The ironic Ichan cigar butt and other piles of cash

Cadus Corporation is a literally a pile of dollar bills for 80 cents.  Greenbackd originally wrote it up 2 years ago (link) and I've kept an eye on it since.  Nothing has really changed in the past 2 years except that a few million tied up in a stock fund has been converted to cash.  Carl Icahn owns 40% of the company and more or less calls the shots.

Icahn's presence is a mixed blessing.  On the face of it, Icahn is a savvy investor and will make good use of the shell.  That has been the premise for the past 10 years though.  Last year, Jason Zweig at the WSJ wrote an article on the company and the investor fatigue over a lack of action, which Greenbackd also chronicled and doesn't require a subscription to read (link).  There's a write up on Cadus from 2003 at the Value Investor's Club as well (link).  I can't really think of a longer time horizon for an investment.

My point is that Cadus is far from a well kept secret.  Greenbackd has written about them, Carl Icahn is involved, the WSJ knew about them, and the same thesis was being touted in 2003 for the company.  Nobody seems to give a shit.  Based on his inaction, even Carl Icahn seems to not care, hence the irony for a man who demands action from others.  To rehash the premise:

There 13,144,040 shares outstanding and $23,565,567 in cash on the balance sheet as of June 30, 2011.  This is $1.79/share in net cash compared to a share price of $1.37, so it is trading for close to 77 cents on the dollar.  The real upside kicker in this situation is the tax losses detailed below:

	Net Operating				Research and Development
Year		Loss Carryforward				Credit Carryforward
2011		$	1,044,000			$	310,000
2012			6,950,000				725,000
2018			8,949,000				935,000
2019			5,810,000				565,000
2020			275,000				-
2021-2030			2,517,000				-

The tax loss carry forwards total $25m.  This creates a side pocket of value that may or may not be exploited.  The looming expiration of $7m in of credits in 2012 might spur some action on behalf of the owners to make use of the cash.  At this point in time, the tax losses being used seems like a given since the company would have otherwise liquidated.  A few weeks ago, a director resigned, although no details were given.  Does this mean something is afoot?  I don't know.  


There's two things I want to highlight.  First, tax credits obviously expire in the short term.  Does this mean that something will be done?  I have no insight into that.  On one hand it would seem logical, on the other hand what's the rush?  There would still be $18m of tax credits, so it does not fundamentally change the appeal of the shell.  I'm unimaginative, but it would be hard for a $23m investment to generate taxable income of $8m in the next 16 months without impairing the principal value.  The business is not properly registered under the 1940 Investment Company Act to earn most of its profits from investing in public equities, although I might be incorrect.  This is really just tea leaf reading and I is quite illiterate.


The second thing that gives me pause is that I can't be the only person to recognize this.  Hypothetically, if the next 16 months pass with no action, even more investors might be fatigued.  They might sell and there would be even less willing buyers.  It's not that I'm worried about potentially holding something with a 25% loss when the cash balance remains unchanged, it's that such an occurrence will have zero impact on management's desire to act and there is an opportunity cost to this.  So an investor today could end up holding an illiquid security where they can only get back 75% of their cost for years when tons of other opportunities pass by.


That being said, it seems foolish to extrapolate non-action into the future.  It certainly is frustrating to see that nothing has been done in ages.  It is the same dynamic many large cap value stocks that haven't moved in 10 years but their multiples have compressed.  Yes the stock hasn't done anything in a decade, but underlying business is in fine shape and it trades at a pretty big discount for an easy to establish liquidation value.  


If we were to do a comparative valuation, there are 2 other micro cap cash piles controlling shareholders that I know of: Peerless and CoSine.  Peerless trades a shade above its net cash position, but has positive cash flow and a controlling shareholder.  Peerless seems further along towards making use of the cash as detailed on Gator Capital (link).  


CoSine on the other hand has $2.06/share in net cash against a market price of $2.04/share.  In a similar vein, Steel Partners has a controlling stake in Cosine.  Steel Partners is actually run by a former Icahn protege.  Despite having a near identical cash pile situation and most importantly, cash burn, it trades for cash instead of 77% of cash like Cadus.  Cosine has close to $600m in tax loss carry forwards in applied to federal, state, and capital gains taxes, which is a massive tax shield for practically a business of any size.  


Both Cosine and Cadus are in similar phases of being a cash pile with NOLs.  There isn't much action going on or signs of pending action.  Cosine's situation still has several years to go before it experiences the same investor fatigue as Cadus.  While Cosine has a large hidden asset with its NOLs, the market is not applying much of a cash burn discount to the valuation.  


These certainly aren't sexy stocks, but it's pretty hard to lose a lot of money when all you do is hold on to it.  Even for an investor with $500 to invest, these are illiquid stocks.  As I said above, you could end up carrying a position at a 25% loss for years before you realize a gain.  I don't have a position in any of the stocks, and so naturally fantastic things for all stakeholders will happen within the next 6 months.  I'm fine with that.  


I'd be interested in hearing anyone's thoughts about these types of investments from a practical or philosophical point.  These aren't typical cigar butts since they aren't operating businesses, although this minimizes risk in some aspect.  They have a certain Taleb-like quality in that they slowly bleed but have this abstract potential for high upside given enough time.