Application Instructions:

Each prospective club member must submit an on-line application that includes a favorite current investment recommendation. To assist you in this process, we have provided the guidelines below.

INVESTMENT IDEA- Should be about a 500 word (or more) explanation of your investment idea. The idea may be equity or bond based and either long or short. We prefer ideas whose operations are US based and follow US accounting standards. Value Investing does not necessarily require or imply that a stock must be selling at a low P/E or a low Price/Book ratio (although such opportunities may make fine investments). Excellent companies selling at a discount to their intrinsic value may also qualify as "value" investments irrespective of current P/E, Price/Book or similar ratios (e.g. the notion of value as articulated by Buffett).

Your idea should include the appropriate valuation criteria for the selected company that may involve some of the following measures:

• Normalized earnings and/or free cash flow if different than current
  
• Future growth rates of sales, earnings and/or free cash flow
  
• Relative value to similar companies
  
• Private market value
  
• Break-up analysis
  
• Asset valuation
  

Heavy insider ownership, recent open market transactions, special option grants or other evidence of extraordinary management incentives should be noted.

Please focus on any special insights that you may have into the company or the particular situation. Detailed operating descriptions can easily be found in the 10-K so space should not be wasted with readily available information that is not central to the basic investment thesis.

CATALYST - should explain what action, event, situation or future realization will cause the market to recognize the value discrepancy that you observe. Examples could include an impending regulatory/legal change, expected sale/merger, spin-off, split-off, restructuring, large buyback, product introduction, management change, or other. Sometimes no catalyst is identifiable, but value discrepancy is too large to ignore.



Definitions:

*TEV (Total Enterprise Value)-is defined as (market capitalization (price times # of shares outstanding) plus interest bearing debt plus preferred stock minus excess cash)-this measure is used when trying to compare companies with different debt levels. For example, the relevant comparison of value between a home purchased for $1 million with 200 hundred thousand dollars in equity and an 800 hundred thousand dollar mortgage versus the value of a home purchased for $1 million in cash with no mortgage can only be made when the purchase price includes the amount of debt and equity used for the purchase.

EBIT (Earnings before interest and taxes) - EBIT is often referred to as operating income. Analyzing TEV/EBIT is a shorthand way of looking at the multiple of total "cost" of the company (market price of equity plus assumed debt) to the pre-tax cash flow generated by that company.

**EBITDA (Earnings before interest, taxes, depreciation and amortization)- adds back the non-cash expenses associated with depreciation and amortization to EBIT. This is often used as a way to measure how much cash a company generates to cover interest expense. Amortization is often a legitimate add back to earnings when trying to determine a company's cash generating ability. However, adding back depreciation to cash flow is only valid when considered in conjunction with the amount of capital spending (a cash outlay) necessary to sustain the current business (see maintenance cap/ex). Therefore, EBITDA minus maintenance cap/ex is a more accurate way of arriving at cash generated to cover interest expense.

Maintenance cap/ex- this is a figure that represents the amount of capital spending necessary to sustain a company's current level of sales and earnings. Capital spending necessary for growth is not included in this number. This number is usually not disclosed and must be estimated based on information available through the company or other means. Using EBITDA as a cash flow measure without subtracting the capital expenditures necessary to keep the business running at the current level will always overstate a company's cash generating ability. The cash outlay of maintenance cap/ex can be higher or lower than the non-cash depreciation charge.

TEV/(EBITDA minus maintenance cap-x) is sometimes a better way to determine the multiple of total "cost" of the company (market price of equity plus assumed debt) to the pre-tax cash flow generated by that company. Capital spending for growth should usually not penalize the analysis of current cash flows because the benefits of that spending will not be seen until a future time and did not influence the current year's earnings. It is the analyst's job to determine whether the return from new capital spending for future growth will be adequate to justify the amount of spending.

Free Cash Flow - this figure represents cash available to shareholders before changes in working capital. It is computed by taking the net income, adding back depreciation and amortization and subtracting maintenance cap/ex.

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