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Chad Brown, CFA  

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  • Long-Overdue Major Stock Selloff Still Looms [View article]
    This statement is utter nonsense:

    "Wall Street is so afraid of investors learning how expensive stocks are today that it is aggressively trying to mask valuations by using fictional forward earnings. These are merely analysts' guesses about the future profits of companies, something they are forever excessively optimistic on. Provocatively, stocks are so overvalued today that they are even very expensive on that forward basis! This is super-ominous."

    Markets are forward looking. Prices reflect expectations, not historic results. The expectations may be more optimistic or pessimistic than what happens.
    Mar 7, 2015. 11:16 AM | 2 Likes Like |Link to Comment
  • Chipotle's Earnings Confirm The Stock Is Too Expensive [View article]
    I have no disagreement with the philosophy of buying the highest growth companies in general, but one should also ask if they are protected by barriers to entry. Buffett calls it a "moat." The Nifty Fifty had very high multiples that were justified by the same logic you have applied to CMG. In retrospect, a few of them did grow long enough to justify their multiples. But not all of them. Beyond superior management, I don't see what protects CMG from competition in the long term. The stock discounts the Mexican burrito concept and a few other concepts too.
    Look at this for example:

    Link to academic paper.
    I recall reading the regular Kidder Peabody monthly report tracking the Nifty Fifty in the 1970s and 1980s since I was an analyst there at the time.

    Some of those names turned out to be vulnerable. Polaroid. Xerox. Simplicity Pattern. Eastman Kodak. IBM. Wal-Mart was the standout performer that more than deserved its high P/E 0f 52.

    It is pretty hard to look far enough into the future to detect the kinds of changes in technology that undermined some of the nifty fifties
    Feb 10, 2015. 10:05 AM | 1 Like Like |Link to Comment
  • Coca-Cola Earnings Preview: Signs Of A Pulse With Green Mountain Deal [View article]
    For what it's worth, I would avoid KO because of the evidence that HFCS in carbonated soft drinks contributes to obesity. I think that view is consistent with Warren Buffett's philosophy to focus on the key fundamental factors. When he first became a fan of KO I don't think the obesity risk was as clear as it has become.
    Feb 7, 2015. 07:31 PM | Likes Like |Link to Comment
  • How Much 'Extra' Return Are You Getting If You Reinvest Dividends? [View article]
    Thanks for the link but it did not seem to address the issue of acceptance of dividend cuts in US versus Europe. US has lower payout ratios on average than Europe. Chart does not directly address volatility of dividends relative to earnings.
    Feb 5, 2015. 08:44 PM | Likes Like |Link to Comment
  • Is A Dividend Cut The End Of The World? Stock Price Recovery And The Contrarian View, Part IV [View article]
    Feb 5, 2015. 08:26 PM | Likes Like |Link to Comment
  • Now a $100M grilled cheese IPO [View news story]
    Example of Clues from the company's 10K of May 2014

    "The report of our independent registered public accounting firm on our consolidated financial statements for the year ended December 31, 2013 contains an explanatory paragraph regarding our ability to continue as a going concern. "

    "Furthermore, the mobile food truck and restaurant industry has few barriers to entry, and therefore new competitors may emerge at any time."

    "Charitable Foundation and Not-For-Profit Initiatives

    On September 6, 2013, our Board of Directors approved the creation of a new charitable foundation. This foundation is intended to provide financial assistance to the surviving spouses and children of United States military personnel who have died in combat and to United States military personnel suffering from physical and mental disabilities. As soon as practicable following the formation of the foundation, an application will be filed with the Internal Revenue Service to seek approval of Internal Revenue Code Section 501(c)(3) tax-exempt status for the foundation. We initially intend to donate up to 1,000,000 shares of our common stock to the foundation, with such shares to be donated from time to time as the Board of Directors determines is prudent. The Board of Directors delegated to General Clark the responsibility for supervising and administering shares under the foundation. As of the date of this Annual Report, no additional actions have been taken regarding the charitable foundation."

    Perhaps this is what is attracting investors?

    "The Franchise Business Model

    We intend to commence preliminary operations as a franchisor (in addition to our operation as a purveyor of food) pursuant to a food truck business model. As of the date hereof, we have not taken any actions to become a franchisor. Our franchise operations are still in development and we began test marketing in Phoenix, Arizona beginning in the first quarter of 2013. As a franchisor, we expect to generate revenues through franchising fees, the sale of food and supplies to franchisees and continuous royalty payments by franchisees. Our business model calls for the sale of up to 100 franchises within twelve months after commencing our franchise activities, although there are no assurances that we will reach this objective. We are currently researching initial franchise markets in the states of Texas, Arizona, Illinois, Nevada and Florida. Company guidelines will be placed on the geographic locations that franchise trucks will be permitted to operate in. Additionally, our franchises will be required to comply with quality and customer service standards that we will develop internally."

    "Brick and Mortar - Fixed location Grilled Cheese Truck Restaurants

    In addition to the initial roll-out of 100 mobile truck franchises, our long-term plan includes the franchising of brick and mortar, or fixed, locations. We are currently performing research and development for potential locations and anticipate opening our first fixed location in 2014. We anticipate that our Company owned restaurant will serve as a springboard to franchise other fixed locations and to provide training for future operators of franchised fixed locations."

    [update: I found no evidence that the company opened its first fixed location in 2014]

    On January 29, 2015 the company appointed a CEO.
    On January 28 GRLD began trading on OTC

    The company will be trying to raise equity capital. It went public as a reverse merger. In my experience there is a very high failure rate for companies like this.

    The good news is the company is getting visibility via Barry Ritholtz's Bloomberg article.

    This may or may not be in the 10K, but one thing that comes to mind is that as a public company it will be under greater pressure to pay taxes (sales, income). The privately owned competing food trucks likely are not full tax payers and so will have lower costs.

    After my less than an hour of "looking" --I won't call it research--, I will predict this company goes bankrupt.
    When the JOBS act was passed to open up capital markets for emerging growth company, advocates predicted great things. They should study this example.

    PS- It looks like the statement above that they have all of 4 trucks may be hyperbole. The 10k mentioned 9.
    Feb 5, 2015. 02:21 PM | 2 Likes Like |Link to Comment
  • Now a $100M grilled cheese IPO [View news story]
    This is a great article by Barry Ritholtz about a clue that markets are unsustainably frothy now. Short-sellers cannot "get a borrow" on this name as noted, but investors can learn something about CMG and SHAK from this.
    I like to rely on what I call "analysis by clues"
    A clue as I mean it is a data point that looks out of line. Follow the clues and you can get to an "insight." Follow the insights and you may come up with an "idea"
    1. clue is this article.
    2. insight is "some names in the restaurant sector have been identified by analysts as looking frothy."
    3. idea is sell or short other names in the "fast casual" restaurant space.
    Good one, Barry.
    Feb 5, 2015. 01:34 PM | Likes Like |Link to Comment
  • Is A Dividend Cut The End Of The World? Stock Price Recovery And The Contrarian View, Part IV [View article]
    Maybe we have to wait for your Part V, but it looks like a rule of thumb is that if a "Champion" stock cuts its dividend, one should BUY it right after the cut, not sell it.
    Ideally we could see results for each dividend cut showing how an investor would have done relative to the S&P 500 on total return basis with each of two strategies: Buy it, Sell it. I am guessing the first strategy would beat the second. I get the impression DGI followers would say the second one.
    Feb 4, 2015. 09:52 PM | Likes Like |Link to Comment
  • Chipotle - This Overvalued Stock Will Continue To Come Down [View article]
    It's not so much visible, rapidly growing direct competitors that can be identified by name today. If there were, CMG would be lower. It is that other firms exist that could challenge CMG if and when they get the right combination of management and funding.
    Baja Fresh Mexican Grill has a similar concept but has been struggling. New management added recently. Real Mex Restaurants. Rubio's. Freshii. Shane's Rib Shack. Qdoba Mexican Grill (Jack in the Box owns it). Theses are just examples that I found in my research in 2008. I have not tracked their recent performance.
    Here is link to story on CNBC about 10 challengers to CMG
    The Fast Casual category seems to be growing pretty quickly.
    Here is something from Washington Post 2 days ago.
    Feb 4, 2015. 09:40 PM | Likes Like |Link to Comment
  • 225 Value Stocks Ready For Review [View article]
    Back from checking out the Magic formula investing site. It is basically a deal where you give them your email address (so they can market other websites to you) and in return they give you 30 or 50 stocks (your choice which you want) that best meet the formula's criteria. Alphabetical order. Only data is the market cap. You also input the minimum market cap you want. So no way to check the accuracy of the selections. Greenblatt does have several mutual funds that invest according to the formula, or something similar. (only in existence since 2012.) What is most interesting is that despite the unbelievably great return one sees claimed for the formula, the actual real world fees, taxes, transaction costs, etc. reduce the returns greatly. The funds could not beat the S&P 500.
    2% fees seem too high to me given that it claims to use computers not human brains. But I think they do have some human brains involved.
    Feb 4, 2015. 06:52 PM | 1 Like Like |Link to Comment
  • Chipotle - This Overvalued Stock Will Continue To Come Down [View article]
    I spent time a few years ago studying CMG and concluded it was overvalued. My thesis was that there was nothing they were doing that could not be copied by others. No moat. Also, the biggest key to their success was not the food quality or sustainability, but the assembly line method. They got more "turns per seat" by far than the average restaurant. One other key was that they do not have full kitchens, which cuts capital costs vs. competitors. Of course, it is also a great management team and execution has been brilliant. But CMG does not have a monopoly on talented restaurant management. High growth rate stocks usually revert to the mean unless they have some very strong protection from competition. Competition is emerging. I would disagree with jcb4008. Tesla is not a good analogy since it has more barriers protecting it than does CMG. I am not surprised to see weakness in the stock, although I don't claim I could have predicted the timing. That's how speculative bubbles behave. You can see something is overvalued, but hard to predict when it corrects.
    Feb 4, 2015. 11:41 AM | Likes Like |Link to Comment
  • 225 Value Stocks Ready For Review [View article]
    I read the Greenblat book. It is also one of the 14 screening methods that Jae Jun uses. He likes it but says that the track record was calculated in a way that overstates the returns. Thanks for posting the link to "Magic Formula Investing" I'll look at that site to see if it is better than what I have seen before. So far I am skeptical that screens are useful for individuals. Good that your account is tax-free. Investing in a taxable account makes it really hard to make money.
    Feb 4, 2015. 11:15 AM | Likes Like |Link to Comment
  • Is A Dividend Cut The End Of The World? Stock Price Recovery And The Contrarian View, Part IV [View article]
    I look forward to reading in full but in my experience buying a stock shortly after a dividend cut is a good strategy provided you have reason to believe the cut is not a prelude to bankruptcy. You seem to focus on hether the stock will recover to its previous high. I would not care about that, only about what is the upside from the post-cut starting point. There are funds and individuals who are forced to sell just because of the dividend cut, regardless of the fundamentals, which creates opportunity.
    Feb 3, 2015. 10:39 PM | Likes Like |Link to Comment
  • 225 Value Stocks Ready For Review [View article]
    I was interested in this list as I am researching what is readily available to individual investors. I do not think it is realistic for individuals to try to do in-depth research on specific stocks, starting from knowing nothing, and expect to be able to make a smart decision within a few hours. I think investors can figure out what is behind successful screening programs. Then they can take the output of a screen and do enough checking to see if the stock fits the concept of the screen. I think they can look for reasons to exclude specific names by doing some research into things that the computer screen did not take into account.
    The list available for download with this article is described as 225 names. The last row is number 225, but there are also 3 rows above the table and so I count only 223 names. There were duplicates, triplicates, etc where more than one of the 14 screens selected a name. I found 36 duplicates, meaning there are 187 distinct names, not 225. I also found another 29 names where the stock price was below $4 AND the market cap was under $200 million. In my experience, names that have such a low price and low market cap are uninvestable, and not worth bothering with. Most screening progroms have criteria that exclude low prices and/or low market caps and they tend to be even more strict than I was in applying a cut off. Now we are down to 158 names. Included are some large cap names that do not seem to me to fit the spirit of this exercise. I am obviously wrong in a literal sense, but my sense is that the purpose was to be smaller stocks that could merit further research by seeking alpha members.
    I excluded market caps of more than $2 billion. For example, I did not think names like the following belonged.
    Comcast Corporation United Parcel Service, Inc. Honeywell International Inc. Hewlett-Packard Company Ford Motor Co. The Dow Chemical Company Las Vegas Sands Corp. DIRECTV BCE Inc. LyondellBasell Industries N.V. Archer-Daniels-Midland Company HCA Holdings, Inc. Ecolab Inc. Corning Inc. Valero Energy Corporation
    and so on for a total of 86 names with market caps over $2 billion.
    Now 72 names remain.
    At this point I was feeling uneasy about the process behind creating the list. Were the screens being applied correctly? The screen I am the most familiar with is the Piotroski F-score. It was designed to be used on Value stocks, defined as the lowest price to book. It was developed because names with low price to book tend to be in financial distress. Piotroski wanted to exclude the most financially distressed names from the ones that were cheap on price to book. He created 9 tests to try to limit the portfolios to names that were in better financial shape and also showing signs of improvement. As I dug in further I found that Jae Jun uses the 9 financial health tests, the so called F-score, but applies them to ALL price to book categories, not just the lowest 20%. I suspect that they do not work the same way on the higher price to book companies as on the lowest 20%.
    Realizing that I could not assume that this list applies the screens the way they are commonly used, I dug a little further and realized that the data are not readily available to test the accuracy of the selections. Metrics like EBIT or Enterprise Value or three years of rising "free cash flow" are screening terms that are supposed to be included in some of the screens, but the downloadable table does not include the data.

    I am not a subscriber to Jae Jun's premium services, and so it is probably not fair of me to be critical of the free versions of his material that he makes available here to advertise his paid service.

    I did continue to look further into some of the 72 names in the remaining list. Several were names that I was already familiar with, and I had to scratch my head and wonder how they ever made it onto the list. Others more clearly belonged on the list in the sense that they were priced cheaply versus reported financial data, and there could be some that would "revert to the mean" by somehow finding ways to outperform currently low expectations. Some of them that I knew already I thought may not be around for a full year.

    I'll continue to explore screening and plan future posts, but thought it would save some people time to be aware of what I was learning about the "225 Value Stocks Ready for Review" It is such a compelling title, There are many other screening tools out there, but so far I have not found any that are both free and well designed. Google and FinvViz have pretty good tools but they do not allow one to combine criteria in ways like the F-score does.

    Anyone able to point out other web-based free screeners?

    Anyone able to point to a mechanical screening tool that has proven to really work in practice without the need for some human intervention?
    Feb 3, 2015. 10:24 PM | 1 Like Like |Link to Comment
  • 12% In 12 Years [View article]
    Thanks for the answer to my question about how much time. I suspected that it was the result of full time attention. I, too, have been able to beat the market. But it was the result of many years of experience and having information resources available to me that are not free to the general public. (I don't mean "inside information"; I mean ingredients to put together the "mosaic" that allows superior judgments). thotdoc's comments above are exactly right. It can be done, given years of practice. Part-time investors with limited experience are very unlikely to achieve 12% annual returns on a consistent basis. They are better off in index funds. Markets are not perfectly efficient. They can be beaten, just not by the inexperienced randomly selected player who has not spent years getting good at it.
    Feb 2, 2015. 10:24 AM | 1 Like Like |Link to Comment