Author: Travis Wiedower

Is the world getting better or worse?

~ Travis Wiedower ~ 4 Comments

“Tell me something that’s true that nobody agrees with.” That’s Peter Thiel’s favorite question to ask entrepreneurs. With it, he’s trying to find people with contrarian mindsets who have no problem believing in things that are not popular. When I first read that quote, I sat for a few minutes thinking of beliefs I have that might fit the bill. Sadly, one of the things I came up with is my optimistic view of the world (including American politics!). Even before Trump, it seems like I rarely run across someone who is optimistic about the overall direction of the world, but especially politics. Everyone thinks people are more racist, politicians are more corrupt, and the world was a better place a few decades ago. My response to that has generally been:

  1. Nostalgia bias.
  2. We’re only human. Don’t expect perfection.
  3. Not that I was alive pre-1987 to know for sure, but when I think about life expectancy, women’s rights, slavery, and the rise of democracy, it certainly seems like the world today is the best it ever has been. And 20 years from now, it will probably be better. And so on and so on.

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Peer Group Valuation Is (Mostly) Useless

~ Travis Wiedower ~ 8 Comments

A company’s value is its future free cash flow discounted back to the present. I doubt any readers will argue with me there. And when you break it down, the two things that determine future cash flow are return on invested capital (ROIC) and growth. So if ROIC and growth are the two determinates of future value, then to have a fair peer analysis the included companies should have similar returns on capital and growth prospects. If two companies have different ROICs or growth prospects then it’s not an apples-to-apples comparison.

Having similar growth potential also insinuates the two companies are in the same stage of their life cycle, meaning they’re similar sizes. So including mature businesses in a peer valuation for a small-cap company is meaningless. When a company is selling for less than its peers, it’s almost always because it has lower returns on capital or its growth prospects are not as good as its competitors. There are a few other factors that play into this as well.
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Don’t Let Numbers Deceive You

~ Travis Wiedower ~ 2 Comments

One of the reasons the recent presidential election was such a surprise was that all the major polls showed Hillary holding a sizable lead right up until election night. There are many theories on why the polls were wrong, but two ideas struck a chord with me.

First, what people say they believe can be very different than what they actually believe. If someone is asked a question (who are you going to vote for?) and they’re embarrassed by their truthful answer, they might lie (answer with another candidate) or downplay it and say undecided. In theory, lying in polls will balance out with a large enough sample, but I don’t think that was the case in this election (Trump supporters were less likely to admit who they were voting for). Second, surveys done online or by telephone will always be skewed in some way. I doubt the group of people who are willing to sit on the phone for 5-10 minutes to answer a survey is a random sample of the entire population.

Those two theories about the failure of the presidential polling prompted me to review my notes from a book I read a couple years ago called How to Lie with Statistics. Whether given to us by management teams or discovered through research, investors are always looking at numbers. I think it’s a good idea to remind myself every once in a while how easy it is to be deceptive with numbers.
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Pro-Dex Should Have Another Good Year

~ Travis Wiedower ~ 10 Comments

Pro-Dex (PDEX) appreciated 93% in 2016 and I think they’ll have another good year in 2017 (though not as good as 2016). In February 2016, Nate Tobik published a PDEX write-up of mine in his Oddball Stocks Newsletter. While the stock has advanced faster than expected, the thesis hasn’t really changed so I’ve copied the entire write-up below. There are a few notable updates from the past ten months:

  1. Their new #1 customer (referred to as project #1 in my write-up) signed a $24 million purchase order to be split between 2017 and 2018. Quite significant for a company that did $13.4 million in sales in 2015. This will be the catalyst for quarterly sales to ramp from the current run-rate of ~$5.3M up to $7M+ in 3Q17 (which ends March 31, 2017).
  2. Their acquisitions haven’t gone as smooth as they hoped so they stopped M&A for the time being. With that being said, each segment is trending in the right direction. In the most recent quarter, the three small segments (ESD, Fineline Molds, OMS) made money for the first time. These had previously been dragging company results down. Margins in the core Pro-Dex business have also been trending up as they continue to work through some manufacturing inefficiencies discussed below.
  3. Their production facility is only at 40-50% capacity so there’s a long runway for growth before major capex expansion is needed.
  4. There are a couple potential new projects in various stages. As you can see below in my write-up, management is pretty tight-lipped on how large the projects they’re working on could be. This means estimating future revenue requires a lot of educated guessing. Suffice to say, there should be one or two new product launches in 2017 and I expect them each to be worth a couple million per year in revenue.
  5. They’ve continued to repurchase shares.

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Shut Up About Creating Shareholder Value

~ Travis Wiedower ~ 4 Comments

You know that feeling you get when a crappy salesman is trying too hard to sell you something? That stereotypical used car salesman? Ugh, I can’t stand it. That’s how I feel when a CEO goes on and on about creating shareholder value. I was recently reading through some Bob Evans Farms (BOBE) conference call transcripts and I wanted to throw up.

When talking about strategic alternatives the company is considering, the CEO Saed Mohseni said “All options of Bob Evans are under consideration by our board of directors. And I believe that ultimately the board will make a decision that is in the best interest of our shareholders and create value for our shareholders.” Next, an analyst asked about a timeline for the strategic alternatives and his answer nauseated me: “I think the best timeline is when we feel that truly enhances shareholder’s value.” My bullshit-meter could not have gone off any louder—what the fuck does that even mean? He obviously wanted to avoid the question, but it’s like he thinks that as long as he throws “shareholder value” into the answer that shareholders will be happy. The ironic thing is that he owns very few shares (all of which were gifted to him) so I highly doubt he cares about shareholder value as much as he talks about it. And if shareholder value is such a huge focus of his, he should probably be gobbling up shares in the open market in preparation for all the value he’s about to create.
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How Effective are Boards of Directors?

~ Travis Wiedower

Directors are supposed to represent shareholder interest. Isn’t it ironic then that new directors are usually a) handpicked by the CEO and b) not shareholders? How can a director represent shareholder interest when they haven’t been a shareholder? The situation is even worse when a hired CEO who has little share ownership himself is picking directors.

I recently read Dear Chairman, which is a great book about corporate governance (or lack thereof) on public company boards. One of the examples from the book was Steve Jobs inviting someone to join Apple’s board. But after that person mentioned some of his ideas to improve corporate governance, Jobs rescinded the offer. He wanted directors who were yes-men, not ones who wanted to change things. This happens all the time and it shouldn’t be a surprise. Humans are selfish and we look out for ourselves first (and that’s how it should be, our self-preservation instinct is a good thing). A CEO wants to keep his cushy position making way too much money every year—why would he want to shake up the group of people that “oversee” him? It makes perfect sense when you think about it from a psychology standpoint.
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Investing in Canadian Marijuana

~ Travis Wiedower ~ 5 Comments

Want to invest in an industry set to grow 20x over the next 5-10 years? You and me both. Canada first allowed medical marijuana sales in 2014 and they’re already planning to legalize recreational use by 2019. With current marijuana sales of $200 million and the mature market size estimated at over $5 billion, there is a very long runway for growth. Predicting how a new industry will evolve is not easy, especially one that is inherently a commodity. There are quite a few public marijuana companies in Canada, but this is more of a high level blog post about the industry as a whole, not a specific buy or sell recommendation for any of those companies.

Background

In 2001, Canada implemented the Marijuana Medical Access Regulations (MMAR), which allowed patients to produce marijuana themselves, designate someone else to do it for them, or purchase it directly from Health Canada. Two-thirds chose to grow it themselves. Enrollment was 39,000 when Canada replaced the MMAR with the Marijuana Medical Purpose Regulations (MMPR) in 2013. Under the MMPR, patients receive a prescription from a doctor and then purchase the marijuana direct from a licensed producer. As of June, there were 32 licensed producers of medical marijuana—22 are fully authorized, four are owned by Canopy Growth, and three are owned by Mettrum. Thus, I believe there are around 15 separate companies that are fully authorized to produce and sell medical marijuana in Canada (with this number expected to grow as more companies are licensed).
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Fogo de Chao Is Looking Tasty

~ Travis Wiedower ~ 6 Comments

A quick housekeeping note first. I recently moved from Cincinnati to Austin, TX which explains my blackout period of blogging. I was busy moving and getting settled in, but I’m finally back to a normal life. Blog posts will be more frequent now. If you happen to live in Austin, shoot me an email! Would love to meet some local investors.

Onto more important stuff. Fogo de Chao (FOGO, $10.52) is a Brazilian steakhouse with 31 locations in the US and 10 in Brazil (plus 1 junior venture in Mexico). I bet some of you are already turned off just because Fogo is a restaurant. I was too. Restaurant concepts come and go and they’re dependent on consumer tastes which can quickly change. Lots of good restaurants open, have a few years of success, and then slowly die as the initial luster wears off and people move on to the hot new concept down the street. I don’t think I’ve ever invested in a public restaurant group before, so hopefully the fact that I like Fogo so much says something (probably that I’m about to learn why restaurants are best avoided).
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Going Through 1,500 OTC Stocks

~ Travis Wiedower ~ 5 Comments

Throughout 2016 I’ve been going through a list of over-the-counter stocks I screened for at the beginning of the year. I started with an Excel spreadsheet of all OTC stocks listed in America (9,855) and then narrowed it down via the following criteria:

  1. Only these exchanges: OTCQX, OTCQB, Pink Current (only wanted companies that were up-to-date with their filings)
  2. Companies based in first world countries
  3. Removed banks, biotech, pharma, minerals, and oil and gas
  4. Removed stocks selling for less than $0.05 and companies larger than $500M market cap

This left me with a list of 1,437 stocks that had a total market cap of just $80.6 billion. This is the third time I’ve gone through a similar list of OTC stocks. The first time was 2011 and the second was 2014. Not surprisingly, the 2016 trip through the list has been by far the least fruitful. The first time I went through in 2011 I found quite a few profitable net-nets, and even in 2014 I found a couple. While I didn’t uncover any interesting cigar butt-type investments this year, I did discover a few high quality companies.
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Armanino Foods (AMNF)

~ Travis Wiedower ~ 8 Comments

Armanino Foods (AMNF, $2.17) sells frozen pestos, sauces, stuffed pasta and cooked meat products. The current CEO, Edmond Pera, took over in February 2009. Since then, revenue has nearly doubled, share count has decreased 8%, and gross margins, operating margins and returns on capital have all expanded. All this fueled a stock price that has compounded at a rate of 31% per year since 2009. Not surprisingly, the small cap investment community took notice to these impressive results. Over the past few years, Armanino has been written up on Value Investor’s Club, otcadventures, multiple times on Seeking Alpha, and it has its own thread on Corner of Berkshire and Fairfax. Because these extensive write-ups already exist, I’m going to give a quick business and industry overview and then focus on why I like AMNF as an investment right now. This isn’t a lengthy write-up, but that’s because the thesis is pretty simple. Armanino is probably my favorite idea in terms of risk/reward that I’ve discovered this year.
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