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).

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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.

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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.

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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.

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The shortcut method for figuring out a company’s accounting

Here’s what I do… I look at how the company handles depreciation and amortization of its assets.  If management is trying to inflate earnings, it is highly likely that management will be aggressive in making aggressive estimated useful life assumptions behind D&A.

  1. It’s really obvious to the accountants that they can inflate earnings by making more aggressive assumptions here.
  2. Pulling this lever is perfectly legal since these assumptions are inherently uncertain and therefore subjective.  No one will go to jail for pulling on this lever.
  3. All companies have to make assumptions on this accounting topic.

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Chart reading… the crazy short selling way (plus other silly tricks)

Here are some shortcuts that I use to quickly figure out a stock.

  1. Mysterious price spikes on high volume and little/no news.  Sometimes, these coincide with stock promotion like an email blast, physical mailers arriving, etc. etc.  A stock that has many of these spikes is probably an egregious pump and dump.
  2. The stock IPOed during the Dot-Com era and has been on a slow decline since.  Usually these Dot-Bomb wreckages are a decent place to look for shorts.  A lot of questionable stuff went public during the Dot-Com boom.  Such stocks have a tendency to stay somewhat questionable.  Pedigree matters.
  3. The share price performance since inception isn’t very good.  Usually a sign of a bad or mediocre underlying business.

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Hollysys: these guys are really good at putting up phenomenal numbers

(*Disclosure: I am short.)

Hollysys is a Chinese company that designs high-tech stuff.  Interestingly enough, they were able to grow revenues, profits, and operating cash flow without having to increase capex.  See the chart on the left from page 31 from the latest investor presentation:

investor-presentation-page-31

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