Initially, Burry cut his teeth on traditional Ben Graham-type stocks that traded below book value. Below, he discusses the Tejon Ranch Company (TRC), a stock with strong downside protection due to the 270,000 acres that it owned.

Looks like TRC is fairly valued on an asset basis if these prices are the case. When reviewing these ads, note that Tehachapi area locations are similar in terrain to the Tejon ranch, but closer to Bakersfield.

The excitement comes from the fact that management has taken an interest in developing some of these 270,000 acres. As noted above, land in developed areas can go for $15k to $30k/acre. So not all of the Tejon Ranch needs to be developed. ANY development should justify the current price, and may lead to significant gains down the road.

What’s also remarkable, was that Burry was getting solicited by certain “high ranking” investors since early 1997.

As you say, I agree that “high-ranking” investors lurk here, since I get e-mail from them every so often

While it’s clear that Burry was aware of the mania (and indeed derided many investors expectations) for Dot-Com stocks, he saw Apple for what it was in 1999, a value stock with any future growth being essentially thrown in for free. He also scolds himself for selling it too soon after a 30% run-up. Most importantly though, it was with stocks like Apple that Burry began to appreciate the power of branding, marketing and management, the sort of intangible factors that Buffett is so perceptive in recognising.

I bought it as a Buffett pick. And then I sold it after a quick 25-30% run-up. Shame shame. But I make no excuses. The run-up to me seemed flimsy. It traded back to the low 20′s then jumped on its internet strategy announcement. I got out. But I sorely want back in. I would like to buy in the low 20′s again, and I will. But at the time I needed money to buy some other stocks that were becoming much more acutely undervalued (my AAPL, APCC, FIC) with IMO possibly better-positioned and better-managed businesses. So far this bet is paying off, but for it to really pay off on both ends I’d be able to buy MAT at 22 1/8 again. And Callaway Golf at 10 and change again, since I sold my Buffett soul and got out of that one too.

BTW, really, no one is crediting Apple, but to me it has the markings of a value stock and potential Buffett-like stock. A real cash machine of late, trading at a mid-single digit multiple of cash flow, with a great recovery in terms of operating efficiency. A great brand name with proprietary advantages and mindshare. Subtract out the cash and it was recently trading at about 10 times earnings. A good holding for an 8 year old. Buy her a blueberry iMac and give her some stock I bought it as a long-term holding but it’s run up too. This problem of ultra-quick 30% gains despite Buffetesque intent is vexing, but not unpleasant.

Re: Apple, boy, everyone is living in the past on this one. Management is now great. The product is now very good, but even more importantly the marketing is now great. The “win rate” for new PC buyers here and especially Japan has gone through the roof. And there’s a future dividend that comes with that. It wasn’t $15 just a few months ago. In fact, now it has $15 in cash generated primarily from operations. It’s been bouncing between the mid 40′s and low 30′s for many months, and is now right where it’s been since 1988 (for a reason – every time it gets to this level people sell),except for the dip to the teens when everyone misjudged the power of the brand. This successful emergence from trial by fire is new information about the durability of the brand, and successful investors it seems to me should be able to absorb it quickly rather than belatedly.

In an early post, he chips in with some thoughts on an overvalued market with a quote that I love.

Buy and hold becomes mantra at the end of a bull market.
Buy and hold becomes anathema at the end of a bear market.
Thanks to the raging bull for those 10 years, everyone is preaching buy, hold, patience.
However, if you had invested in the market in 1969, you would be at a significant loss in 1983, especially given the high
inflation of the times and the down market. In the early 50′s, the common logic was that stocks simply don’t go up, thanks to the doldrums market from the mid 30′s to the mid 50′s. Why can’t this market conceivably crash from these levels and not recover for 20 years? I guess I am just a bit of a contrarian.

As for how Burry chooses stocks, he states it on this thread, also revealing that price is the key determinant in whether to invest, or not.

The screen that worked the best for me? Scanning the S&P MidCap 400 guide – eyeing the lower right hand page for high and consistent ROE.

Then, moving up the page, comparing capital expenditures to cash flows, then moving up to equity and observing that its growth validates the ROE numbers.

Then, still moving up the page, looking at the last 10 years of earnings consistency and growth – at least doubling in 10 years, without more than one down year.

Then look for the low payout ratio and conservative debt.

Then look at the current price and figure out your buy price and wait. You’ll hit a few.

If you do this with the 1997 S&P MidCap 400 Guide, two companies jump out at you – Dairy Queen and Flight Safety, both
Buffett buys.

I used this to find Medusa and BMC Industries, both of which I bought. Medusa was taken out by Southdown at a 50% premium to my price in just a few months. BMC had significant insider buying and now sits about 13% above my price. Of course, by virture of their businesses, neither meets all of Buffett’s criteria.

Re: his picks, I’ll have to take a closer look. Some of them have come up in my reviews over the last 6 months. I should say that I have gone through all the stocks covered by S&P in its three major guides, and the pickings are slim, and will remain so without a major correction.

I’ve said it before, and I’ll say it again – finding Buffett companies now isn’t so hard. Finding them at reasonable prices is dang near impossible.

Finally, here are a few book recommendations from Burry.

My bias is value investing, and I highly recommend Janet Lowe’s Value Investing Made Easy as a primer. I’d follow that book with Why Stocks Go Up (and Down) by William Pike. Other books have been discussed here i.e. Superstocks by Ken Fisher, etc. You can get any of these — even obscure ones –from www.amazon.com very easily and cheaply. When you think you’ve got it all figured out, try Sense and Nonsense in Corporate Finance.

Analysis of the ideas generated to come.

With the fight for control over, the short-term debt to the bondholders restructured, and the company recapitalised; Independent News and Media has been stabilised, and is now focused on improving the business and reducing the debt burden. However, because of the strange way that the Board consolidate results from their 32% stake of APN News & Media into the wider company, general negativity in media stocks, and the downturn in Europe and Ireland; Independent News & Media trades at a substantial discount to intrinsic value.

Selected financial data for Independent News & Media (consolidated of APN News & Media).

• Shares outstanding: 3,499,100,026
• Market capitalisation: €384,901,003
• Debt: €1,003 million
• Equity: €545 million

Graphical representation of revenue and profit breakdown for 2009 – Consolidated of APN News & Media

Selected financial data for Independent News & Media (unconsolidated of APN News & Media).

• Market valuation: €44,197,196
• Revenue: €689 million
• Debt: €532.4 million
• Operating profit (1): €75 million

1. Before depreciation, interest and amortisation.

Independent News & Media recourse debt after restructuring

Breakdown of Independent News & Media’s Irish operation

• Revenue: €357.5 million
• Operating profit before exceptional items: €44.3 million
• Operating profit after exceptional items: €33.1 million

Breakdown of Independent News & Media’s British (including N. Ireland) operation

• Revenue: €122.7 million
• Operating profit before exceptional items: -€6.9 million
• Operating profit after exceptional items: -€86.2

Breakdown of Independent News & Media’s South African operation

• Revenue: €209.5 million
• Operating profit before exceptional items: €47.8 million
• Operating profit after exceptional items: €44.9 million

Selected financial data for APN News & Media.

Shareholding in APN News & Media (ASX:APN): 191,689,820 shares (32.3%)

Value of APN News & Media shareholding: €304,113,520

• Market cap: €947,700 million (AUS$1.35 million)
• Current price: €1.59 (AUS$2.26)
• Earnings per share: €0.119 (AUS$0.17)
• Dividend: €0.0281 (AUS$0.04) – second dividend expected
• Trailing P/E: 14

Selected financial data for Jagran Prakashan.

Shareholding in Jagran Prakashan (BOM:532705): 17,166,690 shares (5.7%)

Value of Jagran Prakashan shareholding: €36,590,287

• Market cap: €641,909 million (Rs36.41 billion)
• Current price: €2.13 (Rs120.90)
• Earnings per share: €0.103 (Rs5.84)
• Dividend: €0.062 (Rs3.5)
• Trailing P/E: 21

Historical financial data

Recent Insider Buying

21/05/2010: Ms. Lucey Gaffney – Purchase of 1,000,000 ordinary shares (0.03% of outstanding shares) at €0.12

21/05/2010: Mr. Leslie Buckley – Purchase of 1,000,000 ordinary shares (0.03% of outstanding shares) at €0.12

21/05/2010: Mr. Paul Connolly – Purchase of 1,000,000 ordinary shares (0.03% of outstanding shares) at €0.12

16/04/2010: Mr.  B. Braun – Purchase of 450,000 ordinary shares (0.01% of outstanding shares) at €0.117

16/04/2010: Mr. Denis O’Brien – Purchase of 168,563,732 ordinary shares (4.82 % of outstanding shares) at €0.10-€0.14

With the highly profitable operations of Digicel backing him, Denis O’ Brien has been flexing his financial muscle to strengthen his hold on the the company. It’s also interesting to see that his three appointees to the board have initiated sizeable positions.

Major Shareholders

Denis O’ Brien: 18.61%

Sir. Anthony O’ Reilly: 15%

Henderson Global Investors: 4.22%

Pioneer Asset Management: 3.32%

FBD: 2.89%

Invesco: 2.67%

Catalysts for improved share price

• Denis O’ Brien has already spent upwards of €700 million on ~20% of the company that’s now worth ~€80 million. He has taken substantial losses on his investment, but his pockets are very deep, especially after he recently pulled several hundred million Euro out of his Digicel company. Also, given that he is a recent buyer of shares, and the fact that he offered to inject €100 million into the company during the bond refinancing, it is quite likely that he will continue to increase his stake further.
• I attended the IN&M annual general meeting, where CEO Gavin O’ Reilly stated that a resumption of dividends was a high priority. When debt levels are reduced, IN&M will be more than comfortable paying at least a 2-3 cent annual dividend. At the current share prices, this represents a 20-30% yield. If operating performance improved, it’s more than possible that this could double. Dividend is expected to be reinstated in either 2011 or 2012.
• Improved guidance from management has been ignored. Gavin O’ Reilly has stated that he expects operating profit of between €220 – €240 million for the year. With the market cap standing at €384 million, this means that IN&M are trading at EBITDA of less than 2.
• Management have also reported that the bondholders who took a sizeable position in the company during the recent restructuring have sold their stakes (20% of the company). This sizeable amount of indiscriminate selling is likely to have depressed the share price in recent months.
• Under shareholder pressure, the company finally disposed of the perennially loss-making Independent and Independent on Sunday. This disposal should reverse the losses of the British operation into a profit (the Belfast Telegraph newspaper will account for most of the British operation). The Sunday Tribune is another loss-making newspaper that is expected to be sold, or closed down. Some media report estimate that the Tribune is losing up to €100,000 a week, therefore a shuttering of this operation would be significant to profitability.
• As we’ve already shown, the stub value of IN&M (excl. Jagran Prakashan and APN News & Media) is valued at a tiny €44 million. If we value the stub value at a very reasonable 8 times EBITDA, then we get a market cap for the company of just under €1 billion, or roughly €0.285, two and a half times the current share price.

I believe the Independent News & Media offers deep value with a high margin of safety.

FREMONT — Publicly traded Fremont Insurance Co. is taking steps to buy Northern Mutual Insurance Co., based in the Upper Peninsula town of Hancock.

The two companies, both established in the late 1800s, announced a “letter of intent” this week, the first step toward that purchase. Because Northern Mutual is owned by the policy holders, it must first “demutualize” and convert to a stock insurer, after which Fremont would purchase all of Northern’s stock.

“It’s in the very preliminary stages right now,” said Jeff Tryka, a spokesman for Fremont. “Eventually it would mean that Northern would be part of Fremont.”

Fremont, whose holding company is Fremont Michigan InsuraCorp Inc., provides property and casualty insurance to individuals, small businesses and farms only in Michigan. At the end of last year, it had $55.6 million in net written premiums and $89.4 million in total assets, according to the announcement.

Northern provides property and casualty insurance to individuals only in Michigan. Last year, it had net written premiums of $8.9 million and total assets of $23.7 million.

Under the plan, Northern would remain a separate entity, maintaining its name, current operations and employees, Tryka said.

“They are a very strong company in Michigan,” he said.

The deal is contingent on the state Office of Financial and Insurance Regulation approving Northern’s stock conversion plan and Fremont’s stock acquisition. A conversion plan has yet to be filed with the office, according to a statement.

Gerard Quello, manager of Northern Mutual, declined to comment on the announcement. Tryka stressed the deal is a “friendly” and agreed upon by both companies.

“Unlike some recent transactions, this is a completely friendly deal,” Tryka said. “We think its in the best interest of both companies, our policy holders, our agents and the communities.”

Tryka was referring to a recent hostile takeover attempt by parent of Steak ‘N Shake restaurants, Biglari Holdings Inc. That effort led company leaders to push for a new state law that prevents a takeover unless two-third of shareholders approve. It was signed by the governor last month.

What struck me about the proposed merger, was that this move was likely to have been driven by the board to further squash the Biglari Holdings takeover attempt. For one, the enlarged Fremont Michigan/Northern Mutual entity would be significantly more difficult for Biglari Holdings to consume. Secondly, while Northern Mutual is smaller than Fremont, it may not be sufficiently small enough that Fremont Michigan could acquire it easily from cash on hand. If a cash purchase is off the table, then the acquisition is most likely to be funded with the issuance of stock. The added benefit of such a purchase would further solidify the Michigan shareholder base, a base that is likely to be more pro-current management, than pro-Biglari Holdings. With the new state law that prevents Fremont Michigan from being taken over with less that a two-third majority; any remote possibility of Biglari pulling in enough votes for a takeover has surely disappeared.

On the merger itself, it’s not easy for Fremont Michigan stockholders to assess whether the deal is likely to be in their best interests, or not. As the two companies are relatively small, there is bound to be cost savings from the removal of duplicate fixed expenditures (accounting, legal, listing and corporate costs, etc.). Also, while it’s not guaranteed, you would expect that a company that’s been around since the 1800′s won’t be going out of business anytime soon. Some of that concern can be taken off the table, as Northern Mutual has been assigned an A- rating (the same as Fremont Michigan, who have a very solid balance sheet) from A.M. Best. Investors will only truly be able to assess the situation when Northern Mutual eventually de-mutualize and open up their balance sheet to public eyes.

Precision Auto Care is a network of franchised and company-owned auto repair and tuning shops. The company has over 380 service facilities in 8 different countries including China and the Middle East. Recently, Precision Auto Care recently “went dark” and stopped filing with the SEC in order to reduce the costs in complying with Sarbanes-Oxley. With the majority of stock held by company management, the lack of free floating stock and virtually no analyst coverage, Precision Auto Care has almost entirely disappeared off the investment radar.

Financial information for Precision Auto Care.

Historical share price of Precision Auto Care.

As you can clearly see, the market has rewarded the improving balance sheet, revenue and earnings of Precision Auto Care by cutting the company’s share price by over 80%. The price now suggests that the company not only is there no chance of growth, but also that there probably isn’t a future for Precision. Given the recession, large cash position, reasonable business prospects and solid revenue; it does seem that there is a degree of overreaction in the share price movement.

Selected financial data.

• Market cap: $4,930,000
• Current price: $0.17
• Cash: $3,825,000
• Long-term debt: $0
• Book value: $9,800,000
• Price to book value: 0.5
• Trailing P/E: 27

It’s easy to see from financial statements why Biglari was drawn to Precision Auto Care. Like Western’ Sizzlin’, ITEX and Stake n’ Shake; the company is run as a franchise, working in an growth area, dealing with a service that’s easy to understand and is unlikely to go away. However, like Stake n’ Shake, there are areas of the business that are a cause for concern. Firstly, with the onset of the recession, management have begun to purchase franchised operations, running them as company-owned stores. With 11 stores now being run by the company, it’s clear even at this stage that the return on investment is not high (you can also see that gross margins are being reduced by this strategy), and may even be negative (from 2008 to present, the company appears to have made a slight loss on company-owned stores. While company-owned stores are likely to become profit generating as the economy continues to improve, it’s seems unlikely that shareholders will see a decent return of their investment anytime soon. Despite this negative, Precision Auto Care is priced at such a discount to intrinsic value, it’s worth a place in any value investors portfolio.

Catalysts for a higher share price.

• Earnings/balance sheet to continue improvement as recession ends (likely).
• Emerging markets to perform (likely).
• Share buy-back/dividend (possible).
• Management to stop purchasing franchised locations and focus on growing the franchise (first part may be unlikely).

I believe the Precision Auto Care offers deep value with the possibility of significant upside due to global diversification, business model and/or improving business conditions.

• Market cap > $0.8M
• Market cap/book value < 0.6
• Financials excluded
• Bankruptcies excluded

It’s intersting to see CRM Holdings popping up as one of the cheapest stocks in the USA. Manual of Ideas founder, John Mihaljevic has initiated a substantial position in this well-beaten down insurer, see here.

Off-hand, Constellation Energy Partners is another stock that simply looks so beaten down, that there’s a huge margin of safety in the stock.

There’s also a few oddball companies in there like Gallery of History (who would have thought you could make a business selling historical artifacts) and Impreso Inc. (they sell print supplies, bottle their own drinking water and maintain an online portal; interesting synergies).

When I get a chance, I’m going to go through a few of the more promising candidates and see can I find a few deeply discounted stocks, that have show upside potential.

The Marketing Alliance – Buffett Group Presentation
The Marketing Alliance – A Micro Cap with a Network Effect Advantage
Interview with Tim Klaus – TMA President
Matt Miller of Chanticleer on TMA

Financial information for TMA.

Selected financial data.

• Market cap: $11,952,137
• Current price: $6.25
• Cash: $3,686,705
• Investments: $2,349,207
• Debt: $0
• Book value: $5,183,395
• Price to book value: 2.31
• Average ROE (5 years): 21.24%
• Earnings per share for Q3: $0.08

Positives

• High returns on equity: This is without a doubt, the stand out aspect of TMA. Also, as the business is not capital intensive, marginal revenue will be strongly income positive.
• Management seems shareholder friendly: Management have been highly receptive of suggestions put forward by Chanticleer (reducing equity exposure, share buy-backs, etc).
• Significant equity exposure on the balance sheet: A large part of TMA balance sheet comprises of equity investments. With the recent rise in the markets, TMA have been able to book investment gains.
• As TMA are only a facilitator to insurers, they are not bound to many of the restrictive rules and laws that insurers are subjective to.

Negatives

• This certainly isn’t a classic Ben Graham stock with a margin of safety (price-to-book is quite high). While there is no indication that the businesss won’t continue to perform, there is always a risk a competitor might emerge and put TMA out of business.
• TMA is about as “dark” as a stock can get. They do not file with the SEC, therefore executive compensation, insider ownership and a whole host of other information isn’t publicly accessible. The financial statements themselves are also a little vague; what do recievables, current liabilities, etc. consist of?
• Significant equity exposure on the balance sheet: This is both a positive and a negative. If a rising market will bolster TMA results, a falling market will impact them too. Another factor to consider is the lack of transparency in the degree of exposure that TMA have. The investment portfolio could consist of anything.

There’s no doubt that TMA is an interesting business with a lot going for it. While I haven’t purchased shares in it yet, I may do so if I can get them just a little bit cheaper. It will certainly remain on my watch list however.

One such stock that we spotted was Defense Industries, which is trading at 1/3rd book value with a net cash position of nearly $1.2 million. What’s even more interesting, is that not only are you buying an actual dollar for 75 cents, but you’re also getting a decent business thrown in for free. The business itself is involved in producing a wide range of products in both the military and civilian defence sector.

Here’s my spreadsheet with historical financial data. Please note that the $4.5 million of income in Q1 of 2008 was extraordinary and a one-off.

Selected financial data

• Market value per share: $0.15
• Cash per share: $0.22
• Earnings per share for Q4: -$0.005
• Price to book value: 0.30
• Debt to book value: 11%

What’s most remarkable about DFNS is the stock performance, relative to the above financials over the past 6 years. As you can see from the Google Finance chart, the stock price has consistantly fallen, despite debt being reduced, book value increasing and a number of years of excellent earnings.

Risks

• Financial statements are unaudited (which is really par for the course with such small companies).
• The defense and personal protection industry is highly cyclical.
• The Israeli political environment is less stable than that of the United States, particularly with defence.
• Dividends are subject to double taxation (20% on the Israeli side, x% on your marginal rate for what ever country you reside in).
• Management may allocate capital poorly, eroding shareholder equity.

I believe the Defense Industries International offers deep value with a high margin of safety.

• Cash/price greater than 1.0
• Market cap between $0.2 million and $10 billion
• Financials excluded
• Worthless bankruptcies excluded

This list is provided for informational purposes and may not be entirely accurate.

I updated my spreadsheet with their historical financial statements and extrapolated the 4th quarter results (IBAL don’t file a specific end-year for the 4th quarter). Please note that the “G. Ma” column refers to the gross margin percentage.

What’s most evident (but not explicitly stated in the annual report) is that International Baler returned to modest profit in the 4th quarter. If we ignore the first three quarters, when the economy was exceptionally bad, the P/E ratio currently stands at a reasonable 12.2. What’s also promising is that 4th quarter revenues doubled quarter-on-quarter, which suggests that while International Baler might not be returning to 2008 revenues, the fundamentals of the business are likely to be sound, with a very definite possibility of improved earnings.

As is evident, the balance sheet is in excellent shape with the book value being nearly twice the current market capitalisation. Further downside protection is added by the fact that the company has no significant debt, and that cash makes up a significant part of that book value.

Selected financial data at a glance.

• Market value per share: $0.50
• Cash per share: $0.37
• Earnings per share for Q4: $0.02
• Price to book value: 0.58
• Price to earnings for Q4: 12.2
• Debt to book value: 0%

It’s also evident that there are a number of intangible factors that are very favourable towards the company.

• The company owns a 62,000 square foot manufacturing facility on 8 acres in Jacksonville, Texas. The company is carrying the value of this facility and all contents at $871,000. The company may be over-deprecating this asset.
• Leland and LaRita Boren currently hold 51.1% of outstanding shares. The Boren family also own 100% of American Baler, a direct competitor to International Baler. They have been building their position in International Baler in the last few years and it may be likely that they will continue to build this position, eventually buying out International Baler, consolidating it with American Baler.
• The macro environment for a company that bales a variety of waste material (paper, metal, plastic, rubber, textiles) is likely to be positive going forward as green issues remain in the public spotlight, with many city and county authorities making recycling and reuse of waste material a requirement.

I believe the International Baler offers Ben Graham value, with a very definite possibility of Phil Fisher growth.