The Oil Turn, Soaring Goose, And Value Traps

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Includes: APPS, BPT, DLX, EXPD, FNJN, GILD, GOGO, GOOS, HK, JAG, LULU, NHTC, NVDA, PCOA, SPACE, SRPT, TPL
by: The Idea Guide
Summary

This week's Idea Guide hits on a broad variety of ideas, ranging from soaring growth stories to value traps that might be worth shorting.

On the long side, two companies hit by the oil price turn are up for consideration.

We also feature a micro-cap turnaround play and a steady dividend grower that may be less known.

by Daniel Shvartsman

Today's Idea Guide splits up evenly between short ideas and long ideas in our review. On the short side, there's a mix of value traps, growth trains, and spiraling companies, while on the long side there's a micro-cap turnaround story, a steady grower or two, and a shareholder base ready to pull the 'acquisition' alarm.

Short Ideas

We published 17 short ideas in the last week, and the pickings are a little slim - Tesla (TSLA) shows up five and SpaceX (SPACE) takes a bonus 6th article, while Netflix (NFLX) and bitcoin related plays get us to the halfway mark. Still, four ideas stood out as intriguing for one reason or another.

Canada Goose: Short The Golden Goose, It's Far Too Expensive by Trevor Soare

Canada Goose (GOOS) seems impervious to market cycles, economic slowdowns, migratory patterns, or anything else at the moment. Trevor Soare's argument is a valuation one, as hinted at the title. He compares it to Lululemon (LULU) as well as the retail sector as a whole, and says even giving GOOS considerable growth credit, it's about 25% overvalued. A few quick thoughts I have after reviewing:

  1. I haven't looked at Lululemon in a while, but wow, I guess they've figured out their growth again.
  2. The article doesn't touch on GOOS's balance sheet, which has doubled long-term debt and seen a significant decrease in cash. That looks to mostly be a working capital build-up before Q4/Q1 (both the holidays and winter for a winter coat maker). Probably not a concern yet.
  3. Without another clear concern to slow down growth - Soare mentions industry views that this is a fad - this is a tough story to get out in front of, and looks like a valuation short.

Sentiment Check - Comments are pretty bullish about GOOS and its prospects. And our coverage from contributors has also tilted heavily bullish about GOOS.

When Legacy Beats Acquired Growth: The Sad Story Of Deluxe by Robbert Manders

I really like where Robbert Manders starts this piece, with the Magic Formula. That's the screen that Joel Greenblatt set up based on his The Little Book That Beats The Market, pulling stocks that have a low EV/EBIT and a high ROIC (measured as EBIT/net working capital). Manders finds Deluxe (DLX) on that list, an indeed it's on the top 30 names even if you set the market cap as low as $50M (Deluxe's is $2.3B).

The screen produces a lot of companies that either have serious questions about their business model - Natural Health Trends (NHTC) - or quirky business structures like trusts - BP Prudhoe Bay Royalty Trust (BPT) - or are patent companies - Finjan Securities (FNJN) or Pendell (OTCPK:PCOA) - or are potential value trips - Gilead Sciences (GILD). It's not an obvious place to go bargain hunting unless you follow the formula as rigorously as Greenblatt suggests, and just buy and forget.

Manders starts with that screen and then looks at Deluxe's business. The company has a direct checks business as its main business line, along with marketing solutions and forms and accessories. It may not be a surprise then, that it falls in the value trap category. Manders looks at the company's roll-up strategy over the last 5-6 years and finds low returns for the effort - negative organic growth and minimal margin improvement. There's not a direct short call here, but it's a good warning for anyone who stumbles on Deluxe in a screen.

Sentiment Check - Comments agree with the author's skepticism. We have published a pair of long ideas this year arguing that the free cash flow yield is good enough to make up for the concerns.

Sell Sarepta Into PROMOVI Results by Doc Biotrading

Sarepta (SRPT) has moved from a battleground company to consensus since the controversial FDA approval of its lead drug in 2016. Doc Biotrading stirs the pot anew, arguing that the company is likely to miss its endpoint in its Phase 3 trial, which could lead to withdrawal of the approval or at least reduced insurance payments for its drugs. The author also argues that the market has gotten ahead of itself with SRPT's valuation given the risk mentioned and the timing of revenue. I've wondered in past Idea Guides about the market's underlying presumption that drug approval = market success, but this is actually the reverse - SRPT has some market success, but could the drug approval wane?

Sentiment Check - This is the first short idea since 2016 on Seeking Alpha for SRPT, and comments reflect a pretty strong consensus that this is old news.

Gogo Inc. Can't Compete, Dilutive Offering Imminent by Olsny Freitas

Gogo (GOGO) provides in-flight wifi, which is ubiquitous enough that it hurts when it doesn't work, which is just about always. Olsny Freitas shares a short thesis with two pillars - one is that the business isn't going great, as the company is facing competition and doesn't have long-term commitments from its customers. The other is that the company just issued $215M of convertible debt that both pays a higher interest rate than the debt they are buying back and converts at $6/share. It buys the company a couple years (pushing out from 2020 to 2022), but Freitas's argument that it puts something of a cap on the short risk at $6/share (vs. $4.35 now) is compelling, and this is a high-risk bet from the company's perspective, I would think.

Sentiment Check - Each of the three articles we have published on GOGO this year has been bearish. There are a couple staunch bulls in the comments here, but also some good discussion about what might happen to Gogo.

Long Ideas

We published 228 long ideas in the last week. Blue chips like General Electric (GE), Apple (AAPL), and AT&T (T) came under the microscope, as well as big tech names like Micron (MU), Facebook (FB), and Nvidia (NVDA). A few other ideas stood out:

Texas Pacific Land Crashed Along With Oil, What Now? by Shareholders Unite

I mentioned quirky business structures in the DLX write-up above. Texas Pacific Land (TPL) is a trust and has been one of the big winners of the 21st century.

Chart AAPL data by YCharts

It is an oil royalty play. It has had a fun fall from ~10,000% return since 2000 to only 7640% return. What happened?

Shareholders Unite cites the obvious - the price of oil has dropped. While I don't know that TPL's shares have crashed, this is a meaningful pullback. And I was surprised to see that TPL's metrics have fallen to reasonable ranges - per Shareholders Unite, the stock trades at about 28x PE and FCF, which for a steadily growing, low cap-ex business, is ok.

Sentiment Check - TPL continues to be a popular pick among commenters, as evidenced in the comment stream here. We have had short ideas in the past, but not since 2017.

Time To Put Halcon Out Of Its Misery by Atticvs Research

The sudden onset of a new oil bear market is especially cruel for smaller oil & gas producers. Halcon (HK) went bankrupt in the 2014 bear market aftermath, then returned to markets, has had a fitful time of it since returning to the markets in 2016.

Atticvs Research has been following the stock regularly, and makes a thorough case for why Jagged Peak (JAG) should buy Halcon (along with a couple other acquirer ideas). I like acquisition target articles that make a real case for the acquirer, rather than just saying 'someone will buy them'. I'm not sure given HK's position and the sentiment around it, however, that they have much leverage unless at least two bidders come to the table. It would be interesting to see a bake-off in this climate, though.

Sentiment Check - The comments reflect well the title of this article; shareholder fatigue and readiness for an exit.

Digital Turbine - Extremely Cheap Valuation For Fast Growing Software Company by Cobiaman

Last I remember Digital Turbine (APPS), the company was a target for shortsellers and a successful short at that. This is our first article on the company since September 2015, and in the three years since, the stock continued downward until the beginning of 2017, before finding a gradual and accelerating rise into the present day.

Cobiaman looks at a lot of small-cap tech companies, and likes APPS' potential growth at an EV/sales multiple of 1.25. Digital Turbine makes an app which pre-installs applications on Android phones. Its balance sheet is a little wonky - convertible notes, derivative liabilities, and warrant liabilities - and the company sold off a part of their business, leading to a discontinued operations line. But it is close to break even on the cash flow front for continued operations. I might look at dilution, as it looks bad on the most recent 10Q but may be a one-off thing.

Sentiment Check - As mentioned, first article on the stock in a long time. Commenters who responded liked the article.

Expeditors International Of Washington: The MicroApple by Trading Places Research

Expeditors International: Overvalued, But Trade Wars May Provide A Buying Opportunity by Dividend Power

Expeditors International (EXPD) is a logistics provider that, per Dividend Power, buys freight space in bulk and then resells it. So something of a middle man to ensure companies can ship goods without getting overcommitted on specifics of how much they have to ship, as I understand it. Dividend Power's article assesses the company from a dividend growth perspective, highlighting the positives - safe balance sheet, growing dividend - and the less positives - it's not cheap at 21.5x PE.

Trading Places Research is a little more colorful and gives background on the company's corporate DNA and how they've fared in past downturns. Given the company's obvious exposure to trade and macro climate, TPR's table of the company's performance in 2009-10 and excerpts about how the company talked about dealing with the period are valuable. That PE is relatively high, and both authors fall into the 'better on a pullback'. But an interesting GARP play if you think trade will be resolved or that a solid balance sheet is where you want to hide when the market does go south.

Sentiment Check - Each article we've published this year was bullish, and we've got a small community of commenters and contributors who chime in on the stock.

A few other headlines that caught my attention, with no further comment:

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That's it for today's Idea Guide. We publish this once a week plus special editions. It is available exclusively to Essential and PRO+ subscribers. Next week, we'll publish a write-up of the Kase Learning Shorting Conference ideas, as I and a couple other editors will be attending.

If you have any favorite ideas, suggestions, or corrections, comment below or send me a direct message, or email me at daniel@seekingalpha.com. I would love to hear how to make this more useful for you. Have a great weekend.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.