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Paul Nouri, CFP
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Paul has been managing Noble Equity Fund, LP, a healthcare-focused hedge fund, since January of 2008. In addition, he manages Noble Advisors, LLC, a Registered Investment Advisor. He also recently launched mydivorcewishlist.com, the first of its kind website providing comprehensive content and a... More
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  • Over Reaction To PetSmart Earnings

    Bears of this specialty pet retailer are declaring victory this week as the stock is off almost 15% from Monday's close. On Tuesday, the stock got hit 5%, along with many other specialty retailers as Dick's (NYSE:DKS) reported disappointing numbers. On Wednesday, the stock took another hit as bears took the chance to seize victory over the company's mediocre quarter. And today, as analysts come out with lower price targets for the company, shares are down yet again.

    For many quarters now, analysts have been speculating that internet companies like Amazon.com would steal share from PetSmart. Though PetSmart reports having lost no share in the quarter, some analysts have come out to say that their thesis is now playing out. I think they are declaring victory prematurely.

    First, while comparable sales were down 0.6%, 0.4% was due to weather and 0.4% was due to foreign currency fluctuation, meaning same store sales were basically flat for the quarter.

    Second, many retailers have been communicating that the consumer environment has been weak thus far in 2014. For PetSmart to continue to grow sales and earnings in spite of that should be viewed positively.

    Third, services continued to grow at a nice clip of 4.5%. Additionally, margins in the segment are at a record. The company will continue to benefit from expense leverage as sales continue to grow in the segment. Strength in this part of the business should continue to support robust product sales.

    At under $56, the stock trades under 10x Enterprise Value to Free Cash Flow and 5.5x EV/EBITDA. In comparison, when Petco was purchased in 2006 by a private equity consortium, it was purchased for 8.2x EBITDA, roughly 50% higher than PetSmart's current valuation. PetSmart has a large and growing services business that Petco did not.

    The stock is reacting as if the bottom has fallen out for the company when there is no indication of that from the recently reported quarter. The fact is that the company guided to sales and operating earnings growth in a weak retail environment. This is the best value I see in the market for a company with a market value over a billion dollars.

    Disclosure: I am long PETM.

    Tags: PETM
    May 22 3:19 PM | Link | Comment!
  • Why Does Muddy Waters Move The Market?

    Everyday, there are hundreds of institutional investors that go on tv and radio and pitch stock ideas. For the most part, the stocks mentioned don’t move more than a couple of percentage points on the news. However, it has become the case that when Carson Block from the research firm Muddy Waters speaks on a name, the stock is headed for volatility and likely a significant decline. That is because Muddy Waters focuses on issuing negative research on Chinese companies.  Additionally, the company readily admits to being short the names it issues research on.

     

    Out of the 7 stocks that the firm has issued negative opinions on, 6 of them are down from the time the opinion was issued. Typically, the negative publicity forces the Chinese companies’ hands to form an investigative committee. Some companies have been de-listed and others struggle through a difficult trading market for their shares. Like any other investor/analyst, Muddy Waters will be right at times and wrong at times. The point of this article isn’t to break down how often the firm is correct in its analysis. It’s to question why the stocks of Chinese listed companies become extremely volatile after the investigative reporting of one firm.

     

    One of the old adages of legendary Fidelity investor Peter Lynch is to invest in what you know. This theory includes buying Proctor & Gamble because you use Tide and McDonalds because you can’t stay away from their fries. Recent stock valuations certainly reflect that institutional and individual investors have embraced this theory. Companies that people embrace, such as McDonalds, Chipotle, Apple, Priceline & Amazon.com, attain Price/Earnings ratios well above the average. This is partly because consumers don’t only show their approval of products by purchasing a company’s product or service; they have come to purchase stock as well. Investors feel comfortable investing in a product or service that they have used or are currently using. That leads us to U.S. listed Chinese companies.

     

    In a best case scenario, before the average individual invests, they look at a company’s financial statements, see what the company generally does, check out its valuation and make a decision. Institutional investors might look more closely and hone in on gritty financial metrics and the market for a specific product or service a company is selling. Unless investors are willing to fly to China and conduct on the ground surveillance, it is unlikely that they will be able to feel secure that their investment in a China listed company is anything other than a high risk. For this reason, when an entity such as Muddy Waters issues a negative report, using the company’s own numbers against it,  sell off and panic ensues in the stock. Whether or not the allegations are true or are already priced into shares is largely neglected. The losses that investors can bare as a result of reports such as this can be significant.

     

    Here are a few suggestions to those investors that are interested in investing in Chinese companies. First, do as much investigative work as possible on the company’s financials. Foreign companies are required to file when there is a significant event, as well as a form 20-F at the end of the year (equivalent to 10-K in U.S.). Through these statements, you should be able to ascertain financial metrics such as DSO’s (accounts receivable collectability) and free cash flow (how well the company converts earnings into cash). Additionally, the 20-F will inform you whether or not the Auditor has approved the validity of the reported financial statements as well as how strong the company’s audit committee is. Second, see how much equity management has in the company and what the insider activity has been. Typically, management teams that are confident in their companies will purchase shares on a severe decline. Additionally, in today’s world of transparency, it is hard to believe that an executive that owns a significant portion of company stock would risk their shares going down for the short term benefit that fraud might produce. Finally, don’t put your life savings into a China stock. This will ensure that if a negative report or development does come out on your stock, you will not lose too much sleep over it. 



    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Tags: FMCN, SPRD, CCME, ONP
    Nov 29 5:18 PM | Link | Comment!
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