Monthly Archives: March 2010

InterOil Update

We have been short on InterOil Corp. (IOC) for some time now, mainly because we believe that the company exhibits characteristics of a company which has been involved in fraud (See our original post HERE)

Now, it turns out that a company controlled by Phil Mulacek, chief executive officer of InterOil Corp. filed a “bad-faith” federal bankruptcy in December in an attempt to derail a potentially massive civil judgment in a fraud case against him and companies he controls, according to court documents filed in Houston.

Less than a month after the filing, federal Judge Marvin Isgur in Houston ruled that Nikiski Partners—a corporation whose $2 million investment in a used oil refinery gave birth to InterOil, one of Wall St.’s high-flying stocks in 2009—had filed the bankruptcy in “bad faith.”

Two days before filing for bankruptcy, Mulacek, through his holdings in Nikiski Partners, dumped nearly $1.5 million worth of InterOil stock, according to the Canadian Securities Commissions. The insider transaction was filed 40 days after it took place. 

In the bankruptcy filing, Nikiski Partners declared $71.5 million in assets and just $5,751 in debts, but argued it needed bankruptcy protection so the 5-year-old civil case could be swept into federal bankruptcy court to avoid a judgment that would be “devastating,” as Mulacek termed it, to InterOil stock–Nikiski’s only asset.

About 20 of the original investors in Nikiski Partners are plaintiffs in the lawsuit (Todd Peters, et al. v. Phillipe Mulacek, et al.), and they allege that Mulacek diluted their investment shares by falsifying records, giving away for free 25% of InterOil stock to a “shadowy” Bahamian company secretly owned by Mulacek’s grandfather, and ignoring “crippling conflicts of interest” in order to benefit family, friends and himself.

In court filings, the defendants in the suits—Mulacek and the companies he controls, including InterOil—deny the allegations in the Peters lawsuit, calling them frivolous and arguing, among other things, that the statue of limitations has run out on the claims.

The Peters plaintiffs are asking between $275 million and $1.3 billion in damages. The case, which makes derivative or stockholder claims, is scheduled to go to trial in early May.

Buffett-Backed BYD Triples Profit

(Bloomberg) — BYD Co., the Chinese carmaker backed by Warren Buffett, gained in Hong Kong trading after more than tripling full-year profit on rising sales.

BYD climbed 0.2 percent to close at HK$69.05 in Hong Kong while the Hang Seng Index fell 0.6 percent. Net income for 2009 rose to 3.79 billion yuan ($555 million) from 1.02 billion yuan a year earlier, the Shenzhen-based company said yesterday.

The carmaker boosted sales 47 percent to 39.5 billion yuan as customers took advantage of government incentives to buy its F3 compact cars, last year’s best-selling model in China. BYD, 10 percent owned by Buffett’s Omaha, Nebraska-based Berkshire Hathaway Inc., plans to start selling electric and hybrid vehicles in the U.S. this year and in Europe next year.

“BYD’s earnings beat our expectations,” said Ricon Xia, an analyst at Daiwa Institute of Research in Hong Kong. “On top of other factors, effective cost control has contributed to the profit growth.”

The company’s vehicle sales increased 162 percent to 448,397 last year as China’s industrywide auto demand jumped 46 percent to a record.

BYD, a battery maker that entered the automobile market in 2003, teamed up with German luxury-car manufacturer Daimler AG this month to develop and sell electric vehicles in China. It is also expanding into Europe and the U.S. to take advantage of higher demand for alternative-energy cars in developed markets.

Volkswagen

The Chinese carmaker signed a separate electric-vehicle agreement in May with Volkswagen AG, Europe’s largest automaker. The two companies plan to cooperate in areas including hybrids and lithium battery-powered electric vehicles.

BYD aims to become the first Chinese company to sell electric cars in western Europe next year with its E6 model and other hybrids. It may eventually design and build cars in Europe, spokesman Paul Lin said March 8.

BYD may start U.S. sales this year, Chairman Wang Chuanfu said in January. The first E6 hatchbacks will arrive in the U.S. late in the year, according to Henry Li, general manager of BYD’s auto export division.

Charlie Munger on Buffett, BYD, and Other Things

This is a rare interview of Charlie Munger, Warren Buffet, and Bill Gates sitting side by side. Munger discusses his friendship with Buffett and his rationale behind the BYD investment.

$1,300 off regular Value Investing Congress ticket price expires midnight (PST) on March 16

This is a reminder that our exclusive 30% discount for the Value Investing Congress expires at midnight (PST) on March 16, 2010. On March 17, 2010 the price will go up by $1,300. Join us at the 5th Annual Value Investing Congress West, May 4 & 5, 2010, to learn from some of the world’s most successful money managers. The all-star speakers will share invaluable insights on how to navigate today’s uncertain markets ….and present their best stock picks. The wisdom you’ll gain will enhance your investing results in 2010 and beyond.

If you’re unfamiliar with the Value Investing Congress, then here’s what you need to know: One good investment idea could more than pay your cost of admission to this event and net you some great returns. The wisdom gained listening to these great investors is difficult to overstate. For a slide show of last year’s event see HERE.

Confirmed speakers include:

  • Bruce Berkowitz, Fairholme Capital Management
  • Eric Sprott, Sprott Asset Management
  • Mohnish Pabrai, Pabrai Investment Funds
  • Paul Sonkin, The Hummingbird Value Funds
  • Thomas Russo, Gardner, Russo & Gardner
  • David Nierenberg, The D3 Family Funds
  • Lloyd Khaner, Khaner Capital
  • J. Carlo Cannell, Cannell Capital
  • Patrick Degorce, Thélème Partners
  • Whitney Tilson & Glenn Tongue, T2 Partners
  • Guy Spier, Aquamarine Fund
  • Amitabh Singhi, Surefin Investments
  • Richard Vogel, Alatus SA
  • Lei Zhang, Hillhouse Gaoling Capital Management

Click here to receive the 30% discount to VIC

You must use discount code: P10VH6 to receive the full discount. Hurry and register!

You’ve got exactly one week to get signed up with these savings. The regular price of the two day event is $4,295. However, ValueHuntr readers pay only $2,995. That’s a 30% discount and savings of $1,300!  If you’re from out of town, the Congress has also negotiated lower room rates at the Langham Huntington for attendees.

It’s going to be an awesome and insightful event, to say the least. Make sure you get our exclusive discount for the Value Investing Congress hereRemember that you MUST use the discount code P10VH6 to receive the full discount!

Please let me know if you have any questions or problems when trying to register with the discount code.

Again, the early bird rate is expiring at midnight (PST) on March 16, 2010. On March 17, 2010 the price will go up by $1,300.

Rocky Mountain Chocolate Factory (RMCF)

We are adding Rocky Mountain Chocolate Factory (RMCF) to our ValueHuntr Portfolio.  Although it is not a Special Situations play, we were recently impressed by the company’s performance even when cocoa bean prices trade near all-time highs. In short, the company is a cash machine. It generates earnings from 9 owned stores and more than 300 franchise stores (no Capex). For analysis, see HERE.

Warren Buffett Letter Highlights

Warren Buffett’s annual letter to shareholders was released over the weekend. Here are the highlights:

Business Operations

Book value increased 19.8% last year, gaining $21.8 billion in net worth, and is at $84,487 per share. In the last 45 years, Berkshire never had a five-year period during which its book value didn’t outperform the S&P 500.

The company had net income of $8.06 billion, or $5,193 per share in 2009, which is about $155 million a week. It has $156.6 billion in cash and securities, or approximately $100,000/share.

The letter included a primer on Berkshire’s approach to business, for the benefit of the 60,000 new shareholders due to the acquisition of Burlington Northern Santa Fe (BNSF). It contained details on Berkhire’s four separate business segments:

1)      Insurance, which had a float of $62 billion at the end of the year, and earned an underwriting profit of over $1.5 billion in 2009.

2)      Regulated utility business, which earned Berkshire over1 billion for the year. In the future, the newly acquired BNSF railroad business is going to be a part of this segment. Berkshire is committed to providing the country with reliable electricity and railroad systems, despite the capital intensive nature of this business and its heavy demand for continuing capital expenditures.

3)      Manufacturing, Service and Retailing, with over $60 billion in revenue and net income of $1.1 billion for the year. The diverse businesses Berkshire owns in this segment distribute groceries, sell chocolate, furniture, jewelry, paint, shoes, cutting tools, ice cream and more. Most of these operations suffered from the recession, but Buffett singles out NetJets, which sells fractional ownership of jets, as particularly problematic. NetJets has been losing money and without Berkshire guaranteeing its debt, would be out of business. Buffett assigned Dave Sokol as its new CEO, with the task of turning NetJets around.

4)      Financial Products: Berkshire owns Clayton Homes, a manufactured home builder, an industry that has been in shambles partly because mortgage rates kept low by the government do not apply to low cost manufactured homes. Berkshire also has furniture and trailer leasing operations that have been hit by the economic downturn. This business earned $781million pre-tax last year.

Investments   

Berkshire has common stock investments worth $59 billion, with a cost basis of $34.6 billion. In the cases of Conoco Phillips, Kraft, Sanofi Aventis and US Bancorp, the market value of its holdings is below Berkshire’s cost. In addition Berkshire owns $26 billion of non traded stocks, in companies like GE, Goldman Sachs and others. These holdings pay Berkshire $2.1 billion in annual dividends and interest.

The 20 largest holdings in Berkshire’s US portfolio all increased in value in the past 12 months. Coca-Cola Co., Berkshire’s top holding, climbed 29 per cent on the New York Stock Exchange. Wells Fargo & Co. doubled and American Express Co. tripled. The US portfolio was valued at $57.9 billion at Dec. 31, a 12 per cent rise from a year earlier.

Derivative Contracts

Derivatives added $US1.05 billion to earnings in the quarter, compared with a loss of $US4.61 billion a year earlier after the collapse of Lehman Brothers Holdings Inc. Liabilities on Buffett’s so-called equity-index puts narrow when four stock indexes, including the Standard & Poor’s 500, climb closer to the levels they were at when Buffett made the deals near the market’s peak in 2006 and 2007. The four indexes — the S&P, the U.K.’s FTSE 100 Index, the Dow Jones Euro Stoxx 50 Index and Japan’s Nikkei 225 Stock Average — rose in the fourth quarter.

Berkshire has also sold credit-default swaps on individual companies, and contracts that require the firm to pay when credit losses occur at borrowers included in high-yield bond indexes. The maximum Berkshire would still have to pay on agreements tied to the indexes is about $US5.5 billion, the firm said

On the Housing Market

Billionaire Warren Buffett said the U.S. will recover from the residential real estate slump by 2011 as demand for houses catches up with the supply that accumulated during the bubble.

“Within a year or so, residential housing problems should largely be behind us,” Buffett wrote Saturday in his annual letter to the shareholders of his Berkshire Hathaway. “Prices will remain far below ‘bubble’ levels, of course, but for every seller or lender hurt by this there will be a buyer who benefits. Indeed, many families that couldn’t afford to buy an appropriate home a few years ago now find it well within their means.“

Record foreclosures flooded a U.S. real estate market already glutted with unsold property, causing housing starts to fall.

“People thought it was good news a few years back when housing starts — the supply side of the picture — were running about 2 million annually,” wrote Buffett, 79, chairman and CEO of Omaha-based Berkshire. “But household formations — the demand side — only amounted to about 1.2 million.“

On Bankers

Buffett mentioned that while shareholders suffered during the recent crash, the top people at the banks got off relatively lightly:

“It has not been shareholders who have botched the operations of some of our country’s largest financial institutions yet they have borne the burden, with 90% or more of the value of their holdings wiped out in most cases of failure. Collectively, they have lost more than $500 billion in just the four largest financial fiascos of the last two years” wrote Buffett.

According to Buffett, the behavior of these CEOs and directors needs to be changed: If their institutions and the country are harmed by their recklessness, they should pay a heavy price — one not reimbursable by the companies they’ve damaged nor by insurance. CEOs and, in many cases, directors have long benefited from oversized financial carrots; some meaningful sticks now need to be part of their employment picture as well.

On Future Returns

Berkshire Vice Chairman Charlie Munger and he, Buffett wrote, “believe that our book value — understated though it is — supplies the most useful tracking device for changes in intrinsic value. By this measurement … our book value since the start of fiscal 1965 has grown at a rate of 20.3% compounded annually.”

Based on market prices, said Buffett, Berkshire’s gains since 1965 would be 22% compounded annually.

However, Buffett sounded a note of warning, claiming that such returns may become a thing of the past. “Our performance advantage has shrunk dramatically as our size has grown, an unpleasant trend that is certain to continue,” he wrote.

He foresees “better-than-average results over time,” he said, before adding: “But huge sums forge their own anchor and our future advantage, if any, will be a small fraction of our historical edge.”

ValueFocus Issue 10 Released

Our 10th Issue of ValueFocus, our monthly newsletter has been released to premium members. The content includes our take on the Greece debt crisis and highlights of Warren Buffett’s latest letter to shareholders, which was relleased over the weekend. To become a premium member and get access to the newsletters, see HERE.