FT Alphaville CFA Meme Contest Silver Medal for Dutch Book!

The Financial Times’ great Alphaville division held a semi-quasi-formal-ish CFA exam meme contest, in which our man Dutch Book participated. Result: Silver medal (although I think he should have easily won the gold with his submission!). Stone Street Advisors: Winners at the research and meme game. (non-official motto).

Here’s Dutch’s second-place submission:

#SoMuchWin

Congratulations to Dutch Book & best of luck on the exam, which he’ll no doubt ace.

–JT

When Life Kicks You In The Butt…

My friend, my mentor, and one of our SSA teammates is in a bit of a squeeze. Per his last semi public update:

“I have a stage 2heartblock which causes me to blackout when I get dehydrated. happened Saturday morning on my way to play golf. I was taken to ER and given to IV drips. Was ok yesterday, but was in bad shape this am. So I’m currently at NYU Hospital being monitored.”

If that doesn’t scare the ever loving shit out of you to he point of action, you are a sick bastard.

While GTJ has some insurance $, anyone who knows how these things work knows damn well the $1,000′s accumulate extremely fast. I’m not asking for a Billion (we’d accept most of it though) but I want everyone who follows him on twitter, and reads his posts here and elsewhere to pray or do whatever you believe in that he’s healthy asap. We, no, I am not asking for any donations, but I will consider an offer if that is the way you want to play it.

My Friend, my Mentor, and again, My Friend is in an unenviable condition. Please do whatever you can to help.

Information @ StoneStreetAdvisors dot com.

I will match any donations as well as I can; any additional monies will go into a newly established charity which will be used for similar situations; zero will come to me or my firm.

Please wish him well, if you don’t have the money.

Jordan S. Terry
Founder & Managing Director
Stone Street Advisors LLC

Put Me in Coach!

Quick Thesis: Coach, Inc. (NYSE: COH) is solid free cash flow story which many investors have overlooked as they focus on the newly public (and faster growing) Michael Kors (NYSE: KORS). The primary concern is that sales will continue to decline and the multiple contraction at Coach will not be short lived as KORS takes share. While KORS trades a premium multiple and is priced for perfection, COH has been left for dead. The stock sits 36% below its 52 week high after missing 2nd quarter earnings on slowing sales. Current multiples make COH a compelling “value” story – with a market cap of $14.4 billion and trading at 13.6x and 8.1x consensus EPS and EBITDA
estimates, respectively, the stock trades at historically low levels. Continue reading

Three Bearish Charts for Equities

First off let let the record show that equities are by no means my area of expertise, but I thought this was worth sharing and too long for twitter.

This week three of my favorite correlations for US equities in different risk areas ended up significantly disconnected from the levels where the SPX is currently trading. Because of this I decided to enter into a short term risk reversal on Thursday.

Economic risk: SPX has lined up very well initial jobless claims for the past 5+ years but has recently overshot by quite a bit

High quality risk: the BAML Global Financial Stress Index, which attempts to measure stress in areas such as solvency and liquidity, price momentum, and short term volatility. This is the first time it has broken significantly below equities in over two years.

Low quality risk: the Markit CDX North America High Yield Index tracks CDS for 100 non investment grade debt issuers. This has been an extremely tight relationship and was the straw that broke the camel’s back for me.

It might be worth keeping an eye out for a minor correction.

Fear Not Every Penny Stock

A lot of people, finance professionals/academics and amateurs alike, will tell you that investing in penny stocks is inherently and necessarily risky, primarily by virtue of generally having small market capitalizations (e.g. below $100 million) and low stock price (e.g. below $5 in the U.S.) As I mention in all of my reports and articles on penny stocks, the lower the price, smaller the market cap, and lower the trading volume, the more susceptible the stock is to manipulation by unscrupulous types, typically using so-called “pump & dump” or “short & distort” schemes. Luckily, these risks can be minimized by using stop/limit (instead of market) orders along with proper position sizing relative to average volume to limit your downside risk and/or lock in profits. This, however, is not a column about trading (although that’s part of the process), it’s about fundamentals of business and investing, and that’s where I want to focus today.

So, now that we know how to (try to) minimize our risks on the trading side, how do we manage the risks associated with the underlying business? First, it depends on how one defines risk, or more accurately, what risks one is able to identify. Just because a penny stock is a small/micro-cap and/or development/transformation stage company doesn’t mean you can’t apply some of the same analytical techniques we use for larger companies to identify risks and determine if a given stock is worth your investment dollars. Interestingly, even the SEC has this to say about the risks of micro-cap stocks, emphasis mine:

“While all investments involve risk, microcap stocks are among the most risky. Many microcap companies tend to be new and have no proven track record. Some of these companies have no assets or operations. Others have products and services that are still in development or have yet to be tested in the market.”

This is a bit of an overgeneralization lacking nuance, but many penny stocks are fundamentally quite similar to the private early-stage companies that venture capitalists and angels invest in; The SEC’s comments could easily apply to both early-stage public and/or private endeavors. Harvard Business School senior lecturer Shikhar Ghosh has some very interesting stats and perspective on start-up/early-stage business failures. Barring outright fraud (more on this later), the reasons and frequency cited for business failure are probably not too much different for early-stage public firms than for private ones (not sure of data on this, but that’s the topic for another article).

So, how do we determine if it’s worth investing in a given penny stock? Generally, I prefer a primarily bottom-up approach with a healthy amount of deference to the top-down, regardless of market cap, and I think such a combination works especially well for penny stocks. Recently, a client hired us to research a volatile micro-cap penny stock, Nuvilex (NVLX) . I’m not going to get into too much detail about the specific project, but I want to use the company/research approach to illustrate how disciplined investors can separate the wheat from the chaff when it comes to penny stocks.

At first, I was skeptical of Nuvilex (not a surprise occurrence as I’m a skeptic first all the time); micro-cap stock, very volatile, very low price, barely any revenue, generally terrible financial statements, and a strange operating history spanning a decade and a half. The more research I did, though, I realized – again, barring outright fraud – the company’s technology has enormous potential. A simple Porter’s Five Forces analysis is always a good way to start, on any stock/company, again any market capitalization.

On a 1-10 scale I’d give Nuvilex a 7.5-8.5 on the five forces based on the public information I’ve reviewed. Regardless, this company, on a stand-alone basis, could change the way cancer, diabetes, and other horrible diseases are treated if not cured. Additionally, it’s a play on the inevitable paradigm shift in medical technologies coming from cell therapy and stem cell advancements. Bottom-up meets top-down; easy, right? Wrong!

Just because from 30,000 feet everything seems promising, we have to get a little closer to ground level, lest we miss something obvious like shady management, impossible financials, etc. I actually found it somewhat reassuring to see Nuvilex’s financial statements seem accurate compared to the story woven by management; many pump & dump, “fraudcap” (colloquialism for fraudulent or otherwise questionable micro-cap stocks) companies file SEC reports that make absolutely no sense given the market/industry and the idiosyncratic attributes of the company in question. Nuvilex’s tech has intellectual property protection, plenty of publications, accomplished leadership, and technology that could help extend if not save lives. When I was looking for competitors, I found one that explicitly disclaimed responsibility for all IP violations and said any issues were their customers’ problem. Amazing, no? Moving on…

The key takeaways here are 1. Don’t judge a book by its cover (or a stock by its price/market cap, 2. Most people don’t have a clue about investing (even some professionals), so beware word of mouth “advice,” 3. Always do your diligence and be on the lookout for shady #’s and characters; if it seems too good to be true, it probably is.

As always,

CAVEAT EMPTOR

Nuvilex: A Penny Stock That Could be a Disease-Fighting Game Changer

Nuvilex (NVLX) is a company that I’d never heard of until about about a week ago when a client asked me to take a look. At first glance, my reaction was something along the lines of “why should I be bothered with a $0.05/share microcap transformational/developmental stage biotechy company with downright scary financials and a strange history?” After doing a ton of reading and research, I’m starting to realize why I – and you – should care about this company, regardless of it being a volatile microcap OTC penny stock.

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Carnival Cruise Lines – This Time it’s Different

Quick note: It seems like it was a year ago when I wrote that the selloff in Carnival Cruise Line (NYSE: CCL) shares after the Costa Concordia ran aground was overdone. Looking back, it was actually 419 days. At the time the shares were trading at $31.56. The shares subsequently recovered to a high of $39.95. A solid 26.6% return. Today the shares closed at $34.95, still up 10.7%, but 12.5% off the highs.

Last time, I gave a number of reasons why I thought the shares were attractive. As the saying goes, this time, it’s different. Continue reading

Howard Marks – Investing in Uncertain Times

While I’m sure I’m not nearly the 1st person to post this from the Oxford Private Equity Institute Conference on March 5th, I thought it an interesting read (especially if you’ve read him previously).

Perhaps the presentation is best summarized by the quote on page 2, to which the entire page is dedicated.  I find this particularly disturbing:

You can read the full post here:129134638-Howard-Marks-Investing-in-Uncertain-Times

 

ZAGG:SKUL::Punxsutawney:Paris

I’ve been negative on ZAGG since July, 2011 when the price was in the mid teens, so the stock is down somewhere around 45-50% since then (fair credit to Citron – who was more and more impatiently negative than I, Roddy Boyd, and others who were on top of this dog early). I’d like to posit a question (or a few): Would you rather own a company that relies on one, maybe 2 accessory products for maybe a handful of devices OR would you rather own a company that has demonstrated brand equity – bordering on being, dare I say, a lifestyle brand with a continually diversified, relevant product portfolio? What if the former had dozens of questions about management, governance, disclosure, business practices, (I could go on for a while), while the latter seems at least relatively squeaky clean?
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On the “Gun Debate,” the Second Amendment, & What No One Wants To Talk About

Since I transitioned Stone Street Advisors from a financial blog to Stone Street Advisors LLC – providing research & analysis services for institutional investors and the like – I’ve shied away from getting into political debates.  Once an issue becomes prevalent, the majority of people have their minds’ made up based upon limited information, usually fed to them through various forms of grossly over-simplified media “reports” or info (read: opinion) from friends/family.  There is generally no use trying to sway the opinion of these people, it’s just an exercize in futility; there are no facts, figures, statistics, or well-researched/constructed arguments that can change their minds.

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