Digimarc has no debt and $43 million in cash as cited above. They have 7.4 million shares outstanding, meaning that at current quotational value, the stock trades at an enterprise value of $26 million outside of cash for a profitable company with one of the world’s most valuable patent portfolios around.

Digimarc compares very favorably to other intellectual property licensing companies. On average intellectual property companies trade at 4 times revenue and over 15 times earnings, even in this terrible market. Digimarc by comparison trades for 1.25 times sales and 10 times my estimate for next year.

Financial Assumptions

According to management, fiscal 08 revenues will increase to $19 million from $13 million in fiscal 07. I assume that revenue will grow a very conservative 25% in fiscal 2009, which based upon market research, past performance and its backlog should be pretty easy to attain.

The pro-forma financials on the Form 10 state Digimarc’s net income for the first half of 08 to be $1.588 million. I decided to assume that Digimarc earns no income in the second half due to one-time items resulting from the spin-off (consulting fees, costs from downsizing, attorney fees etc.). I assume that with the additional revenue and lack of one­time expenses that the company earns $3 million in fiscal 2009. At current prices, Digimarc is trading at 10 times my estimate for fiscal 2009 earnings.

Summary

With almost $6 a share in cash, an intellectual patent portfolio treasure chest, a growing profitable licensing business in a fast growing and important field, Digimarc is well positioned even in this terrible economy. When the market recovers and stabilizes, this is the type of company that will do well, a growth company with excess cash with exciting technologies. Get it while it’s still a value stock.

Jeff Matthews is with Ram Partners. Matthews just published his book today. Two years ago at the annual meeting he took 30 pages of notes. This past May he took his computer and took notes. Had great words to say about Lee Cooperman. He bought Lynne Broadcasting for a $1. Thinks it was bought by AT&T for $131 a share. The next time he talked to Lee he talked about a complete dog. Lee also testified as being long Tyco and testified against it.

Voices of scepticism is being stiffled. Einhorn said Lehman needed to be recapitalized last May. He was also dead right about Allied Capital and he was persecuted for that.

Value investors don’t change the value of assets they just shed light on those values.

Evaluating GE: What would/did Warren Buffett do?

Buffett reads like a maniac. When the Asian crisis hit, Charlie and I had to read and think eight hours a day. Most of us get brain lock when our largest positions go against us.

Is this within my circle of competence? Is it a good business? Easy to understand? Does it have a moat? Throw off cash? Is management great? Do they manage earnings? Do they manage for the long-term or do they play “gin-rummy” with assets? Is the board of directors aligned with shareholders? What’s the stock worth… and where is it offered today?

Buffett probably could answer these questions for most companies for well over a thousand stocks. He could run his own CNBC show, Sane Money with Warren Buffett.

GE has morphed a lot in recent years. It was because a finance dependent company. It probably is easy to understand for Buffett but it is not a simple business.

Is GE a good business? Not as attractive ratios as some others

Does it have a moat? Their “core competency” is a global recruiting and nurturing of the world’s best people. This would likely not appeal to Buffett.

What about GE Capital? Most of GE Capital is mostly commercial paper. This is not the moat you want.

Does GE throw off cash? Yes, but look at what they do with it. The bought back $500+ billion in stock at expensive prices. Their tax rate is also declining from 30% to recently 15%.

“The Four Types” of GE culture. The lowest common denominator here is that they make the number or they are gone.

GE was complaining about the stock in 2002 since it was at the same level as at the end of 1997. Then in 2004 they claimed they are strong. Then they started a broad operating initiative called Simplification that looks Dilbert like.

In 2006 and 2007 this imperative to define GE Capital as a growth engine, they massively increased their financial position just as the subprime area bombed.

Acquisitions were all over the place in 2007, including iVillage.

GE Board compensation in 2007 gets $250,000 to each non management directors and they are well covered in insurance. Buffett provides Board no insurance and $900 for each meeting Board members attend.

Warren Buffett buys $3 billion in GE preferred stock, 10% dividend callable after 3 years at 10% premium. He gets warrants instead.

He is not going to answer what GE is worth. There is a cold wind blowing on Wall Street. The restrictions on short selling cause hedge funds to sell financial stocks.

George
www.fatpitchfinancials.com

Aaron Edelheit of Sabre Value Management presents “Small Cap Diamonds in a Rough Market.” Sabre is generating 19% annualized returns.

How has the small cap value sector outperform so long? Edelheit argues this is because there are periods of illiquidity and volatility. Edelheit focuses on insider buying, spin-offs and restructuring.

Photochannel (PNWIF) is now at $2 or 7 times earnings. They managing front and back end of photo sites. Clients include Costco, CVS, Tesco and Wal-Mart Canada. It is an excellent recurring revenue model. Revenue is suppose to grow 100%. They are creating a wide economic moat with high switching costs. It took Costco 9 months to move their photos. By storing so many images online it will cost a lot to move to another system.

Why not just have retail customers upload it from their computer? It is just a matter of education. As customers upload online, Photochannel grows.

People keep printing photos even in a recession. New customers of Costco, Sam’s Club and Kodak China. Digital prints are up 27%. Print orders online grew 64% online. Home printing is declining, lost 12% of its market share. Home printing is expensive.

There is optionality value of the potential Kodak China and Kodak India income, 25000 kiosks.

They will receive 5% of everything that goes through the kiosks. Each kiosk does $3 a day at 25,000 locations with no expenses to Photochannel.

Why so cheap? Not covered by sell side analysts, small cap Canadian index down over 44% YTD. A few funds have been forced to sell. Its at the lowest price in two years while it added customers and now making money. The company is growing revenues at 80% selling at 7 times earnings is unheard of.

Hemisphere GPS (Toronto: HEM)

Precision agriculture including GPS guidance and auto-steering becomes best proctices on the farm. Payback can be 6 months or less thanks to soaring input costs.

Sold their first product to China yesterday. They grew revenues by 59% in Q2 and should grow revenue 50% plus in 2008. They are raising prices and the grain bull market typically last 10-14 year and we are in year 2.

Why is it cheap? A rival company won business to Agco but HEM still with them as a customer. Rivals product doesn’t work yet.

Only 9 times this years earnings. Insiders are buying shares. They have called for a 5% buyback. There is IP value here that there are only 4-5 companies with the technology. New markets include autonomous mining vehicles. The mining companies don’t have this technology.

Limoneira (LMNR)

Producer of avocados that owns 7,000 acres of prime California real estate. They just got 500 acres to get entitled for residential development. The weather is amazing at this location.

The also own a rectangle of land in Ventura that overlooks the Pacific ocean. It is only one of 2 project to be built in Ventura in the next 10 years.

They also own water rights going back to 1893. They have 5 million acre feet in Santa Paula Basin and another 10 million un-adjudicated in Fillmore Basin. They also own their own mutual water company shares worth $100 million. They also have their own pipeline conduit to Ventura that waters avocado trees that could be used to sell water to Ventura and Oxand

Digimarc (DMRC/D)

It has strong patent portfolio according to WSJ Patent Scoreboard, 21st strongest. The company is not trading yet since it is a spinoff. They do digital watermarking. They are used on picture, audio, and data files.

They have $13 million of revenue in 2007 and expected to grow to $20 million in 2008. 77% gross margins and profitable. Can be used to scan YouTube video for watermarks and even to help monetize that content when it is identified.

How does the 21st strongest patent portfolio in information technology in the world equal a $50 million EV?

Edelheit closed the presentation with a call for participants to be a mentor. I can’t argue with his value claim with that.

A question noted that it is important to look at how many years the patents have left in the Digimarc portfolio of patents.

George
www.fatpitchfinancials.com

Kian Ghazi is with Hawkshaw Capital Management. He starts up by discussing previous picks in Wesco and Learning Tree and how they have played out.

Hawkshaw is a long/short U.S. equity investment partnership. There is a heavy emphasis on research investigation.

How do we invest with conviction?

Value investors identifying high quality one of a kind franchises that are financially strong. Then they kick the tires and uncover the land minds. Ask what could send the stock down 30% or more that would cause us not to want to buy substantially more stock.

Financially strong companies have rock solid balance sheets, positive free cash flows, and monetizeable assets.

Universal Technical Institute (UTI) is a technical school that trains mechanics, primarily auto mechanics. It trades around $15 right now.

What hit this stock? A perfect storm. The company increased capacity by 35% from 2005 to year-end 2006. Company-wide students starts turned negative shortly therafter (2Q06). This pressured margins. The strong labor market and student loan problems this year has really impacted the company.

Ghazi argues enrollment growth is poised to re-accelerate meaningfully through increased demand and improved operations. Analysts are not appreciating this. There is over concern about student loan market. He thinks normalized earnings power is about $2, which is twice the consensus.

There are some good trends. About 50% of qualified mechanics will retire over the next 7-10 years. UTI is twice the size of its nearest competitors. The value proposition here is compelling for the $25,000 investment. Ghazi estimates the return on this educational investment is 25% and if levered it is more like 50%. There are many OEM partners that reduces the capital outlays necessary for operating and equippling UTI campuses. The OEMS include BMW, Harley-Davidson, and many other auto manufacturers.

There exposure to the subprime market is very small. From 2003 to 2005 the company was hitting on all cylinders. Then management failed to adjust to changing employment market. The affordability of the program declined and the educational funding gap increased over time from $7,000 to over $12,000. This resulted in leads dropping by double digit rate. Those that show up after a contract went way down. In 2007, the federal government reduced the subsidies to student loan providers. UTI began funding the gap of subprime loans to students and this caused concern to the market.

As unemployment rate rise, enrollment rises. In 2006 and 2007, high school students could go into construction and make $30 an hours, so they were not finding it attractive to pay to become mechanics.

They have changed the SVP of marketing in January 2007 and the SVP of campus sales in September 2007. They also improved the marketing from infomercials to 30/60 second ads. They improved the company website and spend more time with prospective students to encourage them to enroll and stay in the program. Leads are already starting to grow in the most recent quarter (3Q2008). There was a 41% increase in leads. Modest contracts growth can lead to a high shows growth.

Under the presented scenario there is a potential value of $30 per share.

What could drive this stock down 30%? It could happen if students can’t secure financing, but it appears students still have access to prime loans. Regulatory issues could arrise if default rate spirals out of control and result in the school being cut off from federal student loans.

What you need to believe?

Contract growth: 5%
Show rate improvement: 3.5%
Starts growth: 12% for 2 years
Capacity utilization: 80%
Drop out rate: 30%
Incremental margins: ~50%
EBIT margins: 15%

With more relaxed assumptions, he could envision the stock being worth $45 per shares.

I must admit that I’m interested. My only concern is the amount of mechanics being trained by the military is probably high given the protracted war effort. The withdrawal of troops from Iraq could result in a surge of trained mechanics hitting the market.

George
www.fatpitchfinancials.com

Boykin Curry from Eagle Capital Management starts off the second day of the Value Investing Congress. His presentation is on value investing and time arbitrage.

He starts off explaining that value of a stock is the present value of its future earnings. There is a major focus by most on next year’s earnings estimate. Most questions (81%) on conference calls focus on the next 12 months. Only 19% are interested in focusing on the earnings potential beyond a year out.

Buy things that have short term problems and long term opportunities. The future is not knowable but it might be guessable.

The specific example presented is American Express (AXP). The normalized earnings beyond recession are about $4-5 per share. The secular trend is cash to plastic. American Express is the collective buying power of a pool of wealthy individuals.

Nothing has emerged to threaten their long term earnings power. Earnings in 2008, 2009, and 2010 could be potentially rough. Boykin estimates $30 billion could be gone on charge offs. If you do that for the next 3 years, earnings is estimated to go down to $2 per share for each of the next three years. How does this equate to folks only paying half as much today as they did last year for the same company.

Boykin doesn’t believe that large cap stocks are always efficiently priced. He agrees that there is not information arbitrage opportunities in these stocks. However, the time horizon of investors is often not rational. There is the wisdom of crowds but there is also madness of the crowds. With large cap stocks, one hedge fund can’t go in and move the price up and make it more rational.

Last year analysts 1-year price target went from $76.5 to $41.0 billion from 2007 to 2008. It is all based on multiples of 2009 earnings.

Why does the time arbitrage persist? Clients measure performance over relatively short periods. It makes going down 20% by being early difficult for funds. There are a also a few successful short-term strategies that also blow it up for others, since clients will pull there money and move to them. Also, short-term results are often preludes to the long-run.

Average monthly turnover has increased. Time arbitrage opportunities persist.

You can focus on long-dated call options to take advantage of time arbitrage. When they pay off they are extremely valuable. Examples right now include, Newfield Exploration (NFX), Microsoft (MSFT), and Comcast (CMCSA).

Newfield is a natural gas company. In the long-term, there is a huge incentive for the government and companies to build out natural gas filling stations. If tomorrow it is announced no one will ever use natural gas in cars, it won’t affect the stock price today.

Microsoft is being treated as a declining asset. The future for Microsoft could include their capability to provide synchronized both online and offline activity. If the company decided to stop investing in this, the stock would actually probably go up.

Comcast could in the future develop targeted television advertising, like Google provides online. Comcast’s distributed network of services might also be able to deliver customized content on demand in the future.

This strategy will make it tougher to raise capital and get started as a fund. There are also benefits, because it is intelectually stimulating. Once you are successful, you will better retain clients. It can provide a sustainable competitive advantage in an industry with very few.

Recent events hasn’t changed his strategy. There are a lot of opportunities out there. Just make sure the companies survive the recession. This could actually make the country stronger in two or three years. There is a huge shift in capital allocators from the reckless to the Warren Buffetts and Seth Klarmans of the world.

George
www.fatpitchfinancials.com