ValueInvestorInsight Issue 364

ValueInvestor
October 31, 2012
INSIGHT
The Leading Authority on Value Investing
Critical Path
Inside this Issue
Small companies naturally try to move beyond what initially made them a
success. Its after they stumble that Starboard Value often finds opportunity.
or a successful activist investor, Jeff

Smith exhibits little of the us vs.
them mentality you might expect.
Management pursuing a different plan
than we propose doesnt mean theyre
bad people or malicious, he says. Its a
difference of opinion. The good thing is that
shareholders can decide which plan is best
for the company.
Smiths instincts about whats right for
companies have proven eminently sound.
Since launching his Starboard Value LPs
activist strategy ten years ago, it has earned
a net annualized 16.2%, vs. 10.2% for the
Russell 2000.
Never wanting for good ideas, Smith
today is finding opportunity in such areas
as office supplies, paper products, software,
semiconductors and hair salons. See page 2
INVESTOR INSIGHT
Strategy: Bestinver
How one of Europes foremost
value investors is navigating todays
difficult environment.
PAGE 16
Jeffrey Smith
Starboard Value LP
Investment Focus: Seeks companies in
which the markets valuation reflects a loss
of patience in money-losing growth
initiatives and/or bloated cost structures.
Investor demand for small, quirky companies has lessened since the financial
crisis, say Jim Vanasek and Don Noone which suits them fine, by the way.
VN Capital
Don Noone (l), James Vanasek (r)
Investment Focus: Seek off-the-beatenpath companies that due to neglect or

complexity trade at prices unrepresentative
of their sustainable business prospects.
Investor Insight: Jeffrey Smith

Identifying unrecognized value and
the specific steps needed to unlock it
in Office Depot, Progress Software,
Wausau Paper and Regis. PAGE 2
Investor Insight: VN Capital
Searching well off the beaten path
for mispriced value and finding it in
AirBoss, Ceres, Breeze-Eastern and
Big Rock Brewery.
PAGE 9
Coveting Obscurity
INVESTOR INSIGHT
FEATURES
n discussing the obscure and mundane

companies they own, James Vanasek
and Don Noone of VN Capital know
they run the risk of listeners eyes glazing
over. Lets just say that talking about
rubber compounding and grain elevators
isnt naturally as interesting to people as
Apple or Google, says Vanasek.
There has been nothing boring about
VN Capitals returns, however, since the
firm opened for business in mid-2002. Over
that time it has earned a net annualized
11.5%, vs. 6.8% for the Russell 2000.
With a penchant for companies that
they expect to own for several years,
Vanasek and Noone see undiscovered
opportunity today in such eclectic areas as
rubber processing, helicopter equipment,
agricultural services and beer. See page 9
www.valueinvestorinsight.com
Uncovering Value: Bulldog

What happens when a venerable
activist investor takes over the reins
of one of its targets.
PAGE 19
Editors Letter
On investors preference for bonds
over equities; A timely parable from
Warren Buffett.
PAGE 20
INVESTMENT HIGHLIGHTS
INVESTMENT SNAPSHOTS
PAGE
AirBoss of America
11
Big Rock Brewery
14
Breeze-Eastern
13
Ceres Global
12
Exor
17
Office Depot
Progress Software
Regis
Special Opportunities Fund
19
Wausau Paper
Other companies in this issue:

Acerinox, AOL, Escalade, Fiat, Fiat Industrial, Firsthand Technology Value,
Imperial Holdings, Industrias Bachoco,
Integrated Device Technology, Myrexis,
Schindler, SGS, Ship Finance, SurModics, Thales, Yungtay Engineering
I N V E S T O R I N S I G H T : Jeffrey Smith
Investor Insight: Jeffrey Smith

Starboard Values Jeffrey Smith, Peter Feld, Mark Mitchell, Gavin Molinelli, Tom Cusack and Jon Sagal describe where
they spend the majority of their research time, how they assess whether an activist path is open, how they hedge risks,
and what they think the market is missing in Office Depot, Wausau Paper, Progress Software and Regis Corp.
Most of your portfolio companies fall in
the good core business, failing growth
initiatives camp. Why is that such fertile
investment ground for you?
Jeffrey Smith: If you think about the lifecycle of a small company, it usually initially succeeds in a relatively small niche
where it delivers unique value and becomes a market leader. The business inevitably starts to mature producing strong
cash flow with a lower growth rate and
the natural response from management is
to take some of the cash generated and to
invest it in new areas of potential growth.
Hopefully these new growth initiatives are
related to the core business and hopefully
the company can have some competitive
advantage. This pursuit of incremental growth is exactly what management
should be doing.
One of two things will happen. Either the new initiatives work, everyones
happy, the stock has a high multiple and
we never find it, or the new growth initiatives are not working, the market becomes
disenchanted with the company because
earnings and cash flow are depressed and
that drives down the stock price. Those
are the situations we find attractive.
Once weve identified an attractive
situation, we engage with management in
order to try to get them to rein in spending on failing growth initiatives, refocus
on the good core business, improve cash
flow, and put in place a greater level of discipline with respect to return on invested
capital all of which is meant to make the
stock price go up.
Peter Feld: This dynamic plays out regularly because of human nature. Most public companies want to provide shareholders with compelling growth, and small-cap
companies in particular believe they need
to have even higher growth rates. Again,
when this occurs within the natural flow
October 31, 2012
of the business, it works well. But when

its unnatural and management is trying to
create the growth, thats often a problem. A private-company owner after 18 to
24 months of getting little traction on a
new investment finds it pretty easy to pull
the plug the money is coming out of his
or her own wallet and theres not an adequate return on investment. Its different
with public companies, particularly when
there is little inside ownership. Its just easier to perpetuate the hope that growth will
materialize next quarter or next year than
it is to admit the investment may have
been a mistake, reassess the opportunity
and reduce costs.
Integrated Device Technology [IDTI],
a semiconductor company in our portfolio, is a good example. A substantial
portion of its revenues and profits come
from semiconductor businesses where it
has dominant market shares, high gross
margins and very high operating margins. However, some of these are mature
businesses in relatively mature markets.
To grow, the company has been investing
in new higher-growth areas with much
larger addressable markets. Thats actually a fairly common theme for companies
in which we invest. Theyre not content
having a 40% share of a slowly growing
$500-million market. Instead, they prefer
to try to capture 1% of a $20-billion market. In our experience, its more difficult
and takes much longer than companies
believe to capture a small market share
in a massive market, where theres generally greater competition from much larger
players.
In IDTs case, the company spends approximately 30% of revenue on R&D,
significantly more than most of its competitors, yet its struggled to reinvigorate
its revenue growth. We have representatives on the board and are working with
our fellow board members to apply a
better balance between growth and profwww.valueinvestorinsight.com
Jeffrey Smith
Natural Inclination
Just two years into an investment banking
career at Societe Generale, Jeff Smith in
1996 got a call from his father asking for
help. His fathers company, The Fresh Juice
Co., had expanded its production capacity
too quickly and needed in short order to find
new avenues for growth to fill the capacity.
Fairly certain that investment banking
wasnt for him anyway, Smith, then 24,
joined Fresh Juice as head of strategic
development and in less than two years
played a central role in building an East
Coast wholesale business, merging Fresh
Juice with the wholesale competitor it had
taken on, making two acquisitions that
significantly expanded national distribution,
and then selling the entire company to
Saratoga Beverage.
Now CEO of Starboard Value LP and 14
years into an investment career focused
on activism, Smith considers that early
experience in his fathers business as
less a wake-up call than it was an affirmation. I wouldnt say my Fresh Juice
Co. experience made me want to be an
activist investor, he says, but it did
highlight my natural inclination. Trying to
clearly see the issues, identify solutions to
fix them and then work within the system to
get those solutions implemented is exactly
what our kind of investing is all about.
Value Investor Insight 2
itability. The company has put out operating-margin targets that are significantly
higher than what it has done historically
and that are more in line with its peers.
These are all steps in the right direction.
general and administrative costs, to name

a few. Spending gets so out of line that
the company ends up significantly underearning. Office Depot [ODP], which well
discuss in more detail later, is an example
of this.
firms were investors in companies we were

involved with in the past and they benefited from our involvement and the value
we created.
How do you generate ideas?
PF: Since we often suggest that companies

refocus on their core business, the majority of our research time is spent on determining the health and sustainability of
that business. We need to fully stress test
our assumptions on the core business
thats where something could go wrong if
it were going to go wrong.
Next we analyze the companys existing plan compared to ours. We need to
determine if our plan can create significantly more value on a risk-adjusted basis than the status quo. If along the way
management is able to prove us wrong
and succeed with their existing plan, that
works out well for us too, as value will
significantly increase as their execution
improves.
Where do you focus first in research?
On what size companies do you focus?

JS: We mostly focus on companies around
$1 billion in market cap. The situations
that fit our strategy are pervasive among
smaller-cap companies, where theres
a significant focus on growth with less
discipline on return on invested capital.
We also have to own enough stock to be
able to influence management if necessary, which has historically meant owning
smaller-cap companies.
Does every idea you pursue have an activist agenda?
JS: We believe every company in our portfolio is undervalued, we have an alternative plan to unlock value that is within
our control, and we have a path to implement the plan. By path we mean that
we believe we could win a proxy contest
if it becomes necessary. The overwhelming
majority of the time a contest isnt necessary, either because value is unlocked on
its own or because management and the
board choose to work with us to create
value. To make sure we have the best
chance of success in all situations, however, we remain prepared to run a contest to
replace directors. This way we will either
create value with the companys cooperation or, if the company wont work with
us, were prepared to ask shareholders for
support to implement change.
What ideas fall outside the good core
business, failing growth initiative profile?
JS: Many of our investments fit that profile but not all of them. One related type of
idea we also pursue is when a company is
so focused on growing the top line that it
spends inefficiently without an acceptable
return on that spend. These inflated costs
can be on things like research and development, infrastructure, advertising and
October 31, 2012
PF: There are two primary sources. One

is generating ideas internally, mostly using
a variety of investment screens that have
value as a key piece, but we also screen
for financial metrics that may show symptoms of the types of situations we look for.
On research focus:
We often suggest refocusing
on a core business, so most
of our time is spent on its
health and sustainability.
Say revenues have been flat for the past
three years, but operating expenses have
increased in each of those years. We also
typically look for companies that are underperforming on any number of profitability or productivity measures, against
peers and against their own history. Because theyre under-earning, many of the
companies that interest us look expensive
based on current numbers, but are actually undervalued relative to the pro-forma
earnings that can be generated if our plan
is implemented.
We also find ideas from outside sources
such as more traditional investment firms
that invest in a similar universe. When
they find themselves in a problematic investment, they typically have only two
choices sell their position or just continue to hold and hope. Neither of these are
particularly good choices if they feel the
company is undervalued and underperforming. We provide a third option. Share
the idea with us, let us do our work on it,
and if it fits our criteria maybe we can get
involved and help to unlock value for the
benefit of all shareholders. Many of these
types of relationships started when these
How do you judge whether your activist

path is open?
PF: This involves an analysis of the companys corporate-governance mechanics.
Where are they incorporated? Do they
have a staggered board? Is there a dualclass ownership structure or large blocks
of shares which may be problematic?
What anti-takeover provisions exist?
These are just some of the many technical
items we analyze.
In addition, we conduct a more qualitative analysis of the existing shareholder
base. The performance of the stock is a
key barometer of the collective satisfaction or frustration of shareholders, but
we also use our experience and contacts
with a large number of investors to gauge
the relative difficulty of a potential proxy
contest.
How generally does Starboard approach
valuation?
PF: We develop upside price targets solely
based on pro-forma cash flow and asset
value assuming we are able to implement

our alternative plan. Our plan focuses on
actions that are within the companys control, such as reducing costs, exiting money-losing businesses and selling assets that
dont produce cash flow but have value to
a buyer.
We put equal emphasis on the downside price measurement. Where could the
stock go if our plan is not implemented or
if we are not able to gain influence? That
can mean putting a historically low multiple on the depressed expected EBITDA.
However, our preference is to buy as close
as possible to some proxy of balance sheet
value, such as tangible book value or liquidation value. [Note: In Starboards highprofile engagement with AOL, for example, an important element of the potential
downside protection came from the estimated value of the companys intellectualproperty portfolio.] In general, our target
upside should be a multiple of our target
downside.
JS: The downside price is also extremely
important in how we size positions. We
usually own 15 to 25 companies at a
time, roughly half of which are lead positions where weve filed a 13D, and the
rest are what we call seed positions, where
we have a plan and a path laid out, but
the valuation isnt quite what we want
to see before owning a full position. We
limit each position to a maximum risk,
measured in basis points, to our downside
price. In other words, if a stock went to its
downside price, we dont expect the fund
to lose any more than the maximum risk
for that particular position.
Youve taken big profits on your AOL
stake. Would you say that the activist play
there is over?
JS: Due at least in part to our pressure,
suggestions and proxy contest, AOL successfully sold a portion of its intellectual
property for over $1 billion, committed to
improve the profitability of the display-advertising business, and said it would return
$1 billion of cash to shareholders. This
unlocked a great deal of value and was an
October 31, 2012
enormous success for all AOL shareholders, including us. While the changes so far
have been meaningful, the company has
done very few of the hard things around
shrinking its cost base that we thought
were also necessary. But given the value
that was unlocked, AOL shareholders
decided to give the board more time to
improve the operational execution, which
has been reflected in the stock price.
[Note: At a recent $35.50, AOLs shares
have nearly doubled since early April and
have almost tripled since Starboards initial purchases.] So while we still have a
plan to unlock value, at todays price our
other criteria are no longer met and we do

not currently have a position.
What attracted your attention in officesupply retailer Office Depot?
JS: There are quite a few things that have
us excited about Office Depot. The company has a hidden asset in its Mexican joint
venture which, we believe, may be worth
close to the entire market cap of the company. On top of that, there is $11 billion
of annual revenue that we dont believe is
efficiently managed from a profitability
standpoint. Operating margins are less
INVESTMENT SNAPSHOT
Office Depot
(NYSE: ODP)
Valuation Metrics
(@10/30/12):
Business: Provider of office supplies and

services sold through company-owned
stores and online, as well as to business
customers through an in-house sales force.

Trailing P/E
Forward P/E Est.
Share Information
Largest Institutional Owners
Price 2.39
1.51 - 3.81
0.0%
$681.5 million
Financials (TTM):
Revenue
Operating Profit Margin
Net Profit Margin
Russell 2000
31.3
15.3
(@6/30/12):
(@10/30/12):
52-Week Range
Dividend Yield
Market Cap
ODP
8.4
29.9
$11.19 billion
1.0%
1.0%
Company
% Owned
Thornburg Inv Mgmt
6.9%
Putnam Inv Mgmt
6.9%
BlackRock 6.2%
Vanguard Group
5.2%
AllianceBernstein 4.9%
Short Interest (as of 10/15/12):
Shares Short/Float
15.9%
ODP PRICE HISTORY

1010
10
88
66
44
22
00
2010 2011 2012
THE BOTTOM LINE
The market has weighed in unfavorably on the companys performance, says Jeff Smith,
who has proposed a detailed plan for improving profitability to at least near peer levels.
The stock today trades at an EV/EBITDA multiple, assuming his low to high cases for
annual EBITDA improvement occur, of 1.3x on the low case and 0.7x on the high.
Sources: Company reports, other publicly available information
Clo
than 1%, while the margins of the largest

competitor, Staples, are above 6%. Some
argue thats a function of the size disparity between Staples and Office Depot. But
OfficeMax is the smallest competitor and
its significantly more profitable than Office Depot. We think there are significant
ways to improve profitability at Office
Depot based on changes fully within the
control of management and the board.
Describe the basic elements of the plan.
Gavin Molinelli: One important component is getting costs in line with the business reality and with competition. From
2007 to 2011 the total number of stores
declined by 108 and annual revenue declined by $4 billion, but general and administrative expenses actually increased.
Advertising expenses as a percentage of
revenue are significantly higher than they
are at both Staples and OfficeMax, and
the advertising-expense ratio has been
increasing. So Office Depot spends at the
highest rate but has the lowest return on
that spend.
We believe the company can dramatically improve the economics of its North
American stores by downsizing to smaller
store formats. Management has said that
the new 5,000-square-foot format it has
tested can retain up to 90% of total store
sales from the existing 24,000-squarefoot-format, while at the same time significantly reducing occupancy costs, improving labor utility, and reducing inventory
investment. With roughly 45% of North
American leases up in the next three years
and 67% up within the next five thats
a huge opportunity.
We have also defined a number of operating initiatives to improve profitability.
The company can significantly increase
the mix of higher-margin services such
as copy and print services, security solutions and shipping in its North American retail division. It can improve gross
margins through more direct sourcing of
private-label products. It can lower the
number of SKUs to reduce inventory and
procurement expenses. Its Business Solutions division in North America can take
October 31, 2012
several steps to get its performance more

in line with the competition. Those are
just some of our ideas.
The companys response?
JS: The company has been very cordial
and professional, but we really dont
know whether theyll be willing to make
the changes weve proposed. We are prepared to work with them or to appeal to
the shareholders to ensure the appropriate
changes are made.
On ODP Next steps:

Were fully cognizant of our
choice as we approach the
board-of-directors nomination deadline in January.
The stock popped after Starboards interest became public, but at a recent $2.40 is
still down 75% from its post-crash high.
What do you think its more reasonably
worth?
GM: We try to avoid talking publicly
about what we think a company may be
worth. Our target prices are quite conservative, in that theyre based only on what
we believe the financials would look like if
our plan is implemented. We discuss why
we believe the stock is undervalued and
how the operational performance can be
significantly improved through the execution of an alternative plan for the business. Shareholders can then determine the
full value of the stock based on their own
assumptions.
In Office Depots case, weve outlined a
low case and high case, assuming annual
EBITDA improvement of $275 million to
$540 million. This range would indicate
a doubling or almost tripling of current
EBITDA. Weve also assumed that Office
Depot de Mexico, the 50/50 joint venture
between Office Depot and publicly traded
Grupo Gigante, is a non-core asset with
substantial hidden value of $500 to $700
million. At todays price, the pro-forma
EV/EBITDA multiple is 1.3x on our low

case, and only 0.7x on our high case.
Is the big risk that secular challenges in
the office-supply market, primarily from
online competition, overwhelm everything
else youre counting on here?
GM: The office-supply-store industry has
been challenged by online competition.
We believe the current valuation more
than fully discounts the threats from the
outside as long as the company begins to
follow an alternative plan. We think lamenting about the online competition has
gone too far. The service level and quality you can provide by having a physical
store can be a huge advantage over online
competitors. The company needs to start
playing to its strengths while running the
business as effectively and efficiently as
possible.
Next steps?
JS: Well continue to have conversations
with the company. As those conversations
continue and time passes, were fully cognizant of our choices as we approach the
nomination deadline in January. Office
Depot has a single-class board, which provides full flexibility for any shareholder
looking to promote board changes should
they be necessary.
Describe the public case youve made for
changes at Wausau Paper [WPP].
Jon Sagal: Wausau is a paper-products
manufacturer operating in two segments.
The tissue business makes paper towels
and toilet paper for the away-from-home
market, while the paper segment makes
specialty and technical papers for a number of applications, from industrial tape
backings to fire-resistant paper to microwave-popcorn bags.
The tissue business is an excellent razor/razor blade type of business. Wausau
has developed very strong distributor relationships, and once a distributor has its
dispensers in the office-building or school
bathroom, they dont get replaced easily
or quickly. Given the required number and

frequency of deliveries, market shares tend
to be very high in any given geographic region. Wausau has also built a strong presence in the green, sustainable market with
its 100%-recycled products. As a result of
all of this, it consistently earns high margins 20% EBITDA margins or better
and has shown better growth than most
other tissue manufacturers.
The company has exited part of its
paper business the more commoditized
printing and writing lines since we first
got involved. The remaining technicalpaper business generates only minimal,
if any, profits on a significant portion of

overall revenues.
Wausau is making a huge capital investment in its tissue business. Have you been
on board with that?
Jon Sagal: This is a $425 million marketcap company and the plant it is about to
complete is the centerpiece of a $220 million investment thats almost $4.50 per
share in capital spending for a stock currently trading around $8.50. That said,
the new plant will use less raw material
and energy for every ton of output and has
INVESTMENT SNAPSHOT
Wausau Paper
(NYSE: WPP)
Valuation Metrics
Business: Producer of specialty papers for

industrial, commercial and consumer use,
as well as a broad line of away from home
towel and tissue products.
(@10/30/12):
Share Information
Price 8.63
6.85 - 9.92
1.4%
$425.6 million
Financials (TTM):
Revenue
Net Profit Margin
WPP
n/a
20.5
Russell 2000
31.3
15.3
(@6/30/12):
(@10/30/12):
52-Week Range
Dividend Yield
Market Cap

Trailing P/E
Forward P/E Est.
$1.05 billion
3.1%
(-2.4%)
Company
Starboard Value
Dimensional Fund Adv
Wilmington Trust
T. Rowe Price
Vanguard Group
% Owned
9.3%
5.4%
5.4%
5.3%
5.3%
Shares Short/Float
3.9%
WPP PRICE HISTORY

12
12
12
1010
10
88
66
2010 2011 2012
THE BOTTOM LINE
The companys stock trades at a multiple reflective of a commodity paper business rather
than of the specialty tissue business on which Starboard Value believes Wausau should
focus. On trailing-12-month numbers, says Jon Sagal, the shares trade at an EV/EBITDA
multiple of only 5x, while more-comparable tissue businesses trade at closer to 7-8x.
October 31, 2012
a much lower marginal cost of operation.

Its also flexible in producing different tissue qualities, including new products that
should allow Wausau to compete in new,
higher-end segments of the market with a
100%-recycled premium product.
How are you looking at valuation with
the shares trading today at around $8.65?
Jon Sagal: The stock still trades at a multiple that is more reflective of a commodity paper business than it is a best-in-class
specialty-tissue business. Other tissue
businesses trade at 7-8x EBITDA and
Wausaus is among the best tissue assets
out there. On trailing 12-month numbers
not even our pro-forma numbers the
stock today trades at only 5x enterprise
value to EBITDA.
PF: While we cant say a lot about our
current interactions with management
and the board, one item of note is that we
recently amended our 13D to disclose that
wed increased our ownership here to over
14% of the shares outstanding.
Is Progress Software [PRGS] another refocus-on-the-core-business idea?
Tom Cusack: Yes. The companys core
business is a product called OpenEdge,
which is an application development platform that is used by independent software
vendors
to develop software. The customAdj Close
er base is more than 1,500 independent
vendors, which pay Progress a percentage
of all license and maintenance revenue
they earn on products theyve developed
over decades using OpenEdge. Its costly
and difficult for existing customers to remove OpenEdge from their products, so
this business is extremely sticky, has very
high margins and generates a stream of attractive cash flow for the company.
As growth in the OpenEdge business
began to slow, Progress began using the
cash flow from it to make acquisitions in
high-growth software areas such as Business Process Management [BPM] and
Complex Event Processing [CEP]. Most of
these acquisitions were unrelated to their
core business and had limited synergies

with their other products. So at the time
we got involved last year, there were about
15 different product lines spread across
three reporting segments and our view
was that the company was suffering from
a serious lack of operational focus. Many
of the acquired businesses were growing
revenue 20-30% per year but were losing
money, obscuring the value of the core
OpenEdge business. We asked the company to streamline product lines, reduce
excess costs and consider separating the
money-losing growth businesses from the
mature core business.
Earlier this year, in April, the company announced a new strategic plan to
increase shareholder value that was very
much in line with our and other shareholders suggestions. They agreed to divest 10 non-core product lines, committed
by fiscal 2013 to a 35% operating margin
target up from todays 10% and announced a plan to buy back $350 million
worth of stock, which is about 30% of the
float. Once that restructuring is complete
the company has already announced the
sale of 80% of its non-core businesses
we expect Progress to be a much more
profitable company.
Progress Software
Valuation Metrics
Business: Develops and markets systems

used by commercial and governmental
customers worldwide for the development,
deployment and integration of software.
(@10/30/12):
Share Information
Price 19.30
52-Week Range
Dividend Yield
Market Cap
17.01 - 24.76
0.0%
$1.23 billion
Financials (TTM):
Revenue
Net Profit Margin

Trailing P/E
Forward P/E Est.
PRGS
55.5
14.7
Russell 2000
31.3
15.3
(@6/30/12):
(@10/30/12):
$484.4 million
12.7%
4.7%
Company
T. Rowe Price
Starboard Value
Fidelity Mgmt & Research
Perkins Inv Mgmt
Praesidium Inv Mgmt
% Owned
7.4%
7.2%
6.4%
6.0%
5.7%
Shares Short/Float
2.1%
PRGS PRICE HISTORY

35
35
35
30
30
30
25
25
25
20
20
20
1515
2010 2011 2012
15
THE BOTTOM LINE
The companys announced strategic overhaul involving the divestiture of product lines
and setting of new profitability goals is sound, says Tom Cusack, so the story now rests
on execution. On what he believes the company can earn within the next year or two, the
stock trades at a 4.5x EV/EBITDA multiple, far below software-company peers.
October 31, 2012
JS: The stock price went down 15% on

the news because the market fears the unknown. The risk at that point was execution, and the individual who was supposed
to execute left. Jay said he was leaving to
take his dream job, which turned out to
be CEO of the private education-software
company Blackboard. We dont believe
this changes the companys resolve to go
forward with its restructuring plan.
Now at $19.30, how inexpensive do you
consider Progress shares?
INVESTMENT SNAPSHOT
(Nasdaq: PRGS)
Does the just-announced departure of

CEO Jay Bhatt, after less than a year on
the job, disrupt things?
TC: The stock trades at less than 4.5x

what we believe EBITDA should be over
the next year or two. This excludes the
proceeds from the non-core assets that
have not yet been sold, so if you include
the estimated proceeds for those, the multiple is even lower. We think 4.5x EBITDA
for an extremely stable business, with high
recurring revenue and the potential to
generate 35% or higher EBITDA margins,
represents a very compelling value. [Note:
The EV/EBITDA multiple for comparable
software firms today is 6-8x.]
How much further does your engagement
with hair-salon operator Regis [RGS] have
to play out?
Adj Close
JS: For Regis, we concluded the companys

core North American salon business was
capable of generating consistent free cash
flow and a high return on capital, but the
market wasnt recognizing it because there
was a bloated cost structure and a variety
of non-core businesses obscuring the value
of the core business. We won a proxy contest and got three directors elected to the
board in October of last year.
In our original plan, we identified four
assets that we recommended selling as
well as roughly $100 million in annual
cost cuts. Two of the non-core businesses
have been sold, the Hair Club for Men
and Women hair-restoration centers the
deal for which is not yet closed and a
INVESTMENT SNAPSHOT
Regis Corp.
(NYSE: RGS)
Valuation Metrics
(@10/30/12):
Business: Owns, operates and franchises

more than 12,500 hair-care salons serving
men, women and children; brands include
Supercuts, SmartStyle and Cost Cutters.

Trailing P/E
Forward P/E Est.
Share Information
Price 16.00
15.02 - 19.59
1.5%
$916.5 million
Financials (TTM):
Revenue
Net Profit Margin
Russell 2000
31.3
15.3
(@6/30/12):
(@10/30/12):
52-Week Range
Dividend Yield
Market Cap
RGS
n/a
17.6
$2.25 billion
4.6%
(-4.2%)
Company
Fidelity Mgmt & Research
Birch Run Capital
Robeco Inv Mgmt
FranklinTempleton
% Owned
11.0%
10.4%
7.7%
6.5%
6.1%
Shares Short/Float
21.1%
RGS PRICE HISTORY

25
25
25
20
20
20
1515
15
1010
2010 2011 2012
10
THE BOTTOM LINE
Jeff Smith believes the company is taking the steps necessary to refocus on its core
North American salon business and he is very supportive of the new CEOs efforts to
improve the customer experience. Given the companys operating leverage, a return to
same-store sales growth should produce tremendous shareholder value, he says.
minority ownership stake in Provalliance,

a French salon chain. That leaves two assets remaining that we consider non-core,
a U.K. salon business and a 50% interest
in a chain of cosmetology schools called
Empire Education Group.
The bulk of the story now is about
execution. Were very supportive of the
new CEO, Dan Hanrahan, who joined
the company in July from Royal Caribbeans Celebrity Cruises, where he was
CEO. Dan had been successful in turning
around Celebrity Cruises by significantly
improving the service experience in order
to drive an increase in return rates.
October 31, 2012
At $16, the stock is back to where it was

when you won the proxy contest a year
ago. How are you looking at valuation?
JS: It comes down to how successfully the
operational and efficiency initiatives are
executed. Dan will be active both on the
cost side as well as on improving the in-salon experience, which had been neglected.
Stylists were trained on how to cut hair,
but not on how to treat their customers as
guests how to greet them, the right questions to ask to make sure theyre happy,
how to follow up and improve the chances
they come back for their next haircut. This
is all just good service execution and it

needs to be put in place in order for samestore sales to stabilize and start growing
again. The company has a great deal of
operating leverage, which should produce
tremendous shareholder value when the
execution improves.
You recently sold out of your position in
healthcare company SurModics [SRDX].
Another happy story, but why sell now?
JS: Our plan for SurModics was relatively
simple: sell the money-losing pharmaceutical business and re-focus on the excellent
core business selling coatings for catheters
and other medical devices. The company
was amenable to our plan, allowed us to
join the board and hired a banker to sell
off the
business. After that
Adjpharmaceutical
Close
business was sold, operating margins improved to 35% from less than 10%. Why
sell now? The stock is currently almost
twice where it was when we entered and
the company has made the changes we
had set out in our plan.
One could argue that sentiment toward
activist investors is as positive as its ever
been. Why do you think that is?
JS: Shareholders are becoming more interested in how they can create alpha in
their portfolios and are happy to support
other shareholders whose interests are directly aligned with theirs to create positive
change at companies. There is growing
sentiment that a shareholder perspective
in the boardroom is helpful, which was
not the case 25 years ago. Id like to think
weve moved past the corporate-raider
phase and that most activism today is
done professionally with the interests of
all shareholders in mind.
Companies have also increasingly realized how unproductive it is to resist shareholder input. When activists show up,
management for the most part behaves responsibly and respectfully. That results in
healthy, constructive dialogue about how
a company should operate. That type of
dialogue is absolutely in the best interest
of all shareholders. VII
I N V E S T O R I N S I G H T : VN Capital
Investor Insight: VN Capital

James Vanasek and Don Noone of VN Capital explain how they unearth ideas that are typically well out of plain sight,
what virtues they see in portfolio inactivity, the lesson they learned from getting frustrated by management, and why they
see unrecognized value in AirBoss of America, Breeze-Eastern, Big Rock Brewery and Ceres Global Ag Corp.
Your target company typically operates
well off the beaten path. Can you generalize about the companies and businesses
you find most interesting?
James Vanasek: We focus primarily on
companies in the U.S. and Canada with
market caps of $500 million or less and
that operate in odd-ballish kinds of businesses where they have strong positions
in relatively small niches. Investors running larger funds cant put enough money
to work in them. Wall Street tends to ignore them because they have good balance sheets and cash flow and dont need
investment-banking services. Our basic
premise is that theres a higher likelihood
these types of companies will be mispriced.
Sometimes obscurity alone is enough
for the stocks of such companies to be undervalued, but theres often also something
else going on. Occasionally the broader
industry is under pressure for cyclical reasons or due to some exogenous event, like
a regulatory change. The company itself
may also be undergoing a restructuring
or building a new business, both of which
may take more effort to understand and
require more patience than the small-cap
manager with 150 names can muster.
Youve owned oil-tanker and drilling-rig
lessor Ship Finance International [SFL]
since 2004. What about it has kept your
interest?
Don Noone: There are three fundamental
reasons we think Ship Finance is misunderstood and mispriced. The first is that it has
this crazy lease-finance accounting that is
difficult to understand and distorts shareholder equity, cash flow and net income
throwing off all the high-level metrics a
stock analyst typically uses. The second
is that its treated as a high-risk business
heavily subject to spot tanker-lease prices
which are currently cyclically depressed
October 31, 2012
when in fact the business model is

primarily based on long-term contracts,
and the company has diversified, with
40% of revenues coming from the leasing
of offshore drilling rigs. Finally, for reasons we dont understand, people seem to
look at the large share ownership in the
company of John Fredriksen, a Norweigian billionaire with a long history in the
tanker business, as a negative. We actually
think he has an impeccable record of doing right by all shareholders and think his
association with the company gives it access to investment opportunities at a low
point in the cycle.
Whats representative here of our typical
holding is that some level of misunderstanding is conspiring to keep the stock
from trading at what we think is full
value. As Jim said, that may result from
neglect, or from time horizon, but it can
be even more compelling when our view
is that the markets fundamental analysis
is just wrong.
Ship Finance is at more than $1 billion in
market cap, but has the average company
in your portfolio gotten even smaller since
we last spoke [VII, April 30, 2008]?
JV: We havent consciously decided to pursue smaller companies, but since the financial crisis weve noticed more risk aversion among investors when it comes to
less-liquid smaller-cap names. For almost
anything under $200 million in market
cap, the number of people willing to invest
dries up fairly dramatically, so its no
surprise were finding better opportunities
at that size.
We saw a graph recently showing how
aggregate hedge fund assets had shifted toward large-cap stocks. Now close to 50%
of all assets are in market caps of more
than $10 billion, up from around 35% in
2002. Small caps, defined as less than $2
billion, went over the same period from
Don Noone, James Vanasek
Serendipity over Screens

Its a safe bet that most viewers of reality
show Man vs. Wild, in which the shows
star is dropped into the wild to fend for
himself, dont come away with investment
ideas. But as the protagonist was hoisted
to safety by helicopter, VN Capitals James
Vanasek wondered if making the equipment that lifted people out of danger might
be a good business. One thing led to another and hed found a new core position
a firm called Breeze-Eastern that made
just such equipment for his portfolio.
In seeking out quirky small-cap ideas, Vanasek and partner Don Noone rely more
on serendipity than computer screens.
Theres nothing systematic we can do to
find, say, a new idea every three weeks,
he says. For another recent idea, Vanasek
would have ignored a news item on Ceres Global Ag Corp.s purchase of grain
elevators, except that some of the elevators had been separated from malting
businesses, which hed found interesting
years earlier in researching craft beer. That
prompted him to look at grain elevators,
whose economics had similarities with the
cement business, in which hed invested
successfully in the past. You dont know
when enough things will pull together that
say, Heres an idea, he says, but if you
uncover enough rocks, it does happen.
nearly 30% of assets to closer to 15%.

Its safe to assume that shift is even more
pronounced away from the smallest-cap
stocks, which is good for us.
Youve described your idea generation as
much more organic than systematic [see
box, p. 10]. Is there any process to how
you flag potential ideas?
JV: We dont find screening helpful,
primarily because our type of company
may have less accessible public data, which
means it wont show up in a standard
database or that the data for it will be
incorrect or out of date.
We do spend a fair amount of time maintaining a list of companies with quirky,
odd businesses that we like and market
caps under $500 million. Most of the
time theyre fairly valued or overvalued,
but weve programmed our Bloomberg
to alert us if something happens and the
valuation drops to a pre-defined level at
which wed want to look at it.
Its kind of a bizarre conversation to
have, but we actively discuss what isnt
being talked about. Maybe an industry
is at a low point in its cycle, where our
favorite company would be one that is
still making money and looking to expand
while competitors are losing money and
retrenching. If a commodity is trading at a
multi-year low, well look at the producers
of the commodity who may be suffering.
If a commodity is at an all-time high, well
look at companies that use the commodity
as a raw material and are getting hurt as
a result. This all becomes a starting point
and then we wander around from there.
Give an example of where your countercyclical bent is pointing you today?
JV: Weve been thinking about the casino
business, which was hit hard by the financial crisis and is far from having recovered.
If youre a supplier to the North American
gaming industry, youre still looking at a
fairly bleak demand outlook as few new
casinos are being built and existing ones
are stretching out replacement cycles. We
havent made any conclusions yet, but
October 31, 2012
there are some good little companies that

supply products to the gaming industry
that have been worth a look.
Youve said your portfolio management at
times in recent years has been characterized by conspicuous inactivity. Is that a
habit, or a reflection of the environment?
DN: Its both. Were constitutionally set
up to be inactive, following the Warren Buffett idea that you should always
judge how youre doing in any given year
relative to if youd done nothing. As long
as weve made good decisions and our
investment cases are intact, that creates a
On inactivity:
We follow Warren Buffetts
idea that you should always
judge how youre doing relative to if youd done nothing.
bias for inactivity. We can go long stretches without adding a new name to the portfolio. Our latest addition was AirBoss of
America [BOS:CN] this year, which was
our first new name since 2010.
As the financial crisis hit, we also made
an active decision to be more inactive. Our
basic view was that the crisis was more of
a financial panic than a true crumbling of
the foundations of the global economy. So
we looked at our portfolio and concluded
that if you had to run and hide while the
panic raged, where would you go? We
had a big position in a beer company in
Canada, Big Rock Brewery [BR:CN], and
Canadians drink a lot of beer. We owned
a chicken company in Mexico, Industrias Bachoco [IBA], and Mexicans eat a
lot of chicken. Even with Ship Finance,
while oil demand is variable, the demand
for the transportation and drilling of it is
fairly steady. We concluded we had the
type of portfolio you would want to run
to, so other than selling off a couple holdings that were extremely economically
sensitive, we mostly just hunkered down
with what we had.
Did the crisis prompt any changes in how

you do things?
JV: It really hasnt. Weve tried to be very
conservative both in how we run our
management company and how we run
our fund, which was certainly vindicated
as once-hot hedge funds crashed and
burned after the crisis. Its common in
this business for managers who have had
some success to develop an outsized view
of their actual skill. One benefit of our
partnership is that we keep each other
grounded so that doesnt happen.
DN: I also dont think you can underestimate the importance of having an investor base that allows you to stick to your
strategy. We were down more than 40%
in 2008, but our investors knew what we
owned and why we owned it and were
confident wed react to the selloff in a
way that would benefit the portfolio in the
long run. We wouldnt have been able to
come back as strongly as we did in 2009
and 2010 without that confidence.
Some managers responded to the crisis
by running less-concentrated portfolios,
but you still own around 10 positions at
a time. Why?
JV: Our investors hire us to manage a
concentrated portfolio of obscure small
companies. They dont need us to diversify
for them. Were going to have volatility
in our returns, but were clearly of the
mind that concentrating on a small number
of ideas that we know inside and out is
one of the best ways to have a shot at
outperforming the market over time.
I would add that the stocks we own,
even though theyre small and less liquid,
dont gyrate that much in price. Ship
Finance can be an exception because its
treated as more cyclical than we think
it really is, but most of our companies
are just kind of plodding along in niche
markets where we put a premium on high
and stable market shares.
DN: Industrias Bachoco, for instance, is
in a cyclical business, but its stock price
doesnt move all over the place because

it just keeps executing, chunking out a
consistent return on equity and adding a
point or two of market share every year.
You never know how long youll own
something, but I could see this in our portfolio five or ten years from now as the company continues to expand its product and
geographic footprint. It wouldnt at all surprise us to see it mentioned up there with
Tyson Foods or Pilgrims Pride one day.
AirBoss of America would seem to qualify
as the type of obscure and mundane
company on which you focus. Why is it a
good investment today?
DN: The companys headquarters is in the
middle of nowhere in northern Ontario,
consisting of a few guys set up in the converted project house of a new development that ran into financial trouble. But
its a substantial business, the biggest part
of which is in rubber compounding, where
its the second-largest player in North
America. They basically take different rubbers and mix them in these giant kettles to
produce compound rubbers that meet customer specifications for things like hardness, flexibility and weather protection.
Its not a great business because it can be
cyclical and low-margin, but its also relatively insulated because there arent many
companies that have the expertise to do
this and the capital costs to get started
are high. The primary customers are tire
manufacturers and equipment suppliers to
the mining and coal industries.
mousetrap in CBRN protective gear. This

business today generates roughly the same
level of annual operating earnings as the
compounding business, around $11 million, on about one-third of the revenues.
One thing that sealed it for us was
spending time with management. Were
sitting in this converted house and theyre
describing how the company got started
after buying a tire plant from Uniroyal
for $1, and then signing up Uniroyal as
its first compounding customer. They got
into the CBRN business initially by taking over a government testing lab, beating
out much bigger defense-company suitors
because they played up the fact that they
were Canadian and had extensive rubber
knowledge. We like that kind of contrarian
nature and scrappiness.
To the extent the two businesses are

cyclical, where are we in the cycles?
DN: Chinas slowing down and the impact
thats had on the mining business has hurt
them. At the same time, sales to military
customers are also in what we expect to
be a temporary down cycle. Both of those
things have put pressure on the stock.
With the shares trading today at C$4.55,
how are you looking at valuation?
DN: Net income last year, which we consider a modestly good year, was C$13 million, while free cash flow was more than
C$22 million. At todays market value
then, the stock on trailing numbers goes
for an 8x P/E and less than 5x cash flow.
INVESTMENT SNAPSHOT
AirBoss of America
(Toronto: BOS:CN)
Business: Develops, manufactures and

sells rubber compounds as well as specialty
rubber-based protective gear used in defense and industrial applications.
Financials (TTM):
Share Information
Valuation Metrics
(@10/30/12, Exchange Rate: $1 = C$1.00):
Price C$4.55
52-Week Range
Dividend Yield
Market Cap
C$4.20 C$5.92
4.4%
C$104.6 million
Revenue
EBITDA Margin
Net Profit Margin
(Current Price vs. TTM):

P/E
October 31, 2012
BOS:CN Russell 2000

8.0 31.3
BOS PRICE HISTORY

9
6000
5000
4000
JV: The other main business, in which AirBoss is the worlds largest supplier, is producing protective boots and gloves for use
in dealing with chemical, biological, radiological and nuclear [CBRN] contamination. Most of the customers for this type
of protective gear are military and theres
an attractive replacement profile, as the
gear has to be replaced once its been used
in an actual contamination. Were skeptical of synergies, but this is a case where the
company applied its sophisticated knowledge of rubber properties and compounding to make what appears to be a better
$271.4 million
6.6%
3.0%
3000
2000
1000
4
2010 2011 2012
THE BOTTOM LINE
Worried about cyclical pressures in the companys traditional rubber-compounding business, the market doesnt appear to appreciate the higher growth and profitability of its
increasingly important protective-gear business, says Don Noone. At only 12x a good
years C$15 million in profit, he says, the companys shares would trade at around C$8.
Ad
We try not to make overly aggressive

valuation assumptions, but we dont believe a company like this should trade for
8x earnings. It should reliably generate
C$10-15 million in annual profit, earning an 8-10% return on assets and a 15%
return on equity. You could see earnings
spike as it wins big CBRN contracts, and
the overall profitability profile should
improve as the protective-gear business
accounts for a greater share of total revenues. While you could argue all thats
worth at least a market multiple, even at
12x a good years C$15 million in profit,
the shares would be around C$8.
plants because its a lot cheaper to buy cement from the guy whos 10 miles away
than 200 miles away. The same thing
applies with grain elevators, but kind of
in reverse. If youre a farmer, its a lot
cheaper and easier to transport your grain
to the elevator that is very close than one
thats far away. In these situations it comes
down to what you pay for the fixed assets the lower the price, the higher your
return. In Ceres case, we believe we were
able to buy those fixed assets for free.
JV: We also believe were getting free option value, in the unfortunate event that
a large-scale accident or attack increased
demand for protective gear. As the primary supplier out there, AirBoss would
substantially benefit.
JV: The current market cap is around

C$83 million. Using year-end March
numbers, reflecting a full harvest season,
Walk through that math given todays

C$5.80 share price.
Ceres had around C$40 million in cash

and run-off investments. It owned C$160
million worth of grain in its elevators,
against which it had C$80 million of debt.
At the fund level there was also another
C$40 million in debt. So for less than C$5
million at todays price, youre getting the
grain-elevator assets and the profits they
generate. It recent years those profits have
been as high as C$12 million, with an average of around C$8 million. Discount
that average annuity at 10%, and thats
C$80 million in value right there.
Is there any reason to be more optimistic
about the elevator business?
JV: One significant thing happened in the
third quarter of this year, which is that the
INVESTMENT SNAPSHOT
Ceres Global Ag Corp.

(Toronto: CRP:CN)
So why is a Canadian company in the rubber business named AirBoss of America?

DN: I actually have no idea. We said the
companies we invest in tend to be quirky.
Business: Provider of agricultural grain storage and supply-chain management services

through a network of storage facilities in the
northern United States and Canada.
Financials (FY ending March 2012):
Share Information
Valuation Metrics
(@10/30/12, Exchange Rate: $1 = C$1.00):
A perfect transition to Ceres Global Ag

[CRP:CN], a closed-end fund on its way
to becoming a grain-elevator company.
JV: The backstory here is that Ceres was
formed in late 2007 by Front Street Capital
to invest in the then-hot agricultural commodity boom. Within a year those markets crashed as the recession hit and management shifted focus to hard assets with
the purchase of a dozen privately held
grain elevators from a Minnesota-based
hedge fund manager, Whitebox Advisors.
In 2011, Ceres announced it was going to
run off its investment portfolio and reinvest the cash into similar operating assets.
As we studied grain elevators, we
concluded the business was similar to that
of the cement business, where weve invested with some success before. There are
high fixed-cost assets, with a good that is
fairly low in value but bulky and expensive
to transport. That allows cement companies to have natural monopolies near their
October 31, 2012
Price C$5.78
52-Week Range
Dividend Yield
Market Cap
C$4.20 C$7.24
0.0%
C$83.2 million
Revenue
Net Profit Margin
C$184.4 million
2.7%
(-0.7%)

P/E
CRP PRICE HISTORY

10
CRP:CN Russell 2000

n/a 31.3
6000
10
9
5000
4000
3000
2000
1000
40
4
2010 2011 2012
THE BOTTOM LINE
As the company transitions from a failed strategy as a closed-end investment fund, the
market is almost entirely ignoring the value of what will be its ongoing business of managing grain elevators, says Jim Vanasek. If that business ultimately earns a 10x multiple on
its average profit in recent years, he says, the share price would nearly double.
Adj
Canadian Wheat Board officially lost its

monopoly to purchase Canadian wheat.
That opens up a significant new base of
potential customers for Ceress assets,
many of which are located in the U.S near
the Canadian border. The business will
continue to fluctuate somewhat based
on weather and crop yields, but the new
demand should have a positive long-term
impact on both capacity and pricing.
Another upside we see here is that as
the non-elevator portfolio is sold off, there
will be no need for Ceres to maintain its
closed-end fund structure. Savings related
to that could add another C$2 million or
so annually to the bottom line.
resulted in the two biggest shareholders,

Tinicum Capital and Wynnefield Capital,
controlling more than 50% of the shares.
They brought in a new management team
to sort out the mess and go back to basics.
DN: While all this is getting underway,
the financial crisis hits. The company was
also saddled with large legacy contracts
for supplying hooks and winches in cargo
airplanes that left them holding the bag
on significant engineering-cost overruns.
So while the turnaround has been going
on for some time now, the financial results
havent really shown it.
We think thats about to change. The

company has consolidated its manufacturing into new facilities and has spent most
of the upfront engineering costs for new
projects coming on stream over the next
decade. Signed new projects alone will add
$10 to $20 million in annual revenues, depending on the year, to a current revenue
base of around $80 million.
How do you see that translating into share
upside from todays $8 price.
DN: The core business in the past has
earned as much as $15 million in net prof-
INVESTMENT SNAPSHOT
Describe the turnaround youre betting on

at Breeze-Eastern [BZC].
JV: The companys core business is making
hoist and hook equipment used in
helicopter search-and-rescue missions.
It has roughly 60% of that global
market, in which it operates basically in a
duopoly with a division of Goodrich Corp.
The customer base is primarily military,
though there are commercial end-user
applications as well.
This is equipment that absolutely has
to work, in the worst environments and
operating conditions. As a $100,000 item
in a $23 million helicopter, its not the
type of thing where the manufacturer will
play hardball over price. Theres usually
good visibility on future cash flows, because once youre on a platform youre on
it until the helicopter is no longer made,
and because theres a healthy stream of
replacement-parts business. From a barrier-to-entry standpoint, this also isnt an
area where youd expect a price-cutting
Chinese competitor to come in and take
business.
Breeze-Eastern starting in the 1990s
took the plentiful cash generated by this
core business to invest in becoming a more
diversified defense supplier. They bought
a bunch of companies, paid too much for
them, loaded up on debt and then didnt
manage it all well, basically running the
company into the ground. That eventually
led in 2007 to a special capital raise that
October 31, 2012
Breeze-Eastern
(NYSE: BZC)
Valuation Metrics
(@10/30/12):
Business: Manufacture, sale and servicing

of hoists, winches, hooks and other lifting
and restraining devices utilized primarily in
commercial and military aviation markets.

Trailing P/E
Forward P/E Est.
Share Information
Price 8.00
5.77 - 9.86
0.0%
$75.9 million
Financials (TTM):
Revenue
Net Profit Margin
Russell 2000
31.3
15.3
(@6/30/12):
(@10/30/12):
52-Week Range
Dividend Yield
Market Cap
BZC
33.1
n/a
$81.1 million
11.1%
2.9%
Company
Tinicum Capital
Wynnefield Capital
T. Rowe Price
Kennedy Capital
% Owned
34.8%
22.3%
6.7%
3.5%
0.7%
Shares Short/Float
0.1%
BZC PRICE HISTORY

12
12
12
1010
10
88
66
44
2010 2011 2012
THE BOTTOM LINE
The companys long road back to focusing on its strong core business made longer by
the recession and a number of unprofitable legacy contracts is finally about to pay off,
says Don Noone. At a market multiple on what he considers a conservative $10-12 million estimate of normalized earnings, the stock would roughly double from todays price.
Ad
it. Thats been depressed in recent years,

but we think were being conservative in
assuming they get back to the $10-12 million annual range. That means the stock today trades at only 7-8x more normal earnings. A private buyer for a business with
this type of predictability and profitability
would pay significantly more than that. We
feel good when we can model out a double
in the stock price over the next few years,
which is pretty much where we are here.
Does the recent sale of top-competitor
Goodrich to United Technologies pose
any risks?
JV: The competitor was already a tiny division of a very large company and now
its part of an even larger firm. People are
worried that now Sikorsky, which is also
owned by United Technologies, will stop
buying from Breeze. Sikorsky is run quite
independently, so we think that concern is
overblown. Probably more likely is that
Sikorskys competitors will now think twice
about buying from Goodrich, which could
incrementally benefit Breeze in the end.
Has your case for Big Rock Brewery been
slower to materialize than you expected?
DN: The thesis is still fully intact. Big Rock
has the best reputation and brands in the
craft-beer business in the Alberta province
of Canada, which is booming with the expansion of the energy business there. The
area is importing oil workers from around
the world, mostly men making good money during the biggest beer-consuming periods of their lives. The company is growing and making good money, but it is true
that they havent really made it sing yet.
Why not?
DN: There have been some fits and starts
with management. The founder, Ed McNally, was slow to let go of control and
kind of let the company drift in the past
couple of years. But early this year he
named a new CEO, Bob Sartor, who we
believe is a world-class operator. He has
articulated a clear plan and is injecting
October 31, 2012
new energy and ambition into the business.

His first focus, which we believe is right,
is on product innovation. For Labatt or
Molson drinkers, you need to graduate
them into the craft-beer market. For the
beer nerd, you need to provide them with
new, exciting and flavorful brews. That all
requires pushing the envelope with new
products, which Big Rock hadnt been doing. It has now launched a number of new
and seasonal beers, one of which, a Scottish heavy ale, is already being introduced
into the full-time product stable.
On the operational side, Sartor is shifting marketing spending away from what
he calls trinkets and trash things like
coasters and key chains toward more
on-premise events like beer tastings. To
free up production capacity that was gen-
erating very little if no profit, hes winding

down the production of private-label beer.
He also plans to cut at least C$1 million
in annual expenses, not insignificant for a
company thats been earning C$6-8 million per year.
The last piece of the plan involves geographic expansion, focused on neighboring British Columbia. The idea would be
to translate, through acquisition or building a new brewery, the success Big Rock
has had in one vibrant market to another.
At todays C$13.95, how cheap do you
consider the shares?
DN: If the product and operating initiatives prove successful, we believe the company should earn at least C$10 million per
INVESTMENT SNAPSHOT
Big Rock Brewery

(Toronto: BR:CN)
Business: Produces, markets and distributes

a line of premium craft beers and alcoholic
cider, sold primarily in and around its home
province of Alberta, Canada.
Share Information
(@10/30/12, Exchange Rate: $1 = C$1.00):
Price C$13.90
52-Week Range
Dividend Yield
Market Cap
C$11.50 C$14.50
5.8%
C$84.3 million
Financials (TTM):
Revenue
Net Profit Margin
C$46.6 million
10.7%
8.0%
Valuation Metrics

P/E
BR:CN Russell 2000

22.4 31.3
6000
BR PRICE HISTORY
18
18
5000
16
16
14
14
12
12
4000
3000
10
2000
10
2010 2011 2012
THE BOTTOM LINE
A new CEOs injection of energy and ambition should unearth latent value in the companys core brewing franchise, says Don Noone. At 12x the C$10 million in annual profit
he believes the company should earn, the shares would be 50% above todays price. The
price of options on successful geographic expansion and/or an eventual buyout: free.
Ad
year. It was making that much in the mid2000s, so we dont consider that a stretch.
Put even a 12x multiple on that and youve
got almost 50% upside from todays price.
You then have an option on successful
geographic expansion, as well as on Molson or Labatt swooping in over the next
couple of years to buy some craft-brew
credibility that almost all big brewers have
had a tough time creating. As you wait for
some of those things to play out, theres a
very healthy dividend yield, which on todays price is just below 6%.
It hasnt been a disaster investment for us,

but after years of one step forward, two
steps back, weve decided to move on.
DN: Weve tried to speak constructively to
the board, to get them to focus for each
piece of the business on where theyre
earning a return on capital and where they
arent. That strikes us as common sense,
but there just hasnt been adequate will at
the board level to do that.
Whats something youve been selling recently and why?
Speaking of another idea we discussed last

time, it would appear you sold cigarettepaper maker Schweitzer-Maudit [SWM]
way too early. What happened?
JV: We spoke last time about Escalade

[ESCA], which has this mish-mash of businesses, some of which are good, like pingpong tables and archery products, and
others which arent so good, like paper
shredders and letter openers. Our thesis
was that better managing the portfolio of
businesses getting rid of underperformers
and investing in those doing well would
result in a much more profitable company.
DN: Theres a good lesson there. What attracted us to it was that there was a strong
underlying business, but it was poorly
managed. Dealing with management was
so frustrating that it discombobulated us
and we concluded the situation couldnt
be fixed. In fact, we should have stepped
back and recognized that the attractiveness of the business would outlast management. Within a year of the old CEO
October 31, 2012
leaving, the stock went from the low-teens

to $40 [split adjusted]. We had the conversation at $7 about whether to take a much
bigger position and pound the table more
with management, we just didnt do it.
We asked last time what advice your mentor in the business, Joseph Reich of Reich
& Tang, had been offering up. He had suggested maintaining plenty of liquidity, and
you added, Having been through some
really bad markets before, he doesnt think
this one is over yet. Pretty good advice in
April 2008. Whats he counseling today?
JV: He usually focuses on how were running the business, such as whether were
sticking to our discipline or how were
treating clients. One piece of advice he did
give us recently was that while we should
selectively try to work with our companies
to create value, we shouldnt start thinking were investment bankers with 45
different ideas for the company to implement. The message was to be careful not
to get out of our competence zone, which
is always good to be reminded of. VII
S T R A T E G Y : Bestinver
Eye of the Storm

With a painful economic contraction at home and the European economic union in trouble, Bestinvers Francisco
Garcia Parames would be forgiven for having a downbeat investment outlook. Such, however, is not the case.
INVESTOR INSIGHT
Bestinver Asset Management
Funds People
(l to r) Alvaro Guzman, Fernando Bernad and

Francisco Garcia Parames
On perspective: Overly focusing on

what is going on in Spain and even what
is going on in Europe is losing the right
perspective from our point of view.
Editors Note: The distant observer might

imagine a siege mentality among European
investment managers, clinging for dear life
as the fate of the European Union hangs
in the balance. The view from the inside as
described by Bestinvers Francisco Garcia
Parames, however, is very different. One of
Europes foremost investors his flagship
Bestinfond has returned a net annualized
15.7% since inception in 1993, vs. 8.5% for
its mixed Spanish and global benchmark
Garcia Parames oversees 5.5 billion
in assets from his Madrid home base.
We recently caught up with him and coportfolio managers Fernando Bernad and
Alvaro Guzman to see how theyre navigating todays difficult investing environment. Cautious? Yes. Fearful? Not at all.
Its been an eventful few years since we
last spoke [VII, November 26, 2008].
Have you called any of your core value-investing tenets into question in the interim?
Francisco Garcia Parames: The core of
what we do, investing with a long-term
horizon in stocks that are inexpensive
relative to their normalized free cash flow,
October 31, 2012
has not changed and most certainly will

not change in the future. But that doesnt
mean you dont evolve as an investor. For
example, while I wouldnt attribute this
directly to the crisis, we have moved more
from a pure Benjamin Graham style of
value investing to one closer to Phil Fisher
and Warren Buffett, in the sense that were
putting even more weight on the quality of the business. I dont know, maybe
when youre younger you just care about
getting things that are cheap and making
money fast. But as you become old you see
that buying companies with high and sustainable returns on capital at reasonable
prices tends to work a little bit better.
The second adjustment weve made is to
concentrate more. In our global portfolio
we used to have 100-120 stocks, but
now we have around 50. With the top 15
stocks, we cover 70% of the portfolio.
The more concentrated you are, the more
sure you have to be about everything the
barriers to entry, the leverage, the downside. Every stock in which we hold a large
position has to be very safe by its nature.
defense contractor and aerospace firm

Thales [HO:FP]. It is clearly impacted by
changes in defense budgets, but its margins have also suffered from a number of
poorly negotiated contracts under prior
management. The new CEO has put order to the way the company accounts
for costs and negotiates contracts, so we
expect EBIT margins to increase from
6% to an 8% normalized level, which
is still below the 10% earned by peers.
Just making that assumption allows us
to find the stock quite undervalued. If
defense spending also eventually comes
back to normal levels, which it is likely to
do, that would be icing on the cake.
Contrast that with businesses in which
there are no competitive barriers and
market shares can vary greatly from one
year to the next. These are usually more
purely commodity businesses that, absent
clear low-cost leadership, are difficult to
normalize and were not very interested in.
Has it gotten harder to estimate normalized free cash flow in Europe?
FGP: Sometimes we can add more value

on this front than others, and I would say
today is a difficult time. Much of how
things play out in Europe will depend on
politicians making decisions, which we
consider almost impossible to forecast.
We do spend a lot of effort trying to understand how China will grow. Given that
its growth is based on savings and productivity improvement, were still positive on
the sustainability of its economic expansion. Even as China slows down, if you
look at the absolute growth in its forecasted GDP relative to the expected GDP pullback in vulnerable European countries,
theres no comparison. Overly focusing on
what is going on in Spain and even what is
going on in Europe is losing the right
perspective from our point of view.
Thats why we own global companies.
Acerinox [ACX:SM] is a stainless-steel
Alvaro Guzman: When you look at our

average stock, were not making a huge
effort to predict earnings. A typical business would be like that of Schindler Holding [SCHN:SW], the elevator company,
which has barriers to entry and is difficult
to copy. Were comfortable in a case like
this in assuming 1-2% volume growth and
flat-to-1% pricing growth translating into
4-5% annual EBITDA growth. We dont
have to be more aggressive than that for
almost all of our holdings.
Id distinguish between cyclical stocks
with barriers to entry and those without
them. When market shares are stable,
if the size of the pie goes up and down,
you have historical data points that allow you to normalize. We own French
What macro views are informing your investing today?
company based in Spain, but it just set up

a 600,000-ton-capacity plant in Malaysia
to serve Asian countries outside of China
thats a market of 600 million people.
Despite whats going on in Europe, this
company has been growing 5-6% per year
for several years.
Do you still have your own analyst in
Shanghai?
FGP: Yes, hes been there four years. This
forces us to go there, to learn. If you
invest in almost any sector in the world you
have to know whats going on in China,
both for companies that want to sell there
and to know what competition may come
from there.
Were also learning about Chinese
stocks and while we havent yet invested in
mainland China, we have invested in a Taiwanese company called Yungtay Engineering [1507:TT], which is very active in China. Its an elevator company, an industry
we know very well from investing in European companies like Schindler and Kone.
We are comfortable with its corporate
governance, and feel it provides good additional exposure to an industry we like in
a part of the world that is growing.
Has the geographic mix of your portfolio
been shifting?
Fernando Bernad: In putting more
emphasis on truly global companies, we
have over the last couple of years reduced
our exposure to the euro zone. In terms of
the underlying economic exposure of the
companies we own which we calculate
by looking at both revenues and EBITDA
our euro zone exposure today is 42%,
down from 54% two years ago. Our next
biggest exposures are 20% in emerging
markets (up from 14% in 2010), 17% in
North America and 11% in the U.K.
Other than global exposure, are there any
themes or sectors youre finding particularly appealing?
FB: Not really. For example, our five largest holdings today BMW [BMW:GR],
October 31, 2012
holding-company Exor [EXP:IM], Thales,

information-services firm Wolters Kluwer
[WKL:NA] and Schindler are mostly
in very different businesses and we own
them for company-specific reasons. Thats
the normal situation for us.
FGP: There are sectors we continue to
avoid, generally those in which we have
no knowledge of whats going to be the
situation in ten years time. Thats the
question we ask ourselves every time we
invest, and its the main reason we avoid
technology stocks and sectors with changing dynamics. We see no current opportunity in real estate. Financials also make
us very uncomfortable, because of the
leverage and the difficulty still in truly
understanding the numbers.
Describe the more detailed investment

case for one top-five holding, Exor.
AG: This is the investment holding
company of Italys Agnelli family, which
holds important stakes in difficult-to-copy
global businesses that are for the most
part easy to value.
The first is in a publicly traded Swiss
company, SGS [SGSN:VX], that together
with Bureau Veritas and Intertek is one of
three dominant global players in the business of inspecting, testing and verifying
any number of products, processes and
services involved in global trade. It earns
50% returns on capital and its market has
been a stable tri-opoly for years.
The second big holding is Fiat Industrial
[FI:IM], which makes trucks and pow-
INVESTMENT SNAPSHOT
Exor
(Milan: EXP:IM)
Business: Investment company controlled

by Italys Agnelli family, with top holdings
that include Fiat, Fiat Industrial, SGS
and Cushman & Wakefield.
Share Information
Valuation Metrics
(@10/30/12):

NAV per share (@6/30)
Discount to NAV
EXP
25.64
34.3%
(@10/30/12, Exchange Rate: $1 = 0.770):
16.94
Price
52-Week Range
Dividend Yield
Market Cap
12.87 17.57
2.3%
4.59 billion
6000
EXP PRICE HISTORY

25
25
5000
20
20
15
15
10
10
4000
3000
2000
5
2010 2011 2012
THE BOTTOM LINE
Even though this investment holding company of Italys Agnelli family owns large stakes
in difficult-to-copy businesses that are for the most part easy to value, says Alvaro Guzman, the market appears decidedly unimpressed. Based on his intrinsic-value estimates,
he puts the sum-of-the-parts value of the companys shares at well above 40.
Ad
ertrains and, through its majority holding

of CNH, is the second-largest agricultural-equipment manufacturer in the world
after John Deere. This also is a difficult-toreplicate business, given the importance of
brand names and the extensive distribution network necessary to provide maintenance and repairs.
Then you have Fiat Auto [F:IM], which
gets a lot of bad publicity because of its
financial and union problems in Italy, but
which overall is actually not that bad. It
makes far more money in Brazil, for example, than it loses in Italy. It bought
Chrysler when absolutely no one wanted
it and has done well so far to turn that
business around. The real gems within
Fiat Auto are Ferrari and Maserati, which
are obviously one-of-a-kind brands, and
which together produce between 400
million and 500 million in earnings before interest and taxes.
If we just take the public market values
of Exors stakes in those three companies,
plus conservative value estimates for
smaller stakes in companies like real estate
brokerage Cushman & Wakefield, Italian
tour operator Alpitour and European paper
and packaging distributor Sequana, we
get to a share value for Exor of 31-32
per share. If we adjust those market values
upward in certain cases primarily to
reflect added value we see in CNH and
Ferrari/Maserati we think Exor is worth
well north of 40 per share. Thats against
a current market price for the preferred
shares of around 17.
There seems to be some controversy over
the youth and inexperience of Exors CEO,
John Elkann, whose mother is an Agnelli.
Is that a concern?
AG: There are a couple points to make
here. The first is that the most important
person at the helm of the Fiat businesses
operationally is Sergio Marchionne. Some
people hate him and some people love
him, but we believe hes proven to be an
able operator and astute capital allocator.
Hes making an all-in bet in Italy, saying if
we cannot make money manufacturing in
the country, we will leave. Its difficult to
October 31, 2012
say how that will turn out, but we support

the position hes taking.
With respect to John Elkann, he is
young and doesnt have a long track record, but we think the moves he has made
show that he knows what value is and
that he has an eye for capital allocation.
Separating Fiat Industrial from Fiat Auto
was a messy undertaking and he pulled it
off successfully. Hes now in the process of
fully merging Fiat Industrial with CNH,
which will also be messy but should make
the value of the combined business more
clear and management more accountable.
On the investment front, his acquisition of
Cushman & Wakefield wasnt the greatest
timing, but that company will make more
money in 2013 than it made in 2007.
He certainly hasnt yet made any big
investment mistakes.
If we look at the underlying value and
quality of the assets here, and where the
market is pricing them, that John Elkann
doesnt have a long track record is an affordable risk for us to take.
Theres much talk today about the need
for investors to prepare for tail risks,
such as the euro zone imploding. How
would you characterize your preparation
for extreme bad news?
FGP: We naturally when the market feels

somewhat peaky will move from somewhat
more cyclical stocks to more defensive
stocks. If our BMW shares have gone up
100%, well sell some of them to buy
shares of [U.K. grocery chain] Tesco that
have fallen 20%. But the fact that everyone
today is talking about tail risks tells me
that the world is roughly prepared for
that. The problem was five years ago when
no one was thinking about tail risks whatsoever. Perhaps the world is less prepared
for a continued boom in several countries
in the world.
Our view is that the best way to defend against financial disruption on a
long-term basis is to invest in real assets.
Of the real assets that we can buy in the
world, we prefer the stocks of companies
with high barriers to entry that over many
years should create value and protect you
against terrible scenarios. We think the
equities we own cover us in all possible
scenarios, rosy or not. The average return
on capital of our portfolio companies is
40%, but they trade at an average 7.5x
earnings. Its maybe not as interesting a
time as in the panic moments like early
2009, but we think peoples reluctance to
invest in equity markets is creating plenty
of opportunity. VII
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U N C O V E R I N G V A L U E : Special Opportunities Fund
Narrowing the Gap

Phil Goldstein and Andy Dakos have built an enviable record investing in rather obscure closed-end funds and
operating companies. Having taken the reins of one such target, where are they finding opportunity for it today?
As portfolio managers of Bulldog Investors, Phil Goldstein and Andy Dakos [VII,
March 31, 2008] arent afraid to challenge
management in an attempt to narrow the
discounts they see from a companys or
closed-end funds market price and its underlying asset value. Theyve now taken
that one step further: After winning a
proxy fight over a former UBS closed-end
municipal bond fund, they have renamed
it the Special Opportunities Fund and are
running it utilizing Bulldogs basic hedgefund strategy. Not our first intention,
says Goldstein, but the further we went,
the better we liked the idea.
As in their private funds, Goldstein and
Dakos often place bets on obscure funds
or operating companies. Eaton Vance Risk
Managed Diversified Equity Income Fund
[ETJ] is a typical example. Despite employing a collared options strategy meant to
lessen equity risk, its performance since
inception in 2007 has been dismal and it
has traded at a chronic discount to net asset value. Since Bulldog started agitating
for change, management has responded
with share buybacks and hefty dividend
payments. Dakos considers such effort
a positive sign for the shares, which still
trade at a 10% discount to NAV.
A more recent purchase is Firsthand
Technology Value Fund [SVVC], which
bills itself as a publicly traded venture
capital fund. It acquired shares in Facebook pre-IPO and also holds positions in
private social-media firms like Twitter and
green-tech companies such as SolarCity.
Such holdings are of little interest, says
Dakos, who is more interested in how
investors cooled ardor for social media
has sent Firsthand shares from a crazy
premium to NAV to a sharp discount. At
$18, the shares trade at a 24% discount
to NAV and at even 10% below the funds
uninvested cash on hand.
Myrexis [MYRX] is a typical Bulldog
non-fund idea. Its shares trade for $2.50,
but it has more than $3 per share in cash
October 31, 2012
and is burning minimal resources in pursuing acquisitions of cancer and autoimmune-disease drugs. Goldstein says hes
confident that if the company cant make
an accretive acquisition within a year, it
will liquidate and distribute its assets to
shareholders a heads we win a lot, tails
we win a little investment, he says.
Further out on the risk spectrum is
Imperial Holdings [IFT]. In the controversial business of financing and buying
life-insurance policies, it recently settled a
U.S. Attorneys office inquiry, is still under SEC investigation, faces several share-
holder lawsuits, and may by late next year

run out of money to pay premiums on the
large amount of life policies it owns. Despite all that, Goldstein, who now chairs
Imperials board, sees potential to work
through the problems and realize share
value closer to the firms $8 book value
than its $3.50 share price.
And what of Special Opportunities
Funds own discount to NAV, which is
currently around 11%? Dont give anyone any ideas, says Goldstein. But seriously, we will do the right things if the
discount stays too high. VII
INVESTMENT SNAPSHOT
Special Opportunities Fund

(NYSE: SPE)
Valuation Metrics
Business: Closed-end fund investing

primarily in other closed-end funds, special
purpose acquisition companies [SPACs]
and special-situation equities.

NAV per share
Discount to NAV
SPE
17.73
10.7%
Share Information
(@6/30/12):
(@10/30/12):
Price 15.84
52-Week Range
Dividend Yield
Market Cap
(@10/30/12):
13.91 - 16.38
1.8%
$108.1 million
Company
Karpus Inv Mgmt
Relative Value Partners
Ancora Advisors
% Owned
6.4%
6.1%
0.9%
SPE PRICE HISTORY

20
20
20
1515
15
1010
2010 2011 2012
10
THE BOTTOM LINE
After winning a proxy fight, Bulldog Investors portfolio managers have turned this fund
into a public vehicle that invests with the same basic strategy as their private hedge
funds. Which means an eclectic portfolio of closed-end funds, special purpose acquisition companies and some asset- and controversy-rich common stocks.
Ad
EDITORS LETTER
The Arithmetic of Equities

The typical investor letter can be a
dour affair, with a boilerplate macroeconomic discussion followed by a dutiful
reporting on the number of basis points
in performance gained or lost in the latest
period on this or that stock. There are recurring gems, however, filled with insight
and actionable information think the letters of Jeremy Grantham, Howard Marks,
Bill Gross and, of course, Warren Buffett.
One up-and-comer on the letter front
is Andrew Redleaf of Whitebox Advisors.
While at times more erudite than we can
follow, he is most often clever and contrarian in describing the current investing
environment and what hes doing about it.
His latest letter, The Arithmetic of Equities, is an excellent example. In it he
explains why he finds investors general
preference for bonds over (particularly)
blue-chip equities to be borderline crazy:
The best measure of security of principal
is how much one needs to know about
the future to be confident the principal
will be returned. A bond secured by collateral of enduring value amounting to
several times the price of the bond is all
but perfectly secure. In most plausible
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futures the asset will cover the loan. In

any scenario in which that is not true
invasion, the acts of an especially angry
god no other asset including Treasuries
will be worth much either. We know the
future of this bond because the value
of the assets vastly exceeds the price.
Similarly, if a stock sells at a P/E of 50,
you have to be right about too many
things to consider the principal secure: at
a minimum you have to be right about
both future earnings and the future P/E.
With a P/E of 12, several points below
the historic average, you can get away
with being right about either future earnings or future P/E. With a stock selling
well below book, all you have to be right
about is book value and the efficiency of
your claim.
Basically I am a bond guy. I like fat coupons. And I like return of principal. But
I take my bonds where I can find them.
And these days the place to find fat coupons and return of principal is among
blue-chip equities.
Family Legacy
Regardless of who wins the upcoming presidential election, Washington in
coming weeks will likely be occupied by
discussion over the short- and long-term
ramifications of the U.S.s formidable debt
burden. As input into the discussion, we
offer the following simple parable from
Warren Buffett, from Berkshire Hathaways annual meeting in 2005:
Were like an incredibly rich family. We
sit on the porch of our huge farm so
big we cant even see the end of it and
each year, we consume 6% more than the
farm produces. To pay for this, each year
we sell or mortgage a little bit of the farm
that we cant see, so we dont even notice.
Were very, very rich and the rest of the
world is happy to buy from us or lend
to us, so each year they take a piece of
our valuable assets and they work very
hard. But we will have to service this. If
it goes on for a long time, our children
will pay. VII
We highly recommend the entire letter,

available here.
Always on the lookout for

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October 31, 2012
EDITORS LETTER
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October 31, 2012

ValueInvestorInsight Issue 364

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ValueInvestor

October 31, 2012

The Leading Authority on Value Investing

Inside this Issue

or a successful activist investor, Jeff

Don Noone (l), James Vanasek (r)

Investment Focus: Seek off-the-beatenpath companies that due to neglect or

Investor Insight: Jeffrey Smith

n discussing the obscure and mundane

Uncovering Value: Bulldog

Big Rock Brewery

Special Opportunities Fund

Other companies in this issue:

Investor Insight: Jeffrey Smith

of the business, it works well. But when

general and administrative costs, to name

firms were investors in companies we were

How do you generate ideas?

PF: Since we often suggest that companies

Where do you focus first in research?

On what size companies do you focus?

PF: There are two primary sources. One

How do you judge whether your activist

value assuming we are able to implement

other criteria are no longer met and we do

Business: Provider of office supplies and

Largest Institutional Owners

ODP PRICE HISTORY

2010 2011 2012

THE BOTTOM LINE

Value Investor Insight 4

than 1%, while the margins of the largest

several steps to get its performance more

On ODP Next steps:

EV/EBITDA multiple is 1.3x on our low

or quickly. Given the required number and

if any, profits on a significant portion of

Business: Producer of specialty papers for

Largest Institutional Owners

Short Interest (as of 10/15/12):

WPP PRICE HISTORY

2010 2011 2012

THE BOTTOM LINE

October 31, 2012

a much lower marginal cost of operation.

core business and had limited synergies

Business: Develops and markets systems

Largest Institutional Owners

Short Interest (as of 10/15/12):

PRGS PRICE HISTORY

2010 2011 2012

THE BOTTOM LINE

October 31, 2012

JS: The stock price went down 15% on

Does the just-announced departure of

TC: The stock trades at less than 4.5x

JS: For Regis, we concluded the companys

Business: Owns, operates and franchises

Largest Institutional Owners

Short Interest (as of 10/15/12):

RGS PRICE HISTORY

2010 2011 2012

THE BOTTOM LINE

minority ownership stake in Provalliance,