Chanticleer Advisors Q4 Letter

[farnamstreet]

http://bit.ly/7AIAsM

[QLEAP]

Thanks, exceptional performance and unbelievable record of buyouts - these guys are good at ferreting out underpriced stocks in small cap space.

[goldfinger]

Thank you very much. I truly enjoyed reading it. I sent an email to Chanticleer to get some of their letters for a prospective investment but never got any answer.

[Guest kawikaho]

15% CAGR.

[Rabbitisrich]

Thanks for the letter. I also have a small stake in The Tandy Leather Factory, and it continues to astonish me that people will purchase discretionary leather products in the midst of a deep recession.

[Guest Bronco]

Is Bexil still publicly traded?  I thought that went private a while ago.

[EricSchleien]

They're still traded.  They just delisted.  I'm not sure if they have under 300 shareholders or not though.  If they do, they'd be considered an exchanged traded private company.

[Guest Bronco]

Eric - thanks.  I actually have some history with that company - one of the heads appears on CNBC sometimes.

 

They were a net-net at one point - total cash on the books (and no real liabilities) was less than market cap.

 

 

[Rabbitisrich]

Eric - thanks.  I actually have some history with that company - one of the heads appears on CNBC sometimes.

 

They were a net-net at one point - total cash on the books (and no real liabilities) was less than market cap.

 

 

 

Bexil warranted that valuation, IMO, due to the control position of an unreliable partner, the Winmill's.

[EricSchleien]

Why do you say they are unreliable?

[Guest Bronco]

Don't want to speak for the rabbit - but maybe self-serving is a better term than unrealiable.

[Ballinvarosig Investors]

I really enjoy reading the Chanticleer quarterly reports and find myself in agreement with most of their picks. However, I really don't have the foggiest why they've gotten themselves in with the Winmill's (Winmill Corp, Tuxis Corp, Bexil Corp, Foxby Corp). Gradual erosion of shareholder value (Bexil), lack of reporting (Winmill) and entrenched management (no catalyst for change).

 

Investment Partners Asset Management have been particularily scathing about Winmill and their affiliates. They had this to say about Bexil Corp.

 

http://www.sec.gov/Archives/edgar/data/52234/000145078909000310/exhibit.htm

Bexil Corporation (“Bexil”, formerly Bull & Bear Government Securities Fund) is approximately 25% owned by Winmill.  According to Bexil’s annual reports and SEC filings, Bull & Bear Government Securities Fund, which previously had been a series of Bull & Bear Funds II (an open-end mutual fund), in 1996 converted to a stand-alone closed-end fund organized under Maryland Law.  In 1999 Bull & Bear Government Securities Fund changed its name to Bexil Corporation.  In December 1999 the board changed the investment objective from purely government-oriented income securities to include equity and other securities of selected growth companies and in companies that invest or deal in natural resources or commodities.  In 2000, the board again adopted a new investment policy to own through internal development or acquisition majority stakes in new and small businesses, including privately-owned companies.  In 2002 Bexil filed to de-register, and in 2004 Bexil was granted de-registration as a closed-end fund.  Bexil purchased a stake in York Insurance Services Group in 2002 and sold that asset in 2006 for $38,864,121.  Upon entering the agreement to sell that asset in 2005, $815,625 in bonuses were awarded to employees, and upon consummation of the sale of that asset $1,909,228  in bonuses were paid to Bexil employees.  Bexil’s total expenses in 2006 were $3,452,332, with the largest percentage being employee-related costs. In 2007 Bexil’s shares were de-listed from a national exchange (AMEX) and it de-registered with the SEC as a public company.  Among the reasons cited for this decision were the ongoing costs and expenses of remaining listed on the AMEX.  Bexil’s most current financial information is from September of 2009 when it showed a book value of $38,146,124. Despite Bexil’s stated desire to reduce certain expenses, from fiscal 2007 through the 3rd quarter of 2009 (while Bexil had not yet purchased a stake in an operating business) it incurred $3,339,993 worth of expenses (with the largest percentage being salaries.)  During the first quarter of 2009, Bexil provided for a loan for insiders to purchase $2,366,933 worth of Bexil stock under options for which Bexil does not appear to have yet received any cash proceeds.  The transaction appears to have given Bexil insiders (who previously only had stock options) actual ownership of more than 100,000 shares at a weighted average price of around $21.95, while book value per share at that time exceeded $38.00.  While there is likely a benefit to insiders of Bexil personally, it is not apparent how such a transaction benefits outside minority Bexil shareholders directly or outside minority Winmill shareholders indirectly.  Though Bexil’s stated book value at September 30, 2009 was approximately $38.1 million, its market capitalization at its last-sale share price on December 15, 2009 of $22.40 (according to the quote in the pink sheets) is only about $22.5 million - a discount to book value of more than 35%.  Since January 6, 2004, when Bexil was granted de-registration as an investment company, its share price is up about 36%, while its stated book value has increased by approximately 151% during the same period.

I've seen Matt Miller of Chanticleer posting here a few times. Maybe if he's allowed to, he can explain he's invested here ;D

[mmiller]

While this is by no means an exhaustive discussion of the relevant points when it comes to the thesis for Winmill and Bexil I, would make the following comments:

 

- We do not believe there has been a graudal erosion of value at Bexil.  Its cash is still quite valuable.

 

- The investment Bexil made in York Insurance Services was, in our opinion, fairly successful.  We calculate that over a 4 year period Bexil made nearly 17 times its money (pre-tax) on a cash basis, including dividends and capital gains.

 

- We think that the decision to be quite picky about an acquisition since the sale of York in 2006 was the right decision.  To be fair though, we thought 2008 and 2009 would have been the perfect time to deploy Bexil’s capital.

 

- Mr. Winmill is looking to acquire a business for Bexil at an amazing bargain.  I have met with Mr. Winmill and can confirm how dedicated he is to this.

 

- At Bexil, the accounting treatment of the recent “loan” to shareholders for options leads to an understatement of true book value.  This is not to say that the accounting treatment is misguided, but the loan cannot be included as an asset.  We fully expect that at some point in the future after a deal is completed that the loan will be repaid.  At this point, the only thing the loan is doing is keeping Bexil from collecting a bit over $2 mm from the exercise of those options.  We do not believe that is a big problem.

 

- Despite not reporting results, an observer may be able to triangulate an approximate idea of what the sum of the parts of Winmill might be worth.  It is not difficult to come to a number, in our opinion, that is a multiple of the current price.

 

- Investment Partners raises some very good points.  We are less concerned with what is happening at Bexil as we are at the non-reporting status of Winmill.

 

- Given that both Bexil and Winmill are trading at what we believe are significant discounts to liquidation value and the potential upside in each we are willing to commit a small portion of our capital.  Each is intentionally a small position because of a few of the concerns and the fact that there appears to be no catalyst. 

 

mmiller

 

[valuecfa]

Great returns thus far at Chanticleer. Congrats on making your investors nice returns in dismal markets. I like your style in finding deep values where no one is looking, in the far corners of illiquidity. But, i wonder how you guys get comfortable enough with some of these companies given that some don't even provide audited financial statements, such as The Marketing Alliance (a 15% position as of the Q4 Letter). How can u get comfortable enough to make your largest position in a company that both doesn't provide audited statements, doesn't file with any regulatory body (like the SEC), and provides very, very limited information in which to analyze? Even on the pink sheets they are traded on a very low tier, just above their "Dark/Defunct Companies" category.

 

 

In regards to Bexil. A 5 minute analysis does reveal a huge discount to a safe/hard book, that reveals a massive MOS. However, this company had perhaps the most opportune time to find their once in a lifetime investment this past year, yet they currently still sit in treasuries. This was their most recently revealed Q:

 

Bexil Corporation Announces Third Quarter 2009 Financial Results

 

NEW YORK, NY, Nov 06, 2009 (MARKETWIRE via COMTEX) -- Bexil Corporation (PINKSHEETS: BXLC) today reported its financial results for the third quarter ended September 30, 2009.

 

Bexil recorded a net loss of $146,633 or $0.15 per share for the three months ended September 30, 2009 compared to net income of $72,836 or $0.08 per share on a diluted basis for the three months ended September 30, 2008. For the nine months ended September 30, 2009, Bexil recorded a net loss of $438,183 or $0.46 per share compared to net income of $295,572 or $0.32 per share on a diluted basis for the nine months ended September 30, 2008.

 

The Company's book value per share at September 30, 2009 (991,592 shares issued and outstanding) was $38.47, as compared to book value per share at September 30, 2008 (883,592 shares issued and outstanding) of $43.70. At September 30, 2009, Bexil had positive working capital of $37,747,311, total assets of $38,408,030, no long term debt, and shareholders' equity of $38,146,124. The Company's primary source of income since the sale of our fifty percent interest in York Insurance Services Group, Inc. ("York") in April 2006 has been from interest and dividends earned from U.S. Treasury securities and money market funds.

 

Not much info in which to analyze. Mgmt. did a fabulous job with York, so I don't mean to discredit them, especially with only a rather weak 5 minutes of analysis on the company. Yet, the company has lost 12% of book value while having no operations, in just the past year. Just how much are they paying themselves to roll over t-bills every few months? These guys aren't milk men are they? If you care to respond... Did mgmt. consider any offers within the past year?

 

 

 

[Parsad]

Hi Value,

 

I believe that The Marketing Alliance provides audited financial statements to their shareholders, but because they are pink-sheet listed, aren't required to file those statements on EDGAR.  Matt and Joe can probably confirm this or not, but as far as I know, the NAIC requires all insurers...listed or not...to provide audited financial statements to the commission and to shareholders.  Cheers!

 

 

[valuecfa]

Hi Value,

 

I believe that The Marketing Alliance provides audited financial statements to their shareholders, but because they are pink-sheet listed, aren't required to file those statements on EDGAR.  Matt and Joe can probably confirm this or not, but as far as I know, the NAIC requires all insurers...listed or not...to provide audited financial statements to the commission and to shareholders.  Cheers!

 

 

 

 

Hi Parsad. They definitely don't file any statements with the SEC, and I don't believe that they file audited statements period. At least the filings at the pink sheet site doesn't show them as audited. No auditor's acknowledgment, signature, or opinion anywhere. Ditto at their corporate website. The pink sheet system has multi-tier levels for companies that provide them with audited statements that is different from the one they are currently listed at, which is much lower.

 

The annual report itself is only 5 pages long (including the financial statements, which is missing a cash flow statement) . Correct me if I am wrong, but I don't believe they are actually an "insurance company" (and just provide back office support, etc. to insurance companies) and therefore don't fall under NAIC guidelines.

 

EDIT: I just searched the NAIC filings database and nothing came up under Marketing Alliance.

[Parsad]

Hmmm...Matt, any comments on their financial statements?  Cheers!

[mmiller]

As to Bexil...

 

The drop in BV that people see is due to the previously mentioned loan that was agreed to for the exercise of options.  Per GAAP, this increases the shares outstanding while at the same time provides no credit on the asset side of the balance sheet for the monies owed.  If you look back, it was only until the most recent 12-15 months when treasury rates got so low that Bexil began to report small losses each quarter.  I am not concerned about the burn rate and believe BV has not really declined as much as it would appear. While the last 12 months would have seemed like an opportune time to deploy that capital, I have no problem waiting for the company to find a fat pitch.

 

As to Marketing Alliance...

 

This is one of those types of situations where it really takes some detective work.  I have met with Tim Klusas, President of MAAL, and his team on multiple occassions.  I speak to him at least once a quarter.  I believe he is a great manager.  Of course he is unknown and at a small company, but he is great nonetheless.  The company will provide to shareholders audited statements upon request.  I have personally reviewed audited statements for the past several years.  I think anyone wondering about the accuracy of the statements out to consider, as one data point, the company's track record of dividend payments.  The company has paid a dividend every year since 1999.  These are significant dividends which didn't require additional capital raising to provide.  Also, by my count there are only 37 non-bank companies traded on the Pink Sheets that currently have a dividend yield.  This company is part of a select group of Pink Sheet companies.

 

 

MAAL is not an insurance company so they do not have to provide statements to a state regulatory comission.  The company provides back office and pooling production services to life insurance agents across the country.  While this is slighly beyond the scope of the question asked, I believe MAAL is one of the very best businessses I have every studied. I would be happy to provide a more detailed opinion as to why that is if it would interest the board.

 

mmiller

[benhacker]

Matt,

 

Love the few pieces of analysis I've seen by you, you seem level headed and sharp.

 

With that said, I've got to jab you for this comment (all in fun) because it made me giggle. :)

 

This company is part of a select group of Pink Sheet companies.

 

I for one would love to see an analysis on MAAL... I"m interested.

 

Ben

[Grenville]

Matt,

 

Love the few pieces of analysis I've seen by you, you seem level headed and sharp.

 

With that said, I've got to jab you for this comment (all in fun) because it made me giggle. :)

 

This company is part of a select group of Pink Sheet companies.

 

I for one would love to see an analysis on MAAL... I"m interested.

 

Ben

 

I second that!

 

Thanks!

[Parsad]

Thanks Matt!  Cheers!

[farnamstreet]

You can find out more about MAAL and Matt's and Joe's thoughts on Joe's blog:

http://valueinvestingworld.blogspot.com/2009/04/marketing-alliance-micro-cap-with_22.html

[mmiller]

As per MAAL...

 

You might like to read:

 

http://www.chanticleeradvisors.com/files/107293/Interview%20with%20Tim%20Klusas%20President%20The%20Marketing%20Alliance.pdf

 

http://www.chanticleeradvisors.com/files/757505/Marketing%20Alliance%20Inc%20-%20Buffet%20Group%20Presentation.pdf