August Update – More Rotation

There was a tweet I saw earlier this week explaining that bloggers should reduce the size of their posts and clearly identify their themes with headlines to benefit their readers. Because of my concern about increasing my readership, I will do neither of these things.

With that said, this is a post about stocks, not theory, as the last few of my posts have been. So it will probably be more interesting on that alone. I will do my best to countervail that with long, drawn out text descriptions and no illustrations.

Well as they say on the True Crime Garage, that is enough of the business. On with the show. I am starting to roll my portfolio over into names that stand to benefit once things get back to normal.

I would not go so far as to buy an airline or a restaurant just yet.  But I have noticed a number of names that have produced very good results and that should continue to produce good results as the economy recovers.   And some of theses stocks seem unreasonably cheap.

The biggest of my purchases has been Big 5 Sporting Goods.  If you go back in my portfolio, you’ll note that I have owned BGFV before.  It was a position before the pandemic, and it was a position briefly in May, but I sold out too soon.

I was very close to buying it back leading up to their second quarter results but unfortunately I did not.  The results were extremely good, and the stock popped.  Not one to be deterred by a rising stock price, I bought the stock after that pop, as I think it should be able to carry on higher.

BGFV saw same-store-sales (SSS) increase by 15.5% in the second half of Q2, once their stores had begun to open.  In July this carried on to even higher heights – to 31.9% SSS growth.

Diluted earnings for the quarter were 52c per share.  Guidance for the third quarter was even better; BGFV estimated that it will come in between $1 and $1.30 per share.  In July the company eliminated all of its debt and has a cash position of $38 million against a market cap of $138 million.

Even as I type this, I feel compelled to add more.  The stock, which is trading a little over $6 right now (as an FYI I wrote this yesterday and now it is up even more I see), seems way too cheap given these results.

The second name I added was Waitr.  Mark Gomes did a video write-up on them on Youtube a few weeks ago.  Now I actually haven’t watched that video.  But I assume it is quite good. Still, I first came across the name when I received an email about the video being posted so I have to give the hat tip to him for the introduction.

As an aside, not watching the video was intentional.  I have kind of taken a different stance to tips of late.  I decided I do not want to know why other investors like an idea.  I love getting new names or symbols to look at, but I do not want to hear why I should buy it.

Why is this?  I have noticed a trend – many of the bad ideas I have been in over the last few years have come from other people’s rec’s.  I am not sure why I make poor choices on other people’s ideas, or what it is saying about me, but I decided on a resolution to not review anyone else’s blogs or reports or tweets on anything. 

I began to do this in March and to be honest, it is working out well. It may make for a lonely existence but I think it is necessary given my propensity to be talked into bad stocks by other people.

I will, however, take names and research them myself, which is what I did with Waitr.  It looks like a great idea to me.  They are a food delivery service, based in the southern states, they did an acquisition last year that seems to have went south itself, and left the company losing a ton of money, but then COVID came along and they blew the doors off with the first quarter results.

But this does not seem to be just a COVID story.  The first quarter results were good, but it was in large part because they got their costs aligned with their revenue and actually generated cash for the first time.

I took a small position in early July, but I backed up the truck yesterday when the stock inexplicably dropped a buck after announcing their second quarter earnings.

From what I can tell, the second quarter was even better than the first.  If I look at free cash flow before working capital changes it came in at over $15 million.  At $4.50 this is a company with a market cap of $360 million.  They also got back on the year-over-year growth train in Q2 – growing the top line at 17.8%.   It just does not make any sense to me that the stock should fall on these results.  So, I added a bunch.

Another name I added on a dip is an old favorite – Smith Micro.  Smith did not put together a great second quarter and the stock dropped below $4 yesterday as a result.  But when I read through the conference call transcript it sure sounded to me like they have a bunch of new carrier wins that are on the verge of being signed.  On the call they described it as “late-stage” and “contract” negotiations, which kind of imply to me it is just a matter of dotting I’s and crossing t’s.

I also bought back small amounts of a couple of other positions I previously held – Evolent Health and Sharps Compliance.

Evolent had a really good second quarter, much better than I thought they could have.  They finally showed a decent growth number and are now EBITDA positive. The Passport debacle did not turn out well (count me as surprised that the new Kentucky administration still passed on Passport when they re-evaluated the awards).  But Evolent appears to be getting their money back and maybe more from the sale of Passport’s customers to Molina and the return of statuatory capital. They have also made inroads with one of the winners of the Kentucky program awards, Molina, which they have said will be partnering with Evolent in two states, Kentucky and Oregon. Evolent used to be a $20+ stock. I have always thought it could get back there if they got their shit together, and maybe they finally have.

Sharps Compliance is really the same story it was a few months ago.  They should benefit from the eventual vaccine deployment.  The stock came back into the $6’s and I thought it was worth buying there.  Now it is back in the $8’s and I am less excited about it here.

I am looking closely at another previously held name – DLH Holdings.  They also had a very good second quarter and the company is generating a lot of free cash.  I also added a small position on a second economic recovery name, the At Home Group, but this is another stock I have to dig into more before I can say with certainty that I am onboard.

The other more interesting situation that I am looking into right now is the BankMobile merger with Megalith Financial Acquisition Group.  I have talked about MFAC in the comments a few months ago and have held a tiny position in the stock for a while.

On Thursday MFAC announced what I suspected was going to happen – that they bought and were going to take public BankMobile from Customers Bancorp.

While BankMobile is interesting, it is CUBI that has caught my eye right now.  The bank is trading at under 50% of tangible book.  The second quarter earnings were out and they were not that bad.  CUBI has done the same thing as another bank I own (Sound Financial) – generated a lot of PPP loans – in fact CUBI is the 6^th biggest PPP lender in the country.

BankMobile is a nice growth business but it was not doing much for CUBI.  In fact, BankMobile lost $12 million before taxes last year according to the disclosures released yesterday, which means that they were a drag on pre-tax earnings by about 15%.

CUBI will take equity in BankMobile as part of the transaction, so they will still benefit from growth of that business.  And just taking a step back, I think you have to take BankMobile out of CUBI so that it can expand the deposit generation franchise to other banks. The whole point with BankMobile seems to be to collect fees from the deposits they generate. Having more banks onboard just increases their reach. There is also an issue with CUBI’s size, as they have limits on the fees they can charge to merchants from BankMobile transactions once CUBI gets too big (it is something called the Durban amendment). Making BankMobile its own entity eliminates this growth constraint on CUBI.

The dig on both CUBI and the transaction is that it is an example of both nepotism and cronyism.  It is hard to disagree with this. Jay Sidhu, the CEO of CUBI, also runs MFAC, the SPAC that bought BankMobile, and his daughter is the CEO of BankMobile and will be the CEO of the new company.

I admit that does not look good.  Sidhu is also benefiting through his founder shares, (though he is forfeiting most of them, there are still around 800,000 that he plans to keep, which he got basically for free, and so this is a pretty good payday for him).  But the deal also does not seem particularly unfair to either side to me, at least based on what I have been able to see so far. But I have to say, I am still trying to figure it all out and the disclosures are painful to read through. My bottom line opinion right now is that at such a low price to book I am inclined to take a chance on CUBI.

That wraps up all the buys.  My sells are pretty simple. I have sold pretty much all the SaaS stocks I owned other than PagerDuty and I have been lightening up on my gold stocks after this tremendous run. I also sold the rest of Overstock (too soon of course).

That is pretty much it for now.  Good luck!