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,

CAVEAT EMPTOR

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 information@stonestreetadvisors.com.

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 Finviz.com 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) v