Showing posts with label Sorfis. Show all posts
Showing posts with label Sorfis. Show all posts

Thursday, February 27, 2020

Links

Lucky Problems (LINK)

Controlling the Pendulum of Emotions - by Ian Cassel (LINK)

Charles Schwab on The David Rubenstein Show (video) (LINK)

Roblox Valued at $4 Billion as Investors Bet on Future of Gaming ($) (LINK)
Andreessen Horowitz leads investor group in latest $150 million funding round for popular videogame hub
Up to 91% More Expensive: How Delivery Apps Eat Up Your Budget (LINK)

Infinite Loops Podcast: Jim Chanos – Financial Frauds and Manias: Past, Present, Future (LINK)

The Tim Ferriss Show (podcast): #412: Josh Waitzkin on Beginner’s Mind, Self-Actualization, and Advice from Your Future Self (LINK)

Alfred North Whitehead’s Awe-Inspiring Focus (LINK)

Roger Lowenstein reviews the book Dark Towers [H/T @pcordway] (LINK)

The introduction to Peter Zeihan's latest book, Disunited Nations (LINK)

Matt Ridley: Officially Introducing My Latest Book, "How Innovation Works" (LINK)

Monday, January 27, 2020

Links

I released my year-end letter over the weekend. For those not yet on that email list, you can find it at this link: Sorfis 2019 Year-End Letter.

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There are also some good collections of Q4 and year-end letters HERE and HERE.

Why Invest? A 22-Year-Old’s Tough Questions About Capitalism - by Jason Zweig ($) (LINK)

2019 Project Punch Card Conference notes (LINK)

Data Update 2 for 2020: Retrospective on a Disruptive Decade - by Aswath Damodaran (LINK)

Exiting Stage Left… - by Harris Kupperman (LINK)

Systemic Risk of Pandemic via Novel Pathogens – Coronavirus: A Note [Taleb, et al.] (LINK)

The Recycling of Ships [H/T @the5hippingman] (LINK)
Related link (book PDF): Maritime Economics 3rd Edition
Business Wars Podcast: Boeing vs. Airbus (Part 1, Part 2, Part 3, Part 4, Part 5, Part 6, Part 7)

Alpha Exchange Podcast: Michael Green, Chief Strategist, Logica Capital Advisers (LINK)

September stress in dollar repo markets: passing or structural? (BIS - December 2019) (LINK)

DoubleLine Round Table - Segment 3: Best Ideas (video) (LINK)

The Sherman Show (podcast video): David Rosenberg (LINK)

The Peter Attia Drive: #90 - Ryan Holiday: Stillness, stoicism, and suffering less (LINK)
Related book: Stillness Is the Key
The Positive Side of Shame (LINK)

The (simple) secrets of superconnectors - by Khe Hy (LINK)

Jim Lehrer’s 16 Rules for Practicing Journalism with Integrity (LINK)

Clay Christensen on Business and Life (LINK)

From the archives.... How Will You Measure Your Life? - by Clayton M. Christensen

"I have self-doubt. I have insecurity. I have fear of failure. I have nights when I show up at the arena and I'm like, 'My back hurts, my feet hurt, my knees hurt. I don't have it. I just want to chill.' We all have self-doubt. You don't deny it, but you also don't capitulate to it. You embrace it." --Kobe Bryant

"Have a good time. Life is too short to get bogged down and be discouraged. You have to keep moving. You have to keep going. Put one foot in front of the other, smile and just keep on rolling." --Kobe Bryant

Thursday, January 23, 2020

The Direction of Moats

It's easy for a value guy like me to see some technology companies—or those that claim to be technology companies—that are losing a bunch of money and valued at billions or tens of billions of dollars and call it all a bubble. 

And in many cases, with specific companies, I think it's true. 

But in many other cases, the effects of the internet, the "software is eating the world" dynamic, and the tendency of "winner-take-all" to be amplified because of those characteristics means that, for the companies that succeed, the large majority of their value, and maybe more than all of their profits, will be realized many years from now. 

I've been thinking about all of this as I was reviewing my Final Decision Checklist and read the quote from Rob Vinall that I included on it: 
“In my view, widening the moat is more important than the width of the moat. Everyone is attacking a company’s moat, so the question is not how wide it is, but whether it is widening at a faster pace than competitors are filling it up. Innovation is central to the idea of widening a moat.”
Price matters. A lot. Almost everything is a good value at one price and a bad value at another. There are plenty of examples—such as Microsoft from 2000-2015—where business performance can be good to great to fantastic and yet, if you bought at too high of a price, you earn no positive return. 

Expectations can be too high for even the best of companies.  And competition that one couldn't see, or that may not have even existed, can enter the arena and cause the future of a given business to be worse than most may have imagined. 

So as one who still admits to being a value investor and puts most emphasis on the present and near-term future when making the decision to invest in something—as opposed to the far off future—I may miss investing in some great companies if the expectations are already fairly lofty. 

But because, according to people like Kevin Kelly or Jeff Bezos, we are likely still in the early days of the internet's effect on business and society, I think it's important to study the companies that have the potential to be some of the most important companies of the future—some of which are profitable today, and some which are not. 

And when I'm trying to decide which companies to watch and which to ignore for the time being, the main thing I think about is whether or not the industry will be more or less competitive in the future, and thus, whether or not a given company's competitive position is likely to be better or worse a decade from now. Or, in other words, what is the likely direction of the moat? 

Wednesday, November 13, 2019

Sorfis is now on Schwab

I'm pleased to announce that we've added Charles Schwab & Co., Inc. as a second custodian for offering our services. Given the extent of the Schwab platform, as well as the desire of some potential clients we've spoken with for a more diversified product than the Absolute Return Strategy, we are also now willing and able to offer more customized accounts.

For more details, please see the Services section of the website.

Sunday, July 7, 2019

Tandy Leather Factory, Inc. (TLF)

Here is a write-up I posted on MicroCapClub last month for those that may be interested in the micro-cap space. But first, please read the relevant disclosure below.

Disclosure: I am the portfolio manager at Sorfis Investments, LLC ("Sorfis") and the separate accounts that Sorfis manages own shares in Tandy Leather Factory, Inc. We may in the future buy or sell shares and are under no obligation to update our activities. This is not a recommendation to buy or sell a security. Please do your own research before making an investment decision.

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Tandy Leather Factory, Inc. (TLF)

Ticker: TLF
Price: $5.45
Shares outstanding: 8,934,024
Market cap: $48.7 million
Cash: $17.7 million
Debt: $0
Enterprise value: $31 million

Tandy Leather Factory is a specialty retailer of leather and leathercraft related items. Leather is ~40% of sales, hand tools ~20% of sales, and then there are a bunch of items that make up a single-digit percent of sales (dyes, finishes, glues, hardware, kits, stamping tools, etc.). They are basically a one-stop shop, and by far the largest player in this niche.

They categorize their customers into 2 types: Retail (~62% of sales) and Non-Retail (~38% of sales). Retail customers are individuals that come into their stores and are the end-user. Non-Retail customers are small businesses, youth organizations (Boy Scouts, 4-H, etc.), hospitals, military, distributors, re-sellers, and other similar, non-individual customers.

At the end of Q1, the company operated 117 stores, which are mostly in low-rent, strip mall type of locations. With the closure of the last U.K. store which was planned for this month, there will be 116 stores, with 115 in North America and 1 in Spain. A few more underperforming stores are also expected to be closed as leases expire in the near future.

In Q4 of last year, the company made both a management and strategy change. I think the previous management, which were long-time company veterans, did a good job over the years, but as is often the case, especially in the micro-cap world, put too much emphasis on top-line growth over economically profitable growth. And when cash flow slowed a bit, they started trying new things, such as starting a district manager program, continuing to operate the international stores (which lacked scale) that were unprofitable, as well as some other things which may have been reasonable experiments, but ended up being bad returns on investment (conference sponsorships, opening on Sundays, etc.). More expectations were also put on store managers to get out and try and sell non-retail/commercial business, which took them away from running their stores and providing great customer service to the retail customer base. 

The new CEO (Janet Carr) is focusing more on cash flow. So unprofitable stores will be closed when leases are up. The district manager program has been scrapped in favor zone managers, where 12 district managers have been replaced by 8 zone managers, reporting to 1 retail head manager instead of 2 regional managers. The store managers will also get to spend more time in their stores, as well as new incentives (pay based on cost of living, can now earn overtime, and incentive pay now based on sales, inventory turn, and labor costs instead of just store profit—so that more is in their control). The factory in Fort Worth, which produced about 10% of company product, has been reduced from about 25 employees down to 6, as some of the product it produced can be sourced from cheaper from elsewhere. 

But there is also money being spent on other things in 2019. They’ve hired a few people to focus solely on reaching out to commercial customers. This is potentially an area for growth, as we don’t really know how big this niche market is, but there is now a select, lower overhead group operating out of company headquarters focused on it, instead of having a lot of reliance on store managers to also perform much of those duties. They’ve also hired some other people in Fort Worth to professionalize other departments (marketing, merchandising, human resources, logistics), and are investing in technology that is long overdue to be updated (accounting and POS systems). 

I think there is a lot of uncertainly about how some of these changes may pan out, but I think there’s little downside buying at these levels. Tangible book value is around $6.30 per share the way I calculate it, which should be pretty close to liquidation value given that the inventory does not go bad quickly, and the inventory that was bad (e.g. faded leather that is hard to sell) or slow moving was written down when the new management team came in at the end of 2018 to provide a clean slate.

And while there is investment and some changes happening in 2019, I think—unless they really make some bad capital allocation decisions—the underlying earning power in 2018 should be the minimum level of earning power going forward. Given that I really do think the inventory write-down here can be counted as a one-off expense, and if we add that plus the portion of the previous management severance expensed during 2018, then the after-tax income at a normalized ~25% tax rate going forward would have been around $4.2 million last year. So besides buying it below tangible book value, we’re also getting about an 8.6% after-tax earnings yield (even without backing out excess cash), which I think is likely to grow in the years ahead.

Helping to protect the capital allocation going forward, we also have two former MicroCap Leadership Summit speakers on the board in Jeff Gramm and Brent Beshore. Jeff’s firm, Bandera, owns around 32% of the company. And another board member that runs an investment firm owns a little under 10% of the company.

While it’s often hard to know what actually causes a stock’s price to drop, and it could be coincidence, there is some probability that worries over the tariffs have caused concern among one or more investors with enough shares to move the price. As part of her immersion process into Tandy, Janet Carr mentioned visiting the company’s tanneries in Mexico during the company’s earnings call in March. And then in the week after President Trump’s tweet about the tariffs on Mexico, volume increased in the stock and many shares traded down just slightly above and below the $5 per share range. It may be a coincidence, but I thought it was worth noting, though the company actually gets a little less than 5% of its leather from Mexico (the sources are diversified, but South American countries seem to be the biggest source). And of the $17 million in imports last year, about $2 million were from China (Taiwan was the biggest at around $5 million).

Janet Carr also received restricted shares for joining the company and will receive some extra shares if operating income exceeds $12 million for 2 years in a row and $14 million in one year, which, given the company made $12 million in 2014 and had operating margins in the 12.4-14.4% range from 2012 to 2016, this is a reachable goal—which should certainly make buyers at today’s valuation happy if it is achieved.

Over the next few years, given the company still has a great competitive position and many of the inefficiencies of the past are in the process of being addressed, I think getting somewhere back in the 10-15% operating margin range is likely achievable, and probably within the next 2 or 3 years. So if we assume no growth and the closure of a few more stores, we’d be around $80 million of revenue which, at a 25% tax rate, gets us somewhere in the $6 million to $9 million range of after-tax income, which would give us a very good earnings yield on today’s sub-$50 million market cap, even before backing out excess cash. The company has also paid out a few special dividends in the past, and has been buying back stock. 

What would that cash flow be worth? It’s hard to predict multiples, and I prefer to mostly focus on my downside and earnings yield as a base return. But multiples of small, private businesses with $5 million+ in EBITDA that have a good competitive position, aren’t necessarily growth businesses, but also aren’t too capital intensive tend to sell for 6-8x EBITDA. So assuming a 12.5% operating margin on $80 million of sales, we get $10 million in operating earnings plus about $1.8 million in Depreciation and Amortization, so $11.8 in EBITDA. This would give us a valuation range of $70.8 million to $94.4 million. Assuming 9 million shares outstanding (i.e. buybacks roughly offset extra restricted shares), and $1 per share in excess cash (probably too low), we’d get a valuation somewhere in the $8.85 to $11.50 per share range. 

So in summary, there is uncertainty with how some of the changes will play out, but many of the operational things may be “unrecognized simplicities” that a fresh set of eyes can fix fairly quickly and return the business and operating margins back to where they were a few years ago. If margins get back there, I actually expect it to be with slightly lower gross margins, as the company focuses more on gross margin dollars instead of the percentage, but gains efficiency on the operating costs. All in all, I think it is a potential low downside investment with a reasonable path to doubling over the next 2 or 3 years.


Disclosure: Long



Thursday, March 14, 2019

Sorfis Investments

As many of you already know, my thoughts about starting a Registered Investment Adviser have come to fruition, and Sorfis Investments is now open for business.

The initial letter mostly provides some background about me and how my career and investing philosophy have developed over the years. It’s probably too much detail for many of you, but given that I hope Sorfis will be my main focus for the rest of my investing career, I think it’s worthwhile to give you a written overview describing how I made my way from growing up in Ohio to starting Sorfis in Charlotte, North Carolina. That letter, as well as a sign-up form to receive future letters, can be found on the Communications page.