Identifying Winning Value Stocks

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Identifying Winning Value Stocks

• How to Find Companies that are Trading Well
  Belowtheir Intrinsic Value

World Money Show February, 2006
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Company Introduction

• Financial Newsletter Publisher
• Founded in 2001
• Independent, Unbiased Research
• Five Different Newsletters
• Over 100,000 Subscribers
• Paul Tracy Co-Founder

World Money Show February, 2006
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Todays Topic

• Identifying Winning Value Stocks

• Edited by John DiStanislao
• Degrees in Investment Finance and Accounting
• Two Decades of Experience
• Uses advanced screening methods to uncover
  companies that are trading at a significant
  discount

World Money Show February, 2006
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Where to Search for Undervalued Companies

• Ignore the mainstream financial press
• Widely-followed firms tend to be efficiently
  priced
• Look at small-caps and select micro-caps

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Reasons to Look Primarily at Small-Cap and
Micro-Cap Value Stocks

• Less Coverage on Wall Street
• More Likely to be Undervalued
• More Likely to have Hidden Assets that Wall
  Street isnt fully aware of

World Money Show February, 2006
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Example American Intl. Industries (AMIN)

• Diversified Holding Company
• Majority owner of Delta Seaboard a well
  servicing contractor
• Full ownership of Brenham Oil Gas
• Majority stake in Intl. American Technologies
• Full ownership of Northeastern Plastics
• Owns a variety of real estate

World Money Show February, 2006
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AMIN Price Chart on June 20th, 2005
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What really caught our attention about AMIN

• Selling a piece of waterfront property at an
  asking price of 16.3 million
• At that point in time last summer, investors
  were valuing the ENTIRE COMPANY at just 12
  million
• What this meant is that Wall Street was valuing
  the entire company at far less than the value of
  its real estate assets alone

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Enterprise Value vs. Market Cap.

• Market Cap. Shares outstanding Share Price
• Problem Market cap. just measures equity value
  and ignores the impact of debt and cash.
• Enterprise Value Market Cap. Total Debt
  Cash
• Enterprise value better represents the TOTAL
  value that all investors both equity holders
  and bondholders have placed on a firm

World Money Show February, 2006
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AMIN Land Sale was available for all Investors to
See
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An Important Note aboutCorporate Balance Sheets

• Real estate assets are listed at their
  HISTORICAL COST
• This cost is often far different than the real
  estates current market value.
• In the case of AMIN, the firms waterfront
  property was recorded at its historical cost of
  only 225,000, yet its current market value was
  around 16 million

World Money Show February, 2006
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Shares of AMIN Soar 100 After the Firm Receives
Two Cash Offers for its Valuable Real Estate
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What to Look for in an Undervalued Stock

• Low levels of institutional ownership
• Little or no brokerage research available
• Quality earnings
• Strong cash flows
• Experienced management teams
• Shareholder-friendly firms
• Low debt
• Substantial liquid net assets
• Enterprise value of less than 3X gross profits
• Reasonably valued relative to annual sales
• Strong profit margins
• Avoid common pitfalls

World Money Show February, 2006
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Time-Tested Methods to use when Searching for
Companies with Hidden Value

• High levels of property, plant and equipment
  relative to current share prices
• Rising net tangible assets
• Large cash balances
• Low enterprise values
• Insider buying by several key executives
• Promising new products
• In-depth industry analysis

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Staffing and Outsourcing Industry(Relative
valuation comparison)
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Adjusted Enterprise Value (EV)
Adjusted EV Share Price Cash Accounts
Receivable Debt
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Staffing and Outsourcing Industry(Including
adjusted enterprise value)
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General Employment (JOB)Data as of June, 2005

• Share Price of 1.20 in June 2005
• 0.91 per share in Cash
• 0.36 per share in Accounts Receivable
• 0.44 per share in Liabilities
• Adjusted Enterprise Value 1.20 - 0.91 -
  0.36 0.44 0.37 per share
• Book value of 1.00 per share
• Free Cash Flow of 1.00 per share
• Annual sales of 4.00 per share

World Money Show February, 2006
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Shares of JOB Soar 70
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Important Catalysts

• Positive earnings
• Important press releases
• Acquisition by a larger competitor
• Other investors finally discover the stock

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A few examples of winning value stocks weve
uncovered since May 2005
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Vodavi Technology (VTEK)

• Maker of traditional and IP-based phone systems
• Growing demand for computer-based phones
• Enterprise value of 17 million
• 6 million cash 11 million in A/R and
  inventory 17 million in current assets
• Trading at half of industry average P/E and
  P/FCF ratios
• 50 million in annual sales (EV/Sales 0.3)
• 15 million in gross profits

World Money Show February, 2006
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Harvest Natural Resources (HNR)

• Oil gas company with primary operations in
  Venezuela
• Shares of HNR have declined -50 in the past
  year
• Operating cash flows surge 65
• P/E of 7 well below industry norms
• Enterprise value (EV) of 200 million
• EV / Gross Profit ratio of 1.3
• Profit margin -- 25
• 71 million in free cash flow

World Money Show February, 2006
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Collectors Universe (CLCT)

• Grades and assigns value to collectibles
• Undisputed market leader
• 70 million in cash and no debt
• Enterprise value -- 60 million
• 34 million in annual sales
• 7 million in annual EBITDA
• 20 operating margins
• Expanding into new markets

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General Employment (JOB)

• Professional staffing company
• Enterprise value -- 3 million
• 20 million in annual revenues
• 12 million in gross profits
• Clean balance sheet
• One of the best values in the Staffing
  Outsourcing industry

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Avalon Holdings (AWX)

• Diversified holding company
• Strong cash flows
• Substantial real estate holdings
• Enterprise value -- 6 million
• Annual sales -- 35 million
• Annual free cash flow (FCF) -- 2 million
• Strong balance sheet with 11 million in cash

World Money Show February, 2006
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Sten Corp. (STEN)

• Burger Time fast food chains
• Market cap -- 10 million
• Strong balance sheet -- 4 million in cash
• Significant real estate holdings
• Price/Sales of around 1.0
• Share buybacks and insider purchases provide
  positive signals from management

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X-Rite (XRIT)

• Manufactures optical electronic sensing
  instruments
• Double-digit sales growth
• 20 million in cash, zero long-term debt
• ROE of greater than 20
• Stock now trading near 52-week low
• Recent round of insider purchases

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Thanks for Attending
World Money Show February, 2006