Category Archives: Company Analysis

Urban Outfitters (URBN)


Key Statistics

Enterprise Value = $2.488 billion

Operating Income = $381 million

EV/Operating Income = 6.53x

Price/Revenue = .81x

Earnings Yield = 9.2%

Debt/Equity = 0%

The Company

Urban Outfitters is a Philadelphia based global retail company. They opened their first store in Philadelphia around the University of Pennsylvania in 1970. Since those origins, it has grown into a massive global company with 613 locations. While they are a global company, about 87% of sales originate in the US.

They currently operate a few crucial divisions. Urban Outfitters itself includes 245 stores. Urban Outfitters is an apparel retailer targeting the 18-28 year old demographic. Anthropologie represents 226 stores and 41% of sales. Anthropologie targets women aged 28 to 48. They also operate a food & beverage business focused on pizza & casual dining bought through an acquisition.

Another segment is their Free People brand,  which sells clothes and accessories to women aged 25 5o 30. Their brands are also sold in department stores like Nordstrom and Macy’s.

Urban Outfitters is cheap because of their mall locations, their connection to department stores like Nordstrom and Macy’s, and pressure in recent years on the margins. Trade jitters and late 2018 recession worries also took the stock down late last year. It peaked at $48 in September 2018 and has plummeted down to $29.59. An increase to those levels would be a 62% increase from current levels.

My Take

There isn’t much to dislike about this company. If all you knew were that this was a mall retailer and then took a look at the stock chart, you’d assume this is just another retail trainwreck.

Look closer.

This is a company that has grown sales steadily and robustly by 103% since 2010. They earn a robust return on equity for a retail company, making 21.36%. They are in impeccable financial condition. They have zero long term debt and boast $5.88 in cash per share against a price of $29.59. They are a popular brand with a loyal, niche following. They are buying back shares to a tune of 2.96% per year. F-Score is a 7/9.

This is a fast growing, financially healthy company, boasting respectable returns on capital. That’s the reality. From Mr. Market’s perspective, all that Wall Street sees is “mall retailer,” and it’s priced like it’s roadkill. In fact, the current price is around 2011 levels, when they were earning 47% less and had sales that were 57% of what they are today. Despite all of the company’s growth and tremendous success over the last decade, the stock has been stuck in a trading range for that entire time period, ignored by the market because it’s lumped in with all of the other retail carnage.

URBN’s current P/E of 10.88 compares to a 5-year average of 19.66 and an industry average of 17.89. On an enterprise multiple basis, the current 6.53x multiple compares to a 5 year average of 10.28x. An increase to this level would be a 57% increase in the stock price. At a minimum, I think the stock could return to $45/share.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

Winnebago (WGO)


Key Statistics

Enterprise Value = $1.25 billion

Operating Income = $162 million

EV/Operating Income = 7.71x

Price/Revenue = .49x

Earnings Yield = 10.59%

Debt/Equity = 51%

The Company

Winnebago is an iconic, all-American brand. When you think of RV’s, you think of Winnebago. Winnebago is to RV’s what Harley-Davidson is to motorcycles. Winnebago manufactures two kinds of RV’s: towable (55.9% of sales) and motorhomes (42.7% of sales). Towables are RV’s that can be towed with a truck. Motorhomes do not need to be towed, and the RV itself can be driven. Within the motorhome segment, there is wide dispersion in price depending on what features the buyer wants. A new Winnebago motorhome can range in price anywhere from $80k to $250k.

Winnebago’s business has performed excellently throughout this economic expansion. Sales and earnings have steadily increased without a hiccup. Sales were $212 million in 2009 and have grown steadily every year to $2 billion in 2018. Earnings have gone from a loss of $2.71 in 2009 to a gain of $3.22 in 2018.

Despite the consistently improving results, sentiment against the stock in the last year has been negative. An increase to the 52-week high would be a 51% increase from current levels. The poor stock performance is occurring over trade jitters and concerns that the US might be at a cyclical peak and about to enter a recession.

This is a valid concern. Winnebago was annihilated in the last recession, with the stock falling over 80% from the 2007 peak to the 2009 low. The reasons behind this are obvious. Winnebagos are a massive, discretionary expense. Winnebagos are for fun. No one needs a Winnebago and recessions have a way of clarifying the difference between a want and a need. People are only going to buy them if they are doing well economically and feel good about their jobs. In a recession, sales for brand new Winnebago’s are going to fall dramatically.

My Take

I feel a bit dumb at the moment after purchasing this. After I bought this stock, Thor (another RV manufacturer) reported abysmal results and I sold the stock. Additionally, my entire thesis is that the US is not entering a recession. Friday’s lousy jobs report casts doubt on my hypothesis.

With that said, I am sticking with it. I still think that the US economic expansion is intact. I think that the bad jobs reports was only a temporary blip driven by the government shutdown. The two indicators I care the most about, the spreads between both the 2 and 10-year bonds and the spread between the 10-year and 30-year, don’t show signs that the Fed is too tight. Additionally, the Fed has been signaling that they are not going to allow the economy to fall into a recession. Like it or not, whether or not we go into a recession is mostly driven by one institution, and that’s the Federal Reserve. You can complain and shake your fists at this all you want, but that’s the world that we live in.

In terms of Winnebago itself, I think that the long term secular trends favor this industry. As baby boomers retire, they are going to purchase more Winnebagos. RVs also have an appeal to the burgeoning population of people that want to live on the road. I also think that gas prices are going to be constrained due to the fracking industry in the United States. While I believe prices will probably rise slightly in the short term, the existence of the fracking industry prevents them from getting extraordinarily high as happened in 2007 and 2008.

There are many assumptions buried in my analysis so I will be observing this position carefully. With that said, I think investors are being paid for the uncertainty. The P/E of 9.44 compares to a 5-year average of 15. An increase back to these levels would be a 50% appreciation. They are also in excellent financial health. The Z-Score of 5.04 implies an extraordinarily low probability of bankruptcy. The F-Score is nearly a perfect of 8 out of 9. This is a cheap stock in a solid financial position and, as long as we avoid a recession in the near term, it should outperform the market. We shall see.


Fun movie: Sneakers, 1992. “I want a Winnebago.”

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

Express (EXPR)


Key Statistics

Enterprise Value = $239.42 million

Operating Income = $57.54 million

EV/Operating Income = 4.16x

Price/Revenue = .16x

Earnings Yield = 10.64%

Debt/Equity = 10%

The Company

Express is a mall apparel retailer and is hated. It is down 81% from its all-time highs and down 63% from its 52-week high. It was hammered particularly hard during the November/December tantrum. Unlike most stocks, it didn’t recover from that. The CEO also stepped down in January.

Sales and earnings have been steadily declining for the last few years, which has led to an extremely negative reaction in the stock. Earnings have fallen from $1.38 in 2016 to $.25 in 2018.

Express’s target market is 20-30 year old men and women. Categories cover casual wear and work wear. It has established a niche in this area. They currently operate 635 stores, including 145 outlet stores. They design their own clothes, which also adds to their unique niche.

My Take

The expectations embedded in the price indicate that most investors expect this company to die. The question I try to answer when looking at situations is simple: will this company be a going concern in 5 years?

Looking at Express, I think this company will continue to exist in 5 years and will continue to be profitable. They are pursuing some initiatives to transform the current climate and sustain themselves while mall retail is decline. I think their niche focus on 20-somethings is critical here. When we think about the retail establishments that will survive, I believe that generic retail establishments that try to sell products to everyone are going to have a tougher time than retail establishments with a consistent, loyal niche. Retailers that have established themselves with a unique niche that inspires customer loyalty are likely to survive the shakeout. Express is doing this by laser focusing on young people and designing their own unique clothes.

Express is also taking steps to combat the decline of mall retail. They now offer ship-from-store, allowing their customers to order clothing directly from a nearby store and have it shipped to them. This entrenches its online brand and fights against declining mall traffic. Currently, online orders represent 24% of total sales for Express, and this is increasing.

As they expand their online presence, Express also shows a willingness to close underperforming stores when leases expire. This is a sharp contrast to the Francesca’s debacle I invested in over a year ago, a company which was opening new stores even as their existing chains struggled. Express, in contrast, closed stores and is moving them from malls to more traffic-friendly outlet locations. In 2017, they closed 45 mall locations and opened 24 outlet locations.

The financial position of Express also increases the odds that the turnaround strategy will eventually yield results. Currently, they have an extremely low debt to equity ratio of 10%. The F-Score of 8 also represents an extremely high degree of financial quality. The Z-Score is also 3.44, meaning that the company has an extremely low bankrtupcy risk. This strong financial position gives Express something critical: time. They have the time to weather the storm while other, less well-positioned retailers, are wiped out.

Investors are getting paid for the uncertainty. The P/E of 9.4 compares to an industry average of 17.10. In the last 5 years, the average P/E for Express has been 19. On a price/sales basis, the current ratio of .16 compares to an industry average of .5. On an enterprise multiple basis, the current value of 4.16x compares to a 5-year average of 6.9.

Overall, Express is a troubled retailer with an uncertain future. However, I think that investors are being paid for the uncertainty because the consensus expectation is that Express will not survive at all. Meanwhile, management is aggressively pursuing a turnaround strategy. If the plan actually works, Express should trade at a significantly higher multiple in the future. Trading at half of book value and around double cash value, I think this limits the risks on the downside.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

Hollyfrontier (HFC)


Key Statistics

Enterprise Value = $10.752 billion

Operating Income = $1.642 billion

EV/Operating Income = 6.54x

Price/Revenue = .51x

Earnings Yield = 12%

Debt/Equity = 41%

The Company

Hollyfrontier is a U.S. oil refiner. They refine oil into gasoline, diesel fuel, jet fuel, asphalt, lubricants, etc. They operate 5 refineries and process 457,000 barrels of oil a day. They are headquartered in Dallas, have been operating since 1947, and operate mostly in U.S. red states.

My Take

Hollyfrontier has done extraordinarily well over the last three years. The refining business has been good and the stock is up over 125% from its lows reached in 2016. The current cheapness is mostly a result of how well the business has performed and recent price declines. The stock is down 35% from its high in June 2018. A bulk of this downturn happened late last year, when markets paniced because everyone thought the Fed was going to push the economy into a recession and, also, because everyone is crazy and overreacts.

The biggest risk to Hollyfrontier is dramatic fluctuations in price of oil. Hollyfrontier makes money through the price spread between refined products and the oil itself. Those prices are largely unpredictable. Hollyfrontier can’t control what happens to prices. This uncertainty with oil prices is a key cause of the cheap valuation. When Hollyfrontier encounters good times, for instance, the market doesn’t have any confidence that the good times will last.

Another significant risk to Hollyfrontier is the risk of a recession, which will hurt demand for refined products. As I’ve stated many times before on this blog, I don’t think we are having a recession in the next year. Of course, the caveat here is that’s just like my opinion, man.

Hollyfrontier focuses on factors that they can control, not the price of oil. To control price fluctuations in their raw materials, they purchase derivative contracts to protect themselves against adverse price fluctuations. They are also focused on expanding their footprint and continuing to grow the business through expansion and strategic purchases of other businesses.

Hollyfrontier’s July 2018 purchase of Red Giant Oil in July is a good example of their acquisition strategy. Red Giant Oil was a small family-owned business. Red Giant produces an EBITDA of about $7.5 million. Hollyfrontier paid a reasonable price: $54.2 million, or a multiple of 7.23x. This demonstrates that while management is committed to expansion, it is not in the style of shareholder value destroying “empire building” expansion. They are pursuing acquisitions that help them strategically and are doing so at reasonable prices.

Over time, Hollyfrontier will continue to grow through acquisitions and organic growth of the business. Demand for refined products is never going away and even though the prices are volatile, over the long run Hollyfrontier should do well and continue to grow earnings and cash flow.

From a relative valuation standpoint, Hollyfrontier’s P/E is currently at 8.42 compares to an industry average of 12.87. On a price/sales basis, the current .51x multiple compares to an industry average of 1.8x. A rise to the average levels for the industry would be a significant price increase from the current multiple.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

Lousiana Pacific Corporation (LPX)


Key Statistics

Enterprise Value = $2.76 billion

Operating Income = $669.4 million

EV/Operating Income = 4.12x

Earnings Yield = 15%

Price/Revenue = 1.15x

Debt/Equity = 20%

The Company

Lousiana Pacific (LPX) is a Nashville based company that manufactures building products. The core of the business is the manufacture of oriented strand board (OSB). OSB is created from wood flakes and then bound together with adhesives. OSB is used heavily in the construction of new homes.

LPX also has a siding business. They manufacture vinyl, stucco, brick, and fiber cement siding. They also have a business in engineered wood products (EWP), used mainly for flooring. LPX also possesses an operation in South America.

The revenue breakdown is below:


The fortunes of LPX are tied at the hip to the construction of new homes. While engineered wood products and siding help diversify the sources of revenue, OSB represents a massive component of total sales. The volatile pricing of OSB can dramatically affect LPX’s earnings power.

Currently, the market is concerned that LPX’s earnings are at a cyclical peak. From September 30th through October 22nd, the stock declined from a $30.93 high to a low of $21.42. The stock price reacted to a corresponding 60% collapse in the price of OSB.  As OSB is such a significant component of LPX’s business, the price move in OSB translated into a 30% stock decline for LPX.

The question at hand is whether the decline in the price for OSB was a rational response to supply and demand dynamics, or whether it was driven by irrational fear of a US recession, a fear which caused a sell off in many different markets last fall. Market participants clearly believe that OSB was at a cyclical peak last summer. The sentiment is that housing is peaking and is about to get crushed, at usually happens during a recession.

Fortunately, the collapse in the price of OSB has not yet caused a significant operational slip in LPX’s results. In Q3 2018, LPX earned 86 cents a share. This compared to 76 cents earned in Q3 2017.

My Take

The burning question right now is: are we going to have a recession in the next year? As I’ve chronicled on this blog, I don’t think so. I chronicled the reasons why in my year end post.

The fortunes of LPX depend on demand for brand new homes. New home construction is intensely cyclical and falls off a cliff when the economy enters a recession.

The conventional thinking right now is that the US is headed for a recession. The current expansion is 10 years old, the Fed is hiking, the party is over, and housing is utterly screwed.

I disagree. Not only do I think the US is not headed for a recession, I also think that housing construction is still low and has room to expand.

Here is a summary of US housing starts since 1959:


Because housing starts have been growing since 2009, it doesn’t mean that they are by any means robust when compared to past expansions. It merely feels that way because the previous bust was so sharp and severe. In reality, we’re still below the average level of starts since 1959, and we’re nowhere near a red-hot level of housing starts which we experienced in the mid-2000s, the mid-80s, late ’70s, or late ’60s.

It looks to me like housing starts have more room to run, which is why I think LPX’s earnings are not at a cyclical peak, which is the prevailing sentiment right now. This would also mean that the price decline in OSB was an overreaction to the intense fear of recession which gripped markets late last year.

If I’m wrong and we do have a recession, I doubt that housing starts will be decimated like they were in 2008. If the current boom never went to an extreme level, then it’s logical that the bust will not be as severe either. This is what happened in the early 2000s. In the late 1990s, the stock market went crazy, but the housing market remained subdued and didn’t participate in that financial mania. As a result, housing held up well during the bust of the early 2000s. Once the Fed cut interest rates to deal with the early 2000s bust, the housing market was actually buoyed. Ironically, this experience led to a widespread public perception that real estate was a safer alternative to stocks and this perception helped fuel the mid-2000s housing bubble.

The cheap valuation and excellent financial position of LPX also prevent a permanent loss of capital. LPX currently has a debt to equity ratio of 20% and possesses a cash-rich balance sheet with cash & equivalents presently at $6.86 per share. The Piotroski F-Score is currently a nearly perfect 8 out of 9.

The stock currently trades at multiples below the industry average and its historical averages. The P/E of 6.87 compares to an industry average of 11.17 and a 4-year average for LPX of 13.31. The enterprise multiple of 4.12x compares to a 4-year average of 9x, which is a sensible valuation for such a financially high-quality company.

In summary, I think LPX is undervalued because the market is incorrectly surmising that new home construction is at a cyclical peak. Additionally, I believe that the current valuation and financial quality of the company provides a sufficient margin of safety if this thesis is wrong.


I’ve been listening to this a lot lately:




Which reminds me of this:




PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

ProPetro Holding Corp (PUMP)


Key Statistics

Enterprise Value = $1.024 billion

Operating Income = $233.82 million

EV/Operating Income = 4.38x

Earnings Yield = 13%

Price/Revenue = .63x

Debt/Equity = 17%

The Company

ProPetro is a Midland, Texas-based oilfield services company. The company’s focus is providing equipment and services to support the fracking industry with a concentration in the Permian Basin.

The Permian Basin is an ocean of oil, currently producing 2 million barrels of oil a day. PUMP owns and operates a fleet of mobile hydraulic fracturing units. Other companies pay ProPetro for the use of these units, along with the supporting crew which operates the equipment. They provide equipment, personnel, and services to meet the needs of their clients that work in the Permian Basin. They have strong relationships with their clients and are local to the Permian basin, giving them a substantial advantage in this region due to the relationships that they have in place.

This is a company whose fortunes are directly tied to the performance of fracking in the United States, which is directly linked to oil prices.


Oil has been hammered recently, which led to a decline in the stock price.

PUMP has been punished further in the recent market sell-off, pushing it below its 2017 IPO price of $14.50. This is a small company in a rocky industry and has been, in my opinion, oversold because it is perceived as a risky small cap in a risky industry.

My Take

I am optimistic about the fracking industry, primarily due to the fact that it defied all expectations and survived the misery of the 2015-16 oil price crash. This was a crash that was engineered by Saudis who increased oil production to cripple the fracking industry in the United States. Fracking is only profitable at high oil prices, and the Saudis hoped to cripple the industry by boosting production and lowering the price. They did not succeed despite their best efforts and fracking, while damaged over the crash, survived the crash.

With that said, there is a lot to dislike about the industry. The oil crash of 2015-16 led to a string of bankruptcies among the highly indebted companies in the space. There is also criticism that the industry is too capital intensive and can’t produce sufficient free cash flow to be viable for the long run. The only thing supporting the industry, critics say, is a flood of cheap money from yield-hungry investors and greedy Wall Street banks determined to earn fees while they hold their nose over the stench of crappy deals. Adding more support to the “ick” factor is the environmental criticism of the industry.

Add up all of this and what do you get? An industry ripe for mispricing because of the revulsion is creates. I think ProPetro has been punished unnecessarily by this sentiment.

The speculative nature of this trade is that I am betting that oil prices are close to a cyclical low. The Saudis seem strongly incentivized to increase the price of oil, and they are already taking action to make this happen. They want to take Aramco public in the near future. To get the best possible offering price, they need to maximize the price of oil. This is going to benefit fracking, to the long-term detriment of Saudi Arabia but it will support their short-term interest to maximize the price of oil so they can get the most money out of their IPO.

ProPetro is uniquely positioned as one of the key players in the Permian Basin, which is a hub of fracking activity in the United States. They will benefit immensely by an increase in oil prices.

Even if I am wrong and oil heads lower, ProPetro held up nicely during the 2015-16 crash. They were able to eke out positive operating income in 2015 of $8.78 million and lost only $37.38 million in operating income in 2016. Once oil prices bounced back slightly in 2017, ProPetro came back to life and generated an operating income of $63 million. This suggests to me that even if my thesis is wrong, ProPetro should survive a downturn in the fracking industry and minimize my losses. Furthermore, I purchased the stock at such a significant discount to intrinsic value (4.38x Operating Income, a 13% earnings yield, and only 5 times cash flow), that the stock price should hold up in a downturn.

If my thesis is correct and the Saudis engineer a hike in oil prices to support their IPO, fracking in the United States ought to boom and ProPetro’s multiple ought to improve significantly.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

Nucor (NUE)


Key Statistics

Enterprise Value = $19.038 billion

Operating Income = $2.726 billion

EV/Operating Income = 6.98x

Earnings Yield = 13%

Price/Revenue = .68x

Debt/Equity = 44%

The Company

Nucor exclusively produces steel via minimills. Minimills take in scrap steel, vehicles, or equipment and melt them down in a furnace. Nucor uses electric arc furnaces, which heat the raw materials up to temperatures of over 5,000 degrees Fahrenheit to melt the metal down. The melted down steel is then re-purposed and sold. Nucor is the largest operator of steel minimills in the United States.

The cheap valuation is a result of the recent market sell-off combined with Nucor’s strong earnings in the last couple of years. The market seems to be indicating its belief that we are headed for a recession and steel demand is near a cyclical peak.

My Take

Nucor’s business prospects are driven by demand for steel and steel products. With strong US and global growth, Nucor has benefitted. A bet on Nucor is a bet that the economy will continue to grow and will not enter a recession. As I’ve stated previously on the blog, I do not believe that the US will enter a downturn in the next year.

I also think it’s possible that demand for steel can increase from current levels. With the Democrats seizing control of Congress and Donald Trump’s attitude towards deficits and spending, I think it’s possible that a big infrastructure bill could pass through Congress. This would be excellent for steel demand and could help boost earnings and sales from already strong levels. Infrastructure spending is probably the only area that Congressional Democrats and Donald Trump can find common ground.

Nucor has been expanding in recent years, pursuing a strategy aimed at growing its business. Recently on November 29th, they acquired a Mexican precision castings company called Corporacion POK, S.A. de C.V. In 2016, they acquired Independence Tube Corporation for $430 million. In 2014, they bought Gallatin Steel for $779 million in cash. The acquisition is in addition to Nucor’s investment in its existing capacity. They spent $230 million on a cold mill in their Arkansas facility, allowing it to manufacture more advanced low alloy steel products. They are also building new minimills in the United States, including a $250 million facility in Missouri. All of these efforts, I believe, will strengthen Nucor’s competitive position within their industry.

Nucor is financially healthy. They currently have a perfect F-Score of 9. The debt/equity ratio of 44% and the current ratio of 2.77x indicates that debt is at healthy levels. This is particularly impressive considering that they have been expanding and acquiring new businesses over the last few years. The Z-Score of 4.23 implies a very low risk of bankruptcy in the upcoming year.

Nucor’s valuations look favorable compared to its own history and its industry. The P/E of 7.9 compares to an industry average of 12.18. An increase to this level would be a 54% increase from current levels. Nucor’s average P/E over the last 5 years is 25.28. On a price/revenue basis, Nucor currently trades at 68% of revenue, compared to an industry average of 159%. On an EV/EBIT basis, Nucor trades at a multiple of 7x, compared to a 5-year average of 15.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

Gap (GPS)


Key Statistics

Enterprise Value = $9.397 billion

Operating Income = $1.386 billion

EV/Operating Income = 6.77x

Earnings Yield = 10%

Price/Revenue = .56x

Debt/Equity = 36%

The Company

Gap is a retailer. Have you been to the mall in the last 20 years? Have you seen its commercials trying to convince you to buy khakis? I’m fairly certain you’re familiar with them. (Personally, I buy most of clothes at K-Mart, Wal Mart, and Costco, but whatever.)

The company is not simply the Gap stores in malls. They also own Banana Republic and Old Navy. Banana Republic is pricier than both Old Navy and Gap. Old Navy is the discount apparel retailer that is currently driving the company’s growth. Old Navy has continued growing while the other two segments have been in decline. Old Navy grew sales by 6% in 2017 while both Gap and Bananan Republic experienced sales decline as customers shy away from the mall.

Gap was beat up by the retail carnage a few years ago. From 2014 through its 2016 low, Gap went from around $40/share to a low of $17 in mid-2016. From there, as Mr. Market woke up and realized that most apparel transactions still happen in a store, the stock recovered to $35 in January 2018.

From the heights of $35/share, the stock has been punished again over the last year after some choppy quarters, but the news has hardly been devastating. The stock has also been punished by concerns over a trade war that isn’t yet showing up in the actual results.

My Take

Yes, I’m diving back into this category again – retailers punished by the sentiment that Amazon is eating brick and mortar retail. I keep ignoring the warnings. Like Z’Ha’Dum, the advice is: if you go there, you will die. I keep going there anyway.

Anyway, I think I made a few good picks in the retail sector (American Eagle, Dillard’s, Foot Locker, Dick’s), but this area has largely been a wasteland for my portfolio. Fortunately, I exited the dumpster fires like Francesca’s and Big Five after they posted operating losses. I even got out of Big Five for a slight profit! This is shocking considering the stock is down 68% year to date. In retrospect, the best way to play a beaten up sector is to own more of them in smaller chunks. I made “big” bets on a small handful of dirt cheap ones, but I probably should have been more diversified among a broad number of stocks in the group.

The trade is now played out. Retail recovered as a sector, even though I didn’t always have the right picks. Even after that after the run up, Gap looks to me like one of the best of the bunch and the multiple has been compressed due to some slight underperformance in business results along with trade war jitters.

Gap hasn’t posted a loss at any point in the last decade. Even in the depths of the Great Recession, it still earned $1.34/share. It has also maintained profitability throughout the last few years of intense competition with online brands. They also began a restructuring effort in 2016, which is working. They closed 75 stores internationally that were not performing and realized a $275 million cost savings. I find this encouraging, especially compared to my experience in Francesca’s, which continued to open new stores even while the existing stores were posting terrible results. Gap has a strong shareholder orientation in this regard.

Gap is very well run with a high degree of financial quality. The F-Score is a perfect 9 out of 9. The Altman Z-Score is currently 4.73, implying an extremely low risk of bankruptcy. The debt to equity ratio of 36% compares favorably to industry averages, which currently averages 68%. The company also has a high degree of yield. Last year, they bought back 2% of the existing share count and the current dividend yield is 3.94%.

Gap’s current valuations compare favorably to the industry and its history. Gap’s current P/E of 10.29 compares to an industry average of 14.32. A P/E of 14-15 seems reasonable to me for a steadily performing and financially healthy retailer. On a price/sales basis, Gap’s current ratio of 56% compares to a 5-year average of 83%. On an EV/EBIT basis, Gap’s current level of 6.77x compares to its 5-year average of 7.68. The forward P/E is 9, implying analysts don’t expect any kind of operational loss in the upcoming year.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

First American Financial (FAF)


Key Statistics

Enterprise Value = $3.245 billion

Operating Income = $689 million

EV/Operating Income = 4.7x

Earnings Yield = 12%

Price/Revenue = .84x

Debt/Equity = 22%

The Company

First American Financial is a California based insurance company. Their focus is title insurance, from which roughly 92% of their revenue is derived. Title insurance is simply insurance which protects against losses if a title is deficient.

FAF is paid when mortgage transactions closed. With the real estate market in the United States steadily growing over the last decade, the company has benefited from real estate activity. Since 2013, earnings are up 119%.

The title business improves due to volume and the premium paid for title insurance is derivative of the home’s value. Therefore, FAF benefits from a rising real estate environment. The stock has been punished over the last year due to concerns that this real estate expansion is slowing down.

FAF also maintains an investment portfolio, which is mostly concentrated in fixed income instruments. Currently, they have $4.7 billion in fixed income instruments and $467 million in equity. For this reason, the pressure experienced by the markets in recent months has weighed upon the price. From 2016 to 2017, the investment portfolio increased in size by 157%. If we entered a serious downturn, it is unlikely that that this would persist.

Side note: In the summer of 2001, I had a job working for a title insurance company. My task was simply to spend all day calling title abstractors across the country. I would order title reports from the counties in which the properties were purchased, they would fax it to me, and it was my job to regularly follow up with them. I had a lot of fun doing it! I’m sure the operation is more sophisticated these days, but back then obtaining the reports from the local abstractors was like pulling teeth.

My Take

I owned this back in 2017 and made a 50% profit on it. It is one of my few successes over the last couple of years. I bought it around a P/E of 12. When I sold it, the multiple was around 20, and I made a 50% profit, so I got out. The stock is way down from those lofty levels, and it is now at a P/E of 8.

From a relative valuation standpoint, FAF looks like it is at an attractive level. The P/E of 8 compares to a 5-year average for the stock of 15. The average for the industry is also 15. On a price/revenue basis, the stock currently trades at 84% of revenue compared to an industry average of 125%.

With an F-Score of 6 and a low debt/equity ratio of 22%, the company exhibits a high degree of financial quality. Indeed, FAF is a well run company and this has buoyed its ability to consistently grow over the last decade. Additionally, while title abstracts and insurances looks like an area ripe for disruption, to truly streamline this industry would require many local governments throughout the country to upgrade their technology and systems used to track title information. I don’t think this will happen any time soon.

I expect that FAF will continue to perform well and I don’t think there will be a recession in the next year as many pundits are predicting right now. With that said, even in the midst of the 2008 real estate meltdown, FAF only lost 81 cents per share and quickly recovered to profitability in 2009. I would be shocked if the US entered a real estate meltdown of that magnitude. By all indications, the quality of mortgage loans has improved and household mortgage debt looks sustainable when compared to the disposable income of households.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

Amtech Systems (ASYS)


Key Statistics

Market Capitalization = $66.96 million

Cash & Equivalents = $62.50 million

Current Assets = $124.29 million

Total Liabilities = $56.32 million

Net Current Asset Value = $67.97 million

Z-Score = 2.45

The Company

Amtech operates three segments in three industries: (1) Semiconductors, representing 45% of revenue, (2) Solar cells, representing 47% of revenue, and (3) Polishing of newly sliced silicon wafers, representing 8% of revenue. They supply components and materials used in the manufacture of semiconductors and solar panels.

While the company has produced profits and cash flows for the last couple of years, the market believes semiconductor and solar revenues hit a cyclical peak this year and that the company is doomed to return to its loss-making years. In 2014, 2015, and 2016 Amtech generated net income losses of $13.09 million, $12.94 million, and $7.91 million respectively.

You see this same sentiment in mega caps like Micron, another one of my holdings. For a micro-cap stock like this, this sentiment is producing brutal price declines – i.e., a company selling for less than the cash it has in the bank. Amtech is down 55% year to date.

For the solar business, in particular, the industry is subject to brutal pricing pressure and is likely not a “good” business going forward. Solar projects are being shelved due to the President’s trade war and inclinations against the solar industry.

Furthermore, the company is diluting the shareholders. They have issued shares in the last year and the share count is up 8.37%.

My Take

Amtech is operating in a brutally competitive industry that appears to have peaked, they are issuing shares, and the situation appears grim. Why am I buying this stock?

I bought this because of the absurd valuation. This currently trades below net current asset value and for roughly the cash that they have in the bank.

Usually, when a net-net is this cheap, there are usually catastrophic losses going on. There is typically an asset value, but the market believes that the asset value will quickly go away due to losses. The risk is usually that the company will piss away the cash and the company will go out of business. This is not the case here. With a Z-Score of 2.45, the risk of bankruptcy is minimal. The company is also producing cash flows and earnings, which is extremely unusual for something trading this cheap. In 2017, they made $9.13 million in net income. In 2018, they made $5.31 million. They also produced free cash flow for the last couple of years, generated $5.3 million of free cash flow in FY2018 and $10.53 million in 2017.

There is also a high degree of insider ownership, with insiders owning 15.63% of the company. This is a positive sign, as insiders have a strong incentive to keep the business afloat.

I have no idea if semiconductor and solar demand is at a cyclical peak. As a value investor, I am drawn to the industries where Mr. Market is fretting, stressing, and creating potential bargains. Amtech seems like a compelling bargain to me. Even if the business is at a cyclical peak, I don’t think it matters for a stock like this. Frankly, I would be attracted to this stock even if it were producing losses.

When a company sells for the cash in the bank, all it needs to do to perform well is to simply survive. The question I am trying to answer is: Will Amtech exist a year from now? Will they maintain the current asset value? With a high degree of insider ownership and steady cash flows, I think the answer to both questions is yes. When a net-net like this is generating profits and cash flows, it seems like a compelling opportunity.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.