Tuesday, September 28, 2010

College and Debt.

Here is a post that I shelved a while back:

Go over to Pink-Sheets to see a great blog post. Unfortunately, the posts are generally few and far between, enough so to make me look like a regular blogger. ;P Fortunatly, his write ups there are always incredibly insightful (add it to your reader!). This particular post, stands out to me, as I graduated from college in the past few years.


In the article, the issue of a new bubble forming is addressed. It is noted that inflation is going to come, rearing it's ugly head someplace, and that it is just a matter of time before we figure it out. The part that is most compelling, is where he talks of this guy named Glenn Reynolds, who wrote a piece on how higher education in the country is in a bubble. And how that is where a lot of inflation has occurred.


Here are some snippets:
A New York Times profile last week described Courtney Munna, a 26-year-old graduate of New York University with nearly $100,000 in student loan debt -- debt that her degree in Religious and Women's Studies did not equip her to repay. Payments on the debt are about $700 per month, equivalent to a respectable house payment, and a major bite on her monthly income of $2,300 as a photographer's assistant earning an hourly wage.
And, unlike a bad mortgage on an underwater house, Munna can't simply walk away from her student loans, which cannot be expunged in a bankruptcy. She's stuck in a financial trap.
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First, it may actually make them more economically productive by teaching them skills valued in the workplace: Computer programming, nursing or engineering, say. (Religious and women's studies, not so much.)
Second, it may provide a credential that employers want, not because it represents actual skills, but because it's a weeding tool that doesn't produce civil-rights suits as, say, IQ tests might. A four-year college degree, even if its holder acquired no actual skills, at least indicates some ability to show up on time and perform as instructed.
And, third, a college degree -- at least an elite one -- may hook its holder up with a useful social network that can provide jobs and opportunities in the future. (This is more true if it's a degree from Yale than if it's one from Eastern Kentucky, but it's true everywhere to some degree).
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Yet today's college education system seems to be in the business of selling parts two and three to a much greater degree than part one, along with selling the even-harder-to-quantify "college experience," which as often as not boils down to four (or more) years of partying.
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Take it from a guy who has a worthless degree from a university in eastern Kentucky, who also definitely lived the college experience... This is article is totally right. I was fortunate enough to come out of school (after just over 5 years... eeek!) with a useless BA in General Studies. Being dissimilar to the subjects in the article, I was able to do so with no student loan debt. Simply put, I was lucky. Despite having 2 teachers for parents and being what most would consider solidly middle class, my family made it possible for me to go to school without loans, grants, financial aid, or scholarships. Not only that, but, they (in addition to my brother and sister in law) somehow succeeded in un-forcefully keeping me in school emotionally- I can't remember ever wanting to be in a cinder block institution of learning, let alone being excited to attend college... and believe me, my grades reflected it. The types of support that I received are the reasons that I am able to invest in stocks, have some rent houses, and able to occasionally write things on this blog that are on the verge of being 'not dumb'.


Throughout my college and post college years, I have seen many people take out loans for degrees that can not possibly pay enough to live the lifestyle that our country thinks a college grad deserves, save for any kind of retirement, and pay student loan debts; just as the article points out. Hell, if I took out loans for my degree, what would I do with it? Manage a store of general studies? I have yet to see a prospective employer look for a General Studies major; which is a similar story to a lot of other degrees out there. Often times, people will get degrees in subjects that they don't enjoy, or take jobs that they will hate, simply to pay for their debts. I know that if I had to lever up for school, I probably would have been burnt out quickly and been unhappy for the rest of my life.


From where I sit, the business of taking on debt for an uneconomical degree appears to be common place; people get degrees in things that they like and stimulate them intellectually, but also don't pay well. Hence, they will get to live in a cardboard box. There is even a sarcastically made facebook group devoted to this very idea. Additionally, this cycle seems to eventually lead to credit card debt. The stuff piles up from everything ranging from simple splurges to more necessary purchases; say, a busted car radiator, repair of an HVAC system, or medical bills.


I know that there are people out there with college bound kids that read this blog. If you are one of them and have kids that are thinking about taking out loans for school, I hope that you consider paying the tuition yourself, or even lending your kids the money out of pocket. Your kids may not give school their best effort and you may feel like you are wasting your money, but I can say with a great amount of certainty, that they will appreciate what you are doing for them (even if it is just state school). This will be especially true after they see the sort of cash flows that they generate, relative to those their peers- how is that for an investment related metaphor?

Maybe you would rather think of it as a call option on your kids' gratitude and appreciation. Maybe one day, they will have a blog and give you some of the credit that you deserve for putting up with their shit for so long. Maybe, they will end up being able to afford to have a job that doesn't make them want to kill people. Maybe they will end up living in the street. Who knows? Regardless, you won't hurt them by paying for their schooling. Still not sold? Here's a kicker: you drastically reduce the chance of them not moving back into your house after graduation...


Notice, I never said anything about people not working while in school... unless they are going to do something important, like curing cancer or something, then, they probably should devote their time to studying and research rather than working. :)


Disclosure: This is not advice of any kind. Always do your own research when thinking about doing something that I so much as thing about!

Sometimes, It's Best To Take A Pass #2: Northeast Auto Holdings

One of my favorite things to do is to run a low p/b, low market cap, stock screen on companies that are still earning money. Today, I found an interesting nano-nano-cap: Northeastern Auto Holdings. At the time I am writing this, the market cap is just a hair over $55K. When I saw that the P/E was so low that one could feasibly pull out the earnings of the company after ~2.5 months and get their investment back, I must say, my interest was perked!

Northeast Automotive Holdings, Inc. engages in the wholesale purchase and sale of used vehicles in the United States. It involves in purchasing late model used vehicles from dealers and institutional sellers in Northeastern states, as well as in transporting the vehicles for resale in the Pacific Northwest. The company buys used automobiles at auctions, and repairs, cleans, transports, and resells them in wholesale. It sells vehicles through third-party auctions, which act as a marketplace for used vehicles. The company is based in Merrick, New York.

When looking at the financial statements, the company is generating decent returns, and, despite having a tough time in 2008, business prospects seem to be on the up and up. The company seems to have a decent manager, who not only founded the business at the ripe young age of 25, but only takes a salary of $46K... on the face of things, it seems that he is looking to get rich with shareholders, rather than off of them. WOW!

Now, we delve into the 10K... and find this summary of a big monstrosity:

In April of 2008, to aid the company in paying off a small amount of debt and retire some shares of common, the board decided to issue 10 million shares of preferred stock. Now, when reading a little bit, these shares are able to be converted, 1 for 1, into shares of common stock. Additionally, they automatically convert after 3 years of issuance! So basically, what will happen sometime in the next 7 months, is that the share count of the company will increase to over 10.5 MILLION from just over 550K... thats right, roughly a 20 fold increase in share count.

This dilution takes a company that earned $413K on 555K shares, or, 74 cents a share over the past 4 quarters, to one that is earning 4 cents a share and is still superbly illiquid. Literally, over the past 3 months, the company has averaged 8 shares a day trading hands.

But how could something like this happen? The preferred share's conversion rights are not effected by share splits... Isn't it odd that the company, less than a month after the preferred shares were issued, approved a 1 for 30 reverse stock split? Regardless of the intent of the decision, this was certainly a stride that aided in delivering the bulk of the company's shares to the Solko family.

The great thing about this for Solko, is that after this transaction, will go from owning just under 57% of the company's shares(scroll to item 12), to owning ~96% of shares; basically, for just retiring 100K in debt that the company owed to him and retiring a few of his own shares! At 4 cents a share, the conversion is worth $400K in stock. Even after the retirement of the shares he had to give in order to get the preferred shares, that ain't a bad payday.Basically, he is taking complete control of the company, in a way that only bankruptcy could allow. However, even if the company was insolvent, there isn't anyway that a self respecting bankruptcy judge would ever sign off on this.

Still not enough for you? The company had to restate it's financial statements for the year ending in on December 31, 2008, due to a dividend on the preferred shares! Now, normally, one might be able to overlook this... however, we must remember that the accountants at Kempisty & Company audited these statements, and somehow, missed it. It shouldn't be a surprise that the audit firm came under investigation either. Furthermore, the person that discovered the error, was William Solko himself- the very person that the dividend was paid to! This mistake was for just over $400K; is it plausible that someone can forget to account for such a charge, when it went directly from the company into his pocket?

Additionally, in the previously mentioned 10K, we find that the Board has no committees, has 3 members, and one of them is the wife of the founder of the company. In the past, she took home a very nice salary; well over 2x what her husband made. Given the both of their job descriptions, eyebrows could be raised. Without any independence of the board, a history of habitually making late filings with the SEC, and a bunch of weird share issuance, how can one properly value the company?

Does that P/E of .18 or even 2.5 (post conversion) look so good now? For me, the answer is no.

Disclosure: NONE. This is not investment advice. Always research everything that I so much as think about.

Sunday, September 26, 2010

Oh, how far, The Finish Line has moved.

Shares of The Finish Line (FINL) were down 9% on Friday- reportedly, over not having enough inventory. When looking at the year over year results, they seemed pretty impressive, as the company earned over $17 million more for the quarter, despite having revenues only increase by $2.3 million.

Personally, I wouldn't be too upset with those sorts of results, as, the company is trading for well under 15x earnings...

Despite what seems to be a pretty effective turnaround, I can't help but remember back a few years, when this company was in net-net territory. The Finish Line was in the process of not buying Genesco for a hefty sum. Due to the merger agreement, which would lever FINL to the hilt, and probably destroy the combined entity. The markets were valuing FINL at what seemed to be an insanely low price, relative to book value. The greater part of the blogging value investing community looked at the company's balance sheet, and almost universally opined that this was a deep value stock.

But hold on a minute... There was a catch. Yes, FINL was earning money, but, with credit markets beginning a mortgage rust induced sieze up and the economy going south, how could this combined behemoth of shoe retailing survive? GCO was showing disappointing earnings, which, were used to try to get out of the merger. It may well have been one of the quicker merger then bankruptcies in history. Of course, this merger had to be axed, but at what price? Was the market rational? What were the chances of the companies settling this dispute in or out of court?

Naturally, lawyers were bound a determined to make a bunch of money off of this dispute, that was tied up in court or a not insignificant amount of time. A few bankers probably got canned, just to move on to making dumb loans elsewhere. Ultimately, shareholders of both companies were in limbo, not really knowing what was going on with the merger. How could intrinsic value of either corporation be calculated not knowing if there was a merger happening, and if not, what the terms would be.

Long story short: In March of 2008, UBS and Finish Line settled with Genesco, for $175 million in cash and a boatload of stock from FINL. FINL share went up and then down a year later. GCO shareholders were better off then they could have been, but, also, not as well off as if they had just been bought out for cash.

This story of acquisition, a bunch of legal hassle, stock issuance, then both companies doing well after a few years seems to symbolize everything that has happened in the economy in the past handful of years.

Disclosure: This is not investment advice. I have no positions in any of the companies mentioned.

Friday, September 24, 2010

Friday, September 17, 2010

Signature Eyewear Update.

Having addressed Signature Eyewear's complete lack of transparancy in regards to the Bebe contract in a previous post, the company finally came clean in their most recent 10Q filing:

"Our licenses for bebe and Hummer eyewear expired June 30, 2010. Under the license agreements, we may sell existing inventory of those lines in the United States through December 31, 2010. In addition, we may continue to sell our existing inventory of bebe eyewear internationally through December 31, 2011. The loss of these licenses will have a material adverse effect on our revenues. In the fiscal year ended October 31, 2009, and the nine months ended July 31, 2010, these lines represented approximately 45% of our net sales.

We are actively taking a number of actions to replace the bebe and Hummer revenues. These include: (i) increasing our marketing and sales efforts of our other eyewear lines; (ii) increasing our efforts to obtain other third party licenses; (iii) increasing our efforts to develop our proprietary Signature lines; and (iv) considering the viability of marketing other fashion accessories. We are also taking actions to reduce operating expenses to offset as much of the loss of revenue as possible. No assurance can be given that we will be successful in these efforts to replace the lost revenues. If we cannot replace a material portion of these revenues over the next twelve months, we will have to implement drastic cost cutting measures in an effort to maintain profitability and positive cash flow."

Looking back at my brief experience with the company, I can't blame the CEO for not returning my calls or emails. Would you want to talk to a guy that was curious about something that you probably knew you were going to fail at? I am guessing 'no'. Furthermore, when you own a significant chunk of the company, it is probably all the more painful to have to deal with such an unfortunate circumstance (which happened with a Coach contract years back, as well). As a side note, the company has shed over 1/2 of it's market cap in recent days.

Somewhat sadly, this shedding of market capitalization probably is not enough given the company's bloated compensation structure, especially when looking at what future revenues will be and how bad of a job executives did in retaining very valuable contracts. All I know is, is that I wouldn't want to be a debt holder of SEYE and would rather gamble my money away at a mini-casino owned by Nevada Gold than own SEYE common... I would not only have a good time, but also probably come out with more money in the end! :)

Generally, I don't like these sorts of middle man businesses which rely on a few customers to generate all of their revenues. In the case of Signature, you can kiss almost 1/2 of their revenues bebe-bye (get it!? haha!). Granted, there are always exceptions to the rule; I once bought a regional airline that wasn't burning much cash and was trading at something crazy- like, 1/10th of tangible book.

Regardless, I am looking forward to see if the company will be able to stay solvent. I am guessing that it will, but will have a much lower market price than at present. Who knows? Maybe if the stock gets hit much more, management will take it private, and then suddenly, the company will announce some new contracts? It isn't like that sort of thing never happens with Pink Sheet and OTC companies.

"In looking for people to hire, you look for three qualities: integrity, intelligence and energy. And if they don't have the first, the other two will kill you." W.E.B.

Disclosure: I (very enthusiastically) own shares of UWN, but own no other securities mentioned. This is not investment advice. Always do your own research when contemplating doing anything that I so much as muse about on this blog, or even in real life...

Monday, September 13, 2010

http://mobile.nytimes.com/2010/09/11/your-money/11shortcuts.xml

[EDIT: I forgot to thank josh for this link.]

Sorry about any weird formatting, grammar, or spelling issues, as prevously noted, I am typing on my phone.

Hmmm... if we are not to change our oil every 3000 miles, who would benifit and who would suffer?

I can't imagine that it would be good for Ashland Oil, which derives a good bit of it's revenue from Valvoline. Texaco, Quacker State, and others would probably have similar problems. What about Precision Auto and Midas?

Are there any public companies out there that recycle auto wastes? What about the companies that make other fluids? It would seem reasonable to assume that if a person has their oil changed less, that they would have other items checked up on a lot less as well, which could lead to other problems... for example, if a person doesn't know their power steering fluid is low, since they did not get an oil change after 3000 miles, that they may need to get a power steering fluid pump a lot sooner (since instead if just topping it off, as normal, they would run it low.) Maybe companies like Borg Warner or other parts manufactures will sell more OEM parts. Maybe Toyota will sell more cars since bigger problems will be untracable, and people would rather buy a new car than a transmission.

What about Auto Zone? I guess they will sell fewer filters and less oil, which are provably low margin; but more high end parts to "fix it yourselfers" and small garages? Walmart sells auto stuff, and they will prolly sell less. Plus, it is a reason less that people have to so much as even go in the store, which will eliminate the chance to sell them other items a good 3 or 4 times a year!

I guess that this is a really good test of the moats that have been constructed by auto service companies in the past few years.

Invert, invert, invert...

Any other ideas?

Disclosure: none

update...

Hey everyone... the lack of posting has been due to my cpu dying a few weeks ago. Basically, I have been running everything off of my phone. Hence, the lack of posting and capitalization in this post. It is amazing how little my life has been effected, thanks to my new (and second) android based device. Really, my it is the sole reason that I have yet to fix my computer (a decent wifi connection makes Google reader work wonderfully!). Who would have thought that would be the case even just a few years ago? Certainly, it wouldn't of been me!

Regardless, International Baler and Nevada Gold will be reporting earnings in the coming days. I am expecting some damned good results out of the both. I will try to do some commentary as soon as I have a full size keyboard at my disposal. ;)

Disclosure: long international baler and Nevada gold.