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Purpose of Report This report features seventeen, highly-rated pieces of research chosen from a pool of nearly 1,500 reports uploaded to the SumZero community during the 2014 calendar year. The research available within this document does not represent the best-performing ideas published in SumZero in 2014, but rather includes a diverse representation of high-quality thinking and analysis available therein. These are reduced versions of full-length research reports that carry all of the hallmarks of the type of inspired, actionable analysis that we strive to facilitate as an organization.

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Table of Contents

1. Ajoy Reddi (Fred Alger Management) Page 6 Short on Let’s Gowex S.A. (GOW:SM), June 24 Gowex, a Spanish technology leader in WiFi connectivity and Smart Cities, is really an accounting fraud and a "pump and dump" scheme.

2. Eiad Asbahi (Prescience Investment Group) Page 10 Long on Hawaiian Holdings Inc (HA:US), February 18 Growth spend has resulted in GAAP financials that understate/obscure HA's economics. It's now at an inflection, with margins to rise & FCF to turn positive. 2016E FCF alone = 35% of mrkt cap.

3. Torin Eastburn (Monte Sol Capital) Page 13 Long on Glentel Inc (GLN:CN), August 5 Good company facing temporary problems. $11 stock worth $17 today and $27 in 2016 based on peer M&A multiple. Insiders own 55%. 20%+ ROE. History of double-digit growth. 13% FCF yld, 5% div.

4. Ian Clark (Dichotomy Capital) Page 16 Short on Transocean Ltd (RIG:US), November 3 As utilization across the ultradeepwater space drops, RIG must lock-in day rates well below current rates or idle rigs. RIG’s over-leveraged balance sheet will not help weather the storm.

5. Amarish Mehta (Tenor Capital Management) Page 19 Long on RF Micro Devices Inc (RFMD:US), April 2 RFMD is a special situations investment that entails a transfomative acquisition with TQNT that could drive 50-90% upside in the stock. to $12-15. The analyst revised his price target on 9/2/14 to $17-$20.

6. Tice Brown (Snyder Brown Capital Management) Page 22 Long on Handy & Harman Ltd (HNH:US), May 1 Handy & Harman is a niche manufacturing conglomerate trading at a 2014E free cash flow yield of 20% majority owned and operated by a proven deep value investor.

7. Bradd Kern (Armored Wolf) Page 25 Long on HC2 Holdings Inc (HCHC:US), March 18 Phil Falcone’s newly purchased entity HC2 (HCHC) has been on a torrid deal making pace, suggesting he is intensely focused on value creation within it. The stock is deeply undervalued.

8. Nick Mazing (Ampera Capital) Page 28 Short on Avon Products Inc (AVP:US), September 23 Avon's never-ending turnaround indicates that the business is structurally challenged: should reprice down to other "melting cubes". FX and overpromises for the next 12 months will hurt.

9. Logan Suriano (Sio Capital Management) Page 31 Long on BioDelivery Sciences International Inc (BDSI:US), May 16

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BDSI is a specialty pharmaceutical company nearing regulatory value inflection points for compelling products in defined markets.

10. Parsa Kiai (Steamboat Capital Partners) Page 34 Long on Westjet Airlines Ltd (WJA:CN), June 17 Exceptionally well-run, well-capitalized and cost-advantaged airline trading at material discount to intrinsic value.

11. Steven Kiel (Arquitos Capital Management) Page 37 Long on ALJ Regional Holdings Inc (ALJJ:US), February 22 ALJ is a unique holding company that recently acquired a subsidiary where they can deploy their considerable NOLs. They recently released results from their first relatively clean quarter.

12. Steven Gorelik (Firebird Management) Page 40 Long on Blackhawk Network Holdings Inc (HAWKB:US), June 13 Underpriced Safeway Spin-Off operating in disciplined duopoly, growing at 20% per year with negative working capital.

13. Tao Long (Connective Capital) Page 43 Long on Peregrine Semiconductor Inc (PSMI:US), June 16 PSMI is ridiculously undervalued. Stock has 50% upside based on non-core business alone. Upcoming catalysts offer additional high-impact upside.

14. Sean Brown (Ancient Art, LP) Page 46 Short on Nimble Storage Inc (NMBL:US), January 27 NMBL is a small-enterprise storage-box hardware company with unsustainable margins that is losing money today, trades at 30x revs; very challenged to grow into its near-$4b valuation.

15. Krum Dukin (Ampera Capital) Page 50 Long on Take-Two Interactive Software Inc (TTWO:US), January 6 TTWO trades at a discount to peers despite hugely successful GTA V release, improved intellectual property and a massive cash balance.

16. Maneesh Nath (Arcstone Capital) Page 54 Long on on RS Software India Ltd (RSST:IN), January 23 We expect revenues to grow at over 20% CAGR over the next 5 years. The company generates $67M of revenues & can be bought for $30M. It holds cash of $7.9 M & has 0 debt.

17. Jackie Hua (Zhisheng Capital) Page 58 Long on on Amicus Therapeutics Inc (FOLD:US) June 24 A rare disease developer expected to receive positive clinical outcome and bring new product to a billion dollar market soon, deeply undervalued from misunderstanding of product potential.

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Short on Let's Gowex S.A (GOW:SM) Elevator Pitch: Gowex, a Spanish technology leader in WiFi connectivity and Smart Cities, is really an accounting fraud and a "pump and dump" scheme.

Disclaimer: The author of this idea did not disclose an active position in this security at the time of posting, but may trade in and out of this position without informing the SumZero community.

Author: Ajoy Reddi Age: 40 Title: Vice President Current Firm: Fred Alger Management Location: New York, NY Prior Experience: Allianz Global Investors, Credit Suisse Securities, Franklin Templeton Investments, William Blair & Co. Undergrad: Johns Hopkins University Graduate: University of Chicago (Booth) Certifications: N/A

I first got to know Let's Gowex on July 19, 2013, Recommendation Details when the CEO, Jenaro Garcia, came to New York on a sell-side arranged roadshow. Let's Gowex Asset Class: Common Equity purports to be a global provider of free WiFi Sector: Communications hotspots on behalf of municipalities and transit Country: Spain authorities worldwide. Their business model is to Currency: Euro provide city residents free WiFi through an ad- Situation: Other supported model; essentially a user will access Timeframe: 1-2 Years their WiFi by viewing a free advertisement that Catalyst(s): N/A they sell to ad agencies who represent various Date of Recommendation: 6/23/14 brand customers. The company claims that there Price at Recommendation: 20.00 is a positive network effect created by their Target Price: 0.00 hotspots in that the more users who access the Current Status: CLOSED web through their hotspots the more ability they Date of Close: 7/31/14 have to monetize the user data that is generated. Closed Price: 0.00 The company has ambitious plans to sell Realized Return: 100.0% advanced services such as We2, which they claim Expected Return: N/A to be a "social-WiFi service" that will "to boost the Benchmark: iShares MSCI Europe Small-Cap interaction between people, businesses and the ETF city itself." The company currently has set up WiFi Return vs. Benchmark: 103.5% hotspots in the US in New York, San Francisco SumZero Rating: 100% and now Chicago. Prior to entering the US, the company has indeed set up hotspots in many Spanish cities such as Madrid and Barcelona as well as other major European metros.

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At the time, Gowex's stock price was in the single digit euros and it sported a market capitalization of less than 500 MM euros. It was barely covered by the sell-side (only two firms had published on it) and the company's valuation was attractive. Admittedly, I did not do much work on it as the company's story seemed to make sense and I thought there was not much downside to initiating a small position in our fund.

I also liked the anecdote the CEO told me at the end of the meeting: a year ago he decided to sell his home in central Madrid to buy more of the stock, which he felt was undervalued. After that, Gowex became one of the best performers in our portfolio as it proceeded to almost quadruple by the end of 2013. However, despite the stock becoming one of the highlights of my year, I started having doubts about the company because after subsequent meetings with the CEO I always saw some subtle inconsistencies in the data points he would share with me. I also spoke to a fellow investor whose firm was skeptical about the company's business model so I decided to do more in-depth analysis of the company. My skepticism was also bolstered by the fact that when I tried to access their free WiFi service near my office, it rarely ever worked and I also noticed that the company made users to download an app to access the service.

Earlier this year, the stock was at an all-time high and continued to be the best performer in our fund. In my last meeting with the company, the CEO again gave me inconsistent data points and I also saw that another Spanish broker, JB Capital Markets, started to publish research on the company. The data points in the analyst's report pertaining to the company’s growth and profitability in the company’s various business segments seemed to contradict what the CEO himself had told me.

As a former sell-side analyst myself, I know that a sell-side analyst will rarely ever publish his own estimates of a company’s profitability without some input or blessing from the company’s management. I became suspicious that the CEO was essentially making up numbers to make his company’s growth story look more compelling and that they had a very inconsistent disclosure policy. Essentially, they would tell me the investor one thing and tell others something else. Another company official (and significant shareholder), Javier Solsona, in a meeting in October 7, 2013 would tell me that they do not disclose to the level of granularity that would later be presented in JB’s initiation report that would subsequently be published in February 2014. However the CEO Mr. Garcia had no problem giving me various nuggets of information that put his company in a favorable light.

With all that being said, what was the “smoking gun” that brought me to the conclusion that this company is a FRAUD and caused me to tell my colleagues to completely sell out of the stock in early April 2014? I decided to read through the company’s annual report cover to cover. But there was one problem, the annual report was only published in Spanish and I did not “habla espanol”; however, one thing did standout in the annual report, the name of their auditor, “M&A Auditores”. I had never heard of this auditing firm, but by itself that does not indicate fraud. It could be a local Spanish auditor but I then decided to see whether this audit firm audited other public companies by conducting a search on Bloomberg’s corporate filings database. No other public companies in Spain were audited by M&A. In fact, I had met another small cap Spanish company, Carbures, which was smaller than Gowex in terms of its market capitalization and revenues and it was audited by global Big Four, KPMG. And then I looked up the company’s website at www.ma-auditores.es.

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What I saw was laughable; the website was amateurish at best with stock footage. It was only three pages and there was no phone number and e-mail contact info—only an office address. Why would a company that audits one of the best performing stocks in the world (a company now worth about $2 BN) not want to make itself available to new potential customers? I looked at various websites of local auditors in many other countries and they all had much more detail than M&A’s paltry website.

Prior to selling the stock, I decided to delve deeper into Gowex’s purported relationship with the city of New York where it had—with great fanfare—trumpeted its WiFi hotspot footprint in the Big Apple. There was even a picture of Mr. Garcia shaking hands with Michael Bloomberg (who looked slight perturbed in the picture—he has the expression that he has no idea who he is shaking hands with). (See attached link, http://www.lavidawifi.com/wp-content/uploads/2014/03/jenaro-garc%C3%ADa-michael- bloomberg1.jpg)

I contacted the New York Economic Development Corporation, which is a private corporation that works with the city of New York on various citywide development initiatives. Gowex had signed up with the EDC to provide free WiFi as part of the a pilot project to provide free connectivity across several corridors throughout the five boroughs of New York. What stands out in the EDC press release is that Gowex was selected along with four other organizations that are not technology companies: “the Downtown Brooklyn Partnership, Alliance for Downtown New York, Brooklyn Academy of Music, GOWEX, and the Flatiron 23rd Street Partnership.” Source: http://www.nycedc.com/blog- entry/expanded-public-wifi-nyc

Why would EDC select four other organizations that were basically non-profits to provide the same service as Gowex, which is supposedly a leader in “WiFi Smart Cities”? I spoke with Kat Lau, a project manager at EDC, and they told me that Gowex was selected because of their relationship with New York’s City Hall. However, I have done an extensive search of New York City’s official website and I could not come across any official press release that the City of New York had a formal relationship with Gowex. Clearly there is a WiFi signal that says “FreeGowexWifi” which you will find in various locales in Manhattan but Gowex has clearly stated to me that they were contracted by the City of New York to put these hotspots in. I have found no evidence that this is the case. And remember what I had said previously about accessing Gowex’s WiFi hotspots—the only way to access them is by downloading the company’s mobile app. If that is the case, why has there been no formal announcement by the City of New York that this free WiFi service is available? And why has not Gowex or the City of New York engaged in a basic marketing campaign on the typical mediums to inform the average resident of the City that this service now exists?

Recently, I decided to conduct a raw, unscientific straw poll of users of mobile devices who were sitting in Madison Square Park whether they were aware of Gowex’s free WiFi service and that they needed to download the Gowex app to access the service. Of the twenty people I surveyed, only ONE person was aware of the Gowex app. Everyone else indicated that they saw the Gowex signal but had no idea what it was or how to access it.

Gowex, a purported leader in free WiFi, claims to investors that it offers a game-changing service that will form the foundation for “Smart Cities” and will enable “the Internet of Things” (source: http://www.gowex.com/en/gowex-and-cisco-announce-global-strategic-relationship-to-boost-smart- wi-fi-connectivity-solutions-for-cities/). But its clear that no one really knows about the service and the

Learn more about SumZero research at sumzero.com or contact [email protected] 9 company is essentially trying to run an affinity scam on investors by claiming all these major relationships with cities and municipalities. Gowex has claimed relationships with Cisco and ZTE, which are major telecom equipment vendors. I have not verified these but even if these relationships are true— these relationships should not be considered real proof of the company’s bonafides. These companies rarely engage in forensic due diligence on who they partner with and its clear that Gowex WiFi signals exist; the real questions are whether there are true user benefits and whether the network effects they company claims are reality or ethereal puffery.

But here is the real coup de grace. I wanted to conduct due diligence on M&A—their low profile auditor in Madrid. But how was I to meet them since there was no phone number or e-mail address? I contacted a business school professor at IE Business School, a prestigious business school in Madrid, and asked for his assistance (the professor wanted his assistance to be off the record as he is an adjunct professor and he works as a local investment banker in Madrid); the professor was kind enough to assign four masters students to work with me on a forensic valuation of Gowex. Herein I gratefully acknowledge their assistance in conducting the due diligence on the auditor as well as analyzing the company’s Spanish-only financials. Their names are Maryam El-Hassani, Rita Mensuardo, Julia Gil and Elena Ilieva.

When the group went to check out the auditor’s offices, I will quote verbatim from the e-mail they sent me describing what they found:

“Regarding the project, last week, on Thursday afternoon, we went to the MA Auditores. On the website there is no information of phone number or mail contact, just address. Thus, we couldn’t schedule a meeting. We went directly to the indicated address. Outside of the building, we had no indication (name on the door bell for instance) that the company was actually there, which seemed a bit odd. To find out if the company was there we rang the doorbell of several floors until someone opened the door. Once inside, we discovered the number of the floor by checking the names in the mailbox. Hence, we rang at the company’s door and a gentleman attended us and invited us in. The office is small, with two or three rooms, and did not have any other employee working. The gentleman who attended us said it would prepare a summary of activities and maybe customer for the week after the break. Before we leave, we asked for his mail to get more information, but he hesitated and said was not necessary.” Source (e-mail correspondence to me dated April 16, 2014)

Does this sound like a legitimate auditor to you? I am reminded of Bernie Madoff and how had anyone actually looked into his auditor (which was a small outfit located in a strip mall in Long Island) they would have immediately blown the Ponzi scheme right out of the water. I believe this auditor is major red flag and signs off on whatever financial statements the senior management of Gowex presents to them and does not conduct a traditional audit, as do most other audit firms in the world.

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Long on Hawaiian Holdings Inc (HA:US) Elevator Pitch: Growth spend has resulted in GAAP financials that understate/obscure HA's economics. It's now at an inflection, with margins to rise & FCF to turn positive. 2016E FCF alone = 35% of mrkt cap

Disclaimer: The author and/or the author's fund had a position in this security at the time of posting and may trade in and out of this position without informing the SumZero community.

Author: Eiad Asbahi Age: 35 Title: Founder/Portfolio Manager Current Firm: Prescience Investment Group Location: Baton Rouge, LA Prior Experience: Gabriel Partners, Sand Spring Capital, Kinderhook Partners Undergrad: Louisiana State University Graduate: Louisiana State University Certifications: N/A

We believe shares of Hawaiian Holdings Inc. ("HA" Recommendation Details or "Hawaiian") are grossly undervalued, reflecting

a deep misunderstanding of the company's Asset Class: Common Equity economics. In 2010, HA began investing heavily Sector: Consumer in growth, implementing a capex program to Country: United States build additional capacity primarily in support of Currency: USD new international routes. Being that initiating Situation: Event / Special Situation services on routes involves start-up costs, and Timeframe: 3-6 Months that from the time service is initiated they take 3 Catalyst(s): Activist Target years to reach optimal profitability (i.e., to Date of Recommendation: 2/18/14 mature), HA's GAAP margins were negatively Price at Recommendation: 10.37 impacted; put another way, from 2010 - 2013, Target Price: 20.10 when HA was expanding most aggressively, its Current Status: OPEN GAAP financials both understated and obscured Recent Price: 22.88 its economic potential. With the capex program Realized Return: 129.8% approaching completion, HA is at an inflection Expected Return: (12.6%) point: As capex decelerates and new routes Benchmark: iShares Core S&P Small-Cap mature, we expect Hawaiian's GAAP financials to Return vs. Benchmark: 125.5% begin reflecting its economic potential. SumZero Rating: 34%

We expect margins to rise in 2014 and free cash flow to turn positive in 2015, opening the door for capital returns to shareholders. In 2016 alone, we project the company will generate free cash flow equating to 35% of its current fully diluted market capitalization. Meanwhile, Wall Street analysts and investors appear to be missing the forest for the trees in assuming continued deterioration or the status

Learn more about SumZero research at sumzero.com or contact [email protected] 11 quo into the future - that HA's current financials represent its future - and use this as justification for valuing it at a depressed multiple.

We believe Hawaiian stock has an intrinsic value today of $20 per share, >97% above current trading levels. The significant disconnect presented by HA's valuation is sweetened by several near and intermediate-term catalysts we believe will drive share price toward intrinsic value:

Margins Set to Rise as Growth Slows in 2014, GAAP Financials to Begin Reflecting HA's Potential With exception to initiating service to Beijing, HA is pausing new route initiations in 2014. By Q4, only 8% - 10% of HA's routes will be 155% from the current market price.

Significant Free Cash Flow Generation on the Horizon HA will begin generating FCF when its capex program ends in 2016, opening the door for capital returns to shareholders. In 2016 alone we estimate HA will generate FCF of ~$200m, equating to ~35% of its current market cap. By simply taking its 2016E net debt/EBITDAR up to the peer average, it would in theory be able to implement share repurchases totaling $500m, equating to ~90% of HA’s current market cap! Even if the company desired to maintain a more conservative balance sheet such that net debt to EBITDA was contained to 1x, it could still initiate a repurchase or dividend program to return ~$200mm over the next 2 years and does not jeopardize its capex plan. While shareholder capital returns of such size may be overly ambitious, we believe that even a modest program of $50mm in 2014 is easily affordable and would be well-received by the market.

Fuel Prices as a Macro Tailwind In addition, we model a slight increase in fuel expense in 2014 to 318 cents/gallon, and flat-line our fuel expense estimate for 2015 and 2016 at 320 cents in accordance with Wall Street consensus estimates. Economists are forecasting US and global GDP growth of 2.8% and 3.6%. While historically GDP growth has driven both increasing demand for air travel and rising jet fuel prices, increased global oil supply from US shale production has weighed on prices and disrupted this relationship. We have already seen the effects of this in 2013, with increased travel demand resulting in many airlines reporting significant growth in net income and net margins. We note that HA does hedge its fuel price risk, but on a rolling basis, resulting in some uncertainty as to what realized fuel cost will be.

Management Appears Open to Returning Capital to Shareholders, for the First Time in Years Indications from the most recent earnings call suggest that in light of HA exiting a period of heavy investment, management is at least giving thought to the potential of shareholder capital returns–for the first time in years.

Prominent Activist/Stock Picker to Join HA’s Board this Month: When HA’s February 2014 board meeting takes place, Zac Hirzel, an investor activist with an outstanding track record as a stock picker, will assume his role on HA’s board. Being that he has become HA’s largest shareholder, with a 10.8% stake, he is likely to be influential; no other board member has a shareholding of any significance, with the exception of HA’s CEO, who has a 2.3% stake. Hirzel’s involvement reestablishes the linkage between boardroom decision-making and shareholder interests, a bond founded on shared incentives. David Einhorn’s fund of funds manager, Greenlight Masters, is an

Learn more about SumZero research at sumzero.com or contact [email protected] 12 investor in Hirzel’s funds, and according to their recent shareholder letter, “Hirzel envisions a number of ways to create shareholder value (at Hawaiian).”

Dramatically Undervalued, Heavily Shorted, and Just Plain Unloved: HA is the most underappreciated among equity in the airline sector: HA is cheaper than every single domestic carrier on every relevant trailing and forward metric, and is one of the cheapest airline equities in the world. HA is among the most highly shorted equities of all airlines. Its share price performance has lagged that of the majority of its peers. Lastly, even the sell-side cannot manage to like HA equity; 5 of 8 analysts rate HA equity at either Neutral (3) or Sell (2).

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Long on Glentel Inc (GLN:CN) Elevator Pitch: Good company facing temporary problems. $11 stock worth $17 today and $27 in 2016 based on peer M&A multiple. Insiders own 55%. 20%+ ROE. History of double-digit growth. 13% FCF yld, 5% div.

Disclaimer: The author of this idea and the author's fund had a position in this security at the time of posting and may trade in and out of this position without informing the SumZero community.

Author: Torin Eastburn Age: 32 Title: Founder/Portfolio Manager Current Firm: Monte Sol Capital Location: New Haven, CT Prior Experience: CJS Securities Undergrad: St. John’s College (NM) Graduate: N/A Certifications: CFA

Recommendation Details Glentel is a very well-run company, operating an above-average business, trading for 8x depressed cash earnings of approximately $1.30, and Asset Class: Common Equity yielding 5%. Sector: Communications Country: Canada Currency: CAD The company is currently suffering through three Situation: Deep Value simultaneous but unrelated business challenges. Timeframe: 2 Years+ At least two of these three challenges are likely to Catalyst(s): N/A subside within the next three years. As they do, I Date of Recommendation: 8/05/14 expect cash earnings to approach $1.90 per Price at Recommendation: 10.97 share, equating to a P/E of less than 6x based on Target Price: 27.00 GLN’s current ~$11.00 share price. Current Status: CLOSED Date of Close: 12/1/14 On EV/EBITDA basis, GLN shares trade at Closed Price: 25.58 approximately 6x today. But based on my 2016 Realized Return: 134.7% forecast, and giving the company credit for Expected Return: N/A interim retained earnings, GLN trades for Benchmark: iShares Core S&P Small-Cap approximately 3.5x EBITDA. Return vs. Benchmark: 130.1% To put this valuation in context, the most closely SumZero Rating: 92% comparable public company to Glentel is Carphone Warehouse, which trades in Britain under CPW. Carphone Warehouse was just acquired for 8x trailing EBITDA. That multiple, if applied to

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Glentel, would value the company at $17 per share today, and at $27 per share based on my 2016 projections.

The Factors Depressing Earnings First, a change in Canadian wireless contract laws caused all major Canadian carriers to raise prices on new wireless plans. The price increase was material (~$5/month) and Canadian consumers have been holding onto their older, lower-priced plans for longer than usual. This has extended handset lives and reduced the number of upgrades and activations—as well as Glentel’s same-store sales growth in Canada—by about 15%. This situation is temporary, but because the old contracts were three years in length, the full resumption of normal buying trends could take as long as two more years (the change went into effect in June of 2013).

Second, Glentel recently partnered with Target to run the cell phone kiosks in all Target Canada stores. This should have been beneficial for Glentel, but Target’s roll-out into Canada has not gone well and Target stores—as well as the Glentel-run cell phone kiosks within them—have performed poorly. Currently Glentel is losing money in Target stores. But this will change. The stores will eventually do better, or Glentel will leave. Either way, Glentel will stop losing money with Target. It may even make some.

Finally, Glentel recently acquired Allphones, Australia’s largest independent cell phone retailer. Not long after the completion of the acquisition, Optus, Allphones’ largest customer, announced that it would be phasing its phones out of all third-party retail locations and move to a company-run store model. As a result of this change Allphones is not profitable and the entire acquisition may be written off. There may be some leftover value with Allphones, particularly in a Philippines franchising venture, but for valuation purposes I do not assume any future profit contribution from Allphones.

Looking Forward From an investor’s perspective perhaps the most important part of the Glentel thesis is that Glentel’s earnings, which are substantial even in their currently depressed state, are likely to grow by approximately 50% over the next three years. My 2016 forecast, which incorporates a return to normal business conditions in Canada, modest growth in the U.S., and no improvement whatsoever in Australia, is for $1.90 of cash EPS and approximately $75M of EBITDA.

The founding family still owns 55% of the company and is strongly incentivized to see GLN shares trade for fair value. It is worth noting that GLN shares are highly illiquid, with average trading volume standing at about 10,000 shares per day. In recent weeks the share price has been pressured by selling from entities related to Glentel’s founding family. I believe the purpose of these sales has been to fund those entities’ endeavors, rather than to express a view of Glentel’s value or business prospects. In this sense, I believe the recent insider selling is forced and uneconomic.

Updates to Thesis: 12/1/14 Update: Closing this idea on $26.50 buyout by Bell.

11/11/14 Update:

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Last week Glentel reported an exceptionally strong (record) third quarter that went mostly unnoticed by the market. Recovering from the change in Canadian cell phone contract lengths was supposed to be a three-year process, but after just one year, demand appears to be reapproaching normalized levels. Q4 will be exceptional as well, as resulsts will benefit not only from the rebounding customer demand in Canada, but from the successful release of the iPhone 6.

Currently the company is trading for 7x FCF (which I define as EBITDA less capex, cash interest, cash taxes, and cash minority interest payments). Net debt is 1x EBITDA. I expect next year's EBITDA to grow ~15-25% year over year, and if Glentel simply pays down debt with the cash it generates, it could end 2015 trading at about 3.5-4x EBITDA, based on today's share price. In my opinion GLN is a strong buy.

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Short on Transocean Ltd (RIG:US) Elevator Pitch: As utilization across the ultradeepwater space drops, RIG must lock-in day rates well below current rates or idle rigs. RIG’s over-leveraged balance sheet will not help weather the storm.

Disclaimer: The author of this idea and the author's fund had a position in this security at the time of posting and may trade in and out of this position without informing the SumZero community.

Author: Ian Clark Age: 28 Title: Founder/ Portfolio Manager Current Firm: Dichotomy Capital Location: NY Metropolitan Prior Experience: Cornell University Undergrad: Kutztown University Graduate: University of Oregon Certifications: N/A

Recommendation Details Transocean is the owner of older rigs heading into a long downturn. As utilization across the ultradeepwater space drops, Transocean will be Asset Class: Common Equity forced to lock-in day rates well below current Sector: Energy rates or idle rigs. Transocean’s over-leveraged Country: Switzerland balance sheet will not help the company weather Currency: USD the storm. Situation: Other Timeframe: 1-2 Years Catalyst(s): Dividend Distribution Investment Overview Date of Recommendation: 11/3/14 Transocean shares have declined more than 35% Price at Recommendation: 28.87 in 2014. This decline has been caused by a glut of Target Price: 15.00 newbuild ships expected to be delivered in 2014, Current Status: OPEN announcements of reduced capital spending by Recent Price: 19.70 many major oil companies, and lower oil prices. Realized Return: 31.8% This is not surprising and many of these variables Expected Return: 23.9% are simply a fact of highly cyclical companies. Benchmark: SPDR EURO STOXX 50 ETF The belief that this is the bottom has brought in Return vs. Benchmark: 32.5% many investors who proclaim the company is SumZero Rating: 76% cheap on numerous metrics.

These beliefs are myopic and fail to really comprehend industry dynamics. Transocean, a large offshore driller, is directly in the center of these issues. Transocean will suffer from both equipment obsolescence and the aforementioned industry issues. Even with the current slide in share price, there is

Learn more about SumZero research at sumzero.com or contact [email protected] 17 more downside ahead. Transocean’s leveraged balance sheet will exacerbate any further deterioration in day rates.

If the current industry dynamics continue, Transocean will be forced into difficult decisions including stacking rigs or accepting contracts materially below today’s rates. Oil companies are becoming more stringent and can require the best technology for new tenders. This bifurcation will hurt Transocean, and I believe that more than 50% downside exists in shares today. As investors wake up and realize the company has a history of poor capital allocation that barely earns more than its cost of capital, shares will re-rate to a more appropriate valuation. Asset write downs will come sooner, rather than later, and this will force current value investors in Transocean to reevaluate just how robust these assets are.

Finally, investors will slowly begin to realize that the large dividend currently being offered is unlikely to remain. Management has cut the dividend in the past and will likely do the same now.

Transocean Overview Transocean is the owner of 79 oil rigs split among ultra-deepwater, deepwater, harsh environment floaters, midwater floaters, and high-specification jackups (Appendix 1). In the Q4 2013 conference call management iterated that the long-term goal is to have a fleet comprised of 50% ultra-deepwater rigs, 40% high-spec jackups and 10% harsh environment rigs. This fleet composition goal is intended to help them weather the current demand stagnation that management predicted would end in 2016.

The proposed fleet transformation will be accomplished via some combination of asset sales, spin-offs, and newbuilds. Regarding the latter, Transocean has five ultra-deepwater rigs contracted to start between Q1 2016 and Q2 2017. There are another two ultra-deepwater rigs that do not have contracts, and five high-specification jackups slated for delivery as well. As these newbuilds are delivered, Transocean will still need to bring down its exposure to deepwater and lower-spec units. To do this management has formed Caledonia Offshore Drilling, a United Kingdom North Sea focused drilling entity. The current plan entails separating these assets from Transocean in Q4 2014, a topic that will be discussed later in this report. Following that separation, Transocean will focus on ultra-deepwater drilling; an area management believes displays strong long-term fundamentals.

Conclusion Transocean is facing a tough stretch, far tougher than the market is accounting for. While shares have been hit hard, a lower price does not mean a correct price. Mr. Market is failing to properly account for the massive influx of new deepwater and ultra-deepwater rigs being constructed. Many of these ships offer better equipment and will begin to compete with older rigs.

After committing to a dividend only a year ago, Transocean finds itself in a precarious situation and will soon need to decide who it keeps happy, business partners or shareholders. I believe Transocean will cut the dividend as their fleet begins to roll off contract to save their investment grade rating. At current prices, investors are paying a large premium for a company that will likely write down assets and see EBITDA compress dramatically.

While an exact price target is impossible to gauge I believe the aforementioned issues, sale of profitable Caledonia rigs, and reduced E&P offshore spend gives Transocean shares more than 50% downside from

Learn more about SumZero research at sumzero.com or contact [email protected] 18 a price of $28.78 /share. I believe fair value is below $15 per share and would more accurately price the poor returns on capital and mismanaged capital allocation that Transocean has displayed in the past. There is no easy way out of this downturn and I believe it is just getting started.

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Long on RF Micro Devices Inc (RFMD:US) Elevator Pitch: RFMD is a special situations investment that entails a transfomative acquisition with TQNT that could drive 50-90% upside in the stock. to $12-15. The analyst revised his price target on 9/2/14 to $17-$20.

Disclaimer: The author of this idea and the author's fund had a position in this security at the time of posting and may trade in and out of this position without informing the SumZero community.

Author: Amarish Mehta Age: 42 Title: Senior Analyst Current Firm: Tenor Capital Management Location: New York, NY Prior Experience: Arcadia Capital Advisors, Platinum Partners Undergrad: University of Pennsylvania (Wharton/Engineering) Graduate: University of Chicago (Booth) Certifications: N/A

RF Micro Devices ("RFMD") is a special situations Recommendation Details investment that entails a transformative acquisition with Triquint ("TQNT") that that could Asset Class: Common Equity drive a paradigm shift in its industry resulting in a Sector: Technology 50-90% upside in the stock. Country: United States Currency: USD My target price for RFMD is $12 - $15 for the Situation: Event/Special Situations following key reasons: Timeframe: 6 Months - 1 Year 1) Industry consolidation to 3 players will lead to Catalyst(s): M&A/Buyout Target, Spin Off, capacity reductions, improved pricing, higher Activist Target margins and multiples. Date of Recommendation: 4/2/14 2) Management's synergy estimates of $150M are Price at Recommendation: 8.07 extremely conservative and will ultimately reach Target Price: 20.00 $250M or more. Current Status: OPEN 3) Growing industry led by various large demand Recent Price: 15.61 drivers should enable 10%+ revenue growth. Realized Return: 93.4% 4) Perceived technology risk from QCOM and Expected Return: 28.1% other CMOS-based suppliers is a red herring. Benchmark: SPDR S&P MidCap 400 ETF 5) Combined company will generate nearly Return vs. Benchmark: 90.7% $1.00/sh in pro forma cash earnings or 20-30% SumZero Rating: 79% earnings accretion. 6) The investment has good risk/reward as upside in the stock is 50-90% to $12-15 while downside is 15% to $7.00. Newco's cash, downside earnings and non-core assets provide a margin of safety with a number of catalysts to unlock value.

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The radio frequency components industry ("RF Market") is characterized as one with little differentiation, relentless pricing pressure, and low gross margins. The stocks in the sector have become trading vehicles for Apple and Samsung new phone launches - investors bought them a few months prior to a product launch if they gained a new design win and sold them six months after the handset launch. These were stocks you rented, but never owned.

As we have seen in other low margin, technology component markets, when an industry consolidates down to 3 large players, a more rational approach to market share, capacity and pricing has followed. This had led to improved profitability and revenue sustainability for the surviving suppliers enabling investor's to eventually increase earnings multiples that they ascribe on these businesses rather than valuing them as they were in terminal decline. A strategy of capacity reductions to improve the industry's margin structure as part of a consolidation transaction first happened in the hard disk drive ("HDD") market in 2011 (e.g. Seagate/Samsung HDD and Western Digital/Hitachi HDD transaction where multiples went from 3x to 6x EV/EBITDA) and then more recently in the Memory sector in 2013 (e.g. Micron/Elpida transaction where the multiple went from 1.0x Price/Tangible Book to 10.0x P/E). Historically, both RFMD and TQNT have been valued at 1.0-1.5x EV/Revenue as margins and profits were never sustainable and even harder to project. I believe a similar paradigm shift will materialize in the RF Market as Skyworks ("SWKS"), Avago ("AVGO") and RFMD/TQNT ("NewCo") will be the remaining major players.

Though both RFMD and TQNT equity will be exchanged into NewCo stock upon the deal closing, I believe a long position in RFMD's stock provides a better relative value opportunity as TQNT trades above the merger ratio on expectations of a potential over-the-top bid even though the deal was announced over a month ago. I don't believe a topping bid will materialize as there are only a limited number of buyers of these assets while anti-trust, valuation and business model issues make TQNT unattractive to potential US buyers. Foreign investment approval requirements for TQNT's defense electronics segment make it less likely that a foreign buyer will emerge. Further, the industrial logic, synergies, and that only the merger of these two entities would pass anti-trust approval in a 3 player market make it a very high likelihood of this merger transaction closing. This investment also includes a free option on a potential second step value unlocking event to drive additional future value where NewCo would spin-off or sell a smaller, non-core business that its under the radar of the investment community.

I am assuming NewCo can realize $250M of synergies on combined Street revenues estimates of $2.325B (which I believe is conservative) for CY15 to achieve $750M of EBITDA and almost $1.00 of pro forma cash earnings. Newco is currently trading at 6x EBITDA and 8x P/E multiple which is a 30-40% discount to SWKS' multiples. As NewCo transforms it margin structure and profit potential, I believe it would be appropriate to apply a 9x-10x EBITDA and 12x-15x P/E multiple to this level of earnings which would be in line with those of its competitors. My target price does not even factor in the net cash, free cash flow generation and leverage potential of NewCo to enhance equity value. As a result, my target price for RFMD is $12-15 or 50-90% from the current price.

My downside case assumes that the entity only realizes $150M in synergies on $2.150B of revenues (assuming 7.5% of negative revenue synergies) translating into $.65/sh in CY15 earnings or $565M in EBITDA. Applying a 12x P/E multiple to this depressed earnings levels, leads me to believe the downside

Learn more about SumZero research at sumzero.com or contact [email protected] 21 here is $7.00 in the stock or less than 15%. Newco's cash and value of its non-core assets are alone worth $3.00/sh.

Catalysts I believe that there are several upcoming catalysts that will help investors better appreciate the value of RFMD's equity as it currently remains the cheaper relative value security to make a long-term investment NewCo. For instance, TQNT's closing price on 3/31/14 was $13.39; dividing this amount by the 1.675 merger ratio yields $7.99. RFMD stock closed that day at $7.88 or a 1.4% risk arb spread. The risk arb community in a deal like this will generally be long TQNT on the hope of a potential topping bid, and short RFMD to hedge its risk.

1) Filing of the merger proxy for shareholder approval will lead to risk arb spread collapsing 2) Samsung's launch of its new Galaxy S5 LTE handset globally on 4/11/14 3) Anti-trust approval 4) Closing of transaction and earnings reset 5) Asset sales to generate cash 6) Use of Cash to Create Shareholder Value 7) Unlock value of the MPG segment thru a second step transaction

Conclusion Despite the increase in RFMD's stock by 53% YTD and 36% since the deals announcement, as a value investor, I believe the stock has 50-90% or more upside to $12-$15 as several catalysts including improved supply and pricing dynamics, higher than expected merger synergies, expanding margins, revenue diversification and better than expected growth prospects will drive higher earnings and a better multiple for NewCo than what RFMD and TQNT had individually realized in the past.

Updates to Thesis: 9/2/14 Following recent earnings calls from RFMD/TQNT, SWKS and AVGO, I have updated my CY15 revenue (increasing by $200-300M) and margins estimates (30%+ EBIT margins) which has led me to increase my EPS estimates to $1.30. I don't follow AVGO and SWKS that closely but they are clearly continuing to see double digit revenue growth with margins and earnings expand (EBIT margins are expected to be over 30%) as a result of expansion of RF TAM as the the worldwide smartphone market shifts (1B+ units) from 2G/2.5G to 3G/4G.

Interestingly, SWKS is trading at 14.3x CY15 EPS while AVGO is trading at 13.0x CY15 EPS. Applying a 13x- 15x EPS multiple on Newco, my new price target is $17-$20. My price target assumptions don't include the combined company spinning out or selling it MPG segment which is now on a $600M revenue run- rate. ADI recently purchased HITT for 6x EV/2015 Revenue. Nor does it put any value to Newco having $500M in cash and generating over $500M in FCF annually allowing it to pursue both buybacks and dividends.

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Long on Handy & Harman Ltd (HNH:US) Elevator Pitch: Handy & Harman is a niche manufacturing conglomerate trading at a 2014E free cash flow yield of 20% majority owned and operated by a proven deep value investor.

Disclaimer: The author of this idea did not disclose an active position in this security at the time of posting, but may trade in and out of this position without informing the SumZero community.

Author: Tice Brown Age: 26 Title: Founder/Portfolio Manager Current Firm: Snyder Brown Capital Management Location: New York, NY Prior Experience: Red Alder, LP, Cook & Bynum Undergrad: Harvard College Graduate: Harvard Law School Certifications: N/A

Recommendation Details Handy & Harman is a niche manufacturing conglomerate controlled by deep-value investor Asset Class: Common Equity Warren Lichtenstein through his permanent Sector: Industrials capital vehicle Steel Partners Holdings LP (SPLP Country: United States $16.25). Lichtenstein took control of Handy & Currency: USD Harman in 2005, when his large stake in the Situation: Deep Value unsecured debt of the predecessor company, Timeframe: 6 Months -1 Year WHX Corporation, was equitized in a bankruptcy Catalyst(s): N/A reorganization. Since taking control, he has Date of Recommendation: 5/1/14 worked to sell, close, or liquidate any of H&H’s Price at Recommendation: 22.30 commoditized businesses and redeploy capital to Target Price: 45.11 higher and better uses. Lichtenstein uses both Current Status: OPEN Handy & Harman and SPLP to take control of Recent Price: 37.85 other cheap businesses as well as cash- and NOL- Realized Return: 69.7% rich, publicly traded shell companies. Expected Return: 19.2% Benchmark: iShares Core S&P Small-Cap Over the last eight years, Lichtenstein has Return vs. Benchmark: 65.2% dramatically increased the value of H&H as well SumZero Rating: 84% as the quality and market position of the operating businesses it owns. The company has evolved from an opaque post-bankruptcy, over-the-counter security with less than $20mm market cap and only 35 shareholders, into a NASDAQ-listed $300mm market cap which just hired an external investor relations firm on April 1, 2014.

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H&H produces highly specialized industrial products, including precious metal brazing alloys, coiled tubing, fasteners for commercial construction, high performance materials for military/aerospace printed circuit boards, and meat-room blade replacement products. H&H has consolidated these businesses through acquisitions and is now the market leader in its core segments. The consistent operating income generated over the last five six years by these segments, including during the 2008- 2009 financial crisis, stand as evidence that pricing power and efficiency have improved through this consolidation.

Since the financial crisis, H&H has de-levered its balance sheet, substantially increasing the value of its equity. While the company is still levered and has a significantly underfunded pension liability (left over from the bankruptcy of a division that was divested prior to Lichtenstein’s control), the debt is low cost at a ~3% interest rate and 85% of the current pension underfunding is actually the result of H&H reducing the discount rate for plan liabilities between 2010 and 2013. The current business generated a 15.2% free cash flow yield to equity last year and management has guided to a significant improvement in 2014. Early in 2013, the company completed the repurchase of its 10% debt and began to repurchase shares in the open market, reducing shares outstanding by 3.5% over 9 months.

Steel Partners, Warren Lichtenstein, other insiders, and Mario Gabelli’s GAMCO own 72.3% of shares outstanding, which limits the float available to trade. While this creates substantial economic alignment with majority shareholders, it also creates risks both in terms of liquidity and in the potential for Lichtenstein to do something unfriendly to minority shareholders (a risk that is probably mitigated somewhat by the presence of Gabelli).

Despite the limited float, we believe this is an attractive investment not only for the current cheap valuation, but also for the future value that Lichtenstein may create at H&H. Not only has he de-levered, streamlined and grown the operating businesses, since taking control, but he has also begun to use H&H as an acquisition vehicle in its own right. In 2013, Lichtenstein took control of ModusLink Global Solutions, Inc. (MLNK $3.92), partially through the 11.5% of the outstanding shares of MLNK which are owned by Handy & Harman. This $210 million market cap company is net cash and has $2.5 billion in NOLs.

VALUATION: Barring large future acquisitions, which we believe are likely to occur and likely to add value, H&H’s free cash flow to equity (net of debt service) will lead to a complete deleveraging of the balance sheet over the next few years. We also expect the share count to decline modestly through share repurchases in excess of stock based compensation (which we include as cash compensation in our FCF calculation).

We anticipate that the operating businesses, before required amortization on the bank debt facility and minimum additional pension contributions, will generate roughly $57M of FCF to equity in 2014. Applying even a conservative 10% FCF yield results in $567mm in equity value. Lower free cash flow yields of course generate higher multiples. The $57.9M acquisition of Wolverine Joining in 2013 intrigues us: this is a large outlay for a $300M market cap business, and H&H’s largest acquisition since the financial crisis. The business being acquired was unprofitable in 2013, and we assume no increase in earnings or FCF as a result of this acquisition. However, given Lichtenstein’s successful record of capital allocation, we think there must be substantial value to this business as part of H&H. In our “base case”, we have valued Wolverine at $40 million, which is the tangible book value of the acquired assets.

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H&H also holds an equity investment in ModusLink Global Solutions worth $27M at current market prices. We believe this cash- and NOL-rich business ($175mm deployable cash after a large debt issuance last month, $2.5B NOLs with only a $209M market capitalization) may be substantially undervalued, which presents upside optionality if Lichtenstein can cause ModusLink to acquire a business that will make use of the NOLs.

Handy and Harman has cash and equivalents of $6.5 million, and its own NOLs with an NPV of $60.3M as of year-end 2013. In our calculation of FCF, we assume that the company pays full taxes, but we give credit for the NPV of these NOLs as an asset, since they will certainly be utilized.

In our “base case”, we leave the unfunded pension liability at the full amount shown on H&H’s books, but in our “high case”, we adjust for what we think is a more reasonable 5% discount rate. We further assume buybacks continue apace - that approximately 600,000 shares are repurchased in 2014, and that stock price increases reduce the number of shares issued going forward.

Because H&H’s debt load is low-cost, easily manageable at less than three times FCF, and expected to decline in the coming years, we value this business at a 10% FCF yield to equity and add back the pension liability, but not the debt. We believe this is more conservative than simply valuing the equity at a FCF yield, yet properly accounts for the fact that this is a steady business that should be run with a reasonable amount of leverage, as it is currently.

CONCLUSION: We believe shares of Handy & Harman are worth $39-45 per share today (73%-102% upside), without making the assumption that Lichtenstein will be able to do any value accretive transactions in the future (both at H&H and at ModusLink).

While this company is not terribly liquid, we believe the growing value per share and alignment with a management team that clearly views that shares as cheap compensate for the illiquidity. We have some apprehension regarding the “end-game” in terms of a possible “take-under”, but believe the current discount to our estimation of value compensates for this risk. We believe it is likely that the share price will appreciate this year when management reauthorizes share repurchases after reporting Q1 results.

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Long on HC2 Holdings Inc (HCHC:US) Elevator Pitch: Phil Falcone’s newly purchased entity HC2 (HCHC) has been on a torrid deal making pace, suggesting he is intensely focused on value creation within it. The stock is deeply undervalued.

Disclaimer: The author of this idea did not disclose an active position in this security at the time of posting, but may trade in and out of this position without informing the SumZero community.

Author: Bradd Kern Age: 32 Title: Managing Director Current Firm: Armored Wolf, LLC Location: Irvine, CA Prior Experience: PIMCO, Mesirow Financial, Barclay’s Capital Undergrad: Trinity College Graduate: University of Chicago (Booth) Certifications: N/A

Since March of this year, we have published write- Recommendation Details ups to discuss corporate developments and

synthesize our best estimates of value regarding Asset Class: Common Equity Phil Falcone’s new holding vehicle, HC2 (HCHC). Sector: Communications While the entity was initially rich with net Country: United States operating losses (NOLs), those tax assets were Currency: USD subsequently compromised due to issuance of Situation: Event/Special Situations stock to finance the Schuff deal as well as Timeframe: 6 Months - 1 Year turnover in the shareholder base as investors Catalyst(s): M&A/Buyout-Target sought to take positions shortly after Falcone Date of Recommendation: 3/18/14 turned up. In this article, we update our valuation Price at Recommendation: 3.70 and elements of our qualitative thesis on HC2. Target Price: 7.00

Current Status: OPEN As exemplified by the Schuff and Global Marine Recent Price: 7.45 deals, the HC2 value creation strategy revolves Realized Return: 101.4% around savvy deal making. Falcone and his team Expected Return: (6.0%) are seeking long term investments in businesses Benchmark: iShares Core S&P Small-Cap with high, sustainable free cash flow, and Return vs. Benchmark: 101.6% combining them with smaller, venture capital-like SumZero Rating: 75% deals (American Natural Gas, Genovel

Orthopedics, NerVve, Novatel). The criteria for the VC-like deals appears to be that 1) HC2 can secure favorable valuation and terms; and 2) the investments have potential for outsized returns.

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As we discussed in our last write-up, proprietary deal flow is the name of the game, allowing HC2 to buy businesses at attractive multiples in the private market, whose equivalent comps, in many cases, trade at higher valuations in the public market. In exchange, HC2 offers a long term “buy and hold” approach to value creation (rather than a slash-and-burn mentality common at many private equity firms), initial and ongoing access to capital, and strategic partnership. The reality is that capital is scarce for middle market companies. Proprietary, private equity-like deal making in a capital-hungry space is one critical source of “management alpha” for the HC2 team. As the YTD stock performance of +140% demonstrates, the market has been impressed with both the general strategy and specific deals so far.

While the casual observer, seeing this performance, might suspect there must be some level of optimism built into the stock price, and that the “big money” has already been made, we will demonstrate in this write-up that HC2 stock remains deeply undervalued. Similar to previous HC2 articles, we present “low”, “mid”, and “high” values so that investors can observe the range of values for the various parts as well as the whole. What differentiates this write-up from its predecessor versions is that the release of the 10-Q as well as a high yield bond deal roadshow have allowed us to refine both our analysis and increase our level of confidence in the numbers presented.

In the months and years ahead, we expect to see increased diversification of HC2’s holdings into such industries as telecom, infrastructure, U.S. construction, energy, and life sciences. Each operating subsidiary will have its own management team. Some of the operating companies may have synergies with one other, some may benefit from the holding company’s operational/accounting expertise (as well as business relationships and advice), and some will be “standalone” businesses and investments. In the future, we believe it will become increasingly difficult to value each of these businesses as the portfolio grows and financial reporting segments include multiple businesses that management may or may not break out. In the meantime, we are at an early enough stage where there is still a high level of granularity possible. We detail our efforts below. Our conclusion is that, on a per share basis, HC2 is currently worth $8.67 (+27%) in a base case scenario, with an easily justifiable high case scenario of $11.24 (+64%), and a more difficult to justify low case scenario of $7.13 (+4%). We think even the high case scenario could be conservative, for reasons that will become more clear as we map out our assumptions for each of the segments.

Note that some of our multiple ranges are higher than in previous articles due to the fact that in our last analysis, we effectively set the low range at cost to HC2 of the transaction. As we indicated at the time, this was a highly conservative approach. With new and more information available, our updated analysis reflects a view that we should not penalize the company’s valuation if management was able to achieve favorable terms. For example, if HC2 buys a growing, high free cash flowing company based in the U.S. at 2x EBITDA, does that mean an intelligent investor is best served by setting 2x as the low end of the valuation range on that business? Of course not, although the transaction comp should not necessarily be ignored either. Research may suggest the business is worth significantly more. However, even when comps are much higher than the transaction multiple at cost, we still incorporate the data point of the acquisition cost when determining the range of multiples to apply in our sum of the parts analysis.

Risks to the Investment Some key risks we think about include: (1) distraction of Schuff shareholders lawsuits; (2) a cyclical downturn in U.S. commercial construction; (3) a cyclical downturn in demand for telecom and energy- related infrastructure construction and maintenance; (4) failure of management to turn around ICS; (5)

Learn more about SumZero research at sumzero.com or contact [email protected] 27 failure of the new/higher risk ventures in which HC2 has invested, including American Natural Gas, Novatel, NerVve Technologies, and Genovel Orthopedics; (6) Falcone gets in trouble for something else and is unable to continue running HC2; (7) HC2 overpays or makes bad deals in the future, including the possibility of excessive dilution; and (8) an inability of the company to reduce its cost of capital over time.

Conclusion HC2 stock remains highly undervalued, with base case upside of 27%, but easily justifiable upside of +64% (with the high case more justifiable than the downside case, where upside is only 4%). Upcoming, likely catalysts include the completion of the Schuff short form merger, the stock’s listing on an exchange, a merger of equals involving ICS (telecom services), and acquisition of further businesses and investments.

Even at fair value, we find the proprietary deal flow exposure that HC2’s strategy provides to be attractive, and have confidence in management’s ability to execute the plan in order create value, enriching themselves (primarily through the comp plan, which is based on changes in NAV per share) as well as shareholders. At today’s sizable discount to fair value, the stock is that much more attractive.

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Short on Avon Products Inc (AVP:US) Elevator Pitch: Avon's never-ending turnaround indicates that the business is structurally challenged: should reprice down to other "melting cubes". FX and overpromises for the next 12 months will hurt.

Disclaimer: The author of this idea did not disclose an active position in this security at the time of posting, but may trade in and out of this position without informing the SumZero community.

Author: Nick Mazing Age: 36 Title: Founder/Portfolio Manager Current Firm: Ampera Capital, LLC Location: New York, NY Prior Experience: Bighawk LLC, Lehman Brothers, Aramark Undergrad: University of Maine (Machias) Graduate: Columbia Business School Certifications: N/A

Recommendation Details AVP is a global direct seller predominantly of mass-market cosmetics. AVP has been in a Asset Class: Common Equity turnaround/restructuring mode for about 10 Sector: Consumer years. Despite management changes, various Country: United States programs and realignments, a plethora of Currency: USD marketing strategies, acquisitions and Situation: Other dispositions, AVP has not shown progress: stock Timeframe: 6 Months - 1 Year is at around the 2009 lows. Catalyst(s): N/A Date of Recommendation: 9/24/14 We believe that no initiative has worked because Price at Recommendation: 13.14 AVP uses a structurally disadvantaged model that Target Price: 8.00 is being leapfrogged much like landline Current Status: OPEN telephony, bookstores and physical DVD rentals. Recent Price: 9.33 Threat not only from ecommerce but increased Realized Return: 29.0% retail footage globally. Expected Return: 14.3% Benchmark: SPDR S&P MidCap 400 ETF AVP should re-price accordingly, dropping from Return vs. Benchmark: 26.3% being a “cheap” HPC* name down to the 6-7x SumZero Rating: 76% forward EBITDA multiple awarded to other structurally-challenged businesses (~40% downside). Several likely and possible catalysts over the next 12 months. Selected press releases and slides from 2009-on show various initiatives and promises. PR and slides presented point to multiple initiatives over time. No shortage of ideas and attempts. No shortage of brand recognition and marketing know-how. No shortage of “star” power on board. And, yet…

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Could it be that AVP’s direct selling business model is structurally challenged? AVP is a catalog with a personal shopper attached. Catalogs have played a major role in retail going back to the late 1880s, bringing lower prices and exceptional selection to anyone, anywhere in the US. Expansion of delivery services, color print, credit cards, toll-free numbers and computerized databases buoyed the industry for decades.

The legendary Sears catalog had even sold cars and pre-manufactured homes for a number of years. A catalog on a tablet with a personal shopper is still a catalog with a personal shopper. Could it be that AVP’s direct selling business model is structurally challenged?

Two trends over the last 10+ years appear to be hurting direct sales of cosmetics globally (not just AVP: see next slide). Trend 1: online sales. Trend 2: growing traditional retail square footage. Both reduce the original value proposition of the catalog: purchase of products not available locally. We assert that AVP is being leapfrogged a bit less dramatically than Blockbuster, Borders, Circuit City, Radio Shack, Kodak.

Avon appears to have already recognized that: avon.com in the US allows for direct purchases by anyone without a rep (including “guest” purchases, no account required). Rep numbers across the major industry players are either declining or have decelerated materially over the last few years (sourced from public filings).

Trend 1: eCommerce growth Beauty and personal care was the fastest growing consumer product category worldwide (prior slide chart from Euromonitor). Despite small physical unit sizes, US cosmetic ecommerce is estimated at only 4.5%-8% (Booz vs. A.T. Kearney). Particularly useful for repeat purchases of “known” items. Great improvements in the shopping experience are relatively recent: i.e. skin color matching and recommendations. In-person trial and recommendations slightly less important. In-person emulated through online advisors. Monthly subscriptions of “gift” boxes with “surprise” samples is a relatively recent discovery tool, also reducing the benefit of in-person show-and-tell

Trend 2: retail square footage growth obsoletes the access benefits from catalogs Emerging markets footage growth over the last few years is consistent with the industry troubles both in Europe and LatAm. Within the third major market, the US, we’ve seen growth in the drugstore and specialty channel nationwide: this increases access to a wide variety of mass cosmetics. Some markets, like Walgreen’s Duane Reade banner in NYC, even have beautician-staffed cosmetic counters similar to department stores. Specialists include Ulta and Sephora.

The expansion of convenient locations, well-stocked with mass cosmetics, hurts the basic value proposition of a cosmetics catalog. If AVP’s problems are structural of nature, as we assert, where should AVP reprice to?

AVP is now “cheap” versus its traditional cosmetic comps and its own 10-year average metrics (as is any value trap). What if Avon should really be priced against other structurally challenged businesses? Some likely and possible catalysts

Likely

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AVP’s business trends and extensive exposure to emerging market currencies leads to downside surprises in USD reported results in the next 6-12 months. USD repatriation needs leads to higher tax rates and inability to wait-and-average out the currency cycles

Possible AVP is already one of the smallest companies in the S&P500: there is a possibility that AVP is dropped from the index if the company deteriorates further. Given the high ownership by traditional mutual fund managers, this may lead to substantial selling pressure. Top 4 as of 6/30/14 are T.Rowe, Franklin Mutual, Vanguard and Invesco (accounting for 30%+ of the total). Wider market recognition of the obsolescence of the direct selling model 88% of AVP’s 2013 revenue is non-US. The prospect of “easier comps” in H2 2014 got a lot dimmer recently with USD strength. FX just a part of the problem: business trends continue to weaken.

Valuation While there is a considerable amount of uncertainty and conditionality in any future estimates for AVP, we estimate that AVP will likely generate 2015 EBITDA of under $800 mm and EPS of under $0.80 per share, based on current trends. At $800 mm or under in 2015 EBITDA and 6.5-7x forward multiple (consistent with the structurally challenged businesses listed previously), AVP shares could trade below $8/share or ~40% downside from recent $13.xx levels.

Updates to Thesis: Several updates supportive of the thesis since it was published: (1) Q3 earnings were a disaster, and neither the business trends nor FX is improving (2) The Chief Marketing Officer was removed after less than 2 years on the job; LatAm head role shifted (3) Due to credit downgrades to junk in Oct, the company has lost access to its commercial paper program AND will see its bond rates escalate, starting in Q1 2015 (4) In October, Bloomberg profiled an illegal alien Avon rep in Texas; the company told me that reps are contractors so they don't verify status (5) Direct and broad comps have been hitting new lows recently: direct comps Oriflame, Natura Cosmeticos, Tupperware; direct sellers Herbalife, Nu Skin; broad comps Lat Am consumer businesses (FMX/KOF CCU ARCO AKO-A ABEV CBD CNCO + local airlines CPA AVH LFL) (6) The most recent announcement is the settlement of the company's long-running FCPA violations, resulting is a $130 mm fine payable to the DOJ and the SEC: this is more than the $126 mm Cash Flow from Operations that the company generated in the first nine months this year (7) No insider buying from management (one director has purchased 2000 shares at $9.79) (8) No new CFO (prior one out 10/2/14 per 9/8/14 PR)

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Long on BioDelivery Sciences International

Inc (BDSI:US) Elevator Pitch: BDSI is a specialty pharmaceutical company nearing regulatory value inflection points for compelling products in defined markets.

Disclaimer: The author of this idea did not disclose an active position in this security at the time of posting, but may trade in and out of this position without informing the SumZero community.

Author: Logan Suriano Age: 30 Title: Analyst Current Firm: Sio Capital Management, LLC Location: New York, NY Prior Experience: First Berlin, Merrill Lynch Undergrad: UNC (Chapel Hill) Graduate: Yale University Certifications: N/A

We believe BioDelivery Sciences International Recommendation Details (BDSI) is undervalued as the company begins to adopt a profile reminiscent of our previous Asset Class: Common Equity investment recommendation, Furiex Sector: Health Care Pharmaceuticals (FURX). With the potential Country: United States financial backstop of a royalty from an externally- Currency: USD licensed painkiller, BDSI is on the cusp of approval Situation: Other and launch of its de-risked opioid addiction Timeframe: 6 Months - 1 Year treatment. With multiple catalysts over the Catalyst(s): N/A coming months, we find BDSI to be an attractive Date of Recommendation: 5/16/14 investment candidate. Price at Recommendation: 8.47

Target Price: 14.50 Business Overview Current Status: OPEN BDSI specializes in developing narcotic drugs Recent Price: 13.96 (painkillers), often utilizing its unique delivery Realized Return: 64.8% platform called BEMA (BioErodible Expected Return: 3.9% MucoAdhesive). BDSI is able to leverage their Benchmark: iShares Core S&P Small-Cap expertise with this drug delivery system to Return vs. Benchmark: 59.0% reformulate existing pharmaceuticals into more SumZero Rating: 82% attractive offerings. We view this strategy as an

effective way to reduce development risk. A good

Learn more about SumZero research at sumzero.com or contact [email protected] 32 description of the company’s core BEMA technology can be found here: http://www.bdsi.com/BEMA_Technology.aspx

The products that are the key value drivers for BDSI are: ● BDSI’s narcotic pain killer (known BEMA buprenorphine), which is partnered with Endo ● BDSI’s opioid addiction treatment, Bunavail.

Valuing the Business BEMA buprenorphine One of their key narcotic painkillers (known as BEMA buprenorphine) is partnered with Endo [ENDP], a company with expertise marketing pain drugs. BDSI will earn mid to high teens royalties on this drug. Anticipating peak end-user sales by Endo of approximately $300 million, this translates into a royalty stream (which has no associated costs and is therefore pure operating profit) of about $50 million/year for BDSI. Such a royalty could be valued at approximately 5-7x the annual run rate, suggesting a value of $250+ million for BDSI.

Bunavail BDSI’s biggest value driver is Bunavail, a drug being developed to treat opioid addiction. A similar currently-marketed drug, Suboxone, generates annual US sales of approximately $1.5 billion. Bunavail is easier to use and likely to have fewer side effects. If BDSI can capture 10% market share, revenues of $150 million would justify a valuation of $450 million (using a 3x sales multiple). We think that such sales are achievable and that profitability on this product would be well above the drug industry average. Bunavail has been submitted to the FDA and has a target approval date in June 2014. We do not include any ex-US sales of Bunavail in our estimates, though this could provide further upside once Suboxone loses market exclusivity in Europe.

The market dynamics for opioid addiction treatment were stable until recently, with Suboxone being the 800-pound gorilla in the space for years. Suboxone originally had a tablet formulation, which was suboptimal as patients would have to dissolve a very foul tasting tablet under their tongues for approximately a half-hour. In 2010, Reckitt Benckiser(manufacturer of Suboxone) launched a new sublingual film formulation that had faster dissolve times. Despite still having a very poor taste, Reckitt was successful in leveraging this improved convenience profile to switch the great majority of patients over from tablets. The importance of improved convenience also provided Reckitt commercial protection when generic Suboxone tablets were launched in 2013 (Suboxone film has IP protection to 2030). As one can see below, branded Suboxone prescriptions (incl. Suboxone film) have not fallen anywhere as steeply as is often seen in other non-differentiated generic introductions.

Convenience clearly matters to physicians and patients, and the difference between Suboxone film and generic Suboxone tablets is sizable enough that payers are not universally forcing patients to switch. Into this market, Orexo AB (a specialty pharmaceutical company based in Sweden) has recently launched its product Zubsolv, which is based on the same active ingredients as Suboxone. Orexo’s reformulation is a sublingual tablet, with a much faster dissolve time and better taste profile than Suboxone tablets and films. Since gaining market approval in July 2013, Orexo has sought to secure market exclusivity with insurance programs to reasonable success. However, we feel that although Zubsolv represents a step forward in opioid addiction treatment, Bunavail represents a slightly more attractive profile.

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First, Bunavail also has a much improved taste profile over Suboxone film and tablets. Second, physicians and patients may be reluctant to revert back to a tablet formulation like Zubsolv, even with better dissolve times, because of a comparatively poor experience with Suboxone tablets. Third, Bunavail is able to deliver more of the drug directly to the blood stream by quickly binding to the cheek, allowing less overall drug to be given for the same therapeutic effect. Finally, a patient still cannot talk or swallow until Zubsolv is fully dissolved and absorbed into the bloodstream under the tongue. In contrast, Bunavail represents a “place and forget” solution that is much easier to administer. We have sampled (placebo) forms of each product and found Bunavail compelling.

Ultimately, both products are a step forward from current Suboxone treatments and believe both should eventually be able to achieve a 10% market share based on their improved profiles.

Valuation summary Using this sum-of-the-parts, we reach a valuation of approximately $700+m (current market cap is ~$425m). Finally, we also run a DCF for BDSI to sense-check our valuation and arrive at a valuation supportive of our sum-of-the-parts calculation.

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Long on Westjet Airlines Ltd (WJA:CN) Elevator Pitch: Exceptionally well-run, well-capitalized and cost-advantaged airline trading at material discount to intrinsic value

Disclaimer: The author of this idea did not disclose an active position in this security at the time of posting, but may trade in and out of this position without informing the SumZero community.

Author: Parsa Kiai Age: 32 Title: Founder/Portfolio Manager Current Firm: Steamboat Capital Partners, LLC Location: New York, NY Prior Experience: Sonterra Partners, Perry Capital, Goldman Sachs & Co. Undergrad: Cornell University Graduate: N/A Certifications: N/A

WestJet (TSX: WJA) is an attractive long with over Recommendation Details 50% - 75% upside and limited downside due to its valuation (11x trailing earnings excluding net Asset Class: Common Equity cash), growth potential, balance sheet and Sector: Consumer business quality. Despite its many attractive Country: Canada characteristics, WestJet has lagged its peers by Currency: CAD over 40% year to date and we think that has Situation: Value created a very good entry point for long term Timeframe: 6 Months - 1 Year investors. Catalyst(s): N/A Date of Recommendation: 6/17/14 Price at Recommendation: 24.91 Brief History Target Price: 40.00 WestJet was founded in 1996 by three Current Status: OPEN entrepreneurs, came public in 1999 and has Recent Price: 32.32 grown into the 2nd largest airline in Canada after Realized Return: 29.7% Air Canada. WestJet flies in the domestic Expected Return: 23.8% Canadian market, between the US and Canada in Benchmark: SPDR S&P MidCap 400 ETF what is known as the “transborder” market and to Return vs. Benchmark: 28.7% international destinations in the Caribbean and SumZero Rating: 45% Central/South America. WestJet has recently made its first trans-Atlantic flight to Dublin with

Learn more about SumZero research at sumzero.com or contact [email protected] 35 further international markets planned for the future. For additional background, see the company’s annual information filings (http://www.westjet.com/guest/en/media-investors/annual-information- forms.shtml).

1. Sustainable and Significant Cost Advantage in Commodity Industry Since its IPO, WestJet has maintained a substantial cost advantage against Air Canada, allowing it to both “take” and “create” market share by expanding into new markets that were previously uneconomic for higher cost competitors.

WestJet’s sustainable cost advantage stems from several factors. First, the company’s labor force is entirely non-union. This is an enormous cost advantage compared to the heavily unionized employees at Air Canada and nearly every other competitor. Even low-cost pioneer Southwest Airlines has 83% of its employees represented by a union. The only other major airline that was entirely non-union was JetBlue until recently, and WestJet maintains significant competitive advantages over them as well. National regulations only permit domestic carriers to fly point-to-point within a country, so JetBlue and WestJet do not compete on domestic routes.

Second, WestJet’s average fleet age is substantially lower than its peers, resulting in lower maintenance costs and higher fuel efficiency than peers. Fuel is the single largest expense for airlines, so WestJet’s nearly 20% lower fuel usage per available seat mile is a significant competitive advantage over Air Canada. Likewise, WestJet’s maintenance cost per available seat mile is roughly half of Air Canada’s.

Third, WestJet maintains one of the strongest balance sheets in the industry, with a substantial net cash balance and much lower leverage than peers on lease-adjusted and pension-adjusted metrics.

Lastly, WestJet’s significant employee ownership fosters a culture that differs from many of its competitors. As depicted below, these competitive cost advantages have allowed WestJet to increase its domestic market share to over one-third, creating a duopoly with Air Canada.

2. Significant, Early-Inning Growth Potential From International Markets & Ancillary Revenues WestJet’s domestic success is being replicated in the US-Canada “transborder” and international markets. WestJet is also taking market share in the trans-border market where it has reached a 20% share from less than 5% a few years ago and in the international market, where it is just starting to emerge as a significant competitor. Given the common competitive advantage it has against its peers in these markets, we think WestJet has significant room for growth, just as it did in the Canadian domestic market. Additionally, we think WestJet has other levers for earnings growth beyond just market share gains, namely ancillary revenues and its regional short-haul service called Encore.

WestJet is one of the only remaining airlines to not charge for checked-bag fees, along with Southwest and JetBlue. Industry checks and management commentary suggests that checked-bag fees are a matter of “when” and not “if.” We think that the implementation of checked-bag fees and the roll-out of Encore could very conservatively increase earnings by over 50%, on a stock that trades at 11x earnings.

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3. Valuation One of the interesting aspects of WestJet is that despite its poor stock performance YTD and its valuation, it is certainly not a “broken” company. Quite to the contrary, the company has generated exceptional business and financial results since its IPO in 1999, yet still trades at a discount to its peers and its intrinsic value. Since WestJet came public, it has outperformed all of the airline peers that were public at the time, along with the S&P 500. (Note: several current public airlines have gone bankrupt, some more than once, and WestJet has still managed to outperform their re-org’d equities, such as UAL and Air Canada). WestJet has also managed to grow revenues and earnings at over 20% annually, while being very profitable through the cycle. Given this exceptional track record, we find it surprising that WestJet trades at significant discounts to all of the peers. We think WestJet deserves a multiple in line with other low- cost carriers and that the stock has 50% upside.

4. Why This Opportunity Exists? We believe the current valuation discount for WestJet has to do with near-term fears about the impact of the decline in the Canadian dollar. Since WestJet has a substantial portion of its revenues in the Canadian dollar, while many of its costs such as fuel are priced in US dollars, a weak Canadian dollar hurts the company’s profitability. Early in 2014, the Canadian dollar declined substantially against the US dollar, dropping from near parity for most of 2013 to as low as $0.90. The weakness caused sell-side analysts to downgrade earnings estimates and price targets for Air Canada and WestJet. While Air Canada’s stock has rebounded, WestJet’s has still lagged the overall industry by over 40% year to date.

For a variety of reasons, we believe that the Canadian dollar weakness will only have a brief, temporary impact on WestJet’s business. First, well-run businesses are dynamic entities that can adapt to different operating environments. Second, the Canadian dollar also impacts WestJet’s main competitor, Air Canada, which, in addition to fuel costs, has significant US dollar denominated liabilities. Third, and most importantly, WestJet’s own history illustrates the business’ ability to thrive under almost any market environment. WestJet has managed to be solidly profitable and earn a healthy return in vastly different currency, commodity and economic environments.

In summary, we think that WestJet is attractively priced, with some important catalysts such as the implementation of checked bag fees, which along with additional market share gains and the growth of Encore, leads to significant earnings growth and modest multiple expansion to get a 50 – 75% return on the investment:

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Long on ALJ Regional Holdings Inc (ALJJ:US) Elevator Pitch: ALJ is a unique holding company that recently acquired a subsidiary where they can deploy their considerable NOLs. They recently released results from their first relatively clean quarter.

Disclaimer: The author of this idea did not disclose an active position in this security at the time of posting, but may trade in and out of this position without informing the SumZero community.

Author: Steven Kiel Age: 36 Title: Founder/Portfolio Manager Current Firm: Arquitos Capital Management Location: Washington, DC Prior Experience: The Heritage Foundation, Vista Strategies, US Army Undergrad: Illinois State University Graduate: George Mason University School of Law Certifications: N/A

ALJ is a unique holding company that recently Recommendation Details acquired a subsidiary where ALJ can deploy their

considerable net operating losses (NOLs). The Asset Class: Common Equity subsidiary, Faneuil, was acquired at a reasonable Sector: Materials price and has significant growth potential. Country: United States Faneuil's leadership is strongly incentivized to Currency: USD innovate and cut costs. ALJ's chairman, Jess Situation: Deep Value Ravich, is a demonstrated leader who has proven Timeframe: 6 Months - 1 Year to be shareholder friendly while focusing on long Catalyst(s): N/A term value creation. Date of Recommendation: 2/22/14 Price at Recommendation: 1.77 Target Price: 3.00 Background on ALJ Current Status: OPEN I discovered ALJ in November 2012 when they Recent Price: 3.99 announced they were selling their majority- Realized Return: 125.4% owned steel subsidiary, KES, for $112.5m cash. Expected Return: (24.8%) ALJ is a holding company that had bought into Benchmark: iShares Core S&P Small-Cap the steel mill in the mid-2000s. Along the way Return vs. Benchmark: 123.1% ALJ borrowed against it and accumulated SumZero Rating: 52% considerable NOLs. They also announced, after paying off their debt, they would commence a tender offer to acquire approximately 50% of their outstanding shares. The transaction closed in February 2013 and the tender offer closed soon thereafter. Through the tender, ALJ purchased 30m shares at a total cost of $25.2m.

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At the quarter that ended on March 31, 2013, ALJ was left with approximately $30m total in cash, short term investments, a receivable, and about $2m in liabilities. They had approximately 27.5m shares outstanding. At that point ALJ had no operations, very limited expenses, and $176m in NOLs expiring between 2020 and 2027. Shares traded around 82 cents/sh.

ALJ's stated intention was to purchase another company in order to utilize the NOLs. Jess Ravich's in- depth experience as an investment banker meant this was likely to occur. In order to retain the NOLs and not have to convert into an investment company, which would have been a costly and undesirable situation, ALJ would have to purchase a new company within about a year of the sale of KES. This gave them until around February 2014. The value of ALJ would be maximized by purchasing a company that had predictable cash flow in order to apply the NOLs for years to come. It was also likely, given the potential target acquisition and Ravich's experience, that ALJ would be able to purchase a company much larger than its current assets through some sort of debt financing.

The worst case scenario would be that ALJ would not have been able to find a company and would have liquidated, losing the value of the NOLs. For an investor, ALJ liquidating would have been far from an optimal result, but with no cash burn and the stock trading at that time for about 25% less than its net liquid assets, the worst case scenario would still have produced a positive outcome. However, liquidation would have been a very unlikely result given the other circumstances.

As 2013 progressed, ALJ retired more of its shares and made some money on its short term investments. There continued to be no cash burn. The final quarterly report before the acquisition of Faneuil, September 30, 2013, showed 26.7m shares outstanding and net cash and liquid investments of $27.8m, or about $1.04/sh in net assets.

Valuation At today's price of $1.74, ALJ trades at the following multiples: P/E: 7.5x P/EBITDA: 5.8x EV/EBITDA: 4.8x

At what multiple should ALJ trade? I don't have an answer for that. We do want to consider that Faneuil is now free to be more entrepreneurial, which is likely to mean higher growth. Faneuil's leadership is also heavily incentivized to grow aggressively. In addition to the ownership stake that Anna Van Buren, Faneuil's CEO, acquired in the sale to ALJ (she owns the other 3.57% of Faneuil), she also is entitled to an annual bonus of 10% of EBITDA above $5m per year. At today's run rate, that bonus is in excess of $400,000 and could grow quickly.

We can look at competitors in the call center space, such as Convergys (CVG), Teletech (TTEC), and Sykes Enterprises (SYKE). These aren't perfect analogies because of size, activities, and location, but it is notable that ALJ trades at significantly cheaper multiples than these companies, in some cases half as much. Given the potential for growth, ability for ALJ to handle their debt load, and large tax benefits, ALJ should probably trade at a premium to their competitors. Of course this comparison may be moot if competitors are currently over-valued.

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The quarterly report also mentioned that Faneuil "commenced implementation of two new programs that will recognize revenue in 2014." It is unclear if this refers to the healthcare exchange work for Washington state and Tennessee (which began during the past quarter), or if this refers to new unrelated contracts. Either way, this should mean an increase in revenue going forward.

While I can't currently put a price target on the stock, shares at $1.74 appear to be a safe investment given the underlying value of the company. This situation is akin to the uncertainty involved for companies that have been spun off. Their new flexibility and reduced bureaucracy often leads to surprising growth. While chances are good that will happen here, shares are also cheap if no growth occurs. If shares get above $2.75 (still only a P/E of 12, which would continue to be far below others in the space), then we'll have to get a bit more specific on the intrinsic value. Hopefully at that point we'd have a bit more information on operations and more of a history of results.

Information Arbitrage ALJ has 210 holders of record. While there are others who are following along, the company is too small for large, sophisticated institutional investors. This gives us a distinct information advantage. Additionally, other prospective ALJ investors may not appreciate the value of the company's NOLs. These NOLs are currently offsetting the company's tax rate by 34% and will continue to for many years. Another important aspect of the NOLs is that they incentivize the company's leadership to grow to a size to fully utilize them. When a company's leadership is inexperienced or lacks understanding of the principles of capital allocation, NOLs don't always have value. Here, Jess Ravich clearly understands their importance and has the means to maximize their value.

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Long on BlackHawk Network Holdings Inc

(HAWKB:US) Elevator Pitch: Underpriced Safeway Spin-Off operating in disciplined duopoly, growing at 20% per year with negative working capital.

Disclaimer: The author of this idea did not disclose an active position in this security at the time of posting, but may trade in and out of this position without informing the SumZero community.

Author: Steven Gorelik Age: 35 Title: Portfolio Manager Current Firm: Firebird Management Location: New York, NY Prior Experience: Deloitte Consulting Undergrad: Carnegie Mellon University Graduate: Columbia Business School Certifications: CFA

Blackhawk networks is a global distributor of Recommendation Details open and closed loop gift cards. With over

160,000 locations worldwide and more than 500 Asset Class: Common Equity content providers, Blackhawk is able to bring Sector: Financials unmatched scale to both vendors and distribution Country: United States partners. Blackhawk started as a division of Currency: USD Safeway in 2001 operating gift card mall within Situation: Event/Special Situations Safeway stores. Due to its unique value Timeframe: 2 Years+ proposition, Blackhawk was able to rapidly grow Catalyst(s): Spin Off through relationships with other supermarket Date of Recommendation: 6/13/14 chains as well as within other retail market Price at Recommendation: 24.83 segments. Today Blackhawk has 60,000 locations Target Price: 40.39 in United States and over 100,000 locations Current Status: OPEN abroad. After a partial listing in the fall of 2013, Recent Price: 35.28 remaining shares of Blackhawk were spun out to Realized Return: 42.1% Safeway shareholders in April 2014 as a result of Expected Return: -14.5% Safeway sale to Cerberus. Benchmark: iShares Core S&P Small-Cap

Return vs. Benchmark: 40.8% Why it’s cheap SumZero Rating: 64% Blackhawk is a classic spin-off misunderstood and

unwanted by the shareholders that received it as

Learn more about SumZero research at sumzero.com or contact [email protected] 41 an in-kind distribution. Safeway shareholders were, by and large, value investors and retail specialists that were attracted to the company by its size and low valuation in a traditional business that they understood well. Blackhawk is a smaller growth story that lacks trading comparables. Most of the shareholders who received the stock decided to sell it without giving the business much thought. The fact that shares that were received in-kind (HAWKB) that have 10 votes are trading at a significant discount to the HAWK shares that were IPO’d last year and carry only 1 vote show the extent of this dislocation.

Business Model and Value Proposition Majority of Blackhawk’s revenue come from sales of closed loop gift cards through its network of 160,000 locations worldwide. Operating a gift card mall as a store within a store, Blackhawk offers to its retail partners superior revenue per sqm and low shrinkage compared to their regular offerings. Based on the agreement with Blackhawk, retailers collect the money and remit one week later $94 for every $100 of face value of activated gift card, while retaining the other $6 as pure profit. Two weeks after the gift car is sold, content providers receive $91 from Blackhawk that retains the other $3 for its services. Most content providers are happy to pay of the value of the gift card since their marketing costs are generally range somewhere between 12%-15% of sales.

Since gift card malls require very limited capital expenditure and working capital is paid by the vendors, company enjoys phenomenal returns on invested capital and is able to grow without significant capital expenditures.

Profitability & Cash Flow Generation Out of the $3 that Blackhawk retains they currently spend $2 on marketing and G&A. The remaining $1 added up to about $100m of operating cash flow in 2013 vs $30m of maintenance CapX. In 2013, Blackhawk spent $100m on two synergistic acquisitions adding significant presence in Germany and expanding their corporate offering. Business has negative working capital since retailers pay Blackhawk in 7 days and it pays to vendors in 14, which means that growth does not require significant investment and all of the cash they generate can be used for either acquisitions or distributions to shareholders. Between operating cash flow and negative float, company provides 7-8% cash yield to current market valuation. Free Cash Flow is growing at 20%+ per year.

Competitive Advantage Blackhawk's competitive advantage stems from first mover advantage and is being very carefully cultivated through investments in technology and rapid network expansion. Its network of 160,000 global locations and 500 content providers has been cultivated over the last thirteen years and at this point represents unassailable competitive moat for anyone who is looking to enter into the business.

Strategy Having reached significant market position within US grocery store market Blackhawk is now expanding both internationally within the same product category and domestically into related product offerings. Internationally, within last year, company added over 20,000 locations in Japan and 60,000 locations in Germany. Both of these markets are less developed in terms of gift card culture which means lower number of transactions and load value. The company is able to leverage existing infrastructure with very low capital expenditure budget, which means international operations are value accretive. Domestically company is expanding its open loop gift card offering both to traditional retail and newer corporate

Learn more about SumZero research at sumzero.com or contact [email protected] 42 customers. These products also leverage existing technology and content provider relationships while adding new sources of revenue and profits to the company.

Valuation In order to properly understand Blackhawk’s value one has to adjust its working capital based on the contract terms with vendors and retail partners (7 day receivables/ 14 day payables). Year-end and quarterly balance sheets are distorted by high volume of transactions related to holidays at the end of each quarter. With these adjustments in mind HAWK is trading at an estimated FY 2014 - 15 P/E and 7x EV/EBITDA. 15x P/E does not take into account $30 million per year tax benefit that company will receive when the Safeway deal with Albertsons will close later this year (see below). Given the company’s high growth and returns on invested capital, we find valuation undemanding and estimate that a long term holder of the stock should be able to generate IRRs of 30%+.

DCF Valuation assuming 17% annual revenue growth (10% growth in number of transaction, 5% growth in average load value), 15% cost of equity, and 7x exit EV/EBITDA results in estimated value of the company of $40 per share (66% upside to current price).

Albertson’s deal and tax benefit: If Safeway - Albertsons merger is completed as anticipated by the end of the year, Blackhawk shareholders will get to enjoy the fact that Safeway agreed to bear the cost of taxable distribution of Blackhawk Stock. Blackhawk will retain the benefit of the tax basis and would be able to use it to offset its tax liability by $30m per year for the next 15 years. With 52m shares outstanding, this tax benefit adds up to $0.57c per share of additional EPS per year.

Learn more about SumZero research at sumzero.com or contact [email protected] 43

Long on Peregrine Semiconductor Inc

(PSMI:US) Elevator Pitch: PSMI is ridiculously undervalued. Stock has 50% upside based on non-core business alone. Upcoming catalysts offer additional high-impact upside.

Disclaimer: The author of this idea did not disclose an active position in this security at the time of posting, but may trade in and out of this position without informing the SumZero community.

Author: Tao Long Age: 38 Title: Senior Analyst Current Firm: Connective Capital Location: Palo Alto, California Prior Experience: Broadcom, Infineon Undergrad: California Institute of Technology Graduate: University of Illinois, University of Pennsylvania (Wharton) Certifications: CFA, CAIA

Recommendation Details Peregrine Semiconductor is a fabless semiconductor company specialized in high- Asset Class: Common Equity performance RF applications. It is best known as a Sector: Technology key antenna switch supplier in hero phones, such Country: United States as Apple iPhone 4s, 5 and 5s, and Samsung Currency: USD Galaxy S4. The company holds over 170 patents Situation: Deep Value in silicon-on-sapphire (SOS) and silicon-on- Timeframe: 6 Months - 1 Year insulator (SOI) processes and design techniques, Catalyst(s): N/A and has shipped over 2 billion chips to date. Date of Recommendation: 6/16/14 Price at Recommendation: 7.02 The stock came under pressure since late 2013 Target Price: 10.50 because of their revenue concentration at Apple, Current Status: OPEN which accounts for approximately 30% in 2013. Recent Price: 12.45 The stock hit an all time low of $4.75 (intraday) on Realized Return: 77.4% February 4, 2014 after the company disclosed Expected Return: (15.7%) during the earnings call that they lost the antenna Benchmark: IShares Core S&P Small-Cap switch socket in iPhone 6. On the earnings call, Return vs. Benchmark: 76.3% CEO, Jim Cable, made the following remarks. SumZero Rating: 72% “I will never allow Peregrine to take a course of action that would jeopardize our core intellectual property position. We have spent 25 years building

Learn more about SumZero research at sumzero.com or contact [email protected] 44 our fundamental patent position and no one customer is worth risking that, no matter how large. That may mean sacrifices to near-term business, but we believe there is a deep value in our intellectual property and the strategic value of this…will become more apparent as the RF industry evolves.”

In other words, Peregrine’s design loss is not related to their technology or products, but is a result of the management’s resistance to Apple’s demand to commoditize their IP. The stock has recovered somewhat, and is trading at around $7 today.

While it is disappointing that Peregrine lost the 2014 product cycle opportunity at Apple, the market overreacted and failed to 1) properly value the company’s non-handset business (25%-30% of total revenue) and 2) consider a number of upside in the next six to twelve months. In fact, the current market cap undervalues the high margin non-handset business by 75%.

Healthy Non-handset Business Alone Is Worth More Than the Current Market Cap About 25%-33% of Peregrine’s revenue is from non-handset business, a market segment that covers a diverse set of industries, including wireless infrastructure, broadband, test and measurement, industrial, aerospace and defense—all very high margin markets.

In 2013 Peregrine’s non-handset revenue is approximately $55 million at 60%-plus gross margin. Since 2010, this business has been growing at 10% CAGR, much higher than the sector average of 5-6%. Peregrine should grow faster than end-markets because gallium arsenide (GaAs) chips are being replaced by silicon-on-insulator (SOI) chips. So there is a share gain dynamic. Unlike in mobile, customers in this segment are actively seeking SOI alternative to GaAs because of SOI’s better reliability and better repeatability. In their Q1’14 earnings call, the company reported broad-based growth from this segment and expected the trend to continue.

With a group forward EV/sales multiple of 4.6x (average for the next two years), this non-handset business alone is worth $300 million. (Note: Analog Devices announced to acquire Hittite for $2 billion, or 7.1x LTM revenue on June 6, 2014.) The valuation of this segment alone is 75% higher than Peregrine’s current EV of $171 million. In addition, PSMI has $63 million cash and cash equivalent, but no debt.

Global 1 Module Can Provide Substantial Upside The management resisted Apple’s demand because they are confident of their upcoming Global One (G1) module. This product is an integrated RF front end solution that supports all of the 40-plus LTE bands worldwide. Peregrine announced and showcased G1 at the Mobile World Congress in Barcelona, February 2014.

The holy grail is to have a single radio frequency module that supports any of the 40-plus LTE bands so that 1) handset makers do not need to manage multiple SKUs and 2) end users can use their LTE phones in any part of the world with LTE coverage. In fact, Qualcomm sees the complexity of LTE RF as a significant roadblock for LTE adoption. In early 2013, Qualcomm announced RF360, a CMOS SOI- based radio frequency chipset to solve this very problem. Since Qualcomm’s CMOS SOI process provides better integration at the expense of lower performance than the GaAs process, Qualcomm had to optimize the performance in other parts of the system (e.g., in the baseband) to maintain overall

Learn more about SumZero research at sumzero.com or contact [email protected] 45 performance. So far, RF360 is only used in a low-volume ZTE smartphone SKU. Qualcomm certainly has a long way to broad success of its RF360.

Peregrine currently is providing G1 evaluation kit, and is working with multiple partners (baseband vendors, module vendors and phone vendors). The company expects G1 to penetrate handsets for the 2015 product cycle, given the additional system level work with baseband and RF module vendors. On the most recent earnings call, the company announced a pull-in of G1 schedule by two quarters from 2H15. To sum it up, G1 solves a real problem in building a true world LTE phone and is the first CMOS solution that performs as well as GaAs solutions, an unprecedented technical accomplishment.

Apple Opportunity Is Not Over Yet It’s well known that Apple diversifies its suppliers. Since the first iPhone launch in 2008, the market has seen several times that Apple engaged, disengaged and re-engaged with the same vendors. For instance, Triquint lost iPhone 4 Verizon SKU’s PA sockets, but became a big winner in iPhone 4s. In the case of Peregrine, its antenna switch first appeared in the original iPhone (link) through Murata. Subsequently, they used other vendors for iPhone 3G, 3GS and 4. In iPhone 4s and 5, Apple re-engaged with Peregrine through Murata and the company had 100% share in those models. In iPhone 5s, Apple diversified antenna switch suppliers among Peregrine, Skyworks and RF Micro Devices. Besides Apple’s supplier engagement pattern, there are further reasons to believe that Peregrine can come back to iPhone.

Valuation As mentioned in the earlier sections, the valuation for Peregrine can be simply based on its non-handset (HPA) business of $300 million EV. Adding $63 million cash currently on its balance sheet, the market cap is $363 million. This market cap suggests a share price of $11 (rounded), which represents 57% upside from the $7 level the stock is currently traded at.

Even if we ignore the following upside possibilities, and take the street consensus view that the company will lose $0.45 in the next five quarters before turning to profitability, the price ($10.55) still represents 50% upside.

● Global 1 module commercial launch in 2H15 ● Broad growth in white label LTE phone in 2H14 ● Regain some share in Apple iPhone 2015 product cycle ● Favorable outcome of lawsuit against RFMD

Catalysts and Risks Besides the strength in broad non-handset segment, there is no catalysts for the company till late 2014. ● Late 2014: MediaTek LTE chip production for white label phone market to take off ● Late 2014 / Early 2015: component selection for 2015 iPhone product cycle ● March 2015: Mobile World Congress to see Peregrine’s G1 update ● 2H15: Global 1 commercial adoption

Given the discounted stock price today, the risk in the stock is low. However, without short term catalysts, the stock is more exposed to market sentiment than its fundamentals.

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Short on Nimble Storage Inc (NMBL:US) Elevator Pitch: NMBL is a small-enterprise storage-box hardware company with unsustainable margins that is losing money today, trades at 30x revs; very challenged to grow into its near-$4b valuation.

Disclaimer: The author of this idea did not disclose an active position in this security at the time of posting, but may trade in and out of this position without informing the SumZero community.

Author: Sean Brown Age: 26 Title: Analyst Current Firm: Ancient Art, LP Location: Austin, TX Prior Experience: Undergrad: University of Texas (Austin) Graduate: N/A Certifications: N/A

At $47.70/share, we view significant downside in Recommendation Details NMBL. Why?

1) A super-premium valuation of 30x properly- Asset Class: Common Equity diluted EV/run-rate revenues. In addition, they are Sector: Technology not generating positive EBITDA and have not Country: United States shown significant EBITDA margin expansion Currency: USD despite slowing down sales+marketing spend Situation: Growth growth over the last 3 quarters. Timeframe: 2 Years+ 2) Competitive, technological, and technical Catalyst(s): N/A headwinds. This was confirmed, first and Date of Recommendation: 1/27/14 foremost, by calls with several forward-thinking Price at Recommendation: 44.43 small/mid-size enterprise VARs, all of whom sell Target Price: 15.00 NMBL and all of whom are not just glorified Current Status: OPEN resellers of EMC or NetApp etc. This was Recent Price: 28.36 augmented through research on competitors and Realized Return: 36.2% deep dives into alternative technology Expected Return: 47.1% architectures and storage strategies. Benchmark: iShares Core S&P Small-Cap 3) At a ~$5.5-6.0b takeout price, with few Return vs. Benchmark: 30.2% natural suitors, NMBL has little prospect of being SumZero Rating: 89% acquired here.

NMBL designs, assembles, and sells SAN (Storage Area Network) boxes (“arrays”). The main use of SANs is to serve as storage for enterprises that have outgrown NAS (Network-Attached Storage) and want to store volumes of data, often for targeted purposes. NMBL’s SAN boxes contain several commodity

Learn more about SumZero research at sumzero.com or contact [email protected] 47 components: HDDs for high-volume storage, SSDs which are used as cache drives, DRAM, a multicore Intel CPU, iSCSI connection, and basic I/O (10G/1G Ethernet, 6Gb SAS). NMBL IPO’d in early December. The main venture backers are Accel and Sequoia. The final round of fundraising was done in August ’12 at $9.58/share.

NMBL released its first arrays in mid-2010 and quickly grew to $58m in run-rate revenues in Oct. ’12. Since then, NMBL has grown rapidly, at 23% compounded top-line growth/quarter. NMBL offers hybrid SSD/HDD storage boxes for a similar street price to significantly less-performance Dell Equallogic boxes and, historically, a much lower (60-100% cheaper) price than EMC VNX1 or comparable NetApp arrays.

Our calls and reading show that the main targeted purpose that NMBL boxes are used for today is to act as a purposed storage client for VMWare and desktop virtualization (VDI) through Citrix or VMWare. (See also this customer presentation or this one.) While NMBL likes to trumpet other uses – storage for Exchange, SQL server, or even Oracle databases – all of the VARs we talked with said the vast majority of the cases where NMBL makes sense vs. other solutions is for small/mid-sized VDI deployments of 100-300, and sometimes up to 500, seats.

According to the VARs, NMBL’s sweet spot today is an SME needing to run 100-200 virtual desktops (NMBL talks about deployments with 1,500 desktops, but all the VARs said that it would be unrealistic to use NMBL arrays for such a task). This market is inherently limited, as one VAR we talked to explained: “While the VDI market is still doing well, the 2nd derivative is certainly negative. Enterprises are looking at the best ways to deploy mobile/tablets. The places where VDI is most important – education, government, large enterprise – already have it to a large extent.” (Also see this good InformationWeek article from a few months ago entitled “The Year of VDI: Never.”)

*Competition from all-Flash: Solidfire, EMC XtremIO, Pure Storage

*The biggest direct hybrid competition: EMC - As one VAR we spoke with said: “No one has been fired for buying EMC.” It takes a significant price:performance advantage for the IT guy of a small enterprise to stick his neck out and go for an upstart. It seems, though, that EMC’s VNX1 SAN was so poor that they were beginning to lose traction to NMBL (and others) in this space. EMC released VNX2 in September, telling all and sundry that they rewrote all the compression, tiering, and dedupe algorithms to play better with Flash and better leverage multicore CPU.

*Competition from direct peers: Tegile, Tintri, Nutanix - Tegile and Tintri are direct competitors – hybrid-array pureplays with hardware + software architectures very similar to NMBL. I think Tegile is a more serious threat to NMBL than Tintri. - Many of the VARs we talked to say that support of more I/O standards is a major advantage for Tegile vs. NMBL. According to this white paper, VMWare virtual machines will run faster through Fibre Channel (assuming throughput is the bottleneck). We also received VAR feedback that some small- enterprise IT staff are already accustomed to working with NFS, and would have some resistance to change. - For all this hype – multiple VARs told us that Nutanix is “revolutionary/next-gen/new paradigm,” while NMBL is definitely not - Nutanix’ round valued the company at $1b, ¼ the valuation attributed by the market to NMBL.

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*Competition from below: Synology NAS - Looking at Synology’s newest enterprise NAS, it seems that for many applications, there is little real benefit to using NMBL, while the cost of NMBL, starting at $55k, is 11x (you do have to buy your own HDDs and SSDs separately for Synology, so true cost differential is probably more like a 8-9x). o Synology has replication (with automatic failover); NMBL does not. This is important to many SMEs with 2-4 office locations that either want to have mirrors for user-friendly redundancy/backup purposes.

*Competition from the public cloud - This is especially true for applications like Exchange server. Why would an enterprise with a few hundred, or even a few thousand, employees want to spend significant CapEx on an Exchange server today and then spend an additional $55k+ on NMBL storage for Exchange? They could have Exchange hosted by MSFT for a very low monthly fee ($4-8) – which can be bundled with Office licenses for a total of just $15-20/mo - and never worry about upgrading Exchange certificates, installing a new Exchange on the server, maintaining or buying new server/storage hardware, support from multiple vendors (since NMBL does not make servers or switches or routers), etc. - At some point, even VDI itself will move to the public cloud.

C*ompetition from software-defined storage: VMWare VSAN - Long-term, NBML is challenged by the emergence of alternatives for end-users that are either significantly more performant (PCI cards and all-SSD SANs) or significantly more asset-light and easier to reconfigure (public cloud services). It is also facing an existential threat from competitors that want to make SANs significantly cheaper: VMWare VSAN and other software-defined SANs. While software- defined storage has been a – failed – buzzword for a long time, several VARs we talked to think that VMWare is serious about disrupting the SAN hardware market through its VSAN project, which is currently in beta.

Valuation What is the 30x EV/revenues valuation telling us? Even at its early-stage richest, in Nov ’07, VMWare EV/run-rate sales was 24x. Despite extreme success since – revenues have grown at an awesome 24% 6-year CAGR and gross and EBITDA margins have expanded – VMWare EV is actually lower today than in Nov ’07 (stock price is almost flat). Near the lows, after announcing Q4 ’08, VMWare stock was down 70% vs. after announcing Q3 ’07. What I am saying: VMWare was priced cheaper – and at that time was actually highly EBITDA-positive – in Nov ’07, and has taken 6 years to grow into that valuation. Quite a hurdle for NMBL, whose products are also less sticky than VMWare.

While some of the competitive pressures mentioned above are mid to long term, 30x revenues is a very “long-term” multiple – the sell side has decided to take a shortcut and value NMBL at a double-digit multiple of FY Jan ’16 or Jan ‘17 revenues, with the more bullish sell-side (Stifel) going as far as predicting EBIT breakeven in Jan ’16, “just” two years from now. Goldman takes the time to do the math – a 10-year DCF – and even assuming heroic, historic topline growth of 55%, 44%, 43%, 42%, 42%, 40%, 38%, 35%, 27% over the next respective 9 years, finds NMBL a “hold” despite being lead bookrunner on the IPO. In the nearer term, the recent and impending aggressiveness of Nutanix, Tegile, and especially EMC with VNX2 does not augur well for NMBL’s 2014 prospects.

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Simply put, NMBL is not worth nearly the $4.0b EV the market ascribes it today. This will become more clear over the next year as direct competitors Nutanix and Tegile accelerate spending/aggressiveness on the way to IPO. When they IPO, the public markets will also realize that “Hey, maybe NMBL isn’t so special/unique after all.”

Lockup expiry The top technicals issue is the lockup of a massive % of shares, which expires on 6/10/14 (4.5 months away). All 62.3m shares outstanding pre-IPO – as well as the restricted stock – are locked up. Slightly over 10m will be unlocked by non-affiliates - i.e., no need for a Form 4 filing upon disposition and not subject to shelf filing/Rule 144. Then there are another 39m shares held by the VCs, who can get a S-3 (shelf) filling post-lockup and sell shares. As NMBL has 9.2m shares of float today, this is significant incremental volume that could come on the market later this year. Large sales post-lockup have put pressure on several hot IPO stocks recently, most notably SFM, RALY, TXTR (even before the write-ups), etc. Of course, lockup expiries do not prevent all runups (e.g. DATA). However, large amounts of likely selling is never a good thing technically, and in cases like MKTO the effects “last” for a couple months (before momo once again rears its head against a short position). Lately, it seems short sellers have begun shorting names pre-lockup expiration – meaning we could see a small/medium-sized technicals catalyst in 3-4 months.

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Long on Take-Two Interactive Software Inc

(TTWO:US) Elevator Pitch: TTWO trades at a discount to peers despite hugely successful GTA V release, improved intellectual property and a massive cash balance.

Disclaimer: The author of this idea did not disclose an active position in this security at the time of posting, but may trade in and out of this position without informing the SumZero community.

Author: Krum Dukin Age: 27 Title: Analyst Current Firm: Ampera Capital Location: New York, NY Prior Experience: N/A Undergrad: Suffolk University Graduate: Bentley University Certifications: CFA

Take-Two Interactive Software (TTWO) is a Recommendation Details developer and publisher of games under its two

wholly-owned labels Rockstar Games and 2K. The Asset Class: Common Equity company's games are designed for all types of Sector: Technology devices from consoles to smartphones, and is Country: United States best known for the Grand Theft Auto (GTA) Currency: USD franchise, but TTWO's lineup also includes other Situation: Value top rated games such as BioShock, Borderlands, Timeframe: 1-2 Years Max Payne, and Red Dead among others. Catalyst(s): M&A/Buyout Target Commonly referred to as a one-trick pony due to Date of Recommendation: 1/6/14 the hugely successful GTA franchise (GTA had Price at Recommendation: 17.60 sold 127mm copies as of last 10k, and Target Price: 27.00 additionally, more than 30mm after the release of Current Status: OPEN GTA V this September), TTWO's stock rises Recent Price: 27.59 significantly in the year prior to a GTA release, Realized Return: 56.8% which was observed both in 2013 (GTA V) and in Expected Return: (2.1%) 2008 (GTA IV). Benchmark: iShares Core S&P Small-Cap Return vs. Benchmark: 53.3% SumZero Rating: 93% According to the sell-side, the current valuation fully reflects the revenue from GTA V and given that there won't be another installment of the

Learn more about SumZero research at sumzero.com or contact [email protected] 51 franchise over the next several years, there's no reason for the stock to move higher. However, the market seems to be overlooking several key factors: (i) over the last few years TTWO has built a number of strong new franchises and according to management the company will be coming out with 10 titles over the next 1.5 years, (ii) due to the phenomenal success of GTA V, TTWO generated massive cash and receivables (due in 60-90 days). As a result, pro-forma net cash and receivables are ~$1.0bn, while the market cap is ~$1.5 bn resulting in a very cheap valuation, (iii) TTWO is a great acquisition target for Electronic Arts (EA) and Activision Blizzard (ATVI), and (v) TTWO offers additional upside, not discounted in today's valuation, consisting of the monetization of micro transactions in GTA V, expansion in Asia, and expansion on mobile. As a result, I believe TTWO offers an asymmetric risk/reward opportunity.

Market View TTWO is an 'entertainment' company, and as such, its performance varies with the success of major releases (the GTA franchise in this case), which inevitably leads to large variability in year-over-year revenues. When the last GTA came out in 2008, the upside to a blockbuster release was already priced in TTWO's valuation, and as a result, the stock didn't go anywhere for years (the recession surely didn't help). Currently, investors see an analogous situation with the GTA V release. Despite exceeding by a wide margin all sales estimates, GTA V's success did not impress sell-side analysts who concluded a successful release was already priced in the valuation. Given the lack of a new GTA franchise installment over the near term, there is no upside to holding TTWO stock - investors want more clarity around release schedules and future profitability. TTWO suffers from lack of visibility and this uncertainty leads to the current low valuation.

Additionally, up until the end of November, Carl Icahn held a large position in the stock (13%) and had appointed two board members. The market was expecting that Icahn would push for a sale of TTWO to one of its larger competitors (Electronic Arts (EA) or Activision (ATVI)); however, Icahn was bought out by TTWO and the two board members resigned. The market did not like the move and the stock was down ~5%, despite the fact that after buying back Icahn's 12.2mm shares and another 4.2mm in the open market TTWO's float was reduced by 16% (excluding the potential convertible debt dilution of ~26.5mm shares).

Improved Franchise Contrary to the notion that TTWO is a one-trick pony with GTA, the company has an impressive line-up of successful intellectual property and has developed 9 titles selling more than 5mm copies. What's more important, 5 of those franchises have been added since 2007. In a sense, TTWO has almost doubled the value of its intellectual property since the previous GTA came out. As a result, the company should benefit from a much smoothed yearly revenue fluctuations given there are more titles being refreshed. Looking at the number of franchises and their historical releases, there are on average two major titles that should be coming to the market per year over the next four years, as opposed to the only one in recent history (2009 and 2011). And that assumption excludes any new blockbuster franchises that the company will develop over that period. Additionally, TTWO's successful new annual sports titles, NBA 2K and WWE 2K, should additionally ease the fluctuations in performance.

Micro Transactions With the introduction of GTA online the company has begun testing microtransactions, which allow players to buy in-game items such as cars, etc. This revenue model is popular with free-to-play games which are free to play and the publisher makes money when people make in-game purchases.

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Additional Upside Potential • GTA V sales are not done yet • Expansion in Asia • Games on mobile • MLB contract roll-off

Outstanding management team TTWO is spearheaded by Strauss Zelnick and Karl Slatoff who have been with the company since 2007, both coming from ZelnickMedia. Part of the stock's underperformance is due to the fact that they are not your typical Wall Street-focused management team. However, this management team insists on a long-term vision for the company - they want to make the best product over and over again, which in their view will keep bringing customers back to TTWO's products. As a result of this philosophy, releases could be pushed back until they are absolutely perfect (GTA V came out 5 years after the previous installment) and that is something Wall Street doesn't like. Furthermore, TTWO hasn't historically wasted cash on overpriced acquisitions (something EA does), and management is shareholder friendly as seen by the recent buybacks. For long-term investors TTWO has the right management team that will build value for shareholders over time.

Normalizing Performance and Valuation Given the yearly fluctuations in revenue, it's important to estimate normalized performance in order to value the company. While revenue does fluctuate, if we look at the rolling three year average performance, we can see that long-term trends are positive. Even though GTA V obviously distorts the trends, the improved intellectual property of TTWO clearly drives revenue growth. As such, I believe it's not unreasonable to assume normalized net revenue of $1,350mm, which is the five year CAGR (~11%) applied to FY 2013 revenue.

TTWO's earnings have been very inconsistent historically, especially compared ATVI who publishes its franchises annually and has recurring subscription revenue thanks to WoW. While it's interesting that TTWO's CEO recently said that he expects his company to achieve profitability every year going forward, for valuation purposes I'd shy away from trying to come up with an estimate of operating margins due to the fact that, with the exception of ATVI, profitability margins for comps vary widely and have huge yearly fluctuations, making a comparison unreliable (comps include Capcom, EA, Changyou, NCSoft, Nexon, Square Enix, Ubisoft, Zynga). Thus, in this case I would use EV/Sales and P/Sales for TTWO's valuation.

Despite making the best games and enjoying organic growth, TTWO trades at a meaningful discount to its peers. If we apply a 30-40% discount to ATVI's multiples, due to the fact that TTWO may never reach that level of profitability and stable revenue source from subscriptions, TTWO stock still appears undervalued by 45-55%, resulting in a fair valuation of ~$25-$27 per share. Note: I've excluded the convertible notes from my valuation because I don't believe management will allow the dilution and will likely refi the debt before the stock appreciates enough for convertible to exercise (in Jun'13 TTWO redeemed the 2014 senior convertible bonds for a premium).

Catalysts

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A short-term catalyst is the possibility that TTWO meaningfully exceeds its next revenue estimates. The company guided for revenue in the range of $650-$750mm and average analyst estimates are for a $700mm quarter. Using conservative assumptions, it's not difficult to see revenue coming in above $800mm driven by $400+mm in GTA V sales. Vgchartz shows that GTA V sold ~9.4mm copies on Xbox and PS for the quarter, and if apply a discounted retail price of $40, this results in $374mm in revenue. Including 10% revenue in digital downloaded sales for GTA V (same percentage as in first six weeks), or $37mm, and $20mm in in-game purchases (lower than sell side estimates), we get total GTA V revenue of $431mm. Last year in the holiday quarter, TTWO did $415mm in GAAP sales driven by the release of NBA 2K13, continued sales of Borderlands 2 (released in September 2012), and sales of XCOM. The company should be able to match this performance this year - NBA 2K14 is tracking slightly better than NBA 2K13, WWE 2K14, a new franchise, had 1.2mm units sold, which is close to Borderlands 2 sales last year for the same period, and BioShock Infinite, despite coming out in March 2013, has been selling strongly and will likely be enough to substitute XCOM's revenue. As a result, non-GTA games should bring in ~$400mm in sales, for a quarter likely exceeding estimates by a wide margin.

Conclusion TTWO is the premier publisher of video games, but currently trades at a significant discount to its peers. Despite a hugely successful GTA V launch, investors have been quick to take profits and not worry about the company's future uncertainty. However, improved intellectual property and multiple avenues of untapped revenue potential, coupled with a rock solid balance sheet should result in a 45%-55% appreciation in TTWO's stock. Catalysts for the appreciation include continuous outperformance of expectations and a buyout offer from one of the larger competitors.

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Long on RS Software India Ltd (RSST:IN) Elevator Pitch: We expect revenues to grow at over 20% CAGR over the next 5 years. The company generates $67M of revenues & can be bought for $30M. It holds cash of $7.9 M & has 0 debt.

Disclaimer: The author of this idea did not disclose an active position in this security at the time of posting, but may trade in and out of this position without informing the SumZero community.

Author: Maneesh Nath Age: 39 Title: Senior Analyst Current Firm: Arcstone Capital Location: Lucknow, India Prior Experience: Century Capital Partners, Markit Group, Capital One, Eton Corp, Ford Motor, Tata Motors Undergrad: National Institute of Technology (Surathkal) Graduate: University of Cincinnati (OH) Certifications: N/A

RS Software India Limited is one of the India's key Recommendation Details niche pure plays in the electronic payments

market. The global electronic payments market is Asset Class: Common Equity growing rapidly because developed economies Sector: Financials are transitioning to more internet and mobile Country: India phone based transactions and electronic Currency: INR transactions are increasingly replacing cash usage Situation: Value in emerging markets. RS Software has 20+ years Timeframe: 6 Months - 1 Year experience in this niche software industry, starting Catalyst(s): N/A as a technology solutions provider facilitating Date of Recommendation: 1/23/14 electronic money transactions. The company is Price at Recommendation: 180.35 led by an able, dynamic, and tenured Target Price: 520.00 management team with a vision to increase Current Status: OPEN company's market share. Recent Price: 493.20

Realized Return: 173.5% Revenues have consistently, and without Expected Return: 5.4% interruption, increased QoQ and YoY since its Benchmark: BSE SENSEX inception. The company provides essential Return vs. Benchmark: 148.5% services to merchants, acquirers & issuer SumZero Rating: 41% processors, payment networks (Visa Card),

financial/banking institutions, financial software product vendors and e-commerce and mobile payment providers. RS Software's core strengths are its first-mover advantage and enduring client relationships.

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RS Software has added value and continuously improved its offerings with its knowledge institutions of RS School of Payments and RS Payments Lab, which form the foundation of its Global Execution Methodology (GEM). Consumers in India and around the globe are spending more money digitally via plastic cards and online transactions.

OPPORTUNITIES AND STRENGTHS Globally, only 15 per cent of payments are in electronic form which amounts to annual revenues of USD 1 trillion for the payment processing industry. The remaining 85% is a very large market opportunity for the company. In India, paper money is still used in 93 percent of transactions, representing a large domestic market opportunity.

RISKS AND CONCERNS The company has client concentration risk in that the majority of the company's revenue comes from a single long-term client (Visa). To mitigate this risk the company is focused on aggressively diversifying and expanding both in terms of clients and geography by investing in their sales engine, business development and also looking for an ideal acquisition. Sales and marketing investments have increased significantly over the past year.

Market Structure of Payments Industry: There are minimum threats to profits because the present penetration rate of this global industry is in its nascent stage and there is ample room for future growth without harming existing players.

Bargaining power of the suppliers and buyers (RS Software): In the IT business, employee expense is the major component and so far the company has done well managing costs and at the same time retaining talented people who drive the software development process essential for the business. Attrition rates are below industry average. The company's location in Kolkata faces lower attrition as compared to companies in the Indian Silicon Valley of Bangalore.

Internal Rivalry: As there is plenty of room to grow for the incumbents and new entrants alike, internal rivalry in the business is not of a major concern at the moment. Companies like RS Software, who have gained a high level of experience during last 20+ years of serving big clients, don't face a major risk of losing existing market share due to internal rivalry.

Threat of Substitutes: There are not many substitutes for the enriched and niche services and solutions which RS Software is presently providing. Spending habits of consumers via paper, plastic, online, mobile, etc. is fundamentally stable. Clients in this industry are aware of this characteristic and will have sufficient time to alter their requirements from the service providers like RS Software.

FINANCIAL SUMMARY RS SOFTWARE EXCEEDS MOST OF OUR FINANCIAL SCREENING CRITERIA Sr. No. As of 4th Oct 2013 RS Software 1. Return On Equity (ROE) 42% 2. Return On Capital Employed (ROCE) 67% 3. Return On Assets (ROA) 29% 4. Earnings Growth 10%

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5. Sales Growth 12% 6. Net Profit Margin (NPM) 12% 7. Price/ Earnings (P/E) 4.76 8. Earnings Yield (EY) 21% 9. Price to Book Value (P/BV) 1.49 10. Price/Sales (P/S) 0.52 11. EV/EBITDA 2.30 12. Daily Volume (Averaged Over a Month) Rs. 11 Lakhs 13. Debt/Equity (D/E) 0.00 14. Percentage of Promoters Shares Pledged 0.00% 15. Current Ratio 5.30 16. Promoter Group Share Holding 39% 17. Dividend Payout Ratio 30% 18. Dividend Yield (DY) 2.00% 19. Number of Analyst Covering the Company 1

RS Software surpasses nearly all of our initial screening metrics and exemplifies traits of a good investment opportunity. The business has moderate Capex. Its main expenditure is on human capital which is a feature of its industry. The company has a dividend yield of nearly 2%.

CATALYSTS RS Software is a cash-rich company which has recently started seeking a compatible acquisition candidate to provide a more diversified revenue mix and reduced client concentration risk. Cloud computing and data analytics will provide a strong catalyst for future growth.

RED FLAGS Investing in India is fraught with difficulties, risks, and unknowns. In most, if not all, emerging countries, all is not what it appears. Entering into the market with Western eye shades is problematic. A selection process in the west becomes an elimination process in India. Guarding against nefarious activities is an imperative. Although we do not pretend nor in any way eliminate that danger in our investments we do take unusual precautions to understand all the risks, both obvious and obscure.

Subsidiary companies: No red flags

Fees, transfers, and mechanisms to reduce and transfer company profits by increasing expenses, reducing income. No red flags

Lifestyle expenses shouldered by the company. No red flags

CONCLUSION As soon as the market starts tracking this under covered company and realizes the company's consistent financial performance (earnings growth, profit margins), the stock should attract broad investor interest. A slight upgrade of RS Software's present P/E multiple of 4.83 towards the industry average of 12 will help fill in the gap between the market price of Rs. 150 and a very conservative intrinsic short-term value estimate of Rs. 180.

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Taking into account all the factors, such as above average financial performance, management quality, growth potential of the global and Indian digital payments industry, RS Software is poised to do well in the future.

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Long on Amicus Therapeutics Inc (FOLD:US) Elevator Pitch: A rare disease developer expected to receive positive clinical outcome and bring new product to a billion dollar market soon, deeply undervalued from misunderstanding of product potential.

Disclaimer: The author of this idea did not disclose an active position in this security at the time of posting, but may trade in and out of this position without informing the SumZero community.

Author: Jackie Hua Age: 37 Title: Portfolio Manager Current Firm: Zhisheng Capital Location: New York, NY Prior Experience: McKinsey & Co., Harvard Medical School Undergrad: Peking University Graduate: Stanford University Certifications: N/A

Amicus Therapeutics is a rare disease drug Recommendation Details developer with leading product Migalastat in

phase III trial for Fabry disease. Stock price Asset Class: Common Equity tumbled early 2013 when Migalastat Phase 3 Sector: Health Care disappointed, GSK subsequently returned Country: United States partnership rights. However, FOLD has since Currency: USD updated clinical design and achieved positive Situation: Event/Special Sitiuations outcome on the same patients, without Timeframe: 3-6 Months corresponding stock recovery. Result for a Catalyst(s): Regulatory Change second phase 3 trial is due Q3 2014 and expected Date of Recommendation: 6/24/14 to be positive. This should lead to approval of a Price at Recommendation: 2.90 differentiated product in a billon dollar market Target Price: 7.70 and more than double Amicus value. Current Status: OPEN Recent Price: 8.03 Realized Return: 176.9% FOLD is just starting to attract professional Expected Return: (4.1%) investor attention: Joseph Edelman’s Perceptive Benchmark: iShares Core S&P Small-Cap Advisors acquired 8.3M share (13%) holding on Return vs. Benchmark: 174.8% May 29. Major risk for this investment is that in the SumZero Rating: 72% unlikely event the new phase 3 disappoints, FOLD can lose 30% or more value with few near term catalysts to drive recovery.

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FOLD overview: FOLD is an orphan disease specialist built on an innovative small-molecule chaperon therapy platform. A number of orphan diseases are caused by enzyme deficiencies (e.g., Gaucher, Fabry, Pompe), leading to accumulation of toxic lipid or sugar that harm organ function. FOLD targets such diseases through innovative chaperones, small molecules designed to bind and stabilize the mutant protein in patients to improve folding and rescue function. This approach has been widely researched in labs but FOLD is the leader in clinical application. It provides an oral alternative to the current biologic therapies that require regular infusion, is more convenient and has less infusion side effects.

Majority of FOLD’s value is in a single product, Migalastat for Fabry’s disease. Company also has a chaperone therapy for Pompe’s disease through 2013 Callidus Biopharma buyout; however here the field is more crowded, with heavy weights Biomarin and Genzyme each advancing next generation product (BMN701 in phase III, Genzyme Neo-GAA in phase I). FOLD also has partnership with Biogen on Parkinson’s disease and MPS-I therapy in very early, pre-clinical stage.

Fabry’s disease market overview: billion dollar market with clear unmet need and space for differentiated product Fabry’s disease is a lysosomal storage disorder where Alpha-GAL enzyme deficiency leads to the lipid GL-3 accumulation. Intense pain is a major daily concern, and kidney function loss a major source of mortality. GI problems, heart attack and stroke are additional issues. Symptoms can start at any stage in life. Farbry’s disease is a X linked disorder so used to be thought of as a male disease, but it is clear now that females can be affected too often with milder symptoms.

Fabry’s disease is a billion dollar market with two major incumbents today. The two biologics available (Genzyme’s Fabrazyme, and Shire’s Replagal that is not approved in the US) are synthetic enzymes with a combined $990 million sales in 2013 at ~$200,000 cost per patient. Patients received infusion at doctor office every two weeks for lifetime. Large quantity of enzyme is infused since less than 5% of the enzyme makes it to the target organelle the lysosome. Over time the patient can start making antibodies to the infused enzymes, causing neutralization of the biologic and loss of efficacy.

Addressing unmet need is critical in orphan disease market since price alone can’t convince patients to switch from tried and true life saving drugs. For example in the Gaucher’s disease market Protalix’s Elelyso has fallen short, achieving likely under 1% US market share after over two years, despite a partnership with Pfizer and a 30% price discount to market leader. Unmet medical needs in Fabry’s Disease include the following: ● 1.Patients who have build resistance to existing ERT need alternative treatment, especially in the US where Fabrazyme is the only treatment option. ● 2.Some patients have severe allergy to Fabrazyme: the enzyme is produced in CHO cells, carry some murine feature and can cause immune reactions. ● 3.Both ERTs require biweekly physician visits to get drug infused. Patients with mild symptoms, especially females with one mutant copy, may decide against treatment due to the incontinence.

The Fabry’s disease market is also friendly to new therapy in terms of new patients available who are potentially interested to try new therapy: the patient population is steadily expanding as new diagnostic approaches emerge including sequencing and new biomarkers (esp. lyso-Gb3). Prevalence estimation is

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Key Criteria *Migalastat clinical profile: Migalastat is likely a moderately efficacious medicine in subset of Fabry’s patients, with good safety profile, oral convenience, and no infusion concern. Study 012 finding in Q3 2014, if positive, will provide complete data package for filing. Success rate for Study 012 is in 70-80% range

**Migalastat commercial potential: peak sales of Migalastat mono-therapy should be in $100-200M range, justifying $400M valuation at 3X sales

In terms of competition, Migalastat is differentiated from the in market ERTs in oral convenience and safety profile. No pipeline competitors are major worries. Genz-682452, a novel oral from Genzyme, is still in phase I. Protalix PTR-102 is a biosimlar that carry the same issues as existing ERT. Experimental gene therapy for Fabry’s disease has been reported but again in very early stage of development.

FOLD also has ERT- Migalastat co-therapy in development: Migalastat should improve tissue delivery of the synthetic enzyme delivered, creating a differentiated therapy for the broad Farby’s population. Success of mono-therapy will boost company value by providing validation to the chaperone therapy platform to potential biotech partners, and improving chance of success for the ERT- Migalastat co- therapy.

Full FOLD base case value is ~$500M at sum of part valuation ● Migalastat monotherapy $300M: 3X peak sales= ~$400M, 70% risk discount for study 012 success (using conservative estimation on 012 success) ● Chaperone therapy platform $150M: $200M (conservative), 70% risk discount ● Migalastat ERT co-therapy $50M: 3X peak sales= $400M (assuming same peak sales as mono therapy); subtract $80M development cost, apply 50% risk discount, further discounted for 4 time periods at 10% annual rate given development timeline

**M&A potential: further upside possible once platform is validated by Migalastat approval

Financial position: adequate for near term FOLD has $72M cash on the book as of end of A1 2014, with adequate runway to Q2 2015. If study 012 does not succeed, management will likely need to raise additional funding for Migalastat development program and dilute existing equity.

Management: veterans in orphan disease from insider track The FOLD management team are experienced with orphan drug development. This is very important since the business model for orphan drug development is distinct from other therapeutics, requiring distinct skills in building relationship with patient and treatment community, and addressing reimbursement issue for these high priced drugs. John Crowley, the CEO of FOLD, was among the first generation of orphan disease developers. Mr. Crowley was motivated by the condition of his own children with Pompe’s disease, started a company devoted to the disease, and ultimately contributed to the development of Myozyme by Genzyme as one of the first ERT therapies.

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Major stockholders and transactions: Perceptive Advisors just increased holding to 13%, signals confidence in underlying GSK maintained 17.8% share as the largest stockholder (2013 annual report). Joseph Edelman’s Perceptive Advisors, revealed 8.3M share (13%) holding May 29, 2014, price point that day was $2.43/share. Risks: limited fall but long road to recovery if Study 012 fail

Major risk is clearly Study 012 failure in demonstrating non-inferiority. In such case FOLD will need new funding in $100 million range and 3-4 years to bring Migalastat mono therapy back to registration stage. In such case sum of part valuation will still be close to current EV (Migalastat mono therapy ~$100 M adjusted for time, clin risk, new clin development spend; platform value neglectable; ~$40M co- therapy). But market will likely react to the negative clinical findings with a knee jerk reaction of 30% or more price fall, and given the lack of near term catalysts price will take a long time to recover

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