Behavioral Investors

Behavioral Investors
Contributor since: 2012
Company: Behavioral Investors LLC
Nicely done report. JE was also recommended as a short on the Value Investors Club in June. It's another unfortunate case of a company trying to lure in yield-seeking investors with short-term dividends that can't be sustained by the business.
There's an interesting discussion on VIC about the extent to which management expense ratios can justify the NAV discount of CEFs. Theoretically, using the present value of a perpetuity management fees should reduce shareholder value by the expense ratio divided by the risk-free rate. However it turns out that for those few companies that actively buy back shares at a discount this can go a very long way toward compensating for the headwind. Although investors would obviously be better off if it was liquidated today, Tom Caldwell does deserve a lot of credit for persistently buying back shares at a discount to NAV.
I think you're on target in highlighting these marketing issues. In the past, their marketing strategy centered on bulk direct mail which sent packets to students emphasizing they were personally "nominated for the honor" of being a Student Ambassador, which helped drive conversions as students felt honored to be selected. In fact they were being too indiscriminate in sending out blanket solicitations to commercial direct mail lists, including several embarrassing cases of "nominating" a deceased student. They have since had to soften their direct mail language, which I think is in large part behind their decline in conversion rates.

I would think an appropriate response would be to leverage their relationships with local teachers, and target their direct mail (and online) solicitations more specifically to a targeted list of students who in fact truly are nominated by educators as students who are appropriate candidates for the trip and are likely to go. This would entirely avoid the expense and poor conversion rates of using commercial lists and go a long way toward enhancing their reputation. If managed correctly, their long-term relationships with local educators can be a hugely valuable "moat" and intangible asset that helps support their historically strong RoE.
At the next quarter I expect bookings from late 2012 will continue to be slow which could again pressure the stock in the short term. I expect this should improve somewhat going forward with a return of consumer confidence; over the long term a lot depends on an appropriate marketing strategy enabling the business to return to historic strong RoEs; this is not a foregone conclusion but is certainly something the new activist shareholders also will be strongly incentivized to make happen.
Look more closely at the Schedule 14A filed on 05/09: John Ueberroth actually stepped down as Chairman during the proxy contest this year (or rather was forced out), and did not stand for re-election as a director. Joseph Ueberroth resigned from the Board in August 2011. Together they owned around 3.7% of the stock at the latest proxy, which is absolutely swamped by the stakes of the controlling activist shareholders.
This highlights how the results of the proxy battle are not widely publicized. I don't think many people have yet realized the long-term implications of this change of control.
You're welcome Thomas. Advance bookings through year-end 2012 were collected at the height of the fiscal cliff uncertainty, making families especially reluctant to commit months in advance to future discretionary travel; I think this should improve going forward with a return of consumer confidence and ongoing marketing improvements at EPAX itself. They have been too focused on direct mail and are now increasingly incorporating targeted low-cost digital advertising.
One thing people really are missing is that the business has operated very profitably for years at much lower volumes. Even making fairly draconian assumptions that future revenues would be much lower than today's and ignoring any possibility for future growth, they could potentially generate at least $15 million to $25 million in yearly EBITDA once they bring SG&A costs back in line.
I think this is an interesting idea; I'd put on a small similar position with covered calls before seeing this article, and think this is starting to look attractive again with a further decline is GSVC. If you're like me and are also long some put options against overvalued Web2.0 stocks, selling some mispriced volatility with a cash backstop is an attractive offset.
However, as an investor in CEFs it's not out of the question for discounts to NAV to reach a surprising degree and persist for some time, with management often very reluctant to return cash to shareholders. You mentioned a dividend of proceeds from GRPN; do you have any indication that GSVC management will actually return cash to shareholders through dividend or buyback?
Interestingly, it seems that some people are shorting GSVC as a proxy for FB even though the relevant % of NAV is small; this may result in GSVC continuing to be depressed for several months with the discount potentially narrowing once FB becomes shortable.
Good post Mariusz. I own some ADGF myself -- interestingly, the decision to explore a sale was catalyzed by an individual investor posting here on SA ( who contacted larger shareholders.
I once owned Perion when it was called Incredimail; it was trading at a very cheap multiple then, but the decision to start spending on acquisitions rather than returning cash to shareholders is questionable.
Congratulations, Jay. I think you stimulated this.
This is a testament to what focused small shareholders can achieve through rational and measured activism.
Shareholders Unite, I'd be interested to know your perspective on the Chinese government's aggressive stimulus response to the post-mortgage crisis slowdown. While you called for careful investments in useful infrastructure, they don't appear to have been very responsible, instead spending wildly on unused projects that created a great deal of overcapacity and distortion which are now causing painful deflation.
Setting aside the deflationary effects of the resulting overcapacity, the spending has resulted in even more bad debts on the balance sheets of state-owned financial entities. I wonder what will result from this if deflation continues; I wouldn't be totally surprised if they were eventually forced to liquidate some of their foreign exchange reserves in response to a run on state-owned banks. Well I will try to put together a post about China soon, I'd be interested to hear your thoughts.
Thanks for a really enjoyable blog. You make a good case that the "lost decade" may have essentially included a lost depression - for those interested in thinking about alternate interpretations of Japan's malaise, Eamonn Fingleton's books on Japan are also worth a read.
But as you and the last commentor have mentioned, the core issue may not be whether they were successful in supporting output and employment during recent years, but what the eventual consequences are of the accumulated deficits.
Kyle Bass also makes a good case, which is focused instead on whether the current situation is truly sustainable going forward. So was this a relatively successful MMT-style response, or is the resulting JGB debt pile now a ticking time bomb? I'm still not totally sure that Kyle Bass is right (or if he is, that he might not be "right right away"). As you're pointing out, it seems their private sector has deleveraged so much that maybe they can run a private deficit and government surplus for some time while still not having to rely on external funding. On the other hand, their growing demographic pressures may be what seals their fate.
I think the US probably can't replicate the Japanese experience, if only because we don't have their trade surpluses and domestic savings which soak up so many JGBs allowing them to run public sector deficits while keeping rates low without the need for external funding. China, though, possibly has a lot of parallels in the coming years, having built a lot of excess capacity that could prove very deflationary.
Nice post Akram, and good call BadCop on CRM LEAP puts..
Today's atmosphere reminds me of the very special point in time back in 1999, when it was becoming an established routine for dotcoms to "beat by a penny" (on topline numbers, since GAAP earnings were negative as with CRM) and then pop outrageously after hours -- so routine, in fact, that everyone became conditioned to expect this. Of course, after this has continued for the right amount of time, enough lemmings pile on before earnings waiting with bated breath for an "upside surprise", and one day the stock drops after "beating expectations", leading to a surprise of an entirely different kind..
I predict there will be dead-cat bounces aplenty, but we have now seen the beginning of the end.
I also have a sizable position in RHDGF and had posted it on VIC last year. Aside from the value itself, a core component of the thesis was that management is well incentivized with a demonstrated track record of returning value to shareholders - returns from the special dividends alone have been phenomenal. It's a perfect example of where the correct due diligence can allow you to be more confident investing in a Pink Sheets firm than with the overcompensated and mediocre managements all too common in many listed companies. GRVY looks potentially appealing, but there are a lot more governance questions that make it less obvious whether value will accrue to shareholders. Have you communicated with management, or how do you otherwise get comfortable with this?
With DCHAF the risk-reward has improved with the discount to NAV, but you're left reliant on speculation in the movement of metals prices rather than returns from an underlying business. It's not blindingly obvious to me either way whether near term rare earth prices will resume their earlier surge, or quite possibly crash much further in the wake of new supply. And when it comes to value investing, I like blindingly obvious.
I think it's a very good sign that you want to honestly examine your decision-making process and analyze the reasons behind a period of underperformance. Surprisingly almost no one will have the courage to do this. I think your recent drawdown has less to do with the fact that you're willing to look at Pink Sheets securities than the fact that you had a concentrated and correlated exposure to commodities prices that are difficult to forecast. It's true that liquidity premiums can spike up in a downturn, but if you look at the past few months even highly illiquid deep value names like RHDGF and CNRD.PK have shown consistent positive outperformance.
With momentum waning and such large valuation discrepancies between bubble and value stocks, I think we're entering a period where value investors can outperform very significantly, but may need to consider a hedged long-short strategy to survive.