Borders Group

Purchased (12/14/2009): 400 at $1.29

Target: $4.00

See Ackman letter (Q1 2009 - pub June 2009)

From Whitney Tilson Letter (12/2009):

Speaking of sub-$100 million market cap retailers, we have recently been buying Borders Group, a stock we’ve had a very up and down experience with over the years. Initially it was a disaster, falling well below $1 earlier this year, at which point we bought quite a bit more and were quickly rewarded, as it rose dramatically in less than five months to $4.34. We sold most of our position, but are now getting another bite at this apple as the stock has tumbled anew (it closed yesterday at $1.29).

This is a tough business and the odds appear stacked against Borders in light of threats from Barnes & Noble, Amazon.com, and discounters like Wal-Mart. That said, we like the current management and believe that Borders can succeed.

At today’s price, Borders has a market cap of a mere $77 million, a tiny fraction of annual revenues, which exceed $3 billion. We view this stock as a mispriced option: the company could go bankrupt and wipe out our investment, but if it merely survives – which is likely, we believe – the stock should rise many-fold.

dELiA*s

Purchased: 400 at 1.71

Target exit: 4.50

From Whitney Tilson letter (12/09/2009):

dELiA*s recently reported a mildly disappointing third quarter and gave conservative guidance for the critical fourth quarter, which triggered a sell-off of the stock. Since the company doesn’t communicate with Wall Street as frequently as most retailers and doesn’t report monthly comps, the stock is often volatile around its earnings releases.

Netting out the projected year-end cash balance of $1.50 per share, the core retail business is today essentially being valued at zero. We believe that dELiA*s business is worth at least $3 per share (plus an additional $1.50/share in cash), and would expect this value to be recognized over the next year as the company turns the corner to profitability. In the meantime, we are comfortable that the cash balance makes a further stock price decline unlikely. In addition, based on recent transactions, we have little doubt that the company could be easily sold for at least double its current share price of $1.68, but we actually hope the company remains independent because we believe there’s far more upside if management executes on its growth plan.

While dELiA*s has not yet been a profitable investment, it represents today exactly what we like in a stock: a low probability of permanent loss of capital and a good chance of making multiples of our money.