John Lewis, “Value: 180 Degrees From North to South”

By Travis Johnson, Stock Gumshoe, April 4, 2014

These are my notes and instant reactions from a presentation at the Value Investing Congress, the notes below might contain errors, paraphrases, incorrect quotes, or misinterpretations.

Osmium Partners is a pretty young hedge fund, they invest in small cap companies and work actively with company management and aim for 2-4 year holding periods. John Lewis is presenting a few of their favorite ideas today.

First idea: Tucows (TCX), which has been mentioned before and has, they say, an impressive CEO and has repurchased almost half the company through 7 dutch tenders (this one has also been touted by Louis Navellier and others in the past, I think).

They own a domain wholesale business, and a wireless service business called Ting that resells cheap wireless service.

Domain business has 11% EBITDA margins and manages 14 million domains. They own 35-40,000 domains themselves under a business called “yummy names” and they go through two million expiring names every year and they sell about 5% of the names a year at huge markups. They also make some money by parking the domains they don’t sell.

Catalysts: GoDaddy was taken private at 2X sales and may come public at 3-4X sales. Demand media’s spinoff of their similar company should be valued at a couple times sales.

Osmium case is $12 a share including value of domains, or $10 on a base case, possibly up to $17 if you value them like their peers.

Ting sells wireless service, people bring their own device and Ting is far cheaper than the biggies like Sprint, Verizon, ATT. Ting uses Sprint’s network. Their subscribers are growing dramatically and they got to cash-flow breakeven in that business last quarter.

He calculates that lifetime value of a customer (revenue) is $900, and acquisition cost per customer is $85. They think Ting is worth $10.50 a share. That means $22 for Tucows, so 75% upside potential … and they’ll keep buying back shares.

Next idea: Rosetta Stone (RST), which was presented last year and which I featured for you then and also bought personally.

He thinks there’s been tremendous progress in the last year.

Perception: they’re losing market share to free apps. In reality, RST dominates the language learning industry and has 85% brand recognition.

Perception: Dying CD business. The CD business IS in decline, but they closed the kiosks and the enterprise and education markets are ...

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