Calloway’s Nursery: Undervalued with Aligned Ownership

Calloway’s Nursery is undervalued on an earnings basis, owns valuable property in addition to that, and is run by a very successful investor. Calloway’s runs 19 nurseries and garden centers mostly in the Dallas-Ft. Worth area (with one in Houston). These nurseries are more specialized, have more variety, and are more expensive than the garden centers at Lowe’s or Home Depot.

I’ve followed Calloway’s (CLWY, $4.00) for years, but what pushed me to take a closer look last year was Peter Kamin taking control. Kamin co-founded ValueAct in 2000 with Jeffrey Ubben. ValueAct was immensely successfully while Kamin was there, but he stepped away and started 3K LP in 2012. 3K has no outside investors and they focus on micro-cap companies, both public and private. Kamin seems to be following a similar script at Calloway’s that he’s done at other public companies. That script includes: gradually build a position over several years, eventually take control, repurchase shares, pay down debt, and decrease public company expenses (by down-listing or de-listing). In the case of Abatix Corp (formerly ABIX), Kamin went through the aforementioned steps and eventually took them private at a 39% premium to the market price. Knowing Kamin has taken a controlled company private at a reasonably fair price gives me comfort in him being a majority shareholder at Calloway’s.

At Calloway’s, the game plan looks similar to the above.  3K started buying shares in 2012 and Kamin got a board seat in 2013 after a proxy fight. From 2013 to 2015 Calloway’s paid back roughly half their debt. In February 2016, 3K bought out two major shareholders (including the founder/former CEO). In the year since Kamin took over, operating margin increased from 6.5% in 2015 to 9.6% in 2016. Calloway’s also decreased shares outstanding by almost 25% in 2016. Finally, public company expenses have been decreased as they are now listed on the Pink Limited OTC marketplace and their quarterly releases consists of the three financial statements and nothing else.
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Pro-Dex Should Have Another Good Year

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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Fogo de Chao Is Looking Tasty

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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Armanino Foods (AMNF)

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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Noble Roman’s Short-Term Play

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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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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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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