Adam Xiao

Adam Xiao
Contributor since: 2012
"Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours."
Are you certain?
I'm shocked that this has no comments yet. Very attractive thesis and well reasoned.
A few questions -
1. How competitive do you think this space is from (a) large players like Google and Amazon who offer enterprise solutions, which include security (b) VC-backed ventures who are attempting to bring better technologies into the marketplace
2. Does Carbonite occupy a niche that would protect it from (a) and (b) type competitors
3. Are there switching costs involved for customers beyond the obvious ones
Thank you for the idea
Excluding nonrecurring items, mostly related to lawsuits regarding events that happened 8 years ago, and severance charges relating to exiting a side brokerage business, they grew earnings again this quarter.
They improved in every metric, not aggressively, but still solidly - and the big change is the change in regulation regarding owner-occupied commercial real estate that they were under, which frees them up to own more commercial real estate loans.
Solid performance in my book with no red flags - yellow flag from listening to the investor call that the competition for purchasing discounted loans is heating up, which can be seen in the smaller discount they have this year, but i believe more discounted loans will be unloaded later in the year when tax selling occurs for entities with impaired loans on their books, who want to realize losses.
NBN looks to be on a good road to achieving operating leverage by increasing the size of their deposits, and especially their loan book
It seems CLNY is trading at a 1.5X P/B, and their cost of debt is a fair bit higher (5% convertible senior notes and 8.5% preferred shares) than NBN's. They are only operating with a 1 to 5 leverage ratio, so their gains will not be as leveraged as NBN's.
There seems to be a limited margin of safety buying in at such a premium, especially with so many senior claims to the equity (debt and preferred shares that are not FDIC insured like deposits and therefore have higher interest rate). Upside is also limited because the convertible debt has a strike price of $23.60 a share. With the current price at 23.30, it seems that the stock faces a dilution hurdle before it can break through the 23.60 roof.
Thanks for the idea though. I am always interested in businesses with unique business models and will be happy to take a look at different ideas.
Thanks for the lead Fibonacci. Sounds interesting, I will do some digging.
There are no earnings transcripts, but the earnings call itself and presentation slides are on the investor website. Check out NBN's investors relations page.
The 40% limit was instated in 2010 when FHB acquired NBN in order to begin the LASG program. It was put into place by the regulatory bodies: Maine Bureau of Financial Institutions and the Federal Reserve Bank of Boston.
I believe that this was put into place to ensure the stability of the bank when pursuing an activity which is considered risky and unproven. This may be relaxed in future years if NBN's loan default rates are favorable. I would not expect it being relaxed within the next year though.
Operationally, they have been doing pretty well.
The LASG Portfolio of Purchased and Originated loans is now at 148.4 million and returning over 15%.They can purchase 40 million more loans before they need to start originating more other loans to keep their regulatory purchased loan ratio correct.
They didn't purchase as many loans this quarter, management indicates because availability of attractively priced loans are cyclically low in the first quarter. This logically fits with the fact a lot of selling happens year end (tax loss selling) so I am satisfied with this explanation.
They paid off TARP - Which is good because after a while the interest payment on those would have gotten bigger.
Their total deposits might actually be the most impressive thing, having increased from $422M to $505M, and as a result they have plenty of cash in the bank to buy and originate more loans. They used part of this to repay FHLB borrowings - which has a higher interest cost. Soon, I believe they will move to all deposits as the deposit grow from AbleBanking (Their online banking, which has shown impressive ramp, growing almost 30 million this quarter to currently being at 70.8 Million)
The interest rate spread at NBN has increased to over 5%, and this business is one that becomes more valuable the more it grows, as they become better able to leverage the abilities of their loan purchasers/servicers, and the incremental cost of each loan decreases. Assets grew about 4.5% this quarter even after paying back TARP and FHLB borrowings, so they are growing at a good clip.
On a macro side, interest rates are still low. NBN can take advantage of the interest rate arbitrage to buy discounted mortgages and encouraging the debtor to refinance at lower cost - accelerating the gain realization of the original discount they bought as.
In summary, I am still long. NBN has tailwinds pushing it forward, and is ably run by managers who have skin in the game.
Thanks for well thought out reply. I do agree that BODY looks more attractive now than it did at 30 because of the stumble. The stumble was originally why I started following the stock and I was watching when Beth Angelo resigned.
I might have a bigger position now if they had more reported historical earnings, and a management team that had been around for longer and had demonstrated good comps in the past. I do believe in mean reversion, but the mean in my mind is now a shot in the dark because the business model and management team of this company keeps changing.
I will keep my small position and root for this stock. Good write up and thank you for sharing your thoughts.
Having looked at this company for a while, and while still maintaining a small position, I do have some concerns.
My main concern about BODY, which is the same as GMAN is that these are stocks that were stumbling along and were then bought by private equity firms. Somehow, during the years the PE firms owned the business, the numbers went miraculous. Stagnating businesses becoming high powered growth monsters.
This could be of course, because of the operational improvements created by the PE partners, but it bothers me that PE investors are masters of financial engineering - both in changing a company's capital structure, and in "managing" the books. In both cases, the PE firms sold out of a large part of their position after the companies went public again.
Haha makes sense.
Gotta mix it up some time after exercising so much discipline when fighting the market. Also makes sense not to reveal your hand. Good article!
I agree there are many parallels between poker and investing, in terms of the adversarial nature of the sport, and the goal of making positive expected value decisions in the face of imperfect knowledge and uncertain outcomes. I've always associated poker more with trading than investing though - especially tournament play vs. cash games.
Chris, as a value investor, do you favor a tight aggressive play style?
But to respond more seriously. The only thing I can speak to that is that Tandy is a fairly illiquid stock, with only a few block trades occurring through the day (observe the volume chart in the 1 day charts in either yahoo or google finance).
As Google reports closing prices in its historical charts, if the last trade of the day is one dollar below the normal price because of an overly eager seller, those spikes will be witnessed.
Buying opportunities?
Hi Duke1,
Glad you enjoyed the article. It is a very valid question whether Tandy will be able to deliver an average 20% return on tangible equity over the next decade.
Historical results do not dictate future results, but a company's performance should be evaluated based on the its long term performance over a period of several years. Different opportunities and challenges will cause results to vary either up or down, but by looking at results over a long period of time, one can gauge the quality of a company's economics and management.
Because the economics have not changed - the Tandy name remains as strong as ever - and because the management has not dramatically changed - Jon Thompson, Shannon Greene, and Mark Angus have been with the company throughout the period - the quality that generated the average 20% over the past twelve years remains intact. This does not mean that the future will equal 20%, but it will approximate it, varying with the different overall conditions that the company operates within. If the economy is horrible for a decade, then the company may do worse. If the economy is amazing for the next decade, the company may do better. I try to avoid predicting the behavior of the entire economy.
As to your question below about inventory. As for why management believes that building up inventory improves sales:
"Chief Financial Officer and Treasurer, Shannon Greene, added, 'We have significantly increased our investment in inventory this year, although it is not as severe as it first appears. Our stores' inventories are up approximately 30% from the end of last year in order to eliminate lost sales due to a lack of product availability. Our central warehouse inventory is up 80% during that same time. However, we ended 2011 with our warehouse being out of most leathers, so the increase this year is simply to get it back up to a reasonable level to support the stores. Further, with the positive sales trends at the stores, it is important that we have sufficient stock to carry us through the rest of the year.'" - Q2, 2012
It appears the main way having higher inventory increases revenue is by reducing lost sales through less out of stock issues.
Great write up. Just added to my position today as there does not seem to be a fundamental reason for the recent drop in price. The hefty dividends have served me well in the past and it doesn't look to be running dry any time soon.
This is perhaps the most disturbing article title I have ever seen.
Hi Thomas. Glad you liked the article.
The build-up in inventory was definitely something I noticed when comparing the most recent 10-Q with the 10-K and historical balance sheets. I sought out management comments on it from press releases and I found that Shannon Greene the CFO said in this press release:
"Shannon L. Greene, Chief Financial Officer added, 'Our inventory is holding steady at approximately $30 million at the end of the quarter. As we have mentioned numerous times in recent statements, we believe the increase in inventory at our stores is the contributing factor for the strong sales. We are carefully monitoring our inventory levels, balancing them against anticipated sales.'"
I also compared historical Q3 inventories and they were generally higher than the inventory level during other times of the year. This makes sense as the Tandy stores prepare for the Fourth Quarter Holiday season, which accounts for a larger percentage of their stores relative to other quarters.
However, even seasonally adjusted, this times inventory is much higher than other Q3. It seems intentional as mentioned by the CFO earlier.
As discussed in "Recent Developments" the strong sales have held through October and November, and this investment in current assets rather than fixed assets in uncertain times seems to be working.
Never mind, I made a mistake, however it was prompted by the language in the article...
"Finally, we want excess cash to be a positive number. It is conceivable, although relatively rare, that current liabilities out-strip total current assets. We guard against this by putting a maximum of 0 on the value to subtract from cash:
Excess Cash = Cash - MAX(0; (Current Liabilities - Current Assets + Cash))"
The Max formula does not safeguard against Current Liabilities being greater than Current Assets. It guards against Current Assets (less Cash) being greater than Current Liabilities. Therefore this max function actually does make sense, because excess current assets over current liabilities should not be added to excess cash.
However, that suggests there should be an edit to the language in the article to correctly state what the formula is doing.
Agreed. Also that means Excess Cash just equals Working Capital as Working Capital = Current Assets - Current Liabilities.
The only difference from working capital is the floor on the difference between current liabilities and assets in
Excess Cash = Cash - MAX(0; (Current Liabilities - Current Assets + Cash))
Which makes Excess Cash always positive... which shouldn't be the case. It is possible for companies to be insolvent and therefore have a cash shortfall rather than having excess cash.
Also, one thing I don't like about this entire debate, though I really shouldn't care, is how Mason is always made out to be the villain. Sure he has something to gain but so does Telus management
The board and executives on the board stand to gain 3.3 million dollars at the expense of voting share holders from this collapse because their holdings and stock options are weighted towards nonvoting shares.
To a certain extent, Mason's position is completely valid and he is indeed a champion of voting shareholders, seeking to protect the 5% value of voting rights that voting shares have over the nonvoting shares. As long as he doesn't vote on any other issue relating to Telus governance, this one topic is an instance where he is not an empty voter.
Indeed they started firing up again with a round two. The trade mentioned in the article is already concluded and investors who had followed the trade should have already closed out of their positions a long time ago.
The main thing that changed this time is Telus management is trying to win with just a majority instead of 66% of the voting class. This makes this second outcome harder to predict, because it is more based on legal decisions made by judges and also how the voting shares will align themselves.
Mason's argument:
Summary: I am representing the voting shares in this argument because Telus Management is trying to gyp the voting shares of the premium they have historically paid for the shares.
and too a certain extent the ISS agrees with him:
Mason is also granted an expedited appeal to be heard today on a British Columbia Court decision that prevented him from holding a shareholder meeting:
Telus management argument:
Summary: Mason is an empty voter who has no economic interest in the success of the shares, and is seeking to make a profit at the expense of keeping the share classes separate. The ISS agrees that collapsing the shares would be beneficial.
You might have noticed that both sides are claiming ISS support, but what's ISS's real position?
Its actually really simple. I'll simplify it without all the legal-speak and politicizing obfuscation that both sides are using to advance their argument.
ISS: Collapsing the shares would be good for shareholders by getting rid of an overly complicated shareholder structure, removing uncertainty about shareholder rights. However, the conversion ratio should be looked at to make sure that voting shareholders receive a fair exchange, having paid a premium historically.
You are referencing graham's method of diversifying risks away by buying 20 stocks selling below NAV in order to become the casino in the roulette game. However, what he was doing was diversifying systematic risk-- this does not work if all the stocks you are picking are exposed to the same systematic risk.
For example. If all your stocks are in the car manufacturing sector, and demand for cars drop, your portfolio will drop.
Now if the state of audit in China is so awful that most of the books are cooked then it won't really matter how many different chinese stocks you buy... they are all phonies.
Great article. My only concern with the chinese companies on the list are how can you be sure the accounting is legit.
The main issue with this strategy is that you do not get the dividend payments that just holding the stock would give you. Theoretically its priced in, but that is assuming efficiently priced options...
Great article! This seems like a very good idea. I wanted to do my own diligence on this bank as well and was wondering if you would share more of your sources. I noticed the FDIC website link you posted. Are there any other resources you used in your research? Thanks for the idea SCHFG.
Addressing the dividend: This is a consistent payment that has historically paid, not a special dividend paid only after the new offering round.
Flipping loans is part of the strategy, so gains on sale of loans is part of operations, if you consider the operation similar to a hedge fund focused on distressed loans.
Edit: Also, I am not arguing that the stock is an extremely attractive buy right now at 9.50 as you mentioned. I have not closed out of my position as I still believe there is upside, but I made this recommendation earlier when the stock was priced lower. Since then there has been a 15% rally in the price of the stock, partially because of a Barron's recommendation that occurred a few days ago, and partially as a response to the market moving up with QE3. At 9.50 the book value is more priced in, and there is less protection on the downside. NBN is still an attractive long-term play for me, as I want to be exposed to distressed mortgage debt in this current climate.
I was a little unclear. The limiting factor was that equity had to be 10% of total assets based on the restrictions set by the government preferred bonds. Therefore they could not increase the deposits because that would push Assets past 600 million when their equity was only 60 million. Now with equity at 119 million, they have leeway to aggressively increase deposits.
I've thought a lot about that too as it tripled the shares outstanding and gave new share buyers a huge discount on the existing book value of the company at the expense of the original share holders.
At first I had a negative reaction toward it, until the day after when all the form 4s came out revealing what insiders did during the offering. As I mentioned in the article, the C-Suite increased their positions, even though the net effect was they diluted their ownership slightly of the whole entity - but in exchange has more core equity in the firm.
After I learned about that, I had a few theories about why they would give out so many shares, but the main one I am favoring is impatience. A major way to get more ammunition for buying loans is by increasing their deposits, but they couldn't do that pre-equity offering because of their required 10% tier one capital ratio (they were already at the limit with 600 million assets and 60 million equity), so they could either wait for profits to come in to and increase their equity, (a very slow process as they earn about 1 million a quarter) or have the market contribute capital in exchange for equity.
They seemed to have gone for the latter, and I believe at a massive discount because of how lightly followed the stock is. To attract enough capital to make it worthwhile, they had to give away a significant chunk of the company. The insiders activities of buying in the common share offering indicates that they believe the company is a good investment at the prices that were offered. The amount they bought allowed them to maintain their percentage ownership (with slight dilution), and have a bigger equity pot to work with in expanding operations.
I do not believe that another dilution will occur because with equity at about 120 million, the new asset limit is around 1.2 billion. Total assets are a 669 million, and deposits grew 3% of that this quarter meaning it will take about 5 years for total assets to reach the limit again - assuming no equity growth, which is not the case. NBN should have enough core equity now to do without a similar common offering diluting current shareholders for several years. The only time to worry would be when assets are around 10 times common equity.
Also, this 10% limit might be relaxed after they pay off the federal bailout preferred shares that are requiring this covenant, as for most banks, 6% is considered very well capitalized.
Looks like you are right. I was slightly surprised there wasn't a big gap up after the earnings were reported, but I guess the market is still taking a "show me" attitude towards the stock, and waiting for larger growth in earnings before expanding the multiples NBN is valued at.
To me, the earnings report was a buying opportunity as the acquired loan portfolio has continued to outperform. Everything else looked in order (no spikes in nonperforming debt and questionable loans) and book value continued to improve.
I'm just wondering, how does CHEP handle short execution? Does it ever get called away from its short positions and what percent interest is paid on the positions that they are short.
Also, does the backtesting take into account that expected transaction cost. Thanks.
If buying gold is a hedge against economic collapse, then the only rational way to own gold is with physical gold. If you buy it with gold mining stocks, gold futures or with gold ETFs and the system collapses, then these pieces of paper are worth nothing.
If you believe that gold mining stocks, gold futures and gold ETFs will continue to have value, then the system that enables them will have to survive. If the system survives then the stocks of companies that actually make useful things are a better long term investment than god.