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Vector Group: Buy A Portion Of Phillip Frost's Portfolio

By The Wall Street Fox → Friday, September 27, 2013

Investors who have followed billionaire Phillip Frost and his open market stock purchases have made a handsome return in the past year. Castle Brands (ROX) has returned upwards of 200% since Frost's first purchase back in February. Opko Health (OPK), of which Frost is President and CEO of, gained 75% since his purchase on January 2nd, 2013. Ladenburg Thalmann Financial Services Inc. (LTS) has appreciated more than 50% since one of Frost's many purchases back in November of 2012. If you want to get a piece of all of this and even more, then you should consider investing in the Vector Group (VGR); a financially solid holding company that is invested in the same companies mentioned above, and operates a few others.

The Vector Group operates through four main subsidiaries, focusing mainly in the tobacco market. Vector Tobacco Inc. is based in North Carolina and is focused on researching reduced risk cigarette products. The Liggett Group is a cigarette manufacture that has been focusing on the discount cigarette market, featuring brands such as Pyramid, Grand Prix, Eve, USA Gold, and Eagle 20s. Liggett Vector Brands coordinates the marketing, sales, and other functions for the tobacco products. Lastly, the Vector Group operates New Valley LLC, an investment company that owns 50% of the largest residential real estate brokerage in the New York metropolitan area, Douglas Elliman Realty. Add a hefty dividend, solid management, and a large investment portfolio consisting of companies tied with Dr. Frost and physical real estate, and you've got a highly diversified company that should be in every investors DRIP account. With strong, consistent growth and a current market capitalization of $1.5 billion, the Vector Group stands to continue its gradual price appreciation.

Buy A Little Sin

With a market share of 3.4%, as of June 2013, the Vector Group is the fourth largest tobacco company in the U.S. Leggitt focuses on manufacturing and selling discount branded cigarettes, a segment of the tobacco industry that has been steadily growing for more than a decade. The company's strong cash flow and low capital requirements are very encouraging. Leggitt generated $192 million in the last twelve months while only spending $6.3 million in capital expenditures. The company has also seen positive effects from their price increases that took effect last year, which helped boost margins by 8%.

Leggitt also stands to benefit from being such a small player in the tobacco industry. Under the Tobacco Master Settlement Agreement ((MSA)), Leggitt is exempt from certain payment obligations thanks to their small market share, while the three big tobacco companies have to face an extra tax on their products. This exemption is worth approximately $164 million in 2013 for Liggett and Vector Tobacco. The favorable treatment received from the MSA allows Leggitt to competitively price their premium quality cigarettes as discounted cigarettes.

The Vector Group and its tobacco subsidiaries are poised for continued long-term growth, especially with their current strategy and management team. Ronald Bernstein, the President and CEO of Liggett has been working for the company since 1991, and was appointed CEO back in 2000. Since becoming CEO, he has grown adjusted EBITDA from $78.8 million to $192 million today. The chart speaks for itself.

Liggett's commitment to capitalize on their pricing advantage thanks to the decision in the MSA, focusing their marketing and selling on the discount segment, and emphasis on minimizing operational costs through the utilization of technology and efficiency are just a few pieces of the company's strategy that point to long term growth in shareholder value.

Location, Location, Location

The Vector Group's reality operation is just one more component of this vast holding company. New Valley LLC's holds a 50% stake in the fourth largest residential brokerage company in the U.S., Douglas Elliman. The subsidiary had revenue and adjusted EBITDA of $397 million and $35 million respectively, for the last twelve months ending June 30th 2013. The New Valley subsidiary has almost $90 million in cash.

Douglas Elliman is growing, and making strategic acquisitions along the way. Currently, Elliman is in talks with Prudential to redeem approximately 20% of Prudential equity owned by a former investor of Prudential. If the redemption is finalized and completed, the Vector Group will contribute a significant amount and end up owning more than 50% of Douglas Elliman. In 2012, Douglas Elliman operated a total of 63 offices, and generated real estate sales of $8.4 billion in New York City, and $3.6 billion in Long Island and Westchester County.

While New Valley's stake in Douglas Elliman is poised to grow, along with the company, what's more intriguing to me as an investor is New Valley's investment in physical real estate. New Valley's property investments include:
  1. A 25% interest in a joint venture that has the rights to acquire a 15-story building on a 31,000 square foot lot in the Tribeca neighborhood of Manhattan ($19.3 million)
  2. A 45% stake in a condominium conversion project in Queens ($7.4 million).
  3. A 18% interest in a condominium conversion project located in Manhattan ($2 million)
  4. A 7.2% interest in Sesto Holdings, which owns 42% of a 322 acre plot of land in Milan, Italy ($5 million)
  5. A 12% interest in the Lofts 21, condominiums located in the Flatiron District of Manhattan ($900,000)
  6. A 5% stake in a luxury condominium located in the Flatiron District ($6.6 million)
  7. A 17% interest in the Hotel Taiwana, located in the French West Indies ($6.3 million)
  8. A 18% stake in The Marquand, luxury condominiums located between Fifth and Madison avenue in Manhattan ($7 million)
  9. A 49% interest for a luxury condominium located in Manhattan ($10.4 million)
  10. A 12% stake in a 120,000 square foot building in Times Square.
  11. A 7.5% stake in a portfolio of approximately 5,500 apartment units located throughout Baltimore County, Maryland ($5 million)
The company also has majority stake in a master planned, 450-acre community in Palm Springs, California, which sports 867 residential lots, an 18-hole golf course, completed club house, and a seven-acre site approved for a 450-room hotel. Currently the book value stands at $13.1 million. They are also invested in a real estate conversion project located in Indian Creek, Florida, with a book value of $10.1 million.

The diverse and premium locations that New Valley is invested in, and the possibility that The Vector Group may take more than a 50% control in Douglas Elliman make this company extremely attractive from a long term, value oriented perspective.

Don't Forget Your Goodie Bag

Solid growth, strong fundamentals, tobacco and prime real estate, what else could you ask for in a stock?

How about a dividend that yields more than 9% and has been issued for 18 consecutive years, and an investment portfolio worth approximately $120 million that is solely focused on companies that are affiliated with Dr. Frost.

The Vector Group owns 11.5% of Castle Brands, 7.6% of Ladenburg Thallman Financial, and an unspecified amount of Opko Health. The company also owns 5.6% of the Morgans Hotel Group, 8.8% of SG Blocks, and an unspecified amount of CoCrystal Discovery, a privately held biotech company that was co-founded by a recent recipient of the Nobel Prize in Chemistry. While many of these securities may be viewed as risky, speculative holdings, following Dr. Frost and his management has paid off tremendously in the past, and will most likely continue to do so.

Risks To Consider

Always consider the risks! While The Vector Group operates as a diverse holding company, the majority of their revenue and earnings is derived from their tobacco operations. Investors should lump this company in the likes of cigarette companies, and should understand that the more than $100 million in prime real estate investments will take years upon years to come to fruition and provide true value to shareholders. Also, consider the risks and uncertainties of the real estate market, as well as new regulation and legislation regarding the tobacco industry.

The Vector Group is facing pressure from a liquidity standpoint over the next twelve months. The company has an interest expense of $101.6 million, dividends to pay out (at an annual rate of $143.9 million), and other corporate expenses and taxes to deal with. The holding company is nearly $1 billion in debt, and while the company expects to cover all expenses with cash flows from operations, it should be noted for all potential investors. While it is not expected to happen, if there is a shortfall in resources and the Vector Group is struggling to pay expenses, expect the dividend to be reduced.

Technically Speaking

The Vector Group is in a long term uptrend, started way back in 2002. Hovering above the current trend line, and investors should wait and see if the price retreats back towards the trend line until opening up a position. A pullback to $15.50-$15.75 would be prime time to open up a long position, though the possibility of the stock recently creating a new support line after breaking above the top trend line is very possible.


The Vectors Group is one of the most unique companies I've come across in my time as an equity enthusiast. Their diverse and stable business operations, strong investment portfolios, and relationship to Dr. Frost make this a compelling buy to all long term oriented buyers. The company's revenue almost doubled from 2008 at $565 million, to $1.08 billion in 2012. This trend should continue, especially with the long term oriented investments in prime, luxurious, New York City real estate. A current market cap of $1.5 billion does not seem justified for this diverse holding company; investors should add this company to their buy list.

All information was sources from this just released investor presentation, and their most recent 10-k filing.

Tiger Media: Phillip Frost And Time Are On Your Side For This Speculative Turnaround Company

By The Wall Street Fox → Thursday, September 19, 2013

After highlighting several micro-cap stocks that were purchased by billionaire Phillip Frost in the open market, many of the companies jumped considerably. Here is a breakdown of the returns since my article was released last month.

-SafeStitch Medical (SFES.PK) is up 76%

-Castle Brands Inc. (ROX) is up 70%

-Non-Invasive Monitoring Systems Inc.(NIMU.PK) is up 7%, though they posted short-lived gains of 39%

-Opko Health (OPK) is up 7%, though they posted short-lived gains of 16%

-Ladenburg Thalmann Financial Services Inc.(LTS) is down 1%, though they posted short term gains of 9%, and more than 700,000 shares were purchased by insiders the day the article was submitted, with Frost buying 500,000 of them.

With these kinds of returns in such a short period of time, it pays to follow Phillip Frost. One company that Phillip Frost has interest in that I failed to mention in my last article is Tiger Media Inc. (IDI) This Chinese advertising company has a solid business operation, and the growth potential for this differentiated company is huge. After the company released earnings for the first six months of 2013, held its conference call, and presented at a conference, the stock has dropped almost 30% from a high of $1.89. With current prices near $1.30, and a solid outlook, I believe this is a great entry price for any long-term investor who can stomach a little bit of risk.


Tiger Media, formerly known as Search Media Holdings, was formed in 2005 and operates throughout China. The company is headquartered in Shanghai. The company is a nationwide multi-platform media company that operates one of the largest outdoor advertising networks in China. The company generates revenue primarily through outdoor billboards, street-level LCD screen displays located in high end shopping malls and centers with high foot traffic, and an advertising network that is being installed at Home Inn (HMIN) locations, a leading economy hotel chain in China, thanks to an agreement inked back in 2012. Tiger Media's market capitalization is just under $40 million. Tiger Media recently divested their legacy and low margin businesses, and has brought in a new CFO, Steve Ye, and CEO, Peter Tan. The company's stock price has suffered considerably over the past few years, which makes this a compelling turnaround story.

Time Is Money For Tiger's New LCD Business

Tiger Media began building out their mall and outdoor LCD advertising network in April of 2013. The company first deployed the network in Shanghai, and by the end of September they will have established more than 115 LCD screens in 23 different malls, completing the installation of their Shanghai network.

Here is a picture to better illustrate what these LCD advertisement screens look like.LCD screen sizes vary from 42" to 70" and are built in high traffic street junctions.

Tiger Media has advertised for many Fortune 500 MNC's, including McDonalds, Pepsi-Cola, Coca-Cola, and BMW. The company sells time on their LCD screens in both long term and short-term packages. Currently, a short term, 2 week package costs $100,000 and includes poster ads that last 10 seconds being run at a package of 120 times for 15 hours per day.

The company generated sales of $2.1 million during the months of July and August for the LCD business division. This is very encouraging since the business just started in June. What's even more encouraging is that the utilization rate of these screens has stood in between 10% and 20%, meaning there is a lot of room for growth with the base that is already installed in Shanghai.

If we are conservative and say that the $2.1 million generated in two months represented a utilization rate of 25% of the Shanghai network,and that they reach a utilization rate of 75%, the company can generate yearly revenues upwards of $37 million! A less conservative estimate, say 15% utilization at $2.1 million, and eventual utilization rate of 90%, would equal yearly revenues upwards of $75 million. This potential revenue is all derived from their LCD display operation in Shanghai that was set up in less than half a year. The upside potential is huge for this company, especially when they begin to expand.

This means the company doesn't need to raise any more funds for their Shanghai operation, and as time rolls by, the money will continue to rack up for Tiger Media. The company expects the Shanghai operation to be self-funding within six months. In the Company's recent presentation at the China Best Ideas Investment Conference, the company noted that they could recruit about 44 clients per day.

This company is set up to take full advantage of this new medium of advertising that is experiencing quick, robust growth. Currently the outdoor LCD media network has a very low penetration rate and is an untapped market. Advertisers are constantly looking for new ways to show off media at prime locations, and Tiger Media's offerings fit the bill. The business has high margins when economies of scale are attained. The per-unit cost of an outdoor LCD project may be higher than an elevator advertisement, but much fewer units are required to reach the same level of revenue.

Rapid Expansion Of LCD Business

The company has long-term plans for expansion of its LCD media network. The CEO stated during their conference call that they have just set up office in Beijing and are beginning to recruit a sales force their. The company also plans to expand into other tier 1 cities such as Guangzhou, and Chengdu. The timeline to become established in China's entire Tier I cities in one to two years. In two to three years, the company plans to expand coverage to 6-8 Tier II and Tier III cities. Here are illustrations included in the company's investment presentation.

The company also plans to expand its LCD advertising network by modifying current and future screens to have the ability to connect with mobile phones via NFC chips, Wi-Fi, or data networks. The current screens are already interactive enabled, which will allow people to touch advertisements and scroll through different products from the companies who are being advertised. This mobile online to offline initiative will allow customers to interact with advertisers and acquire more detailed product information and participate in benefits like promotions or special discounts. In CEO Peter Tan's own words, "…potentially we are turning each mobile phone into a screen for us. So instead of 115 screens, we have many, many screens out there." This heightened interactivity between customers and advertisers can help boost insights on customer preferences for companies, making it extremely valuable to them. Management believes that if the mobile online to offline initiative is successfully executed, they "will see huge multiples in revenue growth as a result of that…". With management focused on making this a 2013 event, screens already being interactive enabled and requiring little to no modification, and the strategic location based advertising, the company should see huge revenue growth in the near future.

Home Inns Partnership Has Huge Potential

In July of 2012, Tiger Media entered a definitive agreement with Chinese based company Home Inns to obtain certain rights to build out their advertising network through out their hotel locations. This includes electronic billboards placed on the rooftops of the hotels, as well as elevator advertising and lobby advertising. If Tiger Media can fully leverage this massive agreement, the upside can be tremendous.

Home Inns operated 1,479 hotels in 219 different cities in China when the deal was announced. A little over a year later, the company operates 1,953 hotels in 271 different cities. To be partnered with a company that is experiencing such swift growth is reassuring.

In their recent earnings call, CEO Peter Tan outlined that they have experienced a few shortfalls with this deal. The company has to gain approval from both the government and landlord with regards to building billboards on top of the Home Inns for each specific location. Because of this high level entry barrier, Tiger Media has put this part of the project on the hold, and with their relatively small sales force focusing on their higher margin LCD screen business, it may take time to see this partnership make a significant difference to the company's bottom line. However, the company does not require approval for any of the advertising done inside the Homes Inn, so they have begun to focus their efforts of the partnership on indoor advertising first, and will focus on building outdoor billboards afterwards.

The long-term potential of this partnership could be big, but current investors should focus more of their attention to Tiger's high margin LCD business and their mobile online to offline initiative.

Follow This Insider

Phillip Frost has the tendency to buy/invest in blockbuster companies at dirt-cheap levels. Opko Health, Ivax, and Key Pharmaceuticals, the list goes on. Phillip Frost owns almost 32% of Tiger Media's common stock. His most recent buy occurred on July 10th when he purchased 300,000 shares for an average price of $.81. Phillip Frost owns 10.6 million shares of Tiger Media. Phillip Frost's investment in this company is just another reason to jump in now.


Tiger Media presents a solid Chinese company that is making strides in turning around the company and its stock price. Though the company has been in turnaround mode, and lost $200,000 in the first six months of 2013, the future looks extremely bright for this advertising company. High margin LCD displays, rapid expansion, a proven business model currently operating in Shanghai, and the revenue growth opportunity of implementing interactive advertising displays makes this company a long-term buy with multi bagger potential. I believe investors should keep an eye on the share price as they pull back from their recent highs, and look to enter into a position near the $1.20 levels.

Information was sourced from the company's latest conference call transcript, and their presentation at the China Best Ideas Conference, both held on September 10th, 2013.

Blackberry Is Dead, Long Live Nokia

By The Wall Street Fox → Monday, September 16, 2013

Microsoft (MSFT) has effectively hammered the last nail into BlackBerry's (BBRY) coffin, after the tech giant acquired Nokia's (NOK) mobile handset division and specific licensing rights for upwards of $7 billion. Speculation over who would buy Nokia intensified after rumors of a deal surfaced back in June. Similarly for physical keyboard obsessed BlackBerry, speculation over who would acquire them continues to run wild, with Microsoft's name constantly being tossed up. BlackBerry has been looking for potential suitors for more than a year. While BlackBerry's solid cash position, modest patent portfolio, and enterprise division seem like an attractive fit for Microsoft, actual synergies between the two companies and their product lines are almost nonexistent, which is why BlackBerry's future prospects of a Microsoft tie-up were crushed by Nokia. The future for BlackBerry looks grim, and after the smoke settled between Nokia and Microsoft, it seems clear that BlackBerry shareholders are holding onto dead weight. While the company and/or its divisions will most likely be broken up and sold off in the near future, BlackBerry shareholders should not expect a price move similar to Nokia's recent two-week tear, and they should anticipate the possibility of BlackBerry selling off at a discount, or no premium at all. Current shares are priced at $10.28. Shareholders should consider closing most or all of their position in BlackBerry and opening a long position in Nokia, who has an extremely solid future. Nokia is in it for the long haul.

The Lack Of Synergy Between Microsoft And Blackberry

Synergy is key. For any successful merger to occur, there needs to be a high level of synergy between the two companies. Integration is crucial among all levels of the combined business, from the employees, to the products, to the management style. Synergy is a word that gets thrown around a lot, and some people fail to realize how basic, yet important the word is.
Synergy is the interaction of two or more agents or forces so that their combined effect is greater than the sum of their individual efforts
After reading the definition of synergy, the deal between Microsoft and Nokia makes perfect sense. Microsoft is now able to control both the popular hardware that has captured more than 80% of the WP market, and software for their phones, which tends to create a better experience for the end user. This combined company will continue to make great strides overseas with regards to Windows Phone growth, and a new lineup of innovative hardware will help push the envelope even further and give hope for significant growth in the US.

If you read the above definition one more time, and swap BlackBerry in for Nokia, you may come to the conclusion that the integration between BlackBerry and Microsoft would be extremely difficult, let alone the integration between BlackBerry, Microsoft, and Nokia. BlackBerry has cash (more than $3 billion), a mobile phone division, an enterprise business, and a modest patent portfolio to offer Microsoft. Meanwhile, Microsoft's cash position is the least of its concerns. BlackBerry's mobile division is at its lowest low, runs on a completely different OS, and has inferior hardware when compared to Nokia and their acclaimed cameras. BlackBerry's enterprise division is starting to erode at a rapid pace by competition from Microsoft and Nokia, and BlackBerry's patent portfolio pales in comparison to the quality and quantity of Nokia's patent portfolio. It is safe to say that the synergies between BlackBerry and Microsoft are minimal at best, and the only way I would see a merger between the two is if a certain division of BlackBerry was sold at a discount.

Jefferies analyst Peter Misek laid out his three reasons for why BlackBerry would be an attractive takeover target for Microsoft.
Microsoft would be "1) The definitive #3 handset player with better carrier access and production economies of scale; 2) the leader in enterprise mobile devices with support from the U.S. gov't; 3) a key player in MDM, an area they would love to get into and purchasing private leaders in the space would be pricey."
To counter, 1) Microsoft's Windows Phone already is the definitive #3 handset player, with the IDC estimating that by the close of 2013, Windows Phone will have 3.9% of the market share, compared to 2.7% for BlackBerry. Furthermore, the research firm projects that by 2017, Microsoft will control 10.2% of the smart phone market share, while BlackBerry will control 1.7%. 2) With BlackBerry slowly fading away, and Nokia recently picking up a lot of BlackBerry's former business customers, why would Microsoft buy out a business they themselves are stealing customers from? As Windows continues to grow, BlackBerry will continue to diminish. 3) Windows has an incredibly small footprint in the MDM space, competing with their product "Windows Intune". While BlackBerry's MDM division is very strong, I believe these customers will start to make the switch when more enterprise begins to take on Windows Phone.

In short, why would Microsoft buy BlackBerry and risk a shareholder revolt over the swift acquisition of two phone companies that investors see as incredibly risky, when they can just eat away at BlackBerry's core customers for the time being.

Nokia's stock has outperformed BlackBerry's ever since the latter's disastrous earnings report was released in late June. Since then, Nokia has passed BlackBerry in smart phone shipments, and is now solidly outperforming the company. Expect this trend to continue as Nokia's Lumia phone sales continue to outpace BlackBerry's.

Nokia Is As Solid As A Rock

Investors who are looking to jump into Nokia should take a step back and look into the overall history of the Finnish company. The company, more than 150 years old, has managed to survive world wars and severe times of economic distress thanks to a solid business operation in many different industries. Since inception, Nokia has manufactured paper, communication cables, consumer electronics, including phones, televisions, and computers, generated and distributed electricity, produced various rubber products ranging from car tires to boots, and more. The list goes on and on. The recent divestment of Nokia's unprofitable phone unit is just another one for Nokia's history books. Solid finances and strong future prospects ensure that this company will be around for the foreseeable future.

Nokia shareholders have a lot to look forward too. Nokia's map division is growing fast, especially in the automobile market, and should eventually reach sustainable profitability. They're NSN division has been posting strong profitability in recent quarters, and contract wins with China Mobile will help build up Nokia's momentum. And now without a mobile phone division, Nokia will be able to fully utilize their massive patent portfolio that has been funded by more than $40 billion in research and development over the past decade and reach settlements with major smart phone manufacturers. Nokia's divestment of a cash burning division that hasn't been profitable for years has made Nokia a star among analysts since the takeover deal. Nokia has constantly been receiving upgrades from analysts, which will help the company propel to higher share prices.

The prospect of a special dividend after the closing of this deal in early 2014 is also very possible. The company suspended its dividend in January of 2013 due to financial constraints, and now the reimplementation of said dividend seems extremely likely.

The prospect of Nokia purchasing Alcactel-Lucent's (ALU) wireless division, and even the company as a whole, has been a talked about rumor since Nokia will now be heavily focusing on its most profitable business, Nokia Solution Networks. Alcatel's shares have rallied 20% since the Nokia announcement. If Nokia does go through with the acquisition, or decides to create a joint venture similar to their previous one with Siemens, it may be a great long-term growth play, at least one analyst thinks so.

Finally, Nokia will be able to jump back in the mobile phone business in 2016. While the mobile landscape may be flipped upside down by then, with wearable technology slowly gaining traction, Nokia could become a formidable challenger to the likes of Samsung (SSNLF.PK) and Apple (AAPL) after they are released from Microsoft's shackles and able to produce android based phones. Recent news breaking that claimed Nokia had an android lineup ready for 2014 shows how strong this company can be, and it seems more likely that Microsoft's $7 billion buyout was not only to gain a key executive, Stephen Elop, but to also delay Nokia from releasing award winning hardware for android by two more years.

It is expected that Nokia's advanced technologies division will continue making strides in mobile technology, and these advancements could later be implemented in Nokia's future hardware that would set them apart from the competition. Nokia will be able to produce both Windows and Android phones beginning in 2016, which makes this stock a great long term play. At these levels, the opportunities are tremendous, and the downside is limited. For long-term investors, Nokia is a must have.

This chart from Seeking Alpha contributor Wall Street Artist helps illustrate the solid upside potential Nokia has.


BlackBerry is in the midst of a slow and painful death, and Microsoft is eating them alive. As more and more time passes, the prospects of a spinoff for Research In Motion and their once popular BlackBerry series seems less and less attractive for current shareholders. The strong fundamentals for Nokia versus the questionable future of BlackBerry make it apparent that investors should sell BlackBerry and buy Nokia.

Cosi: New Management And Insider Buying Make This Turnaround Stock A Compelling Buy

By The Wall Street Fox → Tuesday, September 10, 2013

Cosi Inc. (COSI), operator of 124 fast casual restaurants in 16 states, the District of Columbia, the United Arab Emirates and Costa Rica, is a prime example of a speculative turnaround company that has limited downside risk and massive upside potential. The company exhibits many characteristics of a speculative turnaround. The company's share price is sitting at $2.37, within 25% of its 52-week low, signaling that there is plenty of room to climb. Cosi's new President and CEO Stephen Edwards is quickly implementing a strategy focused on turning Cosi into a profitable company that can compete among the likes of Panera Bread (PNRA) and other fast casual eateries. And to top it off, Cosi has seen massive insider buying over the past three months from insider Lloyd I Miller III, who owns more than 10% of the company. All of these factors make this company a strong buy for the speculative investor who has a stomach for risk.

New Management Means New Beginnings This Time Around

Stephen Edwards was appointed to serve as President and CEO of Cosi in June of 2013, marking yet another management shakeup for this company. Stephen Edwards replaced Carin Stutz, who became the CEO of Cosi in 2011. Edwards is the fourth CEO since 2011. One need only look at the company's stock price to see how poorly it has treated investors over the past few years.

The chart is horrible, and for good reason. The company has managed to squeeze out only two profitable quarters since its inception in 1996, and the multiple management shakeups and short-lived CEOs raise the question if this company is even capable of being profitable.

I believe, and hope, that Stephen Edwards is different from the previous CEOs. For starters, Edwards has directly addressed the core issue that is preventing Cosi from being profitable, customer service. Cosi offered a unique dining experience when I first visited its Westchester County location back in 2003. I was only twelve years old, but I remember it distinctly. The interior was sleek, the menu was modern, and it offered DIY S'mores for desert. S'mores! However, sadly, the entire experience was muted by the terrible service that my party received. I have not eaten at a Cosi since. And though I realize this was more than ten years ago, and I was quite young, one poor experience can drive away customers for good, and the current CEO realizes that. Edwards summed it up quite well during the latest conference call, when the company logged a $2.1 million quarterly loss.

"People love our sandwiches, they love our salads. We hear it time and time again, it's never a complaint - a complaint is because someone was rude to me, my sandwich or my salad was incomplete in the ingredients that it was supposed to have... or I got the wrong order or it took me 20 minutes to get my order when there was nobody else in the store."

Edwards is committed to retraining employees and directing a bulk of the company's resources toward improving customer service. Edwards later said, "Class A hospitality and service experience is what we're really focused on." It is encouraging to see that the new CEO is tackling this core problem head on, and not just focusing on cost cutting efforts like previous CEOs. Labor is now Cosi's biggest cost, which will help improve restaurants that were understaffed, and hopefully include wage increases to boost the morale and environment for Cosi employees. This article helps illustrate Cosi's poor scoring on Glassdoor, and the low satisfaction among employees. With the single biggest cost attributed to labor, it seems that Cosi is finally reaching an inflection point and will be able to address issues of profitability in the near future.

While Edwards is focusing mostly on service, the company is also taking the right steps toward profitability. The company continues to close or sell company owned restaurants that are not profitable or have severely declined since opening. The company has targeted restaurants that are on a watch list for the cut. This shows that the company is serious about returning to profitability and cutting costs. This is more effective than cutting costs by under staffing restaurants like previous CEOs, which would then lead to poor customer service.

Cosi is also in the midst of opening new restaurants in areas where it sees strong potential for profitability and growth. Recent location openings include one at Fordham University in The Bronx, one at Temple University in Philadelphia, one at a town center in Columbus, Ohio, and a second location will be opening in Costa Rica. These recent summer additions are encouraging to investors and helps illustrate that there is potential for organic growth within this company.

This Insider Is Screaming Buy, Buy, Buy

Lloyd I. Miller III is an independent investor and insider of Cosi who owns 10% of the company. Miller has been buying shares of Cosi in the open market as recently as Friday, September 6th. Miller has bought nearly 500,000 shares of Cosi since this past June after Edwards took the helm as CEO, and the prices have ranged from $2.00 to $2.25. Miller clearly sees tremendous value in this restaurant company, and now is a good time to get in at similar prices.

Technically Speaking
Cosi is in a clear upward trend since sharply dropping to a low of just under $2.00 in June of 2013. The company's recent price move toward the end of Monday's close helped the price jump above its trend line, which may set up for the company to test the $2.50 level. The price is sitting above both its 20-day and 50-day moving average, and is 12% below its 200-day moving average. The price has been stuck in a box since June, and may continue to trade in a range below the $2.70s until their next earnings report in November. A breakout seems imminent. (click to enlarge)

Cosi has been a laggard in the restaurant industry for years, and has rarely experienced profitable quarters. With sharp declining revenues, terrible customer service ratings and constant management shakeups, there is plenty of risk associated with this stock. But where there's risk, there's reward, and potentially a lot of it. Cosi's current market cap of $40 million doesn't seem to reflect the full value of the company, which owns and operates 74 restaurants and franchises 50 restaurants. With strong insider buying, a new CEO who is committed to solving the company's core problems, and new restaurant openings in several densely populated locations, it seems like now is prime time to invest in this turnaround company before the ship sails back above to the $3.00 level.

The Stars Have Finally Aligned: Microsoft Buys A Chunk Of Nokia And Why You Should Hold On

By The Wall Street Fox → Tuesday, September 3, 2013

The dramatic saga between Nokia (NOK) and Microsoft (MSFT) is finally coming to a close, with Microsoft announcing late Monday night that they will be purchasing Nokia's most well known business, and license their patents and mapping services, for $7.2 Billion. Microsoft will pay $5.0 billion for Nokia's mobile handset unit, and $2.2 billion to license Nokia's patents and mapping services.

The news comes after a week fueled with speculation of who would be replacing Microsoft's departing CEO, Steve Ballmer. While Nokia has put up a respectable fight in the smart phone war, and has managed to claw back at its competitors and remain more relevant than BlackBerry (BBRY), it seems that a major motive behind Microsoft's acquisition of Nokia is due to the man in charge, Stephen Elop. Elop is now, without a doubt, the next CEO of Microsoft. Period. Expect those 5 to 1 odds to increase soon.

With Microsoft scrambling to find a new CEO, the synergies between Nokia's handset unit and Microsoft's Windows 8 ecosystem, and the previous experience and ripe age of Elop, it seems that Microsoft is willing to pay a pretty penny for only a piece of Nokia. Microsoft is paying roughly $1.35 per share for a handset division that has been struggling to post a profit for years, and nearly $1.95 per share for the whole deal. Keep in mind that before Tuesday's open, Nokia's market cap was around $14.45 billion, and their share price was $3.89. Nokia's mobile handset division is hardly reflected in these numbers, and it is interesting to see how the market will assess Microsoft's valuation of a business that many investors and analysts wrote off as dead.

Microsoft is now more than ever focused on securing their future, and clearly they see massive potential with Nokia's handset division, their hardware capabilities, and their management team. Many Nokia executives besides Elop will be joining Microsoft, including Jo Harlow (VP of smart devices), Juha Putkiranta (VP of Operations), Timo Toikkanen (VP of mobile phones), and Chris Weber (VP of Sales and Marketing). Not to mention 32,000 Nokia employees.

The future growth of Microsoft's Windows ecosystem will be spearheaded by Stephen Elop and supplemented by the robust lineup of future hardware devices coming out of this partnership.

Nokia's Future

Nokia's future looks brighter than ever. Not only are they receiving a massive cash infusion from Microsoft, but they are also divesting from their least profitable business. Financially, the company will be in strong health, and will have a massive cushion to focus its resources on its most profitable business segment, Nokia Solution Networks, and continue to develop and improve Here maps. Nokia will no longer be burning large amounts of cash each quarter, and can designate more resources towards generating revenue from their massive patent portfolio.

I see Nokia being lumped in with other telecom companies such as Ericsson (ERIC) and Alcatel Lucent (ALU) in the not so distant future, but the company will still generate diverse revenue streams and should have a more stable financial outlook.

While Nokia has lost some great management executives, they have also managed to shed a lot of liabilities and risks, including the intense competition that has been eating away at Nokia's market share. The upcoming release of the low cost iPhone 5C could possibly prove a tremendous blow to OEMs of the low-end smart phone market (if the price is right), which Nokia has dominated with the 520/620 Lumia models. But now, if the deal between Nokia and Microsoft goes through, Nokia investors can dump these thoughts because the company will no longer be competing with the likes of Apple (AAPL), Samsung (SSNLF.PK), and BlackBerry.

As Nokia begins to act more as a telecom company, the next question on the table will be: when will the suspended dividend return? With more than $3 billion in cash, more on the way from Microsoft, and a lean, profitable business, Nokia is on its way to becoming a miniature cash cow. The dispersion of that money is inevitable.

Microsoft's Future

Microsoft has continued to grow as a company under Ballmer's reign, but they failed to truly innovate for over a decade. One just has to look at Microsoft's 10-year stock chart. The stock price has stagnated between $25 and $35 for more than a decade, and a clear sense of urgency seemed to be missing from Microsoft's top executives until just last month when they announced a major business restructuring.

Stephen Elop is an experienced Microsoft executive who was head of Microsoft's Office division, which experienced robust growth under his direction. Stephen Elop knows how to jumpstart a company, just as he has done with Nokia. Elop has proved with Nokia that he is fully capable of turning around a dying company, especially in a cutthroat environment. Microsoft is striving to fulfill its vision of becoming a devices and services company, and they will leverage all of Nokia's transferred executives to make this goal a reality.

Elop, famous for his burning memo at Nokia, is known for his unique management style and burning down barriers in the work environment, which will allow ideas and concepts to easily flow throughout the company. Elop managed to light a fire under Nokia's bottom, and there's no reason why he wouldn't do that with Microsoft. From creating massive hype around the Lumia 1020, to leading the buyout of Siemens' stake in NSN, Elop is a versatile manager who can create an environment of innovation and help Microsoft's stock get back on its feet. With the hardware innovation that is embedded in Nokia, Microsoft will have no problem becoming a device company that promotes and sells sleek, capable smart phones.

Windows Phone Growth

The massive growth potential lies in Windows Phone, and Microsoft understands that. So does Kantar. The latest figures released over Labor Day weekend show that Windows Phone has become a relevant contender in the smartphone market, thanks to Nokia's Lumia range, especially the 520. Windows Phone hit a record market share of 8.2% across the UK, Germany, France, Italy, and Spain. The market share stood at 11.6% in Mexico.

The strong growth can be attributed to Nokia's strategy of creating a "stepping stone" for feature phone users to upgrade to low-end smart phone devices. 42% of Windows Phone sales over the past year came from feature phone users, which means the potential long-term growth is massive. These numbers are much higher than Android and Apple's iPhone. This trend will only continue, as Windows Phone continues to grow in emerging markets at a much faster rate than its competitors.

The Timing

Timing is of the essence, and it is essential to look at the factors that drove Microsoft to buy Nokia's phone division at this point in time. Clearly Microsoft already saw Nokia as a valuable company, with stories leaking that Microsoft was in talks with Nokia to purchase their phone division earlier in the summer. That fell through, and most likely due to a low-ball offer. Microsoft's time crunch of finding a CEO, and the idea of having to spend a couple more billion dollars for a company whose stock price is trending higher, meant that it was critical for Microsoft to act as soon as possible. The synergies between Microsoft's Windows 8 ecosystem and Nokia's handset business are too large to ignore, and will vastly help Microsoft leverage all the resources necessary to make Windows 8 a long-term success.

Fasten Your Seatbelts

The dynamic effect this potential acquisition will have on both companies will be profound, especially for Nokia and its shareholders. The question is how will the market digest this information, and is $5 billion a fair price for Nokia's most recognized business? It's hard to believe that Microsoft is obtaining Nokia's phone division for less money than Nokia paid for Navteq back in 2007. This may possibly be one of Microsoft's greatest investments, but I don't expect it to go over smoothly.
Shareholder approval is necessary for the deal to go through, and although currently Nokia's phone division is still digging itself out of a massive hole, the potential value of it could pale in comparison to Microsoft's offer a few years from now. As a long Nokia shareholder, I believe it's wise to hold on to your shares for the time being. While Nokia's phone division is struggling, they do have leverage. The company's next earnings report will illustrate an accurate depiction of how valuable and how much potential Nokia's phone unit actually has. If numbers are impressive, expect pressure from shareholders and an increase in the buyout offer. Nokia isn't going anywhere, hold on, and expect a sharp appreciation in Nokia's share price between now and when the deal is expected to close in Q1 of 2014.

Sorry BlackBerry

One company that may be feeling distraught after this newsbreak is BlackBerry. The company, which has been trying to sell itself for more than a year, has just lost a potential suitor, and one that many people thought was a likely deal. Many investors and commentators penned the idea that BlackBerry would most likely be bought out by Microsoft for their enterprise value and patents. But with Microsoft and Nokia eating away at BlackBerry's core customer base, and an aging patent portfolio, it looks like BlackBerry continues to be a sitting duck with one less suitor for a potential take over. The fight for business clients is officially on, and with Microsoft in full control of the hardware, they will be able to streamline their enterprise offerings and be more of a threat to BlackBerry than they already are today.


As a long-term shareholder of Nokia, and a believer in the company, it is difficult for me to wrap my head around the idea of a partial acquisition by Microsoft. After only a few hours of digestion, it is still difficult to truly determine if this offer is fair. From a short-term perspective, this deal looks like the true catalyst that can help propel Nokia's share price back to levels when Elop first grabbed the reins of the company in 2010. However, from a long-term perspective, this deal seems questionable at best, and may limit the true potential of Nokia and its share price down the line. $5 billion seems like chump change for a business division that once ruled the phone market. And the thought of what the division could be worth in the future if all of Nokia's turnaround efforts come into fruition may be hard for investors to stomach if the deal eventually goes through.