Archive for May, 2014

The Winners of Failed Patent Reform

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Last Wednesday night, patent reform was effectively killed (source). And given upcoming mid-term elections, it is unlikely that efforts will get rebooted anytime soon. This is a significant surprise to many as patent reform had largely been a bipartisan effort and was seen as an easy win for politicians. (I put the word surprise in bold because it is perhaps the single most important word in investing… wherever there is surprise, there is opportunity.)

A natural question follows every surprise: who benefits most?

In this case, the answer is clear: Intellectual Property holding companies. In the short to intermediate term, this news completely eliminates the biggest fear surrounding the sector: political risk. Any investor that believed a significant impairment to future earnings was coming has to completely rethink their position. In the longer term, a failure to enact patent reform implies the IP holding companies are in a significantly stronger political position than the market previously believed (some insight here). And this makes me think any future legislation will have little impact to the patent enforcement / patent licensing business model going forward.

This surprise opens a window of investment opportunity as the market begins to re-rate sector risk. And because lower risk equals higher multiples and higher stock prices, I believe the following companies are positioned to outperform the market over the coming months:

Premier Exhibitions (PRXI) – Lots of Uncertainty; Not a Lot of Risk

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As I mentioned in this note, I don’t make a habit of writing about small cap companies with very little liquidity. This time I’m making an exception with a huge “flashing lights” warning – this stock trades $35,000 in dollar volume per day. Buying or selling more than $3,500 worth of this stock in a single day will likely move the market. So if you are inclined to take the risk, put the trade on in your PA, not your fund.

Below I present the investment case for Premier Exhibitions (PRXI) via excerpts from the April 22 shareholder call (read it in full here):

First, let me update you on the strategic alternatives process being pursued with JP Morgan. Our Board, along with JPM, continues to review strategic alternatives. As part of this process, our preliminary valuation work based on financial data provided to JP Morgan by Premier indicates that our shares are trading at a discount to the intrinsic value of the cash flows from operations.  While no valuation from an investment bank is precise, the range of values being indicated by JP Morgans’s preliminary valuation of Premier’s operating business exceed the Company’s current market capitalization before consideration for the value of the Titanic assets.

Buyside Notes: On an operating basis, PRXI shares are cheap. If you include the value of their exhibition assets, the shares are very, very cheap.

Premier owns a unique, one-of-a kind collection of artifacts and intellectual property related to the most iconic underwater wreck site in history. You are also aware that the auction process in 2012 did not yield a buyer for the collection. Without revisiting history, the process gave us great insight into the asset and the complexities involved in selling it. While the current market price for Premier’s stock indicates investors have established a diminished value for the Titanic assetswe remain confident that these assets hold tremendous value for shareholders.

Buyside Notes: A 2009 appraisal done by the courts found the fair market value of the Titanic artifacts to be $110,859,200 (see page 8 here). Management stated that the “value of the assets with the IP surrounding the collection is $189 million” but that the $189MM doesn’t include “intellectual property that was obtained in the dive in 2010, […] a database of information related to all the artifacts, all of the video, all the photography, all the passenger stories […].”

Let’s assume the low end is the right value. $110MM doesn’t include the “IP” nor does it include any appreciation since 2009, but let’s use it. Now compare $110MM to the current enterprise value of the Company, which is $42MM. The difference between the value the market is assigning and the intrinsic value is a gaping $68.7MM (note that in a sale, there will be tax implications so shareholders wouldn’t realize the entire $68.7MM but the point remains: based on the assets alone, this Company is seriously undervalued).

The Demise of the Set-Top Box Makers

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 How does change happen? Slowly, then all at once.

I recently wrote about the disruption of cable TV (note here). As I dive further into the Cord Shaving theme, I find myself struck by the unnecessary complexity of the set-top box industry. And I can’t help but consider the parallels between today’s set-top box makers and Nokia, which went from a dominant handset maker to irrelevant in just a few short years (background here).

Instead of reviewing the maze of middleware, software and protocols that defines the set-top box market, I think it is more helpful to abstract the complexity away and start with a very simple question:

What is a set-top box?

To me, it’s just a technical layer that translates input to output.

Once you understand that part, you get to the question that really matters:

What’s proprietary about this “technical layer”?

And the answer to that question may surprise investors: Nothing.

Altisource Asset Management (AAMC) – A $2 Billion Dollar Parasite

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Bill Erbey’s empire is a complicated web of companies with inter-related interests. The history first:

AAMC Corporate Structure


The Host-Parasite Relationship between RESI & AAMC

The focus here is on RESI and AAMC’s parasitic relationship – here’s how it works:

With shared upside, no bills and no downside, the question is:

Is AAMC disproportionately benefitting at the expense of RESI shareholders?

The conclusion from Glaucus Research is an emphatic YES. RESI massively overpays AAMC.

Firsthand Tech Fund (SVVC) – Realizing Value

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In Mid-March, I wrote about Firsthand Technology Value Fund (SVVC) and a guaranteed return strategy I call the Hall of Mirrors trade (note here). The only way to get this guaranteed return, however, is to either (1) have a management team that’s intelligent enough to recognize it and do something about it, or (2) get an activist involved that forces the value creation. In the case of SVVC, I noted that renowned activist Phil Goldstein would be that catalyst concluding, “It wouldn’t surprise me if one day soon the valuation gap of SVVC completely disappears.”

It looks like today SVVC is on the road to unlocking value for shareholders via the Hall of Mirrors trade:

The settlement also provides that the Fund’s Board approve a plan for the Fund to repurchase up to $10 million of common stock in open market purchases during 2014, and to conduct a self-tender offer for at least $20 million worth of common stock at 95% of net asset value to be completed no later than January 31, 2015. Further, the Fund has agreed to liquidate its Facebook and Twitter holdings no later than September 30, 2014 and October 31, 2014, respectively, and to distribute any net realized gains from those holdings to shareholders within 60 days of completing those liquidations (source).

So Phil Goldstein and his Bulldog Investors record another win and shareholders get to ride along. Well done, Phil. As for you, fellow investor, some advice: read Phil’s semiannual letters – it’s a no lose trade (find them here).