Justin Kuepper

Long only, deep value, special situations, event-driven
Justin Kuepper
Long only, deep value, special situations, event-driven
Contributor since: 2008
Company: JDK Commerce Inc.
Thanks for these insights-
I agree that the strategy to maintain and build rep counts is the most important make-or-break part of their turnaround and it still seems to need a lot of work. It's one thing to cut expenses to the ground, but that will only get a company so far. Revenue growth at decent margins is needed for sustainable long-term growth and profitability.
Thanks for the comment and clarification-
I was simply quoting OTC Markets, but yes, the de-listing was certainly voluntary and justified and they have done a great job of keeping shareholders and potential investors updated. I should have made that clearer in the article and will submit an edit.
I like the stock myself but may wait until it pulls back before taking a position- they've certainly done an outstanding job growing the company and it still appears to be undervalued by the market.
Thanks for the comments!
I hadn't seen PKW before and it seems to be performing quite well lately. The only concern that I would have is that buybacks haven't been supported by as much research as spin-offs, and the current rise may have more to do with the bullish market.
I have seen GURU and agree that it's interesting, too. My only concern with that ETF is that it's long-only from my understanding, whereas ALFA can help hedge against downside by being long-short. But, these are both "for-fun ETFs" for me as well!
DWAS and RYJ also look interesting and I'll have to take a closer look at them next week, so thanks for the notes!
Yes, existing shareholders as of a certain record date will receive shares of the spun off entities much like a dividend distribution works.
I did see some of that selling, but the rationale behind it is uncertain. Either way, I wouldn't recommend buying the spin off until it has come down from the spin price. Since this is a smaller cap stock, it might be a bit riskier than the other two, but I think the spin off itself makes sense and the new management is incentivized.
The business has always been competitive, but SAIC has been able to consistently attract top talent. I don't think this ability will be compromised by the split. There's a lot of additional information available in the Leidos investor presentation that makes for a good read here: http://prn.to/1dv81mq.
Thanks for reading and the comments-
From my understanding, ITW and PCP may be involved in the business in a small way (not really explicitly broken down that granularly in the filings), but HDNG is more involved in businesses that compete with firms like DMG in Germany or Haas in the US. But, HDNG has been around since the 1890s and is entrenched pretty well and there are high working capital barriers to entry.
While the company could certainly become a buyout candidate, particularly at its current valuation, the company has been more focused on making acquisitions of its own recently (e.g. Jones and Shipman assets and Usach) to enhance economies of scale. Of course, the aforementioned domestic or international players may be interested in consolidating their position in a competitive market.
And as for 3D printing, I'm sure there is a subset of the market addressable by these technologies, but I'm not sure if those are considered high-precision yet. Hardinge's and other industry machines cut to measurements in the millionths of an inch and could already be considered a "3D printing" technology in some ways. But, accuracy and productivity are key barriers for "mainstream" 3D printers.
Just my two cents...
Looking forward to the GE consumer finance spin-off.
Just look at CSD vs. SPY and it's clear that spin-offs generate a lot of value for investors. Since January alone, CSD returned 30% versus SPY's 15%. And, it handedly beats the index is 1yr, 5yr and 10yr intervals.
I think the comments that Altria is overvalued stem in part from its 5-year average in addition to its peers and the S&P 500. Given company-specific differences, some investors believe that these historical averages are more relevant than comps in some cases.
In MO's case, its P/E is 15.5x, versus a 13.9x 5-year average, while its P/B is 19.1x, versus a 13.5x 5-year average. However, its P/FCF is below its 5-year average, which is a good sign, and its dividend yield has continued to grow (although is lower than the average in terms of yield, which has more to do with share price).
That said, I have always been a fan on MO in general and hold shares in my long-term portfolio.
Thanks for the article-
I agree with the long-term growth prospects, but are you concerned about UNP's valuation at these levels? Its 17.6x P/E is higher than its own 15.1x 5-year average and industry averages (along with P/B and P/S). The stock also trades somewhat near its 52-week highs.
Interesting article, thank you.
I think the largest looming problem is what you mentioned: Scrap sales are lower due to the low price of gold, but bullion sales haven't moved higher due to weak jewelry spending (http://bit.ly/1dwaSfP). I'm also a little concerned by the majority ownership by an outside firm, which gives shareholders little say in the company.
However, the valuation is compelling and I will keep an eye on the stock when jewelry sales begin to improve.
I think JCP has some positive things going for it, as Ackman explained in one of his presentations. For instance, the company owns nearly half of its real estate, has a good small-town presence, and it has purchasing scale.
The problem with Ackman's strategy was the second item; you can't radically rebrand a chain that has its base in small-town America. It's not surprising to me that sales fell off of a cliff- some people don't like change, they like the familiar.
All of that said, I think it'll be very difficult for JCP to transition away from competing on price or significantly change its "personality", but there are some changes that could still work and perhaps that's what many of the activists involved are trying to do now.
Great article and analysis, thank you!
I sold a lot of my bank holdings after the run-up and have been looking for some small-cap opportunities like these to fill the void- strong banks operating in strong markets that are undervalued at current levels with a 2-3 year investment timeframe. Will keep on the radar.
Of course, P/E multiples are based largely on projected growth.
But, the catch is that you're paying 87x earnings for ARM when you know it'll face competition from INTC, while you're paying 12x earnings for INTC as it enters a new market for expansion.
As a value investor, I'd rather pay the cheaper multiple now for a company that has room for expansion, as opposed to a higher multiple for a stock that could see increased competition ahead.
Well said.
Soros is best known as a global macro investor rather than a value investor or active trader. When I look at his portfolio, I primarily look at put/call ratios and sector rotations rather than any individual stocks. I agree that trying to follow his trades verbatim is a terrible idea.
I don't think we'll ever fully understand his methodology, given how subjective it appears to be in the Alchemy of Finance!
Thanks for the article-
I bought HP a few months ago as an undervalued leader in its market. From my notes back when I bought it, it was trading with a 9% earnings yield, 16% free cash flow yield, and 25% below its historical multiple. Since then, it's jumped about 20% to close that gap, but I'm still holding it as the best drilling contractor at the moment.
I tend to agree on some aspects-
Being first to market is beneficial, but it's not a long-term guarantee of success. Companies may have become before Intel in the space, but Intel undoubtedly has the best manufacturing capabilities and design talent in the industry, enabling them to compete on quality and price.
Intel is also quite undervalued at its current levels, but some of that discount could be justified by the time it will take to break into the mobile market in a bigger way and the risks associated.
And finally, I agree that PC's aren't going anywhere. The reality is that home users are switching to other form factors, but it's still nearly impossible to do homework on an iPad or smartphone. PC's are less necessary for home users and as necessary for business users.
Agreed, Visa has become very affordable at these levels, trading well-below its historical averages in terms of P/E and at an attractive PEG ratio of 0.8x. I agree that the court ruling won't have a long-term impact and that the valuation will recover - the company is clearly a leader in a very attractive industry that will only grow from here.
These are definitely valid concerns, particularly regarding the 7-Eleven contract being at risk. I typically invest in value stocks rather than growth stocks, so I passed this one up either way, but a hit to 10% to 15% of profits could be tough to swallow.
The main draw that I saw was the international opportunity. Germany in particular has very few non-bank-owned ATMs and very favorable ATM habits/demographics. With its Fortune 500 relationships in the U.S., I could see it quickly entering these markets with additional acquisitions in the future that could drive growth long-term.
I had actually written the piece about a week ago, but delayed publishing until yesterday to wait for earnings on August 1st, which was the reason for the volatility yesterday.
As mentioned in the article, they beat analyst expectations (which led to the increase), but I would guess that it sold off towards the end of the day because it had reached a new 52-week high and that usually leads to some profit-taking.
I would argue that almost all lenders in this business have negative ratings- it's simply the nature of high-risk, high-touch mortgages. Looking in aggregate, I think the Fannie Mae 4-star rating and the overall performance speaks for itself on the whole.
I took a look at CWB and it looks like another interesting play in the space right now. While ECF trades at more of a discount to net assets, CWB does have a more attractive expense ratio over the long-term and both have similar holdings. Without the discount, I would maybe consider CWB in lieu of ECF, but the discount makes ECF more attractive at the moment.
In my opinion, Yahoo! simply isn't very well positioned-
It lags significantly behind Google in search, while almost half of its traffic comes from Yahoo! Mail. Moreover, Google really makes its money from AdWords/AdSense and Yahoo!'s own publisher programs haven't been nearly as competitive.
Display revenues were down 11% last quarter and PPC revenues down 10%, but the key fact was that clicks were up 16% with pricing down 7%. So, people are paying less for ads when Yahoo! keeps spending money try to scale their reach.
And finally, everyone's moving to mobile and nobody seems to be able to monetize it. The next real winner in the online space will be whoever figures that out the best, in my opinion.
Best Buy already provides warranties on its own products, as well as owns its own tech support subsidiary (Geek Squad). So, the beauty is that the infrastructure is already in place, it's just a matter of marketing and expanding the warranty program itself.
For example, suppose I buy a used or new Samsung TV online and then go to Best Buy to pick up some AV cables. Since Best Buy already sells Samsung TVs in its stores, they presumably already have the parts and infrastructure in place. Why shouldn't they upsell me a warranty (their highest margin "product") on that TV?
Exactly right, in my opinion.
Intel has one of the most prudent management teams in the world and an unparalleled ability to execute in its target markets. I'd much rather invest in a company that absolutely excels in one business than one that is mediocre in many businesses. It's only a matter of time before Intel comes to dominate mobile chips - the infrastructure is there - the opportunity is hardly a missed one at this stage.
If you model out the sales over the treatment's lifespan and discount it to today including the E.U.'s sales (approval there is likely, if the U.S. approves), and include the rest of its pipeline in the valuation, then the $286mm market cap looks a little less shocking. But, I agree that the $200k treatments may be a tough pill to swallow and, long-term, I think the company may have an uphill battle with payors to realize those sales levels (although patient demand seems it would be robust).
You're right about the melphalan sales- I will request an edit right now and apologize for the error. The source was a conference call transcript that was strangely worded, and I see now that he was referencing the total market opportunity for CHEMOSAT where melphalan is used (e.g. the E.U., U.S. and APAC combined).
Again, I'm not an owner of the stock yet and everything written (minus the error above) was based on information from the company, who based their figures on their own figures (e.g. for ASP costs), LEK Consulting and GLOBOCAN. Moreover, I see this as a short-term opportunity with upcoming catalysts than a long-term play.
Finally, if the stock goes bankrupt, as many have suggested, there's obviously an opportunity to double your money by shorting the stock. Price has very little to do with anything when short selling a company, just short more shares to make up for the dollar difference.
It seems that a lot of people have commented on my estimates above (mostly via personal messages).
I sourced all of the data from the company's presentation that you can download in PDF form here: http://bit.ly/Witish (page 16).
The E.U. market constitutes the bulk of the $2.3 billion estimate (as I mention in the article saying "driven by multi-histology opportunities in the European Union"). The presentation lists the E.U. market as $2.2 billion and the U.S. initial market as $100 million in 2013, if approved.
The reference to multi-billion opportunity at the end is implying a long-term time horizon and not an immediate market (as indicated, again, by "could eventually see"). This would obviously include more than the ocular melanoma market to include the same indications being targeted in the E.U. The presentation estimates this opportunity to be $2.6 billion, if approved, over the long-term.
I apologize for the confusion, but it appears there are a lot of shorts in this stock getting very angry at me for writing the article. I am not long yet, and if so for the short-term, just writing on a company that I was researching and found interesting...
Thanks for the comment.
I don't own the shares yet, but I'm primarily considering it for the short-term opportunity. I think the PDUFA in June and ADCOM in May will provide some catalysts, while the commercialization efforts in the E.U. could produce some upside, if they're successful.
The transaction can be good for both parties because, even though AbbVie receives a capital intensive business that's riskier, it's still operating in the same market as many other pharma companies (same risk profile) but with a higher dividend yield. As mentioned in the article, I think high dividend yields are preferable in today's rate environment, which makes it a stock worth holding all else equal.
Acquisitions rarely increase value in reality and there have been many studies showing this over the years. For instance, check out this study: http://bit.ly/V3YVm0. Large firms in their study destroyed $226 billion in shareholder value over 20 years.
One point in my article is that spin offs differ in that most spin offs increase shareholder value (see the studies mentioned in the article). Spin offs allow two business entities to be valued separately, which typically results in a higher market valuation when adding them.
There are indeed many situations where spin offs don't work out, but the article focused on this particular situation and why I think it will work out in the end. I think the split made a lot of sense for the reasons listed above and it will be mutually beneficial to both companies.
Agreed. Sometimes spin-offs are simply vehicles for parent companies to unload undesirable assets or debt. In this case, I think the resulting company remains attractive and the aggregate spin off statistics are just an added bonus.