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Legal Newspaper’s Quick Rise Leads to Decline

The Daily Journal Corp.’s stock doubled last year, but now the company has tripped over a regulatory hurdle that popped up only because of that stratospheric rise.

The company announced in a Dec. 31 filing that it had missed a reporting deadline for the second time in a month, as it was unable to get a required audit of its financial statements completed before the end of the year. Shares of the L.A. publisher dropped 11 percent for the week, closing at $170.85, making it the biggest loser on the LABJ Stock Index. (See page 24.)

Daily Journal was one of the best performing local stocks of 2013, gaining 106 percent over the year. Its torrid run was driven not by its main product – it publishes the local legal newspaper – but by massive gains in the company’s investment portfolio. Chairman Charlie Munger and Vice Chairman J.P. Guerin decided in early 2009, at the depth of the market crash, to swap a large amount of the company’s cash and investments into equities, particularly bank stocks. That bet paid off so handsomely that it now has an investment portfolio well in excess of $100 million. That, in turn, forced the Daily Journal into a new classification as an “accelerated filer,” reserved for companies with a market value of $75 million or more held by nonaffiliates, according to the Securities and Exchange Commission.

While the company used to have a full 90 days after the close of the fiscal year to file its Form 10-K, its new designation reduces that window to 75 days and requires the company to provide a management report assessing its internal control over financial reporting. The incomplete audit held up the mandated report and caused both busted deadlines.

Daily Journal’s fiscal year ended Sept. 30, and the company was unable to meet its first accelerated deadline in mid-December. That miss had no impact on its share price because the company announced in a statement at the time that it expected to file by the end of the year.

But when word came Dec. 31 that it was still not ready, that spooked investors and sent the stock downhill on the first trading day after the news broke.

The company did not return phone calls for this article.

Munger ranks No. 31 on the Business Journal’s list of Wealthiest Angelenos with an estimated personal net worth of $1.4 billion in May. He is a longtime associate of legendary investor Warren Buffett and is widely regarded in his own right as one of the premier investors in the country. In fact, the company’s stock run-up has very little to do with its actual core businesses of publishing and software, but has been driven by investors who see Daily Journal stock as a proxy of sorts for investing alongside Munger.

Daily Journal reported net income of $826,000 (60 cents a share) for the quarter ended June 30, the most recent report available, a 297 percent increase from the same period a year earlier. Revenue rose 13 percent, to $9.2 million. In addition, unrealized gains on the company’s investments over the same time totaled $4.9 million.

Preliminary unaudited financial results announced by the company in a Dec. 31 press release showed net income of $3.8 million for the 2013 fiscal year, down 31 percent from the previous year. Revenue rose 18 percent to $37.7 million in 2013.

The company’s holdings consist of common stocks of three Fortune 200 companies, two foreign companies and bonds of a sixth, with most of the unrealized gains in the common stocks, according to the press release.

Daily Journal’s securities had a total value of $137 million as of Sept. 30. The company’s portfolio was worth $102 million one year earlier and $56.1 million Sept. 30, 2011.

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