I have found a great value investment opportunity. Bassett Furniture Industries, Inc. (BSET). The upside here is likely 123% and could be as great as 210% (I know those numbers are obscene). Your downside is protected and still likely yields 29%.

This idea is based on a sum of the parts (“SOTP”) analysis. The value of one of these parts involves what I like to call “accounting arbitrage.”

Bassett Furniture Industries, Inc. (“Bassett”) is a home furniture manufacturer and retailer. This idea doesn’t involve any analysis into Bassett’s operations, but spending time determining the value Bassett’s manufacturing and retailing business operations (“Bassett’s Operations”) will help you determine your downside. The beauty of this idea is that even if Bassett’s Operations are worthless, Bassett’s recent market price is 29% below its total underlying value.

Bassett’s recent price, as of 12/21/07, is $8.70 per share, and it has 11.81 million fully diluted shares outstanding (FDSO) for a market cap of $102.72 million. Bassett has non-core assets (or non-operating) conservatively worth anywhere from $11.10 to $14.39 per share. This leaves a negative “stub value” for Bassett’s Operations of ($2.40) to ($5.69) per share. Any worth that you determine Bassett’s Operations is in addition to the underlying value of its non-core assets. In fact, it is substantially likely that Bassett’s Operations have significant value. After subtracting the non-core assets from Bassett’s balance sheet, the implied reported book value of Bassett’s Operations is $12.44 per share. I have simply considered Bassett’s Operations as worthless (conservative), worth half of implied book value (reasonable), or worth implied reported book value (aggressive). These scenarios mean Bassett is currently priced anywhere from 22% to 68% below its underlying business value.

Bassett’s non-core assets include (a) cash on hand; (b) current deferred income taxes; (c) a fund of hedge funds, Bassett Industries Alternative Asset Fund, L.P. (“BIAAF”); (d) a marketable securities portfolio; (e) non-current deferred income taxes; (f) a 49% interest in Zenith Freight Lines, LLC (“Zenith”); and (g) a 46.9% interest in International Home Furnishings Center, Inc. (“IHFC”). I’ll discuss the three material non-core assets: BIAAF, Zenith, and IHFC.

Bassett’s interest in BIAAF was $51.40 million at last quarter. BIAAF is invested in a few names you might recognize: Styx Partners, LP (an affiliate of Cerberus Capital Management, LP), HBK Fund, LP, Contrarian Capital Trade Claims, LP (an affiliate of Contrarian Capital Management LLC), Drawbridge Special Opportunities Fund, LP (an affiliate of Fortress Investment Group LLC), and DB Zwirn Special Opportunities Fund, LP. No adjustment to the figure represented on the balance sheet is needed. BIAAF is worth $4.35 per share.

Bassett’s 49% interest in Zenith is on the balance sheet at $5.26 million. Zenith has recently produced de minimis income/losses. Zenith’s book value, as of November 25, 2006, is $2.95 million. I’ve discounted the Zenith account by 44% and reasonably valued it at this book value on Bassett’s balance sheet. My aggressive valuation simply uses Bassett’s current figure of $5.26 million. My conservative value assumes Zenith is worthless.

Bassett’s 46.9% interest in IHFC is completely misrepresented on the balance sheet. IHFC presents an opportunity to engage in a little “accounting arbitrage.” The best way to think of IHFC is as a taxable REIT.

IHFC exists to solely own and lease out floor space in a showroom facility in High Point, North Carolina. IHFC’s effect to Bassett’s balance sheet is wild. IHFC’s refinancing of its real estate based on the market value of the property (and in excess of its depreciated cost) has caused Bassett to reflect a liability on its balance sheet. Why is that? Well, IHFC used the proceeds of its refinancing to pay a special dividend to its owners. Because this special dividend was “in excess of [IHFC’s] earnings,” Bassett has to reflect a liability to account for IHFC’s ‘undercapitalization.’

IHFC is a beautiful operation. See for yourself. IHFC’s complete financial statements are included in Bassett’s 10-K. Given that IHFC’s net income for the first nine months of 2007 ($9.37 million) is similar to the first nine months of 2006 ($9.92 million), I have simply used IHFC’s 2006 net income to value IHFC. Valuing IHFC at a reasonable 8X earnings places Bassett's interest at $4.54 per share ($14.29 * 46.9% * 8 / 11.81). I would feel comfortable valuing IHFC at 10X earnings, and this is included in my aggressive valuation of $5.67 million. My conservative estimate uses 5X earnings for $2.84 per share. Because IHFC does not have a negative valuation, I’ve removed Bassett’s liability that represents IHFC’s GAAP-based negative net worth.