ACEH (a bulletin board stock), ceased operations and sold its operating subsidiary and Sands Casino in Atlantic City back in late 2006. The cash proceeds from the deal amount to some $21/share, around the current book value of the company. This cash remains in an escrow account accruing interest and should be released as unrestricted to the company in 10 months if all goes smoothly, which I predict it will.
Since the company has no operations and no intentions to revamp any going concern business, this $21 in cash will likely be distributed as a liquidating dividend within the next year or so. The stock, though, trades for a mere $16.45, which effectively offers a cool 25% profit. Given the tax treatment of liquidating dividends as capital gains, the after tax profit still represents a very respectable annualized gain by my estimates.
There is a time-value risk that the funds sit in escrow for a while longer than expected, as well as a risk the firm runs into liabilities that it must cover with the escrowed cash. Someone with more legal expertise than I could probably better size up these risks by checking the escrow and acquisition agreements.
Fair warning: I’m still working on the research here, but I’ve come up with an idea on profiting from the homebuilders’ continued weakness and overselling.
It’s fairly simple: buy the builders trading below book value (Beazer, CHCI, etc, etc) and short an appropriate amount (i.e. buy puts on) of the Case-Shiller housing price index.
The thesis is as follows: several of the builders are trading at mere fractions of book, largely due to the fact that investors anticipate plenty more writeoffs of inventory, consisting of unsold homes and land, going forward. This inventory comprises the vast majority of these companies’ tangible asset values, so it naturally makes sense that discounts to book are largely due to fear that the asset values are overstated. Normally I’d simply buy and hold such cheaply priced companies, but the truth is that I haven’t a clue where housing prices are headed going forward or how much in charges to inventory the builders will take.
What I do know is that a company like Beazer Homes (BZH), for instance, has a geographically diversified portfolio of decidedly normal homes which I believe, on average, to be well-representative of the typical American house. The average unit price is listed on the company’s books at around $220,000, and, interestingly, the average composite home price can be shorted via Case-Shiller at around the same price.
This means a savvy investor can effectively profit from the spread/discrepancy between book value and price of Beazer’s stock by hedging out the writedown risk via a short position in the Case-Shiller composite. While I’m not positive, I’m fairly confident that an inefficiency in the smaller homebuilders’ pricing exists since most investors are not considering how they can come close to eliminating the risk of writedowns. Of course, this is assuming that investors are also willing to stomach the risk of heavy debt, poor management, etc., but for some it may be worth these risks.
Note: I do not currently have a position in Case-Shiller futures or any homebuilding stocks.
I checked out the small (but famous) hot dog maker, Nathan’s (NATH), a few weeks back and liked what I saw going into the company’s annual hot dog eating contest. Yes, the shares have spiked following earnings and on some excitement leading up to the contest, but I still think the shares represent a compelling long-term investment.
For starters, as largely a franchiser (the company only operates a few stores itself), Nathan’s has been generating lots of cash for years and has low capital expenditure requirements. Back a few weeks ago, at some 12x cash flow (it’s now around 15x) it was available at a great price. Revenue has been compounding at a steady albeit low clip of around 7%, but operating margins have improved from 13% to over 18% since 2003. Debt is nonexistent, and returns on average equity using cash flow rather than earnings have been a respectable 15-20% in recent years.
That’s all great, but here’s what I really like. First, the company has plenty of room to grow. With operations in only 22 states and a tiny footprint in just 10 other countries, there’s tons of room for opportunity. That in itself is not enough to justify excitement, but what’s great about franchises with simple businesses, particularly food and retail chains, is that they generally can duplicate success to achieve growth and advantages of scale simply by copying itself in a different geographic location. Though cultural differences surely play some role in an region’s tastes for fast food, it’s unlikely, at least in America, that a great hot dog in the Northeast wouldn’t be enjoyed by folks in the Southwest. Branching abroad may be a bit harder in countries that don’t know the brand or don’t exactly enjoy hot dogs, but I give kudos to management for setting their sites internationally for growth.
The company also enjoys a unique niche in the fast food industry and can really leverage its growing popularity thanks to the Coney Island hot dog eating contest and other generally successful marketing strategies. Despite how unsexy or commonplace a hot dog may seem, I can’t seem to think of a storefront-based company with a bigger presence or more popular brand name associated with hot dogs. Companies like this often benefit from compounding popularity and success. Just like Subway, Starbucks, etc., Nathan’s should be able to enjoy growth from a feedback loop where popularity drives growth, which drives more popularity and recognizability, which drives further growth, and so on.
Of course, I’m not claiming Nathan’s is “The Next Starbucks,” but with no coverage, a tiny market cap, plenty of room for upside, and the potential for compounding success, I like it as a long-term play. I also think it’s only slightly above the low side of my pretty conservative valuation, which places the fair value of the shares at anywhere between $16 and $32 depending on growth rate assumptions. I think a “best case” valuation could place the shares as high as $42. Regardless, great business + strong growth potential + fair price = solid returns over time.
Okay, I just wrote about iPhone hype, but I can’t help do a little hyping myself. I don’t mean to be the pot calling the kettle black, but I’ve got to share something I think is going to be really, really big one day.
It’s a new, simple, and innovative way for investors everywhere to get (and give) distilled, important, story-form research on companies, concepts, and trends by use of an easy-to-use wiki. I myself have contributed articles on Anheuser-Busch, Molson Coors, Moody’s, Harley-Davidson, McGraw-Hill, Black & Decker, and others. Rather than repost them here, I strongly encourage everyone to check out the site. I don’t often get excited about things like this, and I may be biased due to my personal experiences speaking with the remarkably bright, personal, and talented founders of the company, but I’m convinced this is a great tool worthy of any investors research time.
I believe Wikinvest will a) cut down on time spent trying to understand the main drivers, risks, and story behind a company and b) provide a great deal of cumulative wisdom of investment research in one (FREE) place. Check it out, browse around, read up on some ideas/companies, and contribute!
I think you’ll be hearing alot more about this in the coming weeks…
July 2, 2007 at 7:40pm
· Filed under Advice, For Fun
Hype is by definition a short-term phenomenon. And Apple’s iPhone has epitomized it.
Of course hype, short-term results, and pumped up demand for product often blind market participants to long-term business ramifications and actual shareholder value creation. But on the other hand, world-changing innovations which started as hypes and were derided as fads have gone on to make fortunes for owners. So what’s the deal on the heels of the iPhone’s much-awaited debut — is AAPL overbought or underestimated?
Well, first a few qualitative thoughts. As much as I may not be able to tell you with certainty where AAPL will be in ten years, I can say this: they are the reigning kings of what I’d call synergistic marketing and demand creation. In other words, whether or not they are actually innovative (that’s up for debate — iPod was not the first MP3 player, for instance), they are better than anyone at convincing customers that there product is the coolest, hippest, and best must-have invention on the face of the planet. And their success has bred only more success and greater cross-selling revenue (Paul Carton has a great discussion of Apple’s halo-effect here).
Think of it this way — that Apple has been so successful and hip with the iPod has made computer buyers more interested in their other, largely unrelated product, the Mac. This should come as no big surprise — simple psychology informs us that, well, people love winners. This is at the heart of what I believe is Apple’s true competitive advantage. Apple has been and should continue for the foreseeable future to be a winner.
From a quantitative perspective, the added revenue if the company meets sales prediction for the next twelve months should be around $5-7 billion (or about 20% of TTM revenue). That’s assuming sales of 10 million iPhones. My quick and dirty estimate might put incremental net income from iPhone sales at around $0.60/share. So it’s not an insubstantial short-term factor. But in the long-term things become more interesting. Who’s to say the iPhone won’t flop in a couple of years and that the shares that have been so heavily bid up will topple?
Certainly not me, which is just part of the reason I won’t take a position in any shares (I generally don’t short, and almost universally avoid stocks with such rich multiples as AAPL unless exponential growth is a no-brainer). But I can at least speculate on what I think the future of the iPhone or iPhone-like products will be. For what it’s worth (and that’s probably not much coming from me), I’ll attempt to prophesy the future. I’ll keep it brief, but bold:
1) 1-4 years. The iPhone sees significant demand, but competing products (likely from shops like Research in Motion) begin to cut into market share and drive down prices as quality and functionality also increases.
2) 5-10 years. Hand-held, all-in-one personal devices will ultimately become nearly as good, affordable and universal as personal computers. They’ll steal share from the desktop and laptop markets, but those devices will never entirely disappear, though they may change forms. We enter new tech era.
3) 11-15 years. Owners of said devices begin to realize that it is too risky to carry their whole life in tablet form, so devices come equipped with a body-encapsulating bubble and a life-insurance policy.
4) 16-17 years. Given the slight inconvenience of personal bubbles, the iPhone as physical device is replaced by implanted brain chip with telepathic email functionality, trance-inducing sedatives that allow you to watch YouTube videos in your mind.
5) 18-20 years. YouTube, Apple, and Google merge to form You-Google-Appletube, with combined market cap (adjusted for inflation) of $17 trillion and a PE of 245.
6) 21-24 years. All human interaction is replaced by electronic communication.
7) 25-26 years. World peace.
Note: I do not have a position in any company mentioned in this article. I also don’t think we’ll ever see world peace.
I just scooped up some Citigroup shares. I’ll be honest: I didn’t dig ultra deep into any filings yet, as I figured the thesis may no longer be applicable by the time I finished reading the massive tome that is a Citigroup annual report. My reasoning was simple — the sprawling firm has some premier properties, trades at what I consider unjustifiably low valuations, sports a strong dividend yield to provide downside risk protection, and has garnered the sponsorship of a few well-respected value guys, namely someone I consider a Graham and Doddsville superinvestor, Eddie Lampert.
Given that I don’t have many extraordinarily knockout ideas right and had some cash that could have been put to work, I felt this was a safe place to park some dough with the added benefit that a catalyst (breakup, anyone?) could send the shares significantly higher. My back of the envelope calculations put a break-up value at somewhere between current prices and a whole lot more. This highly scientific reasoning is coupled with the fact that Citigroup sports solid returns on equity, respectable — albeit modest — growth for a behemoth its size.
Bottom line: potential for outsized upside, downside protection with dividend yield around 80% of Treasury yields, and lots of smart money showing interest in catalyzing an opportunity.
