B. Riley's Chief Praises GSI Technology, Pushes for Buybacks

While Bryant Riley, founder and managing member of Riley Investment Management LLC, likes GSI Technology Inc. (GSIT)'s sales and profit growth, he thinks the company can do even better by buying back shares.

Sales at the memory semiconductor maker climbed 53 percent in the most recent quarter in a slumping chip market, said Riley, who has snapped up 5 percent of the shares, making his firm the fourth largest investor. Shares have jumped 33 percent this year, compared with a 32 percent decline in the 483-member Nasdaq Computer Index.

``It's got growth, a good management team,'' Riley, 41, said in a Sept. 26 interview. ``They should take this opportunity to buy back shares and they haven't. We'd like to see them utilize some of that cash.''

Finding small-cap stocks with good assets and then demanding management take action to increase the price is his strategy, Riley said. He has started proxy battles at Alliance Semiconductor Corp. and Zilog Inc. and is a director of chip designer Transmeta Corp., flash memory chipmaker Silicon Storage Technology Inc. and golf club component maker Aldila Inc. (ALDA)

In 1997, Riley, founded B. Riley & Co., a Los-Angeles-based brokerage firm providing research mostly to institutional investors. Three years later, he started his management firm, which manages about $120 million. The credit crisis allowed him to expand his staff to 14 analysts from 10, including hiring of Daniel Whang from Lehman Brothers to cover industrial companies and Cohen & Co.'s Joseph Gladue and Andy Stapp to report on banking.

Riley holds a bachelor of science in finance from Lehigh University in Bethlehem, Pennsylvania.

Brennan: What is your investment style?

Riley: We would be considered contrarian value oriented, focusing on a company that has an asset base, whether it's cash or real estate, and an enterprise value that is doing well relative to underlying assets.

Brennan: What other metrics do you like to look at?

Riley: Return on investments, free cash flow, insider ownership. We like to see guys that own businesses that they operate. Growth to us isn't nearly as important. Usually, we find value in companies that aren't growing or they might be being run in a way that is inappropriate to growth.

Brennan: Most investors like to see 15 percent annual sales growth because that means sales will double in 5 years. Can you explain why growth isn't so important?

Riley: A real-life example is a company called Aldila, where I'm on the board of directors. That company about five years ago was a $60 million revenue business doing a couple million in Ebitda. It grew some but Ebitda went up to $15 million because business got better. They didn't make crazy decisions. They didn't grow for growth's sake. They just generated a lot of cash. Margins got better. At some point you want to grow but it's not always the right decision.

That's where you get opportunities because people want growth. They sell stocks that aren't growing or the business fundamentals are deteriorating.

Brennan: How do you define a good company?

Riley: A good company is in an industry that easily outperforms its peers. During the Avian Flu, Sanderson Farms (SAFM) Inc. stock was down. Everyone sold the company. It's a great company. We bought that company when it happened because there were factors out of their control. People got out because they were concerned about the macro-environment. In general, investors overdo it on the upside and on the downside.

Look at Crocs (CROX) Inc. Everywhere you went, you saw Crocs. The stock went crazy, to $60. All of sudden, there was way too much inventory and the stock dived. Now it's interesting. It's been my experience where investors tend to overshoot things.

Brennan: Which stocks have you purchased recently?

Riley: I am on the board of DDi Corp., which makes printed circuit boards. I've been buying pretty consistently. The company has bought 15 percent of the shares outstanding in the last six months. They're growing a little bit, not a lot. Their Ebitda is up. They are trading at three times Ebitda. It's very well run. People are concerned about the macro issues.

Brennan: What have you sold recently?

Riley: We've sold companies that have gotten bought out. Everything's depressed. When you're making sales in the small cap world, it's an acquisition. We've had quite a few. We were a large shareholder in Netmanage Inc., which got acquired earlier this year so obviously we sold that. Iomega Corp. got acquired so we sold that.

Brennan: What's a company you sold that you're proud of?

Riley: Alliance Semiconductor. (ALSC) That was a proxy fight. We took over that company when shares were about $3.70. We took over the board. I ran the proxy fight. This was a company that was burning $35 million a year. It had a lot of really bad deals between management and shareholders. It was a conflicted company. It was not run for shareholders. We removed management. We sold all the assets of the company. So far during that period, we returned about $4.30, I think, to shareholders in dividends.

Brennan: How were you able to spot that company when it was burning $35 million a year?

Riley: They had a very clear portfolio where we saw the assets. They owned some public securities. They had a great balance sheet but they were burning through it. We felt if we could get in, we could rationalize those businesses. They made no sense together. It was run by two brothers who owned 35 percent. For us to win that proxy fight was a challenge. Interestingly, one of the brothers ended up joining us on the proxy fight, which was rare. So we ended up winning that. We did right by shareholders.

Brennan: Going forward, which areas of small cap do you like?

Riley: There's a lot of value in technology. I tend to like software companies but there is a lot of value in hardware companies. Semiconductors are awfully cheap like GSI Technology. They're making money in an environment where prices are getting crushed. At some point, prices will get better.

We were involved in steel seven years ago where everybody looked at capacity and said it will never get filled. It got filled. I'm not suggesting there will be a shortage of semiconductors but there are opportunities. People just don't want to own businesses that aren't doing well now. You get a lot of great balance sheets from those businesses that protect you.

Brennan: Any other beaten-down sectors that look interesting?

Riley: Banks (S6RBNK) are interesting. Our brokerage firm has hired some analysts in banking. There will be interesting opportunities in real estate and airlines. At some point, there will be capacity taken out and these businesses will come back.

Brennan: The airline industry is known for poorly run companies. Where can you make money there?

Riley: It's an industry that has high barriers to entry, a lot of big assets. Eventually, so many guys will go bankrupt that there will be surviving entities that will make a lot of money. I cannot give you names, but these are the opportunities out there, the ones that look so bad.

To contact the reporter on this story: Peter J. Brennan in Los Angeles at pbrennan3@bloomberg.net.

To contact the editor responsible for this story: Colleen McElroy at cmcelroy@bloomberg.net

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