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The Longs Of Whitney Tilson’s Investor Letter: Netflix, Inc. (NFLX) and More

Canadian Pacific has under-performed many of its peers, but it now has initiatives to boost its operating ratio in the range to around 70% by 2016. Tilson also believes that it’s a good bet that Canadian Pacific will hit $150 within 2-3 years and approach $200 within five years. I too believe Canadian Pacific is executing a solid turnaround and continues to be one of the top railway companies ().

Tilson appears to be winding down his micro- and less liquid positions, including dEliA’s, Grupo and Iridium Communications Inc. (NASDAQ:IRDM), which accounted for about 30% of invested capital as of July 1, 2012, but at the end of January made up less than 10%

dELiA*s, Inc. (NASDAQ:DLIA), Tilson’s eighth largest pick, recently announced it is seeking another CEO after current CEO Walter Killough departs in April. What’s more is that the apparel company has been seeing steady declines in earnings over the last five years:

2008 2009 2010 2011 2012
Earnings Per Share $(0.08) $(0.41) $(0.34) $(0.70) $(0.73)

Tilson snatched up 10% of the company many years ago in the $2 range, but the stock only trades around $1 per share now. Tilson’s thoughts sum up the company nicely…

Unfortunately, the company has been free cash flow negative every year and has thus steadily burned through its cash such that it now has only roughly 60 cents/share of cash and the stock is at $1.02. It’s been a classic value trap so far.

One big thing to look out for is a buyout of the company, which has a $32 million market cap. The niche apparel company was reported as putting itself up for sale in early 2011. The teenage apparel market appears to be crowded, and only getting more and more crowded. dELiA’s was bought by Alloy for $50 million before being spun off two years later.

I remain cautious on this pick of Tilson’s, the company has been under-performing for a number of years. Worth noting, is that Tilson has big-name fellow shareholders in dELiA’s, including Royce & Associates and billionaire Jim Simons (check out Simon’s top picks).

GRUPO PRISA SA (PINK:GPOPF) is Tilson’s ninth largest long position, and trades at only $0.32 per share, and a $178 million market cap. The media conglomerate is based in Spain and has over 75% of its business in Spain and Portugal, which has been plagued by depressions and in turn has led to pressure on the company’s earnings. Tilson believes that Grupo is…

…a good business with valuable assets plagued by two things: the terrible depression in the Iberian peninsula and a bad balance sheet. Thus, it’s not surprising that the stock has fallen sharply.

Tilson goes on to point out that the world’s richest person, billionaire Carlos Slim, owns a 3.2% stake.

Iridium Communications Inc. (NASDAQ:IRDM) is Tilson’s tenth largest holding and provides mobile voice and data communications services via satellite and was Tilson’s tenth largest holding at the end of January. Over the past five years, Iridium managed to grow earnings over 47% annually for the last five years, but things remain bleak for the next five, with analysts’ expecting the company to only grow EPS at 13% annually. On the other hand, Tilson continues to be a big believer of the company, saying this…

I believe this is an excellent company and the stock is significantly undervalued. Comparable businesses are trading at 9-10x EV/EBITDA, while Iridium, which is growing significantly faster than and taking share from its competitors, trades at around 6x EBITDA.

Don’t be fooled. Tilson has had a tough 2012, seeing his fund lose 1.7%, compared to the 16% the S&P 500 gained. However, since inception, Tilson has returned 110.6%, which has managed to beat all other indices including the Dow Jones. Thus, it’s worth taking a look at what he might be betting on for 2013, but I would be cautious about his three micro-cap picks, dELiA’s, Grupo and Iridium.

The article The Longs Of Whitney Tilson’s Investor Letter originally appeared on and is written by Marshall Hargrave.

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