(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).
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 jail. Despite 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.
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.
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.
- It’s really obvious to the accountants that they can inflate earnings by making more aggressive assumptions here.
- 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.
- All companies have to make assumptions on this accounting topic.
Here are some shortcuts that I use to quickly figure out a stock.
- 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.
- 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.
- The share price performance since inception isn’t very good. Usually a sign of a bad or mediocre underlying business.
In my experience, the cost to borrow shares is a far more powerful predictor than short interest. Anybody who looks at short interest instead of the cost of borrow is probably not that savvy.
Adam Kommel’s (and Wayne Gerard’s) company, aptly named Activist Shorts, is a research service that keeps tabs on free, publicly-available research put out by short sellers. Some of this research is the best research available for a particular stock. Some of these reports expose fraud and act as the catalyst for a stock going to zero. Examples include Muddy Water’s work on Sino-Forest and Jon Carnes’ work on Fab Universal. In those situations, I would say that these short sellers’ reports were the most important document that you could have read for that particular company- more important than the annual report.
There are two parts to Activist Shorts
- The @ActivistShorts Twitter account, which is free. I highly recommend following it. I read it regularly to find out about all the latest reports being released. You can read it for yourself on Twitter and quickly see whether it’s worth a follow.
- A paid subscription service, which can save time if you spend a lot of time following activist shorts (I kind of don’t).