As the AIL Premium members know, there were a couple of sales and couple of buy transactions in my portfolio over the last two days. Primarily the sales were done to free up monies to invest in some of the new names that I have been researching over the last week or so. There is no dearth of value investing opportunities in the market today and while we endeavour to stay with the holdings as long as the valuation gap remains (or the investment thesis changes), sometimes it just becomes necessary to make room for a new and more compelling investment.

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First, let’s talk about the sales:

Markel (MKL): I trimmed my stake in Markel. I still have a few shares left in my portfolio that I intend to keep holding for a long time (unless the company does something stupid, or Gayner leaves the company, which ever is earlier). Nothing wrong with the company today. It is currently selling at 1.36x book whereas traditionally it has sold for about 2x book so it is a good price to enter and hold the company if you look to history as a guide.

Fairholme Fund (FAIRX): This is more of a philosophical sale than anything else. Fairholme is one of the better mutual funds out there and they invest in the tradition of the best value investors. However, I am picky about the stocks that I buy and need to understand the business intimately. It may be that in the future some of the names in my portfolio and in FAIRX portfolio may overlap but atleast I will know why I bought the stock.

Now onto the Buys:

This is just a brief rationale, full analysis will be posted shortly.

National Presto Industries (NPK): National Presto manufactures small appliances (Presto Pressure Cookers anyone!), armaments for Dept of Defence and adult incontinence products (diapers). If you pay heed to CK Prahlad and Gary Hamel’s contention that a company should focus on their main core competency, than you will probably direct a bemused gaze on National Presto before quickly moving on. However, a quick study of the company’s past operational history shows that it is a tightly run ship with excellent return on equity, large amounts of cash on the balance sheet and shareholder friendly to the core. It is also a company with some durable advantage (in its cost structure) as it generates close to 20% or more gross margins in a highly competitive industry. Its SG&A costs are very reasonable and R&D costs almost non-existent. It does very little advertising.

The basic premise of investing in NPK is its earnings power. Its trailing PE ratio is close to 11 but if you take out close to $125 million in cash and short term investments on its books as the liquidity that can be returned to the shareholders (while leaving enough for working capital), than its adjusted PE ratio falls to below 9. Compare this with its return on equity of 18% or more and you have a company that is a pure cash generating machine. Not surprisingly the company has a history of paying large cash dividends to the shareholders every year (last year it paid out $5.55 per share in dividends).

TII Network Technologies (TIII): This is more of a asset play. The company sports a market capitalization of $16 million and has a book value of $37 million, out of which $22.5 million is in current assets and almost $11 million in cash. It has zero long term debt.

Best of all, the company generates positive cash flow and positive net income (if you take out the non-cash expense of stock option based compensation and depreciation). In the last 12 months, the company generated over $8 million in positive cash flow.

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