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Amit Chokshi, CFA

 
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  • Selling Bank of America Puts Is As Safe As It Gets [View article]
    Yeah but if you're long BAC as it is and the stock drops you're taking big losses on the short put position and the stock. Options are marked to market and you're taking a loss on BAC stock and the puts. I have no idea what the delta and gamma on those puts are but if BAC stock falls even to the low to mid 40s you're going to have to put more cash in to maintain margin. So your BAC stock value drops and you need more cash for collateral for the declining put value. Also, dont underestimate what can happen in 5 months, look at how stocks like C and JPM did in the early 90s, a 13% drop is nothing in terms of demonstrating any bottom or stability has been reached. With those puts you're on the hook for buying them at $40 no matter what, if BAC stock is at $30, you're really underwater on that purchase.

    So if that stock is at $30, you're down on your BAC stock holding and are now assigned a stock you have to pay $40 less that $1.30 premium for. Also, you've had to put who knows how much cash into that brokerage account as the short put value has gone the other way on you. Don't forget the opportunity cost of that collateral/margin cash you need too, that just sits there in your account when you could have been investing it elsewhere.

    I think selling puts is an ok at best idea using short dated options if you want a stock at a specific price. That way you have theta decay working for you at a more rapid pace. Most longer dated options under-price volatility and theta decay is nowhere near as pronounced which is why being a buyer as opposed to a writer is preferable for longer-dated options.
    Aug 9 07:28 PM | Likes Like |Link to Comment
  • Borders Group: Spencer Raises Stake, and SAC Capital Discloses "Passive" Stake [View article]
    Hard to see what these guys will be able to do here. The usual value building 101 of closing down underperforming stores, etc seems ok, guess they can shut down any mall stores and the usual "underperforming" stores but I'd bet that the entire company is underperforming due to no real merchandise aside from Harry Potter. They'll have the same problems Elliott is having with PIR, there is no real separation between under and overperformers, the entire company is having issues. Plus with BGP's current valuation there's no way a buyout firm touches it.
    Aug 7 08:28 AM | Likes Like |Link to Comment
  • Heavy Debt Obscuring Hanes' True Earnings Power [View article]
    HBI's debt is what makes the stock so appealing, it's one of my largest holdings. This is about as close to public LBO participation a public shareholder can have with a phenomenal company. WEB paid 0.5x salesand 11.1x EV/EBITDA for BK Fruit of the Loom and paid 0.7x sales, 6.8x EV/EBITDA, and 24.2x P/E for Russell. FOL was bankrupt and Russell in my view is a weaker brand than HBI. So you're getting a company with arguably the best brand in underwear and very tangible value drivers for a very fair price.

    HBI's Champion/9 series is doing well at TGT too and the company is also getting into other store fronts (Family Dollar).

    The reason I love this co is that irrespective of economic conditions, I expect this to be a top line inflation grower (3-5%) per year but it has some real value drivers in operationionally and financially. They have a lot of non-cash restructuring costs that are being recognized reducing GAAP income, they are offshoring as much labor as they can, they are addressing pension issues and were able to reduce about $70MM in healthcare related costs.

    As for financially, this business cranks out about $500MM in EBITDA per year so leverage for a high brand, stable business is perfect to me. CapEx will be about $90MM per year so you're left with $410MM in cash flow to work with in terms of working capital and paying taxes. THat still leaves a lot of dry powder to delever and reduce interest expense.

    The "risk" is market confusion and execution risk. There's going to be about $250MM in restructuring costs (total) over the next 3 years but we don't know how much will show up in each year so god forbid an analyst covering it has a lower number for a particular quarter resulting in EPS higher than what comes in on a GAAP basis and the stock can take a hit. Also, HBI's switch to a calendar year end will make prior year comps difficult and their exitign as you mentioned from certain lower margin businesses will curtail revenue growht, also making prior year comps confusion. If you can wait it out 2-4 years this will prob be an amazing stock. As for execution risk, obviously having 5.0x debt/EBITDA makes execution of the co's strategic plans important, one minor mistake in this capital structure could be much more significant. However, I feel having Noll and Lee have the RSU's and options at $19 or so keeps them pretty focused on making sure things go smoothly. The comp awards were set pretty fairly in my opinion.
    Jul 24 09:14 AM | Likes Like |Link to Comment
  • Research in Motion Insiders Cashing Out On The Back of New Buyers [View article]
    You're right but the implied vol for those options is high so there's a lot more "meat" to the premium and with a stock that's run up as hard as it has recently, I felt comfortable setting up a short straddle (short time expiry too) and then subsidizing it for later dated long puts. I would not set up a naked short on this.
    Jul 17 01:40 PM | Likes Like |Link to Comment
  • Are Hedge Funds a Risk to the System? The Proof is in the Provenge [View article]
    Right, I realize that and many funds were forced to cover but again, how does that speak to arrogance. Tom Brown and David Einhorn had good portions of their portfolios in companies like New Century and are likely underperforming due to these positions (Einhorn I believe was on the board of New Century so it made his predicament even more difficult). These two guys are phenomenal investors that run hedge funds and stocks like New Cent immediately traded down on days when bad news was released. Would you call them arrogant or reserve those comments soley for funds that short rather than go long?

    Also, while I'm not familiar with the short interest build up in DNDN, do you believe the majority of funds shorted at the low and not in the $5-$8 range and a good portion of the short float was just funds rolling over their exposure in advance of the news? DNDN was a binary play and I think any fund manager on the long or short side recognized that, it was either a 0 or a 5x return event, so if you lose on either side you'd be in trouble. But you're also talking about a microcap biotech, even at its current valuation, so to expound on this being some sort of catastrophic event for fund managers is extreme in my view.
    May 7 09:42 AM | Likes Like |Link to Comment
  • Are Hedge Funds a Risk to the System? The Proof is in the Provenge [View article]
    Hedge funds are arrogant because they shorted DNDN? What kind of prime broker will let a fund manager ride out a $4 short up to $20+ or wherever it hit during that phase? Most funds that were short would have gotten out or forced to buy back much earlier. DNDN is hard to locate as well so it's even that much harder to maintain the overall short without addiitonal margin. Also, are there any indications of hedge funds that bet the house on shorting DNDN? I don't think there are so if you run a long/short and are short DNDN with maybe 1%-2% of your portfolio, sure it's painful but you're not first of all riding a short from $4 to $20+ and secondly, other positions should have mitigated the loss.

    As for arrogance, whether you're long or short any stock I'd imagine most funds conduct some due diligence before initiating a position. Also, some of the best value investors (Buffett, Pabrai, Greenblatt, etc) have had over 30% of their portfolios represented by just one position at times. The determination of whether these types are arrogant or made a smart bet is all based on the outcome. If the investment works well, ex ante it might look arrogant but ex post it makes them look like geniuses that stood by their convictions and had the right analysis to back those positions. I can bet a guy like Jim Chanos probably gets lashed the most in terms of arrogance due to the duration of his ideas mismatched with short-term expectations. His short on LeapFrog might have been arrogant cause it went up quite a bit and he kept shorting and then, now, on an ex post basis he's once again vindicated.
    May 5 10:55 AM | Likes Like |Link to Comment
  • Still Short Downey Financial Despite Jump on Earnings [View article]
    I didn't see an issue with their loan loss reserve, their loan portfolio was $13B in Q1 2007 where as it was $13.9B, they're reserving a slightly higher percentage for the smaller loan portfolio despite the actual absolute value being smaller compared to FY 2006.

    I don't see the LTV info in the 8-k but it will probably be disclosed in the 10Q but not by age, maybe just as they do in the 10-K on a rolling annual basis. About 85% of their prime loans are in NegAm while I think it's about the same for the most part with their subprime loans too. The average maturity will is prob aroun 20-24 months, I do remember on the 10-K the LTV went up from 73% (orig level) to 76% or so for all loans that were utilizing NegAm.

    DSL caps the NegAm at 110 of the original loan so I think that's where a bullish viewpoint is made. You have a deposit business that is a good franchise in SoCal and the NegAm is capped. I think this may be a potentially weak assumption though because the "safeness" of the 110 cap implies that the home value is static so say your mortgate is $80k for a $100k home, the DSL cap means your max LTV is 88% assuming the price of your home is static. If your house value drops 2% and is worth $98k, the NegAm cap would still be 110% of the original mortgage but LTV would be 90% if it reaches the $88k cap. It's like with low P/E stocks where the E drops off in the future. Nobody can predict housing values but I'm pretty certain that the downcycle in southern Cal real estate should catch up in terms of home values.
    Apr 20 03:57 PM | Likes Like |Link to Comment
  • Bad News from Seagate Technology Presents Opportunity in Western Digital [View article]
    Do you think WDC's lack of exposure to flash mem vs STX is a material component for the valuation discount? I like WDC's valuation on the surface but haven't spent much time really looking at the co.
    Apr 11 09:22 AM | Likes Like |Link to Comment
  • Buffett Misses In Hedge Fund Fees Comment [View article]
    Buffett ran a partnership before BRK and got paid 25% after clearing the 6% hurdle rate. I admire him but find his annual letters to be much better for those with a passing interest in investing. Does your analysis implicity state that ou think investors are better off paying 2 and 20% for a beta neutral long/short hedge fund to reduce volatility? What if investors are in a 2 and 20% long/short fund where the short and long book are not integrated and both the short and long book go in the wrong direction? And how is a 2 and 20% long-only portfolio a ripoff? Most hedge funds are absolute return vehicles and running a matching short portfolio is not the only risk mitigation tool. How would you rate the long-term returns of Mohnish Pabrai, Tom Brown, Lampert, etc. who do not run short books?
    Apr 10 09:51 AM | Likes Like |Link to Comment
  • DSW Inc.: Step Into This Growth Retailer [View article]
    Do you have an established valuation range for this company? The valuation doesn't seem to offer much of a margin of safety, especially when you consider that all of their growth is from new store development, don't you want to see some better comp store growth when you're paying 25+x EPS and over 14.0x EV/EBITDA? I like the company though. What do you think about RVI? RVI owns a lot of DSW but trades for a much better valuation, you also get Filene's Basement and struggling Value City which will prob be sold.
    Mar 28 08:50 AM | Likes Like |Link to Comment
  • Private Equity Leaders: Seeing the Big Picture [View article]
    All old news as far as dividend refinancings, these things have been going on with as much, if not more, frequency since 2004. In some cases within a week of the original buyout a sponsor would do a quick dividend recap (see the PanAmSat deal). The LBO guys are smart, if there are stupid buyers that are yield hungry then who cares. It's no different than the late 90s as well, this cycle happens all the time, you'll see it again. In the 90s LBO guys got caught financing a ton of telecom and media deals which blew up on them. Same thing will happen but in the mean time it's just a cycle that's impossible to stop.

    You think the M&A, leveraged finance, and high yield bank group heads are going to say we think it's getting toppy? They're compensation is based on beating last years #s so they'll continue to sell these deals as aggressively as possible and compete with other banks by underwriting more paper with looser covenants to rake in the fees. If you look at any number of these mega deals and you're the banker with the relationship with the big sponsors and you pass on a deal because it's a bad credit, you think you'll look like a hero in front of the group head when it's year end and they say why weren't we on this x billion dollar deal?

    It's always easy to judge this ex post when a few deals blow up and credit markets tighen but in the mean time, from the banker/underwriter's view, they miss out on hundreds of millions of dollars in fees and a lot of lost goodwill with some of the most profitable clients.
    Mar 22 09:19 AM | Likes Like |Link to Comment
  • Topps Shareholders Should Reject Eisner's Offer [View article]
    The valuation some people say is fair is $11 per share, it's based on a break up where some people think the confectionary business goes for 2.0x sales and the cards/entertainment go for 0.4x sales. The confectionary business has a higher contribution margin (~30%) vs the entertainment business (~20%). I don't see that valuation happening just because the market didn't take to the confectionary business. Topps tried selling it in 2005 for 7 months and nobody bought it so I don't see that break up value as realistic. Eisner and MDP may be able to sell it but I'd be surprised if they got 2.0x sales for that business. If you assume Eisner/MDP just want to buy the entire business without plans to divest then this really looks like an overpriced deal.

    Price to sales is not used primarily to value LBOs unless you're looking at distressed retailers, and even then it's just a second check against the main metric which is EV/EBITDA. The cash you're talking about is already factored into the enterprise value and the Eisner/Madison Dearborn bid. I don't own shares and think your write ups on the background are great but Madison Dearborn and Eisner's group can't pay a stupid price because they'd have to put in more equity and dampen their returns. I just did a quick look at the company's historical figures and it looks like margins have been steadily declining. Looking at their latest 10-Q, I just annualized their operating income + D&A for an annualized figure of $19MM in EBITDA. They have minimal annual capex, prob around $3MM or so.

    So based on that EBITDA figure, which is basically how every LBO is valued, the current $300MM enterprise value of TOPP values the deal at 15.7x EV/EBITDA. Looking at their latest 10-K, these guys seem to be treading water at around $295MM in annual sales every year, gross profit margins seem erratic, and SG&A costs have been rising. So being more than fair, these guys did poorly in 2006 but just going to 2005 and 2004, they've been at best a $20MM EBITDA business with CapEx of about $3MM.

    So even assuming Eisner and MDP have some great plan to enhance margins, assume EBITDA is $25MM or so, they're paying 12.0x EV/EBITDA for TOPP on a forward basis. And in today's leveraged loan and high yield markets, you can get 5-6.0x leverage for strong cash flow generating businesses (which I don't consider with TOPP but I'll say the bankers do this deal at that financing range) so assuming they get 6.0x EBITDA for debt that's $150MM in debt they raise and $150MM in equity Eisner/MDP have to put in. A 50/50 split in LBOs is pretty unheard of unless there are some serious growth prospects, even then going less than 65% debt to capital is pushing it in terms of reducing your overall returns. So $150MM in debt, assume these guys have an average interest cost of 9% which is probably being generous, and that's $13.5MM in interest a year.

    So assuming Eisner/MDP have some operational wizard or insight on some secular trend that will drive sales to leverage that overheard or they have some operational wizard that can bring EBITDA up to say $25MM, that's a shaky deal out of the box. $25-$3mm capex-$13.5MM = $8.5mm left over, that's some pretty low interest coverage. On the surface this looks like a fair if not overpriced deal to me, I'd have to imagine Eisner/MDP have some thing already lined up to significantly improve this business because if they don't I don't see how they really generate an impressive IRR.
    Mar 15 06:04 PM | Likes Like |Link to Comment
  • What Readers Say About Seeking Alpha [View article]
    The site is great but to you guys should work on original content. I think (from my outside view), that the initial blog aggregation worked in generating a captive audience but to keep making this site more valuable you need to have some original content because you'll probably run out of high quality blogs to eventually bring in. I see this as being sort of at the cusp where you're getting more contributors but the types of articles are so broad in some cases that it's a lot of "noise" relative to just 6 months ago (maybe just my opinion and not borne by facts). The orig content may not be practical based on your staffing level and because the viewership is fairly diverse but you could do a survey to see what article types (market commentary, economic commentary, port mgmt, individual ideas) visitors want the most and then push any original content in that vein.
    Mar 15 02:14 PM | Likes Like |Link to Comment
  • Advocat: An Undervalued Situation Requiring an Activist Touch [View article]
    FYI contact email should be amit.chokshi@kinnaras.... thanks.
    Mar 12 06:43 AM | Likes Like |Link to Comment
  • Wal-Mart Goes For the Gold In China [View article]
    There seem to be conflicting reports on the $1bn number, Marketwatch said it was $1bn for the stake and Reuters said "Financial terms were not disclosed, but a source familiar with the deal said Wal-Mart would eventually pay $1 billion for all of Bounteous, which operates 101 hypermarkets in 34 Chinese cities." So to me that means that their 35% stake is valued at just $350mm and eventually they hope to own all of Bounteous/Trust-Mart and will do so for a $1bn total.

    That's not unusual for WMT, they entered Central America by buying a small stake in Royal Ahold's subsidiary down there before taking majority control within a few years.

    I don't know that I agree with you about retail not requiring a partner. Previous failures by WMT and Carrefour in other foreign markets show that having a partner makes sense. The stakes in China and India are high and more importantly the regulation/legislation landscape is probably difficult to navigate. In India WMT is teaming up with Bharti Enterprises, India's largest telecom while other competitors like Carrefour and Tesco are expected to team up with Wadia and the Tata Group respectively.
    Feb 28 10:24 AM | Likes Like |Link to Comment
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