Preliminary Analysis Case Study #1 Part 3 – Book Recommendations And More

Preliminary Analysis Case Study #1 Part 3 – Book Recommendations, Power of Learning, and More

On Monday I announced we were going to begin doing a real-world case study on Constellation Brands – Stock Ticker STZ.

Well, after releasing this post, my team reminded me that there was actually a preliminary analysis my client did before this one. So before we get to the STZ case study, we’re doing to take a detour to talk about Canopy Growth Corp –  Stock Ticker WEED.

I didn’t want to skip this one because there’s a lot of context and talk in this discussion that we don’t necessarily go over in the later training sessions because we’ve already talked about them.

This post is a continuation of the last two posts in this ongoing case study.  Both parts are below.

Below is his unedited preliminary analysis for reference – without any of my comments – for you to get a  look at.

Canopy Growth Corp – WEED

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WEED – Canopy Growth Corp (Canadian Company)

All numbers are in millions of CAD unless noted otherwise.

  • FY Ends March 31st, 2017
  • 3,404 market cap (medium)
  • N/A dividend yield.
  • P/B TTM = 4.92
  • TTM Operating Margin is -39.2 and has somewhat increased over last 2 years.
    • 5 year average OM is N/A
  • Share count has done increased from 77 to 119 from FY16 to FY17. Current TTM is 149m.  Statement of shareholder’s equity??
  • Book value per share has increased from 1.34 to 1.55 from FY16 to FY17. Current TTM is 3.73.
  • Morningstar ROIC TTM is -6.58 and a little higher than the last 2 FY’s
    • 5 year average Morningstar ROIC is N/A
  • TTM ROE is -6.45 and a little higher than the last 2 FY’s
    • 5 year average ROE is N/A
  • TTM FCF/sales is -151 and we can’t tell any pattern. See con note on FCF
    • 5 year average FCF/sales is N/A
  • CCC: No info on the payable period (assume the product is cheap to grow) but DIO exploded on FY2017 to 5,494 days (FY2016 and 2015 avg is about 650 days). Research online says cannabis takes up to ½ year to grow so I would need much more investigation on why inventory takes so long to turnover.

 

  • EV=3,312
  • EV/EBIT is -73.6
  • EV/FCF is -37.6
  • EBIT/EV (earnings yield) -1.3%
  • FCF/EV (earnings yield) -2.6%

Con’s

-Young company – only about 3 years old after name change (used to be Tweed)

-Note only balance sheet on Morningstar has FY2015 so we need to look at 10K for data.  We cannot really tell any direction with a 2/3 year old history.

-SG&A & Other are over 163% of Revenue

SG&A roughly decreasing and “Other” is increasing

-Op Income and Margin are (-) but are generally decreasing over time

-Outstanding shares are significantly increasing over time

-FCF is increasingly negative as both op cash flow and CapEx are also both increasingly negative.

-Not much experience with Canadian companies.

-Goodwill and intangible assets exploded on FY2017.

-Regulation laws in Canada and USA?

-They bought a lot of companies in FY2016

Pro’s

-Cash exploded in FY2017

-FY2017 Cash & Equiv – Total Liabilities = $39m

-Book value/share is generally increasing but only for last 3 years

-Low Debt (also reflected by the ROE and ROIC being similar numbers)

-Revenue is increasing over time

-STZ bought about 10% interest in WEED.  Industry took notice and WEED most likely gained some legitimacy with large companies.

-COGS is only 23% of Revenue (doesn’t take much cost to grow product?)

-High Working Capital Ratio = 9.8 but this high typically suggests either too much inventory or not investing excess cash…

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So, after going through the beginning’s of this preliminary analysis process in part 1 on Wednesday, here is part 2 of this discussion below.

In this video, we took a short several minute break from analysis to talk about book recommendations, the power of learning, and much more.

For some reason, when I talk the audio cuts out so below each shorter video I’ve created a video where I’m rehashing what I told the client during our training session.

And my context with the missing sound in the above video here…

Again, as I say in the video not sure why my sound cut out on the recording because he could hear me the entire time.  But all of my past videos are like this and we’ve just fixed the sound issue a few days ago hopefully for good.  For now this is how I’ve got to improvise things.

If you have any comments or questions please post them in the comments section below and I’ll answer them.

I’d also love to see your preliminary analysis as well so feel free to post these in the comments below.

If you’d like more information about the coaching program this client is in, go to this page.

For reference, he’s in the $ 10,000, year-long program and this is only after 1 month of coaching doing nine 1 hour training sessions via Skype.

P.S.  This analysis is based on the preliminary analysis template I developed over a number of years and after evaluating thousands of companies.  If you’d like a copy of this to do your own preliminary analysis you can get yours for free here.

P.P.S.  I put on a FREE webinar yesterday teaching The 3 Secrets That Have Helped Me Beat Buffett In The Stock Market so you can possibly do the same.  If you’d like to sign up for FREE to view the replay of the webinar you can do so here.

Preliminary Analysis Case Study #1 Part 1- Constellation Brands

Preliminary Analysis Case Study #1 Part 1 Constellation Brands

Years ago, I would spend hours researching one company on a preliminary basis so I could figure out if I wanted to do further research on it and possibly invest in it.

And I would do this full hours long process on a company no matter what I found out during the preliminary analysis.

Not only was this a massive waste of time spent researching companies I knew I wasn’t going to invest in, but this process only allowed me to go through one company on a preliminary basis in an hour or two.

With more than 20,000 companies available to research worldwide, I knew I needed to streamline this process a lot.

I needed to get rid of crap companies faster and evaluate more companies in a shorter time.

By doing these two things it would not only allow me to find potentially great investments faster but I’d also learn more industries and business models faster as well.

So out of necessity came my preliminary analysis checklist you can get by subscribing to Value Investing Journey for FREE here.

After developing this process I can now go through 5 – 10 companies in an hour and learn an immense amount about one company in just a few minutes.

Why am I telling you about all this?

Because one of my $10,000 coaching clients, in less than a month, went from minimal value investment knowledge to doing these full preliminary analysis on companies by himself.

He now knows what everything on the checklist means and he now wants to help others as he’s learning.  Here’s the kicker:

He graciously offered to post his first ever full preliminary analysis here on the Value Investing Journey blog so that not only can he get feedback from you to help him improve.  But also so that we could all help each other grow our value investing knowledge by doing real-world value investment case studies together.

The company he chose to evaluate is…

Constellation Brands – Stock Ticker STZ

Here’s the brief profile of Constellation Brands from its own company profile…

Simply put, we produce and market high-end beer and premium wine and spirits brands that consumers love.

Whether at home relaxing, in a restaurant marking a special occasion – or at a concert, a ball game or a day at the beach – our brands are front and center.

We understand our consumers and strive, not only to meet their current drinking preferences, but to anticipate and respond to what they’ll be reaching for next.

If you’d like to participate in this case study yourself all you’ll need is the exclusive Value Investing Journey Preliminary Analysis Checklist you can get for FREE here and Internet access to go to Morningstar.com.  That’s it.

You’ll learn best if you do your preliminary analysis before Wednesday when I release the preliminary analysis he did on this company.

And on Friday, I’m going to release part one of our exclusive training session explaining why everything is on the preliminary analysis worksheet and more importantly what everything means in terms of analyzing the company.

If you have any comments or questions please post them in the comments section below and I’ll answer them.

I’d also love to see your preliminary analysis as well so feel free to post these in the comments below.

How To Be Right Even If You’re Wrong

How To Be Right Even If You’re Wrong

If you’ve ever golfed you know how frustrating the sport can be.

Even if you have a perfect swing.  Select the perfect club.  Hit the ball on the face of the club where you want to.  And hit the ball with the right amount of speed, if the wind picks up while the ball is in flight.  Or hits a small divot when it lands it can make your “perfect” shot look terrible.

The same is true when investing.

If you evaluate a company and decide after researching it for more than 100 hours that it’s undervalued.  Has great margins.  Produces a ton of cash.  And has little to no debt so you buy it…

And then a major competitor has a breakthrough innovation that derails your company’s business.  Or your company has a small problem that turns out to be big later.  These kinds of things can derail your entire investment thesis.

The inverse is also true.

If you evaluate a company and find after putting a ton of time into it that it doesn’t fit your required investment thesis so you pass on it.  Then it gets bought out at a premium and you feel like you did something wrong.

If you love golf or investing you have to learn to deal with these kinds of situations or you’ll drive yourself crazy.

In golf and investing there is no such thing as playing well – or doing things right – every time.

Even when Tiger Woods was at his best during the 2000 PGA Tour season he “only” won 9 of 20 tournaments he entered.  Or a 45% success rate during his best career year.

When investing and something goes against your investment thesis it pays to remember this.  And also the following quote by investment great Peter Lynch.

But even if the market – or some insane company – proves your investment thesis wrong in the short time.  The decision you made can still be the right one.

Why I’m Still Right On KING

In June and July 2015 I did a case study on Candy Crush Saga Maker King Digital Entertainment (KING) at the request of a reader.

At the end of the case study I found even though they had great margins.  And produced a ton of cash that they had major risks keeping me from buying into them.

For those who want to read my thoughts on KING go here.

For those who don’t the major issues were:

  1. KING could reprice options.
  2. It paid company insiders way too much.
  3. It had the most complicated share structure I’ve ever seen.
  4. And it had some related party transactions that were nefarious.

Any one of the above by themselves are bad enough to keep me from investing.  But all four combined kept me as far away from the company as possible.

And I remain comfortable with this decision even after Activision announced its buying KING out for $5.9 billion today.

Why?  Because the price Activision paid for KING is insane.

Using just one example, Activision paid $2 billion more for KING than what Disney paid  – $4 billion – for Star Wars in 2012.

Does anyone on Earth think Candy Crush, Farm Hero Saga, and KING’s various other games and community are more valuable than Star Wars?

But this isn’t the main reason I remain comfortable with the decision I made in July.

Developing Your Investment Processes

When I began investing I took each investment decision on a case by case basis.  I had no strict buy or sell criteria.  And every investment decision I made relied on how I felt on that particular day.

This meant most of my decision making process relied on emotion.  The last thing you want to rely on as an investor.

Relying on emotional whims early led to lost money.  Lost opportunity.  And more stress.

The more I learned the more I realized I needed to develop strict buy and sell investment criteria to take emotion out of the equation.

Over time this led to my preliminary analysis checklist.  My selling checklist.  And my general investment checklist to name a few.  And these are why I’m comfortable “losing” out on a 26% gain in a few months.

Just because Activision is willing to waste money.  And yes there is a great likelihood the money they spent on KING will get wasted.  Doesn’t mean my decision in June and July was the wrong one.

Why?

Because I stuck to my investment thought processes…

Owning KING involved taking on too many major red flags so I decided to pass.  And wouldn’t have bought into the company at any price barring an NCAV situation.

Before developing my investment thought processes when seeing the KING buy out it would have frustrated me.  Why?  Because it was at a 26% premium to what I could have bought them at in June/July.

This would have made me feel like I lost a quick and easy 26% opportunity.

But this makes no sense.

How could I have known KING was going to be bought out in a few months time?  And how could I have known Activision would pay such a high price for KING?

I couldn’t.  So why dwell on what I couldn’t have known. I don’t now and instead rely on what my research and processes told me at the time.

I may have been “wrong” in the short-term this time.  But next time the company could go bankrupt.  Could get investigated by the SEC for fraud.  Or could lose all its subscribers in a short time.  All would be disasters for shareholders.

If done right investing shouldn’t be gambling.  Buying KING would have been just that.  And this is why even though I was wrong I was still right about KING.

Have you developed your own investment processes?  Do you require strict criteria to be met for any buy or sell decisions?   Would you have regretted not buying KING?  Let me know your thoughts on all in the comments below.

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Steiner Leisure (STNR) Case Study Part 3 – Financials

Steiner Leisure (STNR) Case Study Part 3 – Financials

steiner-logo

In Part 1 of this case study I introduced Steiner Leisure (STNR) the company we’re looking at in the newest case study and told you why we’re looking at it.

In Part 2 of the case study I introduced my preliminary analysis of the company which found some worrisome things about Steiner.  But we needed to find these things in the financials.

This is what today’s Part 3 of the case study is about.  Looking at the financials.  And finding out why Steiner’s numbers have deteriorated so much in the last year.

I found those answers and a lot more that’s important in the 2013 10K, 2014 10K, 2015 proxy, and 2015 2Q 10Q.  And in most cases I would release the 21 pages of notes I took about Steiner exclusive to Value Investing Journey and Press On Research subscribers later today.

But this is such a great learning experience I’ve got to release the notes below to everyone.  Click on the STNR Notes link below to get the notes.

STNR Notes

My conclusions so far are not good for the company.  But I’ll let you come to your own conclusions because you’ll learn more doing so.  And if anyone has more private equity experience than I do please let me know what Catterton might be thinking buying Steiner in the comments below.

Next up are valuations for Steiner.

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If you want to follow this and all other case studies.  Get exclusive content.  Be entered to win prizes.  Get a 50% discount on Press On Research.  Get a few gifts.  And access to other exclusive content.  Make sure to subscribe to Value Investing Journey here.