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%.

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).

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.

Comstock Holding Companies (CHCI) – The living dead

Comstock is a distressed homebuilder that defaulted on most of its debt in 2009.  It allowed many properties to enter foreclosure while it worked with its unsecured lenders to re-negotiate/amend its debt.  Currently, the company is still in a precarious position.  It is effectively borrowing money at 20% (from insiders and private investors) while it tries to convert its inventory of land into cash.

Over the past few years, it has been unprofitable and has seen its revenues decline.  Since 2006, every year has been GAAP unprofitable except for 2011 (where the company was profitable because it won a lawsuit).  Comstock trades at a price to book ratio of 8.74 (higher if you take out capitalized interest).