Trex: marketing hype and unproven technology

This blog post is in reference to John Hempton’s post on Trex; the post points out that Trex’s operating margins are suspiciously high.  I haven’t uncovered enough about Trex that would suggest to me that there is some form of egregious accounting fraud occurring.  However, I can see how Trex’s margins can appear to be so high. This industry does not sell a commodity.  Rather, the industry sells marketing hype and unproven technology.

Trex was one of the companies that pioneered the use of wood-plastic composites as decking material over 2 decades ago.  Unfortunately, the composite materials did not live up to their fanfare and marketing hype (e.g. zero maintenance, lasts longer than wood, etc.).  There have been issues with composite deck materials from virtually all manufacturers that have led to recalls, expensive warranty claims, and class action lawsuits.  Some manufacturers have gone bankrupt and were not able to pay out all warranty claims, leaving homeowners holding the bag.

The current practice is for manufacturers to exclude known problems from their written warranties.  These written warranties do not obligate them to stand behind their marketing hype.

(*Disclosure:  No position.)

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Pretium 2017 recap – “they will not have a mine producing 425,000 oz. a year for the next 20 years”

(Pretium has a US$1.8B market cap and the borrow is in the low single digits.  I have written about this stock previously.)

Back in 2013, Strathcona resigned from the Brucejack gold project due to disagreements over what Pretium was telling investors.  Graham Farquharson (Strathcona’s head honcho) was being a gentleman and allowed Pretium to disclose on their own terms (with their own PR spin).  Unfortunately, Pretium instead tried to discredit Strathcona.

So, Farquharson did an interview with The Northern Miner, a trade publication.  You can read the interview on the website (no paywall):

Yes, and we told them that it has an excellent chance of being a small-tonnage, high-grade mine in the Cleopatra vein, and a couple of other similar occurrences that they found in the last drilling program.  If they lined all those up, there’s an excellent chance that they could have a small-tonnage, high-grade gold mine. But they will not have a mine producing 425,000 oz. a year for the next 20 years, as they have been advertising so far.

Here’s the crazy part.  This is 2017 and Pretium is almost finished building that mine.

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Exxon Mobil put options

(Unfortunately I did not have the time to fully research this.)

Improvements in shale extraction technology and a glut of capital have basically destroyed oil and natural gas prices.  While Exxon’s management is ok, the company cannot defy commodity prices.  Its upstream assets aren’t worth that much anymore because they’re inherently leveraged to oil prices.  But despite the dramatic decline in oil prices, Exxon’s share price remains high.

The put options are interesting to me since implied volatility is low (20-30%+) and the company is overvalued.  The options are barely more expensive than SPY puts (in terms of implied volatility), except that oil prices fell by half and America’s GDP did not.

A back of the envelope calculation puts Exxon’s private market value at <$129B versus a market cap of $359B.

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Coach’s brand transformation fake-out

Victor Luis, Coach’s CEO, has told investors about his brand transformation plans.  In practice however, many aspects of his brand transformation plan have not panned out.  Coach has succeeded in discouraging its fans from shopping at retail/mainline stores without actually reducing the discounting of the brand.

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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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CONN 10-K update

Key points in CONN’s latest 10-K

  1. Omitted the static loss table found in previous 10-Ks and 10-Qs.
  2. Removed the following sentence: “Under our current policy, the maximum number of months an account can be re-aged over the life of the account is limited to 12 months.”

I guess I will continue to hold my short position in CONN.  While I don’t entirely know what’s going on, this does not smell right.  (*The borrow is expensive.)

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