Wisdom • Patience • Performance
The purpose of a one-hour analysis is to quickly evaluate the positive and negative attributes of a company. The key question is how much more time do I want to spend on this company. The job of a generalist is make quick decisions about when further investigation is warranted, and when it is best to move along.
It takes experience to develop this skill. Early on a one-hour analysis can easily take 3-4 hours. After a while, it is often possible to dismiss a company in 15 minutes. We have never seen this skill discussed in any other text or book about investment analysis. The best way to learn is to start by actually doing some.
We like to start with a Value Line page. Most of what we look for is also present on Moringstar, Gurufocus, Google Finance and or Yahoo Finance. Here are some of the things we look for:
Sometimes an idea looks good at the start, but upon closer inspection it doesn’t meet the margin of safety or other criteria. Carrols Restaurant Group is an example of this. Here is a report written for Seeking Alpha Pro that illustrates this. There is a lot of potential upside to this company’s business model, but the current valuation and the lack of free cash flow make it a “pass” for now.
Carrols Restaurant Group – Biting Off More Than It Can Chew?
One of the points I have constantly tried to emphasize in my articles is “do your own work” and do not rely exclusively on data provided by financial websites. Carrols Restaurant Group (TAST) is a classic example of how relying on financial website data can cause investors to make significant errors in their analysis. If an investor uses the data provided by websites like Yahoo Finance, Google Finance or Finviz to name a few, he will see that the company has about 23 million shares outstanding. Multiplying the shares outstanding by $4.80 a share would give the company a market capitalization of about $115 million. TAST showed up on a low EV/Sales screen I run on the restaurant industry. However, this calculation would miss the fact that there is a convertible preferred outstanding that will convert into an additional 9.4 million shares. Therefore, these financial websites are understating TAST’s market capitalization by $45 million, which is a significant difference. So anyone doing a screen based on EV/EBITDA or EV/sales or even P/E ratio, would be getting a wrong impression of the current valuation of the company. While the company’s enterprise value is being understated, it also appears as though the company’s normalized EBITDA and operating margins are being understated as well. This article will analyze the company considering both situations.
We like to use Value Line as a weekly source of potential ideas. Since we are value investors, some might find it strange that we would use a publication whose ranking system is based mostly on price and earnings momentum as a primary source of idea generation. Perhaps in the future we will take a look at track record of their ranking system and similar ones like Zack’s and review the literature on adding a momentum component to value investing. But back to how we use Value Line as an idea sourcing tool. Every week Value Line publishes an issue that contains roughly 130 stocks in it grouped by industry. This gives us a chance to quickly review the latest results and financial metrics on 6 or so industries a week. It also puts in front of us hundreds of companies we might never even think about or come across using other methods.
One such company that popped out of a recent Value Line issue we decided to revisit was Live Nation. While at Behind the Numbers we originally wrote up the company as a short. We were concerned with the high leverage, the aggressive rollup strategy, governance issues and long-term growth rate assumptions amongst other things. Since then, LYV has merged with Ticketmaster, signed a mega deal with Madonna and now have John Malone and Liberty Media as large shareholders. We decided to take another look at LYV to see if it has any investment merits either long or short. Here is how I started my “One hour analysis” of LYV. [Read more…]
Investors have a tendency to look at stock charts after a stock has significantly increased in value and think the could have made that big return if they had just known about the opportunity at the time. In reality it doesn’t work that way. Most stocks that are near their lows or out of favor are “cheap for a reason”. Here is an example of one, Body Central (BODY), a former high flying growth stock that is now trading at one-third its peak valuation and more importantly less than enterprise to sales ratio of 40% and cash equal to 30% of the market cap. Similar stocks have been acquired at 2X the current multiple.
When stocks are out of favor and priced inexpensively, investors tend to focus on the reasons they are out of favor. When they are in favor and priced fully, investors tend to focus on the reasons they are priced that way. In truth, most of the time those reasons are always present, it is just that investors tend to focus on just the negative when stocks are declining and focus on just the positve when they are increasig.
Here is our take on the reasons BODY is cheap and some thoughts on what the reasons could be when it isn’t cheap any more….
I have spent almost my entire career in the investment industry, over 27 years of it anyway, as an analyst focused almost entirely on “value” stocks. Most aspiring value investors are intellectually attracted to the investment style because it makes sense intuitively. Buy enough “safe” cheap stocks and thanks to mean reversion or shareholder activism or just plain time, your results should outperform the market. Investors see successful investment results ex-post and believe in “hindsight” they too could have made that investment. However, I believe that, “if you could have you would have.” What most investors fail to understand is that the value stocks that have done well where most likely “cheap for a reason” at the time the potential gains were the greatest and there was no clear reason or “catalyst” to buy the stock at that time. As others have said, “valuation can be its own catalyst.” What follows is an analysis of Body Central (BODY), a stock that is “cheap for a reason” and has no “visible catalyst.” Anyone that is still reading this article after that last sentence, thank you for your support!
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