Nitin Gulati

Value, growth, contrarian, growth at reasonable price
Nitin Gulati
Value, growth, contrarian, growth at reasonable price
Contributor since: 2013
Question that we as investors ought to be asking is " Has the market changed ? " I, personally would say " Yes" and higher volatility is here to say against the backdrop of macro risks which have surfaced . But what's not been discounted yet is the recession in US, which so far has been considered as a fine house in a bad neighborhood. And, if that unfolds, growth premium will get sucked away with the speed of light
So far people have been disputing that Netflix can see 50 handle, but when irrationality upholds anything is possible. If you believe that irrationality can take these stocks to unprecedented levels, trust me it goes with much force when things turn south.
Inevitably net nets demand patience, giving more priority to balance sheet and looking for hidden assets. As you alluded such companies are often left for dead due to undergoing troubles and what i have discovered buried under massive write downs is NOL's they possess. One example would be CFI which was sub 1 stock in 08-09 but as it began to turn around , nearly 70 million in NOL's accelerated earnings power. What are your opinion on LeapFrog(LF)
A return investor captures fundamentally is driven by the fundamental business return net of investments required , changing expectations, and capital return ( either via dividend or buyback). To your point, a high quality business often will itself find trading at multiples reflective of that ( absent any dislocation), so compression in valuation multiple during your holding likely turns out to be the culprit. A business can demonstrate value creating growth, expand upon its capital return program but if it fails to align itself to the needs of its investors base , its returns will remain under pressure.
Often companies have the strategy in place for business growth and what have you, but they will fail to understand what type of investors constitute their investor base. A growth oriented investor will pay a premium for top-line growth , where as a value oriented will certainly abstain from paying a rich premium.
Very interesting !!
Although you touched upon their strong balance sheet, but often strong balance sheets turn into 'a lazy balance sheet' where in cash builds up but reinvestment opportunities fade. Question remains what hasn't been priced in the stock yet?
I agree falling car prices will help dealers but it will also increase loan to value ratio which amid the existing regulatory environment is risky.
And the recovery rates as well
And , what if dealers
Assaf, I can see your logic in stating that true book value of CACC is masked considering CACC writes only part on the book that it advances to the dealers. But if I apply the same logic , in case of defaults - whole loan would need to be written off , contrary to write off of only the amount advanced. May very well explain why the markets view it less riskier than other traditional lenders.
The way I see it as three tranches - First covering the servicing fee part which is least risky since defaults usually happen after 8-10 months, second covers the dealer advance recovery and third is the CACC's equity, the most riskiest.
csail
First of all let me clarify what I am stating. Essentially, I am expecting increase in charge offs due to glut of off-leasing vehicles hitting the market , which will materially impact the bottom-line. Arguably, these charge-offs are a consequence of excess dumb money allowing vehicle sales to be pulled forward. I'm not stating that this is a bad business or an in-competent management. I am just saying given the nature of cyclicality with this business, earnings have peaked for this cycle and it shouldn't be surprising to see another 50-60% draw-down, which isn't uncommon for this stock.
As you noted , you have been long this name for decades now, which speaks volumes about your commitment to long-term investing but would you recommend initiating a long position now to anyone or yourself.
But this trade will have bitter consequences. It's just when everybody starts to make rational decision or in this specific case migrating to shop online only, and hurt their local economies, their employment.
All in all if this will have material consequences
Dear Assaf,
For your first question, 20% servicing fee is based off the anticipated recoveries , ( 71.8 % of $15692)
Second question certainly is interesting, and I am trying to find the missing link in that. Kindly bear with me while I work to get that answered for you.
Dealers had their skin in the game through this risk agreement which allowed CACC to have better collections and yields . a 50% advance is quicker to recover as compared to full 100% value. Secondly, if vehicle valuations deteriorate, they will be left holding the bag as well. All in all, their P/B will contract if they choose to expand their loan books as other lenders.
Agreed AMZN can raise prices and consumers would happily oblige , but question becomes how much prices can they raise without turning their consumers away. American consumer is extremely value conscious and the moment they recognize the product they buy is cheaper somewhere else relative to Amazon , they will make the switch in a heart beat.
Top that off with Bezos intent to compete so aggressively on margin % because he is so much after margin dollars . Meanwhile, they have accumulated the fixed costs of running these humongous warehouses and employee base. It's not that you turn off the lights and maintenance expenses are gone away.
Thirdly, you are putting so much work load on your employees in warehouses without any regard to safety, Might be worthwhile that you know safety audits are done by interns. The moment something unfortunate happens , an additional liability that hasn't been baked in yet .
I love Amazon and shop all the way there, but stock is unilaterally loved, with all the narratives supporting it , and if there is turn in street's sentiment towards its , everybody will be running for the exits then.
I couldn't agree more with your comment that Amazon is way far off from its fair price. On my drive to work while listening to Barry Ritholtz 's podcast with Venture Capitalist Bill Janeway of Warburg Pincus, something struck me quite odd. On one end there is a commentary about how plausible , compelling feed into speculative/ bubble behaviors , meanwhile they discuss all the levers Amazon can pull to turn on the profit spigot. That certainly sounds like substituting plausible narrative until narrative fallacies show their ugly heads.
Now let me ask this , everyone is bullish on Amazon. mechanically they are bearish on American retail sector. And, if you believe Amazon will kill American retail they you better be more scared. Or in other words, your trade is long Amazon/ Short American Businesses.
Just my two cents
Seemingly, you are equating buying at $30.27 per share as same as buying at $76.29. Although I am big believer in paying up for the quality , but someone to initiate a new long position at this macro-economic juncture is certainly wouldn't be wise.
This company is an amazing long term buy and hold play. I took a deeper dive into their business earlier this year and was surprised by their profits, certainly a envy of big town retailers. You are more than welcome to read my view on it here on SA, and comment on any disagreements you might have with me thesis.
Jonathan
Well written article indeed. I have been researching this space for the last 30-40 days, and there are few things which are quiet obvious yet investor community is totally overlooking it. Firstly, I noted most of the people seem to rate managements of players in this space such as CACC, CRMT very highly and often allude to the transparencies in their annual reports, shareholder letters. But if I put myself in management shoes , I have a clear incentive to project it in this way because the business I am in involves charging exorbitant interest rates from less worthy buyers. Notwithstanding , alluring customer into lower payments via increased term .. May be I little more skeptical than I need to be. But if management from every company is that transparent , isn't that little odd.
Secondly, used car sales have outpaced new car sales by a wide margin lately, and windfall from drop in gas prices helps in staying current on payments. But this drop in gas prices has also inflated trucks/ suv sales , and when oil prices begin to normalize , you might have an influx of defaults.
Also, off-rental and off-lease volumes are expected to hit the wholesale market in next year or so that should depress wholesale prices meaningfully , which means lower trade in's , lower repo values , and if gas prices rise from current levels - perfect storm for slow down in loan origination.
Lastly, every company's management is stating they are waiting for competition that arose from cheap credit availability to fade away - which to me sounds like a lot of hope.
Wondering what your thoughts are
Matt & John
I appreciate the insightful work you guys have put in on researching CRMT. However, my question is on another major player in the sub-prime auto lending market, Credit Acceptance, which has a completely different business model but shares an awful lot of similarities. Firstly, they have chosen to grow their active dealer base and taken a hit to loan units generated per dealer, suggesting they went after the market-share with expectations that as the lending market tightens they will be able to withstand the tightening. Unequivocally, there's an assumption that since this market segment came out unscathed or held up well during the great crisis, we should outperform during the next crisis. There seem to be a lot of similarities in narratives put out by these companies, and investors biased with management's openness are completely overlooking the apparent element of uncertainty stemming from the hopes rested on tightening of auto lending markets. Don't you sense a denial mode here among management's as well as investors here?
Secondly, there is a prevalent narrative spun out that low gas prices at the pump are good for sub-prime borrowers since more money equates to lower risk of default. But wouldn't low gas prices cause these customers to move up the food chain as well, meaning buying more expensive vehicles that they otherwise would have shunned away from had gas prices stayed elevated. And, we already have seen sales of pickup trucks ( used & new) accelerate lately. Counter-intuitively this demand has elevated prices in the wholesale market, and to offset it dealers are demanding longer loan terms, and bigger share from the lenders, pushing the consumer's equity further in out and putting lenders at risk in the short to intermediate term.
Thirdly, a lot of off-lease supply will enter the market that potentially could weaken repossessed vehicle prices, further risking net book values for their receivables.
Lastly, after reading several auto lenders, I sensed a lot of management openness, and not playing a devil's advocate here but why is every player so open. Strikes me little odd !!
It appears as a decent business, but certainly is showing signs of topping out. Few observations after reading out their 10-k's .
1. Loans per active dealer declining since 09 , and similar trends are noted in new dealers signed up.
2. Unarguably their spreads in portfolio programs are tightening. Although many view cash advances creeping up , but what if dealers demand lower monthly fees which makes up a big chunk of CACC's top-line revenue.
3. So if all the financial media / pundits are right that lending standards have loosened up lately, impact on such loans will not hit until next couple of quarters.
Sophocles
An impressive article indeed, and thanks for linking up my article on it as well. While challenging retail environment has been well telegraphed pretty much all this year, I view SSI from an asset-conversion perspective. First, I believe SSI has nearly $65-70 million worth of asset ( Cash plus Real Estate), which itself is one fourth of its market cap. And I don't believe there is any appreciation among investment community for SSI's real-estate. Oh wait, it lacks the word "B"- hence not worth it.
At current price, market is hair cutting everything it can think of.
A dividend cut could quickly form a perception of a liquidity crisis fueling downward spiral. Although, pulling down of guidance for the straight 3-4 quarters is of a concern but I would argue that is something every retailer has been challenged with lately. Relative to PIR, Stage's biggest advantage is their unit economics and in the small communities they serve they could easily get their rent expense lowered.
At the least if they initiate their buybacks at these levels, it would certainly be accretive.
What about the real estate they own ( 2 DC, one in TX, and one in VA) which they could do a sale-leaseback .
Yes retail sector continues to be at the whim of consumer spending, holiday shopping patterns, and externalities such as weather. But labeling entire retail sector as dead is essentially christening american consumer as dead. Consumer shopping patterns have always changed with time and there is no reason to believe they will not change in future as well.
Companies have and will continue to evolve with changing consumer habits. It's investor psychology which chased expansion stories, overlooking how they were funded. In particular, I saw everyone touting gas savings dollar to translate into more dollars spent at the retail , hence warrants bidding up their multiples. Oddly. no body accounted what repercussions a repeat of extreme weather could have. Here investors didn't bothered to look past 8-12 months let along going back too far in time.
Everybody appears to be touting about threat of online retailing. If you are believer of online retailing to displace brick and mortar completely you might as well short energy ( less miles driven for shopping- cumulatively after netting shipment) , short discretionary, grocers.
At the end of day, what matters is looking for retailers which manage their costs prudently, reluctant to expand through debt.
There are several not widely followed , outstanding retail business generating returns > 25-30%
I saw their numbers, and market rewarded them well enough for not disappointing. Their $300 million buyback , essentially reduces the float by nearly 35%-40%, that's impressive capital allocation. On omni-channel initiative you have to put into perspective what target markets and consumers they serve, and if accelerating it make economical sense. I think ship from store , visibility across all the chain is enough. However, any narrative to acceleration in e-commerce can get them rewarded in terms of valuation , but that doesn't mean they have to race towards it.
But he clearly stated during Q4 call that
Ray Arthur - CFO
From a cash perspective, I think you can expect cash to decline to a low point in October and then start to build again. We have a significant investment in inventory coming up to October, which then turns into receivables. We do have a $75 million revolver as well at our disposal,
which is an ABL based on receivables and potentially inventory. I think you'll see a low point in October and then cash to start to build again.
later he stated "my projections currently show me not having to use it. That said, I'll probably use it just to make sure we have ample liquidity."
So if the company dipped into revolver, I am not surprised by that because it was telegraphed earlier.
Although, holiday season remains the key.
dydd
I completely agree business's such as HIBB , which are un-levered are ripe of shareholder activism. Although I chose to not publish correlation between HIBB ( due to SA Pro Publication Policies ) and CATO's comps which thrive in the same parking lot as Hibbet and for the past two months CATO has been positive healthy comps. That tells me comps have bottomed for this calendar year.
And at this price, with such phenomenal fundamentals it indeed would be a handsome investment.
Hi Nicholas
Great Article. I strongly believe they are worth near $6 bucks ( thanks for putting link to my article), but the question looms would the management sell it . Personally , I think they should use up their NOL's and let the market reflect upon it.
Alan,
Clearly there aren't much value opportunities available in US equity markets , and a true value investor needs to be patient for the right time to swing. And, this isn't that time yet. On the other hand though, this last streak of bull market although extended , is giving value oriented investors ample of time to do their homework on the businesses they like to own and what price they are willing for it.
To us, this certainly is an opportunity to get your home work done and swing when pitches come down your way.
Thanks
Nitin
Depends on what opinion you hold, I mean you want to hold for a long term, then the buying opportunity was last week, chasing it after this pop certainly is not what value seekers do
Nearly up 20 cents since the last week.
May be they do reverse-split to avoid that from occurring. Having said that would incur some additional charges .
But they have started changing the strategic direction . Should that be telegraphed more loudly, yes, in my opinion. Expanding traditional products non-screen based toys , LOOP's to leverage content on other platforms. Precisely the direction blue pacific investment group laid out in their letter to board earlier this year.
Meanwhile infant/preschool category reversed its trend this year after declining for few straight years. What if the holiday season is better then expected ?
Certainly alarming . Lets see how earnings season pans out . An earnings recession could manifest itself into a revenue recession under the surface
M Cuturic
I realize that a lot of people have turned bearish on this name, especially after when a few of them gotten their thesis discredited. In any case, I am always willing to get my thesis criticized , to allow myself to pick up and evaluate the impact of it on my conviction. And, all shorts , ironically so far what I have heard agree that learning's product business segment has value as an independent unit, validating my thesis so far. Looming question remains can multi-media business show signs of life, which no far thinks can happen.
In my view, we can generally form this opinion, that learning products business in itself has value as an independent unit but multi-media business will drain the resources from the company. What if management puts out signs of stabilization in multi-media business segment.
On the same token, they articulated plans to expand their traditional toys segment, and expand into LOOP's . I agree company has had their chances , where they totally failed , and thus everyone now is questioning management's credibility. Even in your comments you alluded the option to shudder the multi-media business in its entirety, and use licensing arrangement of its still valuable brand. But what about the Learning Products segment : Still selling $100 million worth of toys , is that totally dead in your opinion