OCTOBER PERFORMANCE SUMMARY AND LOOKING AHEAD TO NOVEMBER

Portfolio Highlights For October:

– CIDM was the leading gainer in the portfolios during the month of October. The company announced a transformative acquisition during the month that completes their transition from a cinema services company to a leading digital content distributor. The acquisition is immediately accretive, with only a mild level of dilution taking place with a $13 million stock offering. The acquisition does provide CIDM with enough cash flow from operations going forward to avoid further dilution in the future, which has been the major concern among investors.

The company acquired Gaiam's “GVE” unit for $51.5 million. The most alluring part of the deal is GVE's licensing agreements with major entertainment brands such as WWE, NFL and Discovery, which immediately transforms CIDM's library, as well as their clout in the marketplace. Following the acquisition, CIDM now has over 32,000 titles, relationships with every major retailer from Netflix and Amazon to Walmart and Target.

This transaction turns CIDM into a company with $320 million in revenue. That revenue number is miniscule when taking into account the market share that the company can command as a result of their newly found dominant position.

Digital content distribution is the engine of the current entertainment business model. Those who deliver content to the homes of consumers will come to rely on companies like CIDM at an ever increasing rate to deliver the content consumers demand on an ongoing basis. This leaves CIDM with a highly-reliable, beginning stage, recurring revenue model that can be leveraged to the hilt to gain further market share.

The aggressive nature of management, along with their diligent nature when it comes to tending to the debt structure makes for some outstanding possibilities going forward.

2014 should produce some noticeable results for the company as their efforts of the past few years start becoming reflected in the top and bottom line numbers, resulting in a dramatic increase in share price.

– EVOL posted a gain of close to 9% for October. This is another portfolio holding that announced an acquisition during the month. In EVOL's case, the company acquired is Telespree, which is an obvious move for EVOL into the US market, an area that has been lacking for the company.

Telespree derives 100% of their revenues from the SaaS market in the US, which is basically software on demand. EVOL has been transitioning their DSA solutions to an SaaS model overseas, further enhancing the opportunity in the acquisition as this transition progresses.

There wasn't much financial data for Telespree included given that they are a private company. I was able to find one website that estimated their revenue at close to $25 million per year. I'm not sure how accurate this figure could be. EVOL's coming earnings call should provide further highlights into the acquisition. If the revenues are anywhere near $25 million, given the deferred payment terms of the acquisition, then this would be a very substantial event for the company.

The position in EVOL was increased during the month back to a mid-sized position given both the positive fundamental and technical behavior of the stock.

– SBCF posted a gain of 5% during the month of October. The company did announce earnings that saw 62% increase in earnings over the last quarter. This does mark the third quarter in a row that earnings have grown greater than 50% sequentially. Obviously, regional banks are making a strong comeback given the efficiency measures they have taken over the past several years paired with strength in the real estate market.

What seems to be slowing down companies like SBCF is the massive dilution that was suffered during the peak of the financial crisis. These measures, that were basically the only way to save the banks from spiraling into oblivion, diminish the potential for outstanding upside gains.

I did reduce SBCF to a small position during the first half of October, both as a means of cushioning risk should the market have weakened further than I expected and to reallocate those funds into opportunities with increased upside in the months ahead.

– BFCF is the first new position to be initiated since EVOL in July. A detailed research report into the opportunity is available by clicking here.

The cliff notes of version of BFCF is as follows:

1. A company whose management has generational roots in real estate, being one of the originators of master planned communities in the U.S.

2. A company that has under its umbrella an incredibly profitable, cash generation machine in the form NYSE listed company BXG – Bluegreen Resorts – an owner and operator of vacation timeshares throughout the world.

3. A company that is using the cash flow from BXG to invest in other opportunities like the company they acquired just last week: Renin Corp, a maker of interior closet doors, wall décor, hardware, and fabricated glass products. Basically, the stuff needed to build homes. Make your own assumptions about the intentions of management after such an acquisition. It will be easier when you understand the next point.

4. The company owns a huge number of properties AND land gained through foreclosure that is primed for development throughout Florida.

5. The company has a huge number of distressed assets in their FAR (Florida Asset Resolution Group) portfolio that they are still pursuing, either collecting in full on the debt owed or foreclosing on the property, gaining an addition to their vast real estate portfolio.

6. If you breakdown the value of the BXG by itself, it is cause to invest in the parent BFCF as a pure value play. Once you throw in the vast number of real estate assets the company owns the investment becomes an absolute no-brainer. Investors are getting those assets for literally pennies on the dollar AND gaining an experienced management team that knows how to leverage those assets, whether through development or sale.

Portfolio Lowlights For October

– HMPR was liquidated completely from the portfolios during the month of October for what was a small overall profit from inception. This investment turned out to be disappointing when taking into account that it was up over 30% just a short-time ago.

The technical setup for the investment was exceedingly favorable, making me feel that this type of near 100% retracement of the move up we have witnessed hints at something sinister beneath the surface. In other words, this certainly should not have happened. The fact that it did is a significant negative.

I will reevaluate HMPR in 2014. However, given the muted upside and difficultly in holding onto gains, it is more than likely that I am done here.

– WMIH was a victim of low volume selling following the spike it saw in September. What must be realized about WMIH as an investment is that the investor base is incredibly vast for a pink sheet listed company. This is due to the fact that many of the current investors were former investors in Washington Mutual that have been holding on for 5+ years (In WM and as of 2012 in WMIH), hoping to gain something/anything out of WMIH.

The investor base here is not terribly sophisticated, counting retail as the predominant class of investor. Further, most of the investors likely have not looked into WMIH beyond the market value listed on their statements. Going even further than that, it takes a special type of investor to hold throughout all the turmoil that was the debt crisis clinging onto hope as their final refuge.

For that reason, an investor in WMIH can expect that selling will take place when the substantial buyers step aside. There is a predominance of investors involved in this stock that are frustrated, battered and long overdue for relief, which they take for themselves by selling their last remaining remnant of the relationship with this investment that they are cashing out for pennies on the dollar by selling WMIH at these prices. There are times in an investments lifespan when selling for pennies on the dollar is a better feeling than dealing with the potential, regardless of how great or perhaps misunderstood it can be.

This is essentially what we have in WMIH. A group of battered wives who one by one leave the house after each rally fizzles.

Keep in mind that regardless of our 100% plus gain since July of last year, shares of WMIH are unchanged from the date of their inception in early 2012. Unchanged in a market that has gone up dramatically. Imagine that reality from the perspective of the long-term holders in this name that already feel mislead and forgotten.

I expect that these investors will be rewarded for their perseverance if they manage to hold onto their shares long enough.

Into the end of 2013, there will come a price point when buyers will become interested in WMIH again. And it will likely be sooner rather than later.

Looking Ahead To November

There has been a certain grinding aspect to 2013 that I have not only experienced myself, but other investors have commented about over the past several months. It is unusual because we are in a very healthy, powerful and upright bull market that is relentless in its pursuit of value creation. We have been profitable this year in our investments. On par with the return of the S&P 500 more or less. Why then has 2013 been frustrating for so many investors, myself included?

There seem to be a number of factors at work that have made what I consider to be the beginning stages of this secular bull market difficult for most. I will go through them one by one here:

1. Leadership is rotating as this bull market accelerates. Companies that investors were used to relying on for gains haven't been keeping up in 2013.

2. Pullbacks are increasingly shallow in nature against a backdrop that expects a 10% plus pullback or even a crash.

3. Rallies have been developing in a sudden nature following short pullbacks, not allowing those who want to participate the opportunity to get allocated until it is too late.

4. Headlines continue to be unfriendly towards investors. A week does not go by without talks of a crash or economic calamity in the offing. This causes under or misallocation to take place in stocks among a majority who are headline driven in their behavior.

5. This is beginning to mid-cycle of a secular bull market, typically a difficult spot as momentum money is not truly engaged with the market at this stage.

6. Rallies are being led by a diminishing number of momentum names that have become increasingly difficult to buy into due to their unpredictability. NFLX, TSLA and GOOG just to name a few.

7. Investors remain myopic in their focus, leaving the best opportunities to be lost in the shuffle.

8. There continues to be a tendency for lesser-known names to drift down as they have been doing for some years now when buying interest fades. This type of drift doesn't occur in late stage bull markets as capital is touching everything on a consistent basis. It is why late stage bulls are where the easiest money is made. Early to mid-stage bulls remain difficult because of the selective actions of capital.

The last point is the most important one, for me at least. I deal in a world of underground companies in the sense that they are almost invisible to the investment public. My job is to find a handful of these opportunities on a yearly basis for outsized gains over the long-term.

So when I become frustrated by a disinterested market as my names simply drift lower due to light bids, disinterested investors and general cluelessness as to the scope of the opportunity, it causes me to question exactly how mature this bull market could be?

In my estimation, it is much less mature than anybody suspects. The dead periods in the market, such as what I consider October to have been, caused by the fearful tendency of investors to pullback completely and then fail to catch up once the market rallies, are a significant clue that the capital being put to work in this market is miniscule compared to what it CAN be over the next several years.

What is critical in the future assessment for what a bull market can be is the realization that the AHA! moment for investors is not a process but rather an event. It happens literally overnight and it happens unilaterally, across every class of investor. This is what causes the rush known as a “blowoff top” marked in technical circles by increasing volume and a dramatic expansion in the daily, weekly and monthly ranges of the market.

The event that is realization of a bull market and all that it entails can last for many months or years depending on how rich with the liquidity that current environment happens to be.

Needless to say, we have not seen anything hinting towards this event to date. Instead, what we are witnessing is a propensity towards panic at the first sign of trouble. An attitude of general discontent with the stock market that is being hidden beneath false impressions of bullishness that come from nonsensical studies of margin debt or the put/call ratio, just to name two. Misleading, misrepresented points that are being delivered to investors out of proper context.

These bullish affairs must be met with an open mind as to what they can become, as well as how long they can last. Otherwise, an investor will fall into the same category as the majority class who have chosen to forego the spoils in pursuit of tragic memories of losses suffered at the hands of the market in the past. Those same investors who will be a part of the AHA! moment that is to come and will eventually pave the way towards the market top that everyone seems obsessed with finding.

Regards,

Ali Meshkati