Sturm, Ruger (RGR): I’m betting against the short sellers

I think that short sellers are right most of the time.  The most obvious shorts tend to have very high short interest and/or borrow costs.  I try to avoid going long heavily shorted stocks because the short sellers probably know something that I don’t.

The borrow on RGR is a whopping 80.5% (on Nov 2 it was “only” 62%).  If RGR was about to enter bankruptcy like ATPG or STP or CMEDY, I would understand the borrow being so expensive.  But I seriously doubt that RGR is about to enter bankruptcy anytime soon.  The company has been paying dividends since 2009.  At the end of 2012, it issued a whopping $4.5 dividend (about 8.74% of its market cap at the time).  Its products are real and are reviewed all over Youtube.  I think that the shorts are wrong to pay such a high borrow for this stock.  It is almost impossible to make money when the borrow is 80.5%.

Because the borrow is so expensive, the call options on RGR are trading at very low implied volatilities (mid 20s versus historical volatility of around 40).

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MTY Food Group (MTY.TO): Fast food, faster growth

MTY Food Group is a collection of fast food franchises.  A large part of its growth has come from buying second-rate and third-rate food franchises.  MTY is a very good operator as purchased concepts have generally become much more profitable and have grown into much larger franchises since being bought.  The company’s CEO and founder, Stanley Ma, has been referred to as “the king of the food courts”.

Return on equity: around 22.75%.  (The company has virtually no debt.)
Growth in book value from 1996 to 2012:  21.5%/year.
Growth in share price from 2003 to today:  Over 100X.  (Yes, over one hundred times!)

*Disclosure:  Long 1 share as a tracking position.

Visa: A wonderful business with a strong moat

Visa is basically a technology company in the payments processing industry.  Network effects and economies of scale contribute to the duopoly enjoyed by Visa and Mastercard.  Both companies should grow earnings as they are toll bridges on the secular trend towards electronic payments.

Unfortunately, the valuation remains a little high so this is not one of my best ideas.

Adjusted TTM P/E: 23.47 (source: Yahoo Finance / Capital IQ)
Forecasted earnings growth: “Mid to high teens” (source: Q3 investor presentation)

*Disclosure:  Long Visa.

Sprott Resource (SCP.TO) – Trading below NAV but I’m not buying it

Sprott Resource Corp is somewhat similar to a publicly-traded closed-end fund.  It is a vehicle for generating asset management fees for Sprott Inc. (SII.TO).  SCP is currently buying back its shares as they are trading at a ~21% discount to NAV.  Normally I like situations where undervalued companies are buying back their shares.  However, I’ve been learning (the hard way) that management matters.  While SCP’s management is not the worst in the business, I am not enthusiastic about it.

Selwyn Resources – Harlan Meade is out, company will distribute cash to shareholders

See the press release filed on SEDAR.

National Research Corporation (NRCIA/B)

National Research corporate does surveys for healthcare-related organizations.  The operating business has grown around 14%/year over the last decade.  Its CEO is obviously a Warren Buffett fan and (in my opinion) has higher integrity than Buffett.

Recently, National Research has performed a recapitalization that has created an A and B share structure.  There is some uncertainty as to the relative economic interest between the two share classes.  The B shares should be worth anywhere from 6X to 1X that of the A shares if voting rights and illiquidity are ignored.  This is a huge range.  Because of the uncertainty over the relative value of the two share classes, there are two different possible trades:

1. Arbitrage.  Go long the B shares and short the A shares.  One could make the argument that the B shares have 6 times the economic interest of the A shares.  On top of that, the B shares have higher voting power so they should trade at a slightly premium (though in practice it could trade at a discount due to illiquidity).
2. Go long the B shares.  National Research is a well-managed company run by a CEO with unusual integrity.

*Disclosure:  Long NRCIB, no position in NRCIA.

Pinetree Capital (PNP) update

I’ve sold out of Pinetree at 45 cents/share and above.  While it still trades at a discount to the market value of its assets, Pinetree’s management is truly awful as discussed in my previous post on the company.