Uncovering the Value of Enterprise Value: January Portfolio Review

by: Randy Durig
Low Enterprise Value Stocks: January 2011 returns

The month of January 2011 was disappointing after the rewarding year-end rally. Utilizing our selection criteria, the performance of the holdings in the
High Cash Stock Review portfolio was down an average of -1.62 % percent compared to the S & P 500’s 2.33 % gains.

In the fourth quarter, the High Cash Stock review was up a strong 20.38% percent compared to the S&P 500’s gains of 9.92%.

Our third quarter 2010 performance was rewarding with 16.68% returns compared to the S & P 500’s 10.62% return. Please review our update.

Enterprise Value is defined as the total company value. This includes adding the market value of the common equity, the debt and preferred stock together and then subtracting all the cash and cash equivalents. The cash is removed because, like when DivX was purchased, the cash was not part of the purchase and went back to DivX shareholders. Acquirers paid for basically for the ongoing business. When our founder last purchased and sold business in the private markets, they did not include cash.

We seek companies with little to no debt and low or negative enterprise values meaning that the underlying ongoing business operations are trading close to nothing. This is where high value can be found. The ultra simplified question then becomes would you buy a profitable lemonade stand with $100 dollars in the till for under a $100? The answer is hopefully a resounding yes.

We yearn for these unique situations. After filtering these companies to select the ones with the best cash flows, business models and earnings forecasts, we include them into the High Cash Stock review. Below are the equity positions that had these characteristics when they were published on in Seeking Alpha and have done well.

The January added to the second half of 2010 based on simple math is:
High Cash Stock Review.
S& P 500
January 2011
2.33 %
Fourth Quarter 2010
20.38 %
9.92 %
Third Quarter
16.68 %
35.44 %
23.15 %

Fourth Quarter 2010 performance on our Seeking Alpha listed stocks:
January 2011
Fourth Quarter 2010
China Yuchai International Limited (NYSE:CYD)
- 10.38 %
63.14 %
Homeowners Choice, Inc. (HCII)
3.34 %
* 29.69 %
KHD Humbolt Wedag International AG (OTCPK:KHDHF)
5.56 %
22.76 %
-1.70 %
New to the portfolio
O2Micro International Ltd. (NASDAQ:OIIM)
6.80 %
(- 1.44) %
Openwave (OPWV)
- 4.25 %
New to the portfolio
The Bancorp Inc. (NASDAQ:TBBK)
- 7.57 %
44.02 %
Tollgrade Communications Inc. (NASDAQ:TLGD)
0.00 %
28.10 %
Tessera Technologies Inc. (TSRA)
- 21.81 %
19.55 %
Silicon Graphics International Corp (NASDAQ:SGI)
9.86 %
11.21 %
Sonus Networks, Inc. (SONS)
3.00 %
(-27.76) %
Terra Nova Royalty Corporation (NYSEARCA:TTT)
2.30 %
*14.61 %
*Dividends not included

It appears the top performers one quarter are often the worst the next as Silicon Graphics was the worst performer last year followed by O2 Micro. This month they have been the two best performers. Both China Yuchai and The Bancorp made strong runs last quarter driving the portfolio higher with both the best and second best performing in the fourth quarter of 2010. In January 2011 they are the second and third worst performers. Sonus, the worst performer in the fourth quarter, was up very strongly in the third quarter prior to the decline.

We started the High Cash stock portfolio with the understanding that very low values may provide protection from a market sell off. Positive earning, cash flow providing profit increase, possible stock price expansion are all examples that assist in raising these very low values. Sonus and Tessera both had a disappointing quarter, Sonus last years forth quarter and Tessera reported in January, each gave up about half their previous gains after our first review. This is helping us solidify our model, that if the value is low enough when investing, even on a very bad quarter, the overall damage might be minimal in these two cases loose half of the gains.

The High Cash Stock review appears to mirror the performance of the Income and Investment review (which has the same investment criteria while requiring a dividend payment.) This portfolio returned an -.06 % in the fourth quarter and this is not including the 4% annualized dividend yield.

Updated portfolio review: No positions were added in January 2011.

No positions were sold during the month.
Additional disclosure: Both Durig Capital and its clients have positions in all the above positions. Performance is bases on written reports published as1) High Cash Stock Review or2) Income and Investment Portfolio.These both are hypothetical portfolio illustration and no money was invested by clients or Durig Capital in this enclosed published manner. Hypothetical only takes into consideration all High Stock Reviews or Investment and Income stock position that were written and publicly published plus held for the entire quarter. Any new position or liquidate position that occurred in the published quarter were not included in the performance. This assumes all positions have an equal investment value at the beginning of each quarter. This is purely a hypothetical account and actual performances of individual active accounts have preformed both above and below the hypothetical returns in the past and most probably will in the future. Past returns are no way indicative of any guarantee of any possible future return. Individual suitability and advice should be sought about any particularly matter or circumstance.