Lares Capital

Hedge fund manager, small-cap, long/short equity
Lares Capital
Hedge fund manager, small-cap, long/short equity
Contributor since: 2011
Company: Lares Capital
Paulo, looks like this was plain old "channel stuffing":
Do you think any specific information that they will not file 10K on time?
HP just became 1000 times overpriced based on new revenue multiple....
In one word: ugly. The last Q was shockingly bad as JOEZ top line came in 15-20% below where it should have been assuming the trend. There must be some underlying reason for such a sudden sales collapse such as a cancel by a large customer, they didn't get a shipment on time because of a port dispute, or an issue with the working capital. We can only guess at this point as 10K has no information on what caused Q4 sales to come up so short. but there is one key metric which is really disturbing: JOEZ impaired $3.6 million of its inventory as obsolete or discounted vs. usual 1.5-2 million. This implies that whatever they made didn't sell well and won't probably sell well.
Even worse, JOEZ has drawn on its revolver with CIT to stay afloat probably making CIT very nervous. While technically JOEZ could stay afloat for another Q or so if its lenders do nothing, I think chapter 11 now is the most likely outcome. CIT may (and I would if I were them) decide to pull its credit line as their loss wouldn't be so large due to decent collateral.
Just looked at their Balance Sheet: both A/R and inventory are way up as % of sales in last Q. This doesn't look good and doesn't explain why they have trouble both selling and collecting. Not that I really dug in yet to form an overall opinion..but just sayin'...
You should look at FTLF. Similar company but seems more conservative.
If you guess is correct, it's old fashioned "channel stuffing", a well known accounting fraud scheme. You should sell the stock immediately. This is how Sunbeam ended up in bankruptcy.
Read the end of the first page of this article:
I am not familiar with MSLP books to make a judgement but if you are right, the company may be as bad as worthless.
To be honest, it's hard to judge without any other evidence.
On a positive side, the company wants to find (or found) a buyer and they want to install their own CEO. On a negative side, Q4 wasn't good and the company is in trouble. It could also mean nothing new, the board wants to install someone more competent and put a former CEO in charge for the time being.
The market reaction was negligible with the stock roughly matching the market activity and lower daily volume. I would watch for further news and the earnings announcement, which may shed some light.
Paulo, let me reiterate. China still has a weak education system, mostly poorly educated workforce engaged in manual labor, and no immigration. What makes you think that an average Chinese has high IQ apart from that silly academic paper which contradicts any other study? Have you been to China? It's still a very poor mostly backward country apart from Beijing and Shanghai...
I am afraid that you have a serious case of Chinese beer goggles, probably contracted from Jim Rogers. Most of the Chinese data is about as reliable as earning reports of Chinese micro-caps. I don't even believe China GDP growth numbers because its supplied by local party leaders whose promotion depends upon how much their region contributed to the party 5 year plan of GDP growth.
We don't know reliably median Chinese IQ but likely it's quite low compared to any Western country. Most of its population are still employed in manual, construction or factory labor - do you think they solve mathematical puzzles after work? Chinese universities are very poor, with few exceptions. I took classes in their supposedly second best school, Peking University MBA program and it was on a level of a second-tier US university (actually some of my professors had their PhDs from second-tier US Universities). I could only imagine what the rest of the universities are like.
Finally, China has generated high growth due to a demographics fluke. With one child policy, it currently has an unusually large proportion of its population in their 30's - most productive age. In 30 years, it will have the same population in its 60's with no reasonable solution possible such as immigration.
You say China is not socialist. I think you are only partially right. The dictionary definition of Socialism has never been implemented anywhere. Today, China is still a statist top-down rigid dictatorship where almost all large companies are majority government owned, foreigners cannot directly own stock and hold dubious off-shore derivatives with no voting rights (search for VIE in Alibaba prospectus), information is censored, and property rights are not respected (did you know that Chinese don't actually own their houses but lease from the government for 50 years?).
I don't think China has a bright future, barring some major revolutionary reforms. They picked up low hanging fruit of being a cheap world factory, they don't have a ladder to climb the rest of the fruit tree.
Dkostek, this is unnecessary harsh and not entirely accurate. The borrow rate now for EDC and EDZ is about 4.5% on IB. IB and other professional brokers charge around 2% on margin balance. So this is not such a high watermark to beat.
The real life strategy would have to take into account the factors you mentioned but it can be successful in principal if you spend the time to conduct daily analysis. It's just not as cut and dry as one might believe.
Very nice article. Amazon bonds are already approaching "junk" territory...
You are not quite correct about PIK. Don't forget that Dahan and convertible notes aren't getting paid now (it still accrues) which actually offset about $5-6 million a year:
"as a result of the events of default under the Term Loan Agreement and the revolving credit agreement, the Company is prohibited from making any (i) payments under the subordinated convertible notes issued to the former equity owners of Hudson Clothing Holdings, Inc. and (ii) earnout payments to Joe Dahan. "
Companies don't voluntarily file if they can pay because it means two things: 1) zero to shareholders and 2) management is replaced. Now, the management are the biggest shareholders or junior creditors who will likely get next to nothing in Chapter 11 (Grossman, Dahan, Kim) so obviously they will do their utmost not to file.
Involuntary bankruptcy is a possibility, but probably only if it's clear this quarter is bad and the lenders want out any cost (possible but probably too early for that).
Thank you for reading. I still see no rational basis for putting JOEZ into bankruptcy. Everyone would lose. This Q would be critical - if the cash flow is bad then who knows - BK may be an option, but if they show improvements, the return could be huge.
I think the stock plunged: a) someone knows something (obviously BK) or 2) some bin investor needs to offset capital gains or 3) Joe Dahan really needs money after his 63K allowance was put on hold by technical default
Next couple of days will be critical in terms of the news. Watch for Sec 4 forms.
I don't think the demand will decline at all. The margin pressure though will be relentless. With Wintels becoming cheaper and cheaper, CPU is the last component which is maintaining gross margins in excess of 60%. IBM, SUN, and HP got out of chip business seeing that that customers will not pay a premium, it's just a matter of time before some Chinese no margin operator will come in (or maybe buy AMD) and will put a sticker on every computer "Who cares what's inside?"
Are you saying that Intel reported that according to its own research it's a great choice? :)
Not at all. Intel has no choice but to invest in cloud or be another "Blockbuster" (not the movie, the company). I am afraid Intel today is where Compaq and Sun were in 2000. The PCs and servers didn't go away, they just became low margin commodities, the same will happen to chips.
Paulo, overall I think your thesis is good but I disagree with a couple of points:
"Although less servers are needed, this trend does not affect storage".
Cloud will eventually be very bad for storage (hard drives, SSD, etc.). If you are a consumer, you don't buy digital music, you stream it from Spotify. If you are a business user, you don't have to buy Microsoft Office and install it on your hard drive, you buy Office 360 streamed to you from the cloud. If you are a company, you don't back up your server data to offline storage, you rely on your cloud provider back-up which is much more efficient.
I also think even a bigger problem for Intel and other "brand names" is commoditization of servers in the cloud due to virtualization and "big data" technologies such as hadoop moving calculations to a grid. If you are a cloud provider, you want to buy a million cheap no-name easy-to-replace boxes with modest CPUs, not a high-end 64 core server. The servers are racing to the bottom where the cheapest producer takes all, just like PCs did a few years ago.
I would have complemented your article if it came out a couple of days earlier but now it's old news with a 20/20 hindsight. Many investors don't understand an extremely volatile nature of OME main business with many moving parts and get overenthusiastic over a good earning report and bearish with a bad one. In reality, this is a very mean-reverting business where buying cheap and selling high, while paying less attention to last Q earnings, is the best strategy.
I actually think that now OME presents a decently value after a huge sell-off. I am with you that one shouldn't be very comfortable with their last purchase of Bioriginal for that high a multiple (that's why I am not an owner of the stock at this moment). But overall one should start looking into getting back as the stock price will probably mean-revert just like it has always done.
Robin, EBITDA is likely to significantly improve as they cut post merger costs. Also, their CapEx is very small as they mostly do wholesale. So, given lower interest costs, most of it would flow to the bottom line (after tax).
Joe's and Hudson are decent brands and do have brand equity. Just look how much they charge for their jeans.
Alex, I'm not sure why you think Rick's didn't treat its employees well. The court decision made mockery of minimum wage laws. Do you really believe that any of the dancers were making less than $7 an hour? It's possible that the judge was handcuffed by idiotic labor laws and had no choice so I am also not exactly optimistic that Rick's prevail on appeal. Yet, the pay out is far away and you should take the present value of the payout which is much less than $10 million. In addition, the case wasn't going well for a while so a lot of it was already priced in.
On an energy drink, all I can say Eric never learns his lessons from Ricky Bobby debacle. I agree that the company should stick to its core business where plenty of money can be made.
Just another horrible idea no doubt lobbied by market makers and exchanges so they can line up their pockets at the investors expense who will be forced to pay high spreads. Where HFC shop was stealing a penny, now a market maker will steal a nickel. Well done!
Maybe we should go back to phone brokers with $400 for a simple trade so they can provide "objective research" for their clients.
Agree with Keubiko. The deal with the energy drink company is a head-scratcher but the amount invested is too trivial to qualify as the "destruction of shareholders' value". I wouldn't be shocked if some details will come out in 10Q/10K in "related party transactions". I would much prefer that the company put all its energy in cash reducing its high cost of mortgage debt by transferring to REIT or refinancing instead of stock buy-backs or acquisitions. RICk's is still paying over 10% on some its secured debt which is obscene in our ZIRP environment.
IV, thanks for reading. I agree that Dilma's election is helpful as she does favor social spending.
My point on Ebola is that that the attention will eventually shift from controlling outbreak to its prevention. In the perfect rational world, Ebola would make the last page of a newspaper if at all as it will kill a much smaller number of people than flu, malaria, polluted drinking water, etc. There is yet a single person to die of Ebola in the Western World (in almost a year), apart from the patient who came already sick.
In the stupid world we live in, driven by sound bites, talk show listeners who can't even locate Africa on the map, the focus will stay on Ebola for a while which will probably lead to opportunities for WHO and other NGOs to get bigger budgets. It will help Female Health to position itself as Ebola prevention company.
I suppose your point is technically correct but it misses the point of my article. The condom will prevent one from getting Ebola from a person who is symptom free after being "cured". There must be at least several thousand males in Africa who survived Ebola and look healthy but will carry the virus in their semen for next three months. Basically, it's hard to completely stop Ebola unless male survivors stop having unprotected sex or females protect themselves by using female condoms. The disease is likely flare up again and again after a lull. Hence, big opportunity for FHCO.
"Deutsche Bank President Jens Weidmann". You confused Deutsche Bank (private company) with Deutsche Bundesbank (Central Bank).
Thank you for reading but I am not sure I understand your comment, especially about the nurses, or perhaps you didn't read what CDC said until the end of the page.
Semen is different from other body fluids that it can carry the virus 90 days AFTER a male is cured. Condoms are obviously very effective in preventing semen from getting into female body.
Probio Invest, I believe you reference my numbers in last two paragraphs about hazmat representing only 2% of revenue. Please be courteous and provide a citation link.
Thanks Jorge. I'd be careful with shorting though, or at least be ready for a short squeeze if another nurse gets sick. I know people who went broke shorting and Webvan in 1999. Market can stay irrational much longer than you can stay solvent.
It's best to wait out and pick up the pieces after VSR will (inevitably) crash. The company itself should have a good year in its main business (check their record backlog). I wouldn't be shocked if it will make a new low after the day traders exit.
Because the unit production capacity is tiny. It's nice of them to change the graphics and put Ebola imagery all over the place, but several days ago infectious diseases were not even mentioned on the Web site.
Christopeher, a great summary how the problem is grossly blown out of proportion by the media. I am sending it to my friends who are not even invloved in investing...
Maple, first of all, there is no evidence yet that they can ever produce hazmat suits appropriate for Ebola. They are known as nuclear protective gear specialists.
If they can produce them, their capacity musty be tiny since they have such small revenue. If you are US government or WHO, would you rather hire a tiny division of a tiny company or, let's say, DuPont or 3M for a critical need?