GrizzlyRock

I understand Klarman's reticence to have his material out there publicly. I know we all like reading the material but his business is private and confidential for a reason.

High-end day care center providing multiple language learning and academic instruction. High demand with many dual income families striving to put there kids on the right path. Probably $200K give or take to get going

Hey guys here is my take on optimal portfolio allocation: http://www.marketfolly.com/2013/01/position-sizing-utilizing-kelly-growth.html Klarman's comments as posted in this thread basically say the same thing without getting into the Kelly formula. (Not that I am holding myself to be as astute as Klarman!)

Kraven - Correct.

Board Aficionados, I'm working on a personal project to enhance my sell methodology. While I view my self as a reasonable seller of investments, I can always get better. A great way to get better is to learn from the experts. This thread is designed for people to add comments from expert investors - NOT our personal opinions. Thanks in advance I'll kick it off with the following: "Only sell to buy a security that is a third cheaper than the stock you currently own." - Benjamin Graham “If investors could predict the future direction of the market, they would certainly not choose to be value investors all the time. Indeed, when securities prices are steadily increasing, a value approach is usually a handicap; out-of-favor securities tend to rise less than the public's favorites. When the market becomes fully valued on its way to being overvalued, value investors again fare poorly because they sell too soon.” -Seth Klarman from “Margin of Safely” Page 12 Cheers, Kyle

CLOs proved themselves in the downturn providing risk solid returns. Great business model too but very hard to get into No opinion on other C"insert letter"O structures.

Perhaps I came on a little strong. Let me try to talk from a higher level. Liberator is a good business (definitely not weak and not great per se) in a good industry trading at an an insanely inexpensive valuation. Given the size of its current segment, Liberator will not be able to compound equity at double digits rates forever without address markets other than urological products. However, it will be able to grow at a run rate of mid-single digits annually while providing substantially higher margins than they are currently showing. The sensitive nature of the product also helps a direct-response advertiser vis-a-vis buying at a drug store. I wouldn't put it in Geico territory due to only a fair moat (customer relationships) and limited market size. I also wouldn't put them in the Netflix box as Liberator owns the customer relationship. While the product (catheters for Liberator and content for Netflix) is made by other firms, Liberator is the delivery mechanism for the product while Netflix doesn't own the delivery either (uses telco / cable infrastructure to deliver content). As such, Liberator should return a fair ROA on the intangible customer acquisition lists. In regards to your question about length of customer relationship some estimation is required if you choose not to believe management's commentary. Look at the chart at the top of page 5. This graphical representation of quarterly revenue was derived from me breaking down their chart from page 11 of the most recent 10-K. Let's analyze the 2008 vintage. This vintage generated roughly 10% less revenue in 2012 than it did in 2011. These customers have been around for 4 years and still generating $9.3 million of revenue for Liberator. If they lost $1.5 million each year hereafter (way more than they lost last year) if would take another 6 years to fully expire this customer tranche giving a total life of 10 years.

10+ year life is from management estimate. Management has extensive experience in the direct-response-advertising industry so I give them the benefit of the doubt. Secondly, based on quarterly run-off data investors can get a sense for the life cycles of customer segments (in the report) Liberator is nothing like Netflix - that is a straw man argument. Liberator provides device manufacturers another way to sell product in the B-to-C market place. Liberator's model is direct-response customer acquisition. Liberator owns the customer relationship.

Right. Medicare reimbursement changes would be the scud that blows up Liberator. Impossible to quantify yet unlikely.

ShahKhezri - Thanks for the questions. Management at Liberator is in their 60s with the vast majority of their wealth in the business. Further, they have guided investors verbally toward a sale when revenue is closer to $100 million run rate. My guess is that number is where they estimate the business will be reasonable scaled to show attractive margins and command a fair middle market multiple as opposed to a discount for selling a business with < $10 million EBITDA. Liberator is not actively looking to acquire businesses although they did a tuck-in in 2011 at an attractive price. My guess is that they won't pursue acquisitions here. Who should be rolling up this industry is a middle market PE shop - not Liberator. Don't know enough about 180 Medical to comment but I would make 2 points here: (1) 180's referenced EBITDA margin is pro forma. Who knows what garbage the bankers stuffed back in here. Liberator has never shown a pro forma EBITDA margin calc. (2) Liberator's margins are currently low as they are spending in tremendous amount on personnel to grow the business. If/when they decide to sell management has many levers to pull to boost margins. Mid teens or higher EBITDA margins here are well within reach as the business scales. Medicare is 3/4ths of the business. Not sure I understand your question but let me comment on liquidity broadly. Liquidity is not an issue for Liberator. Management sits down weekly to decide on ad expenditures for future clients. No ad spend goes towards maintaining current clients. Thus, any week they decide they want to post positive operating CF they can. The existing customer base is recurring in nature and only requires communication regarding new orders, eligibility verification, order shipping, and Medicare billing (all straight SG&A items) to generate FCF. Now, customers are retained at an ~85% annual clip so ultimately revenue would go down in teh absence of ad spending but there are very little short term liquidity issues. Management is getting more focused on collecting AR in a more timely manner concurrent with the mentioned reduction in ad spending. As such, this company should still grow revenue ~10% in fiscal 2013 while raising margins and posting strong CF. The merits of this decision are for another post but this is readily achievable.

Great article. I would add ownership bias for us investors

Central time. No worries on snyde comments - I may make some of my own!

Not offended at all. Just wanted to post something substantial without divulging everything I give to clients. The client LTVs and cost per add are hard to calculate given the info mgmt has divulged to date. I have been pressuring mgmt for more disclosure so investors can run their own models with less guess work. Regarding growth rates: Liberator has been suffering and now wants to run cash flow positive. Of course I want them investing strongly if ROI remains high but putting cash on the B/S means they have optionality later. Per mgmt, some investors have fears that Liberator is going to have to issue shares at (extremely dilutive) current levels. Regarding 180 Medical: 36% margins were pro forma. If you know how Charlie Munger feels about EBITDA then you know how I feel about pro forma adjustments. Perhaps they were selling other, higher margin products. Don't know enough about 180 medical for solid commentary. Why don't you give me a call in the office next week to discuss more. 773-278-9609

Packer16 - "I have found a few of these including TVL, GTN, NXST, SALM and EMMS. What I have observed is the debt of these firms are at quite low yields versus the FCF of the equity. Same set of cash flows, two different valuations. What do you think could be causing this large discrepancy other than a market mispricing of the equity?" Sure. So I do think many of these equities are cheap but many are cheaper than others. I came to know these names when I was focusing exclusively on HY bonds & levered loans. Media has historically produced very stable cash flow levels and thus have been HY favs for awhile. Broadcasters went through the 2008 debacle very clean proving the businesses were more resilient than many thought. The knocks on the broadcasters are as follows: (1) who even watches TV any more? Especially "the news"? Much of the content that the local stations provide is low quality at best (2) at some point the TV monopoly on the living room fades and operating leverage takes overdue to TIVO/internet/roku/netflix (3) this ultimately is a melting ice cube but no one knows when the cube begins to melt faster. People are substantially underestimating retrans fees growth (100% margin) for the broadcasters as well as the sustainability of small DMA TV stations. (i.e. how many people in Mobil Alabama have iPads?) The better operators rise to the top by creating duopolys to sell ads and manage stations inexpensively. Just look at the retrans fights. Who has won? Its not the MSOs and Dish/DTV. PS: you mentioned the name I own. I'll give you a couple hints: small DMA focus with solid duopolys, excellent management, retransmission consent leadership, cheap for an extraneous reason, and highly leveraged.

ScottHall - Tell you what. In the spirit of good faith for this forum I'm willing to post most of the report (16 pages) It should get you directionally what you are looking for and if you want more we can hop on the phone: http://grizzlyrockcapital.com/GrizzlyRock_Liberator_Corner_Of_BRK.pdf Hielko - Fair question. 3 reasons: (1) I am an idea junkie and was told that this group does a reasonably high level of conversation (2) As an emerging fund manager working by myself I am both trying to grow my online presence and business. Online is leverage. (3) as a "lone wolf" analyst / PM, it is nice to have a forum for conflicting ideas & viewpoints. The reason I don't typically do much online is that I can't stand short form analysis and snide comments (i.e. trolls). I hope this forum has none of that. You will always get an unvarnished opinion from me and if I have no opinion I won't act like I know everything. Much of investing is knowing one's weaknesses & strengths. Cheers GrizzlyRock_Liberator_Corner_Of_BRK.pdf

I don't think the magnitude of newspaper stock changes are instructive due to financial leverage. For example, LEE has nearly $1 billion in debt and a market cap of $60 million while MNI has $1,515 of debt to $292 in mkt cap. Not taking a stand on other parts of article but don't own newspaper. They are in my "too hard" pile given timing of FCF decline.

Good evening fellow members, I wanted to reach out and introduce myself to this group as a new member. I run an emerging long / short fund, GrizzlyRock Capital. I use fundamental value-based analysis to find mispriced securities in both equity and debt. My background is in HY credit and my focus tends to be situations that are cheap based on cash flow valuations (as opposed to GARPy names or balance sheet catalysts). I also traffic in event driven investments and shorts. Very little options and no commodities, FX, sovereigns, mortgages - just corporate investments. Of note: I am not much of an "online guy" and have spent no time on message boards investing or other before this. Thanks in advance for pointing me in the right direction. Lastly, so you can get to know me and so I can share one attractive idea here is my Year End Letter recently forwarded to my clients: http://grizzlyrockcapital.com/GrizzlyRock_2012_Year_End_Investor_Letter.pdf Looking forward to meeting many of you online, -Kyle Kyle Mowery Managing Partner GrizzlyRock Capital, LLC www.grizzlyrockcapital.com

For sure, branded CPG goods are basically thew same as Coke

I would submit Costco as an exceptional business with scalable operations, great mind share, exceptional management. That being said - its not cheap enough for me to purchase.