NRCIB: the business has grown but the share price has stayed the same

(*Disclosure:  Long NRCIB.)

Idea type:  GARP and/or share class arbitrage

Three years ago, I wrote about National Research Corporation, an obscure and illiquid company with a market cap of half a billion.  Since then, the company has continued to grow (around 11-14%/year) while the share price has stayed the same.  According to the 2015 10-K, EPS for class B shares was $2.52 so the GAAP P/E is around 14.  However, due to this company’s unusual structure, GAAP earnings overstate the true P/E.

The arbitrage trade might also be interesting since the spread between the B and A shares should be somewhere around 1:1 to 6:1 or higher (arguably close to 6:1), but is currently 2.16:1.

Continue reading

Amazon: the high-margin online retailer

(This is not an actionable idea.)

From researching dollar stores, one of the things that struck me was that you can purchase a pregnancy test for a dollar.  Amazon’s #1 best seller pregnancy test costs $12.33– a magnitude more expensive than dollar stores.  Amazon is clearly not competing on price!!

amazon-pregnancy-test

By comparison, a more discounting-oriented online retailer like Newegg has razor-thin gross margins of between 8 to 11% (before overhead).  Newegg sells computer parts online.  Its financials are available via the  S-1 filing on EDGAR due to Newegg’s aborted IPO.

Continue reading

Coach’s brand transformation fake-out

Victor Luis, Coach’s CEO, has told investors about his brand transformation plans.  In practice however, many aspects of his brand transformation plan have not panned out.  Coach has succeeded in discouraging its fans from shopping at retail/mainline stores without actually reducing the discounting of the brand.

Continue reading

The Chipotle Mexican Grill way

(This is not an actionable idea or writeup.)

What makes Chipotle different is how small its menu is.  With a barebones menu, the restaurant can turn over its food quickly.  This allows Chipotle to make food before a customer orders, allowing customers get freshly-cooked food without having to wait for that food to cook.  This means high-quality food with a very short wait, making Chipotle an attractive choice for workers on their lunch break (or anybody who wants a quick meal).

Continue reading

Dollarama: The low-tech retailer that could

(This post is long and may not be very interesting to you.  This is not an actionable idea.)

Lately I’ve been trying to learn more about the retail industry.  Two things about Dollarama struck me:

  1. Its returns on capital are very high.  My 2013 post on dollar stores put Dollarama’s return on capital at around 57.8%, dramatically better than all of its dollar store peers.
  2. Dollarama is a technology backwater.  Dollarama did not fully implement a point-of-sale system until 2011.

Dollarama has higher returns on capital than most other retailers out there, yet it’s not obvious why that is.  My take is that Dollarama is really good at doing three things:

  1. Choosing what products to buy.
  2. Choosing what prices to sell that product at.  Dollarama buys high-margin items and undercuts its competition on pricing.
  3. Cutting out the middlemen.  Dollarama sources a lot of its product directly from manufacturers rather than going through distributors.

Continue reading

Scumbaggery matters, but only up to a point

When researching a stock, sometimes I stop caring about how shady the insiders might be.  The quality of a business usually overpowers insiders’ shadiness.  For example, Steve Madden (SHOO) is an example of terrible corporate governance.  It originally began as a ‘chop stock’ (similar in concept to a pump and dump).  Many of the people behind the scam went to jail or were barred from the securities industry.  Steven Madden, the founder of the company, went to jail.  But even after many people went to jail, the shenanigans continued.  While in jail, Steve Madden was paid a high six-figure salary even though he admits that he didn’t work while in jailDespite all of this… the stock did incredibly well since its IPO.  In many cases, the underlying business can make far more money than insiders end up stealing/siphoning/wasting.

Continue reading

Quickly estimating the DCF of oil and gas reserves

From what I can tell, practically all stocks’ oil and gas reserves will have a Net Present Value of roughly 2-7 times the trailing twelve months’ cash flow.  One relevant article is titled: “The Valuation of Oil and Gas Properties: Are They Really Worth 3x Cash Flow?“.  For conventional wells, the 3X rule of thumb should come fairly close to the NPV in most cases.

I use this shortcut to get a quick sense of whether or not an E&P is massively overvalued.  Currently I only short E&Ps and am not seeing any undervalued E&Ps even though these stocks have fallen a lot.

Continue reading