Restoration Hardware: Their numbers don’t make a lot of sense

Restoration Hardware is a retailer with a shrinking store count, going from 95 stores in YE2010 to 70 stores in YE2014.  Despite this drop in store count, capital expenditures have grown from $2.024M to $93.868M in that timeframe.  One explanation is that Restoration Hardware is improperly capitalizing expenses to inflate its earnings.  Of course, it is also possible that there is no accounting fraud here.  Perhaps Restoration Hardware is legitimately making a huge investment in software and store renovations.  As always, you should do your own due diligence and come to your own conclusions.

Market cap:  $2.6B
Borrow:  <1%
Shares short / shares outstanding: 10.3% (Shares short as a % of float would be higher)

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The Wolf of Wall Street

This book by Jordan Belfort tells the tale of how his firm used its army of brokers to sell stocks at inflated prices to rich retail investors.  This is secretly one of the best books on short selling.  By understanding the criminal point of view, I started realizing more of the footprints that pump and dump-style frauds leave behind.

The book does have its flaws.  The author isn’t exactly a reliable narrator.  Jordan Belfort is not a “wolf of Wall Street” at all.  The book talks about how he specifically kept his offices and those of his affiliates away from Manhattan.  As well, most of the book does not talk about securities fraud.  Nevertheless, if you want to develop a gimmicky skillset that is only useful for short selling, I highly recommend this book.


The book was also adapted into a Hollywood movie.

KMI and the $1 club

Kinder Morgan’s CEO has voluntarily taken $1 in salary for a very long time.  The chief operating officer, Steven Kean, looks like he will follow in his boss’ footsteps.  Kean will still get paid stock so his overall compensation won’t be as low as Richard Kinder’s.  Still, I think it reflects very well on management’s integrity.  From the proxy statement:

In 2013, Mr. Kean made a similar request to Mr. Kinder to change his annual base salary to $1. Mr. Kean also requested that he receive no annual bonus from us or any of our affiliates. As a result, Mr. Kean’s total compensation consists of a restricted stock grant received in 2013 which is subject to six-year cliff vesting, dividend equivalents paid on that restricted stock, and benefits available to our U.S. employees generally (such as healthcare, life insurance and 401(k) plan benefits). There are no plans at this time to grant additional restricted stock to Mr. Kean until the vesting terms of his 2013 grant have been met.

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What I learned about HFT from day trading

Years ago, I briefly tried my hand at day trading with a company called Title Trading.  Title Trading is a proprietary day trading firm similar to Swifttrade (the pioneer) and somewhat similar to SMB Capital (SMB has an excellent blog).  These firms will take almost anybody, sit them in front of a computer and get them to trade very small amounts of money.  The end game is to find talented traders to day trade the company’s capital.

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China 2.0

Apparently there is a new wave of Chinese stocks hitting US exchanges.  Some of them are Web 2.0 related.  Needless to say, I am extremely skeptical about these Chinese stocks.  Historically, there has been an extreme level of blatant fraud from China.  This is mainly because these Chinese stocks were listed on foreign exchanges around the world and because scumbags gravitate towards reverse mergers.  (To be fair, these China 2.0 stocks are not reverse mergers.)  The underwriting of these China 2.0 stocks seem rather loose.  They do not have to comply with all parts of Sarbanes-Oxley thanks to the JOBS act.  At least 3 of these companies (GOMO, WBAI, WUBA) have identified material weaknesses in their internal controls.

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The not so pretty side of Altius Minerals

I have a large position in Altius.  But sometimes it is good to invert and to look at why your positions aren’t great ideas.  Here are some things about Altius that deserve examination:

  1. Altius owns shares in Alderon (and has a valuable royalty on Alderon’s flagship Kami project).  Alderon pays for stock promotion.  The way this paid promotion is disclosed may be improper.
  2. It is hard to time if the Kami mine  is economic.
  3. Alderon engages in your typical junior mining bullshit.
  4. Altius voluntarily bought shares of Virginia Mines, a company which pays for stock promotion.
  5. Some of Altius’ corporate presentations are on the promotional side.

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Unbuilt mines with planned expansions

It is a red flag when a development-stage mining company makes plans for a mine with expansion stages.  Why?  There is one mine size that maximizes the net present value (NPV) of the deposit.  Usually this size results in a mine life of 6-15 years.  A bigger mine exploits the resource faster, making the future revenues happen earlier.  Because there is a time value to money, mining faster increases the present value of the future cash flows.  A larger mine also enjoys economies of scale that lower operating costs.  Of course, all of this has to be balanced against the capital costs of a bigger mine.  Underground mines tend to have higher capital costs so they tend to be designed with longer lives.  Open pit mines tend to have low capital costs so they tend to be designed with short lives.

If the estimated mine life is over 20 years, then there is probably something fishy going on.  Usually, it would make more sense to build a bigger mine with a shorter life.

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