I realized recently that I look at a lot of investment possibilities, and, more often than not, I come out a pass. However, I have a slightly different approach to my investments than many other people, so I thought it might be a good idea to give out a few names that I've passed up and list my reasons why. After all, something I passed up might look good to someone else, so without further adieu, here are some of my passes:
- World Wrestling Entertainment, Inc. (NYSE: WWE)
WWE is the corporate entity behind what used to be known as the World Wrestling Federation or WWF. It's where Hulk Hogan, Dwayne Johnson and John Cera all got their start. On many measures, WWE is an incredible company. I love any company that has a customer base that's as rabidly faithful as the WWE's. (As Warren Buffett said this May, it's great when you have a company where the customers literally tattoo your name on their chest.)
The company has a very strong balance sheet with only about $3 million of debt backed by $226 million of current cash and marketable securities (and an additional $22 million of long-term marketable securities). If you back out the extra cash and cash equivalents, the company is trading at a market cap of roughly $1 billion.
Over the long-term, I'm sure that they're good at least $50 million per year in free cash flow, which means that the company is trading at 20x -- a little too rich for me. Additionally, while I drool a little bit each time I look at that 9% dividend yield, it doesn't look sustainable at that level. It looks like they're provisioning some of that $80 million of dividend payouts by counting some non-cash expense paybacks from the cash flow statement (such as doubtful accounts provisions and stock compensation costs).
The former is unreliable and the latter is on the income statement expense line for a reason. They could probably pay out $60 million without a problem though, and I'd love to pick up some shares if they ever cross back to their recent 2009 low of $9.25 a share.
- Madison Square Garden, Inc. (NASDAQ: MSG)
MSG is a spinoff from Cablevision Systems Corporation from earlier this year. Madison Square Garden is made up of three divisions: MSG Media (programming), MSG Entertainment (Rockettes!), and MSG Sports (the Knicks and the Rangers). The spinoff was well capitalized, and the company has no debt based on its most recent quarterly report.
On an absolute valuations basis, you can probably get the entirety of the current market cap on a conservative valuation of just the earning ability of MSG Media (and possibly MSG Sports as well) -- a relative valuation basis for media companies would place you at a higher valuation. Then you'd get the Rockettes, the land, building, air and development rights for Madison Square Garden and the Chicago Theatre, plus a variety of other smaller assets like Cirque du Soleil's Wintuk for free.
The problem for me here is that, in order to achieve a cushy margin of safety, you'd have to either (a) value MSG Media at a much higher multiple, in-line with other media companies, which I'm not willing to do or (b) figure out some way to monetize the captured asset value in the Madison Square Garden land, building, air and development rights without having that affect your earning power.
- Hudson Technologies, Inc. (NASDAQ: HDSN)
Hudson Technologies, Inc. is a great little illiquid company that has a potentially massive economic tailwind at its back. Hudson Technologies takes recovered refrigerant coolants and recycles them. The EPA put in new rules as of January 2010 that caps production of R-22 at 20% less than demand.
This rule is meant to stimulate the coolant recycling business while simultaneously providing an economic incentive to reduce the amount of coolant that is released into the atmosphere rather than recycled. The last time the EPA phased out a gas like this, it was with R-12, which increased the price of R-12 from $1 per pound to $28 per pound over a 7 year period. R-22 may be on the same trajectory upwards.
The spot price for new R-22 is at around $4 a pound right now. (Recycled R-22 sells for the same price as new R-22.) The problem is that it's very hard for me to figure out a normalized free cash flow amount for this company. The earnings are rather uneven, so if I can't figure out a normalized free cash flow for the company (and it's not an asset play), then I've no way to figure out if the current market cap of $38 million is low (good) or high (bad).
Furthermore, the company has recently issued more than 2 million shares in common stock and warrants to raise $5 million for working capital needs, which means any normalized FCF would have just taken a 9% haircut. If you can figure out a good normalized FCF measure, then this just might be a winner, but it's too tough for me.
Those of you that are VIC or SumZero members should look up the writeups on the last two companies. They make a much better bull case for each of these stocks, and I think their analyses are worth a few minutes of your time. It's just that I came out a little differently given my investment philosophy.
Disclosure: No positions