Tuesday, December 24, 2019

Cash Replacements

I've recently taken a furlough from the world of investing. I climbed a small mountain and wolfed down butternut squash apple salad and a few former feathered friends, downing it all with copious quantities of tap water. The next time I get the urge to whirl myself at high velocity by winding up a makeshift baby swing seat suspended from a tree branch, I'll do it before the sweet potato casserole.

Between bites of dressing, I decided I owned plenty of shady Greek tanker companies. Why not buy something conventional for a change? I'm always getting notices from Schwab that my portfolio is "dangerously concentrated". Sure, my Schwab account is 100% in a single pink sheet penny stock, but can't a guy catch a break once in a while? I'm ready to settle down, live the quiet life, sit back and chillax. R&R is the new R&D.

I only have so much brainpower. I can spend that brainpower tracking liquefied natural gas inventories, or I can spend it enjoying my extended lake vacation. And as anyone who's been on an extended lake vacation knows, nasty surprises have a way of spoiling the fishing. I want something I can depend on, something that will still be there if I catch a few winks after lunch. Something I can hang my hat on. Something like Tesla.

On second thought, maybe not. I want something so boring it doesn't even interest the fine folks at my friendly neighborhood department of water quality statistics. I want money market funds. Being a bargain hunter and all, I'd never dream of buying a straight money market fund.

I looked for "cash replacements" - companies selling for less than cash in the bank, with "a little something extra". I learned the importance of "a little something extra" from Grandma's cooking. Whenever she cooked chicken, she would add a little bit of this, and a little bit of that, until it was just right. Anyone who gives you the silverware just for the privilege of parting with "a little something extra" clearly isn't familiar with Grandma's cooking, but that's their problem.

Cash replacements aren't hard to come by. They're scattered left and right. A few months ago, I picked up Support.com for $1.53, and it had more than that in cash. The indefatigable Richard Bloom, after ninja slicing the incompetent C-suite in a mad bid for unlimited power, had taken the helm, slashing champagne expenditures and milking the support center for cash flow. In his spare time, he started a tech support biz to help out grannies with iPhone issues. Right about then, another activist bought a big stake, demanded a big dividend, and roundly scolded Ricky for blocking him from buying more. It wasn't an especially hard call that the stock was worth more than $1.53. Buy the cash at a discount, and get a profitable tech support center for free, with a disruptive granny assistance startup for dessert.

Why didn't I tell you about this sooner? Well, I'm on vacation. I have deck chairs to rearrange.

Let's not forget Rubicon! RBCN is a pile of cash, with real estate and a pill delivery company thrown in for free. As a nice bonus, Rubicon doesn't have to pay taxes. All of this would count for nothing if management were running the company into the ground. Fortunately, Timothy Brog put a stop to that and is lying in wait for a big acquisition, wearing camo garb as necessary. Sure, there's a bit of cash burn from overhead (and Tim's salary), but I'm willing to bet he'll wave a magic wand and make money for everyone.

And then there's CBA Florida. Once upon a time, the fellows at CBA had the bright idea of getting into the squeezing-blood-from-umbilical-cords-and-putting-it-in-storage-tanks line of business. The expected synergies with their TV & Radio Advertising division did not materialize. That's why a hedge fund bought a bunch of stock and fired everyone and sold everything (for the princely sum of 1.1 cents per share). I have a hunch the cash will make its way back to us presently. For some reason, people keep selling me stock for 0.75 cents.

You don't even have to find them yourself. David (of Elementary Value fame) tipped me off on two. ORGN trades below net cash and has tax losses to shield pretty much any amount of future income from taxes. And then there's that company trading at net cash, with a dump truck full of patents (compliments of the chef), and a neat share buyback program. Plus, they're suing a bevy of multinationals for patent infringement. I conveniently forgot the ticker symbol, but the point is you can find cash replacements all over the place.

Toodle-oo - back to rearranging deck chairs.

I own shares of SPRT, ORGN, SYEV, CBAI, NTIP, RBCN, CNAT and so many more!

Sunday, November 17, 2019

Jeff, Timmy, and the BrogBots

Rubicon Technology trades at an eensy-weensy discount to net cash, with some real estate thrown in for free. The previous CEO followed a strategy of selling dollars for 80 cents. This strategy was more popular with customers than shareholders. Fortunately, the board of directors fired prior mismanagement in favor of Timothy Brog, who hiked prices and downsized left, right, backwards and sideways.

Rubicon plans to use the losses reaped by prior mismanagement to shield future profits from taxes. Brog milked the legacy sapphire operations for cash, and built up a substantial war chest, with the idea of using it to buy up other companies, which will (hopefully) make tax free profits. The US corporate tax rate is 21%, so the earnings of anyone Rubicon acquires will instantly grow by 27%. 

Timothy Brog used to run an investment bank, so I imagine he gets plenty of phone calls about 
potential acquisitions, and since he's run a value investing activist hedge fund for 15 years, I doubt he'll overpay for the latest shiny fad. 

So far, he has closed on a deal to buy Direct Dose Rx. The purchase price? After a bit of rounding, $0. Rubicon bought Direct Dose off of the corpse of Wellfount Corporation, which raised $50 million from investors, made several "fastest growing innovator" lists and reached peak revenues of $20 million. 

Wellfount's main business was putting RedBoxes in hospitals and nursing homes, but with prescription drugs instead of movies. This worked until it didn't - pharmacies caught on and built their own vending machines. Meanwhile, Brog gleefully took Direct Dose off Wellfount's hands. Direct Dose made up only 10-15% of Wellfount's revenue, and it wasn't the part that went bad. Timmy and his BrogBots will need to restart Direct Dose from scratch, so this is somewhere between a startup and a distressed takeover.

And now to the fun part, the Breakdown by Division: 

First, let's get the carcass of the old sapphire business out of the way. This is no one's idea of an economic franchise, but at least it spits off more cash than it takes in. In a true stroke of genius,  Rubicon's new overseers started requiring positive gross profit margins on new contracts, but that doesn't show up as profits because they're liquidating antediluvian inventory at a loss to free up cash.

The sapphire business uses an unpronounceable technology that creates a quality advantage, but price is all customers care about. The balance sheet shows $2.8 million of inventories and accounts receivable for this division, as well as well as $2.7 million in property plant & equipment. Using highly sophisticated DCF analyses, I arrived at a value of $5.5 million. That might be on the high side. 

Second, they own a tract of land in Batavia, and a 65,000 square foot plant in Malaysia. They're trying to sell these, but Batavia isn't the most exciting place to do business, and Malaysia is a bit too exciting. The accountants say it's worth $4 million. 

Third, they own 25 million crisp one dollar bills. Take cash, subtract $1.5 million in total liabilities and you're left with $23.5 million in net cash, compared with a market cap of $22.5 million. Add in real estate, inventories, and accounts receivable and you get $33 million. Since they can reinvest the cash tax free, the cash is really worth in the neighborhood of $30 million.

Now, time to talk about the acquisition. Direct Dose Rx mails prescription drugs to sick, dying, and very old people. Specifically, Direct Dose Rx contracts with hospitals and nursing homes to send drugs to patients being discharged, under contracts with the institutions. Timothy Brog's minions check up on these poor people every few days, and when the meds run out, the BrogBots ask the customer if he (or she, you never know) would like the Overlord to send next month's pill pack. From there on out, autorenewal takes over.

Direct Dose conveniently packages drugs by dose instead of by med. Instead of going out of their way to fulfill traditionally packaged prescriptions at Walgreens or CVS, subscribers magically find meds in the mail whenever they run out. Since Direct Dose doesn't have to lease huge stores and hire clerks to populate them, I believe Direct Dose's subscriptions are cheaper than filling prescriptions at traditional pharmacies, though I'm not 100% on this. Direct Dose Rx serves two constituencies: 

Sick or chronically ill people

Hospitals and nursing homes 

The sick people stick with the service for convenience, but hospitals and nursing homes like it for a different reason. Sick people returning from captivity feel fine enough, after being doctored up. What's another couple of days? Besides, if I start feeling sick again, I can always make a quick trip to Walgreens. I deserve a break, and my favorite Netflix show just released a new season. This line of reasoning sends hospitals straight back to square one, wrecking readmission stats. For nursing homes that want a helping hand, Direct Dose Rx steps in, earning a nice cut.

It doesn't take much capital to grow a mail order pharmacy, so Direct Dose Rx could generate free cash even as it expands. Direct Dose has recurring revenues, nice margins, and an excellent value proposition for both the sick people and the hospitals. Under new management, Direct Dose intends to offer its services to retail customers as well as patients discharged from institutions. This gives it a shot at growing much larger than its predecessor. As Sir Tim said in a press release, “Although this type of transaction was not exactly what Rubicon was looking for, the low risk and high rewards of this investment are compelling.” 

Rubicon isn't going to make any of us millionaires, but it's a decent cash replacement, especially with Brog allocating the cash. Rubicon is ideally placed to capitalize on a recession, as it could buy up companies on the cheap and cut out the taxes. We pay for the cash, and get Direct Dose Rx and the real estate for free. Meanwhile, Rubicon is busy buying back shares.

Jeff Gramm, Timmy's pal and the author of Dear Chairman, owns 9.5% of Rubicon through Bandera Partners. My only concern is the BrogBots...

I own shares of RBCN.

Thursday, November 7, 2019

Never Navios

Who's up for a 200% forward cash flow yield? How about hitchhiking on the growth of India and the Orient, while riding the wave of increasing environmental regulations, and profiting from the US spats with China and Iran? You've come to the right place, but there's a catch. Actually, there are seven.

Navios Maritime Acquisition Corporation (ticker NNA) trades in the $7's, but they own a fleet worth $86 a share based on secondhand transactions. Unfortunately, they owe $86 per share to creditors. Before you blacklist "White Chip Stocks", a few bits and bobs add another ~$8.

I bought in after the latest round of dilution sent the stock below $8. Since then, the stock has fallen to $7.38, and I'm buying every downtick. Judging by my trusty sentiment indicator, Seeking Alpha message boards, tankers are about to tank, Angeliki Frangou is about to run off with the money, and time is running out. Here is a representative comment chain post-dilution:

Grannyscookiejar123 - Stupid People!!!

Stephen - I'm NEVER putting money into anything Navios again.

Rodrigo - Crooks peddling diamonds.

Hot$tocks - Why oh why did I not place a sell at $11. Back to Tesla and safety.

Jacob296 - There goes retirement.

Joanofarc - My mantra from now on - Never Navios!

As revealed in my first post, I'm a big fat tanker bull. Shrinking supply, exploding demand, and untoward operating leverage make for a true roller coaster. Everything Navios has lit money on fire for a decade, but tanker rates are finally breaking out, and new supply is restricted through at least 2021. Pipeline completions will more than double US crude export capacity over the next 18 months, and US exports have to travel twice as far as Saudi crude to get to China, India, Malaysia, and the rest of the gang. Meanwhile, boats are being taken offline for scrubber retrofits.

If you've been following shipping at all, you know that IMO 2020 will crush demand for high sulfur bunker fuels, while multiplying demand for compliant fuels overnight. High sulfur bunker fuels come from dregs at the bottom of the barrel, with little in the way of alternative uses. When demand shuts off, there's nowhere to put it, short of floating storage, which would take even more boats offline. In fact, if all of the excess HSFO went to floating storage, it would fill up the entire global Aframax fleet in three years. Will this happen? Of course not. But the math is tantalizing. Let's say we have 200 million surplus barrels of heavy fuel oil, which would be a few months' worth of the daily surplus. An Aframax can carry 750k barrels of oil. It's easy to see how floating storage could take out a significant portion of the ~700 strong Aframax fleet.

While that's nice, sanctions and scrubber installations are pulling ships off the water today. America recently sanctioned some of COSCO Shipping's boats, after catching COSCO sneaking oil from Iran. Clarksons, a reputable source, says that 26 VLCCs were affected. VesselsValue, another credible source, says that 4 VLCCs were affected. But the real story is that many Western charterers shunned COSCO entirely. COSCO controls over 5% of the VLCC fleet, and panicking charterers pushed headline rates to $300,000 per day as traders panicked to lock in replacement charters, prompting the U.S. Treasury Department to issue a waiver, allowing traders until December 20 to wind down the transactions. Shortly afterwards, rates floated down to $70,000 per day, a measly 20x last year's lows.

As we learned in the latest round of Iransanity, shipping is such a terrible industry that almost any change is for the better. Disruptions in oil supply translate directly into arbitrage opportunities for trading houses, boosting tanker demand. The work of a boat is to resolve supply/demand imbalances between one place and another. Chaos spells disequilibrium, higher demand for shipping, and mushrooming profits. If you don't believe me, take a 10 year chart of oil price volatility and compare it to tanker rates. I rarely leave my statistician's cubbyhole, but it's hard not to notice when Iran is launching missiles left and right (allegedly...) and China and the US are playing "trade war".

NNA owns crude and product tankers, split between VLCCs, LR1s, and MRs. One share of Navios controls almost $100 worth of tankers and assorted receivables - all as spot rates are surging, demand for oil transportation continues to grow, and scheduled deliveries of new tankers as a percentage of the existing fleet remain at the lowest level since Microsoft was a hot stock. With IMO 2020 pandemonium scheduled to break out sometime between now and mid-December, I'm buckling up to enjoy the ride.

Needless to say, Navios has issues. That's why it's down 95% since the IPO. NNA owes more than most competitors even have. NNA's insolvent parent owns a third of the common, and a Greek lady is calling the shots. NNA pays management fees to a company controlled by the CEO. NNA has to come up with $700,000,000 in cash to cover the 2021 debt wall, no mean feat for a company with a market cap barely over $100 million. They don't have scrubbers, forcing Navios to burn high sulfur fuels, which could add significantly to daily operating costs. NNA has diluted investors badly to stay afloat. This is Greece - there are probably loads of dodgy deals we don't know about. And unlike the Greek government, Navios pays a distimctly positive interest rate on its debt (did I mention they have debt?).

If you're still here, it's time for number crunching (also known as "counting your chickens before they hatch"). NNA has 41 tankers. Only God knows how much bunker madness will add to fuel costs, but let's call TCE breakeven ~20k. Let's suppose NNA achieved a $35,000 blended daily rate. Multiply by 365 days in a year x 41 tankers and you get $225 million. Divide by 15.6 million shares outstanding and you get $14 - not to mention free exposure to any increase in vessel values. If NNA earns twice its market cap in a year, I don't think it will be trading at NAV.

Sure, I'm ignoring utilization and plenty of other stuff, but what if VLCC rates stay at $70,000, where they are now? We won't have to wait long to find out.

Angeliki has more brains than she gets credit for. Though she has consistently run Navios into the ground, assured investors the dividend was safe months before slashing it, deftly drained millions into her own pocketbook, and perfectly mistimed every market shift since 2010, she always seems to have an ace up her sleeve. She owns millions of dollars of stock. For now, she's on our side of the table.

If I'm wrong about charter rates, Navios is toast. With rates in the stratosphere and IMO 2020 looming, I think Navios can make it. If not...

Caveat Emptor: This is a Greek shipping company leveraged ten to one.

Tuesday, October 15, 2019


Quite a ways from these parts, across the Misty Sea, lies the dark and dusky country of Vernebeltland. Few know of it, and those who do speak of it only behind close doors. Respecting the quiet people of Vernebeltland, I have kept the ancient tradition of silence. But now that I've started a blog, I'll spill the beans free of charge. The contented inhabitants of this lowland go daily about their affairs, dutifully smithing and fletching and trading amongst themselves. But once a year, at the Royal Repast, all good elves assemble to rejoice in dance and song, trusting in the Shining Protector, S. E. C.

The ground beneath Vernebeltland lies fallow, a legacy of centuries of toil and overuse. The discount rates used by the clever farmers of Vernebeltland are too low, and the only way to earn a decent living is to venture into the gloomy land of Finsternis, whose glowering crests deter the faint of heart. Finsternis is a maiden land, overflowing with milk and honey. Those who dare to enter number few, but riches abound beyond the giddiest fancies of any on our side of the Misty Sea.

A bit of history is in order. The tree dwellers of Finsternis have been the subjects of the elven tree masters of Vernebeltland since time immemorial, and are duty-bound to offer all the bounty of the land to the Vernebeltlanders. In the Olden Days, the tree dwellers of Finsternis grumbled against the reign of S. E. C., saying, "Why must we bear the hideous burden of preparing quarterly scrolls for your Awesome Majesty? Would it not be enough for us to report these things to our masters, the Vernebelt Elves?". S. E. C. showed mercy, declaring, "Mark my words, O rebellious people, and mark them well. I shall cordon Finsternis off from the rest of the land, and dub it Section 12(g). You may lay your scrolls aside, but abide by one law: Thou shalt continue providing timely and accurate reports to the Vernebeltlanders."

At first, the tree dwellers did so happily. As time wore on, however, the tree dwellers forgot their vows, and grew lax in reporting the bounties of Finsternis to the Vernebeltlanders. This grieved S. E. C., who bellowed in his wrath, "O wicked tree dwellers, I shall forbid the Vernebeltlanders from entering again into your land until you resume reporting its abundance."

This saddened the Vernebeltlanders. Unable to sustain themselves from the foodstuffs of Finsternis, the elves of Vernebeltland starved. Vernebeltland was no more. The tree dwellers rejoiced, keeping the fruits of the land to themselves for all eternity.

This concludes the lore of the country across the Misty Sea.

When the Securities Exchange Commission proposed a rule that would prohibit brokerages from quoting "dark" stocks that don't file reports with the SEC or OTC Markets, the sorry plight of the Vernebeltlanders instantly came to mind. An echo on this side of the Misty Sea would come close to giving me a heart attack.

If the SEC goes ahead with this rule, over $1 billion worth of dark stocks will become untradeable overnight, not including the countless Pink Sheet and exchange listed companies that will choose to delist and go dark as a result. If the rule goes through, owners of such stocks have no way of protecting themselves. The closest to "protection" against the rule that shareholders will get is panic selling before the effective date of the rule. The extreme illiquidity of the affected stocks means that such selling could result in prices 75% or more below today's levels. When considering the many small public companies this rule would incentivize to go dark, it's easy to envision investor losses approaching $1 billion. It is both silly and wrong to punish "everyday Joe" investors for actions perpetrated by their fiduciaries against the everyday Joes. Back where I grew up, we generally punished the criminals instead of the victims.

Rather than ruining the numerous OTC stock investors who specialize in dark companies, a wiser course of action would be to:

Impose heavy civil penalties and a bar against serving as a fiduciary in any capacity on management wantonly withholding financial statements from shareholders in violation of state law.

Streamline the process of requesting and collecting financial statements from errant companies.

The $1 billion of theoretical losses the rule could cause is twice the aggregate market value of:

Build-A-Bear Workshop
Tandy Leather Factory
OTC Markets

I highly recommend you read David J. Flood's post on the proposal at Elementary Value. For more commentary on the rule, check out Dan Schum's post over at NoNameStocks.

Please tell the SEC what you think. Families are counting on you. It's a cinch to leave a comment. Instructions are here. My comment is here. All comments can be found here.

Saturday, October 12, 2019

The Money Graveyard

Shipping is where money goes to die. Who cares whether you charter your ship from Frontline or General Maritime? One guy's boat is as good as another's. I'm no economist, but if there's one thing I remember from Econ 101, it's that the price of a commodity is determined by supply and demand. The trouble is, the supply of ships almost always exceeds demand. That's great for customers, but not so great for shipowners. The worst part: the unions don't care whether you're losing money hand over fist. You still have to pay the same wages.Your boat guzzles the same amount of gas when customers are paying $5000 a day to charter your boat as when they're paying $50,000 a day. On top of this, boats only last so long, and you eventually have to replace them. You would have to be crazy to get into a business like this.

So, why would anyone buy a boat? Well, you don't have to use your own money. You can raise a couple hundred million from investors, buy a few tankers, and pay yourself $10 million a year. When your company goes bankrupt, rinse, wash, and repeat. But why would anyone fall for this? When times are good, times are really good. When demand outstrips supply, customers scramble to charter boats at any price. China isn't going to cancel its national infrastructure program just to save a few dollars per ton in transportation costs. In shipping, costs are fixed, and when charter rates skyrocket, the added revenue falls straight to the bottom line. Multiply that by high financial leverage, and you have an explosive cocktail.

After a decade of bankruptcies, shipowners have finally given up on ordering new ships. The ships built in the last boom are now old and decrepit. Ships don't last forever, and you have to scrap them sooner or later. Environmental regulations are getting tougher and tougher, requiring ships to spend millions of dollars apiece on Ballast Water Treatment Systems (BWTS). On top of this, the International Maritime Organization promulgated a regulation that will require all vessels without scrubbers to burn fuel with 0.5% or less sulfur content, starting January 1st. Putting my logic hat on, when 40,000 hulking ocean vessels switch from high sulfur bunker fuels to low sulfur alternatives, low sulfur fuels will become pricey in a heartbeat.

That's a lot of money. If there's one thing shippers can't afford right now, it's losing money. Despite raising diluting shareholders into smithereens, many shipping companies are teetering on the brink.When IMO 2020 adds a few million to your 20-year old Capesize's annual operating costs, there's only one thing left to do: Give up! Selling vessels for scrap instantly stanches the bleeding. The proceeds are available for debt repayment (or, more commonly, executive compensation).

It's awfully hard to move stuff around in a boat that's in a million pieces. Lower supply results in higher charter rates with demand held constant, but global demand increases at a few percent each year. That's why charter rates overshoot any reasonable equilibrium when supply finally gets taken out.

Meanwhile, a certain inhabitant of a white building is ramping up a trade war with China. This will disrupt trade routes and lead to circuitous workarounds to reduce the effect of tariffs. If you paid attention in geometry, you know that the shortest distance between two points is a straight line, and the longer the distance, the more ships you need.

If this weren't enough, remember: emerging markets are the future. At least, they were 10 years ago - I think they still are. Africa has had a hard few centuries, but it will have its day (2100, 2200, I promise! It's coming). In a decade, India is going to be bigger and more prosperous than it is today. All of this growth takes steel, coal, and oil, and I don't think they'll be importing it with drones. What's more, oil demand growth is coming from east of the Suez, while all the marginal supply is coming from places like Brazil, the US, and West Africa. Longer distances mean more demand for tankers.

With this backdrop, you might assume that shipping companies trade at substantial premiums to NAV, discounting future profits. In reality, they trade at huge discounts across the board. You can buy companies at 4x cash flow with revenues on long-term contracts, and you can even buy companies with the potential to dividend out multiples of the market cap over the next couple of years.

With Basel IV forcing banks to require significantly more collateral on loans to shippers than in the past, major shipyard bankruptcies, a wide array of prime aged purchase-and-sale candidates, and boats trading at discounts to replacement cost, new orders will be minimal going forward.

By the way, guess who's going to be carrying all those compliant fuels? Product tankers.

Needless to say, I own loads of STNG, the largest, most efficient, lowest-cost operator of product tankers. How much money will STNG make? I don't know, but oodles is a definite possibility.

Pick your spots. Don't hold on too long - and don't sell out too soon. It looks like we're in for a fun ride.