Interview with Abba Horwitz, Old School Partners

by: Zack Miller
An interview with Abba Horwitz of Old School Partners was featured as part of our new subscription newsletter, Israel Opportunity Investor.
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Tell us a little about yourself and your fund.
Abba Horwitz, Portfolio Manager: We started started Old School Partners in March of 1999.  Since then, we’ve compounded a net return to investors of around 19%.  We’re running the fund for the most part from Israel.  With a junior partner, I’m managing roughly $60 million.

What’s your philosophy?
AH: We focus primarily on the small to mid-cap world.  We apply a value approach.  Basically, we’re looking for two things.  We’re looking for value where there is a clear catalyst to unlock this value or cheap growth with value undiscovered, on the cusp of coming out.  Unfortunately, I’m not a big commodity buff and have not been riding this current wave.

Can you give us a couple of examples of some successes you’ve had?
AH: I’ll give you an example from last bear market of 2002.  We invested in a firm, CNXS, that manufactured a product called Breathe Right nasal strips.  The firm had $1.50 per share in cash, was going to earn $0.40 and was trading at $4.50.  The following year, the stock was up three or four times as the company expanded margins and grew its business.  We saw insider buying and management change, two other things we look for.  Eventually, Glaxo (NYSE:GSK) bought the company for $37.

A holding on our books now is New Motion (NWMO).  This company has $1.50 per share in cash and no debt.  The company provides mobile content and own properties on the internet that target 25 million users per month.  This division is doing very well.  The company makes money via advertising but more importantly, New Motion sells content over the mobile and delivers advertising alongside it.  With over one million users it’s charging for content, mobile advertising is off the charts as well.  The CEO is someone I know very well.  It merged with Traffic, Inc., a company with great assets but that was not run efficiently.  Now, the company has $15 million in cash flow and trading at 3.5-4x this year’s cash flow, and it's growing the top line at 30-35%.  We’re basically witnessing the shareholder base transitioning from the old TRFX investors to a new set of shareholders.

Do you invest in Israeli companies?

AH: I used to invest in Israeli stocks a lot.  Israeli companies have disappointed so much though that it’s hard to get quarter-to-quarter confidence in their numbers.  I find it difficult to find ideas that I can invest in over a long period of time in the Israel universe.  The ones that I do put money into are mostly trades, not investments.  Look at BluePhoenix Solutions (BPHX).  BPHX mentioned to investors that in spite of the bad market, the company believed it could do $1 in earnings and then things got worse and it couldn't achieve this goal.  The stock was cut in half, and in half again.   Given their high tech businesses, some Israeli firms don’t have very good visibility and therefore, do not have the track record I’m looking for.

 We do own RRSat Global Communications (RRST), a company that global broadcasters use to outsource their satellite transmissions.  It’s actually a bit of a different animal.  It has $2 per share in cash.  Backing out the cash, this firm has a high level of visibility.  We know its backlog.  The likelihood of the company missing has to be less because it’s hard to cancel this type of business.  It has been hurt because of the strength of the Israeli shekel, which has hurt its margins.  I don’t see a visibility issue and at this level, we think the risk/reward is pretty good.  The company is also in a high growth market, and could be doing this for a few years, and growing 20-25% per year.

Are there other Israeli companies on your radar?
AH: We’re looking at RadVision (NASDAQ:RVSN), the Israeli developer of video conferencing technologies.   It’s trading at about cash.  I estimate that its SIP business is worth at least a buck or two.  Maybe its enterprise business is worth nothing, but it’s probably doesn’t have negative value.  It’s possible that maybe no one cares about this market.  It’s very intriguing if you are a pure value investor.

We’re also looking at cosmetic laser company, Syneron (NASDAQ:ELOS).  The company doesn’t have good visibility and sells a product that is used for high-cost cosmetic procedures.  In 2009, the introduction of a new, home product could be huge for it.  The company continues to hit its numbers even in a tough environment and that says something about it and the products if it can continue to do this.  Compared to its peers, Syneron outshined everyone last quarter.  With some newer products that have recurring revenue attached to the company, this could be a very interesting and different approach to its business.

Lastly, we have car-security firm Ituran (NASDAQ:ITRN) on our screens. Its whole business essentially is in Israel, Brazil and Argentina.  However, we’re just  not comfortable with this geographic spread.

What would it take to get you more interested in Israel?
AH: With a couple exceptions, I’d like to see greater management depth.  One problem is that Israeli entrepreneurs don’t take their firms to the next level.  This occurs because many managers don’t have sufficient management experience.  What should happen is that these founders need to bring in another layer of talent.  The minute that one product stops selling, these entrepreneurs don’t know what to do.  They spend more on R&D.  If you really knew what was going on inside these companies, you would never invest in them.  Typically, there are only one, two, or maybe three people who know what’s going on internally, and that’s it.

I’d love to invest in more Israeli companies.  Take ClickSoftware (NASDAQ:CKSW) as an example.  It’s a software company with a good product.  Management kept promising performance but continues to bring projections down and down.  As a portfolio manager, I can’t afford to lose money on these stocks.  Even though I have competitive advantage in investing in Israeli companies because I’m based here, I can’t take the risk on these firms.

We’re also looking at Comverse (NASDAQ:CMVT).  It needs to get re-listed on the Nasdaq from the Pink Sheets.  It’s interesting if you do the arithmetic: its businesses are doing really well.  The company has a huge cash position and could be trading in the mid-twenties.  Comverse is expected to get re-listed in August, and expectations are so low.

What’s your view on the strength of the Israeli shekel?
AH: I’m not a currency person.  Israel is a small country and eventually, it can’t have export businesses survive in such a strong currency environment.  If the American dollar were to strengthen, it would weaken the shekel.  Upgrades in Israel’s economic status and higher growth have all helped shekel versus the dollar.  What I don’t understand is why, with all the political instability in Israel, in its Knesset - I don’t understand why that hasn’t affected the shekel.  If you remember the Clinton impeachment hearings, the market went down every single day.  Yet in Israel, it has no impact.


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