Whitney Tilson’s Small Cap dELiA*s (DLIA) Investment

As of September 30, 2010, Whitney Tilson’s hedge fund T2 Partners had over 2.75% of its long equity portfolio in small-cap specialty retailer dELiA*s (NASDAQ: DLIA). In fact, the company is so small that Tilson’s nearly $6 million position accounts for almost 10% of the company’s outstanding shares. At the close of trading on Thursday, DLIA had a market cap of just $62 million. While the last available 13-F for T2 discloses positions held at the end of September, there is no reason to believe that Tilson has divested, although he certainly could have. Either way, it certainly appears that the opportunity in DLIA is still very attractive.

At first glance, it might sound crazy that a prominent hedge fund manager like Tilson would be speculating in a penny stock like DLIA. Once you examine the numbers, however, it becomes obvious. You see, Tilson is a value manager to the core and based on his DLIA position, it is pretty obvious that he will pursue value no matter where he finds it. DLIA is trading well below book value, or what the company would fetch if it were liquidated. The shares are trading at $1.98 with a book value per share of $2.69.

Furthermore, dELiA*s has no long term debt and has grown its annual revenues each of the past five years. At the beginning of 2007, this was a $10 stock. While management has had a very difficult time executing in the current environment, notching a near $10 million net loss in the most recent quarter, this still remains a tremendous opportunity. The risk/reward in this name appears to be quite asymmetrical. On the one hand, DLIA has the potential upside of a speculative stock in that it is a small-cap company experiencing near-term operational problems whose stock price could soar if the company is able to return to profitability. On the other hand, DLIA is a deep value name with a large margin of safety. At current levels, investors can still be reasonably certain that they will get their money back even if the company were to liquidate tomorrow.