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Nat Stewart
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Growth at a reasonable price, special situations, warrants, leap securities, VIX products.
My company:
N.A. Stewart Capital Management LLC
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  • Great Investment Reading

    Originally posted here at

    One source of great investment thinking that I have enjoyed for some time is the market commentary at the investment firm Horizon Kinetics. I particularly like the two following essays, even though I think they are all worth reading.

    • Scalability - Great essay that explains the very important concept of operational leverage, which I believe is one of the most important ideas in business or investing. Operational leverage can allow for substantial free cash flow generation while requiring only a low level of incremental capital spending. Free cash flow can then be re-invested, which accelerates the compounding process. I discuss this basic idea in this article, but a different context.
    • The Consequences of Portfolio Turnover - Shows the power of allowing an investment to compound in one good company over a long period of time. To me this type of logic demonstrates that if you want to trade, you need to do it in a non-taxable account, and/or you need to shoot for much more significant returns that make risking the "churn" of taxes and fees worthwhile.

    One think Murray Stahl focuses on allot is what he calls the "owner-operator" model. It was this concept that first attracted me to his writings, as I have always been attracted to the notion of investing beside a controlling shareholder or highly talented (and highly invested) CEO. A perfect example of this would be my articles on National Beverage, my latest being here. In fact, this might be the area where I have experienced the most in terms of investing success - It has really been a focus of mine. You can find the "owner-operator" concept in many of Stahl's essays, but this one is a good intro:

    I will only be linking to content on other sites when I think it is super-worthwhile to read, so if this stuff interests you, make sure to check the above links out. I am working on an article on a company that combines an owner-operator CEO, superior operating leverage, and a new product that looks very promising. Make sure to check back, or sign up to the free email list to stay informed. Hope everyone is having a great weekend.

    Jun 29 6:29 PM | Link | Comment!
  • This Small-Cap Stock Has Created Serious Value Over The Past 20 Years – And Might Be Returning Signifigant Cash To Shareholders Before Year-End

    Note: I decided to re-post this here on the Seeking Alpha instablog. It was originally posted here at my site, NAS Trading.

    National Beverage (NASDAQ:FIZZ) is the creator and distributor of bottled drinks such as Faygo, Shasta, and LaCroix. The entire company is animated by the charismatic personality of CEO and controlling shareholder Nick A. Caporella. Indeed, the website copy and shareholder communications are the most uniquely upbeat that I have ever read.

    This upbeat style combined with solid marketing and operational controls have led to very good returns for long term shareholders. National Beverage is one of those "boring" stocks that often seems to be going nowhere (Beta is .35), yet over the long term it has consistently created shareholder wealth. Dividend adjusted data shows a cumulative 2390% shareholder return over the past 20 years. In many ways National Beverage's solid operational performance reminds me of another low beta small-cap stock I recently profiled, Mesa Laboratories.

    National Beverage does not pay a regular dividend. Rather, the policy has been to distribute surplus cash in special dividend payments whenever it piles up on the balance sheet and the company sees no higher NPV (net present value) investments. Cash tends to accumulate quickly, as the company has a strong track record of free cash flow generation.

    The last special dividend was issued in December 2010, and equaled 17% of the company's market capitalization. Investors who simply look at a non-dividend adjusted chart will not get a clear picture of how well this company has continued to do over past 10 years. The company has zero debt, which I generally view as a positive. However, in today's ultra-low interest rate environment, an argument can be made that National Beverage is under-leveraged and overcapitalized.

    With highly probable tax increases arriving next year, a good argument can be made that National Beverage should add leverage (preferably long-term in order to get the inflation hedge benefit) so that the next few years of free cash flow can be "pulled forward". The proceeds could then be distributed to shareholders, who would then be taxed at today's lower rates.

    A conservative amount of long-term debt would also provide a hedge against future inflation. This is because the company would be able to pay back loan proceeds and interest with depreciated dollars.

    There is reason to believe that CEO Nick Caporella might be considering this action or something similar. I noticed the following "notes" written on the cover of the 2012 Proxy Statement:

    Let me break out the most critical elements contained in these "notes." Caporella starts by listing positive attributes of National Beverage (In his words):

    1. Well managed balance sheet - No Debt!
    2. Strong historical trends - cash flow management!
    3. Special dividend payments - best for company and shareholders!
    4. Capital assets - Off balance sheet equity!

    He then lists items he is thinking about or considering (In his words again):

    • Buyback?
    • Leverage?
    • Nov - Cash!
    • Call Dan (Tax attorney, Washington DC) - Potential tax changes - Cap gains, divs? ask for new info

    I interpret this in the following way: The CEO is thinking like an owner (because, of course, he controls 75% of the outstanding shares) and is looking for ways to maximize shareholder value given the upcoming tax-policy changes. He is considering a buyback and adding leverage, and will be making a judgment about distributing surplus cash in November.

    Caporella mentions "Off balance sheet equity" as point number four in his list of company positives. My interpretation of this is that the company owns assets (likely real estate) whose value is not reflected on the balance sheet. This means that prudent borrowing capacity might be beyond what it appears to be given free cash flow levels and balance sheet equity. At the very least, it suggests Caporella is looking for ways to convert this "off balance sheet equity" into a form that will benefit the companies market valuation or cash-on-cash return to shareholders.

    One possibility that I would be less than pleased with would be if the company's cash flow and potential borrowings were used to buy a large block of stock directly from insiders. In my opinion, it is too easy for this type of transaction to enrich the majority shareholder(s) while providing no real benefit for the rest of us.

    However, Caporella's strong track record suggests that investors have reason to be confident. National Beverage is currently a good value. I believe it is likely that this company will keep "winning" (As Caporella would say) for long-term owners.

    Disclosure: I own shares of this stock as a long term investment.

    Disclosure: I am long FIZZ, MLAB.

    Tags: FIZZ
    Nov 12 1:22 PM | Link | Comment!
  • Use This Strategy To Profit From Market Volatility - Trading Volatility Breakouts In The SPDR S&P 500 ETF (SPY)

    In our last article on the volatility breakout trading strategy, we focused on explaining this trading method in easy to understand terms with clear examples. At the end of the article, It was suggested that simply knowing this general approach was not enough to make for a very profitable trading strategy. In fact, in certain markets and under certain conditions, taking volatility breakout trades can be very counterproductive.

    What is the key to making this strategy profitable? I want to share with you a few of the things that I have found to be highly effective when trading this approach in the stock index futures market (NYSE:ES) or stock index ETF (NYSEARCA:SPY).

    1. ) Volatile market conditions - This strategy works best when the market is frothy with the emotions of speculation and fear. Many would guess that buying upside volatility breakouts would be a great strategy to use during bull markets. In fact, this is often not the case. Bull markets frequently see volatility compress and trading ranges contract, which takes away the core market condition where this strategy thrives. In fact, 2008 (A year in which the S&P 500 was down around 40%) was perhaps the best year ever to be trading volatility breakout strategies in Stock Index ETF's or Futures.

    2.) Opening Gaps. Many traders believe that because markets trade almost 24 hours a day, gaps (as measured by day-session hours) are no longer useful as technical indicators. I have found this point of view to be false. Gaps have been and continue to be highly significant events for a number of different strategies, and this is particularly true for volatility breakouts.

    3.) The swing position of the market. By this i mean, "where is the current price relative to the recent trading range over "X" number of days? I used this concept in this article and applied it to just one day. However, it can also be applied to a longer period if time. I have found that on average, volatility breakouts work best when the direction of the breakout contradicts the swing-position of the market. By this I mean upside volatility breakouts work better when the prior day closed at the low end o the recent trading range, and downside volatility breakouts work better when the prior close was in the upper half of the recent trading range.

    By combining these three factors, you can come up with some very good trading strategies.

    Note, none of these ideas involve an ultra-complex pattern or any type of advanced calculations. I have known some traders who use very complex, "if - then" type logical statements that use a huge number of inputs in effort to find the best trading patterns for this approach. While this might work for some, I have found that by distilling ideas into the most simple, conceptual form possible, they tend to work better in real time.

    In our members-only report on volatility breakouts, I will share with you the exact indicators and settings I use to screen and trade volatility breakouts. I also document some of the historical evidence for this methods success. For short-term and swing traders, I believe this one report alone will be worth more than the cost of the entire service.

    Good Trading.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Tags: SPY
    Oct 29 5:43 PM | Link | Comment!
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