I’ve done a lot of reading up on crypto currencies and blockchain the past month—not because I want to invest in it, but because I find it fascinating and potentially life-changing. Just last week I was traveling internationally and I can’t tell you how many times I thought to myself “this would be so much easier if everyone was using a Bitcoin app on their phones.” I have no idea if Bitcoin is the MySpace or the Facebook of the cryptocurrency future, but it’s fun to learn about either way. One thing I haven’t seen much of is people attempting to value Bitcoin.
I’ve read plenty of logical sounding arguments for why Bitcoin will be $20,000 or $50,000 in 10 years, but those people rarely mention the discount rate that needs to be slapped on those estimates. Even if you’re a Bitcoin bull, you have to admit it’s an incredibly risky asset and there’s a chance it’s worth $0 at some point in the future. Given that, a high discount rate is required. When I value profitable, growing public companies that have little debt on their balance sheet I use an 11% discount rate. Thus, I’d say any discount rate on a Bitcoin valuation needs to be significantly higher than that—maybe 30-40%—though I wouldn’t fault anyone for going even higher.
Continue reading “How to Value Bitcoin”
Followers of this blog won’t be surprised that I much prefer investing in founder-led companies. I will admit I am very biased when it comes to founders. I have started a couple companies myself, am a member of Entrepreneurs’ Organization, and tend to love all things related to entrepreneurship. I believe companies led by their founders often have intangible assets that are nearly impossible for a professionally managed company to replicate.
How many times have you heard a hired CEO describe the company as their baby? Probably never. But I have heard many entrepreneurs describe their own companies this way. Loving a business like it’s your own child doesn’t guarantee you’re a good CEO, but that obsession can make up for a lot of faults.
Continue reading “Why I Prefer Founder-Led Companies”
“What about Where Food Comes From initially caught your attention as a value investor?
Where Food Comes From checks several of my favorite investment boxes: small, founder-led, high insider ownership, zero debt, profitable, and growing. I love industries that have long runways of growth ahead of them. Where Food Comes From benefits from several major trends in food—organic, non-GMO, gluten-free, animal welfare, and more generally, consumers demanding transparency in the food chain and wanting to know where the food they eat comes from. I like large industry tailwinds because it makes business much easier. In a fast growing market, competitors are less likely to engage in price wars or other detrimental practices. This is because most participants are growing revenue, even if they’re losing market share. Growth is harder to come by in mature markets so there’s more likely to be competitive practices that are harmful to all participants.”
The above is an excerpt from an interview I did recently about Where Food Comes From. The rest of the interview can be seen at The Business (And Stock) Behind Where Food Comes From.
As of this writing, Wiedower Capital owns shares in WFCF. This is subject to change.
For a while now I’ve been wanting to go through all small and micro-cap companies that are still run by their founders, but I could never find a list anywhere. So I finally decided to generate the list myself. I started by downloading a list of companies that fit the following criteria:
- Market cap less than $500 million
- Average daily volume of at least $5,000
- Share price of at least $0.05
- Only companies with up-to-date reports (so no grey or dark companies)
- Based in the USA
- No biotech or pharma
Continue reading “Like Founder-Led Small-Caps? Here’s a List of All of Them.”
I published a write-up on Seeking Alpha yesterday about Trupanion (TRUP). The summary is:
- Trupanion is building a durable competitive advantage in an industry that is set to grow 10x+ over the coming decades.
- The company is still run by their passionate founder who has the vast majority of his net worth in Trupanion stock.
- The current valuation looks very expensive, but starts to look reasonable the farther out you look.
Read the full write-up here: https://seekingalpha.com/article/4090526-trupanion-long-term-compounder
As of this writing, Wiedower Capital does not own shares in TRUP. This is subject to change.
I published my first write-up on Seeking Alpha today. The summary of my thesis is:
- Franklin Covey (FC) is going through a SaaS transition that is temporarily harming its financials.
- The new, improved business model should become more obvious to the market in the coming quarters.
- There is upside of 40-80% over the next 18 months with potential for more longer term.
To read the entire write-up, head over to https://seekingalpha.com/article/4084174-franklin-covey-nearing-inflection-point
As of this writing, Wiedower Capital owns shares in FC. This is subject to change.
I went to a couple annual meetings recently that got me thinking a lot about how important company culture is. Specifically, what an advantage it is to have employees that are passionate about what the company is trying to accomplish.
Trupanion (TRUP) is a pet health insurance company that I’ve spent a lot of time on recently, including a ride-along with one of their territory partners and the annual meeting at their headquarters in Seattle. The first thing that’s obvious about the employees I met are how much they love that their work goes towards saving pet’s lives. I can’t blame them: saving pet’s lives is a pretty kick-ass corporate mission that a lot of people would love to be a part of. The employees are also nearly all pet owners themselves who get to bring their furry little friends into the office with them everyday.
Continue reading “Company Culture and Passionate Employees”
Last week I was on the Planet MicroCap podcast talking about CEO compensation. You can check out the hour long episode below:
Planet MicroCap Podcast Episode 46
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.
Continue reading “Calloway’s Nursery: Undervalued with Aligned Ownership”
When I first got into investing I didn’t care whether a company was acquisitive or not, but the longer I invest the less I like acquisitions. Any roll-up strategy is an instant pass for me. Two things have slowly changed my views over the years.
First, there’s a lot of evidence that acquisitions (especially large acquisitions) are a poor way to grow a company. According to a McKinsey study, the average acquisition has historically increased the value of the combined entities by 5.8%. The problem is, more often than not, all of this increased value is transferred to the shareholders of the acquired company via the premium paid (i.e. goodwill). The average public company acquisition is made at a 30% premium to its previous day close. Increasing an acquired company’s value by 30% just to break even on the price paid is a hard enough task as it is, let alone earning an adequate return on top of that. Another interesting note is that M&A activity peaked in 1999 and again in 2007. It seems managers are all too prone to make acquisitions when times are good and valuations are high.
Continue reading “Why I Avoid Acquisitive Companies”