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SmallCapandSpecialSituationsResearch

TheSmallCapandSpecialSituationsResearchreportoffersvaluefocused,in-depth

fundamentalanalysisofsecuritieswebelieveofferfavorablerisk-rewardprofiles.Weseekto

identifyandexploitmarketinefficienciesthroughourrigorousduediligenceprocess,and

applytechnicalindicatorswithagoaltoidealizetradeexecution.

Coverage

Whileknowinghowtovaluebusinessesisessentialforinvesting,acriticalcomponentinthe

investmentprocessinvolvesknowingwheretolookforopportunities.Webelieveour

coverageuniversecontainsampleopportunityforcapableinvestors.

1. SmallCapCompanieswithmarketcapitalizationoflessthan$2billion,includingthose

tradingonOTCExchanges.Wesearchforunloved,underfollowed,and/or

misunderstoodsecurities.Ouridealopportunityhasanimmediateorneartermcatalyst

forrealizationofunderlyingvalue.

2. SpecialSituationsTheunderlyingthemetomostoftheseinvestmentsischange.

Somethingoutoftheordinarycourseofbusinessistakingplacethatcreatesan

opportunity.Thedetailsofeachsituationvary,butnormallyinstitutionalconstraints,

illiquidity,complexityandinformationalinefficiencycreatevalueopportunity.Typical

SpecialSituationsinvestmentsoccurinthefollowingtransactions:

Spin-offs

Bankruptcies

Restructurings

RightsOfferings

MergerSecurities(CVRs,etc.)

Recapitalizations

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ResearchProcess

Ourresearchprocessisabottom-up,valuebasedapproach.Creativeideaflowrefinesourbroaduniverseintoabasketofworkableleadswhicharethenmetwithhard-nosedskepticism

andanalyticalrigor.

1. IdeaFlow

a. Proprietaryfundamentalscreens;

b. TargetedqualitativescreensthroughSECfilings;

c. UnusualActivity:Indexreconstitution,delisting,andinsideractivity;

d. Developingtrends.

2. Analysis

a. FinancialStatementAnalysis,emphasizingassetqualityandearningsreportedvs.

thetrueeconomicvalue;

b. PeerGroupandIndustryAnalysis;

c. Company&ExecutiveHistory;

d. OnSite/Companyvisitswhenwarranted;

e. TechnicalAnalysistooptimizetiming.

Strategy

Fromunprovenbusinessmodelstounfavorablecapitalraises,manytradersoutrightrefuseto

investigatesecuritiesliketheoneswecover.Thisbroad-brushthinkingoftenleadstooutsized

riskpremium,andthereforevalue.Inseekingobservablefactsandfollowinglogicalreasoning,

ourresearchaimstomitigateriskandidentifyunderappreciatedvalue.

Wewilldeliverstrenuouslyresearchedopinions,andformulateideasonhowtotradethe

namesbasedonourcombinedexperience.Theexpectationforhighvolatilitymustbe

appreciated,anditmustbenotedthatoutsizedpriceactionworksbothways.Patience,

positionsizing,timing,andexperiencecannotbeignored.

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Ethics&Disclosure

Ourproductinherentlydealsininstrumentswhosepricescanbemovedbyrelativelysmallsums.Notonlywillweoftenparticipateinthesecuritiescoveredasamatteroftrustinour

ownsystem,wemaytradeinthem,aswell.Weviewethicsasanimperative,andtherefore

willnotrefrainfromdisclosingpositionsatthetimeofwritingbuttherecanbenoexpectation

thatprompt,oreventimelynoticewillbegivenwhenchoosingtosell.Weviewstock

ownershipandtradingasanindividualmatter,notonlyonourpart,butonyours.Ifa

situationarisesthatchangesouropinionofagivensecuritythatopinionwillbedistributedas

soonasispracticable.Wereceivecompensationinconnectionwiththepublicationofthis

newsletterexclusivelyintheformoffeeschargedtoclients.

AboutKyle

KyleworksinCorporateFinanceforaFortune500company.Outsideofhisprofessional

activitieshedevotesthemajorityofhistimetomanaginghisowninvestmentsinthesmall

cap/specialsituationsspace.

AboutChris

UpongraduatingfromcollegeChrisspentalmostadecadeinconstructionmanagementwith

responsibilitiesincludingwritingcontracts,creatingschedulesandbudgets,andclient

interfaceforprojectvaluesrangingfromnegligibletotensofmillions.Beginningin2007,he

begantotakeownershipofamodestretirementportfolio,andseparatecashaccountwiththe

recognitionthatassetmanagementbeginsandendswiththeassetholder.Afterexceedingly

profitabletradingthroughthedown-turnandfollowingreboundhelefttheconstruction

industryintheSpringof2010todedicatemorefocustohislongtermresearchandmoretime

tohisshorterterminvestmentstrategies.

Valueinvestingisatitscorethemarriageofacontrarianstreakandacalculator.Thestrategyofbuying

whatsinfavorisafoolserrand,ensuringlong-termunderperformance.Onlybystandingagainstthe

prevailingwindsselectively,butresolutelycananinvestorprosperovertime.

SethKlarman