GameStop (GME) – A buggy whip manufacturer

GameStop is a leading bricks and mortar retailer of video games. This business is in a slow decline due to online competition.  The short thesis is simple… and quite subjective.  Online delivery of video games offers more value than physical delivery of games.  It’s cheaper, more convenient, and the copy of the game can’t get damaged or lost.  In my opinion, it’s inevitable that most video games will be distributed over the Internet.  GameStop’s revenues and profits will be a fraction of what they are today.

Unfortunately, predicting GameStop’s future revenues will be incredibly difficult as there isn’t a historical precedent to base predictions on.  Inflection points are hard to predict precisely.  However, GameStop’s high valuation provides some margin of safety.  If GameStop makes $400M after-tax annually (this is a little generous) and has a market cap of $6B, then its P/E ratio is 15.  That P/E ratio is too high if GameStop’s revenues were to shrink to a fraction of what they are today.

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Miller Energy Resources (MILL) – This company is awful

Miller Energy is an independent exploration and production company that is mostly involved in breathing new life into old oil and gas assets.  It has many of the characteristics of an ideal short:

  1. The company has been very unprofitable over the past several years.  In most years the company was GAAP unprofitable.
  2. The company likely will not make money in the future.
  3. The company has debt (some at 18%) so the short thesis will play out faster.
  4. Insiders are overpaid.
  5. The company trades at a large premium to the market value of its assets.

Unfortunately, I am not the only person in the world that thinks this stock is a great short.  Roughly 29.2% of the float is sold short and the interest on the borrow is roughly 5%.

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Armanino Foods of Distinction (AMNF)

Armanino is a company that makes a variety of frozen prepared foods for the food service industry.  It is a wonderful company that has enjoyed years of growth and high returns on capital.  This company trades on the pink sheets and deregistered its shares in 2005.

P/E ratio: 15.4 (according to Google Finance)
Market cap: $46.82M
Share price growth over past 10 years (annualized, excluding dividends): 18.5%

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Canadian Zinc (TSE:CZN) – Inflated technical report

(This company is not worth shorting unless its share price were a lot higher.)

Canadian Zinc’s flagship property is the Prairie Creek property.  It used to be a mine that opened in 1982 and shut down the year after.  It must have been a horribly uneconomic mine to have shut down so fast.  Fast forward to today.  CZN is trying to raise capital as it needs at least $234M to build a mine on the property (probably more).

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Steve Madden (SHOO): A fast-growing company I won’t touch

Steve Madden (SHOO) is a shoe retailer with impressive shareholder returns.  Its share price has compounded at roughly 20% a year since 1993.  Currently the company is trading at a reasonable P/E (19.3) and has cheap call options.  However, one of my rules is to avoid management teams with questionable integrity.  Steve Madden, the founder of the company, is definitely a very sketchy dude.

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Motley Fool CAPS

(This post has very little to do with real investing.)

glenn12345 motley fool CAPS

For some reason, I’ve been obsessed with beating Motley Fool’s stock picking system.  I’m interested in beating it as an intellectual challenge and am not aware of any meaningful prizes.  Motley Fool’s CAPS lets you pick up to 200 stocks and you get ranked based on how those stocks perform compared to the S&P 500.  Unlike other stock contests, you are rewarded for diversification.

Normally in a stock contest, my strategy is to go for a portfolio with extreme concentration, correlation, and volatility.  This greatly increases my chances of winning.  It works.  (Unfortunately at, I forgot to claim my prize one time.)  This kind of strategy would still work in CAPS because you could setup multiple accounts and short bull or bear leveraged ETFs.  But I want to make life difficult for myself and do things the hard way: only use one account.

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Pharmacy Benefit Managers / Express Scripts (ESRX)

Express Scripts (ESI) is the largest pharmacy benefit manager (PBM) in an industry where scale is a competitive advantage.  It has been able to compound earnings, free cash flow, and free cash flow at very high rates (over 20%) over the past ten years.  Fundamentally, I believe that Express Scripts’ returns are mostly driven by its CEO, George Paz, who has held the position since 2005.  In the past, ESI never had the benefit of scale.  Its success was driven by the quality of its management.  In the future, ESI will begin to see advantages and disadvantages from its larger size.

On the other hand, the PBM industry has some dubious practices that creates regulatory risk.  The PBMs are rarely transparent with their customers and have often taken kickbacks from drug manufacturers.  There is a chance that future government intervention will target such practices.

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