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Portfolio Update

Some recent updates:

The market turmoil in the last month has created some great opportunities. I was building up small positions (1-3% each) in few companies that I had known well. We bought and sold 3 positions, UT Starcom, CEDC and Radiant Logistics, for a quick 15-20% gains. All positions would be a great long term picks but I found other plays that I liked over a long term. UT Starcom announced a $20M shareback buyback (market cap is only in the 200Ms) and management said they would buy $500K worth of shares publicly. CEDC was selling at prices below the 2009 lows. There are some risks associated with upcoming debt and operations in Russia but at prices of $5.50 it was too cheap. We missed selling right when another investor (Mark Kaufmann) announced a 10% stake, the stock jumped 50% in a day. I booked gains because I wanted to put cash in another investment. Radiant Logistics is going through high growth with very little capital requirement. Radiant could be a huge success if management is able to execute on its plan.

I also sold my Berkshire position. Nothing to not like when the Brk-b shares are trading in the $60s range. Although if you can find other opportunities that are much cheaper then you have to consider the best opportunity. I also sold out of MAM Software, creating cash for other opportunities.

I bought a large stake in Taro Pharma, making it my second biggest holding. Taro Pharma has a similar story to Caraco Pharma. Can you name a company that has increased revenue and kept gross margins steady from 2005 – 2010? In another way, find me a company that actually grew revenue during the credit crisis. There are some companies that did this but very very few. Also, there are not many companies that were able to grow top-line in mid-teens range during this crisis.  Taro Pharma is one of the companies that grew revenue during the crisis. And this was while the company was run by poor management and had bad operating margins. The company is tested in a recession market and a good place to invest in a market like today’s. Taro also sells at a huge discount when compared to peers or valuation that its parent is selling at. Why? In 2007, Sun Pharma made an offer to buy Taro Pharma. Taro had $200M of debt and only $16M of cash at that time. In typical Sun Pharma deals, the acquisition was dragged out for 3 yrs in court. In 2010, Sun Pharma finally got its acquisition completed. Sun Pharma now owns 66.3% equity of Taro and over 75% of the voting rights. The turnaround at Taro has started in the last few quarters and the financials are starting to show it. At 6/30/11, Taro had around $150M in cash and $50M in debt. For Q2 ’11, Taro reported $38M of EBIDTA and signs digit growth rate. Taro currently has a market cap of $900M, so an EV of $800M. The company is making around $34M of EBIT per quarter. If we annualize the EBIT, you are looking at $135M of EBIT. This gives us a EV/EBIT of 6x (CapEx is very little for this company, around 10-12M annual). Sun Pharma is trading around 22x EV/EBIT, Teva at 18x, Watson at 20x, Perrigo at 19x. Also, Taro is just starting to reinvest in R&D, so I expect the company to start showing very strong growth numbers in 2013. Analyst reports are already expecting 25-28% CAGR for the next 4 yrs for Taro. So we have a company selling at 1/3 the valuation of peers and if you look at the growth prospects the upside is much higher. So what is the catch? The company is trading on the pink sheets. The previous management had not filed audited numbers, so Taro has been working with its auditors to get its previous years audited. Taro recently filed audited numbers for year ended 2010 (and yesterday they filed the audited number for 2007, 2008, 2009). I expect the company to file the reports for the previous years shortly. Once the audited reports are filed, the company should relist on a major market and get more attention. The other concern is the shares are very illiquid currently. It trades around 1-3K daily. I’ve said it before, I think Dilip Sanghavi is one of the best managers in the generic pharma space. He doesn’t get much credit for it but his track record speaks volume. I think Taro is going to be another one of this masterpiece, I’m in for the ride.

I have also been buying Bank of America Class A warrants. The concern about BAC stock is very interesting. It almost seems like people are afraid BAC could be forced to close shop or be bought at a cheap prices. The litigation concerns are real but the estimates people are putting out as to total costs to BAC are absurd. Todd Sullivan, at ValuePlays.net, has done couple of good detailed write-ups on the litigation. It is a great read to better understand what is actually happening in these litigations, the media is not covering the entire story. Also, Buffett’s investment in BAC is strong support for current management and BAC’s future prospects.

I have also been looking at two other companies. One is a tech company that is focused on the P&C insurance market. The other is an India-based company that is run similar to Berkshire Hathaway. The company’s chairman has modeled the company based on how Buffett runs Berkshire. The chairman has a very good track record, over 9 yrs, and has done a great job in compounding the book value of the company at 13% annually. The book value of the company has increased from $3/share to $8.9/share in 9 yrs. Even though management has tripled the share price in 9 yrs, we can still buy the company at only a 50% premium to what management paid for its 60%+ stake in the company 9 yrs ago. India has had high inflation, from 2002 – 2006 it was averaging around 4.5% and 2006 – 2011 it is around 7-8%. So if we assume even a 6% average for the last 9 yrs, then on an inflation adjusted basis the current cost is lower than what management paid for its stake. This is a very small company, a market of less than $30M. The shares are extremely illiquid, trading only around 100-300 shares daily. The operating companies are tied to the energy (coal) and construction industry in India, so the performance hasn’t been excellent. Although over the long run India is going to need lots more coal production (just look at the production numbers that Coal India is putting out) and infrastructure. The investment decisions by the chairman have been excellent. Buying shares of India-listed companies is a bit cumbersome as much paperwork needs to be filed before I can even get my account opened for trading. I’m in the process of opening the account. More on these companies soon.

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