) was the largest contributor to the positive performance of the Fund. The stock increased in value to $28.20 as at June 30, 2013, up from $13.95 as at December 31, 2012. It is interesting to note that a year ago, on June 29, 2012, it was trading as low as $6.91 per share. Generally, when prices hit a new low, our reaction is to check whether our evaluation of the company's intrinsic value is accurate enough. If it is accurate enough, we either sit put or buy more. Since we already had a fair amount of OSTK in the portfolio, we did not add any more but were comfortable with our investment in the company. There are many ways of evaluating a company and one of them is to check recent transactions within its industry which may provide a sense of its intrinsic value. For example, in 2009 Amazon bought Zappos, a company that is similar to OSTK but different in many ways, at close to one times revenue. At one times revenue, OSTK's intrinsic value is more than $40 per share whereas its stock price closed on December 31, 2012 at $13.95 per share. One important caveat: This type of comparison is fraught with danger and should be viewed as just a frame of reference. At the end of the day, it is OSTK's earning power or its future potential earnings based on its revenue growth (or lack of it) that will determine its intrinsic value. So, be extremely cautious when using only revenue as a basis for estimating intrinsic value. It must be substantiated by earnings. If the earning power is not there, then a company's value is strictly the value of its liquidated assets minus its liabilities. Under that scenario, OSTK would be worth almost nothing.
If you take a cursory glance of OSTK prices over the last 18 months, it may appear that we had a huge winner in OSTK, but there is more to the story. The investment in OSTK did not pan out as expected. When you are investing, the time value of money must be given serious consideration. We first invested in OSTK in 2006 and since then, the results have been positive but sub-par to say the least. Looking back, we paid too much for it and the intrinsic value that we estimated seven years ago was too high. Since we are a patient investor and can hold on to stocks for seven years or more, it is imperative that the intrinsic value of the company we invest in grows satisfactorily. In that regard, OSTK's growth in intrinsic value was anemic at best.
We held on to the stock because there were several positives to the company. Management has been quick to admit that it made many missteps along the way, and the corrective actions it took has put the company back on the right path. We especially like OSTK's fulfillment partner business, through which they sell merchandise of other retailers, cataloguers or manufacturers via their website, which accounts for approximately 80% of its revenue. Further, it is debt free after taking into account the cash on its balance sheet, management over the past few years have been buying shares and the founder owns a huge chunk of the company.
In the end we made some money but not to the degree we expected. And, because the price of OSTK has now risen significantly and is trading closer to its intrinsic value, we have drastically reduced our position.
From Francis Chou
's semi-annual report 2013