The Fat Pitch Financials Portfolio has maintained its downward trajectory this past month. The portfolio ended June with a balance of $1,225,136.89 versus the May balance of $1,291,425.91. On a positive note, while the Fat Pitch Financials Port was down only 4.09%, the S&P 500 was down 8.43% this past month according to the Fat Pitch Financials Marketocracy numbers.

Looking at mid-year performance, the Fat Pitch Financials Port is down 11.03% since the beginning of the year, while the S&P 500 is down 10.64%. Basically, I’ve been performing at about par with the S&P 500 this year. That’s rather disappointing given my portfolio’s value focus. However, I’ve read several reports indicating that several other professional value investors are also struggling.

My overall total returns for this portfolio are 23.51% since inception versus 21.76% for the S&P 500. More importantly, the Fat Pitch Financials Portfolio annualized returns are 5.75% versus 5.35% for the S&P 500. My goal is to get my annualized returns above 10%, but it looks like for now I have a long ways to go before reaching that goal.

The following table provides a breakdown of my current holdings and their performance:

Fat Pitch Financials Holdings as of July 1, 2008

There were no portfolio transactions this past month. However, there were some interesting developments in some of my holdings. Microsoft (MSFT) dropped its merger talks with Yahoo (YHOO) earlier in the month, but now rumors are surfacing that some level of talks are back on again. Western Sizzlin’s Sardar Biglari was successful in wrestling control of the Steak & Shake (SNS) board. Hopefully, now that Biglari is Chairman of the Steak n Shake Board he can unlock that value that he sees in this poorly performing regional restaurant chain. He is also signalling that he feels Western Sizzlin is undervalued by initiating a significant share buyback last week. There other developments that probably deserve some discussion if I had more time.

I still hold $302,310.77 in cash in this portfolio, so I can add positions easily as value opportunities are discovered. Given the latest negative market fluctuations, it is likely that I’ll be dipping into this cash reserve soon.

Finally, I also wanted to mention that I bought some shares of Kraft (KFT) for my personal portfolio this month and thus ended the discrepancy between the Fat Pitch Financials Portfolio holdings and my own actual holdings.

Disclosure: I own all the shares mentioned in this post except Steak n Shake (SNS).

I just wanted to provide you with a quick update on the Fat Pitch Financials Portfolio. This Marketocracy portfolio ended the month of May with a total value of $1,291,425.91 (the account started with $1 million). The portfolio was down 1.48% for the month of May. For the last 12 months, the portfolio is down 2.58%. Nevertheless, the portfolio is still up 28.78% and has an annualized performance of 7.09%.

I still have $301,724.31 in cash, which should be a sufficient amount of dry power in case the markets really meltdown. There are a couple of stocks I’m watching for just such an opportunity. I’m also starting to consider adding to some of my current holdings that have gone down in price recently.

Here is the break down of my current holdings as of June 6, 2008:

The only transaction this past month was the purchase of Sotheby’s (BID) shares. As you might remember from my previous post, I added 2,650 shares of Sotheby’s for $24.55 per share on May 13, 2008. As you can see from the table above, I’m already up 7%. On the other hand, Mothers Work (MWRK) share price continues to disappoint.

Disclosure: I own all the shares mentioned in this post.

Today I added shares of art auction house Sotheby’s (BID) to the Fat Pitch Financials Portfolio. The shares were purchased earlier this morning for an average price of $24.55. As is typical with any new purchase, shares of Sotheby’s dropped further today to a low of $23.75. It always seems like a little pain is needed before gains can be had.

Regardless, I am very excited about this purchase. It is very rare to be able to pick up shares in monopolies or duopolies for such a low multiple. Even though there may be a bubble in the modern art market according to some reports that I’ve read, other art sectors haven’t seen as much appreciation. Even if the modern art bubble deflates, art collectors will continue to use art auctions in the future regardless of current art prices. The choice typically comes down to either Sotheby’s or Christie’s when selling major works of art. I like those type of odds. Basically, Sotheby’s is a toll both on the road to obtaining fine art.

I expect that Sotheby’s may get a bit cheaper if this housing led recession starts to impact the super wealthy. However, unless things get much much worse, it is unlikely that the wealthiest, with their multiple income streams, will be sufficiently impacted by the economy to curtail their purchases of fine art and collectibles. If I’m a bit too early, I still have sufficient cash reserves to buy additional shares at an even lower price.

Disclosure: I own shares of Sotheby’s.

The Fat Pitch Financials Portfolio was down 1.21% in April. Considering that the S&P 500 was up 4.87% last month, this performance was rather disappointing. Looking back over the past 12 months, performance was was a bit better. The Fat Pitch Financials Port was up 0.36% versus a negative -4.93% for the S&P 500. Most importantly, the annualized rate of return since inception for this portfolio is 7.70%, which basically matches the 7.83%.

I recently received a question about the beta of the Fat Pitch Financials Portfolio. I don’t normally track the beta of my portfolio, so this was a rather interesting question. Thankfully, Marketocracy tracks the beta, alpha, and R-Squared for my portfolio. The beta was 0.50, which basically tells me that I have a very boring low volatility portfolio. Alpha is 4.66%, which I believe means that this portfolio beat the S&P 500 by 4.66% on a risk adjusted basis. Finally, the r-squared for the portfolio is 0.29, which means the portfolio does not closely track the index. From what I’ve just read, this low r-squared also indicates that I should put much weight on the beta number. I don’t normally look at these portfolio statistics. Do other value investors track these numbers?

As far as transaction, April was a quiet month. No trading occurred. However, there was quite of bit of news to read about my stock holdings. Microsoft (MSFT) drama with Yahoo (YHOO) has been interesting to follow. I not in favor of the bid for Yahoo, so the passing of the offer deadline is good news for me. However, my guess is that this story is not over yet.

Western Sizzlin also caught my attention a few times this month, but so far all the news has been bad. None of the deals (SNS and ITEX) have been completed. These transactions had a significant negative on earnings. However, I’d rather see Western maintaining disciple than seeing Sardar Biglari upping his bids.

Hopefully, May will bring some good news for my companies. In the meantime, I’ve got my eye on a few stocks and I continue to hunt for other value opportunities.

The Fat Pitch Financials Portfolio first quarter 2008 performance update is a bit overdue at this point. I’ve been playing around with the new SEC EDGAR XML feeds all week and a few things have taken a backseat, including this post.

It’s been a tough quarter for stocks. The S&P 500 was down 9.44%. Thankfully, the Fat Pitch Financials Portfolio was able to keep its decline in value to only 5.38% this quarter. Sadly, this past month my portfolio declined 1.75% in value versus a 0.43% decline for the S&P 500.

Total return for this portfolio since inception is still a positive 32.32%. That comes to a 8.26% annualized return, which is currently beating the equivalent 6.57% annualized rate of return for the S&P 500 over the same period of time.

The Fat Pitch Financials Portfolio ended the quarter on March 31, 2008 with a balance of $1,357,220.93 (remember this is a paper portfolio that starts with $1 million). Of this amount, cash made up 27% of the portfolio. I still have a considerable amount of dry powder I can put to use as new fat pitches come my way.

There haven’t been too many trades this quarter. As you might remember, I added a position in the contraversial Premier Exhibitions (PRXI) earlier this quarter. Then this past month I accidentally added Kraft (KFT) to the Fat Pitch Financials Portfolio. I’ve held onto Kraft because it is a good company that traded for a very reasonable price when I added it to the portfolio. I kind of wish that I had bought Kraft for my real portfolio, but that hasn’t happened yet.

Here is how my current holdings have been doing as of the end of the first quarter:

• Stock: Return since inception 
• Premier Exhibitions (PRXI): 41.04%
• Microsoft (MSFT): 22.05%
• Western Sizzlin (WEST): 21.48%
• Kraft (KFT): 5.53%
• Concord Camera (LENS): -1.29%
• Western Union (WU): -1.42%
• Broadridge Financial Solutions (BR): -4.15%
• The McGraw-Hill Companies (MHP): -11.21%
• Pfizer (PFE): -14.14%
• USG: -18.82%
• Mothers Work (MWRK): -21.22%

Amazingly one of my newest positions, Premier Exhibitions is my top performer. Microsoft (MSFT) is my second best returning position, but it would have been better if they hadn’t decided to go after Yahoo (YHOO). Finally, Mothers Work is my poorest performing position. The clothing retail sector has taken a big hit with all this talk of a potential consumer recession. I thought the niche of Mothers Work would be somewhat shielded from the slowing economy, but that might not be the case. Maybe mothers are opting to stay home in sweats instead of heading to work in maternity business suits.

I’m starting to look at a few potential opportunities. It will be interesting to see how the housing market unfolds this spring. If things start to stabilize, the end of spring will likely be a great time to pick up some discounted stocks. Stay tuned.

I went shopping for diapers at Amazon (AMZN) today, and I discovered a big mistake. I use an old email account for my Amazon account, which is also the same email address that I use for my Marketocracy account. I haven’t check this email address in well over a week. I found the following email in there today:

Your ticket to buy 2000 shares of KFT at $30.0000, created at 09:23 Feb 15
completed at 10:00 Mar 14. 2000 shares were bought at a net average price of $30.0493 including commissions and fees.

Oh no, it looks like I forgot all about an old limit order I made back in February. Kraft is a great company, and I thought $30 would be a great price to pick it up at when I learned Warren Buffett bought some shares. However, after Berkshire Hathaway (BRK-A) disclosed its Kraft holding, the stock went up above $30. I guess during last Friday’s panic associated with the Bear Stearns (BSC) collapse, Kraft shares traded below $30 and my Marketocracy account bought the shares automatically.

I want to apologize for not disclosing this Fat Pitch Financials Portfolio buy earlier. I’m rather embarrassed that I made this mistake. However, I kind of wish I had a real world limit order in place so that I would also have bought Kraft in my own account. This is the first time that the Fat Pitch Financials Portfolio has a stock that I don’t actually really own. Maybe I’ll correct that discrepancy in the next few days. The lesson here is to avoid having too many email addresses and to keep a close eye on limit orders.

Disclosure: I do not own KFT at this time, but I may buy some shares in the near future.

Premier Exhibitions (PRXI) announced yesterday that they signed a 10 year agreement with the Luxor Resort & Casino. The agreement includes the construction of an exhibition complex that will include the Titanic and Bodies… The Exhibition features. This sounds like a very promising development. A longer term exhibit like this will likely have higher returns, since there won’t be the cost of packing up the exhibits and moving them to new locations every few months.

The associated new Titanic exhibit sounds really interesting. It will include a themed restaurant, bar, and even a recreated ship bow for photo ops. The only drawback to all this Vegas grandeur is that it will likely cheapen the image of the Titanic exhibit.

It appears the plan is to move the exhibit into the Luxor sometime in 2008. I’ve never been to the Luxor, so I don’t know much about it. Anyone here been there?

Disclosure: I own shares of Premier Exhibitions.

The Fat Pitch Financials Portfolio basically broke even in February. I started the month out with a balance of $1,375,445.21 and ended the month with a balance of $1,350,582.57 for a change of 0.04% this month. Nevertheless, this still beat out the negative 1.61% return for the S&P 500 over the same period.

This month was not your typical boring month for this value portfolio. As you might remember, I added shares of Premier Exhibitions (PRXI) on February 15th. I picked up the shares for $4.41 per share. Since then, the shares have gone up as the fear of the 20/20 report past. Premier shares have gone as high as $6.20, but closed the month out at $4.78. I was tempted to sell when the shares quickly appreciated to over $6 per share, but I thought even at that price there was still a ways to go before reaching intrinsic value. Time will tell if I was being a bit too greedy.

The Fat Pitch Financials Port holds ten other positions in addition to Premier Exhibitions. These positions include the following stocks along with their returns since inception:

• Western Sizzlin (WEST) 40.17%
• Concord Camera (LENS) 14.72%
• Microsoft (MSFT) 12.62%
• Premier Exhibitions (PRXI) 8.21%
• Broadridge Financial Solutions (BR) -0.78%
• Western Union (WU) -4.8%
• US Bancorp (USB) -5.94%
• McGraw-Hill (MHP) -6.02%
• Mothers Work (MWRK) -8.81%
• Pfizer (PFE) -10.52%
• USG Corp. (USG) -26.90%

There were several interesting developments with my holdings this month. The biggest news was Microsoft’s bid for Yahoo (YHOO). This has now basically turned into a hostile bid and it has negatively impacted Microsoft’s shares. I really hope that Microsoft does not raise their bid for Yahoo, especially since I’m not very in favor of the merger between these two companies. I’d rather see Microsoft focus on their strengths and not their weaknesses, such as media and online content.

This month Western Sizzlin also made the news by announcing that its listing on the NASDAQ. The symbol for the shares changed from WSZL to WEST and the stock has performed nicely in response to being listed on a major exchange. Western also announced that it is extending its tender offer for ITEX, which is not great news, since I was hoping the share exchange would have been successfully completed in February. At the end of this week, we will also find out how Western’s bid for two board seats at Steak & Shake (SNS) turns out.

Concord Camera finally started seeing some positive price appreciation this month. Several institutional investors have increased their stake. This month there was a 13G filings by Zeff Daniel and Everest Special Situations Fund run by Elchanan Maoz. Maybe Concord Camera is ready to move forward with a “strategic alternative” now that pressure is starting to build.

Finally, Mothers Work is finally starting to recover. Shares ended the month above $20. Maybe the new free shipping for those who can’t find their size in a store was received positively by the market.

The bottom line is that the Fat Pitch Financials Portfolio’s total return so far is 34.68%. The portfolio has a 9.03% annualized rate of return since inception versus 6.87% for the S&P 500. My goal is to continue beating the S&P 500 and eventually raise my absolute performance to above 12% annualized.

While sifting through the 52-week low list on Friday at Value Investing News, I spotted the stock of Premier Exhibitions (PRXI). Premier Exhibitions’ stock was down over 20% Friday morning. This ghastly plunge came on the news that Premier Exhibitions’ main source of revenue was at the center of an investigative news report. Shareholders of Premier Exhibitions panicked on the news and many of them sold their shares on Friday. While they are fearful of the fallout from this news report, it might be time for value investors to become greedy.

The investigative news report by ABC News 20/20 looked at the potential that a black market has formed in China for bodies, specifically bodies of executed prisoners. The investigative report by Brian Ross looked at the source of the specimens used in Premier Exhibitions’ “Bodies… The Exhibition”. The main point of the report was that Premier’s supplier, Dr. Sui and the Dalian Medical University Plastination Co. Ltd., have no connection to Dalian Medical University, and therefore the specimens they acquired and leased to Premier did not come from Dalian Medical University. The segment then went on to suggest that some of the bodies supplied may not have died of natural causes.

Premier has now also received a subpoena from the New York Attorney General’s Office. According ABC News, the Chinese Foreign Ministry is also investigating the market for bodies, including allegations that bodies had been shipped to Premier Exhibitions despite a 2006 law that prohibited the export of corpses for commercial purposes.

Premier shot back this weekend with an open letter to 20/20 and shareholders defending the content of their exhibits. They argue that Dr. Sui has been a member of the staff of Dalian Medical University and that Dalian Medical University Plastination Co. Ltd. is 70% owned by the university. Premier also states that all the specimens have been reviewed by their team of medical experts and they have found no evidence of trauma, serious bodily injury, execution or torture. The company also notes that they have sworn affidavits on their website supporting this, but I had trouble finding them.

Premier Exhibitions generated 87% of their revenue last quarter from their Bodies exhibits. Therefore, any disruption in their ability to continue attracting thousands to these exhibits would dramatically impact their profitability. That type of risk would normally cause me to move on to other opportunities.

However, Premier Exhibitions has a hidden asset that is unique and impossible to replicate. Premier Exhibitions has salvor-in-possession rights to the RMS Titanic and already has in its possession over five thousand artifacts from this famous sunken vessel. The Titanic exhibits generated the other 13% of Premier’s revenues last quarter. The full value of these assets are not reflected on the company’s balance sheet. There is the potential that these artifacts could be sold for tens of millions of dollars in the future.

Given the uncertainty associated with Premier’s ability to continue growing revenues from their Bodies exhibit, I focused my attention on the company’s balance sheet. As of November 30, 2007, Premier had $25 million in unrestricted cash and marketable securities. This comes out to $0.83 per share.  Premier has no long term debt. The company’s net current asset value is $36 million, which comes out to $1.20 per share.

There are also an additional $3.09 million in artifacts under long term assets. These are the artifacts recovered in the 1987 Titanic expedition in which the company received full ownership of the artifacts by the government of France. These artifacts are valued at the lower of cost of recovery or net realizable value on the balance sheet. However, it is likely that these 1,800 artifacts are worth many times more than this. Premier has an additional 3,700 artifacts from expeditions conducted in 1993, 1994, 1996, 1998, 2000 and 2004. While Premier is currently restricted from selling these artifacts as the salvor-in-possession, the company on November 30, 2007 moved the Court for a salvage award for these items.

In part, because these assets are not fully reflected on the balance sheet, Premier Exhibits is able to generate a return on assets of over 25% and a return on equity over 27%. These are some amazing numbers, especially considering that Premier is currently trading at a P/E of just 9.7.

For a business that relies heavily on visitors, all publicity is good publicity. This 20/20 show, while potentially impacting Premier Exhibitions’ ability to expand the number of Bodies exhibits, may in fact attract more attention to current shows. It’s basically free advertising. Controversy usually increases curiosity and in turn attracts visitors. If Bodies… The Exhibit was an online webpage, we might even consider this whole affair to be an elaborate linkbait campaign. Even if further legal investigation turns up major problems, Premier Exhibitions still has its Titanic exhibits and associated valuable collection of priceless artifacts.

I just couldn’t pass up this opportunity on Friday to pick up shares of this small cap wide moat company selling at a major discount. I added a half position to the Fat Pitch Financials Portfolio at an cost of $4.41 per share. It appears share dropped a bit further on Friday and closed the day at $4.29. It will be interesting to see how long it takes for the impact of the 20/20 investigation to pass.

The Fat Pitch Financials Portfolio weathered the stormy market in January pretty well. The portfolio was down only 1.18% versus a decline of 6.00% for the S&P 500. There were no new trades in January for the Fat Pitch Financials Portfolio, so my positions are the same as what I reported for the Fat Pitch Financials Portfolio at the end of 2007.

There were a couple of names that I was interested in buying, but I anticipated that market would go down further after the international market plunge on Martin Luther King Jr. Day. However, the U.S. markets have held up pretty well as a result of significant cuts in the Fed rate and the development of an economic stimulus package by Congress. I am a bit remiss in not putting some of the $491,061.96 of the portfolio’s cash to work. At a minimum, I should have average down a bit on a couple of my positions. The lesson learned is that one should always do their homework, so you can be ready for the temporary market fluctuations.

One of the names that I did actually add to recently (on December 31, 2007 to be exact) was McGraw-Hill (MHP). I’ve been meaning to write up my analysis of McGraw-Hill, but fellow blogger Mike Price contacted me shortly after I bought McGraw-Hill. Mike had produced a detailed research report on McGraw-Hill and wanted to have it published on Value Investing News. Value Investing News has recently started accepting full length articles on a ad share basis. I didn’t want to post an article about McGraw-Hill while I was reviewing Mike’s research.

Mike published his McGraw-Hill research this morning on Value Investing News, so now I feel more comfortable talking about it now. The conclusions of my analysis are fairly similar to that of Mike’s. I ended up valuing McGraw-Hill at around $76 using a slightly modified version of my Fat Pitch Finder spreadsheet. Mike used a different method of valuation, but came up with a similar value of $72.82 per share. He used Mohnish Pabrai’s approach to valuing stocks using a discounted free cash flows, and several other methods. I encourage you to read Mike’s research report on MHP. The main difference with my method of valuation is that I model free cash flow growth for wide moat companies using a linear trend. I often base the linear trend of off a linear regression of the past 10 years of free cash flows for a company. Most other models use an exponential growth function, which is simply a percent increase from the previous year. I believe that using percent growth rates tends to overestimate the growth of most mature businesses. My use of a fixed dollar amount of growth each year is a bit more conservative. However, in the case of McGraw-Hill it appears that using either approach gets you to a similar number.

The Fat Pitch Financials Portfolio closed out the month with a balance of $1,375,445.21. My return since inception is 38.18% versus 29.94% for the S&P500. My annualized return is now up to 10.09%. These numbers are okay, but I hope to start edging out the S&P500 by a wider margin in the future. The key to doing that will be to wait patiently for fat pitch opportunities in excellent companies with sustainable competitive advantages.

Disclosure: I own shares of McGraw-Hill (MHP).