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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Contango Ore (CTGO.PK) – Interesting drill results

Contango Ore is a mineral exploration company that spun off from Contango Oil and Gas (MCF).  Brad Juneau, MCF’s long-time oil & gas exploration partner, is the CEO.  Avalon Development Corporation provides geological services for the company.  Contango Ore has interesting drill results though it’s too early to tell if it has an economic deposit.

CF Industries Holdings (CF) – Speculating on commodity prices

CF produces nitrogen fertilizer.  It is a bet on:

1. Natural gas prices in the US staying low, allowing CF to have lower costs than its foreign competitors.
2. Corn prices staying high, driving demand for nitrogen fertilizer.

The current P/E is roughly 6.25.  CF is buying back shares and building new capacity.

Crocs Q2 2013 earnings

Crocs stock is down over 20% today as it released bad earnings.  Its Japanese operations continued their decline and had terrible results.  Comparable store sales for Japan dropped a whopping 19.5% quarter over quarter (on a constant currency basis).  Something is seriously wrong with their Japanese operations and I haven’t been able to figure out why.  As well, Crocs’ SG&A costs have gone up significantly while gross profits have stayed flat.  The overall result is that net income has dropped a third from $73.8M last quarter to $49.6M this quarter (-33%).

Pacific Sun (PSUN) – overvalued and losing money

PacSun is an apparel retailer that targets the fickle teen market.  I’m going to keep this post short and simple.  Since Gary Schoenfeld became CEO in June 2009, PacSun has been consistently losing money.  The CEO has had 3-4 years to turn the company around.  A good CEO would have turned around the company by now.  Of course, PacSun continues to report losses.  If the future resembles the past, then this company will continue to lose money and go bankrupt in a few years.  In YE2013, the company had GAAP losses of 77 cents/share versus a book value of 95 cents/share.  While the company has a lot of debt ($1.17/share at YE2013), the debt is probably not that dangerous as most of it matures in 2016 and (as far I can tell) doesn’t have financial covenants.

Market cap: $273M
Earnings yield: -22%
Price/book: 6.87
Short % of float: 15%
Short % of outstanding: 8.2%

*Disclosure:  Short PSUN common stock.

AV Homes (AVHI)

This company is a mess but it isn’t as overvalued as some of the other homebuilders.  So, I don’t think it’s a great short.

Hovnanian (HOV)

Hovnanian has a huge mountain of debt that it is trying to outrun.  Management has been diligently extending maturities on Hovnanian’s debt and raising capital through secondary offerings.  My short thesis is this:

1. Hovnanian is overvalued if you were to sell off all of its assets.  Its market cap is $760M.   Book value is -$478M (yes, that’s a negative sign).
2. It’s losing money.
3. They are one of the worst managed homebuilders so they will likely continue to perform poorly in the future.