Aswath Damodaran’s Spring, 2015 Valuation Class Project Results

As some of you know, I’m finishing my MBA at NYU’s Stern School of Business, and thankfully, I’ve had the privilege of taking Aswath Damodaran‘s capstone valuation class. Each year since 1999, students in Professor Aswath Damodaran’s capstone valuation class are required to complete a large valuation project. Students pick from any listed stock globally (with a few exceptions), and perform a discounted cash flow (DCF), relative, and in some cases, a real-option valuation.

The results are in, and boy are they interesting! I’ve written a quick summary, and I think you’ll enjoy reading it!

Town Sports’ ‘High-Value Low-Price’ Strategy Is Doomed To Fail. Horribly.

• The New York Sports Club parent is trying to win back market share from low-priced competitors with $20 & $40/month “high-value low-price” no-contract plans.
• Most existing members will switch from $60-125/month memberships to these low-priced packages.
• Members of low-cost competitors unlikely to switch for same or higher cost, with little if any difference in amenities/service at CLUB.
• With generous assumptions, CLUB needs to increase membership 50% from 505,000 at 3/31/15 to 755,000 just to realize break-even operating income.
• It is extremely unlikely that CLUB will break even, let alone turn a profit any time in the foreseeable future.
• Bankruptcy is a very real concern over the next 2 years.

It seems two very competent activist investors, PW Partners and HG Vora, have got themselves into a sticky situation. Together, they control about 25% of the company and now the board, as well. Regardless, they face a Sisyphean task. As we have remarked and detailed several times before, turnarounds are hard, and this one is no different.

On the Perils of Management Access & Straying From Process: Our Adventure With Jones Soda


  • We initially were skeptical about Jones Soda (JSDA) due to declining and generally weak financials, questionable strategy, and uncertainty surrounding its turnaround plan.
  • After the annual meeting and a one-on-one with the CEO (& CFO), we became convinced the company was in capable hands, and the turnaround would go well.
  • Turnarounds are hard, particularly for severely resource-constrained firms. We now believe Jones should put itself up for sale rather than wait/hope for a small miracle.

  • Introduction

    In late May 2013, we started working for a client who was interested in knowing what we thought about Jones Soda (OTCQB:JSDA). It was a bit of a treat to be able to work on a company whose products I had enjoyed so much during my more formative years, and it provided me the opportunity to do a lot of work that I don’t often get asked to do, some banking and activism stuff in addition to research.

    Unfortunately, until very recently, I was bound by a non-disclosure agreement, which prevented me from sharing further analysis publicly. Now that I’m at liberty to write again, I want to discuss how we got the bullish call wrong in June 2013, what happened when we realized we were wrong, what we’ve learned in the process, and what we think about Jones Soda today.

    I’ve tried to be brief, but since there’s a lot of relevant background information, this isn’t exactly a quick read. If all you care about is our current view on the company, you may skip to the last section, though you’ll be doing so at the expense of understanding the bigger picture.

    A Good Analyst is a Skeptical Analyst
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    Unilife Releases OrbiMed Loan Covenants: Is Default Imminent?

    In May, we explained how UNIS – with the helping hand of the SEC – was able to file the OrbiMed credit agreement and leave out very important details, particularly what financial performance it had to achieve to avoid triggering an event of default/covenant breach:

    As far as we know, we are the only observers to find this unacceptable, as it allows UNIS to severely impair analysts’ and investors’ ability to evaluate the firm’s default risk and valuation.
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    A Brief Example of The Limitations of Algorithmic Investment Selection

    Earlier today, I came across this interesting piece of “research” identifying Jos. A. Bank as a compelling long opportunity. For those out of the loop, JOSB is in the process of being acquired by Mens Wearhouse for $65/share. As you can see, since MW made its most recent offer (raising the price to $65, that is), JOSB hasn’t exactly been a great stock to trade, to put it gently. To wit:

    +3% and change since JOSB filed the press release announcing the higher takeout price, raised from $63.50 on 3/11 of this year, which was just the most recent bump in the long road that has been the MW-JOSB journey (which, if you’ll recall, started with JOSB offering to buy MW back in September of last year, a brilliant strategy in my humble opinion). The odds of the bid being raised from $65 at this point are, in my fairly well informed opinion, lower than the odds that MW’s board will change its mind after conducting due diligence (itself unlikely, but non-zero). Put simply, any trader/investor can do 5 minutes of work, 15 tops, to realize there’s little upside, and a lot of opportunity cost, not opportunity, getting long JOSB at this point.

    TheStreet’s QuantRatings system, available for the bargain price of “less than $1 per week!” touts, among other things, “In-depth analysis of the stock’s most important fundamental and technical factors…”
    One would hope that, among the many factors this or any system “analyzes” the existence of a tender offer (easily found in SEC filings, press releases, etc by man or machine) would be one of them. Alas…

    With novice and professional traders/”investors” alike increasingly relying on any “new information” in the market to inform their decisions (or, too often, confirm their preexisting views), such garbage systematic “research” is as much, if not more a source of risk than a source of opportunity.

    Making money investing/trading is not easy; assuming for even a moment otherwise is a surefire way to shoot oneself in the foot.

    As always,


    Stone Street Advisors LLC Equity Research Performance Analysis, 2011-Present

    When I started Stone Street Advisors, I hadn’t yet developed the full business plan, mission statement, or anything along those lines; I just wanted to do research and consulting differently, and had a general plan for so doing. Over the past few years I’ve refined my approach and my thinking to the point where today, I can be very clear about what the company does, why, and how we add value to clients.
    Simply put, our philosophy is that given finite resources and a finite amount of very high-return, high-conviction equity opportunities available at any given time, our effort is best spent identifying only the very best investment ideas, even if that means coming up with a few per year. We believe generating a handful of great ideas is far more valuable to our clients than several handfuls of ok-to-good ones. To be clear, we don’t presume to replace our clients’ existing research capabilities, but rather seek to complement them. We do not manage money, nor maintain a portfolio (actual or virtual), allowing us an unbiased perspective to focus solely on identifying long and short opportunities that we expect will return 50%+ over the next 12-24 months. While we do not explicitly make allocation or risk management (entry/exit/limits) suggestions, we try to convey all relevant risk factors to clients, especially for short and contrarian ideas.

    Since we’ve yet to have a client ask to see our track-record, I never kept anything more than a mental accounting of our stock picking performance, that is, until this week. Below are the results of the long & short ideas that we have published (the dozens of high-level analyses we’ve shared have been excluded) since 2011, both in absolute terms and relative to the S&P 500.

    Some highlights:

    - Long ideas returned, on average, 237% from initiation to their high price or 222.8% relative to the S&P500
    - Long ideas have returned, on average, 124.7% from initiation to their current price or 104.0% relative to the S&P500
    - Short ideas have returned, on average, 56.2% from initiation to their low price or 71.4% relative to the S&P500
    - Short ideas have returned, on average, 26.5% from initiation to their current price or 66.8% relative to the S&P500

    For inquiries, please contact us via

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

    Initial Thoughts on Unilife’s New Debt Financing

    Since I started looking at Unilife (UNIS), I’ve been extremely concerned with the company’s liquidity and solvency situation. They’ve been burning through cash like it’s going out of style and operating expenses are already very high and have kept growing at a fast pace. Operating losses every year meant the company already has significant negative debt service coverage ratios (i.e. they burn cash to pay debt service rather than using operating income to pay interest/principal). At the end of the last quarter (Dec 31), they were already highly levered with a Debt/(book) Equity ratio of ~0.74, placing UNIS in an elite group of companies — 0.74% of the 6,795 stocks in the database — with such high leverage and negative margins.
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    Unilife, Or: When A “Growth” Pure-Play Isn’t A Smart Play

    I come from the school of fundamental value analysis/investing. So when a client asked me to look into Unilife Corp (UNIS) a few weeks ago, naturally, my first reaction was to look at their SEC filings and financial statements. It became immediately clear (as it should to anyone who’s spent more than 60 seconds looking) that this was not a company on which one could perform a discounted cash flow (DCF) valuation or any other traditional fundamental valuation, since their financials are an absolute and utter disaster of the highest order. DCF won’t work – it’d just be adding an enormous degree of false precision/certainty to an extremely uncertain and unpredictable set of financials – and comps are only useful insofar as they not only exist, but have similar activities, capital structures, etc. Option valuation is just another exercise in futility, especially considering the firm’s financial and operating history is all over the place, making any assumptions/inputs useless.

    So how then are we supposed to value this company? Continue reading

    The Limit of Fundamental Analysis: You

    The other day, my friend Eddy Elfenbein wrote a post entitled “The Limits of Fundamental Analysis,” which made some good points (as he most always does), but in so doing, made far too broad and thus inaccurate a conclusion. The premise is (and I welcome Eddy to correct me if I’m off-base) that in some circumstances, fundamental analysis is inappropriate, such as when dealing with transformational businesses like Amazon was (is), cyclical firms, leveraged firms, firms with varying earnings quality, etc. The thing is, we can – and do (try to) – adjust for all of these things – and more – when performing a proper fundamental analysis! I’m going to attempt to show how, by making relatively small changes to a few key assumptions (sometimes even just one number will do!) in a simple DCF framework, we can grossly change not just how much we think a stock is worth, but why it’s worth that price, as well.

    Fundamental analysis, by definition, involves examining the industry in which a firm competes, the regulatory/legal environment, the market for a firm’s goods/services, the goods/services themselves, the firm’s financial condition/performance, strategy, capital structure, reliability of financial statements/accounting controls, and several other factors, not only currently, but in the past and, more importantly, the future as well. Fundamental analysis isn’t just looking at a few ratios on Yahoo Finance or Finviz or whatever and concluding a company is a good (bad) investment based on valuation, liquidity, solvency, and/or other metrics. That can be the starting point for narrowing down firms which are more (less) likely to be worth investigating further, given a finite amount of time to allocate to identifying and researching ideas which we hope will help us invest wisely.

    A quick tangent: If you’re not in the markets to invest, you are in the markets to gamble. This is not up for debate, it just is; if you find or fancy yourself a gambler, save the trouble and head to your closest casino where they’ll be more than happy to separate you from your presumably hard-earned money quite expeditiously (you may even get some “free” food and drink out of it). If you’re not sure whether you’re trying to invest or gamble, just put your money under your bed until you figure it out, you’ll be doing yourself a favor. If you’re interested in making good investment decisions, this is where the fun starts…

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    BOFI: A Diamond in the Rough, Part II

    First, apologies for publishing this so late, we had a few hurdles to overcome before we could do so that aren’t worth mentioning, just administrative stuff. Also, yes, I know they’ve reported q4 results (well in an 8k at least), here’s the release, #’s look pretty good, might do another post with new #’s, doubtful though

    Anyway, back in March, I first wrote about a stock that we think has great upside potential, Bank of Internet Holdings, BOFI. Since I published that article, BOFI is up ~30%, while the S&P500 is flatish, the Nasdaq Index is down ~2%, the Financial Sector SPDR (XLF) is down ~6%, the Bank SPDR (KBE) is down ~9%, and the ABA NASDAQ Community Bank Index (ABQI) – to which BOFI was recently added – is down ~4.5%.

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