Steve Harris

Long/short equity, value, special situations, arbitrage
Steve Harris
Long/short equity, value, special situations, arbitrage
Contributor since: 2012
I have been following all of the articles and analysis on KMI. Much of focus is on how it's a toll road with little exposure to commodity prices, sports a reasonable valuation and their ability to continue paying dividends. It seems to me that the most important question that investors should be asking, is: What will the revenues look like two years out if commodity prices remain low and a significant number of their customers have either declared bankruptcy or simply can't afford to pay for the contracts they have entered into with the MLP's? That question may lead investors to rethink their views on whether or not the MLP's are exposed to commodity prices. Of course they are exposed.
Another issue with regards to the book value at KMI is that 70% of book is goodwill. I have not done any homework on KMI, but presumably the goodwill is a fair representation of how much they overpaid for purchases of assets. After the recent plunge in valuations of everything energy related, I'm guessing that KMI would need to take some pretty substantial impairments to goodwill if they were to attempt to sell any of their assets in order to shore up capital.
I am not trying to jump on the bear bandwagon. Hopefully the MLP's have fallen far enough. I would love to see some analysis on who their customers are and what the landscape will look like in the coming years with sub $40 oil and $2 natural gas.
I find it interesting that many of the comments highlight the fact that the company should be buying back its deeply discounted bonds. It seems that everyone is in agreement about how cheap the debt is, but all of the focus is on whether or not to invest in the equity.
I just bought the 8.625% of 10/15/2020 at .56 cents for a yield of 24%. I figure that since they have hedged out a large portion of production for 2015 and 2016, that they will have enough cash flow to make the coupon payments on the debt for the next two years. Also, they can cut the dividend as you mentioned, to conserve cash. If they pay two years worth of coupons then my cost will be 40 cents on the dollar.
Based on recent balance sheet the company has assets of $7bln and debt of $3.1 bln. Assuming the assets are overstated by 50% due to the drop in energy prices means assets would be $3.5 bln. If company declares bankruptcy in 2017 after the hedges run off, it seems likely that the debt holders will achieve a reasonable recovery, possibly 100 cents on the dollar.
If energy prices recover, then note holders will continue to get paid. There is also a decent probability that the company will buyback or restructure existing debt, which would be a positive catalyst for the notes maturing in 2020.
It seems to me that the risk reward of buying the debt far more favorable than buying the equity.
A sale of the company would be a welcome development. Maura Loa has the operations that you mentioned. They are owned by Hershey and would make a likely acquirer for nnutu.
It is unlikely because the land is zoned for agriculture. The locations are great, but I'm biased because I love Hawaii. I am not familiar with the laws in Hawaii, but I will do some research and get back to you.
I agree that they are expensive. Unfortunately, macadamia nuts tend to cost more than other nuts. I'm not sure where you shop, but the product is very new east of Colorado. They rolled out in California and slowly worked their way east. I'm in New Jersey and the nuts just showed up recently. Only two flavors (barbecue and cracked pepper) were in my local Shoprite. It's understandable that people in the stores are unfamiliar with the brand. The recent 10-K said that they are now in 10,000 stores and expect 20,000 by the end of the year. I suspect they will be spending quite a bit to promote the product this year. The price point worries me. They do seem expensive, but they really taste great. I think Whole Foods will do very well with the brand since their shoppers are used to paying more for good quality. Only time will tell.
The increase in volume was due to the release of their 10-k. They reported a very weak 4th quarter. The weakness should not have been a surprise since they suffered storm damage from Iselle and continue to ramp up marketing spend. It is perfectly reasonable for people to be sellers on the news. I suspect we will find out in a few days that Mr. Ebrahimi was buying the majority of shares that were sold
They have done a horrible job negotiating contract terms. My understanding is that they have been captive to customers on the island of Hawaii. Now that they completed the drying facility, they will be able to sell into global markets.
Highly unlikely
That depends on your time frame and definition of meaningful. There are plenty of days when five to ten thousand shares can be purchased, so it is possible to build a position. Ebrahimi has purchased more than forty thousand shares since December. Good luck with your cold fusion and unicorns.
Please see comment below from chazsf
L,
Thanks for your comments. I tried to present a balanced opinion on nnutu. As stated in the article, Ebrahimi's intentions are an unknown. A takeunder is a possibility, but you make it sound like a certainty. It is more likely that he views the partnership as an undervalued investment opportunity with great potential. He has $21mm invested in the shares. The most intelligent exit strategy for him would be to push for a sale of the company to Hershey or another branded products company. A second approach would be to try to rezone some of the land for residential or commercial use and sell it.
Regarding money in a coma, it's hard to know. The idea is definitely presented as a long term investment, so investors should indeed prepare for a long wait. If the company is successful, then investors will be well rewarded.
Liquidity is definitely an issue, which is why I added the "word of caution" paragraph. It is not feasible to buy a large position, but investors can easily put a few thousand shares in their portfolios as a spec.
Daniel,
Looks like you put a lot of work into this. I think the stock is a binary trade. If the financial statements are accurate and the product actually does exist, then the stock is clearly worth multiples of its current price. The problem is that the perception of the company is that it is a fraud, due to the damaging report published by Absoroka. They claimed that the financial statements were fraudulent and that the product was nearly impossible to find in any stores. I hope you are correct in your analysis. I am long the stock because I think the risk / reward profile is compelling. I would be curious to hear your thoughts on the Absoroka piece.
Good point. Thanks for clarification
Clearly, it is difficult to handicap the probabilities. The team at Bulldog has had a lot of success with their proxy campaigns. Many of these general equity closed end funds such as (NYSE:GAM), (NYSE:USA), (NYSE:ADX), (NYSE:BCV), (NYSE:CET), and others, seem like relics. They charge excessively high fees, in most cases, more than one percent, for portfolios which are essentially indexed to the S&P 500. The existence of these types of CEF's may have made senses prior to the advent of ETF's and low cost index funds. They just don't make sense any more in their current form. I think they are likely to come under increasing pressure from activists and investors during the next couple of years and it will become increasingly difficult for their directors to argue against the merits of providing investors a means to achieve net asset value for their positions. How can the Board of Directors justify that a share repurchase which creates an instantaneous return of 14% to investors is not in the best interest of shareholders?
I was accounting for the $5.86 per share that was paid out as result of the sales of FB and TWTR. With respect to the tender offer, the pro-ration factor was 17.04%. So even though they tendered for 10% of the outstanding common shares, shareholders who tendered sold 17% of their shares.
I was including the $5.86 in distributions that were paid out as proceeds from the sales of FB and Twitter
I invested in SkyPeople a while ago, because the valuation was the cheapest of any company that I had ever seen, assuming that the financial statements are accurate. The accuracy of the financial statements is the big question. If the financial statements are correct, then this is clearly a $10 stock. Who can pass up a great bargain? I am quite cynical that such a massive mispricing can exist, but willing to take the risk of owning the shares, since the payout could easily be 10 to 1.
There is a lot to be cynical about:
Firstly, the company reported $77mm of cash on the balance sheet at the end of 2012, and $11mm of short term debt with no long term debt. The $66mm of net cash was worth $2.50/share, the stock was trading at $2.00, hence, they could have repurchased all of the outstanding shares with cash on hand and owned the property plant and equipment, valued at $2.60/share, for free. It is hard to believe that any sane management team would have passed up on that opportunity.
Secondly, they began to borrow money during 2013 and 2014. They have increased short term borrowings to $45mm and long term debt to $8mm. Why would management be using expensive debt to finance operations, when they had so much cash on hand? Again, this makes no sense at all.
Third, I have reached out to many of my Chinese contacts and nobody has ever seen or heard of their brands.
Lastly, check out the link below, if you have not already seen it. It is a report published in 2011 by Absoroka Capital. I won't go through the details, as you can read it for yourself. Absoroka raised some serious questions. They were unable to find the product in stores. They also found the financial statements that were filed in the Province, and those statements did not agree with the financial statements filed in the U.S.. It is a very comprehensive report.
http://bit.ly/1FQrwlH
Please let me know your thoughts, as this remains a very interesting yet controversial opportunity.
I was looking closely at SKX because of the compelling valuation in terms of price to book. The one thing that keeps me out of the stock is that I never see anybody wearing Sketchers. I have visited their stores often when evaluating it as an investment. The Times Square store had lot's of people, but nobody seemed to be buying anything. They had a lot of very nice looking shoes, but the Skechers "S" on leather boots looked ridiculous.
I think SKX could be a great investment if they could just re-brand themselves. The name is really lame and kids past the age of 11 start to feel embarrassed about wearing them.
I want to get on the next conference call and tell mgmt to come up with a cooler logo.