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  • Incorporating Right-Brain Thinking Into Your Investment Process [View article]
    Thank you for your compliments. We have the same goal that you do.

    Here was an earlier article also meant to help investors improve their process.
    May 7, 2014. 03:16 PM | Likes Like |Link to Comment
  • The Illusion Of Control [View article]
    Thank you all for your comments and compliments. We want to do a series of articles about subjects like this. We are glad that everyone found it thought provoking and inspiring. BTW we love the irony sentence too!!!!
    May 3, 2014. 10:14 AM | 5 Likes Like |Link to Comment
  • The Illusion Of Control [View article]
    I have thought about this for a while. Since most value benchmarks are skewed towards financials 20-25% of weighting, I have not been a big fan of most funds in that space. While others claim to be successful at analyzing large complex balance sheets of banks and other financial institutions, Gregg and I have always passed on that. I think someone that runs a concentrated large cap value fund has a better chance than a broad based fund. The upside of large cap value is that usually the bad news is much more widely distributed by the media (BP or HPQ or AAPL) that may drive the valuations to such prices that attractive returns are very likely. Very few problems at large companies are life threatening and they have the financial ability to withstand what it takes to turn it around. I low PE or a high FCF yield is probably a good enough starting point. The analysis may be as simple as "things will eventually get better in the future".. Usually after major bear market selloffs is when large cap value becomes a viable strategy because everything in every index is going down, but companies are all different.
    May 2, 2014. 12:13 PM | 3 Likes Like |Link to Comment
  • The Illusion Of Control [View article]
    thank you for your comments. I haven't watched CNBC or any other business TV show in over 15 years and don't even have a TV in my office.
    May 2, 2014. 11:58 AM | 5 Likes Like |Link to Comment
  • Lockup Expiration For Norcraft Companies A Built-In Shorting Opportunity [View article]
    Found these studies on IPO lockups and price performance.. There does seem to be a negative correlation, but the price decline related to it is modest (-1.5% or so). VC back firms do experience more potential selling that PE firms.

    Short Selling Around the Expiration of IPO Share Lockups

    We are the first to examine daily short selling activity around the expiration of initial public offering (IPO) share lockups. Overall, short selling is abnormally high over several weeks leading up to the lockup expiration date, peaks one day before the lockup expiration date, and declines in the following week. We find that more abnormal short selling prior to the lockup expiration date is associated with poorer stock returns on the lockup expiration date, suggesting that short sellers are informed. We also find some weak evidence that short sellers front-run insider sales. Unlike VC-backed IPO stocks, PE-backed IPO stocks do not
    experience a negative return or trading volume jump on the lockup expiration date.
    Apr 26, 2014. 12:11 PM | 1 Like Like |Link to Comment
  • Lockup Expiration For Norcraft Companies A Built-In Shorting Opportunity [View article]
    I have yet to see any analysis or peer reviewed studies that show any correlation between lock up periods ending and negative share performance. Do you know of any? Almost every SA article discussing an IPO usually lists the end of the lock up as a major risk.

    I have been in the business 30 years and have yet to see this as a real investable factor.

    I am always looking to learn new things, so if there are any peer reviewed studies on SSRN or in financial journals you can direct me to, I would love to read them.

    Many times the shares are redistributed in secondary offerings, which makes for a more orderly distribution of shares. If the holders of the shares are sophisticated investors, why would the just blow out their shares is such a way as to significantly drive down the price? Aren't they just hurting themselves? Or is your point that they made so much money on their initial investment that they really don't care what price they get for the rest of their shares?

    Also, why would anyone buy an IPO if with the next 90-180 days a ton of stock is going to come on the market and negatively impact the share price? And just how often to the owners of these lock up shares actually sell and what % of shares available do they sell? These are real questions to consider.

    I have no opinion on this particular stock one way or another.
    Apr 26, 2014. 11:57 AM | 1 Like Like |Link to Comment
  • Luby's: Undervalued Turnaround Play With Balance Sheet Stronger Than It Looks [View article]
    Ramius was the predecessor to Starboard Value. This was Jeffery Smith's original activist fund
    Apr 24, 2014. 05:34 PM | Likes Like |Link to Comment
  • Bally Technologies: Macro Headwinds Create Attractive, Best-In-Class Buying Opportunity [View article]
    IS this part of that patent dispute?

    Paradise Entertainment persists with patent case
    Posted: 3/25/2014 12:33:20 PM

    Gaming equipment supplier Paradise Entertainment Ltd says the courts have yet to dismiss its case that competitor SHFL Entertainment (Asia) Ltd infringed patents held by Paradise Entertainment subsidiary LT Game Ltd.

    SHFL’s parent company, Bally Technologies Ltd, said on Friday the Macau Public Prosecutions Office had told it that there was no evidence to support allegations by LT Game and Paradise Entertainment that SHFL had infringed two LT Game patents.

    A spokeswoman for Paradise Entertainment told Macau Business: “Our injunction preventing SHFL from displaying, promoting or marketing their product in Macau still stands.”

    The dispute is about an SHFL product, SHFL Fusion Hybrid, which combines live dealers with electronic betting terminals.
    Apr 1, 2014. 06:07 PM | Likes Like |Link to Comment
  • U.S Global Investor: What You Need To Know Before Considering An Investment [View article]

    I think you have made a significant analytical error in this article. You seem to be implying that the company's investment in its Ultra Short Bond fund is a bet that interest rates will rise and that it will make money when that happens.

    This fund is not a double inverse ETF type fund that goes up when interest rates rise. This is a short term bond fund that invests in T Bills and other government paper with a maturity of about 1 year. It used to be a money market fund that was converted to extend the maturity profile.

    Am I reading your point correctly?
    Feb 21, 2014. 04:55 PM | 1 Like Like |Link to Comment
  • A. H. Belo: Valuation Has Increased, But So Have The Opportunities And Risk [View article]

    Thanks for your comments.

    I too live in Dallas and I agree that being hyper local is where newspapers need to focus. I always thought that was a huge advantage in smaller towns where TV stations were not as strong. I work with many DMN photographers and they are all excellent at their job. Also Dallas is a strong city in terms of growth prospects. I just feel that the TV journalism in Dallas is very very strong. They do a very good job of exposing local corruption and other stories. They have high profile personalities that can attract readers attention more easily (Dale Hansen on Ellen DeGeneres for example). I am not saying they cannot compete, but DFW is a more competitive in terms of TV vs. newspaper than some other places in my opinion.

    Now that Decherd is gone, there is hope of real change.

    Marketing services is where they can compete, especially against radio, but it will take a long time for that to impact the bottom line.

    There is debate about who originally said that quote

    I am long AHC, and hope that they will succeed. But at the same time, there is less "margin of safety" at this valuation vs. the original valuation, unless it turns out their us of cash generates some very attractive returns, which is possible.
    Feb 16, 2014. 11:09 AM | Likes Like |Link to Comment
  • Galena Biopharma responds on stock-promotion allegation [View news story]
    40M shares traded today. 103M in the float.. That is a lot of "investing" going on today.

    100M shares traded in last 5 days.

    So much for investing in the long-term potential of the company's products..
    Feb 14, 2014. 06:41 PM | Likes Like |Link to Comment
  • Central Garden & Pet: Another Step In The Right Direction [View article]
    I have read those reviews as well.

    Small sample size, but certainly the users that were dissatisfied feel very strongly about their bad experience.

    I have no doubt that if they produce products that are poor their sales will suffer.
    Feb 11, 2014. 04:05 PM | Likes Like |Link to Comment
  • Fiesta Restaurant Group: Balance Sheet Recapitalization Creates Upside To Estimates [View article]
    I had a few questions about your assumptions as well.
    I agree with letsberealguys, in that your $66 risk adjusted price target seems to be your 2019 price target. Is that correct? If that is true there is only a 57% potential gain over five years, but you seem to think that the 12 month upside is 30%? Understandably you seem to be 100% certain of the near (no upside or downside weighting) and less certain long-term (50% chance base case comes true). But I wanted to make sure I understood what you were saying.
    On page 24 of FRGI's ICR Xchange presentation (, The company is expecting 2-3% comp growth long-term vs. your estimate of 5%. I understand that Pollo Tropical is comping in the 6% range currently and has a 13.5% two year comp, but Taco Cabana is now barely positive in its comp and has negative traffic. Pollo Tropical will have to generate comps above 6% for a long period of time to offset the drag of TC and produce the blended 5% comp you seem to expect. The good news is PT still is showing 3% traffic growth which shows the concept is resonating with consumers.
    For 2014, the company is guiding for 3-5% comp at PT and 1.5-3.5% at TC.. So the blended rate is below 5%. You also mention your in your downside risk case, it is mostly SG&A since "revenue growth is mostly units based". Your estimate is for 12% revenue growth. Your unit growth in your model is 9.5% + 4-5% comp. That comes closer to 14%. Am I missing something? And 4-5% comp means that 40%+ of your revenue estimate comes from comp growth, something that is much less certain that near-term unit growth.
    In the body of your article you talk about self-funding 20+ new units annually, but eyeing your table it looks like you are using closer to 30-35 new new units. It that correct?
    Your article also talks about how the recapitalization of the balance sheet puts FRGI in a position to "self-fund" its growth. it does appear as though FRGI was outspending their CFO to grow. So does this just get them to breakeven in FCF or does it mean they can now generate some FCF? They seem to be spending around $37M to build 18 restaurants in 2013. They guide to spending $45-$50M to build 22-26 in 2014 ( I am assuming $15M goes to other cap ex in 2014). So while it does seem the secondary reduced interest expense by $15M+ to fund the incremental new restaurant growth in 2014, it seems as though they will be FCF negative anyway and certainly if they accelerate growth to 30+ restaurants a year. That means another secondary or more debt so I am not sure your 2020 valuations reflect what shares outstanding might be or net debt.
    The point of this post is not to demand precision in your estimates. That only creates the "illusion of control" or certainty. No one, not even management, has any idea what this year will bring let alone the next five years so putting probabilities on your estimates are reasonable. I think too many investors want earnings models simply to have something that gives them additional confidence that their decision to buy or sell is justified. Earnings models are good for testing sensitivities and scenarios to gain a better understanding of how a company operates and its strengths and weaknesses, but I do not think they should be taken as anything more than what they are, educated guesses. I know you understand this.
    The point of this post is to help others assess the strengths and weaknesses of your analysis and make their own judgments. When we worked together we always tried to gain an edge on WS by looking at their assumptions and seeing where they were aggressive or conservative.
    If nothing else, after a 250% run from its spin from TAST is shows the merits of looking at spins closely and the benefits of becoming a free-standing company. FRGI is a classic example of value creation from a spin. The company has two quality concepts, offers a competitive product and has shown a history of above market comp growth and certainly above average cash on cash returns (20%+) for a new store which should encourage growth.
    You are correct to assume that, generally speaking, multiple expansion occurs as earnings growth "surprises" investors over time and that its peer group you used is reasonable. And if they grow units at 50% higher than expected, there will most likely be a re-rating. But their peers are not cheap (especially when looking at EV/EBITDA multiples from a few years ago) and investors may re-rate all of them lower for reasons that will be dutifully articulated after the fact.
    Valuations are always subjective and there is no "right" multiple to use, so that is something everyone wants to debate. The important analysis in not on the ultimate multiple (although that does impact your returns, but is 100% out of your hands other than you deciding what your stating multiple is), but the merits of the company's business model and management's ability to maximize its strengths.
    Keep up the hard work. Your articles are good starting points for additional due diligence and I read them all.
    Jan 31, 2014. 01:02 PM | Likes Like |Link to Comment
  • Energy Recovery Inc.: The Little Company With The Big Technology [View article]

    I think you need to rethink a lot of your model assumptions..

    For example, your "downside" scenario seems too aggressive in terms of what the company can earn.

    I am just looking at the Op Ex line and not the revenue or gross margin line..

    You think their run rate on SG&A under your base scenario is $22M.. Their SG&A hasn't been that low since at least 2009.

    2009 $23M
    2010 $26M
    2011 $28M
    2012 $27M
    2013 $26ME

    So you seem to be starting with an SG&A assumption that is too low at $22M

    In your downside scenario, you are using $11M in OP Ex.. Do you really think they are going to cut Op Ex by 50% if sales disappoint? If they truly believe that the future is as bright as you say, don't you think they would continue investing in R&D (you have it being cut in half) and marketing and infrastructure?

    In 2011, sales dropped 36% ($17M) and Op Ex ROSE $2M. In addition, it appears as though you have ERII making $0.11 per share on $30M in sales, when the Street thinks ERII will make $0.02 on $51M in sales.

    It seems highly unlikely the company would make MORE money on 25% FEWER sales.

    Also, your "conservative" 2015 revenue estimate is 2.3X 2013.. Quite a growth rate for a company that has shown a 20% decline in sales since 2008. I am not sure I would call that assumption "conservative". Your analysis may prove correct, but at least on the surface, your models seems to make some very simplistic assumptions that don't really reflect recent past in terms of expenses or execution of their sales plan.

    Revenue and gross margin assumptions are hard to make with this company, but your estimates could be as good as anyone. No one (including me or management) really has any idea. But Op Ex has a pretty good history to look at and there have not been many dramatic changes in them over the last five years. So I think it is much easier (still not easy) to estimate (really still a guess) Op Ex and your assumptions seem a bit out of whack with history and how a company like ERII would probably manage them.

    For example, what would you think about the company's future if they cut R&D expenses by 50% this year? It has grown almost every year. Would you think the company's apparently bright prospects has suddenly changed dramatically?

    Same with sales and marketing. If the company wants to double its revenue because it has a great product for a new market (O&G), what would cutting sales and marketing by 50% seem to mean in your downside scenario?

    Management truly believes in their products and their potential, so I do not think that they would suddenly cut expenses by 50% if things got "pushed out" a few quarters.

    You seem to be making a classic mistake that many young analysts are make. Your modeling expenses as a percentage of revenue and not what they might be based on how the business is actually run. Your expenses as a percentage of revenue are exactly the same in your base scenario and your downside scenario.

    Hope this helps.

    I used to work at Manalapan with your boss Joe. So I have followed ERII a long time.
    Jan 29, 2014. 09:55 PM | 7 Likes Like |Link to Comment
  • Buffalo Wild Wings: Growth Model Is Starting To Crack While Risks Grow [View article]
    Very similar to the Sumzero report written last week by Midsummer Capital and highlighted in their Institutional Investor Stock Pitch contest. Even your price target of $100 is the same.

    I was a fraternity brother of one of the founders and have followed the company a long time.

    The premise is reasonable. The multiple expansion is certainly unsustainable. Having written investment reports on the both the long short side for over 30 years, I would quibble with your characterization that the 2.3M share decline in shares sold short was a major factor in the rise in the stock price. The long-term correlation between your chart and the stock price seems less clear as well. BWLD is a classic momentum driven long play because it has all the factors momentum investors need. Unit growth in a no growth industry, relatively strong SSS, margin expansion and momentum. While I agree that over-leveraged or over weighted shorts can be their own worst enemy (just like leveraged longs can become forced sellers), that is probably not the case here. No doubt the shorts had to reduce their positions as the stock has gone up 80% or whatever (70% decline in the number of shares short vs. 60% decline in the value of those shares seems to indicate that in aggregate the short sellers were reducing exposure due to dollar exposure more than share count exposure).

    High fliers's stock prices decline, not because the shorts push it down (as the main stream media and many investors seem to believe), but eventually the "story" or the numbers turn in a way that turns momentum buyers into sellers. Shorts need longs to give up and turn demand into supply, which almost always eventually happens. Especially with high EV/EBITDA names. Outside of Fidelity, which has certainly turned into a momentum shop vs. their old research focus, most of the top holders are passive indexes and ETF which buy on the way up and sell on the way down. Fido has turned into a seller and holds 13% of the shares. They will eventually be the ones to help the shorts out I would think. Shorts can add to the momentum selling by supplying more stock with short sales, but longs can supply much more stock faster and be more aggressive at hitting bids in size and when you add the lack of buyers because of negative momentum you decline your multiple contraction.

    You are correct to point out that with almost every growth restaurant company that is public, the company eventually expands its store base into lower and lower return markets in order to maintain its growth multiple and that eventually impacts ROICs, first with lower asset turns (lower unit volumes), then with lower margins (Occupancy and operating costs are higher as a % due to lower unit volumes) and growth rates. This eventually translates into lower growth rates and hence, a lower multiple. Building smaller stores is a classic sign of this. The Law of Large numbers eventually catches up to every rapid grower. You can't constantly increase your YOY unit growth in order to maintain or accelerate store growth.

    So far in its history, wing price spikes have almost always been recovered within two quarters of their first impact on gross margins. I have looked at this as a short for years and that has always been one of the short points. If you go back over the last 10 years and look on a quarterly basis, I believe you will see in every instance, gross margins recovered from the spike in wing prices. Swings in commodities in restaurants is just a part of the biz. BWLD is wings, others is fish or beef or wheat. Changes in those commodities (up or down) has never really been a long term driver of the long or short case in a restaurant unless something permanently alters their pricing and value proposition and there are no substitutes or their competitors have some way to get supply at an advantaged price.

    But like I said, the premise is reasonable, mean reversion and lower ROICs will eventually will lead to lower growth and therefore a lower multiple. It could happen over a long period of time (WMT) or a short one (any teen retailer it seems).
    Dec 18, 2013. 03:22 PM | 2 Likes Like |Link to Comment