Market Overview

Which Investors Benefited from The Brick's 95% Gain?

From August 12, 2011 to November 19, 2012, The Brick (OTC: BRK) -- one of the largest furniture and appliance retailers in Canada -- rose more than 140 percent. The company is now being acquired by Leon's (OTC: LNF) for approximately $700 million.

On October 17, 2011, Rational Investment Group founder and manager Guy Gottfried recommended The Brick while speaking at the Seventh Annual Value Investing Congress. He provided a detailed presentation outlining the various reasons why investors should buy into The Brick, starting with its potential for "substantial FCF growth in near/medium term." Gottfried referred to it as a "high-quality business" with a "strong balance sheet." He said the firm has "excellent capital allocation" and is ran by an "intelligent management" team.

"It is a high-quality and extremely well-run business that trades at an undeservedly cheap price," Gottfried wrote on ValueInvestingLetter.com. "The Brick traded for $9-plus per share as recently as 2008 but was undercapitalized entering the financial crisis due to years of excessive dividends by prior management. It nearly went bankrupt before being recapitalized in mid-2009 in a transaction led by Fairfax Financial. It then recruited turnaround specialist Bill Gregson as CEO, and under his leadership has staged a dramatic recovery in its operations and financial condition."

That "dramatic recovery" allowed The Brick to accumulate $100 million cash, along with record profits and the best same-store sales in its space.

Regardless, Gottfried believed that The Brick was "still stigmatized by investors" following its near-death experience. He also said that it was illiquid due to the high level of insider ownership, along with the fact that it has almost no institutional following. None of those factors are related to the business fundamentals, he said.

As one of the "most recognized brands" in the Canadian retail sector (and as the second-largest furniture and appliance retailer in country), Gottfried had tremendous faith in the company.

With regard to the franchising side of the business, Gottfried said that The Brick had significant demand and was "underpenetrated in small markets." He added that the firm had low capital requirements and was highly profitable with a recurring revenue stream. The Brick even managed to maintain "meaningful growth" during the recent recession and amid the company's financial difficulties. Thus, Gottfried believed that The Brick's expansion was "set to accelerate."

In the 13 months following Gottfried's October 17, 2011 presentation, The Brick rose more than 95 percent. His market-moving recommendation proved to be invaluable for the Value Investing Congress attendees that heeded his advice.

Gottfried is scheduled to speak at the Eighth Annual Spring Value Investing Congress in Las Vegas next year. Scheduled to take place on May 6 and 7, 2013, the upcoming event will feature a number of prominent speakers, including Steven Romick, David Nierenberg, Cara Jacobsen, Phillip Goldstein, John Hempton and Whitney Tilson, among others.

Benzinga readers can save $550 off the entry price if they register and enter code S13BZ2 by Tuesday, December 11.

Follow me @LouisBedigianBZ

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