rick_v

Parsad, Yes I agree with you. Sardar brought some much needed new blood. The problem I have and it is a huge problem, is that once he changed the name and released his ego for the world to see I began to "Invert always Invert". And here is what I came up with: 1) A very skilled actor/writer who basically copies word for word the verbiages, paraphrases, sentences, paragraphs and even WEBSITE of Warren Buffet. He even tries to sound like Buffet... this stuff is very frightening as he is not originally from the mid-west, believe me. 2) An individual who knowingly is shoving a compensation structure which is completely unfair and unheard of down the throats of innocent shareholders. 3) An individual who was able to blind the eyes of shareholders by effectively exuding a buffetesque like vibe until the time when he reached control. Then he showed his true colors by trying to take over a permanent base of capital which was paid in over many decades by long-term shareholders and make it his forever! 4) Someone who as an investor was not able to raise that much money for a Hedge Fund if he had such a great track record and really attributed his stock picking success to three situations: A) Friendly's Ice Cream - Buyout Craze, I believe total profits to Lion Fund were $1.8M Please keep your hats on this is not a crazy amount of money. B) Western Sizzlin - I am sure many of you have done the analysis of the actual growth in book attributed to RIGHTS OFFERINGS as opposed to organic growth in value, if you havent it will surprise you. Nothing spectacular but even I overlooked it initially. C) SNS - The Jury is VERY much still out, taking control of any value play during the period in question would have produced significant results. I bought some shares of DTG during the same period just as a gamble because it looked cheap, spent a total of $16,400 and watched it grow to over $700,000 in that period. Unfortunately, this is how I see BH and Biglari at this stage and he is going to have to prove a lot for many years before I ever consider him to be a successful investor. This is how I measure people in the investment industry. Its not what he did, its how he did it and being a fiduciary myself I can't fathom those types of actions. Now I want to make one more important point. When I discovered Biglari and SNS in early 2009, I truly thought I had found an incredible investor and for a while was sold hook line and sinker. I bought shares of SNS and even made some good money, that is how I found this board (never posted on a board in my life). But when the sh** the fan I was so devastated that I had to re-evaluate everything about this guy and I think many of you here need to really think about what has occurred. It's just a total shame on so many levels and its way more than Chutzpah, its Shady pure and simple. And we still don't know how much leverage in the Lion Fund is being used to influence his votes on the upcoming proxy. There are so many variables here.. Biglari just decided to turn into buffet with one liner press releases and a one page website. Honestly, I am just not sure if he has what it takes to run a public company.

Yup Adams has been selling for quite some time, I have been buying a lot of his shares. Have just under 3% now.

When buffet did "workout" scenarios as he liked to call them he went in slowly and would take his time prior to "working them out". What Biglari did here was sell most probably at a loss after he realized he couldn't work out a tender. And this is not the same as an Icahn or Lampert investment because going into the trade if he knew it was just to test the waters he could have accumulated 5.1% and not 6%. My opinion is that he built a position it went against him and like you said, he needs the capital elsewhere. Back to S&S, I am still of the opinion that the only thing he really did was cut Capex. The net income figures today are not that much better than they were a few years ago under previous management even with high capex. Now there is an a nice interview I watched once with Steve Wynn. In it he talks about Capex. I will try to find it it was on Bloomberg I believe. With some businesses as I am sure you agree, and SNS may not be one of them, playing with Capex is like playing with fire. Would love to see those Biglari Annual Reports as well!

HLYS - Heely's Shoes Market Cap - $68M Cash - $67.2m Equity - $80.1M Company is essentially trading at cash, the business is being given away for Free. Is the business worth anything? I believe it is. Either way there is very little risk of permanent capital loss given the fact that the company generates enough interest and cash from operations to prevent it from burning its equity. Catalyst: New Shoe Line, at one point HLYS generated 27m$ in net income. Not sure if those days will ever return, but this is an easy buyout target at even 3-4$ given its huge cash position. The shoes are still sought after by kids and they have great global distribution. Enjoy!

Parsad, While I partially agree I believe that if this was the case Biglari could have just accumulated a 5.01% position and not a 6% position. From a capital allocation perspective it seemed as though he wanted BH capital allocated in this position. Also to invest in this manner (either I get a tender or I don't) will never work, last I checked he is not an activist investor he is a value investor?!? To me this just further evidences his lack of actual success as an investor. Aside from reducing Capex @ SNS I have not been impressed one bit. (A 40m$ fund which attributes all its gains to the rise of one stock run by a skilled writer does not translate into a good investor)

This is very funny. What type of an investor builds a position and then exits it one month later. Would love to hear the explanation on this one...

This is a great post. I too agree with Shalab. Central Banks will continue to debase their currencies in order to re-inflate the economy. This keynesian approach is really the only solution (based on what they believe). The issue is that the mechanism which normally allowed the "inflation" to reach the real economy is no longer in tact. That is of course the whole debt securitization market. Also, like in the great depression, consumers now want to rebuild their nest egg so they are saving and reducing discretionary consumption. This is why the savings rate is going up. I think its a fantastic time for value investors as the truly undervalued companies will perform very well as they are easy buyout targets. I have had two plays get bought out in the last 2 months. And slowly but surely more interesting scenarios are presenting themselves by the day.

Would love to know who the berkshire shareholders that could be on the Forbes 400 are :) Back to Simpson, this is probably the first step in the transformation of berkshire from a company run by superstars to a company that will have to be run by a set of rules and culture instilled by superstars.

Argument Settled? :) Its either Crawl date or actually returns the absolute dates the content was written as opposed to just using a search with keywords which as Munger pointed out is extremely unreliable and hits really mean nothing... Now with regards to the Flu, what these government bodies do is actually measure the amount of people typing the word "flu" into google and that forms a matrix which allows them to gauge spikes which can then be correlated to IP addresses in geographic locations. When certain IP's from certain locations type the word flu that means the flu is spreading and they can get a head start on dealing with it because its basically instantaneous. Get it?

You guys do realize that google has an option to filter search results based on the first crawl date right? lol http://www.google.ca/search?q=%22subprime+problem%22&hl=en&sa=X&ei=4YNtTJK-L4-WvAPkk-GWDQ&ved=0CAwQpwU&source=lnt&tbs=cdr:1,cd_min:2003-1-1,cd_max:2005-1-1 http://www.google.ca/search?q=%22subprime+problem%22&hl=en&sa=X&ei=8INtTK7SFce2ngfeobyBCA&ved=0CBAQpwU&source=lnt&tbs=cdr:1,cd_min:2005-1-1,cd_max:2008-1-1 Cheers?

I tend to see this argument in a completely different light. If you think about it statistically... there would be no bubble unless a majority of the capital deployed believed the hype. So its a matter of fact that the amount of people who did not believe the hype were a minority. But that to me is not as interesting as this. To write a few sentences about something is very easy to do, Nostradamus was a pro at it. You can structure visions in a way that will formulate one way or another. As investors we need to focus on the guys that actually deployed their capital and gained from the downturn. Now I recall in the 2009 Berkshire Annual Meeting, Munger made a comment that kind of pissed me off. He said that a Manager which was all cash in 2008 was not the Manager he would want to have. I strongly disagreed with that statement as I believe that a manager in tune with the markets who had the understanding of the fundamentals relating to the events could have easily made a decision to scale back and even short the obvious. And those are the guys I admire: #1 - Michael Burry #2 - Albert Friedberg #3- Tom Kaplan There are others as well but these are guys you won't really hear about have made billions of dollars combined, and this was the foundation of their investment strategy... They knew what was going on, deployed capital accordingly, and killed it! Now back to Parsad's point, what impressed me about Prem is not that he talked about it but that he actually performed amazing in 2008. Deployment of Capital in the real world is so different from practicing in theory. I cannot stress this enough.

Most value investors despise the concept of understanding the Macro picture. This is obviously due to the belief that when searching for undervalued securities the intrinsic value should be so apparent that in a stable or normalized economic environment the macro doesn't really matter. I believe that in the current environment understanding the Macro is important. There are only about a few people in the world who I admire when it comes to Macro thoughts, the leading one is a gentlemen by the name of Albert Friedberg. Friedberg is a commodity trader from Toronto who has been a commodities trader his whole life. In addition to owning a commodity trading firm he runs a hedge fund which has generated absolutely incredible returns over the past decade. He is up about 70% in just the last two years. He's been absolutely right on the Macro picture and I highly recommend his insights. He's even got a little buffet in him, worth around 600m$ yet lives in the same house on the same street forever. Back to the current environment, there are certainly some factors that must be considered, and I think an astute investor in the next 20-30 years will have to incorporate them into their overall investment thesis. The most important point in my view is this ridiculous concept that a central bank can all of a sudden decide to reduce interest rates to levels never before seen in any period of history and believe that there will be no repercussions. Here are some words from Friedberg.... Enjoy! http://www.friedberg.ca/c/htmlos/001508.3.1615748909916047517/push/2nd_Q_2010.pdf And some more although not being entirely credited to Friedberg, the smart ones know who writes this stuff being their largest shareholder: The Gold Market 8/10/2010 In our view, the next leg up in the gold price is imminent. The deflation scare we have been predicting is now in full bloom, right on schedule. The Keynesian inflationist economists are using this fear to gather support for an expansion of the Federal Reserve balance sheet in the form of further quantitative easing (“QE”). More stimulus spending by the US Treasury is unlikely given the current level of concern about the deficit. But Federal Reserve expansion of the money supply is what the Keynesians believe is necessary to revive a failing economic recovery and most of these economists work for Wall Street or Washington, both of which are intent on preserving the status quo at any cost. The deflation scare has supported a bear raid on gold which has fallen 7% in price from its all time high in late July 2010. Sentiment on gold is intensely negative. We believe this development is temporary. In our view, the Federal Reserve is about to attack deflation, undermining the dollar and just about every other vehicle for protecting savings and wealth – other than gold. Let us be clear that deflation is largely an American concern. Much of the developing world is struggling with rising inflation especially the BRIC countries of Brazil, Russia, India and China. These countries attempt to maintain their currencies in a narrow range against the US dollar. As more dollars are created, and as more dollars flow towards these stronger economies, they will be forced to create more of their own currencies to absorb these dollars and prevent major revaluations. Thus, if the Federal Reserve expands its balance sheet as we expect, the US will once again export significant inflation to the rest of the world. In our view, those who (sincerely) fear deflation are misreading the signs. Is there a real threat of deflation if the Continuous Commodity Index is at a new two year high (which it is)? Is there deflation if central bank reserves are nearly 10% above their 2007 highs? And if there is deflation, would we not expect the US dollar, the world’s reserve currency, to be rising? In fact, the dollar index is down precipitously from its June 7, 2010 high as deflation fears have mounted. Yes, US Treasuries are up in price but is that a signal of deflation or anticipation of more Federal Reserve purchases to come? In one sense, the reality of the deflationary threat does not matter. The Federal Reserve is going to act on it and defeat deflationary forces real or not. But a misreading of deflation is important in one respect; if there is no real 3 threat of deflation, as we believe, then new measures from the Federal Reserve could substantially increase financial instability, enhancing what is already a growing role for gold in investor portfolios. What is the evidence for deflation? Economists point to low consumer price inflation, falling asset prices (particularly residential and commercial real estate) and a large output gap. The output gap is the difference between the economy’s potential performance and its current level, a gap which reflects a combination of weak end demand and excess productive capacity. We will examine these deflationary forces in more detail. First, let’s be clear about the current economic situation. We are two years into the collapse of the biggest credit bubble in history. In a credit bubble, asset prices and debt outstanding chase each other higher. Cheap, easy credit, the necessary condition of a bubble, bids up asset prices which in turn provide more collateral for further borrowing. Because interest rates are low in a credit bubble, investors are encouraged to reach for yield by taking on more risk, often more leverage. Investors are encouraged to speculate rather than invest. Savers are encouraged to spend rather than save. Much of the cheap, easy credit goes to support consumption, or poor investments that do not generate a reasonable return. The end result is a series of unstable imbalances. Asset prices, debt levels and leverage are too high. Cash flows and investment income are too low. When the bubble collapses, prices, debt levels and leverage must come down. Excess capacity needs to be wrung out of the system. Spending needs to slow down and savings need to increase. Debt needs to be restructured and repaid. The reconciliation is painful but necessary. The real problems begin when governments and central banks try to prevent the reconciliation by supporting consumer demand, propping up asset prices and discouraging savings. Clearly, most governments and central banks have been trying their best to re-inflate the bubble and suppress the reconciliation process. In the US, we have had programs to support end consumption such as “cash for clunkers” which have simply added to the deficit without any economic benefit. Similarly, we have had a myriad of programs to keep people in homes they cannot afford and to subsidize new home purchases, never mind the enormous efforts being made to bring mortgage rates down and facilitate more lending. Despite low interest rates engineered by the Federal Reserve to encourage savers not to save, households are consuming less and trying to rebuild their balance sheets. That’s where we are today. Does low consumer price inflation represent a threat to the economy? In the late nineteenth century, America enjoyed the strongest period of economic growth in its history. Substantial investments in new technologies reaped huge productivity gains, real incomes rose and corporate profits went through the roof. During this same period, the general price level fell substantially. The money supply grew more slowly than the economy thanks to the benefits of the gold standard. Savers and wage-earners prospered. Do falling asset prices mean deflation? We would argue that asset prices are simply finding the correct level where they represent economic value. Yes, this means restructuring and outright default. Restructurings and defaults do not reduce the money supply. Credit availability may be reduced but this is part of the deleveraging process. Credit and money should not be confused; they are not the same thing. In our view, deflation should mean an increase in the comparative value of money due to its relative scarcity and we are not seeing any evidence of money scarcity. One of the arguments the Federal Reserve is likely to make in favor of new QE is the money supply. M2, the Fed’s preferred measure of money, is growing at the slowest rate in 15 years. However, M2 includes money market funds and time deposits which are securities, not money, and must be sold to acquire money. The slowing in M2 is largely the result of a shrinking of these non-money components as savers flee from them due to their low returns. More narrow and exact measures such as True Money Supply, a yardstick prepared by the Von Mises Institute, show continued strong growth in money supply exceeding 10% annually although the growth rate is down in the last six months as QE1 slowed to a halt. There is no evidence to suggest that there isn’t sufficient money to support current prices. As for the output gap, the theory is that we need to see strong economic growth which reduces economic slack and increases end demand to the point where it strains capacity before we can have inflation. This is the reigning economic theory and it is an elegant one. Unfortunately, it fails to explain nearly every major inflation of the past hundred years, most of which occurred during severe economic contractions. Consider the Weimar Republic’s hyperinflation of 1921-3. After WWI, a defeated and demoralized Germany was faced with high unemployment and onerous war reparations to pay. To stimulate the economy and to help pay the vast debts outstanding, the German central bank steadily increased the money supply. For two years, nothing much happened. Due to the uncertain political and economic outlook, German citizens and institutions hoarded their cash. 4 Then, within a period of few weeks, and without any warning, the population changed its mind. Suddenly, savings no longer made sense and Germans began to spend. They lost faith in their government, their financial system and their currency. Germans decided that it was better to hold real goods rather than money. The output gap had nothing to do with it. Serious inflation is an issue of confidence in money; it is not primarily an economic phenomenon. The purpose of this narrative is not to compare the Germany of the 1920s to America today. The point is to highlight the extraordinary importance of central bank credibility, especially as the Federal Reserve moves towards its next phase of QE. In the QE process, the Federal Reserve purchases securities using freshly printed money. In the first wave of QE which began in March 2009 and ended one year later, the Federal Reserve purchased $1.75 trillion in mortgage securities, agency debt and Treasuries. These purchases were added as assets to the balance sheet while the new dollars were recorded as liabilities. To the extent that these purchases were from commercial banks, the results were not inflationary because the banks had to rebuild their balance sheets and so they kept most of the money as reserves on deposit at the Federal Reserve. However, many purchases were made from private market participants and thus new money entered circulation. It should be noted that prior to QE, the Federal Reserve had only ever purchased non-Treasury securities when they also had a re-purchase agreement requiring the seller to buy the securities back. In QE, this was not the case. The Federal Reserve became one of the largest owners of residential mortgages and the largest holder of liabilities issued by Fannie Mae and Freddie Mac, two bankrupt government sponsored agencies. Not the sort of investing that increases the perceived strength and credibility of the world’s largest and most important central bank. What will QE2 do to further weaken confidence in the Federal Reserve and its currency? Many of those who argue for deflation point to Europe as another source of the problem. The EU has decided upon a series of austerity measures for its membership which are intended to prevent the restructuring of European sovereign debt. To its credit, the European Central Bank has greatly curtailed its purchases of securities and thrown its weight behind the need for budget cuts to finance debt repayment and improve the credibility of sovereign debt and the Euro. In our view, these well-intentioned efforts will ultimately fail because they require the sacrifice of citizens and their living standards in favor of bondholders. The time for deflation fears was two years ago when the US dollar soared in response to the initial collapse of the credit bubble and gold fell 30% to less than US$700 per ounce. The gold price is now telling us to expect inflation and we are confident that the Federal Reserve will succeed in making inflation the biggest risk that investors face. In our view, deflation is most unlikely in a democracy with a fiat monetary system where unlimited money can be created at zero cost. Governor Ben Bernanke has told us (in his now famous November 21, 2002 speech to the National Economists Club) that deflation will not happen here because the Federal Reserve has a printing press. We believe him. Nonetheless, there will also be significant debt restructurings and defaults. Gold remains the best protection against both risks…debasement and default. We expect these risks to become more prominent in the months ahead and we expect a dramatic response from gold.

Relating to Pico I am not even a shareholder but I was just pointing out that they have done a great job taking a company and growing it through value investing techniques. I have attached a bloomberg graph showing the equity return in the last decade it comes out to about 11% annualized even though the stock is about 50% down from its peak so I am not sure what you saw on MorningStar but last I checked the S&P did not achieve 11% annualized over the last 10 years. Regarding insider ownership, they have done a terrible job at controling dilution which has led to the current situation where management owns about 7% of the company when taking into account their ESOP. But again this is their ownership not owned through some fund over which they preside (ie: biglari). What they have done is grown their permanent base of capital nicely to about $537m and still have a beautiful balance sheet. I believe they issued a bit too many shares but if you sit down and do some analysis about Nevada Land Holdings you will find its one of those assets that almost rarely can be owned by private enterprises. Do some digging there, you will enjoy it :) Its like they own a good chunk of the state of Nevada. Then they have their water assets. Read the 10K you won't be let down. Again, when pointing them out I was simply trying to demonstrate a group of investors who have taken elements of the buffet approach without any self marketing and build a pretty great holdings co utilizing value investment themes and applying them in unconventional ways... (buying water reserves, land holdings, acquifers) they even had a nice exit once to a european company I can't remember right now. Not sure if you ever heard of Danaher (DHR) but that is also run by a group of brothers, the Rales, who have generated about 20% annualized for over 20 years. I added a bberg graph there as well for your pleasure. Its funny actually there is a buffet book I think by Lowenstein that mentions the Rales brothers as some hot shot playboys in the 80's. Little did the writer know these guys are actually bonafide billionaires and have compounded beautifully. Another relatively unknown group are the Desmaris family from Montreal, their Power Corp has achieved 20%+ annualized as well. Enjoy!

Its amazing how a majority of Mr. Dell's net worth is now located outside of Dell shares and in MSD.

I thought I would put this one out there since I used to think this was the riskiest value play just to see what you guys think: Majestic Insurance, Formerly CRM Holdings. Workers Comp Insurance based in Bermuda (tax free investment income). Market Cap - Grand Total of $3.91m Investment Portfolio - $304m invested in Treasuries and MBS yielding a grand total of 3%. Cash - $28.4m Total Equity - $52m What happened? In short a convergence of two factors, the first the company had a terrible CEO with a bad reputation who mismanaged some of their business, he was fired but retains a large stake. The AG opened an investigation almost 2 years ago. Since then nothing has really advanced. The CEO is actually a smart guy and is trying hard to salvage the business. The second factor is they are in workers comp insurance which has been hit hard due to the slowdown in construction. Now again I subscribe to the notion that there is a value for everything. At 4m Market Cap its hard to argue that MAJC is overvalued. They also recently engaged I-bankers to come up with strategic alternatives. I would love to take over this company, the problem is Bermuda Corp Docs say you can only own up to 10% of the voting shares. Wouldn't it be great to manage this insurance float (305m$)?? I would also conduct a R/S to retain NASDAQ listing and initiate a share buy back. They are losing money but again the CEO Jim Scardino is really cutting costs and starting to clean things. And it was nice to see shareholder equity decline by the lowest amount in the last two quarters. Just another high risk high reward value play... would love to hear your thoughts.

Great point VG and this plays back into what I have been saying which is that this is purely a capital structure issue. And because you had a stubborn controlling shareholder he chose to take on more and more debt at ridiculous rates while not diluting his stake. He was the number one believer in the company as he probably still is. Now he has to face the music and it will definitely be interesting to see what type of deal is cut. I can promise you that the AG and SEC investigations will only keep everyone more honest than they otherwise would have been so we may see a sweet conversion deal announced any day. At this valuation there are two things that could happen which would make the company worth fundamentally less than what it is being offered for: 1) Chapter 11 (and even this is debatable at an equity value of 53m) 2) Their numbers are complete BS including 06,07,08, and 09.

Tariq and Parsad, I believe the comparison to Enron is the comparison of Apples to Oranges. Let us not forget that the numbers I showed were from 2005,2006,2007,2008, and 2009. Annual Statements which the great Deloitte had signed off on. If there was any fraud involved or shenanigans they would have been discovered by Deloitte then or by Lion when doing the DD on their debt issue, (also look at the debt terms very sophisticated). The issue at hand is simply one of corporate governance, and with a firm like Deloitte if you don't have your numbers in on time it makes them look bad and they drop you just like that. That being said I also agree with you Parsad thats this is a more speculative investment and for that reason I said its not a vanilla value play but I also am of the belief that in 2010 to be a value investor and generate the top tier returns you have to look at a convergence of factors. Since information is so readily available you must look for situations where the information actually affected Mr. Market in the most drastic way. If you look at APP today it is now valued at 53m$. If you were to take over the company through the debt as you propose there would be about 100m$ left over and this is not the type of inventory you sell at a "garage sale". This stuff is in great demand just look at the growth in their internet sales. Now in a portfolio like mine especially on a year when I am up double digits (thank you XJT) there is room to allocate 1-5% of the portfolio in such a position. The downside is not permanent loss of capital its permanent loss of a portion of the alpha for that year. Its a capital allocation decision. But I do believe there is a value for everything and in APP's case it is getting more attractive by the day. Also the two investigations in my view or totally late and irrelevant as always. I can just imagine the AG prosecutor who got a copy of the WSJ or Business week articles last week and decided to open an investigation. I remind you that APP has missed not filed ANY financials since their 09 10k!! So opening an investigation today is really laughable. The path of least resistance takes you to this type of a scenario :Dov Charney needs to go as a CEO as his weak internal controls and corporate governance led to the company missing two quarterlies, Deloitte which tried to work to complete the quarterlies got fed up and resigned, at the same time declining operating figures and Mr. Charneys implicit stubbornness to stay in control led him to over-leverage instead of raising equity and then everything converged and we have what we have today. The SEC and AG are just not relevant in my view, Deloitte resigning is sad, but has no bearing on past performance and the intrinsic value of the enterprise, and Lion Capital as a P/E Fund is not interested in dealing with class actions and angry equity holders, when they can just as easily convert their debt to equity and have a liquid position in their NAV. I bet they have been trying for 6 months but Charney was not open to any negotiations. Finally I want to say that I do agree that this is the best board I have seen and that is why I am happy to be part of it. I just also believe that while the basic framework of value investing is the same as it ever was, in today's world to generate the really fantastic returns you have to look at a convergence of factors.

I think another amazing group of investors are Pico Holdings, John Hart. These guys are value investors as well and have built a great business. They have an incredible asset base which includes one of the largest land holdings in Nevada and water reserves and water pipelines. They also have a ton of cash. Check them out! Good reputation and no self promotion, which I think is very important.

One last post! Year Ended December 31, 2009 2008 2007 2006 2005 (In Thousands Except Per Share Data) Selected Statement of Operations Data: Net sales $ 558,775 $ 545,050 $ 387,044 $ 284,966 $ 201,450 Gross profit (5) $ 319,912 $ 294,421 $ 213,368 $ 145,636 $ 101,688 Income from Operations $ 24,415 $ 36,064 $ 31,122 $ 10,572 $ 10,782 This is a beautiful business! lets not forget how terrible the last few years have been, its just had a bad capital manager at the helm. Btw avg. return on equity deployed is ridiculous its over 30% avg. In my view this demonstrates the strength of the brand.

Guys I am new here but a little surprised, this is supposed to be a value investment board. Since when do you pay attention to every little detail out there in an emotional manner, we are supposed to cut through the static and focus on the meat. All the comments about Charney or his father or spac or apartment leases, all those didn't prevent the company from generating the following EBITDA numbers in 09,08,07 respectively: Earnings Before Interest And Taxes 27,555 35,288 32,824 You have an enterprise with bad capital management the owner btw who owns 53% is the one who lost the most he tried to keep the capital structure going with minimal dilution and kept raising more and more debt now he is going to have to pay by losing control. Lion Capital or Burkle will step in, convert the debt into equity and voila ! you have a "healthy" company again. I used "" because its healthy given the price it is being offered IMHO... Price is what you pay, value is what you get!! I would like to see 75m$ of the debt converted into equity at these levels, Company would have about 150-160m$~ in equity trading at about 150-160m$ Value. But as a business you would get back to profitability. The ultimate LOSER here is Dov Charney he waited too long to restructure. As investors today in APP we are being given a great deal, to buy the equity at what debt holders would be given at a valuation that basically prices in 5~ Ebitda and at what I estimate to be roughly book. Again many assumptions being made here and I am going to stop posting about APP I was merely surprised at the relatively unsophisticated level of rebuttals that really have nothing to do with past performance or the issues at hand. If you want to hear what I think can go wrong I will outline it here: 1) Negative momentum in core businesses / store closings/ economy (but again with proper capital structure they could handle such a scenario) 2) Lion get too sweet of a deal on the conversion (IE: many warrants at conversion price which would mean too much pressure for a major gain to be realized) But this is where I think Burkle is a good counter. Thats it for me on APP! unless I am right in a few months and then I will toot my horn a bit ;) It was just awesome to see a post about it on the board given that I have built a position these past few days.

You can never be 100% confident about variables which are outside your control, thats why there is a large potential return here and why I said its not a vanilla value play. But I also believe that at 73m$ Market Cap this is worth an allocation. By the time the clouds clear up and we know what you want to know the shares will not be trading this low ala~ BP in June. The great thing about the market is we will know soon enough! Again we must remember that this company ebitda's about 20-30m per year there is simply a liquidity issue mixed in with negative market sentiment.

I am not following? A debt to equity swap at these levels would mean the market cap would be what it was about two weeks ago... lol

RE: CROX here is a link to an article written by the Washington Post forecasting their coming BK very similar to the APP Article. This is what happens when journalists with no investment knowledge write about the topic du jour. http://www.washingtonpost.com/wp-dyn/content/article/2009/07/15/AR2009071503672.html FYI CROX since this article is up about 500% and is one of the top perfomers in terms of percentage gain over the last 52 weeks.

I see a ton of value in APP and have been accumulating a position over the past few days. Great Eye... This is not a vanilla value play but there is a clear discount to intrinsic value and even a margin of safety. First - Ron Burkle the billionaire recently built a 6% position, at an avg cost of 1.38$. Now Mr. Burkle with a net worth of 3 billion has filed 13D on a total of 5 stocks in the last 5 years: WFMI, BKS, APP and two others which I can't remember. WFMI Mr. Burkle bought at a market cap of 2b$ (10$ per share) he purchased 10m shares and sold 8m shares @ 30-40, leaving him with 2m free shares. BKS Burkle has acquired about 20% at an avg cost of 13$, he doesnt like to lose and if you follow the history on bloomberg you can see he has done everything in his power to "unlock" the value. Which leaves us with APP, which Burkle bought with about 6m$ of his personal funds. Burkle and Charney are both in LA and Burkle is known to be in the same circles as Charney so it is not out of the realm of possibility that Burkle will be cutting a deal. Either way I doubt Mr. Burkle would lose 6m$ in a few months when the company simply has a liquidity issue. Lion Capital which holds the debentures (not Biglari) is also a great firm and I believe it is in their best interest to convert the debt into equity. Assuming such scenario you would have a business which effectively generates 500m$ a year in sales with 51% gross margins trading at a market cap of about 150m$ (full debt converted, I would convert half). Remember, sometimes when making value investments a lot of scenarios have to converge, and I definitely see that being the case with APP. There is way too much negativity with regards to the auditor change or the negative press Charney has received. The bottom line is, this is a brand with a durable competitive advantage, they sell good clothes at cheap prices and if you read the Bloomberg/Newsweek piece on APP Charney wants to go after the prep competitors (J.Crew/RL) and if he is even able to capture a small segment he will do very well. He has vertical manufacturing in the US and a great distribution network of stores. All these cannot be discounted. Finally a good test I use when measuring the value of a business is this: If I were to give you 150m$ tomorrow could you build an American Apparel? Could you open 300 stores around the world, a manufacturing facility, and a brand which has resonated pretty quickly with 20-40 year olds? I think not. The caveats I see actually have to do with the economy but hopefully they can survive I think if they restructure their capital base everything should be fine. There arent many situations when one can effectively buy a business like APP for free. Looking back a few years its a bit similar to CROX in early 2009 and TRLG during the same period.

Its very rare to see a biglari style takeover. I don't believe I have ever seen someone with such a small percentage of a company come in so quickly and take full control whilst changing the name of the company to his own.... That has actually never been done. Icahn has a company named after him but he owns about 92% and its an LP. But what Biglari has done is basically unheard of and even more proof that a large reason he was successful was due to his ability to exude a buffet like image which was gobbled up by the investors. Its almost like an affinity fraud... and I apologise if I am going overboard here. Just some things are blatantly sad when it comes to Biglari, IE: the website... Great Board btw look forward to contribute!