I first noticed GPN about a month ago when the stock got hit ~10% in a day after they announced a security breach. After taking a glance at their numbers, it looked to me like this might be a great business with a temporary problem. However, as I dug a bit deeper I found a bit more to be worried about.
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a quick idea i sent to a client a week or 2 ago.
I think BJRI looks like a good short. I first came across it when looking at companies w/ high exposure to California a month or so ago b/c the state was going through what seems like an annual ritual of disasterous budget problems. I have also been looking at high exposure to food inflation with recent stories about record low size of the cattle herd and the “pink slime” scandal which will equate to demand for an additional 1.5M head of cattle due to the backlash against the beef filler, which obviously pushes beef prices even higher. Has also been a few stories about lower grain yields this year due to low moisture content in soil due to the mild winter and resultant lack of snow melt. Reuters had a good article this morning too http://www.reuters.com/article/2012/04/04/food-fao-idUSL6E8F42J520120404 noting food inflation tied to high fuel prices… also as relates to fuel, California has the highest gas prices in the country, hurting consumer spending. http://www.californiagasprices.com/Prices_nationally.aspx
So – to tie all of that to BJRI – they operate around 120 restaurants in the US with about half of them in California. They have been growing fast (bberg 5 year geometric growth estimate of 21%), and because of that growth are currently trading at a trailing PE of 43x and a forward estimate of 37x.
However, it seems like growth is about to get less profitable. With most of their restaurants in CA they are going to have to start looking to expand geographically – not a big problem as they are already in 13 states – but the problem will be maintaining margins as they grow. Take a look at the #4 and 5 holder on the HDS list. Jacmar Companies http://companydatabase.org/c/dairy-products-retail/products-general/retail-foodservice/wholesale-meat-meat-products/real-estate/property-management/the-jacmar-companies.html is a food distributor located in California, and William H Tilley is their CEO. Basically as it stands now BJRI gets their food at discounted prices b/c Jacmar is incentivized to help them out and sells to them at a discount ensuring strong margins. However, Jacmar is pretty much limited to CA, so future restaurants will not get the same benefits.
So – basically shorter term we have a company with huge exposure to a geography that should see a higher than average impairment to consumer spending and a company that should see margin squeeze from higher food costs. Longer term we have a growth runway that seems like it is about to get rocky. At the very least its worth a look as a short.
Any feedback appreciated
PS – full disclosure – BJRI did recently get a write up the Columbia biz school news letter, so I’m sure other people are thinking the same way – 18% is already short.
A problem I have is narrowing down the list of stocks I want to look in to. It is easy to screen for stocks with high ROE or ROIC, low debt etc etc, but even still the list is huge, and given that I am unfortunately unable to spend time during the work day really researching stocks, I have been looking for a way to further whittle down the list.
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GTIV is a provider of home health care services and hospice care in the US. I first bought the stock in mid August, when the entire world was hating the company for around $7.40/share.
The stock was down more than 50% in the last few weeks and about 70% since its March highs.
The sell off was caused by a flurry of headlines related to medicare/caid cuts as the government struggled with its budget issues. More specifically, there were allegations that GTIV staff had geared patient treatment in a manner that would ensure maximum reimbursement, regardless of whether or not treatments were necessary.
The high debt load further contributed to the sell off as investors questioned if reduced margins resulting from government crackdowns would prevent the company from servicing its debt.
While these concerns were valid, i decided to buy the stock for three reasons.
First, i think the long term defensibility of the industry is sound. It is a demographic fact that the US has an aging population, and this population will need care.
Second, while quantitatively I was intimidated by the debt load, qualitatively I reasoned that lenders would work with the company to adjust the terms of the debt rather than allowing the company to default. My thinking was that financial institutions were in the cross hairs of EVERYONE – politicians, talking heads, occupiers etc. There was no way that a lender would want to see a front page headlines saying, “Bank Forces Seniors to Give Up Care” or something like that. Basically, there was headline risk for the banks if they did anything other than work with GTIV and its contemporaries.
Third, since its founding, GTIV has rolled up several smaller businesses. In a crunch, these businesses could likely be sold off in order to meet debt servicing needs.
I felt reasonably confident in the above analysis, so I initiated a small position with plans to dive deeper into the industry. Initially the stock began to drift higher, causing me to delay digging deeper and reinforce my hypothesis.
However, within a few weeks the stock had dropped another 50% to a low of $3.02 and the airwaves were alive with talk of a potential bankruptcy.
While i was strong enough to not panic and sell my shares, i was not strong enough to back up the truck and really start aggressively buying shares… a costly mistake considering that the stock has since rallied more than 150%.
In summary – while I agree with Klarman’s comments that if you wait until you have done 100% of the analysis before buying you may lose the opportunity, in this case not following up on my original analysis prevented me from having the strength to buy when it really mattered. A mistake that I won’t be making again.
With revenues growing from 68.1M to 194.5M in FY10 and 182.8M YTD11 SUMR has been a rapidly growing designer and distributor of branded infant health, safety, and wellness products. Spending on infants is a retail segment less likely to be impacted by any downturn in consumer spending, although a quick google search shows that SUMR’s products appear to be priced at the high end.
The company’s growth has been primarily fueled through acquisition as laid out below:
4/1/08 6.5M for Basic Comfort 4/21/08 12.4M for Kiddopotamus 7/22/09 for Butterfly Living 12/8/09 for Classy Kid Inc 3/28/11 for Bornfree Holdings
The acquisitions were paid for with borrowed money and company stock, which resulted in shares outstanding growing from 11.2M to 15.5M and long term debt growing from 4M to 52M from 2005-2010.
This externally funded growth and accumulation of debt may be explained by the fact that management’s discretionary bonus is based on EBITDA – with an extra emphasis on “before interest.”
On the bright side and probably outweighing management’s questionable bonus incentive is the fact that insiders own more than 21% of the company – specifically the CEO owns almost 20%.
The company sold off hard in early January when they provided updated guidance for FY11 of $238M in revenues and EPS in the range of .42 – .44 / share, a disappointed vs. 2010 FY earnings of .46/share and a clear disruption of the company’s growth trajectory.
So. The question becomes – is this temporary setback in growth an opportunity to pick up a growing retailer at a discount?
A steady state business probably deserves a valuation of 10x EPS, and SUMR is hardly a steady state business despite recent performance. At current prices of 4.80/share it is trading at ~11x the midpoint of FY guidance – cheap at a glance.
A quick over view of the company shows attention to innovation which is attractive as well.
However, the company is facing wage and cost inflation, and while they are attempting to build a moat through brand recognition, it is not there yet. They have a limited amount of distribution through a hand full of retailers, and any change in status w/ one of those retailers could really hurt the top line.
Furthermore, the company is not producing FCF in any reliable way – although if you back their acquisitions out of the FCF the story changes a bit.
I do find roll ups with increasing debt loads interesting however because at some point the market begins to price in a default due to the debt, while the nature of the roll up provides assets / business lines that could be potentially sold off to pay off the debt. I don’t think this is overly likely at this point, but if the company stumbles through next year, it will be worth taking a look.
For now, I’ll put the name on my watch list with a $4 wake up and maybe take a deeper look as the company approaches 9x 2011 expected eps.
On 2/16 JNGW announced that their Chairman and CEO would like to take the company private. In order to de-list the shares, JNGW must reduce its number of share holders to below 300. In order to accomplish this, there will be a 1 for 20,000 reverse split. Shareholders owning less than 20,000 shares will be cashed out for $2.20 / share.
I was able to buy 5,000 shares at $1.90/share on the day the transaction was announced.
Assuming that all goes according to plan, I will receive .30 / share or $1,500 on my $9,500 investment – an almost 16% return.
Not bad for a relatively low risk situation.
The company anticipates the transaction will be completed sometime in the 2nd quarter.
RSH announced earnings pretty much in line with their disappointing guidance from 3 weeks ago. Not really much new although the company did comment that they anticipate Q1 2012 will be more challenging than Q4 2011.
They continue to deal with margin compression as their sales blend rotates toward lower margin smart phones and mobility as a whole, and they continue to point to changes in the way Sprint finances their phone upgrades as a drag on performance.
Also of note was a question on why the dividend hasn’t been cut – something I have wondered myself. The company has a strong history of returning capital to shareholders through dividends and buybacks, but recently cut their buybacks only months after raising their dividend. Personally, at these prices I’d rather see buy backs than dividends. Regardless, the company danced around the question and said they had no plans to cut the dividend as of now, but I have to believe (hope?) that it is a very real possibility.
I’m still optimistically hoping the company can turn its self around.
KSWS reported -.70 vs -.42 estimate but is not comparable as there is some junk in there related to writing down goodwill etc. Q4 revs were way coming in at 50.2M vs 41.4M expected. 2012 rev guidance is lower than expected at $240-$250M vs estimates of $270M.
My immediate reaction is that I wish I had sold at $4 a few weeks ago and locked in a 23% gain – that is what Burry would have done.. but my inner Pabrai tells me that turn arounds take time, the brand has value, liquidity is not a concern, and I need to hear the con call to understand what is happening with the Palladium brand… not to mention it is worth holding on for the long term tax rate.
Side note – I have been thinking more about the importance of moats and margins of safety lately – it is probably inappropriate to mention Pabrai’s name in the context of this investment.
I have been thinking more about how I want my portfolio to look (eventually – assuming I am able to dedicate more time looking for investments rather than playing the chicken w/ no head game as a sales trader) and I am starting to like the idea of 5% for initial investments, with room to average down into a 10% investment if the stock sells off more than 33%. This would be only for companies with strong earnings history, low debt levels, and identifiable moats.
I would still like to leave some room for companies like KSWS – companies with less predictability stuck in some sort of turn around situation etc – but they should be more 1-2% positions combining to be no more than 10-15% of the portfolio.
Much to think about as always.
I’ve mentioned that I have been keeping an eye on aluminum stocks since the investment community turned seriously negative with a series of downgrades on AA – notably GS in early December, UBS in mid December, Jefferies in late December, and most recently Barclays reducing their price target following a disappointing earnings report on 1/9 (-.03 EPS vs -.01 estimate on better revs). Despite this series of downgrades, the stock hung in around the 8.60 level suggesting that anyone who wanted to sell had been shaken out in the 50+% decline from $18 to $8.50 from April to October. The stock then rebounded hard in the new year as a dog of the DOW, and as AA and others announced a series of production cuts. In fact, a WSJ article on 2/8 suggested that aluminum production as a whole in Australia (5th largest producing country) was basically not viable at these prices, and just yesterday the world’s largest producer – RUSAL – announced further cuts of 3.9M tons.
All of this is great – but the big X factor in aluminum production is China – the world’s largest producer. On their earnings call 1/9 AA said, “we believe china will curtail about 1.1 million tons” in 2012 which surely helped calm market fears over the China X factor. However, this morning Chinalco – the largest aluminum producer in China – announced that they expected China production of primary aluminum to rise 10.5% this year as capacity grows. China can do this because they are a non economic operator. In other words, it is more important for the Chinese government to keep workers employed than it is for them to keep their aluminum companies profitable.
One would think that the western aluminum cos would sell off pretty hard on this news – they were expecting a cut, and instead they were reminded that China is not a rational actor. They have rallied ~17% YTD making a pullback seem even more likely. However, the stocks haven’t moved down much, which suggests to me that the bottom is in on these stocks. WORST CASE I think you have ~17% downside to the strong support that developed during the series of downgrades in late Dec. Upside is substantial based on any kind of normalization of supply/demand in the next year or 2. To be clear – I don’t love these companies as investments – in fact, they are pretty crappy (10 year average ROE of ~4.5% for AA) but as a trade, I think the risk reward is there to go long.
I came across OSTK on the monthly value contest on Guru Focus.
At first glance it is an immediate pass for me… I mean, the company doesn’t have any history of making money, and quite frankly i don’t know how to value a company without a (semi) consistent earnings history.
However, after noting who owns the stock, I decided to make a note to keep an eye on it.
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