August 20, 2013

Playing Tesla's Suppliers

SA has an intriguing article on Modine, one of Tesla's suppliers.  The company is still in the growing stages and has a reasonable valuation, unlike Tesla who is trading at a sky high level. 

August 7, 2013

On Cynosure

Cynosure is a small but steadily growing laser manufacturing company whose products are used primarily in cosmetic surgery.  You may have to be patient with this company, but the company is growing at a healthy pace:

SA has a small write-up on the company:

"Investors have got to be patient here. What you're seeing is a company that's growing revenue at 20% year-over-year every quarter, and very consistently. The company is trading at about 2.5 times its sales for the trailing 12 months, and it is growing earnings. Unlike so many of the biotechs that we talk about, which are pre-revenue, let alone pre-profit, this company is cash flow positive and making a profit."

Immunocellular May be the Biggest Hidden Gem in BioTech

SA has a nice write-up on ImmunoCellular and why it has the potential to have significant upside. 

The company was also mentioned in another SA article a few months back by a fund manager who states that the field that ImmunoCellular is in is quite crowded, but they have superior technology that many investors haven't caught onto yet. 

On Weight Wathers

Weight Watchers certainly looks undervalued right now.  The Fool certainly agrees, but there isn't much substance behind their argument. 

Geoff Gannon recently put 25% of his investment portfolio into WTW.  Here is his analysis:

From there, my thinking was:
  • Weight Watchers is the most psychologically powerful general weight loss program I know of
  • WTW is basically a publicly traded LBO
  • The stock is much more volatile than the business
  • Investors treat marketing misses the way they treat fashion misses in apparel retail - so you should buy the stock when they mess up marketing
  • WTW has a high free cash flow yield (low price to 10-year average earnings, etc.)
  • Doesn't require net tangible assets to run the business - can pay out 100% of reported earnings (and then some)
  • Stock dropped 20% right before I bought
  • High short interest relative to float  (most trading is short-term and institutional)
  • Stock price is the same it was 10 years ago. Company has doubled in size. Each share has doubled in percentage of ownership. There are now 4 times more sales per share than 10 years ago - but the price is the same. Most stock are more expensive than they were 10 years ago. This one is 75% cheaper.
Against this:
  • They have a lot of debt.
  • Business performance next year will definitely suck. It may suck for the next few years.
How I framed it:
  • Write-off the next 3+ years
  • Imagine what the stock should trade for in a "normal" January 2017.
Under normal circumstances, I saw no justification for a price below $52 a share. This is 15 times what I expect reported earnings would be in 2017 ($3.50 a share ). Free cash flow would be higher than EPS. That's a 10% return over 3 years. I could live with that.
Do I think they will produce zero free cash flow for 3 years?
No.
Do I think they will buy back zero shares for 3 years?
No.
Do I think it will take a full 3 years for sentiment to turn?
No.
Therefore, I felt the upside was somewhere between 10% a year and a lot. The cost of getting a chance at the “a lot” is 3 years of volatile discomfort.
In my experience, it rarely takes 3 years. But I always tell myself it will.
What could derail this?
The debt:
  • If WTW issues shares, I will lose money. 
  • If WTW uses all free cash flow to pay down debt, I won't beat the market. 
Both are possible when you owe more than 4 years of EBITDA – and you expect EBITDA to decline – as WTW does.
The debt is a big risk. If the market cap was the same and there was no debt, I would have bought this stock a long time ago.
We are not talking about a low EV/EBITDA stock here. WTW is not a value stock.