Why ZERO is a Zero - Released One Day Too Late

September 25, 2012 Leave a comment

LST was drafting a post on ZERO last night (Monday, September 24, 2012) , and fell asleep before finishing it. ZERO crashed earlier today… Oh well.

Here is what LST was writing before falling asleep…

ZERO is a blatant pump and dump , and blast from the past the likes of which only a bunch of morons and crooks would go long. LST  will not bother doing any real work…take a look at the following 3 things (to be skimmed, not read carefully), and you’ll see why ZERO is a zero:

(1) first ever filing

(2) Most recent 10Q

(3) Entire stock price history (before today)

A friend pointed out the following as well (it seems some people actually bothered to do real work. Good for them):

ZERO’s “research and development facility” is reportedly located at 235 Tennant Avenue, Morgan Hill, California 95037 (06/30/12 10Q, page 8), which seems to be the same location as an AAMCO car and transmission retail repair center

This piece of crap actually traded as if it were a ~$200 million market cap company, even if it were short lived…

Oh, and last but not least:

Filed under Short Ideas

Keurig Offers $50 Rebate, After Saying They Might Raise Prices

September 25, 2012 1 Comment

GMCR is offering up to a $50 rebate in keurig brewers, after saying they might raise prices just a few months ago. Should Larry Blanford, CEO of GMCR/Keurig, change his middle name to ‘liar’ ? Larry Liar Blanford ?

“…But should something like that happen we have a number of tactical responses, one of which could in fact be deciding to raise the price of the K-Cup brewing system.” – Larry Blanford, CEO of Green Mountain Coffee Roasters, Piper Jaffray Consumer Conference, June 6, 2012

On June 7, 2012, LST wrote:  GMCR to Raise Prices on Old Brewers? Pigs Must Fly in Vermont.

It turns out pigs don’t fly even in Vermont…

Filed under Short Ideas

The Alchemy of REITs

September 25, 2012 Leave a comment

LongShortTrader loves REITs (Real Estate Investment Trusts). The progression of headlines/developments in credit and REIT-land over the last few years (and especially within recent quarters) is getting LST very interested in this space. The below is one of the best explanations of REITs that LST has ever read:

My best documented encounter with a boom/bust sequence is that of Real Estate Investment Trusts. REITs, as they are called, are a special corporate form brought into existence by legislation. Their key feature is that they can distribute their income free of corporate taxation, provided they distribute all the income they receive. The opportunity created by this legislation remained largely unexploited until 1969 when a large number of REITs were founded. I was present at the creation and, fresh from my experience with conglomerates, recognized their boom/bust potential. I published a research report whose key part reads as follows:

THE CASE FOR MORTGAGE TRUSTS (February 1970)

THE CONCEPT
Superficially, mortgage trusts seem to resemble mutual funds designed to provide high current yields. But the analogy is misleading. The true attraction of mortgage trusts lies in their ability to generate capital gains for their shareholders by selling additional shares at a premium over book value. If a trust with a book value of $10 and a 12% return on equity doubles its equity by selling additional shares at $20, the book value jumps to $13.33 and per share earnings go from $1.20 to $1.60.
Investors are willing to pay a premium because of the high yield and the expectation of per-share earnings growth. The higher the premium, the easier it is for the trust to fulfill this expectation. The process is a self-reinforcing one. Once it gets under way, the trust can show a steady growth in per-share earnings despite the fact that it distributes practically all its earnings as dividends. Investors who participate in the process early enough can enjoy the compound benefits of a high return on equity, a rising book value, and a rising premium over book value.

ANALYTICAL APPROACH
The conventional method of security analysis is to try and predict the future course of earnings and then to estimate the price that investors may be willing to pay for those earnings. This method is inappropriate to the analysis of mortgage trusts because the price that investors are willing to pay for the shares is an important factor in determining the future course of earnings.
Instead of predicting future earnings and valuations separately, we shall try to predict the future course of the entire self-reinforcing process. We shall identify three major factors which reinforce each other and we shall sketch out a scenario of the probable course of development. The three factors are:

1. The effective rate of return on the mortgage trust’s capital
2. The rate of growth of the mortgage trust’s size
3. Investor recognition, i.e., the multiple investors are willing
to pay for a given rate of growth in per-share earnings

THE SCENARIO
Act One: At present, the effective yield on construction loans is at an optimum. Not only are interest rates high but losses are at a relatively low level. There is a pent-up demand for housing and new houses readily find buyers. There is a shortage of funds so that the projects which do get off the ground are economically well justified. Builders who are still in business are more substantial and more reliable than at the tail end of a boom. Moreover, they do their utmost to complete the construction phase as fast as possible because money is so expensive. Shortages of labor and material do cause defaults and delays but rising costs permit mortgage trusts to liquidate their commitments without loss. Money is tight and alternative sources of interim financing are in short supply. Investor recognition of the mortgage trust concept has progressed far enough to permit the formation of new trusts and the rapid expansion of existing ones. The self-reinforcing process gets under way.

Act Two: If and when inflation abates, the effective yield on construction loans will decline. On the other hand, there will be a housing boom and bank credit will be available at advantageous rates. With higher leverage, the rate of return on equity can be maintained despite a lower effective yield. With a growing market and growing investor recognition, the premium over book value may continue to increase. Mortgage trusts are likely to take full
advantage of the premium and show a rapid rise in both size and per-share earnings. Since entry into the field is unrestricted, the number of mortgage trusts will also increase.

Act Three: The self-reinforcing process will continue until mortgage trusts have captured a significant part of the construction loan market. Increasing competition will then force them to take greater risks. Construction activity itself will have become more speculative and bad loans will increase. Eventually, the housing boom will slacken off and housing surpluses will appear in various parts of the country, accompanied by a slack real estate market and temporary declines in real estate prices.

At this point, some of the mortgage trusts will be bound to have a large number of delinquent loans in their portfolios and the banks will panic and demand that their lines of credit be paid off.

Act Four: Investor disappointment will affect the valuation of the group, and a lower premium coupled with slower growth will in turn reduce the per-share earnings progression. The multiple will decline and the group will go through a shakeout period. After the shakeout, the industry will have attained maturity: there will be few new entries, regulations may be introduced, and existing trusts will settle down to a more moderate growth.

EVALUATION 

The shakeout is a long time away. Before it occurs, mortgage trusts will have grown manifold in size and mortgage trust shares will have shown tremendous gains. It is not a danger that should deter investors at the present time.

The only real danger at present is that the self-reinforcing process may not get under way at all. In a really serious stock market decline investors may be unwilling to pay any premium even for a 12% return on equity. We doubt that such conditions would arise; we are more inclined to expect an environment in which a 12% return is more exceptional than it has been recently and in which
the self-reinforcing processes of the last few years, notably conglomerates and computer leasing companies, are going through their shakeout period. In such an environment there should be enough money available for a self-reinforcing process which is just starting, especially if it is the only game in town.
If the process fails to get under way, investors would find downside protection in the book value. The new trusts are coming to the market at book value plus underwriting commission (usually 10%). Most recently formed trusts are selling at a premium which is still modest. It will be recalled that when their assets 3fe fully employed in interim loans, mortgage trusts can earn 11% on their book without leverage and 12% with a 1:1 leverage. A modest premium over book value would seem justified even in the absence of growth.

If the self-reinforcing process does get under way, shareholders in well-managed mortgage trusts should enjoy the compound benefits of a high return on equity, a rising book value, and a rising premium over book value for the next few years. The capital gains potential is of the same order of magnitude as at the beginning of other self-reinforcing processes in recent stock market history.

My report had an interesting history. It came at a time when go-go fund managers had suffered severe losses in the collapse of the conglomerates. Since they were entitled to share in the profits but did not have to share in the losses of the funds they managed, they were inclined to grasp at anything that held out the prospect of a quick profit. They instinctively understood how a self-reinforcing process works since they had just participated in one and they were anxious to play. The report found a tremendous response whose extent I realized only when I received a telephone call from a bank in Cleveland asking for a new copy because theirs had gone through so many Xerox incarnations that it was no longer legible. There were only a few mortgage trusts in existence at the time but the shares were so eagerly sought after that they nearly doubled in price in the space of a month or so. Demand generated supply and there was a flood of new issues coming to market. When it became clear that the stream of new mortgage trusts was inexhaustible, prices fell almost as rapidly as they had gone up. Obviously the readers of the report failed to take into 4 account the ease of entry and their mistake was corrected in short order. Nevertheless their enthusiastic reception helped to get the self-reinforcing process described in the report under way. Subsequent events took the course outlined in the report. Mortgage trust shares enjoyed a boom that was not as violent as the one that followed the publication of the report but turned out to be more enduring.

I had invested heavily in mortgage trusts and took some profits when the reception of my study exceeded my expectations. But I was sufficiently carried away by my own success to be caught in the downdraft with a significant inventory. I hung on and even increased my positions. I followed the industry closely for a year or so and sold my holdings with good profits. Then I lost touch with the group until a few years later when problems began to surface. I was tempted to establish a short pcsitioo but was handicapped
in that I was no longer famiiiar with the terrain. Nevertheless, when I reread the report I had written several years earlier, I was persuaded by my own prediction. I decided to sell the group short more or less indiscriminately. Moreover, as the shares fell I maintained the same level of exposure by selling
additional shares short. My original prediction was fulfilled and most REITs went broke. The result was that 1 reaped more than 100% profit on my short positions-a seeming impossibility since the maximum profit on a short position is 100%. (The explanation is that I kept on selling additional shares.)

Self-reinforcing/self-defeating cycles like the conglomerate boom and the REITs do not occur every day. There are long fallow periods when the specialist in such cycles remains unemployed.

He need not starve, however. The divergence between underlying trends and investor recognition persists at all times and the astute investor can take advantage of it.

- The Alchemy of Finance , George Soros

- UPDATE -

Make no mistake, you should get to know your prevailing cap rates, drivers of NOI (rental rates, lease expiry schedule, expenses/costs, etc.), CRE supply/demand  dynamics, capital markets activity (Interest rates, IPOs, credit/equity activity, etc), and a few other things, but let’s be serious… this aint rocket science. Or brain surgery.

 

Filed under Long Ideas, Short Ideas

The Joke Otherwise known as GMCR’s “Independent” Audit Committee

September 19, 2012 Leave a comment

Question: How can an Audit Committee where 2 members are:

(1) The Chairman/Founder/Largest Shareholder’s brother-in-law (Jules del Vecchio).
(2) The Chairman/Founder/Largest Shareholder’s long-time good friend, who borrowed from GMCR and never repaid (William Davis). Davis seems like a corporate entitlement/welfare recipient/beneficiary.

independently review and evaluate claims alleging accounting impropriety?

Answer: LongShortTrader believes it cannot. Del Vecchio and Davis may have qualified as “independent” by the letter of the law, but boy do they seem to have (deliberately) violated the spirit of the law.

What’s even a bigger mystery is what current CEO Larry Blanford told the Wall Street Journal yesterday:

WSJ: What is your response to the SEC’s questions about your accounting policies and Mr. Einhorn’s criticism?

Blanford: Anything like that is immediately turned over to our audit committee and they independently evaluate and review them using outside auditors and legal counsel. There have been no issues found whatsoever.

Remind me Larry: How exactly can an audit committee that includes Robert Stiller’s brother-in-law and long-time friend “independently evaluate and review” negative claims against GMCR?

“No issues found whatsoever”? Really? How come some of your restated segmented numbers still don’t add up or make no sense, as documented by Sam Antar in many posts? Why all the historical restatements? The SEC comment letters?

Larry, did anyone actually over at GMCR review and evaluate Mr. Einhorn’s concerns? How come no heads have rolled?

While, we’re at it, few more questions:

(1) Buybacks - How can you buy back $500 million in stock, when you’ve generated nearly zero cash flow from operating activities in the last several years (even as you’ve reported record breaking paper profits)?

In fact, you’ve only generated ~$160 million in combined cash flow from operating activities since 1991. 

(2) Quarterly Cash Flows - What happens to your cash flows in your fiscal Q4 every fiscal year? Why is it that in every year since you’ve been with the company, Q4’s cash flows wipe out Q1-Q3’s combined cash flows ?
Given this dynamic, doesn’t this mean that year-to-date 2012 cash flow from operations  as of Q3 2012 are effectively meaningless? You implied as much, when you said GMCR would not generate cash flow for the full year. 

LST’s Take:

(1) GMCR cannot pay $500 million in buybacks, absent a common or convertible equity issuance. This raises the question: Why and how did GMCR authorize stock buybacks without the means to pay for it? It is LST’s opinion that the only possible explanation is GMCR wants holders not to sell, and attract others to buy.

(2) There are material accounting issues, and Q4’s cash flows, compared against the Q1-Q3s combined cash flows more accurately paints the real story. Q1-Q3’s numbers are not audited. Q4’s numbers are audited, as it is presented on a full year basis. As a result, it seems Q4’s number seems to serve as somewhat of a plug to ensure that the cash flow numbers tie in with cash balances at fiscal year end.

UPDATE I: Private Equity Firms Interested in GMCR. WILL YOU PLEASE STAND UP

Apparently there is (or was) a private equity rumor circulating earlier today…for the umpteenth time in the last few years. Remember the Radioshack buyout rumors since the stock was trading in the teens?

If you’re a private equity firm, willing to buy a company that’s generated $160 million in cash flow (before capex) over the last 20 years combined (that works out to $8 million in cash flow per year before capex),  for $5 billion + please contact LongShortTrader !

 

UPDATE II: Starbucks Begins Selling the Verismo, its Single Serve Espresso and Coffee Brewer, Starting Out at $199.00

The machines and capsules, are being sold online initially, will be available in some Starbucks cafes and at other retailers, including Macy’s, Williams-Sonoma, Sur La Table and Bed, Bath & Beyond beginning in October.

Source: Seattle Times - link to the story here

Here’s a quick comparison, by the #s, versus its competitors:

 

Filed under Short Ideas

Fraud and Japan: Like Two Peas in a Pod?

September 15, 2012 Leave a comment

Ask most Americans or Western Europeans (“Westerners”) what they think about Japan, and the following words tend to come up: “efficient”, “organized”, “polite”, “shrewd”, “westernized”, etc.

Ask a Chinese, Korean or other eastern Asians what they think about Japan…you might get some of the above, but you are more likely to get - shall we say - less genteel - descriptions.

LST is bracing for the possibility that a wave of fraud contagion hits Japanese stocks, a la the China reverse merger trade. Few considerations:

  • (1) A fund manager based in Japan indicated to LST last year that the # of potential frauds were just as high in Japan (if not higher) as China;
  • (2) The first few QEs made it economically unappealing to short US-based companies (and fueled bubbles in names such as MCP, NFLX, etc)… LST believes this contributed to the appeal of the “China RTO fraud trade” ; QE III is here, and there’s a good chance that something similar may happen now, but to a different category of companies.
  • (3) A half-decent short seller suggested he is looking as we speak
  • (4) It seems that some “drum-banging” can work wonders to expose fraud in Japan…

Oh, lest we forget history: Japan never fully owned up to the rape, theft, murder, and other crimes committed against China, Korea, and many others, the way Germany did (for all Jewish readers: Happy Rosh Hashanah ראש השנה ).

“It may be pointless to try to establish which World War Two Axis aggressor, Germany or Japan, was the more brutal to the peoples it victimised. The Germans killed six million Jews and 20 million Russians (i.e. Soviet citizens); the Japanese slaughtered as many as 30 million Asians, at least 23 million of them ethnic Chinese. Both nations looted the countries they conquered on a monumental scale, though Japan plundered more, over a longer period, than the Nazis. Both conquerors enslaved millions and exploited them as forced labourers—and, in the case of the Japanese, as (forced) prostitutes for front-line troops. If you were a Nazi prisoner of war from Britain, America, Australia, New Zealand or Canada (but not the Soviet Union) you faced a 4% chance of not surviving the war; (by comparison) the death rate for Allied POWs held by the Japanese was nearly 30%.“

- Historian Chalmers Johnson

Despite the efforts of some very heroic and noble Japanese citizens to right these wrongs, it seems the nation-state of Japan chose instead to largely c0ver-up and hide. To make matters worse, efforts to revise history, deny Japan’s crimes (via Japan’s education system) and to glorify its criminals have picked up serious traction in the last 10 years in Japan.

On 26 June 2007, the U.S. House of representatives Foreign Affairs Committee passed a resolution asking that Japan “should acknowledge, apologize and accept historical responsibility in a clear and unequivocal manner for its military’s coercion of women into sexual slavery during the war”. On 30 July 2007, the House of Representatives passed the resolution, while Shinzo Abe said this decision was “regrettable”. Democratic Rep. Tom Lantos described as “nauseating” what he said were efforts by some in Japan “to distort and deny history and play a game of blame the victim.” “Inhumane deeds should be fully acknowledged,” said Lantos, chairman of the House Foreign Affairs Committee. “The world awaits a full reckoning of history from the Japanese government.” 

- U.S. House passes sex slave resolution

This doesn’t seem like the best way to win friends. Nor does it seem like the best way to cultivate a culture where integrity is rewarded, a culture where admitting (and learning from) mistakes is encouraged…in fact, it seems like a perfect environment for fraud.

Michael Woodford, former CEO of Olympus Corporation shared these opinions several months ago, regarding fraud and Japan:

“I”ve read about the former Goldman director in the press. I’m not going to say greed and wrongdoing is unique to Japan. There are scandals in Europe, Siemens, Worldcom, Enron. Human nature is what human nature is. Individuals will act in a way that is wholly unacceptable. That’s not exclusively Japanese,” Woodford says.

“What is Japanese is the culture of deference and obedience. These qualities make hiding corrupt transactions much easier. You have people blindly following leadership. I saw even more of this after I made it public.“

“At first the Japanese media didn’t pick it up at all. They’re very self-censoring,” Woodford says. “It took an overwhelming barrage of me banging drums and repeating points in the media. In Alice In Wonderland Japan people think they can just ride these things out.“

“Even after chairman Tsuyoshi Kikukawa resigned, the person who took over for him went before the press well into November and stood up and defended those two payments despite their being so transparently ludicrous. That would never happen in New York! People like you would be throwing cabbages.“

“If this scandal tells you anything about Japan, it doesn’t make one optimistic that Japan will adapt to the challenges it faces,” Woodford says. “Japan has terrible demographics… and a debt-to-GDP ratio that makes Greece look like it’s in wonderful health. It’s only sustainable because the Japanese buy government bonds.”

“Without a Westerner who could articulate and express the problems and was willing to risk his career, to risk anything, the Olympus scandal would never have gotten out. How many more Olympus’ there are is a matter of speculation.“

“70 percent of turnover in Tokyo stock exchange is overseas investors. This is worrying when you consider the reaction of overseas investors to the Olympus scandal.“

“It makes a mockery of Prime Minister Noda’s claim that Japan is the same as any other capitalist country.”

Source: Here’s Why Corporate Fraud Is Easier In Japan

Filed under Short Ideas

Initial Thoughts on UnderArmour: Why it’s On The Radar

August 16, 2012 Leave a comment

Jim Cramer, the hug-able, love-able, and smart CNBC Mad Money says: “UnderArmour is a technology company.”

Whether true or not, the stock has certainly behaved like a high growth tech company…and has been valued like one too. LST is not sure if it is a tech company or not, but may initiate a starter short position in the near future for the following reasons:

  • Recent divergence in paper earnings vs. cash flow trends.
  • Insider selling.
  • Dick’s Sporting Goods UK JJB Sports writeoff makes it tougher for UA to grow there.
  • A few minor accounting red flags that may signal bigger problems.
  • Executive resignations over the last 2 quarters.
  • Consumer companies hyped as tech companies offer  “fad” play.

OPEN QUESTIONS

  • Is UA a “technology company” ? To what extent yes, and no?
  • What are its core products and why are they so appealing? Do competitors currently offer compelling alternatives?
  • Is there buyout potential at these levels? Why buy when you can build (build vs buy) for a fraction of the cost? Why pay ~$6 billion, when you can build spending, say $600 million over a 5-10 year horizon?

Filed under Short Ideas

West China Cement Limited ( HK: 2233) Equity is a Zero, according to Glaucus Research

August 8, 2012 1 Comment

Glaucus Research, who recently went negative on  CMED/CMEDY (China Medical Technologies), believes West China Cement Limited ( HK: 2233) equity a ZERO, debt = $0.20/$1.00

West China Cement is halted as of this writing. The report is loaded below in case their website encounters problems.

Original link - Glaucus initiation on West China Cement with strong sell

Filed under Short Ideas

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