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Frank Voisin
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At, you’ll find my analysis of potential investment opportunities (from a value investing perspective), as well as my book reviews, articles of interest and current news items.
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  • Global Telecom & Technology: More Upside To Come ($GTLT)

    At the beginning of the year, I posted a reader submitted investment thesis for Global Telecom & Technology (OTC: GTLT). Since publication, the company's stock is up a whopping 82.2%. However, the author of the original investment thesis believes there is more upside to come, as we'll find out in the following update.

    Author Disclosure: I (Frank) did not write the following, and have no position in GTLT.

    Send Frank your Investment Thesis here



    Since we initially mentioned Global Telecom & Technology (GTLT) on January 3, 2012, its stock price has increased approximately 70%. However, there have been two recent and significant developments that make us believe the stock remains significantly undervalued and should continue to appreciate.

    The first development is that on March 21, 2012, the company reported very strong Q4 results. These Q4 results included 6.3% ORGANIC SEQUENTIAL quarterly revenue growth and 7.6% ORGANIC SEQUENTIAL quarterly Adj. EBITDA growth. These growth rates are truly impressive, especially for a company trading at such a low free cash flow multiple. Adj. EBITDA for Q4 was $2.76 million, which implies a runrate for 2012 of $11 million. However, this $11 million runrate (unrealistically) assumes no organic growth, so we feel confident the company will generate at least $11 million of Adj. EBITDA for 2012. (Note: If the company generates only $11 million of Adj. EBITDA in 2012, it will be reporting growth of 23.5% over the 2011 figure, which should interest growth investors). However, we believe GTLT will generate organically far more than $11 million of Adj. EBITDA this year. The $11 million runrate also assumes the company will not do any accretive acquisitions. However, Management
    indicated they expect to do an acquisition in Q2 (they have a long list of attractive targets) and we expect the acquisition will be highly accretive and financed purely with debt. To summarize, in 2012 we expect GTLT to generate significantly more Adj. EBITDA and not to have to issue any equity to achieve this growth.

    We encourage investors to focus on GTLT's Adj. EBITDA runrate and not the LTM figures. The LTM Adj. EBITDA was $8.9 million (a dramatic 20% less than the $11 million runrate). However, this LTM figure is deceiving because it doesn't reflect the company's improving operating results and a full year impact of a 2011 acquisition.

    The other positive development is that insiders continued to personally buy GTLT stock. Most notably the Chairman bought 16k additional shares at as high as $2.26 per share. While this is not a large investment in absolute terms, one needs to remember that this stock is hard for insiders to buy because the stock is illiquid and because insiders have restrictions on their ability to buy and sell shares. So, although the Chairman's latest stock purchase may not be incredibly large, it is an interesting data point to see that despite already owning 27% of the company, he is buying even more stock even though it would be very difficult for him to ever sell his shares in the open market.

    GTLT's stock is appealing to insiders, the people that know it best. We suspect that once more investors become familiar with the company, both value and growth oriented investors will find this to be an attractive investment. The stock can be hard to buy, but lately there appears to be some for sale.

    Tags: GTT
    Apr 18 8:58 PM | Link | Comment!
  • A Bearish View of Gold
     Over the last year, we have seen gold increase in price from approximately $1125/oz to a high last week of $1410/oz., a 25% increase, exceeding its ten year CAGR of 16.7% (a somewhat misleading figure, given that the vast bulk of this growth occurred in the last two years). This leads to the question of what causes the price of gold to continue higher and can a long or short case be made for gold? As you can tell by the title, I conclude that a short  case is the only rational position and that a tremendous number of investors (and, more horrifying, a vastly increasing number of individual retail investors) will be left bathing in a sea of red.

    1. General Concept

    An axiom of financial theory is that an investment’s value is the sum of its future cash flows discounted to the present. Adjustments can be made for the riskiness of these cash flows, in essence judging the expectation of actually receiving them, but the base case is that we project cash flows outward, then discount them back to today, summing to reach the intrinsic value of the asset. Value investors seek to pay less than that intrinsic value, fools pay more.

    2. Gold’s Cash Flows

    Gold has three categories of cash flows:

    1. The first and simplest is the negative cash flow from purchasing gold.
    2. The second category includes storage costs which are also negative. You pay to store gold.
    3. The third and most complex is the future positive cash flow from selling gold.

    So, in the case of gold, the amount of the future positive cash flow must be greater (once discounted to today) than the sum of all of the negative interim storage costs (each discounted to today) and the immediate negative cash flow from purchasing gold. Moreover, the amount by which the discounted final cash flow must be greater than the sum of the discounted interim cash flows must be of such magnitude as to compensate for the opportunity cost of negative cash flows, otherwise it would be a relatively poor investment.

    3. The Final Cash Flow

    Let us now turn to what affects the final positive cash flow from the ultimate sale of the gold. Economics tells us that the equilibrium price of a thing is, at its base, reached by the intersection of supply and demand. When supply exceeds demand, the price falls until demand catches up. When demand exceeds supply, the price rises until demand declines or suppliers rush to increase supply.

    3.a) Supply of Gold

    Nearly the entire amount of all gold ever mined from below the earth’s surface still exists today. In other words, gold is not a material that is destroyed, like oil or natural gas. Gold is mined and refined and some portion of it is turned into items for sale, but it is not destroyed. The conclusion we can draw from this, knowing that gold production continues today, is that the world supply of gold is on an upward march and has been since the first ounce was mined. I should be more specific here, since the worldwide supply of gold is fixed (the sum of the below and above surface amounts) and say that the world commercial supply of gold (that is, the amount available for sale and affecting the supply/demand balance) is increasing.

    By how much is the supply of gold increasing? When the price of gold is low, many mines are too expensive to operate and they are mothballed. These mines are too expensive because the amount of gold they produce for the amount of capital spent to produce that gold is not justified by the ultimate sale price of the gold. On the other hand, when gold increases in price, more of these financially marginal mines become profitable and are recommissioned (a process that has a long lead time, so despite the run-up in the price of gold over the last three years, the acceleration of production still has quite a bit of steam left). The conclusion we can draw from this is that, due to the high price of gold today, the commercial supply of gold is both increasing and accelerating as more mines come online and production at existing minds ramps up.

    Another interesting thing happens when the price of gold increases. The supply of secondhand gold begins to increase as people seek to cash in old jewelry (and businesses begin recycling electronics and other items in order to recover gold). This gold had previously been sold and was effectively removed from the commercial supply. As the price of gold increases, it is added back to the commercial supply, due largely to the massive proliferation of gold buyers advertising everywhere imaginable, encouraging individuals to sell their old jewelry (often at a massive discount to the current market price). The conclusion we draw from this is that the recovery of previously sold gold begins to add to the commercial supply of gold as the price of gold increases.

    To conclude this section, we can say that the supply of gold is increasing, and as the price continues upward, the supply will continue to increase at a somewhat accelerating rate.

    3.b) Demand for Gold

    An increasing supply of gold in itself is insufficient to lead to a decline in price. The price could remain steady if, for example, demand increased at an equal rate. However, if demand increases at a slower rate or if demand stays stable or if demand declines, then the price will decline to reach an equilibrium.

    There are two categories of demand for gold: consumption-demand and investment-demand. Consumption-demand is derived from demand for end-products, such as jewelry, dental products, and electronics. Investment-demand is due to a belief that the final positive cash flow will exceed the sum of interim negative cash flows (all discounted to present) by an amount greater than an equal investment in a different asset.

    The World Gold Council provides research data that help in identifying the relative amounts of consumption-demand and investment-demand for gold. These data are available here. From the charts on that page, we can see that jewelry consumption declined 20% from 2008 to 2009 and then an additional 5% Quarter on Quarter for 2010 Q2. Industrial demand, on the other hand, is up 14% QoQ for 2010 Q2, after a 15% decline from 2008 to 2009. However, Industrial demand  is just 1/4 the absolute size of jewelry demand, so it is somewhat less relevant than jewelry demand. Overall, what we are seeing is a slight decline in consumption-demand following substantial declines from 2008-2009. At best, we may see a slight increase, though it appears that stablizing demand is closest to what could be hoped for.

    In contrast to consumption-demand, investment-demand has skyrocketed over the last few years. There was a 14% increase from 2008-2009, but a 118% increase QoQ 2010 Q2, with ETF demand driving this (414% QoQ!). With consumption-demand flat to possibly up *slightly*, we see that overall demand is being driven by investment-demand.

    What can we conclude from this? Demand is being driven by investors who believe that the final cash flow will exceed the interim negative cash flows (all discounted to present) by an amount that exceeds the return found on other investments. Let’s be a bit more explicit about what the final positive cash flow represents: the final cash flow is a sale to another investor. How can we know this? By looking at the demand for gold and seeing that consumption-demand is flat. If investors rush for the exits, consumers of gold will not be picking up the slack. We are left with demand being driven by a belief that future demand will be even higher (which it must be in order to both compensate for the increasing supply AND justify the expectation of a return exceeding that of other investments, including those that actually generate positive cash flows!).

    4. Conclusion

    The conclusion I draw from the above is that, with supply increasing and demand driven by a belief that a future investor will want to buy at an even higher price (and, to be clear, that future investor must also believe in this), gold is unsustainable at present levels. Scenario 1 is that investment-demand is stable. This scenario will lead to lower gold prices, as supply will continue upward. Scenario 2 is that investment-demand declines. This scenario will lead to drastically lower gold prices for a period of time until supply begins to decline (as mines are mothballed and the gold recycling market declines). The only alternative to these scenarios is a short-term continuation of investors entering the market with the belief that future investors will pay more. This is no more sustainable than tulip-mania and will ultimately leave many investors worse off.

    Read more: A Bearish View of Gold | Frankly Speaking 
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    Disclosure: Short Gold
    Dec 03 3:35 AM | Link | 1 Comment
  • Aeropostale Inc. (ARO)
     In a previous article, I explained Joel Greenblatt’s Magic Formula. A screen I performed showed the clothing retailer Aeropostale in the results, so I thought I would test out Greenblatt’s Magic Formula to see how compelling this opportunity is.

    Aeropostale has an Earnings Yield of  19.86% (= 411 TTM EBIT /2070 Current EV) and a ROC of 73% (= 411 TTM EBIT / 562  average of Net Fixed Assets + Working Capital over TTM). The first problem that arises is that, while it is appropriate to look at Earnings Yield at a single point in time (since this is measuring how “cheap” the company is presently), ROC is an inappropriate measure for making a conclusion about the quality of management – it would be more useful to look at how consistent management is in generating returns on capital by looking over a full business cycle. So, here is Aeropostale’s ROC for each of the last five years (through the depth of the recession):



    Earnings Yield22.3%21.0%11.8%11.1%9.9%
    Return on Capital70.9%53.2%69.4%42.7%37.3%

    These numbers look good, but they are missing a key element. Aeropostale is a retailer that leases its locations using off balance sheet operating leases. In order to get an accurate picture of Aeropostale, we capitalize these operating leases (and associated CAM and Property Taxes, as disclosed in the company’s 10-k’s), which means we record an asset and a corresponding liability (equal to the present value of the operating lease obligations) for the leases (which affects both capital and enterprise value), then we add back the interest portion of the lease payments already eliminated in EBIT (the remainder of the lease payment represents amortization of the principal, which we do want to remove from EBIT). How does including the operating leases affect the earnings yield and return on capital? Let’s see:

    Earnings Yield16.1%14.3%9.7%9.3%8.5%
    Return on Capital28.6%21.9%22.8%19.3%17.9%

    Clearly this has a big effect on the perceived attractiveness of Aeropostale. Additionally, we see the company’s leverage ratios increase profitability ratios decrease (in early years, though higher in later years).

    Lesson: the Magic Formula may be a good place to start screening for investment opportunities, but you have to investigate each opportunity further.

    Author Disclosure: At the time of publication, the author DOES NOT have a position in securities of this company.

    Read more: Aeropostale Inc. | Frankly Speaking 
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    Disclosure: No Position
    Tags: ARO
    Dec 03 3:33 AM | Link | Comment!
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