Saturday, February 28, 2009

Lambasting Eddie Lampert

Jeff Macke of Fast Money on CNBC recently wrote an article lambasting Sear's Eddie Lampert. It is the quintessential "noise" write up.

Merely in the title, Macke messes up, not knowing what Lampert does-act as the Chairman... The CEO is Bruce Johnson (for now).

In the article, there were a bunch of gems like this:
“A dirty store,” Ken Macke told me, “is a f**k-you to the customer”. I’ve never been in a Sears or Kmart that didn’t all but scream that vulgarity at me the instant I walked in.
As a customer I may hate that too. But I could safely assume that a dingy store means (all things equal):

1)I can get a better price on what I buy
2)The owners of the company have a high return on invested capital
3)The company is slowly dying (in which case, #1 may still be relevant)

Speaking of dingy places-you ever buy jewelry at a pawn shop? If so, you certainly got a much better deal than you ever could of at a retail store. The pawn shop assuredly made a killing on the sale too. Everyone wins; unless you believe in bad karma. Buying stock in SHLD at a discount (and to a greater extent, value investing) is similar to buying jewelry at a pawn shop-it may not be popular to do or have a pretty location-but at the end of the day your getting a great asset at a cheap price.

Another bothersome point made was in regard to how Lampert "effectively cashed out to the tune of $5 billion dollars in January of 2007 with SHLD in the high 170s". I have no idea what this is related to-there was a big option exercise by Third Avenue-SHLD certainly didn't issue shares, and ESL hasn't had any significant sales of stock... Regardless, Lampert represents more SHLD stock than anybody on the planet, as such, it is safe to assume that it is do or die for he, his hedge fund, and his company.

Macke states "I weep for the shareholders because, by definition, they were too poorly informed to know better than to trust Mr. Lampert to look out for them." Wow! Apparently Bruce Berkowitz is a jackass for riding the stock down! This, being despite buying in at a level at which the company could liquidate and the average purchase still be in good shape. I will again point out that Lampert represents over 50% of the stock, and is looking out for himself-and by extension, all shareholders.

My favorite jab at Lampert is when he is called 'amoral'. Normally, this is a form of respect that I would expect to hear thrown at Carl Icahn (in both cases, despite doing more for shareholders than most managements).

I guess that the bottom line is this: Either SHLD is the most elaborately misconstrued and covered up collapse of a retail giant ever (complete with recent share repurchases and all), or the market is simply to manic in it's valuation of the company. While I own no shares of SHLD, they certainly seem compelling at the moment (especially with the large short interest). While I disagree with many of the points made, I hope that Macke's article sends the stock to $5 bucks a share-I would sell everything I own and live in a cardboard box to buy SHLD stock.

If the lack of numbers in this post bothers you, I would suggest that you go to Noise Free Investing, Can Turtles Fly?, or Compounding Machines for some excellent SHLD analysis... take your pick, all of us value geeks think roughly the same way-some just use more numbers than others!

Tuesday, February 24, 2009

Western Sizzlin' Annual Meeting Notes 2008

With a bit of egging on from Kyle at Compounding Machines, here are my notes from the Western Sizzlin' Annual Meeting, which was held on July 9th, 2008 in New York City... It only took me 7 months to get them up!

Here is the preceding Chairman's Letter. Also, you should check out Jeff Annello's notes-they are a much more complete than mine, hopefully, I added to his thoughts.

Overall, there were around 45 people in attendance, all of whom were pretty young. I was astonished that I, being 23, was not the youngest person there-which has historically been the case at shareholder meetings. I met, and talked to some new people-all of whom had interesting stories and ideas to share. No surprise, but there were a ton of fund managers there... I should have asked them how they went about starting their funds, but that's a whole different story.

Here are the issues that were addressed, in roughly the order that questions were asked; with a little bit of my own commentary... Keep in mind it has been 7 months, so some of it is a little fuzzy.

Reverse stock split/NASDAQ listing
  • Hopeful of reducing transaction costs
  • Wanting to reduce the spreads related to share price...
Capital allocation possibilities
  • Dividends, common stocks, whole companies, etc.
Bob Moore was introduced as the CEO of Western Sizzlin' Franchise Corporation
  • Previously involved with Whataburger, Sonic, GE, and Merrill Lynch.
  • Had yet to sign a contract with the company (a testament to the culture of WEST)
  • Overly enthusiastic about contacting franchisees, finding out their intentions on growth, and restoring a good relationship with them (similar to what Tim Taft did at Pizza Inn.)
  • Constantly asking himself "what is best for the brand?"
  • Spoke of unit economics and how the new prototypes are incredibly scalable.
  • Noted that year over year sale for new restaurants can be deceptive, since when a store initially opens, it does quite well, with traffic eventually dropping off.
Steak n' Shake
  • Biglari noted the sizable ownership that WEST has.
  • Stated that he had been spending 17 hours a day reviewing the workings of the company and re-allocating capital.
  • Joked with Phil about how everything that could have gone wrong, had gone wrong.
  • Stated that the boardroom had a 'collegial' setting, and that the other members were coming over to their line of thinking. Also noted that age restrictions would change the makeup of the board.
  • Franchisees are interested in opening more locations, and historically, make sales go up when a unit is re franchised.
  • Made mention of tax savings
Land Acquisition
  • Kenneth Cooper addressed the lands developed good value when it was altered- so that the flood plain wouldn't be an issue.
  • The property has 1,400 linear ft facing I-10, and is on the Rim in San Antonio, where there are over 800 acres of mixed use land.
  • Noted how hard it had been to acquire, since there were 9 different owners of the 23.5 acre plot.
  • Said "you make money when you buy real estate" as I am a small time landlord, I will attest to this being true.
  • "Comfortable" with the position WEST has.
  • A hedge fund manager stated that International Monetary Systems had been sought by Itex to buy them, rather than go with a WEST purchase. Obviously, they were/are on the verge of insolvency and in no position to buy Itex!
  • Learned that un-solicited offers generally are not received well, and that solicited ones are very friendly, but generally cost the acquirer more money.
Call Options
  • Bought with the intention to call and keep the stock-due to the rights offering that WEST did to raise cash.
  • Will most likely use strategy in the future, despite bad results with SNS.
  • Has been looking for insurance companies to buy, though, non have been attractive.
  • Mentioned a small Texas company run by 1 guy, who insures cars that cross the border for a few days at a time.
  • Noted that insurance is not necessary, Buffett started in textiles... it's all about buying undervalued assets.
  • Eventually hopes to buy a well managed property and casualty company on the cheap.
Rights Offerings
  • Rights offerings are the cheapest way to get capital, and you don't deal with the fixed costs of an investment bank.
  • Noted that while ownership may be diluted, there is more capital to allocate.
Other Points
  • Noted that the business is highly decentralized, essentially running it's self.
  • The depreciation WEST has is accounting, not economic.
Books mentioned

  • Equity Analysis by John Stowe
  • Wisdom of Crowds by James Surowiecki
  • Unwarranted Intrusions by Martin Fridson
  • Fooling Some of the People, All of the Time by David Einhorn and Joel Greenblatt

Overall, it was a great meeting and totally worth the trip. I plan on going back this year-after all, it is certainly a good excuse to meander around Manhattan for a few days- eating fresh sushi just about every meal!

Disclosure: I am long SNS and ITEX, I have no holdings in WEST.

Sunday, February 22, 2009

Rick Santelli is my hero.
(I think that this one is a bit better of a site) :-)

I got the above site from this article on Seeking Alpha. I won't add any of my usual banter to the conversation, since about everything that could of been said, has.

Well, actually, that's a lie... I will say this: Robert Gibbs is a jackass, whereas Rick Santelli is an awesome guy.

Really-which of these makes more sense to you? I'll give you a hint... One of the videos has a higher rating on youtube. Being the good capitalists we are, we must let the market decide!

Rick: The Patriot

Big Brother: Bashing the media

The Patriot's response

I really hope that the Chicago Tea Party is a huge success- I plan on being there. I look forward to the exchanges that happen in the coming days in this clash of titans (or Titanics). :-(

Wednesday, February 18, 2009

Short Squeeze and SNS

It has come to my attention that there may be a short squeeze in the works for Steak n' Shake. Volume has been substantially lower, which, when coupled with a higher price, means that money is coming into the stock and staying there (I'll reference John Burr Williams in The Theory of Investment Value for that 'all things equal' technical tidbit!).

Here is the case that I will lay out; keep in mind that I am 100% a value guy, who would never use technical analysis of any sort to justify the purchase of an equity... this is more of a 'noise' post that has little bearing on anything.

The Case:

Volume for SNS is quite low (compared to a few months ago) and there are still a ton of shares short (5.82 million as of 01.12 and 6.09 million as of 01.27). From the fund holdings that I can see on Yahoo! Finance, I presume that about 1/2 of all outstanding shares are institutional and are not going to be readily sold (MSD Capital, Sardar, Gamco, HBK, ect.). I also presume that there are a bunch of smaller hedge funds and people out there like me (and probably you, if you are reading this) that have no intent on selling their shares until significant price appreciation. I feel comfortable saying that around 75% of outstanding shares won't be sold for a while.

75% leaves roughly 7 million shares 'floating' around. This seems like a ridiculously low number considering there are just over 6 million shares that eventually need to be covered, as they are short positions! Heck, even if there are 10 million 'floated' shares out there, it would still be hard for all the shorts to cover their position at one time... the short ratio is an astounding 38.1! When was the last time that a company with the prospects that SNS has, had a short ratio that high? In addition, SNS had been on the short threshold list a few months ago, helping to bolster the short argument.

For the record, it would be really awesome if there were a bunch of naked shorts out there. I am not suggesting that there will be a Volkswagen style squeeze, but it may be an interesting few months-especially with management working their magic in regard turning the company around!

Maybe, by writing this, I am looking for a reason to justify the share price being depressed. Maybe I am blind to the company being ready to go out of business. Maybe Chewbacca was really the main character in Star Wars. Maybe Warren Buffett is a chump. *shrug* I don't know...

Regardless, the situation relating to the market value of SNS doesn't make a lick of sense to me.

Disclosure: I am long SNS.

I just noticed that MSD Capital has recently sold all of it's SNS holdings- this effectively adds another 2 million shares to the company's float.

Saturday, February 7, 2009

The Generator Man

As many of you may know, the recent winter storm has wreaked havoc on my home state. Around 1/4 of Kentucky was without power and there are presently thousands not on the grid. To help explain the extent of the problem, we are presently preparing for a crap-ton of Federal Aid to come our way.

To all the non-Kentuckian readers out there: Thanks for your money; I am sure that we can spend it infinitely better than you ever could have! ;-)

Getting back to the original reason for my post- David at KYProgress has alerted me to a man... no scratch that- a patriot, doing his capitalist duty to God and Country: delivering life saving power to the powerless- for a modest fee.

Read the AP article on him here.

Wednesday, February 4, 2009

Why CEO Pay Is Over Rated

Something that has been bothering me as of late, is the ruckus over CEO pay for recipients of bailout money. President Obama made a politically savvy move by capping CEO compensation at $500K/year. While there is no doubt that this is a very popular move, it seems to be missing the real issue at hand.

I say this, because in the grand scheme of things, a few billion dollars in executive perks/pay is a such a microscopic amount when compared to the $7.36 TRILLION that has been printed and borrowed. I will take this moment to tout my article on what we should have done with the bailout money.

I don't think that people have considered the moral hazard that this issue creates, in addition to the fact that it gives CEO's less incentive to, well- be CEOs. Why would we want to dumb down the people at the top of the corporate ladder? Not to say that I actually think CEO's are overly intelligent in the first place. In addition, where will it end? If a company 'wins' a contract with the government, what is to keep the government from setting a pay cap for it's employees? What if a landlord accepts Section 8? After all, there have been lawsuits ruling that they must. What if, by crazy extension of the law, any company accepting money from a person on Social Security must cap CEO pay? After all, it isn't like you can legally discriminate over it, and the money ultimately does go through the hands of the government...

Surely this debate should also be centered on if the government should be in the position to cap CEO pay in the first place... We need to address if we are totally comfortable with the government picking winners and losers in the economy from companies that shouldn't exist anymore; spending tons of money that isn't there; and attempting to fine tune our monetary system.

Seriously people, if we had a time machine, and could go back 50, 25, 10, 5, or even 1 year- we would be shocked at what has happened, not only in our government, but also in the greater economy.