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AYSI, KDUS, PWEB: a hodgepodge of ideas

Well, the end of the year is coming and if you’re like me the end has been disappointing compared to the middle. I’m looking forward to getting through December to see if I can get a little January Effect going on in my portfolio.

Once the year is over, I will do another Portfolio post. I’m also planning to do a year-end assessment including the rate of return I earned over 2014, where I went wrong, and where I went right. Right now my 2014 annualized rate is about 20%, but it feels a lot worse because that number was multiples higher a few months ago.

All that said, I simply want to use this post to list a couple stocks I’ve been thinking about over the past month.

Alloy Steel International (AYSI)

Arcoplate Lining Front End Loader

AYSI’s Arcoplate lining a front end loader

AYSI put out very solid earnings last week, and the stock is not up as much as I would’ve expected since. I analyzed the earnings in a Seeking Alpha article: Update: Alloy Steel International’s Q4 Earnings Are Strong.

This is my biggest position at 15% of my portfolio as of the end of last month.

Cadus (KDUS)

I don’t own this one. It’s been on my watchlist but I haven’t seen enough of an upside to buy, although the downside is pretty well-protected. Basically, it’s a Carl Icahn-controlled play on Miami real estate. If you count the recently purchased real estate portfolio (“held for sale” on the balance sheet) as a Current Asset, KDUS is a net-net.

Icahn infused a bunch of cash into Cadus earlier this year via a rights offering at $1.53. He was a big buyer, buying up all the unsubscribed rights and increasing his stake percentage in the process. It has been a shell with cash and NOLs for years leading up to now.

This year, Cadus has spent a majority of its cash to buy about a dozen high-end properties in the Miami area and one in the Hamptons. They are demolishing and rebuilding most of the houses.

Icahn’s son-in-law seems to be heading up the company, which I saw as a red flag at first, until I did some research and learned that the son-in-law worked for Icahn prior to marrying his, I think, step-daughter. In other words, the guy came into Icahn’s life due to his own skills at investing (for lack of a better term) rather than through a family connection.

The stock did its last trade at $1.39, a 9% discount to the rights offering (at which price Icahn participated heavily), and about a 13% discount to Net Current Asset Value.

I recorded my own, earlier bearish thoughts on Cadus in a Seeking Alpha comment:

Thanks for the article. This is an intriguing idea because of the (probable) downside protection, and is one which I have my eye on.

However, let me play devil’s advocate a little: This company is run by Icahn’s son-in-law I believe. And Icahn’s stake is worth ~$25M. Icahn’s net worth is estimated at $20B, so his investment here is about 1/10th of 1% of his net worth. I am pretty sure he would be willing to potentially lose that money in helping his daughter’s husband out.

Also, you state to look for double-digit markups… like 10%? If it takes two or three years for this 10% gain to play out, that is NOT a good return.

And finally, you say: what could you lose by parking some money here? What you could lose is the opportunity to make better gains elsewhere.

All that said, thanks for the write-up. It is an interesting idea that I will continue to watch.

I learned about the idea from a Whopper Investments post: Where have I been buying?

Pacific WebWorks (PWEB)

Here’s a shady one for all you guys who don’t mind messing with the darkside. I have stayed away from it, maybe being too cautious.

Pacific WebWorks sells website creation software (I believe through a subscription model). They came to my attention recently when they reported $280K net income in Q3 on $4.0M sales… not bad for a $1.1M market cap company! 90 days earlier, in Q2, PWEB lost $140K on a mere $1.0M in sales. So, they quadrupled revenues in only three months! And they earned a quarter of their market cap in one quarter…

From what I can tell, investors are worried about lawsuits disclosed in the company’s filings. This PCWorld article gives some insight into the business model that got PWEB into trouble five years ago: Company Sued by Google Had a Profitable Year.

Like I said, I have refrained from taking a position to date. However, I think it’s more likely than not that PWEB’s next report will show earnings that boom the price up. You could make a crazy return in a couple months here, or lose all your money out of the blue…

Nat Hunt

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