valueman

Overlooked Education Sector: K-12 Poised to Prosper

I think you are not addressing two of the main bear thesis:

(1) Is there a moat? Quite a few better established education content companies have all the same material. If market is big enough, why won't they compete and why won't they have an advantage over smaller LRN? Just because the out-of-classroom model might grow does not mean LRN will be a successful company.

(2) The teacher's unions and budget constrained governments do not necessarily support the LRN model. From the perspective of the government, LRN emphasizes the cheapness of the model, but the problem is that students who enter the LRN model might instead be home-schooled or attend private school. Thus, the govt took a zero-cost student and made them a positive-cost student. It might be efficient for society but not necessarily from the perspective of the public education technocrat.

Just some bearish thoughts.

Sounding the Alarm on DTS Inc.

Very well-written idea, and my research supports your general thesis regarding cost-switching between units. However, if I was forced to construct a bull case, it would be that the fact that DTS is mandatory in Blu-Ray means that DTSI has pricing power and can grow revenue significantly. Can you help me understand the nitty-gritty of the negotiation between an equip manufacturer and DTSI. For example, what constrains the price DTSI charges? Is it that a manufacturer will simply not follow the Blu-Ray spec exactly and leave out the DTS? Or is it that the manufacturers will change the spec if DTS charges too much? Or is it that DTS agreed to a price already for the minimal 2-channel DTS decoding technology?

My fear is that the fact that DTS is required will give DTS tremendous pricing power even if nobody uses it.

Thanks in advance.

Jackson Hewitt: Taxes at a Discount

I agree that IRS has no direct jurisdiction over RALs but they absolutely have jurisdiction over tax preparers with respect to RALs. They have jurisdiction because they have jurisdiction over anything that affects tax returns. And agency lawbooks are filled with court decisions that give every shadow of a doubt to the beauracrats. If the IRS says that mixing RALs and tax preparation raise fraudulent returns, that is good enough. Proof not required. Justice Scalia would have it very differently, but his view has not prevailed since pre-FDR. I am very confident that if the IRS wants to eliminate tax preparers from profiting from RALs, it can do so and no court would overrule that action.

I am not sure I agree with the simple motive you assign to the IRS. My observations regarding government agencies are that their actions are driven by much more complex motivations.

It is well known that there are several legislators who want to eliminate RALs. Their method was going to be to prevent lenders from finding out if the tax payer has any outstanding liens. By withholding that info, the risk of the loan would skyrocket and cause big troubles for RALs. It is quite possible that a legislator has encouraged this action from the IRS since they could not get legislation passed. It would not be the first time that a legislator has used executive branch action to accomplish what could not be passed under law.

My main point is that this stock is trading at $22 not because of franchise troubles (that issue was resolved favorably) or because of seasonality or because the market does not appreciate the strength of its business model. The only first-order factor in the case of JTX is whether IRS kills the business model. And I think the belief that the IRS will almost certainly not eliminate the biz model is just wrong. How often do we see govenment agencies (especially the IRS) start the formal rulemaking process without a serious intention to consider the rule? If the IRS had simply wanted to send a shot across the bow, there are much easier and less formal ways to accomplish this. My sense is that the IRS reallly wants to consider it and really wants feedback.

I think the industry has a strong argument against the proposal as outlined by JTX. Namely, the IRS cannot eliminate RALs and if tax preparers cannot be involved, payday lenders will enter the field and the practices will be even more abusive. I believe this argument carries a lot of weight.

I think the probaility IRS eliminates tax preparer/RAL connection is 50%-ish. Are you saying you think it is <10%? I'd say mkt is implying about a 65% right now with stock at 22.

Jackson Hewitt: Taxes at a Discount

I follow this company closely, and I think you are very much under-estimating the IRS's intentions and willingness to eliminate tax preparer's ability to profit from RALs. It is important to understand that the IRS has no regulatory ability to end RALs, but they do have the ability to prevent tax preparers from profitting from the marketing of RALs.

If JTX loses its ability to profit from marketing of RALs, this stock is worth $15/shr. And if IRS does nothing, it is worth $40/shr. I have no idea how to handicap what the IRS will decide, but they are not starting the rulemaking process simply to fire a shot accross the bow, as several analysts have stated.

Blue Nile Appears Highly Overvalued

I was wondering how you got that mgmt Q4 forecast represents 15% year-over-year growth. Top line, they are forecasting revenue between $109mm and $115mm. The top end here would represent 27% y-o-y growth. And similarly with EPS forecast. I do not disagree with your short thesis, but I do think your numbers may be wrong.

CryptoLogic's Future Too Uncertain

I've looked at both CRYP and PTEC, and I struck by the widely differing expenses between the two. It seems they do about the same thing, but PTEC has half the expenses as CRYP. Is this solely due to the fact that PTEC has its developers in Estonia and other developing countries? Or is there something else? I'd appreciate any further insights into the relative cost structures. And whether you think that the cost structure difference will persist. Why doesn't CRYP slowly move development to developing countries as well?