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Jay Unni

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  • Rolling Up Our Sleeves On Jos. A. Bank [View article]
    Nice job bringing this cash flow red flag to the attention of investors. Yes, JOSB has been stocking up on inventory, and is delaying its payments on it. However, I do think that the "best case" may be considerably better than poor working capital management.

    It is true that inventory as a percentage of assets has increased from the first of the year, however, in each of the past 10 years, JOSB has increased inventories in anticipation of the fourth quarter. As MarketWizard07 points out, a better comparison may be Q3 inventory percent of assets for 2011 and 2010, which are both above 40%.

    It is also true that inventory on an absolute basis has increased over the years, as illustrated by Patty Edwards' bar chart, however, this is perhaps less than the full story, since the store count has also increased during that period. Again, as MarketWizard07 points out, a better comparison might be the inventory level per store.

    The five and ten year averages for Q3 finished goods per store are both around $528000 per store, with a standard deviation of $44,000. The current figure, $578,000 / store, is more than one standard deviation higher, so this is significant. But management was planning this increase.

    CEO Neal Black explained his reasoning for increasing inventories this season on the last conference call. He gave four primary reasons:
    1. "The cost value of new inventory is higher than last year, due to cost inflation--just replacing the same units means that the total cost will be higher."
    2. "We are planning to open 50-53 new stores [in 2011], As compared to 36 new stores [in 2010]."
    3. "We need to build back some basic inventory that was sold down to below planned levels at the end of 2010."
    4. "We need to build and carry some extra basic stock inventory in order to get ahead of coming additional price cost increases in some categories."

    The "some categories" that Black refers to are likely the Wool, Silk, and Leather products, as he mentioned earlier that these materials were likely to increase in price in 2012, while cotton was likely to decrease.
    I have a strong feeling that anticipation of cost increases is the main reason that they are building up inventories currently--JOSB is trying to avoid margin compression in the future by stocking up now.

    As Brian Harper points out, high inventories are part of JOSB's business model, so retailers like GPS may not be the best comparison. From the Q3 conference call, "We also look at the size of our inventory as a strategic advantage, which gives us the opportunity to aggressively promote as deeply as we need to in order to drive the planned margin dollar results, without running completely out."

    You are correct that the season did not go as well as they hoped, as Neal Black admitted that November was a "tough month" and comparable store sales were less than November 2010. The reason for the steep discounts in December 2011, Black explains, is that they are hoping to make up the difference by deeply discounting in December.

    Admittedly, these discount may hurt margins. However JOSB is hoping to gain more sales, and thus increase earnings, in a recessionary environment. The CEO states that the promotions have become "the new normal", and that they "will continue to be promotional until the economy gets better."

    I believe that there is no reason to expect any sort of "crazy accounting issue" with this company, as the items you mention are explained openly by management.

    The key question is whether JOSB's strategy of deep discounts will work in Q4. While I am less skeptical than you are, I am still apprehensive. The answers will come when we see
    a) Comparable store sales for December,
    b) Total inventory drawdown when Q4 results are released, and
    c) The wool, leather, silk, and cotton pricing environment in 2012.
    Dec 31 12:22 AM | 3 Likes Like |Link to Comment
  • Momentum Stock Bust Is Self-Reinforcing [View article]
    In the short run, the effects of the bust in and Amazon were very similar. Amazon lost 92% of its market cap, from peak to trough, in the Dot-com bust.

    However, companies can recover from such a bust, as Amazon has proved, provided they generate enough cash flow to grow from operations alone.

    There is a very good chance that 3D Systems may resemble Amazon in the scenario you describe; I believe it will emerge from the bust with operations intact. However, a 92% decline in the meantime is disastrous for short-term portfolio results.
    Mar 27 07:58 PM | 2 Likes Like |Link to Comment
  • Traditional Stock Analysis Will Not Work For Tesla Motors [View article]
    Even if the car production numbers do not increase enough to justify a 100 P/E this year, as long as the price stays above the intrinsic value, the company can continue this process with rounds of new financing, in both the equity and debt markets.

    I never meant to imply that future earnings do not matter. I don't think traditional models do a very good job of describing the course of stock prices in certain situations. Even in the late 1990's internet bubble that you cited, discounted future net earnings models would not predict a massive rise, then fall in stock price.

    You may hold the opinion that all excesses in the market must eventually be corrected. My point is that the company has a mechanism by which the excess can be maintained for quite some time.
    May 27 12:25 AM | 2 Likes Like |Link to Comment
  • Tesla Motors: Long Now, Short Later [View article]
    Be careful - once a self-reinforcing boom sets in, it may continue much longer than anyone expects!
    Apr 25 05:13 PM | 2 Likes Like |Link to Comment
  • Tesla Motors: Long Now, Short Later [View article]
    I thought I had covered these points, but perhaps I was not clear. I mentioned the Motor Trend award and the attractiveness of EVs in the "less tangible" section. I also believe that it will continue to outsell gas-powered rivals in the same price bracket as long as it continues to be placed in a lower price bracket, because of the credits. Whether this continues in the absence of the credits remains to be seen, but it is a risk that investors should bear in mind.
    Apr 25 04:27 PM | 2 Likes Like |Link to Comment
  • C&J Energy: America's Cheapest Oil Services Stock [View article]
    Excellent article pointing out a stock with such an amazing margin of safety. I would like to add even one more impetus for increased earnings in the future: the purchase of Total, "a manufacturer of hydraulic fracturing, coiled tubing, pressure pumping and other equipment used in the energy services industry and one of (CJES's) largest suppliers of machinery and equipment."
    In addition to vertically integrating the company to reduce costs, the Total purchase allows them to sell machinery and equipment to third party service companies to further profit from the trend in shale exploration and production. CJES just spent $2 mm building a new manufacturing facility for Total, which was completed in December 2011, so I expect this business segment to contribute to earnings growth significantly in the coming years.
    I am curious to know if you are worried about the risk of an influx of fracking fleets to CJES's oily basins. The Bloomberg article you mentioned stated that at least two of the majors (HAL, BHI) have been shifting their fleets to North American oily basins. This may bring down the spot rates CJES has been charging for off-contract work. I currently view this as the largest risk to earnings. And as gas prices decrease, this risk will become larger and larger.
    Disclosure: I am long CJES.
    Jan 30 10:35 PM | 2 Likes Like |Link to Comment
  • Is Facebook Really Worth $58 Billion, Maybe [View article]

    I actually take the opposite viewpoint on this issue. If a company is trading above its intrinsic value, then it is actually a positive to use stock-based compensation. Why? Rather than spend cash on salaries, they can use overvalued stock to essentially get a discount on their SG&A expenses and R&D expenses.

    Actually, if you dig in to the 10-K, you can see that the majority of their R&D expenses (60%) are covered by issuing shares. This introduces a "reflexive" component - increases in share price can lead to bigger discounts on new product development, thus justifying the high share prices.
    Jun 15 07:41 PM | 1 Like Like |Link to Comment
  • Traditional Stock Analysis Will Not Work For Tesla Motors [View article]
    Your questions about the gross margins and labor costs have been addressed by other commenters. A company cannot create a short squeeze in its own stock.

    The ZEV credits are a concern for the immediate future, and the decrease of credit sales will be a significant test for Tesla - can it remain profitable with decreased credit sales next quarter? A "no" would lead to a pullback of the trend, a "yes" would lead to a continuation.

    I believe the trend is strong enough to continue, even if the lowered ZEV credit sales push them into the red and lead to a stock pullback. The trend has a way of reinforcing itself, as pointed out in the article.
    May 27 01:50 AM | 1 Like Like |Link to Comment
  • Tesla Motors: Long Now, Short Later [View article]
    Glenn - if I understand your model correctly, you outline several scenarios at various valuations and probabilities, and use those valuations and probabilities to calculate a risk/reward ratio. I believe this is a valid model. I think you should reconsider the importance of the underlying assumptions of probabilities and valuations that you are plugging in to those models. I would argue that the end result is largely dependent upon those initial assumptions.

    Also, have you considered that there may be possibilities you have not outlined? For example, have you considered a possibility where Tesla dominates the automobile market, but still suffers a huge collapse in stock price prior to this eventual outcome? In such a case, Tesla might end up at a very high share price in, say, 2020, but a very low one in, say, 2016? Are there not other examples like this case that may not be accounted for in the scenarios you have outlined?

    The reason I take an approach based on logical argument is that the structure of the argument can be changed over time. The conclusion is based on several premises; if a premise does not hold, the conclusion must be revised. Thus it is a process of constantly testing and refining the investment thesis - you test by investing according to the theory. If it is working, then the theory is provisionally valid; if it stops working, then something in the thesis is wrong, and the trade must be altered.

    If, for example, no risks mentioned in the article materialize, then I would never switch to a short position - I would not have reason to do so. If new components of the boom emerge, I would be compelled to strengthen my argument for a bull run in the stock, if new risks emerge, this strengthens my argument for an eventual bust.

    Perhaps the difference between our approaches is this: the scenario based approach is concerned with determining the eventual outcome for the company, whereas my approach is more concerned with how it gets there, how this process happens. To me, being able to go long, short, and, perhaps, long again is the essence of "seeking alpha" in the market.
    Apr 30 12:02 PM | 1 Like Like |Link to Comment
  • Tesla Motors: Long Now, Short Later [View article]
    I apologize for the error - you are right that the company has already announced its profitability.

    Excellent counter argument. However, I believe the current customer base is not indicative of the customer base that Tesla is attempting to cater to.

    The early adopters of a new technology typically have a lot of disposable income. Right now, the customers that are buying Tesla's are those that can spend $70K without breaking a sweat, but eventually, the goal is to attract customers who are shopping in a lower price range. The financing option was introduced to attract customers who are wealthy enough to lease but not to purchase.

    I believe it is the combination of this financing option with the step down of the credits that could eventually spell trouble for the company. After the credits begin to step down, the lower-end customers may be dissuaded by the change of the financing option from a zero-down loan to a loan with a down payment.

    Also, while it is certainly disputable that the step-down of the credits would lead to a turning point, I believe it is indisputable that the presence of the credits will contribute to the boom phase.
    Apr 25 08:54 PM | 1 Like Like |Link to Comment
  • Tesla Motors: Long Now, Short Later [View article]
    How are you calculating those odds? How are you calculating the eventual market cap of the company?
    Apr 25 07:41 PM | 1 Like Like |Link to Comment
  • Tesla Motors: Long Now, Short Later [View article]
    True, it is a step-down of the credits, not an end to the credits. The website linked in the article more fully explains the step-down procedure. You may be correct that the company will be established enough at that point to survive - but to make any judgments about that, we will have to see how cash flows shape up.
    Apr 25 07:32 PM | 1 Like Like |Link to Comment
  • Why I Just Sold FactSet Data Systems [View article]
    To match the historical PEG of 1.25, the shares would have to be priced at a P/E less than 20.2. Using TTM income, that would be $79.40. So I would consider buying again below $80/share.
    Jun 2 01:16 AM | 1 Like Like |Link to Comment
  • 4 Of George Soros' Favorite High Growth Stocks [View article]
    Since Soros Funds typically speculate on possible reflexive processes underway, the valuation of Amazon may not be a great concern to Soros's underlying investment thesis. In fact, the high valuation of Amazon is likely part of the reason for the speculation in the stock.
    Soros discusses the behavior of stocks in "far-from-equilibrium" conditions. Under such conditions, the market price may have less to do with the behavior of Amazon's earnings, and more to do with the market bias towards the stock.
    Currently, it seems that Amazon stock is undergoing a "test" of that bias, with its shares down from the $240 a piece to around $180. If the stock can post solid fundamentals for the quarter, that shows good holiday sales and evidence of the company making inroads with its Kindle Fire device to the tablet market, the market bias is likely to turn more positive than it was before, and send market price upwards. Such a move is likely to be reflexive, as an upwards price movement will make the market bias more positive (analysts turn positive on a stock that is in a bull run), and both will reinforce each other on the way up.
    That is, can increased hype about Amazon actual increase fundamental sales of Amazon products in some way? Amazon does is not a net seller of its shares, so the positive bias is not affecting the fundamentals via that mechanism.
    However another mechanism may be at play. A glance at AMZN balance sheet shows that its accounts payable is growing at a rapid pace, far faster than its accounts receivable. This results in a growing working capital figure.
    So, Amazon is getting generous terms from its creditors, likely due to the favorable bias that credits have towards them. The higher working capital allows Amazon to make investments that will eventually grow its earnings. Thus the bias is affecting the fundamentals of the stock, through the credit market, not the stock market. The stock price trends are simply ancillary effects.
    It makes perfect sense that Soros funds would be speculating on such a stock. They seek out positions where the fundamentals are being affected by and are affecting the market bias and market price. This two-way relationship is the key to a reflexive process. If Amazon is actually undergoing such a process, the stock may be in for a boom and bust, allowing speculators to make a lot of money on the rise up, then make money on the way down as well.
    The key events to watch for are the 1) fundamental data that will be released when Q4 results are reported, and 2) the resultant price action - can Amazon's share price recover from the "test"?
    Dec 18 12:03 PM | 1 Like Like |Link to Comment
  • Momentum Stock Bust Is Self-Reinforcing [View article]
    You make some very good points. A rising rate environment itself, and the paradigm shift from risk assets, is not a foregone conclusion. I consider it a working hypothesis, and it accords with the overall perception of analysts at this time. Whether that perception turns out to be true or false will be proven with time.

    You bring up an interesting point about institutional risk taking. In the larger economy, no, institutions are probably still not taking enough risk. That leads me to the question whether lending has improved enough to warrant an end to QE.

    However I believe this momentum stock boom was partially a side effect of this - in order to stimulate institutional lending, the Federal Reserve actually stimulated the purchase of risky equities by retail investors and large funds. I believe this strength in the equity markets may actually lead to the end of QE before it has really had the chance to stimulate the lending it was intended for.

    I am confused by your last point. It sounds like you are skeptical of the ability of these companies to leverage middle class prosperity?
    Apr 2 12:24 AM | Likes Like |Link to Comment