Northeast Bancorp Using Cheap Leverage To Buy Distressed Mortgages [View article]
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.
Northeast Bancorp Using Cheap Leverage To Buy Distressed Mortgages [View article]
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.
Northeast Bancorp Using Cheap Leverage To Buy Distressed Mortgages [View article]
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.
Body Central Cheap For A Reason: Isn't That Always The Case? [View article]
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.
Body Central Cheap For A Reason: Isn't That Always The Case? [View article]
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.
Texas Hold 'Em Tournaments And Value Investing [View 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?
Tandy Leather Factory: A Great Company Selling At A Normal Company's Price [View article]
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.
Tandy Leather Factory: A Great Company Selling At A Normal Company's Price [View article]
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.
Is It Time To Upgrade Your Portfolio? [View article]
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.
Tandy Leather Factory: A Great Company Selling At A Normal Company's Price [View article]
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: http://bit.ly/TCBtOx
"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.
How To Use Excess Cash In Stock Analysis [View article]
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:
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.
Northeast Bancorp Using Cheap Leverage To Buy Distressed Mortgages [View article]
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.
Northeast Bancorp Using Cheap Leverage To Buy Distressed Mortgages [View article]
Northeast Bancorp Using Cheap Leverage To Buy Distressed Mortgages [View article]
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.
Northeast Bancorp Using Cheap Leverage To Buy Distressed Mortgages [View article]
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.
Body Central Cheap For A Reason: Isn't That Always The Case? [View article]
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.
Body Central Cheap For A Reason: Isn't That Always The Case? [View article]
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.
Texas Hold 'Em Tournaments And Value Investing [View article]
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!
Texas Hold 'Em Tournaments And Value Investing [View article]
Chris, as a value investor, do you favor a tight aggressive play style?
Tandy Leather Factory: A Great Company Selling At A Normal Company's Price [View article]
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.
Tandy Leather Factory: A Great Company Selling At A Normal Company's Price [View article]
Tandy Leather Factory: A Great Company Selling At A Normal Company's Price [View article]
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.
Is It Time To Upgrade Your Portfolio? [View article]
The Seductive Warren Buffett [View article]
Tandy Leather Factory: A Great Company Selling At A Normal Company's Price [View 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:
http://bit.ly/TCBtOx
"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.
How To Use Excess Cash In Stock Analysis [View 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.