Brian Gaines, founder of Springhouse Capital, just finished his speech at the Value Investing Congress entitled Low Risk Bets in a Risky World. The following are our notes from the presentation.
Investment Idea: LONG ModusLink Global Solutions (MLNK) – formerly known as CMGI
- The company is a supply chain management provider.
- Main products are consumer electronics (Sandisk (SNDK), AMD (AMD), and HP (HPQ) are its largest customers).
- Company does not take ownership of customer inventory.
- Largest player in outsourced space. The industry still has a large number of players who want to outsource for either strategic or legacy reasons. Several competitors are distressed, versus a strong balance sheet at MLNK.
- Largest risks here are management acquisition risk (company has a huge NOL), operational cash burn, and complete unwind of global growth and consumer electronics business.
- Company has been good at managing costs, running positive EBITDA ($9+mil EBITDA last quarter).
- Valuation: Low = $4.00/share (downside protection: there’s $4.70/share of liquid net working capital), Base $7.00/share, Homerun is $20/share. Gaines only gives the NOL value in the “homerun” scenario.
Investment Idea: LONG Market Leader (LEDR)
- One of Brian’s favorite ideas. They have a site called justlisted.com. LEDR stock price is $1.90, cash/share is $2.40, cash burn = breakeven, views the business as a legacy in wind-down and small upcoming spend on option.
- Made $20 million in EBITDA when the market was good. Thinks it could do $5-7million in EBITDA and could be worth more than $5.00/share.
Investment Idea: LONG zipRealty (ZIPR)
- Brokerage agency, operates mainly online.
- Gives you a 20% kickback if you buy through ZIPR.
- Stock price is $2.80, cash/share is $2.32, losing $10-12 mil ($0.50 cents per share). A high risk/high reward opportunity.
Investment Idea: LONG Tree.com (TREEV)
- Spun off from IACI. Stock price is about $9.00, cash/share is $7.00, $8M EBITDA in last quarter, clear brand name in LendingTree (medium risk/medium reward).
- Company owns realestate.com, management owns a lot of shares. (Recent price increase makes the investment less attractive.)
Investment Idea: Short-Sell Jack in the Box (JACK)
- Gaines sees short opportunities in restaurant industry: Thesis is that multiples implying full recovery, cost cuts (which have boosted earnings) will end. Discounting is pervasive from QSR up to high-end dining.
- Jack and Qdoba have higher than average company owned restaurants,
- Qdoba was a growth engine.
- Nearly 1/3 of operating income is re-franchising. Brian believes that weakness in the company operations will limit ability to re-franchise going forward. Starting six months ago the company began providing mezzanine financing for the franchisees.
- Discounting is running rampant across the industry.
- Brian estimates than franchise margin is 1.5% or $21,000 on average unit volume of $1.4mm.
- Valuation: Downside $26/share, Base $16/share, Homerun $10/share.
Investment Idea: Short-Sell Blackboard (BBBB)
- Education software provider that claims to be mission critical -- basically, they set up a portal to share stuff (60% higher Ed/40% K-12).
- Management says future growth will come from upgrades and not new licensees (believes BBBB has fully penetrated its market and customers).
- Brian is looking out a year on this investment. He believes that BBBB is not as mission critical to the education system as the company claims it is.
- Schools have been cutting costs -- Brian mentions an extreme example of one school in Florida that cut purchases of toilet paper.
- Valuation: Downside $31.00/share, Base $20.00/share, Homerun $13.00/share.
About Springhouse Capital
- Springhouse was down 10% in 2008, up 24% in 2009 YTD.
- What do they look for? 1) Longs - 20% maximum loss over time, 50% upside in a year (or some iteration of multi-years), Looking for 5-10 great ideas at any time and to ideally be 70%-90% invested on the long side but willing to hold significant cash. 2) Shorts: 10% loss, 30% upside, small positions of 1-3% and purely based on opportunities. Uses moderate leverage, and looks for multiples on normal earnings.
- What are they finding? Longs: Few true good stress tested mid-cap/large cap ideas (35% invested on the long side). Seeing opportunities in small and micro-caps with strong balance sheets where you can look out 1-2 years. Also sees opportunity in mediocre but clearly real businesses, possibly great businesses but unproven and flexible operating models able to adjust to new levels of demand. Shorts: Many stocks priced for perfect execution and economic rebound, approximately 30-40% gross short.
About Brian Gaines
Gaines is the Founder and Managing Partner of Springhouse Capital. Prior to founding Springhouse in 2002, he worked for Gotham Capital. Mr. Gaines is also an adjunct professor at Columbia Business School. He earned his BA from Brandeis and his MBA from Wharton.
Disclosure: No positions.