Monday, April 30, 2012

Help A Couple Of Bloggers Finds Some Research?

As many of you hopefully already know, My Investing Notebook is a great blog... Here is the most quote that makes up it's most recent post:

Warren Buffett:
While I was on the board at Gillette, the company would go to Wal-Mart and offer discount razor blades at quarter-end to boost results. It is a terrible treadmill to get on.

This was a great snippet of info to learn. As I was sure there would be more good things to read, I decided that it would be a good idea to go to the source that the quote came from so that I could read more. Towards the end, something stuck out to me. Buffett said the following (I actually assume that this is a summation and not a quote):

Q: Student loans offer people the chance of higher education, but in the U.S. there is
a trillion dollars in student debt. Some 36% of students graduate with “little sign of
higher education”. Is there a bubble coming as far as the  higher education trend
goes? What’s your opinion on this issue and when will this bubble burst?

(Buffett responded with a lot of wisdom, but, this stuck out to me...)

John Mellor did research on group of students for a project. One group was
sent to the beach while the other studied at university. Their results are not that
different. It’s always about consistent improvement of your abilities.

As I have a history of being critical of cinderblock institutions of learning, I naturally tried to find this research. After a significant time from me and the author of MIN searching the doldrums of the internet, we came up with nothing.

Any help finding this info would be greatly appreciated and will be the subject of a future post with full credit going to you, if you want it. :)

Tuesday, April 24, 2012

Space Mines, Books, and Aluminum.

This story about space mining exemplifies the sort of risk that is hard to see (h/t rkbabang). I surmise that the venture will turn out wildly unprofitable, but, from a geeky standpoint, it seems pretty interesting to think about. If the project does work, I know that I wouldn't want to be sitting on a hoard of platinum like metals...

Examining some other industries: in 1995, who would have thought that a place that sold books and had a coffee shop in it could ever do bad? What about a 1980's view of discount clothing stores preforming terribly? I suppose that a similar question is in 1885, who would have thought that aluminum would ever be worth nothing when compared to gold?

Well, if you were the person that was buying the cap stone of the Washington Monument, you were in for a real lesson in black swans and technological advancement. When construction started in 1848, there was to be a 100 oz capstone was to be used as a lightening rod. The real trick here, is that aluminum was super hard to make in that day and age. As such, it was pretty expensive... in 1888 (literally, just after the monument was finished), there was a process that was invented by 2 independent scientists that made the metal pretty easy to produce. The price of aluminum immediately plummeted.

In 1886, aluminum could fetch $1 dollar an ounce; the whole cap on the Washington Monument cost $225 dollars! Today, not adjusted for inflation, aluminum doesn't even fetch a $1 dollar a pound... I don't know about you, but to me, that doesn't sound like a good long term investment!

It has been quite a journey for aluminum, Syms, and Borders. The former, went from being one of the most cherished metals, to being so worthless that there is enough of the stuff lying around at a fraternity party to make a couple of caps for the Washington Monument. The later went from having warehouses full of dead trees, to being bankrupt and being able to fit all the information printed on said dead trees onto a backpacks worth of SD cards. The middle one, is finishing up liquidating itself.

The bottom line? Constantly be on the lookout for things that can destroy your capital... Who knows? Maybe space mines should scare a lot of metal investors.

Disclosure/Disclaimer: I and various members of my family are long shares of Syms. I reserve the right to change any of my positions at any time. This is not advice of any kind. Always do a ton of your own research in regard to anything that I say, do, write, or so much as even think about.

Tuesday, April 10, 2012

Where I Went Wrong On My Analysis Of UWN's AG Trucano Deal.

Ok, so, I am more than willing to admit when I get something wrong. My analysis of the AG Trucano deal did have some bad analysis in it. I am sorry for that and am dedicating this post to it...

Here is what I said that wasn't entirely correct:
Looking at the most recent annual report for gaming operation in South Dakota, we see that there was approximately $95.5 million in revenue generated by slot machines... If 24% of this went to AG Trucano (which, may not hold true due to revenue distribution) and there are no major changes in the South Dakota Gaming market, we can expect for Nevada Gold's revenues to go up by just a hair under $23 million... This is pretty significant for a company that has generated around $55 million dollars in revenue in the trailing 12 months.
Considering that the company paid ~4x trailing EBITDA, or $5.2 million (per the presentation that I saw at the annual meeting), that implies additional EBITDA of $1.05 million. If they get up to just 15% EBIDTA margins on, say, ~$25 million in revenue, that would imply additional EBIDTA of just under $4 million at some point in the future… Even if revenues for Trucano fall to $20 million, they will still be flying.
OK, so, where I messed up was in using the state's revenue numbers, then assuming that AG Trucano was literally getting (in revenue) the percent of it that their machines occupied in the Deadwood market. As such, my revenue expectations are WAAAAY off. In the conference call before last for UWN, it came out that the company has revenue sharing agreements in place that will give the owner of the space, say, 70% of the revenue of the slot machines. As such is the case, while the company is responsible for the production of more than $20 million of revenues in the Deadwood market, AG Trucano (soon to be UWN) probably doesn't get that for it's top line. If they get 30% of the money that their market share would indicate, then their EBITDA margins go from a paltry 5%, to almost 21%. Those margins are pretty juicy and would be hard to improve by a huge amount, I would imagine. 

I still think that there will be some cost savings coming from the company's new perspective on the operation. There should be expansion in the Deadwood market, new marketing, and synergies that will be recognized. Furthermore, on the earlier mentioned conference call for UWN, Bob Sturges noted that the present CEO of Trucano would be staying with the operation for a year for a transitional period. I have no idea what his present salary is, but, there may be further cost savings once he leaves. Additionally, the company is going to try to grow the top line of the operation, which seems to be quite scalable. So, that should improve earnings of the operation as well.

Another point, is that if ELSTs are legalized in Washington, I would imagine that Mike Trucano would be a valuable asset to tap for setting machines up in the Washington card rooms (even if he would just be a part time consultant). Additionally, it seems that the government in South Dakota is trying to improve the revenue that it's gaming generates- again, a plus. I found it interesting that Wells Fargo expanded their line of credit with Nevada Gold so that they could pay the taxes on the machines in the area. I would imagine that this means that there will be a nice overall infusion of cash into the operation, given that a bit of the money from the S-1 was used to keep in the coffers of Trucano. Overall, these 2 actions essentially free up more cash for UWN to use in an acquisition... If that is the case, then, I would likely be happy with that move (even despite the dilution and the high interest rate the company is paying to borrow money) just from considering how well they tend to buy gaming properties.

Getting back to the original point of this post, in light of my faulty analysis, this provides a good reason to always heed the advice of my disclaimer. After all, I am human, and do screw up from time to time.

File this one under "me being wrong." :)

Disclosure/Disclaimer: I and various members of my family are long shares of Nevada Gold (UWN). I reserve the right to change any of my positions at any time. This is not advice of any kind. Always do a ton of your own research in regard to anything that I say, do, write, or so much as even think about.

Thursday, April 5, 2012

Adding To SVU, Because I Have Nothing To Add...

As of late, I have been increasing my stake in SuperValu. I have not added any in regard to my option position (which I went into knowing that it may turn out wildly unprofitable), but have gone long a decent bit of the equity. It isn't that I really have anything to add to the discussion that many others have already covered, but, there does seem to be a ton of pessimism in regard to the company- which is something that I generally try to flock to.

To give some history, one of the first value guys to talk about the company was Saj Karsan, who really liked the company and even compared investing in it to partaking in an LBO. There was also Frank Voisin who liked the stock. In another corner, you have John Hempton, who doesn't really like the company, but, isn't down for shorting it either. I personally take a hybrid of these views. It's not because I am so sure that things will turn out well for the company, but, mainly because I have a small bit of faith in the management team and think that relative to the risk that I am taking on by being long the equity, I stand a pretty good chance to have a multi bagger in my portfolio.

Honestly, a lot of my thesis in regard to this stock is overly simplistic and unresearched. As was pointed out on here, we have a situation where the bonds of the company trade for more than par; a rarity for companies that are saddled with so much debt. So, the bond market seems to be agreeing with what I already thought, based on their cash flow: there is little chance of the company defaulting on their debt (this is especially true when looking at the convenants of their debt, relative to the healthy ratios that they sport). Given the management team that has been hired, I am suprised that people are freaking out over margin and revenue shrinkage. The CEO came to the company from Wal-Mart... given that company's culture, who in their right mind would expect for him to do anything but cut prices to try to gain market share?  Furthermore, who would expect for the customers to immediately say "Wow! Prices at Save-a-lot are better than ever! I am going to shop there now!" These things take time to filter through, especially when you consider that the company is closing under preforming stores at a rate that outpaces the openings of their Save-a-lot locations (which in my part of the country are opening like crazy). Long time readers of this blog will attest to the fact that even Steak 'n Shake took time for the customers to get what the company was doing... And that was probably one of the best turnarounds in history. Add to this that the company has shrunk SG&A by more than a BILLION dollars in last few years and I get optimistic.

Moving along, we see that over 1/3... That's right, over 33% of the company's shares are sold short. Again, I have trouble thinking of many companies that this occurs with for such a long period of time. With a short ratio (meaning, the number of days that it would take for short sellers to cover their position based on historical volume) north of 13, I start to froth at the mouth. While the float isn't crazily low as was the case with, say, Farmer Brothers (which came back both operationally and in price more quickly than I ever would have thought), it seems that if SVU posts any news other than "Hey guys! Sorry that we screwed up... we are closing 1/2 of our stores, our distribution/logistics service lost almost all of it's customers, and by the way, we are cutting the dividend..." It could mean great things for the stock (knock on wood).

Additionally, with so many shares short, it seems to me that the shorts had better be right about the goings on at the company. Otherwise, a declining price could actually be of benefit for long term holders of the equity due to how the company carries it's intangibles. They write down goodwill as their share price falls. When a ton of short sellers come in to play, that effectively reduces the earnings of the company in a negative feedback cycle, as the goodwill goes against the company's income... this leads to lower earnings, which in turn, will potentially lead to more people shorting the stock. I view this as a double positive due to the depression of earnings that makes the share price goes down, which, essentially gives the company a tax benefit, allowing them to pay down debt that much quicker, as well as open up more high margin Save-a-lot stores. If earnings and share price ever start to rebound, look out above.

All this said, I wouldn't want to make this a super huge position, say, 1/2 or even 1/4 of my portfolio, but for me, there is a place for it. I don't really see a situation playing out in the coming years where the equity doesn't go way south or the company doesn't trade for multiples of what it is at. Time will tell... I do know that I will be shocked if the stock prices (coupled with the operations of the company) stay roughly where they are at today.

Is the company in a brutal industry? Yes. Are they the best of breed? Hell no. Am I catching a falling knife? It is a strong possibility. Is the market discounting every marginally good thing and expecting every bad thing that could happen to the operations of the company? I lean towards a yes.

Disclosure/Disclaimer: I am long SVU equity and options and Farmer Brother's equity. This is not advice of any kind and is solely my own opinion. Always do a ton of your own research before contemplating doing anything that I say, do, write, or so much as think about.

Pawn Shops For The Rich.

Having worked for several pawn shops, this story on a pawn shop for 1% was of great interest to me. Yes, it is even cooler than pawning your stuff online.


"We kind of position ourselves between the high end pawn shop and the deals too small for private banks," says founder and CEO Paul Aitken in an interview with The Daily Ticker.

Disclosure: None.

Tuesday, April 3, 2012