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Brian Sanders  

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  • Downgrading Caesarstone On Concerns About Its Capital Expenditure Accounting And Management's History At Tefron [View article]
    Mr. Axler, thanks for these two articles. Just a few comments/questions.

    1) CSTE is a quartz pure-play unlike many other general building material businesses that you have mentioned as peers. Gross margins are not easily comparable. Most people know that the margin on stone versus OSB, concrete, asphalt mix, etc is pretty big. So i'm not sure how you can expect a reversion to the industry average.

    2) Even if the company's product is about 4% less quartz volume than what advertised, what are the implications? For most industries it would simply be classified as a slightly lower quality product. Pricing would likely remain untouched and fines are irrelevant. Anyone can call their product "premium" will not fall into the category of false advertising.

    3) "R&D expense and margins are already razor thin. Any further cuts to R&D could sacrifice further product innovation and future competitiveness."
    Claiming that R&D spending is razor thin is subjective. The company has maintained the same schedule over the last 4 years and has done pretty well. The R&D margin has declined simply because revenue has increased.

    4) In your last article, you stated that the company's interest of Google Trends was "range bound" since 2012, however this claim is a misnomer. If you look back to 2004-2007, the viewing interest appeared to be doing the same thing. Now without adjusting the chart, viewing interest has a CAGR of ~5% and just hit new highs to date. Therefore total market exposure is in fact increasing.

    5) The FX implication on margins should be clarified for readers. First off, I will say that I think current levels are unsustainable simply due to incoming alternatives. Maybe the silver lining is a strong distribution system? Marketing is their strong suit after all. But anyway, you stated FX is protecting underlying gross margins yet the company has issued statements saying they are a headwind. So is this a net positive or negative?

    6) The company has generated double digit ROIC and has a solid balance sheet. These two items alone show that management is not incompetent. Therefore, while I think risk attached to the revenue deceleration and margin compression is high, I'm not sure how comfortable I would be shorting at this price.
    Oct 7, 2015. 10:31 AM | Likes Like |Link to Comment
  • Chicago Bridge And Iron: The Gloomy Guise Begins To Unravel [View article]
    Hi Bruce, thanks for commenting. Glad that you found it useful.
    Oct 7, 2015. 08:36 AM | Likes Like |Link to Comment
  • Chicago Bridge And Iron: The Gloomy Guise Begins To Unravel [View article]
    Actually to clarify, the flash crash trader would place sell orders and remove them before the market could place them. However the market would still read as if they were active. This action occurring at nano seconds was called spoofing the market. This is illegal. However driving a stock up or down artificially by different methods that I mentioned beforehand is entirely legal.
    Oct 4, 2015. 12:48 PM | Likes Like |Link to Comment
  • Chicago Bridge And Iron: The Gloomy Guise Begins To Unravel [View article]
    Hi ralphf74, thanks for commenting.

    There are a few different ways an individual/group can artificially manipulate a stock downward. The first strategy is buying a large quantity of shares, setting incremental sell orders (after gauging the average selling rate by other traders), and catalyzing the fall by a block sell order. The seller will then use their reserve of shares to sustain pressure on the stock. This is a similar method used during the technical flash-crash that happened a few years ago.
    The next way is simple mechanics. Whenever one sells a stock short, shares are effectively being sold (even though they are borrowed) which forces the stock price lower. It will not recover until shares are repurchased (aka covered). The last tactic is typically when there are large orders of put options, complimented by heavy volume, do other market players become concerned and sell their respective positions.
    Therefore utilizing a strategy of selling your own shares, selling others short, and loading up on bearish options it is fairly easy to drive a stock downward temporarily. Moreover, if a buyer sees that a stock is plunging and is unlikely to recover immediately that buyer will often sit back and wait for the best price possible. Buyers won't always swoop right in, hence patience is key in these scenarios.
    Oct 4, 2015. 12:41 PM | Likes Like |Link to Comment
  • Chicago Bridge And Iron: The Gloomy Guise Begins To Unravel [View article]
    Hi James,

    I didn't really talk about the industry prospects for CBI in general because it is, as you mention, a market that constantly has revolving work. I have worked in the commercial construction industry in the past. There are times when bidding for contracts is slow but when it heats up there's a lot of opportunity. CBI is in a great position given their diversified customer network and large employee talent pool.
    Oct 4, 2015. 12:25 PM | Likes Like |Link to Comment
  • Dunkin' Brands Group: Bears Zero In On Comps Decline [View article]

    Coming back to reality..
    Oct 1, 2015. 02:23 PM | Likes Like |Link to Comment
  • Chicago Bridge And Iron: The Gloomy Guise Begins To Unravel [View article]
    Hi luckydiet, glad you liked the article. It's nice to be aware of the external factors that influence a stock on both the positive and negative side. In this case both of us were able to take advantage, I was able to get long yesterday around $37.60.
    Sep 30, 2015. 04:59 PM | 1 Like Like |Link to Comment
  • Chicago Bridge And Iron: The Gloomy Guise Begins To Unravel [View article]
    willhand, thanks for commenting.

    Agreed, it all depends on how we project cash flows will turn over the next year or so while looking at worse than average project delays and costs. For example, if we looked to their cash flow range of 500-600mm, I would use the lower end of that spread as a benchmark. Being realistic and conservative is usually what works for me in my models and back of the envelope assumptions.
    Sep 30, 2015. 03:52 PM | 1 Like Like |Link to Comment
  • Chicago Bridge And Iron: The Gloomy Guise Begins To Unravel [View article]
    Aslana, thanks for commenting.

    As I stated before...CBI management looked for potential cost overruns when examining Shaw Groups project portfolio and they strongly believe Toshiba is responsible. They also stated that contractual CC&Rs would protect the company.

    Even if the liability must be accounted for by CBI, the amount would not cause a significant drag on long term value. The Vogtle plant cost overrun is estimated to be 247 million but the proportionate liability claim is still in the works (it could be 100% or zero). Worst case scenario, a charge in the full amount would cause the multiple to jump to ~11.5x for this year. That said, capital impairment at current purchase prices is effectively nothing.
    Sep 30, 2015. 03:28 PM | 11 Likes Like |Link to Comment
  • Short-Selling: What Are You Optimizing? [View article]
    Nice logic. Here is my opinion.


    1) Negative expected value, as you mentioned, from the borrowing costs and dividend repayment is a big issue. This is where finding a company that doesn't a pay a dividend and one with a low short float comes in handy.

    2) Battle against management. You are assuming that management is either incapable/incompetent of increasing long term value of the firm. Usually this is where finding a business that is trading at a relatively high market level and is beginning to weaken through operations. High operating and financial leverage usually serve to the short sellers benefit especially when management is *admitting* to a difficult situation. I've observed this in many industries. The market will often react to magnified uncertainty accordingly.


    1) Short term trading. Activists can cause a single stock to plunge dramatically within a short time frame simply based on their opinion of a company. From what I have seen, market participants are more willing to get out now and evaluate later. Moreover, buying immediately (using fresh capital) on a positive opinion is often slow to materialize. If the short seller is good enough...put options are the perfect tool.

    2) Market hedging. Sadly doing this removes our positive expected value of the overall market but Einhorn employs this consistently to avoid market risk. It makes sense to short the weakest businesses and get long your favorites. Overtime the market does head higher but if you have investors that are concerned over volatility (i.e. a popping bubble) then it's a smart way to have exposure.
    Sep 28, 2015. 01:14 PM | 2 Likes Like |Link to Comment
  • No Happy Ending? My Vale Journey [View article]
    "70% of the value drop is because of the increase in country risk"

    Not sure if this is the case. I would say at least half of the valuation weakness is because of iron ore prices declining. Operating leverage is the issue. The company does have the lowest cash costs because of mechanization but now that we have a downturn reducing costs is tough. I don't think all is lost though. If they can cut non-core operating expenses and capex, it can thrive in the long term. China is not in flames, it's just growing much less than it was in terms of infrastructure. Iron ore prices should start to stabilize in the $45-55 range...that is what most IBs are projecting. VALE holds a cash flow break-even between $38-42 avg ttm (some quarters being higher than others). Low cost projects and debt repayment will be the reason VALE does okay over the next few years. Management has indicated to sweep projects and target a $30 level...can someone name a competitor that can reach this?

    Brazil has country related risk like politics, high inflation, weak currency...but these are not the primary cause for value destruction. It should now be selling at a PE of 8x if we back out one-time charges. This is not good but it also doesn't warrant a sell rating. Still tons of uncertainty but granted iron ore stays within the current range...if it drops another 15%, it will be a conservative buy. If 30%, it should be a strong buy. Sometimes you have to become smaller before you get bigger. Marginal producers and large diversified miners (with high cost IO segments) are feeling the pain. I would not feel comfortable owning Rio Tinto, Cliffs or Glencore.
    Sep 28, 2015. 12:26 PM | 3 Likes Like |Link to Comment
  • A Year Of Cancer [View instapost]
    Stephen...I am sorry about your situation.

    I too feel strongly about the healthcare system..I wish there was a way to stomp out wasteful inputs and put research for disease, disabilities, and otherwise into hyper speed.

    "Last and not least, I've learned how much months matter. Whether or not a drug that extends life by 6 months is "worth" $100,000 or more is a subject for another time, but those months matter a lot more when you're living through them one at a time. It's ridiculous that anybody in his or her early 40's should feel grateful to get another six months, but that's how it is."
    This is simply riveting..

    I wish you and your family all the best.

    Sep 17, 2015. 06:51 PM | 1 Like Like |Link to Comment
  • Rebuttal: Iconix Is Not Broken (Time To Buy) [View article]
    I guess they're just another value player tagging along in this long opportunity. The managers are not activist but it's not a plain-vanilla mutual fund either. It states right on their website that they evaluate companies from a bottom-up perspective:

    "We invest in stocks where, in our opinion, the present value of the company’s future cash flows exceeds the current market price. We identify these investment opportunities by employing a rigorous, bottom-up investment process that emphasizes internally-generated fundamental research. We believe that the consistent application of this research process has the potential to provide superior long-term risk-adjusted performance."

    I don't care one way or another, but it seems to be moving shares higher.
    Sep 16, 2015. 03:50 PM | 1 Like Like |Link to Comment
  • Rebuttal: Iconix Is Not Broken (Time To Buy) [View article]
    In the 1970s Henry Earl Singleton ran a company called Teledyne. It was essentially operating as a conglomerate. In 1969, the business reported 1.3b in sales and 90mm in net income trading at ~$40 per share. One year later, due to a bear market, shares declined nearly 80%. Management decided that repurchasing a considerable amount of the float would create shareholder value. Over the course of 10 years, firm earnings also grew about 90%. At the end of the period, the stock price was about $175 (or 2000% higher a decade later).

    In the case of Iconix, management is smart for repurchasing shares because A) the business is undervalued, B) operations will improve going forward, C) current financial condition is sound. This strategy is not simply a way to "return capital to shareholders" but actually improve the value of the firm significantly.

    I have already made this a big position in my portfolio but maybe it can get a little cheaper through the next earnings report. The only true risk is if we see a major backwardation in affiliated brand sales and/or potential one-time fines that are large in nature.
    Sep 16, 2015. 08:36 AM | 1 Like Like |Link to Comment
  • Goldman rate-hike plays: Favor balance sheet quality, avoid floating rate debt [View news story]
    GM has floating debt but their pension liabilities are offset to a greater extent by the rate hikes. Financing is not a concern.

    Also management is more aware than anyone else of the cyclical behavior of auto industry economics. We just saw a few large insider purchases. I'm assuming they recognize the risk reward play at hand.
    Sep 14, 2015. 12:18 PM | 1 Like Like |Link to Comment