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Brian Grosso

 
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  • PDF Solutions: Contractual Issue Masks 40% Near-Term Upside
    Editors' Pick • Nov. 25, 2014 PDFS 2 Comments

    Summary

    • Quality business: strong ROIC, ROA, gross margin, and LT top line growth, growing patent portfolio, tech sector and semiconductor industry tailwinds, strong value offered to and aligned interest with customers.
    • Strong, unpromotional management owns ~14% of company and is compensated reasonably. Good Glassdoor reviews, though a limited sample size.
    • Recent contractual issue has created opportunity in the stock and optionality for the business.
    • Stock is too cheap even without highly favorable potential developments.
  • Vectrus: Recent Spinoff With 40% Annualized Upside Over 1-3 Years
       • Nov. 15, 2014 VEC 4 Comments

    Summary

    • Spun out from XLS. Began trading late September. Spinoff enhances VEC ability to execute and resulting forced selling creates opportunity in stock.
    • High quality business: variable cost structure, high ROIC and ROA, sound management, competitive advantages created by agility and enduring customer relationships, and large TAM (less than 1% market share).
    • Risks overstated. The customer concentration is not as bad as you'd think. Afghanistan revenue phase out has largely already occurred. Business resistant to sequestration.
    • Scenario analysis indicates 40% annual upside over 1-3 years.
  • Fluor: An Unexciting Short-Term Buy
    Nov. 4, 2014 FLR 4 Comments

    Summary

    • Uncontroversial and unexciting thesis.
    • Attractive qualitative characteristics and equally attractive ROIC/growth profile.
    • Overblown oil & gas concerns.
    • Acknowledge it is a valuation disagreement-centered idea, but I find valuation attractive and think conditions make a quick <1 year move to fair value very possible, enhancing returns.
  • Trading At 3x What PE Deemed Reasonable Last Year; Avoid Burlington Stores
       • Oct. 9, 2014 BURL 1 Comment

    Summary

    • Stock seems expensive on absolute basis at 15x EBIT, 20x FCF, and 25x EPS..
    • In IPO last year, Bain and Burlington were willing to price as low at $14/share (37% of current price) at one point and Bain is now trying to dump shares.
    • The apparel retail industry is unattractive, economically sensitive, capital intensive, competitive, and risky. Another economic downturn is probably not very far off and BURL will suffer due to excess leverage.
    • Market expectations for further improvement in ROIC/growth/operating margin don't seem to be grounded by BURL's 20-year operating history.
    • The company should still appreciate in intrinsic value over time and, due to this and other factors, is probably not a very good short. It is best to just avoid.
  • Drilling For Contrarian Value In Oil And Gas: Consider Oceaneering
    Oct. 1, 2014 OII 5 Comments

    Summary

    • Anything related to Oil & Gas has declined substantially over the last 3 months in a period when the S&P has been flat. There has to be value here somewhere.
    • Started my search with those worst hit: offshore drillers. Came away from research on RIG disheartened. Next step was to look down the industry supply chain for an indirect play.
    • Enter OII: manufactures ROVs and provides a range of support services to offshore drilling industry.
    • A high quality company: strong management and governance, significant competitive advantages, a record of very profitable growth, and generally good prospects.
    • The stock looks undervalued at 8x EBITDA. I see upside of 30% to $85. Considering the opportunity costs of my book, though, I am looking for a bit more value.
  • A Simple Regression Debunks A Simple Short Thesis; Buy Sturm, Ruger And Smith & Wesson
       • Sep. 26, 2014 RGR, SWHC 33 Comments

    Summary

    • Firearm demand is simply returning to a 15-year normal trend of growth from inflated post-Sandy Hook levels, NOT going to zero. Shorts are guilty of data point extrapolation here.
    • With the above and the unlikely risk of complete prohibition of private gun ownership established, the firearm industry is actually quite attractive from an investing standpoint.
    • SWHC and RGR are great companies- high ROIC and top/bottom line growth over long periods, strong and enduring brands, solid and unconventional management, engaged employees, and excellent products.
    • Both stocks are cheap. There is a possibility of a short squeeze and/or PE takeout. RGR is slightly more attractive.
    • Risk of complete gun prohibition is improbable, but there. Lack of immediate catalyst lends to a gradual position entry.
  • American Public Education: Best Of Breed And Misunderstood; Put This Baby Back In The Tub
       • Aug. 29, 2014 APEI 8 Comments

    Summary

    • The major risks APEI faces, namely DOD funding cuts and regulatory/legal challenges plaguing most other FPEs, are significantly overstated by the market consensus.
    • It is a high-quality enterprise, as evidenced by strong governance, management, high ROIC, recurring revenue, strong margins, a highly variable cost structure, and a sustainable business model.
    • The business is struggling a bit, but the stock looks cheap in a base-case scenario, with optionality for outsized returns if revenue and margins improve within 5 years.
  • Genworth Financial: Making Sense Of The LTC Troubles
    Aug. 15, 2014 GNW 19 Comments

    Summary

    • The company recently reported its Q2 2014 results, which showed continued improvement across the business, besides U.S. Long Term Care, where significant adverse losses were experienced.
    • There is still plenty to like about Genworth, mainly the company's outstanding leadership and leading position in various insurance markets, particularly U.S. LTC where the company has >40% market share.
    • The adverse LTC losses have resulted in another review of the business, the results of which will be released prior to Q3 results and could include significant value impairments.
    • Valuing LTC and the rest of the business separately based on a range of potential outcomes, I came up with a weighted average price target of $16.06 or 19% upside.
    • This also accounts for additional 8-10% annualized returns. It seems attractive on average, but an estimated 35% chance of substantial permanent capital loss is outside my risk profile.
  • Strayer: Business Clearly Turning And Stock Remains Cheap
       • Aug. 8, 2014 STRA 5 Comments

    Summary

    • The premise that Strayer will avoid most regulatory/legal damage that other FPEs are being hurt by seems to be holding true.
    • The company's Q2 results offer clear evidence (starts, bad debt expense, RPS guidance) that the turnaround is picking up.
    • The stock remains cheap when considering the likely ROIC, multiple, and EBIT margin reversion.
    • I am not investing now due to the lack of share repurchases and chart which seems to indicate an imminent pullback.
  • Liquidity Services: Solid Business And Valuation, But A Few Concerns
    Aug. 4, 2014 LQDT 8 Comments

    Summary

    • A top pick of Joel Greenblatt's Magic Formula Screener.
    • Niche focus on the surplus/salvage market and professional qualification and trade clearances of buyers and sellers create competitive advantages.
    • Benefits from the continued shift of world economy online and further, seems to make the surplus/salvage market more efficient than existing processes.
    • Significant relationships with DoD and WMT are a testament to legitimacy of such a small business, but also present significant customer concentration risks.
    • 58.4% pre-tax ROIC and 15%+ growth should not equal 5.8x EV/EBIT and 8.9x EV/FCF.
  • Booz Allen Hamilton: Textbook Quality At A Discount
       • Aug. 2, 2014 BAH 6 Comments

    Summary

    • This article serves as a more comprehensive follow up to my initial research - Booz Allen Hamilton: A Sustainable Excellent Business At A Discount.
    • Concerns over the impact of US government budget cuts are overblown and much of the financial impact for BAH has already been realized.
    • I believe the firm is of outstanding quality for a variety of reasons, including its durable competitive advantages from security clearances, longstanding client relationships, etc.
    • Stock seems significantly discounted under 15x adjusted EPS and closer to 10x FCF.
    • $1 special dividend should bolster stock over next month.
  • Booz Allen Hamilton: A Sustainable Excellent Business At A Discount
    Editors' Pick • Jul. 25, 2014 BAH 15 Comments

    Summary

    • Competitive advantages associated with century-old brand and longstanding customer relationships.
    • Consulting is an excellent industry involving a highly-intangible service, limited price competition and benefiting from value-based management and enterprise technology trends.
    • The details above and BAH's excellent management make BAH an excellent business and I believe sustainably so.
    • 46.5% ROIC plus ~10% growth for some time plus excellent business quality deserving a premium plus 2.07% dividend yield, should not equal <10x EBIT, 13.7x EPS, and 14.4x FCF.
    • Backlog decline, management transition and tough FY15 guidance present challenges that I believe are temporary and causing this phenomenon.
  • Activision Blizzard: A Low-Risk Business Model In A Risky Industry - Compelling Value Here?
    Jul. 23, 2014 ATVI 7 Comments

    Summary

    • ATVI's focus on existing, strong franchises makes the company's business model lower risk (less hit-and-miss) than the gaming industry at large.
    • The company's 10 year "Destiny" partnership with Bungie creates valuable optionality.
    • The gaming industry is growing 12% annually, but much of this growth is coming from mobile apps, where ATVI is less active.
    • High ROIC 25% pre-tax. 10-15% forward growth seems reasonable.
    • Shares seem slightly discounted but far from the 12-13x after-tax multiples of FCF, EPS and NOPLAT where I'd really be interested.
  • Capital Southwest: A BDC To Believe In?
       • Jul. 21, 2014 CSWC 16 Comments

    Summary

    • Became interested in the stock through various mentions in Martin Whitman's "Modern Security Analysis.".
    • The company's investment strategy is unique as far as concentration and time horizon and generally aligns with my own. I did not find any qualitative deal-breakers and was generally impressed.
    • Operating valuations do not apply here. NAV/share and growth in said metric matter. NAV is somewhat arbitrarily-determined but seems reasonably representative of fair value in this case.
    • A return in stock price to NAV/share, NAV/share growth, and the small dividend make a 100% total return in 5-6 years reasonable, or 13.4% annually.
    • Sympathize with the long case, but am not investing because some of the firm's holdings don't seem to be excellent businesses and upside is insufficient for me.
  • Phillip Morris: Will Collateral Damage From Reynolds American Judgment Create Opportunity?
    Jul. 21, 2014 PM 10 Comments

    Summary

    • Reynolds American being hit with $23.6B in punitive damages should pull down all cigarette stocks in the week ahead, yet Phillip Morris is not exposed to the US legal/regulatory risks.
    • The cigarette industry is slowly declining, but the super-low cost of manufacturing cigarettes enables sustainably high ROICs across the industry and the customer base is extremely 'loyal.'.
    • PM in particular earns a fantastic 58.1% ROIC.
    • At 14.9x FY14 adjusted EPS guidance for 4-6% earnings growth and a 4.37% dividend yield, PM would be a clear buy for me without the legal/regulatory risks.
    • With the tough circumstances, I'd really feel comfortable paying 12x or ~$70. Doubt the stock will get there despite the negative catalyst, but I will continue to watch.
  • Does Catamaran Stack Up To Express Scripts?
    Jul. 18, 2014 CTRX 10 Comments

    Summary

    • Much of my ESRX thesis applies here and Catamaran is an excellent company in its own right.
    • 21.7% ROIC is awesome and supports my qualitative conclusions.
    • At 20x the company's FY14E adjusted EPS guidance, shares seem slightly discounted but insufficiently so for my liking.
    • I am moving on and setting a price alert at $39 where I would reevaluate the stock.
  • Coach: A Business And Industry I Hate, But A Valuation I Love
    Jul. 17, 2014 COH 38 Comments

    Summary

    • Coach possesses some decent business qualities, but I have a very strong distaste for softlines retail and the company's recent management turnover and sales troubles in the U.S. compound that.
    • Fantastic ROIC of 39.9%.
    • Really, really cheap at 10x NOPLAT and 12x FCF. Never have I seen a comparable ROIC business selling so close to single digit after-tax multiples.
    • Wealth creation opportunities through financial leverage. A 2x EBITDA net debt position is not unreasonable and would mean $3.6B in additional funds for share repurchases or a buyout.
    • Just cannot bring myself to invest in a business I qualitatively dislike so much. Serious opportunity for investors less negative on retail and Coach's business.
  • WABCO: High Quality Enterprise, But Is The Price Right?
    Jul. 17, 2014 WBC 5 Comments

    Summary

    • High quality industry leader selling a somewhat intangible product that benefits from trends in technology, safety, and regulation.
    • Strong ROIC >20%.
    • Seemingly fairly-valued at this point at 31x LTM EBIT(1-t) and 19x FY14E earnings.
  • Hershey: Outstanding Company, Rich Valuation
    Jul. 15, 2014 HSY 9 Comments

    Summary

    • Obviously excellent business with numerous competitive advantages and attractive business qualities.
    • Sustainably high 27.5% ROIC is a real rarity.
    • Rich valuation intuitively and as indicated by the 'tao of corporate finance' equation.
    • Will continue to watch stock in case it becomes discounted over the next few years.
  • Graco: A Great Company Now And 10 Years Hence?
    Jul. 11, 2014 GGG 8 Comments

    Summary

    • Manufacturing business that seems globally-diversified, deeply-embedded in economic supply chain, and in a market niche, but manufacturing is not typically a high ROIC industry, partly because pricing is very tangible.
    • ROIC calculation using NOPLAT rather than EBITDA less Capex due to recent acquisitions. Also excluded excess cash and goodwill and came up with a very impressive after-tax LTM 22.1% ROIC.
    • Stock does not seem obviously discounted. Based on ROIC, growth and dividend, shares would be very attractive under 15x NOPLAT and FCF, but trade at 23-24x.
    • Shares don't seem obviously expensive either though. If there is good execution and sustained 20%+ ROIC over the next 5-10 years, 23-24x is fine now, but those are big IFs.
    • Avoiding the stock for now due to the above and other miscellaneous factors.
  • Accenture: In The Search For Sustainable Business Quality, A Winner Here?
    Editors' Pick • Jul. 10, 2014 ACN 4 Comments

    Summary

    • Looking for a high quality business that I can envision remaining so long into the future due to both industry and business-specific factors.
    • Positives: expect continued increasing popularity of VBM, industry ripe for high margins, strong brands, differentiation, etc., benefits from continued tech shift, should intuitively be well-managed and seems to be.
    • Lots of IP, strong financial position, compensation and attrition look good, value creation credibility, tax advantages, high ROIC, and a highly diversified revenue stream.
    • Negatives: primary asset is people, high quality competition, stock seems pricey without perspective, and significant lumpiness in performance.
    • Still very interested and will likely perform further research on ACN and companies in peer group, but not a buyer at this point.
  • Polaris Industries: Execution Risks, Industry Uncertainty And Price Keep Me Away
    Editors' Pick • Jul. 7, 2014 PII 11 Comments

    Summary

    • Positives: Best-of-breed market leader, very strong ROIC, strong brand/reputation, consolidated industry with barriers to entry, somewhat diversified revenue stream, somewhat timely, strong balance sheet, and value creation credibility.
    • Negatives: Cyclical/unpredictable industry, industry prone to recession, and a pricey stock.
    • Clearly a high-quality company, but did not see enough to consider the stock a conviction buy.
  • Growth-Centrism Is Flawed
    Jul. 6, 2014 AAPL, AZO, ESRX 16 Comments

    Summary

    • On average, growth is meaningless and thus, growth-centric analysis and strategy is flawed.
    • Focus should be instead on ROIC and WACC, which informs of implications on corporate value of growth and gives quite a bit of other qualitative information about the business.
    • There is still a place for growth in corporate strategy and investment research, but definitely after ROIC and WACC.
  • Panera: Opportunity In The Broken Growth Story?
       • Jul. 3, 2014 PNRA 12 Comments

    Summary

    • Panera looks like an obvious broken growth story from a distance and I've found that high quality businesses can occasionally be found at discounts to fair value in such situations.
    • Positives: secular tailwinds, strong ROIC, under-utilized balance sheet, tight leash on franchisees, strong brand, strong historical performance, and timeliness.
    • Negatives: retail is tough, operational headwinds, hidden debt, high quality competition, uncertainty, personal preference, and a pricey stock.
    • Will continue to follow stock but have seen enough to rule out an investment for now.
  • Tim Hortons: A High ROIC, High Quality Canadian Powerhouse Worth Considering
    Jul. 3, 2014 QSR 7 Comments

    Summary

    • A high quality company worth considering for Buffettesque investors.
    • Positives: personal preference, diversified revenue stream, dominance in Canada, small format stores, strong ROIC, somewhat timely, strong LT growth and value creation, shareholder-friendly, reasonable compensation and good incentives.
    • More positives: decent recent performance, reasonable price, history of innovation, and secular tailwinds.
    • Negatives: high quality competition, heavy debt load, retail is tough, and saturation in Canada.
    • Would like to see stock a bit cheaper. Will continue to follow over the next few months and give more thought.
  • AutoZone: 38% ROIC, Talented Management, Creditworthiness; Starting To Look Like The Full Package
    Jun. 26, 2014 AZO 13 Comments

    Summary

    • Outstanding and improving ROIC - 38% most recently.
    • Talented, seasoned, reasonably paid, and relatively young management.
    • Strong credit rating and low cost of debt despite considerable financial leverage.
    • More confident than I was a month ago when I last wrote and seriously looking to initiate a position on a decent dip.
  • Express Scripts: M&A Activity Blurs A Profitable Enterprise
    Editors' Pick • Jun. 18, 2014 ESRX 25 Comments

    Summary

    • My initial article on ESRX fell short in addressing the company's history of acquisitions and their implications.
    • The acquisitions and the resulting goodwill, intangibles, and stock dilution create challenges in trying to calculate ROIC.
    • Alternative methods such as analysis of the 2012 Medco acquisition, use of maintenance FCF/share, Warren Buffett's value creation test, and ESRX's long-term stock performance all suggest a profitable enterprise.
  • Destination Maternity: An Optimal Destination For Value/Contrarian Investors?
       • Jun. 11, 2014 DEST 3 Comments

    Summary

    • DEST seems to have a strong competitive position through its scale and brand portfolio and decent industry prospects as total US births resume a century long trend of growth.
    • Company pays a nice dividend, is well-managed, and stock is exceptionally timely.
    • However, the company faces high quality competition, operates in a tough retail industry, and is vulnerable to an e-commerce shift and a culture of maternity apparel exchange in the US.
    • Stock trades at a low multiple of 14x 2014E EPS, but this implies growth in line with that the company has done historically.
    • In addition to issues mentioned above, hidden debt in operating leases and purchase obligations and a large comps decline of 5.6% in Q2 keeps me from investing.
  • Annie's: M&A Target And High-Quality Business On Sale?
    Jun. 11, 2014 BNNY 4 Comments

    Summary

    • High-quality business that seems to be differentiated and advantaged through its strong, 25 year old brand, loyal customer base, wealthy and health-conscious demographic, and international expansion opportunities.
    • Poised to benefit from the nature and continued high growth rate of the organic food industry.
    • Some concerns such as customer concentration risk, high-quality competition, commodities pressuring margins, many tapped growth avenues, and an auditor resignation red flag.
    • However, company still has plenty of growth potential, stock is exceptionally timely, and catalyst through potential as an acquisition target.
    • Stock seems fairly valued at current price and high implied growth along with above concerns keeps me from buying at this price.
  • Arctic Cat: Market Is Skeptical Of Aggressive Long-Term Targets
    Jun. 11, 2014 ACAT Comment!

    Summary

    • ACAT seems to have an OK competitive position in a consolidated but surprisingly competitive market.
    • The stock seems extremely timely and very cheap relative to the company's long-term guidance.
    • I'm skeptical of this guidance however as it implies growth far in excess of what the company has done historically and even recently.
    • Risks associated with the recent unexplained management transition are the icing on the cake for me to avoid the stock.
  • Target: Sometimes The Market Consensus Is Right
    Editors' Pick • Jun. 8, 2014 TGT 22 Comments

    Summary

    • Bad press related to recent data breach and management turnover along with a steep share price decline makes TGT an intuitive contrarian pick.
    • However, contrarianism alone is flawed. There must be other elements to the thesis.
    • There are some positives in the form of positive reversion in performance, strong competitive position, and reasonable prospects.
    • Valuation seems to reflect this though, and the negatives related to the data breach do hold some weight.
    • The market is right, and TGT is fairly valued.
  • GNC: A 'Strong' Pick, But A Few Concerns
    Jun. 5, 2014 GNC 7 Comments

    Summary

    • Surprising competitive advantages through scale, brand, and loyal customer base, but I'm highly skeptical of retail. Company seems to have a narrow moat.
    • Will benefit from rising healthcare costs and estimated 7.1% vitamin & supplement growth in next few years. Hit especially hard by weather, but temporary headwind and comps are already improving.
    • Below moving averages and far off 52 week high, stock is extremely timely. If you're contemplating buying, now is the time.
    • Should be able to grow 13-17% going forward, and if so the stock is very cheap. Even at 10-12% growth, the stock is probably fairly valued.
    • Excessive debt load magnified by operating leases for a retail business is concerning. This and opportunity costs of other ideas keeps my on the sidelines, but I am definitely bullish.