Tailored Brands, Inc. (TLRD)

A June addition to the Satellite portfolio resides in a part of the equity markets that investors are very fearful of these days. The retail sector. Typically, I navigate away from retail in my investment process because consumer trends can change very rapidly. In addition, I usually avoid turnarounds with high debt loads. However, value cannot be ignored, and I purchased shares in Tailored Brands (“TLRD”) in early June. The idea came courtesy of Michael Burry, who’s firm, Scion Capital Management, disclosed a stake back in March.

TLRD is a beaten down, small cap retailer in a niche corner of the retail clothing market. The company is the largest men’s formal wear provider in the U.S. and Canada. The business has struggled lately but I believe that the current valuation has priced in an unwarranted amount of negativity that has produced an asymmetrical risk/reward opportunity that, with a little patience, investors can exploit.

The full analysis can be found here:


I have sized the position relative to the higher risk of this investment. My position in TLRD is ~3% of my active portfolio. This will be reflected in in the Author’s section with the next portfolio update. Questions/Comments? What do you think about the investment?


Twin River Worldwide Holdings, Inc. Modified Dutch Auction Tender Offer

Ticker: TRWH

Price: $30.48

Shares Outstanding: 41.1 million

Market Cap: $1.25 billion

Tender Type: Modified Dutch Auction

Tender Range: $29.50 – $33.00

Tender Amount: $75 million

Company Background

Twin River Worldwide Holdings, Inc. (TRWH) merged with Dover Downs Gaming & Entertainment, Inc. on March 26th, 2019. Dover Downs shareholders received ~.08 shares in the combined company for every share held of Dover. Twin River operates casinos and racetracks in Rhode Island, Colorado, and Mississippi. Dover Downs, a wholly owned subsidiary of Twin River, owns a casino, hotel & conference center, and a raceway in Dover, DE.

Market Opportunity

On June 25th, Twin River announced a proposed modified Dutch auction tender offer for their shares with an odd lot priority provision. They plan on using $75 million to purchase shares at a price no less than $29.50, but no greater than $33.00 per share. The offer is set to expire at 5:00 P.M. on July 24th, unless the offer is extended or terminated.

In a modified Dutch auction, investors elect a price at which they will tender their shares within the range given by the company. From these prices, the company determines the tender purchase price and tenders those shares that were tendered at or below this price. The risk here is that if you offer too high a price, your shares will not be tendered. This is also true for the odd lot priority provision. Holders of 99 shares and less will automatically be tendered if they elect to tender their shares at or below the purchase price, or if they elect to tender shares without specifying a purchase price.

Executive officers and directors do not plan on tendering their shares. They hold ~2.8% of shares. Standard General, an event-driven limited partnership, owns ~31.8% of total shares outstanding. They have not stated whether or not they plan on tendering shares. However, they plan on informing shareholders about their decision no later than 6 business days prior to the expiration of the offer (July 18th).

It is worth noting that two other large holders of the company have been selling their shares. This can give us some insight as to what price they may elect to tender their shares at. Chatham Asset management holds 13.4% (5,496,003 shares) of the company. They have sold 438,085 since June 20th at an average price of $30.55. Their lowest sale price was $30.25. They also sold 50,000 shares in April at $33.00. Solus Ltd. Holds 7.50% (3,118,225) of the company. They sold 144,183 shares in early April at an average price of $31.01. Their lowest sale price was $31.00.

Of course, due to the nature of a modified Dutch auction, the purchase price isn’t determined by the largest shareholders, but rather those shareholders who offer the lowest price to the company. If the minimum price of $29.50 is determined to be the purchase price, they will purchase 6.2% of total shares outstanding. If the maximum price of $33.00 is determined to be the purchase price, they will purchase 5.5% shares outstanding. Had this been a larger tender, then the large holders of the stock would surely have more power. Regardless, it is still useful to see the price where certain large holders value the company at.

TRWH currently trades at $30.48. Given the small size of the tender relative to the total amount of shares outstanding (5.5 – 6.2%), it is likely that the share price won’t be pegged to the tender range. As a smaller shareholder, this is a good thing, as your shares will not be prorated if you own less than 100. Unfortunately, there are no options on TRWH to use as reference for implied volatility up to the expiration date. The implied forward volatility would be useful in determining the probability of getting in at a favorable price.

It’s hard to say what the purchase price will be, so I am therefore keeping this on my watch list. This tender offer is also risky in that it can be terminated at any time before expiration if certain circumstances occur (e.g., a 10% drop in market averages, suspension of trading… etc.), so it is probably most prudent to just sit and watch to see if Mr. Market gives you a fat pitch.

Disclosure: No position in any of the securities mentioned in the above article.

Position Update: SBUX Q2 2019

Recent Stock performance

Since analyzing and purchasing Starbucks (“SBUX”) in July of 2018 the stock price of the coffee giant has exploded 51% to ~$78 (at time of writing). Given the run-up in the price I thought it would make sense to revisit my analysis. SBUX would make a great case study in how quick investor sentiment can change. It was only 8 months ago that the stock was selling off due to the change in management and uncertainty about the future. Sales were decelerating in the U.S. and investors we’re unsure about international prospects. The position currently makes up ~5% of my satellite portfolio.

In the most recent earnings call, management declared that they are “making meaningful progress against (their) three key strategic priorities, 1.) accelerating growth in (their) two long-term markets, the U.S. and China; 2.) expanding the global reach of the brand through the Global Coffee Alliance with Nestle; and 3.) increasing shareholder returns.” I briefly reviewed each of these to see if the story is unfolding how long-term investors have hoped. I find less than a year a bit quick to fully judge management execution but decided to take a look nonetheless.

Overall, total sales grew 4.5% year over year. Excluding the impact of the Global Coffee Alliance and FX translation, total organic revenue increased 9%. As of March 31, 2019, SBUX had over 30,000 company-operated and licensed stores, an increase of 7% from the prior year and the firm’s global comparable store sales grew 3%.


The Americas segment delivered 8% revenue growth in Q2, driven by net new store growth of 4% over the past year and comparable sales growth of 4%. Management highlighted beverage innovation as a driver of growth, citing the roll-out of nitro cold brew and the cloud macchiato as examples. However, as mentioned in my initial write-up, it has become evident over the last couple years that growth in the America’s has decelerated. SBUX has pretty much saturated the American market and the focus here has been on building efficiency and customer loyalty (more on this in a moment). These numbers are better than I had anticipated. The health of the business model looks to be in-tact. In my opinion, this speaks strongly to the brand. In fact, there’s a Starbucks just outside my office and there is always a line.

China/Asia Pacific

Investors have been watching the growth in China/ Asia Pacific (“CAP”) closely. Given that the region drinks a lot more tea than they do coffee investors have been skeptical about the growth opportunities in this region. There are also some known competitors in the space (i.e. Luckin’ Coffee) that are trying to increase their market share. This was a strong quarter for SBUX as they were able to demonstrate that they can continue to penetrate the Asian market effectively. If this trend can continue, this should bode well for the company’s growth. I believe most long-term shareholders tend to think the runway to further growth heavily resides in this region.

China delivered 9% revenue growth in Q2 and, excluding the 4% FX translation, the growth was closer to 13%. This was driven by 12% net new store growth over the past year and 2% comparable sales growth for the quarter. Given the race for market share, SBUX has been aggressively opening stores, with doors opening on 553 net new stores over the past year, representing a 17% increase. Furthermore, as I discussed in my original analysis, most people in the region are tea drinkers. However, drinking coffee has been picking up steam adding a secular tailwind to the business.

Loyalty Programs

Starbucks’ loyalty program continues to be an economic boon for the company. In the most recent quarter, over 40% of sales in the United States were from program members, while membership increased 13% to 16.8 million. Not only is the loyalty program good for its customers, but it’s beneficial for the company by allowing them to access a significant amount of data about its customers. This should help management improve product mix and directed advertising to their consumers. Clearly SBUX is doing a good job retaining their customer base in the U.S. If the U.S. can be any indication of how effective the company’s rewards program can be in China, then this should help SBUX integrate the economic moat we see here in the U.S. over in the pacific market. Since the launch of the rewards program in China less than a year ago, 90-day active Rewards members has increased 1 million during Q2 to a total of 8.3 million.

Coffee Alliance

Management said on the conference call that this partnership with Nestlé has exceeded their expectations. However, I believe the jury is still out on this initiative. Late in fiscal Q2, Nestlé launched the first 24 Starbucks products across three platforms, Starbucks coffee by Nespresso, Starbucks coffee by Dolce Gusto, and Starbucks roasted brown and whole bean coffees. These products co-created by Starbucks and Nestlé are now being deployed to 16 global markets as part the initial rollout. This should in theory help produce global brand awareness and provide access to the SBUX brand for home brewers and I will be paying attention to how this develops over the coming quarters given that the project is still in its infancy. SBUX continues to produce the coffee products in North America, while Nestle is in charge of manufacturing throughout the rest of the world paying SBUX a percent of sales in royalties. Nestlé paid about $7 billion up-front in the agreement which SBUX has used (along with debt) to invest in CAP and provide returns to shareholders.

Capital Return

In March, SBUX initiated a $2 billion accelerated share repurchase program that is expected to be completed by the end of June. This puts the firm on pace to deliver about 80% of the expected $25 billion capital return commitment by the end of FY 2019. Additionally, the dividend yield sits at 1.8% with a 5-year growth rate of 24.5%, including an increase the dividend by 20% in August of 2018. In the latest quarter the payout ratio was a bit high at .68 but this should come back down as new initiatives hit the bottom line and debt is paid down. It’s important to note, however, that SBUX increased their debt load by ~$7 billion this year and now has a debt load over $9 billion. However, given that the firm produces healthy, growing, and predictable cash flows the elevated debt does not concern me. SBUX has a Debt/Asset ratio of .5 and an interest coverage ratio of 12x.

Guidance and Valuation

For fiscal year 2019 management anticipates revenue growth to be 5-7% with global comparable store sales growth of 3-4% and expects to add approximately 2,100 net new stores across the globe. EPS is expected to be $2.40 to $2.44. If we assume the low end of guidance, we are left with a forward P/E ratio of 33x. P/OCF sits at 8x and EV/EBITDA sits at 19x. These are on the higher end of the historical trading range.


A strong cash flow producer with high returns on capital that is still growing rapidly deserves to trade at a premium, but I do not see myself adding to my position at these multiples. I believe that SBUX has the business model and proper brand recognition that allows the company to retain significant cash flow that can provide shareholder returns for years to come. I intend to let the story play out as a long-term shareholder and would look to add more shares if the price becomes attractive again.


Are Great Businesses Great Stocks?

Should you invest in Apple? Should you invest in Amazon? Most people would agree that these are both terrific companies. The return on capital that these companies generate is astounding. But are these excellent businesses good stocks to buy? The answer depends on the expectations that are set by the market vs. the true future fundamentals of the company.

The value of a company is simply the sum of the cash it will generate discounted at it’s cost of capital. These future expectations are what influence the share price over the long term. If the market expects a company to generate less cash flow than you have projected, then the company may be a good buy. The inherent difficulty in this is predicting the future cash flows of the company. This is where fundamental analysis and a margin of safety come into play.

One measure an investor can use in order to figure out the expectations of the company is called the present value of growth opportunities (PVGO). This measure is based off of earnings, which is subject to accounting manipulation and may not accurately represent the true economic profit earned by a specific company. However, it should be kept in an investor’s toolbox, nonetheless. The PVGO breaks down the value of a business into two components:

1. The value if the business if it were to not grow at all

2. The value that the market is ascribing to future growth (PVGO)

 The formula is as follows:

PVGO = Share Price – (Earnings/Discount Rate)


Share Price = (Earnings/Discount Rate) + PVGO

The higher the PVGO relative to the share price, the more value the market is ascribing to future developments. Ben Graham constantly warned investors not to look at companies through “rose colored glasses” – to be wary of the bright future expectations that the market expects. Rather, he told his students to look at companies with dark blue glasses – to remain conservative when projecting the fundamentals of a company and to protect yourself against your own future projections by buying at a large margin of safety.

There is a fundamental reason as to why Graham warned against looking at companies through rose colored glasses. Economic profits are mean reverting. When a company starts to earn a large profit, it draws in competition. These competitors compete to take market share away from that first mover. The one exception to this rule are companies that have a moat – which is an article for another time. In general, those that tend to earn high economic profits will not be able to continue to do so in the future. If the market expected them to do so in the future, then the shareholders of that company are in for a rude awakening.

One of my favorite Mungerisms is “invert, always invert”. If companies that are earning a high economic profit are destined to have some of their market share taken from them, what is to be said of the companies that are in the doldrums? The companies that the market ascribes 0 PVGO to? The lack of economic profit dissuades companies from investing any further into their operation. These companies tend to close shop. With less competition, there will be room for a company to step in and take whatever market share is left. Economic profit will start to grow and the cycle will repeat itself. Economic profit is mean reverting.

Is a great business a great stock? It depends. When investing, always try and get a feel for what the market is expecting and compare that against your own fundamental projections. This article is not to say that Apple and Amazon are bad buys. Measuring the market’s future expectations against your own should be examined when doing any type of valuation. This method does not discriminate against the statistically cheap (Morningstar value) or statistically expensive (Morningstar growth). If your margin of safety is adequate enough to protect yourself against your own future projections, then buy. If not, keep your bat on your shoulder and wait for the big pitch.

  • Porcupine

Portfolio Update: Purchase (SVIN)

Given the meticulous and thorough analysis done my co-host of LTInvestments, I have decided to build a small position in this micro-cap company trading for less than liquidation value with an upside catalyst- Scheid Vineyards, Inc. (“SVIN”). Since I began building out my equity portfolio roughly 5 years ago I have tended to shy away from illiquid micro-cap investments. Not because I didn’t view them as good investments, but mainly because I wanted to build a dividend income stream to help me increase the rate at which I could put capital to work. This remains my underlying strategy that makes sense given my personal financial situation. However, investing is a constantly evolving process and I don’t intend to ever limit my portfolio to one style or look for investments in a constrained universe.

You can find the original anlaysis here:

The truth is, if I have conviction in the investment thesis and can justify the risk a new security brings to my portfolio, I will happily invest. It just so happens that I am typically drawn to established companies with demonstrated competitive advantages that produce meaningful free cash flow and dividend growth. When shares of quality companies are trading hands for cheap, I intend to scoop them up. I continue to comb through financial statements regularly on the look-out for these types of investments but haven’t found any as of late. I monitor my current portfolio constituents regularly but do not intend to increase any of those positions at this point. Either I am waiting for a lower entry point or the position makes up a significant percentage of my portfolio.

The co-author (Porcupine) and I have a lot of similarities in how we think about investments. However, what I believe is even more beneficial to both our growth and success, lies in our differences. As much as we are a team, we play devil’s advocate with each other, often bringing different perspectives that result in different “stories” for the same potential investment. As is typical, I have been trying to poke a hole in his investment analysis for Scheid Vineyards since he first posted the analysis back in February. The more I do this, the more I find myself drawn to the thesis. The due diligence was thorough and conservative in nature. In the end I’ve found the investment worthy of a small position in my portfolio while the story for this tiny company continues to unfold. I will add to the position if certain expected milestones are hit. You can see my updated portfolio in the author’s section.

-Uncle Pennybags

My Thoughts on the Yield Curve Inversion (3m/10yr)

So it finally happened. The “most reliable recession indicator is finally flashing red.”

Last week the 10-year yield fell off a cliff and dropped below the 3-month yield for the first time since 2007. Gasp! That was just before The Great Financial Crisis. Data from the National Bureau of Economic Research tells us that the yield curve has inverted before each of the last seven recessions. (This time the inversion was brief- only part of a day) Many analysts firmly hold the belief that the yield curve is the best forecasting tool for recessions. Yes, that is true, I suppose. So now what? Is it time to sell out of the markets? Should I put my feet up and sit back on the sidelines waiting for stocks to fall? What if they don’t? If they do, when should I re-enter the market? The answers to these questions presume that I know when, exactly, a recession is coming and how bad it is going to be. Truth is, I have no idea.

Even I could tell you, without any economic data at all, that we’re going to have another recession. In fact, I guarantee we will. There might be (probably will) multiple in my lifetime. How does it make sense that the price of borrowed money (because that is what interest rates are) in 3-months is more expensive than 10-years? The answer is complex and I’m not about to turn this post into an essay in an attempt to explain it. But I’m sure many of your friends and colleagues know exactly what is causing the inversion and what to do about it. However, unless your friends and colleagues are noted economists, I am skeptical. Even if they are, well, given economist track records, I am still skeptical. Did you know economists have predicted 7 out of the last 5 recessions?

So what am I going to do about it?


I’m not going to rush to judgement and assume a huge recession is right around the corner and that equities are going to come crashing down in a fiery ball of fury to reign hell on my portfolio and turn my cash to ash. This would be an emotional response to new information. Emotions are an investors biggest foe. I will not sell out of any positions unless I believe the decision is warranted based on fundamentals. Nor am I going to rush into cash or buy more gold. Why? Because I am a conservative, value investor that is structuring an equity portfolio so that its manager (me) can ignore what is happening in the broad market. In other words, I intend to keep my portfolio ready for a recession (more specifically-a stock market crash) at all times. There’s mainly two ways I do this.

1.) High liquidity.

I will admit, in a slightly hypocritic way, as someone who says they do not try to “time the market”, I do tactically adjust my cash position based on the over/undervaluation of stock prices. Usually this happens naturally, such as right now, where I am finding it difficult to find investments that warrant my hard earned money. The dividends keep rolling in, I do my best to remain consistent in putting aside money each month, and I have not found opportunities to re-invest. But the point here is that I always keep a cash buffer. Currently at ~17% of the satellite portfolio, my cash position is on the high end since inception. I hold a cash position that I can deploy when I find opportunities that fit what I deem to be strong investments. Currently, I can’t find any! I think most value investors are having the same issue and, as a result, my cash position continues to grow.

2.) Bottom-up Fundamental Analysis.

Said another way, I am not making bets based on macroeconomic or geopolitical factors. The inversion of the yield curve is not part of my decision making process. Neither are trade tariffs, political uncertainty, GDP forecasts, nor the undertones in Jerome Powell’s speeches. Sure, I follow these items. I read the WSJ on a daily basis. I have my thoughts on the economy, different asset classes, and even the yield curve inversion. But this is done for no other reason than to help build context of the investment environment I am operating within. I try to be aware of all sorts of risks, but if I made trades based on how the newspaper made me feel about the economy, I would constantly be making trades. Execution costs would have zeroed-out any investment returns. I look at each investment opportunity on a stand alone basis. I look for a sustainable competitive advantage that can withstand a recession and an incentivized management team, amongst many other boxes that need to be checked. Then I calculate the value of a company and compare it to the price, only buying when there is a significant discount. This “margin of safety” is intended to protect my portfolio against broad market drawdowns. Strong companies will continue to do business regardless of a recession and the stock market will fluctuate regardless of what the economy is doing. What matters to me are finding companies that provide a good or service that will be in demand even if the economy comes to a screeching halt. But even more important, is buying these companies when they’re cheap. I already mentioned that I’m finding it difficult to put my money to work. I would welcome a sale on the stock market.

So there you have it. My profound thoughts on the yield curve inversion. I’m not doing a damn thing besides continuing to scour the investment universe for the next addition. High liquidity, good companies, and a margin of safety should insulate the portfolio from irreparable mistakes. As a gambler would say, “make sure you can live to play another day.” I intend to. So bring on a stock market crash. I wont be swimming naked.

Uncle Pennybags

P.S. Where’s the term premium?