Small Cap Diamonds in a Rough Market

Aaron Edelheit of Sabre Value Management presents “Small Cap Diamonds in a Rough Market.” Sabre is generating 19% annualized returns.

How has the small cap value sector outperform so long? Edelheit argues this is because there are periods of illiquidity and volatility. Edelheit focuses on insider buying, spin-offs and restructuring.

Photochannel (PNWIF) is now at $2 or 7 times earnings. They managing front and back end of photo sites. Clients include Costco, CVS, Tesco and Wal-Mart Canada. It is an excellent recurring revenue model. Revenue is suppose to grow 100%. They are creating a wide economic moat with high switching costs. It took Costco 9 months to move their photos. By storing so many images online it will cost a lot to move to another system.

Why not just have retail customers upload it from their computer? It is just a matter of education. As customers upload online, Photochannel grows.

People keep printing photos even in a recession. New customers of Costco, Sam’s Club and Kodak China. Digital prints are up 27%. Print orders online grew 64% online. Home printing is declining, lost 12% of its market share. Home printing is expensive.

There is optionality value of the potential Kodak China and Kodak India income, 25000 kiosks.

They will receive 5% of everything that goes through the kiosks. Each kiosk does $3 a day at 25,000 locations with no expenses to Photochannel.

Why so cheap? Not covered by sell side analysts, small cap Canadian index down over 44% YTD. A few funds have been forced to sell. Its at the lowest price in two years while it added customers and now making money. The company is growing revenues at 80% selling at 7 times earnings is unheard of.

Hemisphere GPS (Toronto: HEM)

Precision agriculture including GPS guidance and auto-steering becomes best proctices on the farm. Payback can be 6 months or less thanks to soaring input costs.

Sold their first product to China yesterday. They grew revenues by 59% in Q2 and should grow revenue 50% plus in 2008. They are raising prices and the grain bull market typically last 10-14 year and we are in year 2.

Why is it cheap? A rival company won business to Agco but HEM still with them as a customer. Rivals product doesn’t work yet.

Only 9 times this years earnings. Insiders are buying shares. They have called for a 5% buyback. There is IP value here that there are only 4-5 companies with the technology. New markets include autonomous mining vehicles. The mining companies don’t have this technology.

Limoneira (LMNR)

Producer of avocados that owns 7,000 acres of prime California real estate. They just got 500 acres to get entitled for residential development. The weather is amazing at this location.

The also own a rectangle of land in Ventura that overlooks the Pacific ocean. It is only one of 2 project to be built in Ventura in the next 10 years.

They also own water rights going back to 1893. They have 5 million acre feet in Santa Paula Basin and another 10 million un-adjudicated in Fillmore Basin. They also own their own mutual water company shares worth $100 million. They also have their own pipeline conduit to Ventura that waters avocado trees that could be used to sell water to Ventura and Oxand

Digimarc (DMRC/D)

It has strong patent portfolio according to WSJ Patent Scoreboard, 21st strongest. The company is not trading yet since it is a spinoff. They do digital watermarking. They are used on picture, audio, and data files.

They have $13 million of revenue in 2007 and expected to grow to $20 million in 2008. 77% gross margins and profitable. Can be used to scan YouTube video for watermarks and even to help monetize that content when it is identified.

How does the 21st strongest patent portfolio in information technology in the world equal a $50 million EV?

Edelheit closed the presentation with a call for participants to be a mentor. I can’t argue with his value claim with that.

A question noted that it is important to look at how many years the patents have left in the Digimarc portfolio of patents.

One thought on “Small Cap Diamonds in a Rough Market

  • October 9, 2008 at 11:36 am

    I am a huge fan of your site and Sabre might be doing well but a cursory glance at the ROE and cash flow situations of these companies shows them to be trash.

    This is pure speculation.

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