US Air Update
We put our neck out on the line on June 24th with our US Airlines: a Put on Oil? piece. Call it luck (I certainly do), but US Airways, which we referenced in that piece, is up 220 percent since then.
And it truly was all about oil. The inevitable oil pullback has brought many an airlines stock price back too life. Can the run continue? I for one still believe oil prices are headed lower, but the airline bet is now too risky for my blood. I will venture to say that's the last 2 bagger in 2 months time you'll ever read about here.
*The author does not have a position in US Airways. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks following the date of this post.
Tuesday, August 19, 2008
Thursday, August 07, 2008
Cheap Stocks 21 Net/Net Index: 6 Months Later
Six months after launching the first index comprised of companies trading below their net current asset value, the results have been fairly compelling. However, six months is still far too short a timeframe to draw a meaningful conclusion. In any event, the CS21 Net/Net Index is up 20.62% since inception, while the Russell Microcap Index is down 2.21% during the same period.
When you dig into the underlying index constituents and return experience of each, the results are along the lines of what we expected: a handful of companies with very strong returns, with the majority in negative territory. So it goes with net/nets; some will go under, some will be acquired, some will tread water, while others will be rediscovered by the market, having been mis-priced.
So far, there has been one acquisition, Renovis Corp. Rather than replace this company in the index, we decided to keep the proceeds in cash.
Below are the results to date of the companies comprising the CS21 Net/Net Index:
Company, Ticker, Original Weight, Return
Adaptec, Inc(ADPT),18.7,42.86%
Audiovox Corporation(VOXX),12.22,-0.52%
Trans World Entertainment Corporation(TWMC),7.57,-32.27%
The Finish Line, Inc(FINL),6.26, 337%
Nu Horizons Electronics Corp(NUHC),5.81,-17.19%
Richardson Electronics, Ltd(RELL),5.15, 22.31%
Pomeroy IT Solutions, Inc(PMRY),4.62,-46.62%
Ditech Networks Inc(DITC),4.29,-38.33%
Parlux Fragrances, Inc(PARL),3.92, 65%
InFocus Corporation(INFS),3.84, -15.29%
Renovis, Inc. (acquired 5/5, proceeds held in cash)
Leadis Technology, Inc(LDIS),3.5,-53.64%
Replidyne, Inc(RDYN)3.3,-42.27%
Tandy Brands Accessories, Inc(TBAC),2.93,-32.99%
FSI International, Inc(FSII),2.87,-29.41%
Anadys Pharmaceuticals, Inc(ANDS),2.53, 73.75%
MediciNova, Inc(MNOV),2.31, 9.43%
Emerson Radio Corp(MSN),1.65,-10%
Handleman Company(HDLM),1.7,16%
Chromcraft Revington, Inc(CRC),1.63,-32.29%
Charles & Colvard, Ltd. CTHR,1.5,-46.67%
While we are pleased with the results of this experiment so far, we also realize the potential opportunities in constructing a portfolio of net/nets that is not naively constructed, as this one is.
*The author does not have positions in any of the companies that comprise The Cheap Stocks 21 Net/Net Index. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks following the date of this post.
Six months after launching the first index comprised of companies trading below their net current asset value, the results have been fairly compelling. However, six months is still far too short a timeframe to draw a meaningful conclusion. In any event, the CS21 Net/Net Index is up 20.62% since inception, while the Russell Microcap Index is down 2.21% during the same period.
When you dig into the underlying index constituents and return experience of each, the results are along the lines of what we expected: a handful of companies with very strong returns, with the majority in negative territory. So it goes with net/nets; some will go under, some will be acquired, some will tread water, while others will be rediscovered by the market, having been mis-priced.
So far, there has been one acquisition, Renovis Corp. Rather than replace this company in the index, we decided to keep the proceeds in cash.
Below are the results to date of the companies comprising the CS21 Net/Net Index:
Company, Ticker, Original Weight, Return
Adaptec, Inc(ADPT),18.7,42.86%
Audiovox Corporation(VOXX),12.22,-0.52%
Trans World Entertainment Corporation(TWMC),7.57,-32.27%
The Finish Line, Inc(FINL),6.26, 337%
Nu Horizons Electronics Corp(NUHC),5.81,-17.19%
Richardson Electronics, Ltd(RELL),5.15, 22.31%
Pomeroy IT Solutions, Inc(PMRY),4.62,-46.62%
Ditech Networks Inc(DITC),4.29,-38.33%
Parlux Fragrances, Inc(PARL),3.92, 65%
InFocus Corporation(INFS),3.84, -15.29%
Renovis, Inc. (acquired 5/5, proceeds held in cash)
Leadis Technology, Inc(LDIS),3.5,-53.64%
Replidyne, Inc(RDYN)3.3,-42.27%
Tandy Brands Accessories, Inc(TBAC),2.93,-32.99%
FSI International, Inc(FSII),2.87,-29.41%
Anadys Pharmaceuticals, Inc(ANDS),2.53, 73.75%
MediciNova, Inc(MNOV),2.31, 9.43%
Emerson Radio Corp(MSN),1.65,-10%
Handleman Company(HDLM),1.7,16%
Chromcraft Revington, Inc(CRC),1.63,-32.29%
Charles & Colvard, Ltd. CTHR,1.5,-46.67%
While we are pleased with the results of this experiment so far, we also realize the potential opportunities in constructing a portfolio of net/nets that is not naively constructed, as this one is.
*The author does not have positions in any of the companies that comprise The Cheap Stocks 21 Net/Net Index. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks following the date of this post.
Thursday, July 31, 2008
Blogger Roundtable
Many thanks to Geoff Gannon of the excellent Gannon on Investing Site for including us in his recent roundtable, with the editors of three outstanding value oriented blogs. Its also great to see Geoff posting regularly again.
Many thanks to Geoff Gannon of the excellent Gannon on Investing Site for including us in his recent roundtable, with the editors of three outstanding value oriented blogs. Its also great to see Geoff posting regularly again.
Wednesday, July 16, 2008
“Dear Bill….”: A Letter to Bill Miller, Manager, Legg Mason Value Trust
Dear Bill,
I hope you are well these days, I understand it’s been a difficult time for you lately, and I’d imagine you’ve had many sleepless nights. I trust that there are better days ahead for you. I hope for your sake, as well as for others who have trusted you with their money, that this is indeed the case.
When I hired you several years ago to manage a nice chunk of my retirement portfolio’s large cap allocation, I did so knowing that our investment philosophies are quite different. We view “value” in very different terms, but that was ok. I understood the differences, and I took the risk. I was actually quite pleased that my company’s 401K plan brought you aboard.
We had a great run, Bill. In fact, your streak began years before I hired you, and I certainly did not expect it to continue forever. After all, how many managers beat the S&P 500 Index 15 consecutive years? You did, Bill. But just like all streaks, yours came to an end. Unfortunately a very abrupt and painful end; more painful than either of us could have ever imagined.
When I hired you, I never dreamed I’d be writing you this letter. But after a great deal of thought, it pains me that I am hereby replacing you as my primary large cap manager. I can no longer take the risk that your investment process is indeed broken, or is no longer effective.
I know, Bill, every active manager hits bumps in the road, and the market environment has been extremely difficult. But your underperformance the past two years has gone way beyond normal market gyrations.
How is it possible that you are down 32% year to date, or 39% over the past year? Looking back, do you think that your positions were too concentrated in financials? Yes, Bill, I know hindsight is 20/20, and I sound a bit like Captain Obvious here, but Bear Stearns, Washington Mutual, Citigroup, Merrill Lynch, Freddie Mac, AIG, Countrywide? Where was your risk control? Was it deep conviction or wishful thinking on your part that financials would turn around? I know that what has transpired over the past couple of years in financials was essentially the perfect storm, but I hired you because I trusted that you’d be able to navigate even the worst market events. I certainly never expected things to turn out like this.
Unfortunately, your recent performance has been so devastating that it essentially renders your 15 year streak irrelevant. Over the past five years, you’ve underperformed the S&P 500 by more than 800 basis points…per year. Over the past ten years, you are under 90 bps per year. You have to go back to 1996 in order to find a multi-year period (through now) that you’ve outperformed. Guess I should have indexed large cap all along. My bad.
Unfortunately Bill, what many investors fail to understand is that average returns are meaningless. What truly matters is the time path of returns, i.e., the order in which returns occur. Your huge losses the past couple years all but wipe out the previous gains your shareholders enjoyed.
Finally, Bill, just a word of advice about where you are spending your time these days. I know you want the Yahoo situation to work out to the advantage of your shareholders, and you do hold a fairly large position in the company (4% of your portfolio). But are you devoting too much time and energy to this?
In closing, I can’t place all of the blame on you. I should have pulled the trigger several % ago. I admit I got too caught up in “Bill Miller: The Legend”.
Bill, best wishes for the future.
Regards,
Jon
Dear Bill,
I hope you are well these days, I understand it’s been a difficult time for you lately, and I’d imagine you’ve had many sleepless nights. I trust that there are better days ahead for you. I hope for your sake, as well as for others who have trusted you with their money, that this is indeed the case.
When I hired you several years ago to manage a nice chunk of my retirement portfolio’s large cap allocation, I did so knowing that our investment philosophies are quite different. We view “value” in very different terms, but that was ok. I understood the differences, and I took the risk. I was actually quite pleased that my company’s 401K plan brought you aboard.
We had a great run, Bill. In fact, your streak began years before I hired you, and I certainly did not expect it to continue forever. After all, how many managers beat the S&P 500 Index 15 consecutive years? You did, Bill. But just like all streaks, yours came to an end. Unfortunately a very abrupt and painful end; more painful than either of us could have ever imagined.
When I hired you, I never dreamed I’d be writing you this letter. But after a great deal of thought, it pains me that I am hereby replacing you as my primary large cap manager. I can no longer take the risk that your investment process is indeed broken, or is no longer effective.
I know, Bill, every active manager hits bumps in the road, and the market environment has been extremely difficult. But your underperformance the past two years has gone way beyond normal market gyrations.
How is it possible that you are down 32% year to date, or 39% over the past year? Looking back, do you think that your positions were too concentrated in financials? Yes, Bill, I know hindsight is 20/20, and I sound a bit like Captain Obvious here, but Bear Stearns, Washington Mutual, Citigroup, Merrill Lynch, Freddie Mac, AIG, Countrywide? Where was your risk control? Was it deep conviction or wishful thinking on your part that financials would turn around? I know that what has transpired over the past couple of years in financials was essentially the perfect storm, but I hired you because I trusted that you’d be able to navigate even the worst market events. I certainly never expected things to turn out like this.
Unfortunately, your recent performance has been so devastating that it essentially renders your 15 year streak irrelevant. Over the past five years, you’ve underperformed the S&P 500 by more than 800 basis points…per year. Over the past ten years, you are under 90 bps per year. You have to go back to 1996 in order to find a multi-year period (through now) that you’ve outperformed. Guess I should have indexed large cap all along. My bad.
Unfortunately Bill, what many investors fail to understand is that average returns are meaningless. What truly matters is the time path of returns, i.e., the order in which returns occur. Your huge losses the past couple years all but wipe out the previous gains your shareholders enjoyed.
Finally, Bill, just a word of advice about where you are spending your time these days. I know you want the Yahoo situation to work out to the advantage of your shareholders, and you do hold a fairly large position in the company (4% of your portfolio). But are you devoting too much time and energy to this?
In closing, I can’t place all of the blame on you. I should have pulled the trigger several % ago. I admit I got too caught up in “Bill Miller: The Legend”.
Bill, best wishes for the future.
Regards,
Jon
Tuesday, July 15, 2008
Friday, July 11, 2008
Premier Exhibitions Update: The Controversy Continues (PRXI)
Premier Exhibtitions can't seem to steer clear of contoversy these days. A few months back, the issue was the source for bodies used within the company's "Bodies...The Exhibition" show (see our March 29th post). Now it's a generally disappointing quarter, and a shareholder calling for action.
Premier Shares fell 17% on Wednesday following a less than stellar earnings release. For the quarter, Premier lost 912K, vs net income of $3.26 million for the same period last year. Revenue increased 34% to $15.2 million, but this was well below estimates, and not nearly sufficient to offset increased expenses.
Costs of goods sold rose dramatically, namely exhibition costs, which more than doubled from $3.06 million to $6.36 million. SG&A more than tripled from $2.54 million to $8.02 million. On the revenue side, management blamed the shortfall on the fact that 13 of the company's 22 exhibits moved during the quarter, which resulted in the loss of 330 "revenue-producing days". Be that as it may, this has led one shareholder to call for change.
Bill Vlahos of Odyssey Value Advisors LLC, fired off a letter to the board calling for the sale of the company, or at least the sale of the Titanic assets Premier owns. Vlahos complained of bloated management compensation, and a strategy that is fraught with too much risk. While we can't determine Odyssey's current stake in Premier, reaction to Vlahos' letter sent shares up 12% yesterday, to $3.8.
While we are also extremely disappointed with Premier's performance both operationally, and from an investment perspective (shares are down 33% since May, and 78% since this time last year), we don't think that now is the time for the sale of the company. While the Titanic assets alone may be worth several times current market cap, a sale at this point would be a sale into weakness. We don't believe that these assets would fetch anywhere near their true value (if they could indeed be sold) given the state of the economy.
We've noted that Seller's Capital continues to gobble up Premier shares, having purchased another 1.19 million recently, and now owns 10.84% of the company. We'll continue to add to our position as well as opportunities present themselves.
*The author has a position in Premier Exhibitions (PRXI). This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.
Premier Exhibtitions can't seem to steer clear of contoversy these days. A few months back, the issue was the source for bodies used within the company's "Bodies...The Exhibition" show (see our March 29th post). Now it's a generally disappointing quarter, and a shareholder calling for action.
Premier Shares fell 17% on Wednesday following a less than stellar earnings release. For the quarter, Premier lost 912K, vs net income of $3.26 million for the same period last year. Revenue increased 34% to $15.2 million, but this was well below estimates, and not nearly sufficient to offset increased expenses.
Costs of goods sold rose dramatically, namely exhibition costs, which more than doubled from $3.06 million to $6.36 million. SG&A more than tripled from $2.54 million to $8.02 million. On the revenue side, management blamed the shortfall on the fact that 13 of the company's 22 exhibits moved during the quarter, which resulted in the loss of 330 "revenue-producing days". Be that as it may, this has led one shareholder to call for change.
Bill Vlahos of Odyssey Value Advisors LLC, fired off a letter to the board calling for the sale of the company, or at least the sale of the Titanic assets Premier owns. Vlahos complained of bloated management compensation, and a strategy that is fraught with too much risk. While we can't determine Odyssey's current stake in Premier, reaction to Vlahos' letter sent shares up 12% yesterday, to $3.8.
While we are also extremely disappointed with Premier's performance both operationally, and from an investment perspective (shares are down 33% since May, and 78% since this time last year), we don't think that now is the time for the sale of the company. While the Titanic assets alone may be worth several times current market cap, a sale at this point would be a sale into weakness. We don't believe that these assets would fetch anywhere near their true value (if they could indeed be sold) given the state of the economy.
We've noted that Seller's Capital continues to gobble up Premier shares, having purchased another 1.19 million recently, and now owns 10.84% of the company. We'll continue to add to our position as well as opportunities present themselves.
*The author has a position in Premier Exhibitions (PRXI). This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.
Saturday, June 28, 2008
Blyth: Punished Value Stock or a Trap?
Home goods company Blyth has fallen on hard times recently, and is down more than 50%in the past year. In fact, the Greenwich Connecticut based company has not traded at its current level since 1995. Unfortunately, in an economic environment where inflation is rearing its ugly head, housing has been in the toilet in many areas of the country, and consumers are feeling squeezed, some businesses will suffer the consequences, as Blyth has.
There’s just not a whole lot of interest these days in a company that operates in the “home expressions” business, which is a fancy way of referring to candles, home fragrances, and decorative accessories. Not exactly a recession proof business. Those are the kind of products consumers will shun long before giving up steak or ice cream.
As recently as May 29th, this was a $20 stock, with a decent 2.7% dividend yield. In fact, this company has been an exceptional dividend grower over the years, with a five year compound annual dividend growth rate of nearly 18%. That’s the kind of company I like, putting their money where their mouth is, taking the ultimate risk of raising the dividend too high, and having to make the unkindest of cuts. I also like these situations because dividends don’t lie (except, perhaps in the case of Allied Capital, where Greenlight’s Capital’s David Einhorn has made a pretty strong case to the contrary), while earnings aren’t exactly always honest.
Blyth’s recent 38% slide since the end of May was partially the result of a poor earnings release, partially due to rough market activity. Sales for Q1 fell 8% to $249.8 million from the same quarter last year, while earnings (excluding onetime charges) fell 52% to $6.5 million. Ex charges of $5.2 million to write off its investment in RedEnvelope, a publicly traded specialty retailer in which Blyth owned a 14% stake, the company earned $1.16 million.
Still, all the bad news aside, of which there is plenty, this may be the case of a company that Wall Street punished a bit too quickly and severely. Despite its near term issues, Blyth still has a very solid balance sheet with $147.5 million in cash and $15 million in short-term investments, or nearly $4.50 per share. Blyth also carries another $21.6 million in long-term investments, but since this includes auction rate securities, we’ll assume, for arguments sake, they have no value. (Blyth does carry long term debt of $155.2 million.)
Currently trading at just .43 times trailing 12 month sales, the market has all but written this company off in the near-term. Recent company guidance suggests full year 2009 earnings in the $1.26-$1.31 range, and cash flow of $90 million. While you should always view such forecasts with skepticism, even a haircut to these numbers should still allow Blyth plenty of room to keep from cutting the dividend.
Of course, the real catalyst here, besides the realization that the punishment has not quite fit the crime, is a pickup in economic activity. No guarantees there.
Finally, I like the fact that Blyth continues to buy back stock, and has reduce shares outstanding 3 million shares in the past year. Only time will tell if Blyth represents true value at these levels, or is just another trap.
*The author has a position in Blyth. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks following the date of this post.
Home goods company Blyth has fallen on hard times recently, and is down more than 50%in the past year. In fact, the Greenwich Connecticut based company has not traded at its current level since 1995. Unfortunately, in an economic environment where inflation is rearing its ugly head, housing has been in the toilet in many areas of the country, and consumers are feeling squeezed, some businesses will suffer the consequences, as Blyth has.
There’s just not a whole lot of interest these days in a company that operates in the “home expressions” business, which is a fancy way of referring to candles, home fragrances, and decorative accessories. Not exactly a recession proof business. Those are the kind of products consumers will shun long before giving up steak or ice cream.
As recently as May 29th, this was a $20 stock, with a decent 2.7% dividend yield. In fact, this company has been an exceptional dividend grower over the years, with a five year compound annual dividend growth rate of nearly 18%. That’s the kind of company I like, putting their money where their mouth is, taking the ultimate risk of raising the dividend too high, and having to make the unkindest of cuts. I also like these situations because dividends don’t lie (except, perhaps in the case of Allied Capital, where Greenlight’s Capital’s David Einhorn has made a pretty strong case to the contrary), while earnings aren’t exactly always honest.
Blyth’s recent 38% slide since the end of May was partially the result of a poor earnings release, partially due to rough market activity. Sales for Q1 fell 8% to $249.8 million from the same quarter last year, while earnings (excluding onetime charges) fell 52% to $6.5 million. Ex charges of $5.2 million to write off its investment in RedEnvelope, a publicly traded specialty retailer in which Blyth owned a 14% stake, the company earned $1.16 million.
Still, all the bad news aside, of which there is plenty, this may be the case of a company that Wall Street punished a bit too quickly and severely. Despite its near term issues, Blyth still has a very solid balance sheet with $147.5 million in cash and $15 million in short-term investments, or nearly $4.50 per share. Blyth also carries another $21.6 million in long-term investments, but since this includes auction rate securities, we’ll assume, for arguments sake, they have no value. (Blyth does carry long term debt of $155.2 million.)
Currently trading at just .43 times trailing 12 month sales, the market has all but written this company off in the near-term. Recent company guidance suggests full year 2009 earnings in the $1.26-$1.31 range, and cash flow of $90 million. While you should always view such forecasts with skepticism, even a haircut to these numbers should still allow Blyth plenty of room to keep from cutting the dividend.
Of course, the real catalyst here, besides the realization that the punishment has not quite fit the crime, is a pickup in economic activity. No guarantees there.
Finally, I like the fact that Blyth continues to buy back stock, and has reduce shares outstanding 3 million shares in the past year. Only time will tell if Blyth represents true value at these levels, or is just another trap.
*The author has a position in Blyth. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks following the date of this post.
Tuesday, June 24, 2008
US Airlines: A Put on Oil?
Having grown up around aviation, (with a father who was an air traffic controller and private pilot) it's always been a fascination. As an investor however, I've typically stayed away from airlines: its just a fundamentally difficult business, to put it mildly. Heavy capital requirements, and typically strangling levels of debt don't mesh well with fuel costs rising at alarming rates. While some, such as Southwest, have a great track record, and seem to really know how to profitably run an airline, that's the exception and not the rule.
When the industry took it on the chin after oil breached $135, and panicky operators announced they'll now charge for baggage, we began to view the industry a little bit differently. While the risks of banktruptcy for some of the players seem to grow with each passing day, perhaps there may be some opportunity, however skewed the risk/reward profile may appear.
We now view the airlines as a way to play the oil bubble. First, this assumes there actually is an oil bubble, as we do. Second, it assumes that you can identify an airline that, save the oil issue, has the chance to survive.
That being said, we've recently initiated a small position in US Airways. With $2.07 billion in cash at the end of Q1 (how much they have burned since is a concern), this company may be able to withstand the pressure from oil for awhile. The company does have $3.1 billion in long-term debt, but the next major maturity is $249 million, in 2013.
Don't get me wrong, this is not based on the notion that oil prices will begin to fall in the next couple of years, because by then, it will be too late. Think of this as a put option on oil, with an embedded expiration; that being US Air's bankruptcy if oil continues it's march skyward.
Don't enter into this one lightly. The risks are incredibly high, and based almost solely on the notion that:
1. oil prices will pull back, and
2. airline stocks will react positively.
*The author has a position in US Airways. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks following the date of this post.
Having grown up around aviation, (with a father who was an air traffic controller and private pilot) it's always been a fascination. As an investor however, I've typically stayed away from airlines: its just a fundamentally difficult business, to put it mildly. Heavy capital requirements, and typically strangling levels of debt don't mesh well with fuel costs rising at alarming rates. While some, such as Southwest, have a great track record, and seem to really know how to profitably run an airline, that's the exception and not the rule.
When the industry took it on the chin after oil breached $135, and panicky operators announced they'll now charge for baggage, we began to view the industry a little bit differently. While the risks of banktruptcy for some of the players seem to grow with each passing day, perhaps there may be some opportunity, however skewed the risk/reward profile may appear.
We now view the airlines as a way to play the oil bubble. First, this assumes there actually is an oil bubble, as we do. Second, it assumes that you can identify an airline that, save the oil issue, has the chance to survive.
That being said, we've recently initiated a small position in US Airways. With $2.07 billion in cash at the end of Q1 (how much they have burned since is a concern), this company may be able to withstand the pressure from oil for awhile. The company does have $3.1 billion in long-term debt, but the next major maturity is $249 million, in 2013.
Don't get me wrong, this is not based on the notion that oil prices will begin to fall in the next couple of years, because by then, it will be too late. Think of this as a put option on oil, with an embedded expiration; that being US Air's bankruptcy if oil continues it's march skyward.
Don't enter into this one lightly. The risks are incredibly high, and based almost solely on the notion that:
1. oil prices will pull back, and
2. airline stocks will react positively.
*The author has a position in US Airways. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks following the date of this post.
Saturday, June 14, 2008
Getting Caught in the Trap Part II: Silverleaf Resorts
In part one of our piece on Silverleaf Resorts (SVLF), we discussed some of the risks associated with this tiny timeshare company. These risks centered on the high interest rate loans the company makes to its customers, some of which have less than stellar credit, as well as the method by which Silverleaf finances these loans, primarily through receivables based revolvers. The company captures the spread between the loans it makes to timeshare buyers, and it’s borrowings from creditors. Typically this spread is very wide; at year end, 2007, the company’s portfolio of customer notes receivable had an average yield of 16.3%, and company borrowings had a weighted average cost of 7.6%. While this leaves room for some defaults, given the difficulty some consumers may be having these days, that’s a slippery slope. If defaults rose precipitously, this could lead to insolvency. We are not suggesting that’s where SVLF is heading, just laying out the potential risks.
If customers default on loans, the company will take back the timeshare, the prospect of which involves a foreclosure process of sorts, re-advertising and then finding another buyer: not the preferred method of business for the company, and not as lucrative as the normal course of business.
That being said, Silverleaf does have an interesting array of assets, including the following: (From 2007 10K)
Of course, the entire business is dependent on attracting customers and selling timeshare intervals, and marketing costs are huge; 50.9% of vacation interval sales in 2007.
So far, the company has appeared to weather the recent real estate storm fairly well. There’s a huge dependence on attracting customers, collecting from those customers, and having adequate liquidity to keep the whole process from falling apart. Given the state of our economy, and perception that consumers are in trouble, its pretty clear why this stock has come under pressure, and trades at 3 times trailing 12 month earnings. The risks here for Silverleaf are twofold: The prospect of current customers defaulting on their loans, and the difficulty finding new timeshare buyers if consumers cut their discretionary spending.
Value trap or screaming buy? Perhaps too early too tell.
*The author does not have a position in Silverleaf Resorts (SVLF). This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks following the date of this post.
In part one of our piece on Silverleaf Resorts (SVLF), we discussed some of the risks associated with this tiny timeshare company. These risks centered on the high interest rate loans the company makes to its customers, some of which have less than stellar credit, as well as the method by which Silverleaf finances these loans, primarily through receivables based revolvers. The company captures the spread between the loans it makes to timeshare buyers, and it’s borrowings from creditors. Typically this spread is very wide; at year end, 2007, the company’s portfolio of customer notes receivable had an average yield of 16.3%, and company borrowings had a weighted average cost of 7.6%. While this leaves room for some defaults, given the difficulty some consumers may be having these days, that’s a slippery slope. If defaults rose precipitously, this could lead to insolvency. We are not suggesting that’s where SVLF is heading, just laying out the potential risks.
If customers default on loans, the company will take back the timeshare, the prospect of which involves a foreclosure process of sorts, re-advertising and then finding another buyer: not the preferred method of business for the company, and not as lucrative as the normal course of business.
That being said, Silverleaf does have an interesting array of assets, including the following: (From 2007 10K)
Pinnacle Lodge. In 2006, we purchased Pinnacle Lodge, a 64-room hotel property located near the Winter Park recreational area in Colorado which provides our owners with another destination vacation alternative and gives Silverleaf an entry point into this increasingly popular destination area. We generated $1.1 million and $522,000 of revenues at the Pinnacle Lodge during the years 2007 and 2006, respectively.
Other Properties. We own a 500-acre tract of land in the Berkshire Mountains of Western Massachusetts that we are in the initial stages of developing. During September 2007, we purchased an additional 394.3 acre tract which adjoins the 500 acres. We have not yet finalized our future development plans for this site.
In November 2007, we purchased 15.3 acres of undeveloped land in Grand County, Colorado with plans to develop up to 136 Vacation Interval units on the property. The acquired land is located only two miles from the Pinnacle Lodge hotel.
At December 31, 2007, we owned a total of 13 timeshare resorts. Each of these resorts was encumbered by various liens and security agreements at December 31, 2007 due to inventory from each resort being pledged as collateral under our inventory credit facilities with our senior lenders. See “Note 8 – Debt” in the Notes to our Consolidated Financial Statements for a further description of these credit facilities. Principal developmental activity which occurred at our Existing Resorts during 2007 and future plans are summarized below.
Continued Development of The Villages Resort. The Villages Resort, located approximately 100 miles east of Dallas, Texas, has 362 existing units. We intend to develop approximately 236 additional units (12,272 Vacation Intervals) at this resort in the future. During 2007, we added 16 new units and a $10 million indoor water park at this resort.
Continued Development of Piney Shores Resort. Piney Shores Resort, located near Conroe, Texas, north of Houston, has 202 existing units. We intend to develop approximately 168 additional units (8,736 Vacation Intervals) at this resort. During 2007, we added 12 new units at this resort.
Continued Development of Timber Creek Resort. Timber Creek Resort, located in Desoto, Missouri, has 72 existing units. We intend to develop approximately 24 additional units (1,248 Vacation Intervals) at this resort. During 2007, we did not add any new units at this resort.
Continued Development of Fox River Resort. Fox River Resort, located 70 miles southwest of Chicago, in Sheridan, Illinois, has 240 existing units. We intend to develop approximately 276 additional units (14,352 Vacation Intervals) at this resort. During 2007, we added 12 new units at this resort.
Continued Development of Apple Mountain Resort. Apple Mountain Resort, located approximately 125 miles north of Atlanta, Georgia, has 84 existing units. We intend to develop approximately 180 additional units (9,360 Vacation Intervals) at this resort. During 2007, we added 12 new units at this resort.
Continued Development of Ozark Mountain Resort. Ozark Mountain Resort, located approximately 15 miles from Branson, Missouri, has 148 existing units. We intend to develop approximately 12 additional units (624 Vacation Intervals) at this resort. During 2007, we did not add any new units at this resort.
Continued Development of Holiday Hills Resort. Holiday Hills Resort, located two miles east of Branson, Missouri, in Taney County, has 458 existing units. We intend to develop approximately 444 additional units (23,088 Vacation Intervals) at this resort. During 2007, we added 12 new units at this resort. During 2005, we purchased approximately 81 acres, and in 2007, we purchased approximately 37 additional acres of land, both adjacent to the existing resort.
Continued Development of Hill Country Resort. Hill Country Resort, located near Canyon Lake in the hill country of central Texas between Austin and San Antonio, has 342 existing units. We intend to develop approximately 156 additional units (8,112 Vacation Intervals) at this resort. During 2007, we added 40 new units at this resort.
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Continued Development of Oak N' Spruce Resort. Oak N’ Spruce Resort, located 134 miles west of Boston, Massachusetts, has 320 existing units. We intend to develop approximately 30 additional units (1,560 Vacation Intervals) at this resort. During 2007, we added 12 new units at this resort.
Continued Development of Silverleaf’s Seaside Resort. Silverleaf’s Seaside Resort, located in Galveston, Texas, has 132 existing units. We intend to develop approximately 276 additional units (14,352 Vacation Intervals) at this resort. During 2007, we added 12 new units at this resort.
Continued Development of Orlando Breeze Resort. Orlando Breeze Resort, located in Davenport, Florida, just outside Orlando, Florida, has 48 existing units. We intend to develop approximately 24 additional units (1,248 Vacation Intervals) at this resort. During 2007, we did not add any new units at this resort. On January 4, 2006, we purchased an additional 31 acres contiguous to the Orlando Breeze Resort. We have not yet finalized plans for development of this property.
Of course, the entire business is dependent on attracting customers and selling timeshare intervals, and marketing costs are huge; 50.9% of vacation interval sales in 2007.
So far, the company has appeared to weather the recent real estate storm fairly well. There’s a huge dependence on attracting customers, collecting from those customers, and having adequate liquidity to keep the whole process from falling apart. Given the state of our economy, and perception that consumers are in trouble, its pretty clear why this stock has come under pressure, and trades at 3 times trailing 12 month earnings. The risks here for Silverleaf are twofold: The prospect of current customers defaulting on their loans, and the difficulty finding new timeshare buyers if consumers cut their discretionary spending.
Value trap or screaming buy? Perhaps too early too tell.
*The author does not have a position in Silverleaf Resorts (SVLF). This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks following the date of this post.
Thursday, June 05, 2008
Getting Caught in the Trap? Part I
Evaluating Silverleaf Resorts (SVLF)
As value investors, many of us know what it’s like to be caught in the veritable “value trap”, when a name looks cheap and enticing, but there’s more under the hood then we bargained for. Most of us have been caught here a time or two (being generous in my case), and hopefully experience brings with it the benefit of knowledge. Perhaps we can avoid making the same mistake thrice.
As deep-value microcap investors, we probably see an even proportionately larger share of traps. They are especially prevalent in the land of net/nets (companies trading below net current asset value) where we expend a great deal of research effort.
Recently we stumbled on an excellent example of a potential value trap. While we are not making a judgement on this company at this point, we thought it was an excellent example of when to dig deeper.
Silverleaf Resorts(SVLF)
Dallas based Silverleaf is a small timeshare company with a market cap just shy of $83 million. Trading at just 3 times earnings, the company currently trades below its net current asset value. At first glance, it appears too good to pass up. It may ultimately be a steal at $2. Or, it might be a trap.
We covered this company a few years back (search the archives), and at the time it was also trading below its NCAV. Silverleaf subsequently ran to $7 (a five bagger), and has since given back a lot of that ground.
In evaluating a company such as Silverleaf, we first look at the company’s enterprise value. Equity market cap is a poor indicator of the value the markets are placing on a company, because it does not reflect the entire capital structure. We find that Silverleaf’s enterprise value is $425 million—a far cry from its $83 million market cap. As it turns out, Silverleaf is highly leveraged, to the tune of $352 million in short and long-term debt. Couple this with the fact that it’s in the timeshare industry, not a great place to be given the housing bust and current state of the economy, and you can start to see the uncertainty surrounding this company, as well as reasons it trades so “cheap”.
Next we examine the balance sheet. Here we find that current assets ($546 million) are comprised primarily of inventories ($183 million) and receivables ($304 million). The receivables are potentially more troublesome. Referring to the notes, we find that the receivables are used to finance the purchase of timeshares by consumers.
From the 3/31/08 10Q:
Furthermore, we find that the company’s debt load is financing the receivables. Silverleaf makes money on the spread between the interest charged on customer timeshare loans, and the interest the company pays its lenders. This amounted to more than $14.5 million in the first quarter, nearly double net income. Clearly the net interest margin is wide. But what happens if Silverleaf’s customers can’t pay? For more on that, we turn to the 2007 10K and find this note:
This tells us that a relatively large amount of the customer base may be at risk of default. Given the current credit and housing market conditions, this is another risk factor for the company, and further explanation of the “depressed stock price”.
Finally, the Q1 income statement gives us more evidence: Of $65 million in sales for the quarter, $14.3 million was deemed uncollectible. This was up sharply from the same quarter last year ($8.5 million on sales of $53.4 million). Clearly, conditions are deteriorating. All of this adds up to uncertainty at best. But if you look at the bottom line alone (earnings of $.19 per share, net profit margin of 11.4%),SVLF looks like a steal. It's rarely ever that easy.
In Part II of this piece, we’ll explore the company’s assets.
*The author does not have a position in Silverleaf Resorts (SVLF). This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks following the date of this post.
Evaluating Silverleaf Resorts (SVLF)
As value investors, many of us know what it’s like to be caught in the veritable “value trap”, when a name looks cheap and enticing, but there’s more under the hood then we bargained for. Most of us have been caught here a time or two (being generous in my case), and hopefully experience brings with it the benefit of knowledge. Perhaps we can avoid making the same mistake thrice.
As deep-value microcap investors, we probably see an even proportionately larger share of traps. They are especially prevalent in the land of net/nets (companies trading below net current asset value) where we expend a great deal of research effort.
Recently we stumbled on an excellent example of a potential value trap. While we are not making a judgement on this company at this point, we thought it was an excellent example of when to dig deeper.
Silverleaf Resorts(SVLF)
Dallas based Silverleaf is a small timeshare company with a market cap just shy of $83 million. Trading at just 3 times earnings, the company currently trades below its net current asset value. At first glance, it appears too good to pass up. It may ultimately be a steal at $2. Or, it might be a trap.
We covered this company a few years back (search the archives), and at the time it was also trading below its NCAV. Silverleaf subsequently ran to $7 (a five bagger), and has since given back a lot of that ground.
In evaluating a company such as Silverleaf, we first look at the company’s enterprise value. Equity market cap is a poor indicator of the value the markets are placing on a company, because it does not reflect the entire capital structure. We find that Silverleaf’s enterprise value is $425 million—a far cry from its $83 million market cap. As it turns out, Silverleaf is highly leveraged, to the tune of $352 million in short and long-term debt. Couple this with the fact that it’s in the timeshare industry, not a great place to be given the housing bust and current state of the economy, and you can start to see the uncertainty surrounding this company, as well as reasons it trades so “cheap”.
Next we examine the balance sheet. Here we find that current assets ($546 million) are comprised primarily of inventories ($183 million) and receivables ($304 million). The receivables are potentially more troublesome. Referring to the notes, we find that the receivables are used to finance the purchase of timeshares by consumers.
From the 3/31/08 10Q:
Note 4 – Notes Receivable
We provide financing to the purchasers of Vacation Intervals in the form of notes receivable, which are collateralized by their interest in such Vacation Intervals. Such notes receivable generally have initial terms of seven to ten years. The average yield on outstanding notes receivable at March 31, 2008 and 2007 was 16.4% and 15.9%, respectively, with individual rates ranging from 0% to 17.9%. Notes receivable with an interest rate of 0%, originated primarily between 1997 and 2003, have an outstanding balance at March 31, 2008 of $89,000. In connection with the sampler program, we routinely enter into notes receivable with terms of 10 months. Notes receivable from sampler sales were $3.4 million and $2.9 million at March 31, 2008 and 2007, respectively, and are non-interest bearing.
We consider accounts over 60 days past due to be delinquent. As of March 31, 2008, $4.2 million of notes receivable, net of accounts charged off, were considered delinquent. An additional $26.0 million of notes receivable, of which $22.9 million is pledged to senior lenders, would have been considered to be delinquent had we not granted payment concessions to the customers, which brings a delinquent note current and extends the maturity date if two consecutive payments are made.
Furthermore, we find that the company’s debt load is financing the receivables. Silverleaf makes money on the spread between the interest charged on customer timeshare loans, and the interest the company pays its lenders. This amounted to more than $14.5 million in the first quarter, nearly double net income. Clearly the net interest margin is wide. But what happens if Silverleaf’s customers can’t pay? For more on that, we turn to the 2007 10K and find this note:
We may be vulnerable to the change in the credit markets which could adversely impact our results of operations, liquidity, and financial position.
Because we use various mass marketing techniques, a certain percentage of our sales are to customers who may be considered to have marginal credit quality. During 2007 and 2006, approximately 21.6% and 19.6%, respectively, of our sales were made to customers with FICO® scores below 600. In addition, we have experienced an increase in defaults in our loan portfolio as compared to historical rates. Due to deteriorating conditions in the sub-prime mortgage industry there can be no assurance that defaults have stabilized or that they will not worsen. These and other recent adverse changes in the credit markets and related uncertain economic conditions may eliminate or reduce the availability or increase the cost of significant sources of funding for us in the future. Specifically, if default rates for our borrowers were to rise, it may require an increase in our estimated uncollectible revenue.
This tells us that a relatively large amount of the customer base may be at risk of default. Given the current credit and housing market conditions, this is another risk factor for the company, and further explanation of the “depressed stock price”.
Finally, the Q1 income statement gives us more evidence: Of $65 million in sales for the quarter, $14.3 million was deemed uncollectible. This was up sharply from the same quarter last year ($8.5 million on sales of $53.4 million). Clearly, conditions are deteriorating. All of this adds up to uncertainty at best. But if you look at the bottom line alone (earnings of $.19 per share, net profit margin of 11.4%),SVLF looks like a steal. It's rarely ever that easy.
In Part II of this piece, we’ll explore the company’s assets.
*The author does not have a position in Silverleaf Resorts (SVLF). This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks following the date of this post.
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