Mannkind (MNKD)

This article was not accepted for publication by Seeking Alpha (http://www.seekingalpha.com). Therefore, decided to turn it into an Instablog post on Seeking Alpha on February 14, 2013.

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IT IS NOT ADVISABLE FOR RETAIL INVESTORS TO SHORT MNKD

This is not an article about AFREZZA.  As Mannkind’s website states “AFREZZA® (pronounced uh-FREZZ-uh) is a first-in-class, ultra rapid-acting mealtime insulin therapy being developed to improve glycemic control in adults  with Type 1 and Type 2 diabetes mellitus. It is a drug-device combination product, consisting of AFREZZA Inhalation Powder single use dose cartridges, and the small, discreet and easy-to-use AFREZZA inhaler.”

Many of the medical aspects of AFREZZA have been covered in excellent articles by George Rho, Maredin Capital Advisors, Jeff Eiseman, and at afresa.blogspot.com among other places.

This article is simply an attempt to warn retail investors about the risks of shorting a biotech stock such as Mannkind. Whether you are long or short, we can all agree on a few things:

1)      Nobody knows whether the Adcom panel will vote for or against approval of AFREZZA on April 1, 2014

2)      Nobody can say with 100% certainty that a majority Yes vote by the Adcom panel means that FDA will approve AFREZZA on April 15, 2014 (yes I am making an assumption that the PDUFA date will be April 15, 2014 because at this time we do not have any information otherwise.)

3)      Nobody can say with 100% certainty that a majority No vote by the Adcom panel means that FDA will reject  AFREZZA on April 15, 2014

Given the above, it would be unwise to invest a large portion of your portfolio in MNKD stock or calls. That said, going long by buying shares or calls of Mannkind means that the maximum you stand to lose is your investment. This is not the case when you short shares of MNKD. When you short shares of a stock your risk of loss is greater than 100%. Many brokerage firms out there today will let retail investors sell shares of a security that they do not own. This is, in my opinion, a tragedy. Many retail investors lose a lot of their hard earned money this way. I believe that shorting should be permitted only for accredited investors. But that is the topic of another discussion.

In the case of Mannkind, if you are a hedge fund or big institutional investor you may have many reasons to short shares of Mannkind. Some of these could be

1)      You have a convertible bond position in Mannkind and you wish to offset (hedge) some or all of the underlying long position in Mannkind shares by shorting shares of Mannkind stock

2)      You have entered into a long position in another biotech stock or in a biotech ETF such as IBB and the Mannkind short position is one part of a complicated long-short strategy

3)      You have arranged short position trades for one or more clients of your firm and you stand to benefit in fees and commissions from arranging this transaction

The list goes on and on. But as a retail investor, you are not able to participate in, or directly profit from, any of the above transactions. So in other words, as a retail investor, you should not be shorting shares of Mannkind.

Here are some other very good reasons why you should not short shares of Mannkind:

1)      Rumors, if any, of a partnership deal could send the stock price up quickly before you have a chance to cover. It is no secret that Mannkind has engaged the services of advisory firm Greenhill & Co to identify and secure a partnership to market AFREZZA after FDA approval.

2)      Actual news, if any, of a partnership deal could send the stock price up quickly before you have a chance to cover.

3)      Rumors, if any, of Mannkind’s plans to apply to other markets (outside US) for approval could send the stock price up quickly before you have a chance to cover. This is nothing new or unusual. Many medical devices and drugs have been approved in other countries even though the FDA has rejected them. Sanofi’s Lemtrada (GCVRZ) is an excellent example. The FDA has rejected Lemtrada but it has been approved in over 30 developed nations including Canada, Australia and Germany.

4)      Actual news, if any, of Mannkind’s plans to apply to other markets (outside US) for approval could send the stock price up quickly before you have a chance to cover.

5)      A run-up to Adcom, and the PDUFA soon after, could send the stock price up quickly before you have a chance to cover. Many biotech stocks have been known to rise as a significant FDA event approaches such as an Adcom date or a PDUFA date. In this particular case, Mannkind has faced two “rejections” in the form of Complete Response Letters (CRL). There is literature that indicates that this actually increases the odds of a company’s chance for approval a third time. This make sense because, with each CRL, the company spends millions of dollars to further test the device or the drug and makes sure that all the I’s are dotted and the T’s crossed before the next submission. Mannkind’s Adcom date is expected to be April 1, 2014. This means that the stock could go up quickly in price as April 1 approaches, before you have a chance to cover.

6)      Any number of other news, rumors or just random short covering could send the stock price up quickly before you have a chance to cover. As of 1/15/2014, 51.45  million shares of stock have been sold short according to NASDAQ.

I look at it another way. If I am long Mannkind and the FDA does not approve a third time, Mannkind has the option to apply for approval in the rest of the world. Mannkind’s Chairman, CEO and primary investor, Dr Alfred E Mann has many different ventures that he is involved with. He is not out of money as some people have been saying.  Dr.  Mann is Chairman of Second Sight which recently got approval for its Argus II Retinal Prosthesis System  (bionic eye). The Alfred E. Mann Foundation for Scientific Research recently won a patent infringement lawsuit against Cochlear Ltd  that awarded it $131.2 million. Suffice it to say that Dr. Mann does not have all his eggs in one basket or all his net worth tied up in Mannkind and he has the resources and the connections needed to put more money in this company if he has to. So as a long, I can sleep at night.

Maybe it is just me, but if I were short, I would be unable to sleep tight. I would be terrified of incurring unlimited losses due to one or more of the possible events outlined above. I am biased towards Mannkind and AFREZZA but I am even more biased towards Dr. Mann. I really believe that Dr. Mann is an amazing human being, successful entrepreneur and investor and genuine philanthropist.  Due your own due diligence and I hope you do well with your investments.

A Sale Or Joint Venture Of RadioShack De Mexico Might Be In The Cards

This article was accepted for publication by Seeking Alpha (http://www.seekingalpha.com) on August 18, 2013
http://seekingalpha.com/article/1642132-a-sale-or-joint-venture-of-radioshack-de-mexico-might-be-in-the-cards?source=yahoo
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I wrote earlier this month that Joe Magnacca is making many of the right moves at RadioShack (RSH). He brought in restructuring expert Holly Etlin from AlixPartners and investment bank firm Peter J Solomon to raise financing. It is no secret that they are looking at ways to reduce expenses, improve the balance sheet and right size the company footprint. Just last week we learned that the company is talking to lenders about reducing their interest expenses by paying off their current lenders with new lower cost loans. We also learnt from this SEC filing and subsequent news release that William Nebes III, the EVP of Mexico Operations separated ("fired"?) from the company. This got me thinking. Is there more to RadioShack de Mexico than meets the eye? Stay with me on this. I will get to the "Mexico angle" very soon.
It is clear that Joe and Holly are making all the right moves. This includes a number of initiatives to improve the top and bottom lines from reducing interest expense (debt refinancing) and reducing SG&A (headcount reduction) to sales and margin growth (concept stores). I actually think Joe wants to make RadioShack a "growth story" and not a story about a struggling consumer electronics (CE) retailer thrashing about for survival.
All indications are that the new concept stores are being well received. If Joe can pull it off, people may actually start talking about RadioShack as a cool place to try and buy the latest gadgets. Apple (AAPL) has shown us that physical CE retailing is not dead and can in fact be very profitable if done right.
While reduction in interest expenses and SG&A are important and necessary, these moves may not give Joe and Holly the financial flexibility to restock the stores with fresh new inventory for the upcoming holiday season or to expand the concept store rollout. This is why I think that they might consider a joint venture (JV) or outright sale of RadioShack de Mexico. This move would bring in a substantial sum of money and could give Joe and Holly the additional financial flexibility they need to finish executing the concept store roll out here in the US. A JV would be going back full circle since the company bought out its JV partner in 2008 for $44.7 million. At that time, RadioShack de Mexico had 200 stores. Now RadioShack has 273 stores in Mexico.
The table below tells the story of two different Radio Shacks.

	Year	2008	2009	2010	2011	2012	June 30, 2013
Number of company-operated stores in	US	4453	4476	4486	4476	4395	4311
	Mexico	200	204	211	227	269	273

As you can see, the number of company-operated stores in the US has been shrinking steadily from 4453 stores in 2008 to 4311 stores in 2013 (except for a slight uptick in 2009 and 2010). During the same period, the number of company-operated stores in Mexico has been growing steadily from 200 stores in 2008 to 273 stores in 2013. Many CEOs have come and gone but the Mexico operations have expanded steadily upward. Would the company have kept expanding in Mexico if the stores were not solidly profitable? I think not.
One might wonder why the company would sell all or part of a thriving and growing Mexico operation. This is a valid question. But given the current state of the company's balance sheet and cash burn, and given the company's focus on rolling out new trendy concept stores in the US, this might be a good way to generate some cash. The more I think about it, the more a JV makes sense as opposed to an outright sale. It would give the company much needed cash for the concept store roll out and inventory build for the holiday season, while at the same time continuing to maintain a stake in the Mexican growth story.
Or perhaps Peter J Solomon bank and Holly might advise Joe and the RSH board that an outright sale of the entire company is the way to go. Many names such as Best Buy (BBY), Google (GOOG) and Microsoft (MSFT) have been thrown up in the press as potential acquirers. But given Amazon's (AMZN) decision to support a sales tax and their yearlong experiment with locker pickup, Gina Chon and Maria Halkias suggest that Amazon may be the most likely candidate.
In any case, the fact remains that RadioShack has a number of options it can explore and Joe is a savvy retail merchant who can be counted on to do what is right for the company. However, a number of hedge funds and retail investors do not share my optimism. RadioShack is the 5th most shorted stock in the entire NYSE as a percentage of the float. This fact might actually provide a good reason to buy shares of if you are a true contrarian with a bit of technical trading savvy. With 39.2% of total float having been sold short as of August 09, 2013, I believe that the odds are in favor of a short squeeze in the not too distant future.

Will Joe Magnacca Prove To Be The Archie Norman Of RadioShack?

This article was accepted for publication by Seeking Alpha (http://www.seekingalpha.com) on August 09, 2013
http://seekingalpha.com/article/1622652-will-joe-magnacca-prove-to-be-the-archie-norman-of-radioshack?source=yahoo

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Some of you may not know about Archie Norman especially if you are not from the UK. In my opinion, he is one of the top 20 rock star CEOs of the last 50 years. He took over as CEO of ASDA in 1991 when it was on the verge of bankruptcy, managed to turn it around against all odds and then sold the chain to Wal-Mart (WMT) for $11 Billion in 1999!
It is perhaps a bit premature to compare a newly minted CEO like Joe to a tried and tested veteran like Archie.
But now compare this!
1) Before joining ASDA as CEO in 1991, Archie Norman had never been a CEO before.
Before joining RadioShack (RSH) as CEO in 2013, Joe Magnacca had never been a CEO before.
2) Before joining ASDA, Archie had overseen the successful turnaround of KingFisher (then Woolworth Holdings) and had already made a name for himself as a future high potential would-be CEO.
Before joining RadioShack, Joe oversaw the successful turnaround and sale to Walgreens of the Duane Reade drugstore chain and had already made a name for himself as a future high potential would-be CEO.
3) One of the early senior managers to be fired by Archie was the CFO who was part of the reason ASDA's finances were in such a mess.
One of the early senior managers to be fired by Joe was Dorvin Lively who was the interim CEO and had been the CFO since 2011 (and no - I do not think Dorvin willingly walked away from the job and a $1.5Million retention bonus)
4) Archie lost no time in cutting unnecessary Selling, General and Administrative (SG&A) expenses - read "bloated payroll" - at the corporate office.
Joe is taking steps to cut SG&A expenses and reduce inefficiencies at the corporate office.
5) In the midst of all the cost cutting, Archie decided to experiment with new store formats and new concept stores which were wildly successful. These stores bypassed the usual bureaucratic reporting chain in ASDA and reported directly to the top management.
In the midst of all the cost cutting, Joe has introduced a new concept store in New York and is proceeding with his planned country wide roll out of about 220 such stores. Early indications are very promising.
6) Archie realized that he could not do all the work alone and he also needed outside experts who were not part of the problem to take a fresh look and suggest good workable solutions. To this end, he brought in a consulting firm and some of the consultants stayed on to take important roles in the transformation.
Joe realized that he could not do all the work alone and he also needed outside experts who were not part of the problem to take a fresh look and suggest good workable solutions. To this end, he brought in turnaround firm AlixPartners and hired its managing director Holly Etlin as RadioShack's interim CFO.
7) Archie managed to rally the employees around a clear simple message and got them excited about working for ASDA again.
Joe is trying to rally the employees around a clear simple message and to get them excited about working for Radio Shack again.
I found the similarities between the stories of these two men fascinating to say the least. And the best part is that Joe does not have to be even half as good as Archie was. RadioShack is trading at a fraction of its tangible book value and is in no immediate danger of running out of cash. For the naysayers who say that a big chunk of the book value is worthless inventory, I will simply point out that using discounting and promotions, Joe not only managed to increase same store sales for the first time in 3 years, he actually managed to turn supposedly "worthless" inventory into cold hard cash.
All it takes is a change of "sentiment" and this stock could easily double in value from the current "bankruptcy" price of $2.51 per share. If you do not believe what "sentiment", or "market psychology" can do to a share price, then take a look at Tuesday Morning's (TUES) numbers. Incidentally, I randomly picked TUES as one of many excellent candidates to prove my point. I could just as easily have picked one of the other retail turnaround stories such as Pier 1 Imports.
Here are the numbers for TUES taken straight from the SEC website:

TUESDAY MORNING CORP	12 months ended June 30, 2010	12 months ended June 30, 2011	12 months ended June 30, 2012	Nine months ended March 31, 2013
Sales (in '000s)	828,265	821,150	812,782	636,179
SG&A (in '000s)	293,850	295,273	301,427	237,875
Operating Income (in '000s)	20,145	18,043	7,437	(45,211)
Share Price	3.99	4.65	4.29	10.37

In other words, I do not see any discernible or significant improvement in Tuesday Morning's sales and operating income or any significant decrease in SG&A expenses. SG&A expenses have actually increased steadily over the last four years. And operating income has been falling steadily and fell off a cliff from a positive number to a negative number in the nine months ended March 31, 2013! However, the share price has actually tripled since January 2012!! Why did this happen? One reason is that the market was pricing the company for bankruptcy and when it seemed that TUES would not go bankrupt, the share price skyrocketed.
Could this happen to Radio Shack? Most certainly. Will it happen? Nobody knows. However, with ample liquidity, a stock priced for bankruptcy and a rock solid CEO leading the way, the odds are in favor of such an event.
In summary, it is too soon to write the obituary for this retailer as many in the popular press have done. This is a 92 year old company that has survived many economic cycles. RadioShack was opened in 1921 by the Deutchmann family, offering ham radio operators and electronics buffs a retail and mail order source for their electronics needs. By the 1960s, the company had nine stores and was shipping electronics to people all over the world, but was falling on hard times.
Charles Tandy purchased the company in 1963 and turned its $4 million debt into a $20 million profit. Today the company operates stores nationwide, selling everything from batteries to satellite dishes to electronics buffs and general consumers.
Fast forward to August 2013 and the company is once again on the ropes.
Now it is Joe Magnacca's turn to write a new chapter in the Radio Shack story. I am betting that it will be one of success and one of survival.
Perhaps as a much stronger stand-alone company.
Perhaps as a stronger revived entity that is acquired by a bigger rival.
Only time will tell.

Tecumseh products

I wrote an article on Tecumseh Products that was accepted by Seeking Alpha on Feb 05, 2013. I decided to add the same content in my blog as well. So here it is:

Tecumseh Products Company (TECUA) is a special situation investment. The company announced on Jan 21, 2013 that Kent Herrick, Chairman and great-grandson of company founder Raymond Herrick is resigning. The company press release stated that Kent’s resignation was “driven by the pace of the strategic decision making by the Company”. A couple of days later, on Jan 23, 2013, the company announced that it was exploring strategic alternatives including an outright sale of the company. The same press release also noted that they had retained Sagent Advisors, LLC, which “the Company engaged to explore various strategic alternatives, including the possible sale of the Company”.

In this context, it is important to note that activist investor Roumell Asset Management , which disclosed  a 20%+ stake and filed a 13-D in May 2012, has been pressing the company to divest non-core assets – particularly a manufacturing facility in Hyderabad, India and a plant in Brazil. Roumell noted in its latest filing that the 55 acres of land held by the company in Hyderabad, India could be worth $67 million “after applying a large track discount with an immediate sale focus”.  Per their 13-D, Roumell commissioned “a leading worldwide real estate brokerage firm with offices in Hyderabad” to arrive at this number. Having grown up in India and having followed the real estate market in India for over 30 years, I can confirm that this valuation is not “pie in the sky optimism” and, as Roumell noted, the land could fetch even more if broken up and sold in parcels. This is just the Hyderabad property we are talking about here. I have not even brought up Tecumseh’s holdings in Haryana, India or its Brazilian plant. To put this in context, the company has a current market cap of $131MM and tangible assets on its balance sheet of $285 million. It is important to note that in this $285 million number, the value of “Land and land improvements” is held at $13.8 million. That is right folks. ALL the land held by the company in Brazil, India and other countries is held at a mere $13.8 million!!

From the company’s 10-K:

“We maintain manufacturing plants in the United States (“U.S.”), Brazil, France, and India as well as assembly plants in Canada, Mexico, Malaysia and a joint venture in China”.

This confirms that the company has real estate assets in multiple countries.

In addition, the company has $393 million worth of tax loss carry forwards that is not being reflected in this tangible asset number.

So it is safe to say that the value of the tangible assets is WAY NORTH of $285 million. The company WILL find a buyer. It is not a question of “IF” but when.

The stock rallied 19.45% to close at $7.06 on the news and has been trading around the $7.1x level since then. But I would like to make the case that the real rally is yet to come. And it has to do with two main themes. They are “Housing” and “Mergers and Acquisitions (M&A)” outlook.

Housing:

Housing is showing signs of a slow but steady recovery.  As of Dec 2012, 300,000 construction jobs were added since the Great Recession according to various sources. Of this number, 100,000 were added in the last four month of 2012 alone.  There are other signs of a slow but steady housing recovery all over the US. A respected investor with 30 years of successful investment experience in the Atlanta real estate market told me that he has never seen the market “this good” since 1998! He has seen multiple real estate market crashes dating back to the 70’s. This recovery in construction could provide a boost to the company’s household refrigeration business here in the US and to the company’s valuation as a whole.

M&A Activity:

The Fed has pledged to keep interest rates low till unemployment touches 6.5%. It could take us a few years to get to that number. Certainly, nobody is expecting us to hit the 6.5% number in 2013. This low interest rate environment combined with a resurgence in structured finance means that 2013 promises to be an even better year for M&A’s than 2012 was. This is not just my opinion. Two of Atlanta’s most prominent Private Equity investors told me so in talks I attended.

What does all this mean for Tecumseh?

First and foremost, the company’s Enterprise Value will show a significant increase as revenues and margins improve. This is a double positive because, this means that the company is

a)      Increasingly likely to find a buyer for its Brazilian and Indian assets or for the company as a whole

b)      The combination of margin expansion and increasing revenues may return the company to profitability. Given that the company has $393MM worth of tax loss carry forwards on its books, all this future profit will be tax free.

It is rare to find a special situation investment that is trading at a third of tangible book value. Tecumseh is one of those rare gems. To paraphrase Warren Buffet, TECUA is a “one-foot fence”. However, the opinions expressed in this article are just that and I urge everyone to do their own due diligence.

MFC Industrial Ltd

In this article, I am going to write about the largest, and arguably the most frustrating, holding in my portfolio. As of April 24, 2012, the name of the company is MFC Industrial Corp with a NASDAQ ticker symbol of MIL. I write this because the name and ticker symbol could change at any moment. This company was called Terra Nova with a ticker symbol of TTT when I first opened a position in the company in January 2011. And as Dr Clemens Scholl writes in the article linked below, the company was known as Arbatax way back in 1996 and has gone through many name changes, spin offs, stock splits, rights issues and dividends since then.

Read all about it here:

http://seekingalpha.com/article/290755-15-for-15-years-michael-j-smith-s-outstanding-track-record

If you were patient enough to hold on through all the ups and downs, you would have been rewarded with at least a 15% compounded annual return in those 15 years! That works out to over 800% in total return and is a fantastic performance by any measure.

Here is the company’s version of its own track record:

From http://www.mfcindustrial.com/Overview

“The team at MFC Industrial Ltd. has a 25-year record of identifying undervalued or troubled assets, profitable turnaround opportunities, and low-risk restructuring methods for problem operations.  More important, it has rewarded its shareholders with spinout, dividends, returns of capital and other distributions, producing a compound annual return of 20.4% over the last 10 years.  The team has deep expertise in the resource, basic materials, commodities and logistics business, with unusual expertise in creative financing and the maintenance of unusually low levels of risk.”

Given this fantastic track record, I had high hopes for my investment. How has my investment worked out so far? Basically FLAT for 16 months even counting the 2.x% dividends! This pathetic short term performance while frustrating in itself, has been compounded by the fact that the company releases little or no information about itself, and any information when released, is usually under some obscure subsidiary and buried among mountains of documents on sedar.com.

I see no need to repeat what Dr Clemens Scholl has painstakingly compiled in the Seeking Alpha article above. So I will summarize the pros and cons as I see it:

Pros

a)      MIL is trading at a discount to book. Tangible book value (BV) is $8.74 per share while the market price is just $7.59.

b)      Intrinsic value is north of $14 per share as follows:

Cash (net of debt) is around $5.7 per share
Wabush royalty ($200MM) $3.2 per share
German real estate ($50MM) $0.8 per share

KHD shares $0.1 per share

= sub-total $9.8

Other operations worth at least $4.2 per share combined, namely
* Commodity trading & supply chain (MFC Commodities)
* Aluminum and Zinc Processing operations (AFM,MAW,Brock)
* CTF MEG (Magneto encephalography)
* Magnum Minerals (Iron Ore mine in India)
* Eye care/ LASIK hospitals
* Various equity stakes (Blue Earth, Somes Dej,  Vivactis) and off-take/marketing agreements
* The recently acquired interest in the Pea Ridge iron ore mine

Total is $9.8 + $4.2 or around $14 per share.

c)       A big chunk of the tangible BV is in cash and marketable securities of about $560MM. This combined with a) and b) above gives substantial downside protection.

d)      Michael Smith (MS) has a terrific long term track record of returning value to shareholders. He has earned himself a long rope. I will give him the benefit of doubt and trust that he is working towards doing the same thing for the next several years.

e)      MS revealed in a past conference call that he controls about 11% of the company. If you invest alongside MS you will do fine in the long run. (Officially he holds under 5% so we have to assume that the rest is held indirectly through various vehicles under the names of family members).

f)       The turmoil in Europe and the lingering effects of the global financial crisis should provide MS with some excellent opportunities. Tons of cash in the hands of a master capital allocator at a time of great turmoil. What more could you ask for?

Cons

a)      Long periods of underperformance (as we have just seen) while MS waits for the perfect opportunity that will match his criteria for risk and return.

b)      High level of secrecy surrounding MS’s deal making.

c)       Very little information released by the company. Very poor PR.

d)      Not loved by Wall Street and justifiably so because of b) and c)

e)      If you do not invest alongside MS you could get screwed. I have no reason to believe this is true, but, if, for some reason, MS decides to shift his family wealth from MIL to some other holding company unrelated to MIL, we, as shareholders, may not realize the market beating returns of the past.

f)       The company does not present itself as a compelling investment if you simply look at the operating earnings. You have to look at the growth in tangible BV and the growth in intrinsic value. This is hard to do, especially with a company that is as secretive as MIL is.

g)      The company is MS and MS is the company. If something were to happen to him, shareholders may to unable to realize the fair market value of some or all of the numerous investments he has made around the globe.