This is going to be a quick post on a short-term investment I made. It’s already partially played out (quicker than I expected), but I think there’s more to go. Hopefully some readers can make a quick buck here. Privet Fund acquired just under three million shares (14%) of Noble Roman’s late last year and wrote a letter to the board in November. Privet’s attempts to get active obviously didn’t go well because they started dumping their shares on March 31 and it appears they sold their final chunk last week. NROM is a small ($13 million market cap) illiquid stock so three million shares hitting the market affected the stock in a big way. The day before Privet started selling, NROM was at $0.88. When Privet sold the rest of their shares last week, the stock bottomed out at $0.47.
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Author: Travis Wiedower
WACCs are Wack
The weighted average cost of capital (WACC) measures what it costs a company to acquire funding. Internally, it’s the hurdle rate a CEO should be using to decide on what projects to allocate money to. If it costs a company 8% per year to acquire their debt and equity, they shouldn’t be green lighting projects that return 5% per year. That’s lighting money on fire. Externally, we as investors can compare a company’s return on invested capital (ROIC) to its WACC to evaluate the quality of the company and the CEO’s capital allocation skills.
A CEO’s goal is to invest capital at a higher rate of return than what that capital costs the company to acquire. If he or she is able to do this, the value of the company will grow. If he or she invests in projects at low returns, the company’s value will shrink. Similarly, as an investor, my goal is to invest my own capital at a rate of return that surpasses what I can easily achieve elsewhere (such as a broad market index fund). My hurdle rate for investing capital is different than that CEO’s. Yet, the traditional discounted cash flow method suggests I use the company’s cost of capital as my own hurdle rate. This doesn’t make sense to me.
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My Love-Hate Relationship with DCFs
One of the biggest changes in my investing process over the past year has been my increasing usage of discounted cash flow (DCF) models. I used to rarely use them and now I build DCF models for every company I’m serious about. I want to start by reviewing the major things that a lot of investors (including myself) don’t like about DCFs and how I’ve gotten over these concerns.
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Xpel Technologies Part 2: The Lawsuit
Last week I gave an overview of Xpel Technologies (DAP.U, $1.10). If you missed it, I recommend starting there before reading on. This post reviews the patent infringement lawsuit filed on December 30th by 3M (who owns one of Xpel’s competitors). Before starting, I want to emphasize that I am not an expert in patent law, and while I have talked to professionals who do specialize in this area, I have almost certainly misinterpreted at least some part of what they’ve told me. This stuff isn’t simple.
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Xpel Technologies Part 1: Company Overview
Xpel Technologies (DAP.U, $1.05) sells paint protection film that goes on the front of cars to protect them mainly from rock chips. Paint protection film is a clear and very thin polyurethane-based material that is virtually invisible once installed. From Q4 2011 to Q1 2015, they recorded an incredible 14 consecutive quarters of at least 50% revenue growth (almost all organic). Not surprisingly, Mr. Market thought very highly of this growth and Xpel’s stock was often priced around 40-50x earnings. Inevitably that growth slowed down the past few quarters (although it remains over 30%) and the stock took a beating as a result. To top it off, on December 30th 3M (who owns one of their competitors) filed a patent infringement case against Xpel and the stock dropped another 50% on New Year’s Eve alone. It’s traded in that ballpark since. There’s a lot to say about Xpel so I’m breaking it up into two posts. This post covers all the main stuff (business overview, competition, management, etc) and then part two will review the lawsuit.
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What Is Sitestar Worth? Part 2
In February I wrote a post detailing the situation at Sitestar (SYTE). If you didn’t read it, Sitestar is a micro-cap ($4M market cap) that was taken over by a couple of activist investors this past December. Most of Sitestar’s value comes from the 42 properties they own around the Roanoke, Virginia area, but they also have a legacy dial-up ISP business and they own the domain first.com. In the last post, I valued the company on a net asset value (NAV) basis somewhere in the range of 7 cents to 9.2 cents (current share price is 5.5 cents). Steven Kiel and Jeff Moore (the two activist investors) haven’t announced their plans for the company yet, but I think some kind of liquidation is one of the more likely outcomes. If a liquidation does happen, a discounted cash flow (DCF) is probably the best way to value the company.
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Zoom Is Zooming Into Massive Growth
Zoom Telephonics (ZMTP, $1.73) is a microcap that is about to experience explosive growth. In 2015 they did $10.8 million in revenue and their 2016 goal is to do between $50 and $100 million. This ramp up is due to a large contract win they announced last April with Motorola. The stock is up around 800% since then! But if management hits its projections, Zoom’s stock could have a lot more gas left in the tank.
Business overview
Not counting the Motorola deal, Zoom mostly sells low-end modems and modem/router combinations (but not routers). They sell modems for cable Internet, DSL, and even 56k. Never would I think that in 2016 I’d be researching two companies that still deal in dial-up Internet. Maybe Sitestar and Zoom need to get together and see who’s legacy dial-up business is shittier.
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Scuttlebutt on Google Maps
Derek Cheung of Honne Capital posted an intriguing presentation of Sientra (SIEN, $6.68) a couple months ago that prompted me to dive into the company. Long story short, Sientra sells breast implants which in the US is a triopoly (I may have made that word up, to clear up confusion: only three companies sell fake boobs). Sientra was buzzing along just fine until late 2015 when their third party manufacturer had some issues during a regulatory inspection. To add fuel to the fire, this manufacturer’s plant burned down shortly thereafter. In response, Sientra voluntarily halted all US sales of their breast implants, but it looks like they’ll be back selling again next month.
On October 28, Sientra held a conference call to discuss the above issues. Then-CEO Hani Zeini made a comment that the fire took place in building F2 which is where Sientra’s implants were produced. Another building, F1, was not affected and could potentially be modified for breast implant production. My first thought upon hearing this comment was, “What if F1’s capacity isn’t what F2’s was?” Sientra could have production bottlenecks for some time. And off I went to Google Maps in search of an answer.
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What Is Sitestar Worth? Part 1
I’m betting Sitestar (SYTE, $0.0465) is a familiar name to those of you who follow the microcap space. For those who don’t recognize it, I’ll do a quick catch-up. Sitestar started getting attention in 2011 when Jeff Moore (aka Ragnar Is A Pirate) began writing about them and continued updating readers up until June 2014 when he started some activism. If what I write piques your interest, I highly recommend reading through his many posts for an educational and entertaining look at his past 4.5 years of involvement in this company.
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Human Biases Make Investing Hard
I recently read Thinking, Fast and Slow for the first time, one of the go-to books on human biases. If you’re unfamiliar, there are many things the human brain does that are both automatic and unconscious. You can’t look at “2+2=” and not have “4” pop to the forefront of your thoughts—it’s automatic. Most of these unconscious processes are there for our own good thanks to generations of evolution, but sometimes these innate biases can get in our way. Being aware of these biases is the first step to being able to recognize and overcome them. Thinking, Fast and Slow dives into many biases that affect us, but I want to talk about the ones that relate most to investing.
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Travis Wiedower 