Michael Burry wrote short bits about companies he was researching for MSN Money a while back. If you haven’t heard of Michael Burry, you should read The Big Short. Michael Burry did very well for himself and investors (even though his investors all left after him minted them a fortune), so logically, if I write short bits about companies, I too will do well for myself and investors, right?
WETF: Wisdom Tree ETFs:
Sometimes I add one too many zeros to a figure. I always catch myself because the result is so absurd it is obvious. I was sure that was the case when I read the financials on Wisdom Tree. Revenue for trailing 12 months is $130m and its market cap is $1.9B. I am not making that up. Their valuation is [insert your own term]. In fact, I wouldn’t invest in the company if their revenues were their cash flows. That being said, the company has amazing asset-lite business model. Their capex is virtually non-existent. It’s all about the marketing.
WRLD: World Acceptance Corp. and EZPW: EZ Corp.
I just can’t get comfortable with the payday lending companies. They appear to being beaten down pretty heavily right now, but I have two problems with them. One, I think their business model is harmful to people. I may have to turn in my libertarian card for that comment. I can’t remember the second, the first appears to be sufficient. Buffett once said he would own stock in tobacco companies, but not own the companies outright. I don’t see the difference. I don’t claim to run any sort of social fund, but I don’t agree with Buffett on this one. There’s a first for everything. If I am taking his comments out of context, I am happy to be corrected.
Munger, on the other hand, has said “Don’t sell anything you wouldn’t buy yourself.” I can live with that.
WWW/WEYS: Wolverine World Wide and Weyco Group
Both companies are in shoe business. Very low-margin business that has competitive fad pressures to boot. That makes it tough to earn a long-term return on your investment. You invest a lot to build up a brand, but in the meantime, your margins are fairly slim and then the fad turns on your brand and you have to build another brand. I have been to my wife’s family for the past 8 Christmases and each year there is a new shoe that the women are getting, UGGs, Tom’s, those British rain boots, Perry Top Siders, and surely a few I missed. As it turns out, WWW recently purchased Perry Top Sider. I will check back in 5 Christmases to see if the women are still receiving deck shoes…
WTSL: The Wet Seal.
I don’t really love retail and especially not retail clothing. Every time one of these retail clothing companies falls by 30-40% over a few weeks, I make a trip out to my local mall. I walk around for 15 minutes and am struck by the same conclusion each time. If you had to design the worst possible business model, it might involve selling fungible goods in very close proximity to your competitors where discounting plays a significant role in product promotion. Add in the fact that these fungible goods are fad-related and your lease agreements are most likely longer than your fad will last. That about sums up the retail clothing space. I usually lose count at about 15 different companies when I walk around my mall, but I can’t be exact on that figure as I was counting on my fingers…
GAP has done a good job of trying to overcome this problem with four separate brands (GAP, Old Navy, Banana Republic and now Athleta), but even they have had considerable ups and downs over the past decade. Are they in or out of fashion now? I don’t know, but I am out.
Undifferentiated retail product. Tough to compete on brand name, because what you are selling isn’t the brand name, but diamonds, which are a commodity (just don’t call the recipient a commodity). This theory shows in their financials, very low profit margin. When bad times hit, there’s no cushion. During last recession, Zales needed outside capital which diluted existing shareholders. The next time won’t be different. Tiffany & Co. has done a good job of changing this dynamic by making the brand itself the primary product the customer is buying not the product itself. This difference shows up in the financials, Zales has earned anywhere between 4% and -10% net margins over the past 10 years. Tiffany’s, on the other hand, has hovered around 10-12% net margins. That’s a consistently large difference. That’s a moat. But the Tiffany’s moat is about expensive as their products. I will pass on the robin egg blue…
I’m noticing that my commentary is internally consistent, negative on all fronts. I do have a positive commentary on a stock in this neck of the alphabet. Munger’s kids once called him a “book with legs.” I try to use all my time to its fullest, so when I am sitting down preoccupied* with something else I usually bring a book that is fairly easy to pick up and put down. About 8 years ago, I read about a company from this book, 100 Great Businesses and the Minds Behind Them. The book isn’t anything that will knock your socks off in terms of interesting businesses. But it did plant a seed in my mind. I knew immediately why this company was so good, but obviously everyone else did too and just recently has it become affordable.
I had a crush on a girl in high school. Everyone knew I liked her. And as soon as she became available, my good friend began dating her. Fool me once….
*Otherwise known as “toilet reading”