market folly

We've posted up notes from the Value Investing Congress in Las Vegas and next up in the series is Carlo Cannell of Cannell Capital who pitched Cavco Industries and Build-A-Bear long.


Carlo Canell's Value Investing Congress Presentation

• Pitch: Maker of the coveted Iron Ranch! (Cavco Industries). 
• Tortoise do win- boring is sexy!  
• 1994 and 1999 were the last peak for the industry. Perhaps could attain or exceed.
• #2 participant before Berkshire, only 45% capacity utilized!
• Lots of operating leverage with min. CapEx. 
• CJS securities think $10.5 EPS assuming the company gets back to half of historic run-rate. Think they can earn $16 with capital employed and MFH marketing rebounds – not much sell-side coverage
• Now onto Plug Power – exciting company. Peak $1.1B market cap, $63MM losses, accumulated deficits are huge! It’s all about the future. Mentions the company –   didn’t say short it per se but a high valuation. (did not pitch this as a short but as a comparison for an exciting company).
• With a dull company you are not subject to built in belief like plug power.


• Pitch: Build-A-Bear workshop is the next idea. New CEO in June 2013.
• What is attractive – strong brand easy to wholesale or license. 
• In the worst year FY 09 – company generated $24MM cash flow from ops. Mini- Disney experience – affordable. Turnaround is all about pruning stores – expect   EBITDA growth.
• Recaptured 20% of traffic from closed stores.
• BBW was neglected at $10.25.
• Objective at Cannell is to create wealth not transfer wealth (like the tech companies above mentioned).


• Q&A – comment on Tesla since you have a disdain for high-tech. believes it is a   remarkable company (no position), innovator CEO, but once it starts producing   earnings, it will be valued as a remarkable auto company. Don’t think its 20MM person market.
• Why don’t you short it – risk appetite for VMEM, TSLA, or plug powers is very high.   Preference is to shoot them in the back! One strategy –investment arrogance to presume high flyers are necessarily proven shorts. Doesn’t know they will be falling.
• Coldwater creek is an example of a company which lost its way- filing or has filed   ch.11. 
• TSLA has a free call on capital can just issue shares.
• Any of the companies you talked about are shorts? Since you mentioned shoot them in the back. Some shorts – a few companies doesn’t mention which one he is specifically short– a transformation from print companies (like Dex Media, standard register) massive amounts of debt – equity is razor thin. Digital sales are not coming through. Legacy companies clearly wounded. 
• Thought that equity would be wounded by the debt. 
• Carlo believes all retailers will come to an end – evolution. Track 1993 restaurant IPOs shocked by the mortality rate. Blimpie is an example.
• Brutal time for short sellers, Whitney Tilson says Carlo is one of the best – do you wait till  they fall for 50%/80% and then jump in? Successful short selling – look at things through the eyes of a fledgling stock market manipulator. (staff office with unethical  brokers) reach out to organized crime to order stocks! Dealing with disreputable  people. 
• Thin float, lock up the stock, a lot of buyers, very little sellers. 
• Short sellers should follow the filings and comments – who are the sellers and when are they declared effective. The short manipulators are first out. As shorts you want   to short at the same time. Stocks implode when the manipulators exit – this isn’t  new. In Canada the occupation of a stock market promoter is “noble”.
• Manufactured home lending – question about credit access for buyers. Only to play for the manufactured home lending is through Berkshire or Cavco. Manufacturing housing lending hasn’t come back.
• How does Carlo size shorts? When you wake up and see the ticker of the short –  reduce by 25%! Not a scientific process. Ideally many shorts at 45 bps, hard to  maintain however – very volatile. 
• Talk about Crumbs Bakery – is a retailer of 60 cupcake stores - $3 per cupcake.  Very potent following among the 17 to 10 female and 45 and up suburban mom.   High gross profits. Troubled company, but the valuation is virtually nonexistent.  Interest is taking the brand of Crumbs and could this be franchised? If so what are the charactertistics of the stores. Better stores can produce 30 – 35% EBITDA margins.   Some stores in California are hurting due to poor leases.
• Binary outcome. Think they can do 400 stores – who knows what the exact store potential. Quick version of the thesis.
• Summary – long presentation – really pitches on Build a Bear and Cavco.
• Point is that it's ok to buy boring companies! Have a discipline to contain the toxic speculative juices or at least take advantage of the speculative juices of others.


Be sure to check out the rest of the Value Investing Congress presentations.