daniel Wahl, from The Guru Five. Thanks Daniel.]

As usual, Buffett can’t shake someone’s hand without the press immediately speculating whether that person is (or is not) going to be his successor. Getting old isn’t all beer and skittles–even if you’re a billionaire.