Added more GTIM

I bought more GTIM this week around $4.50. I think GTIM’s fundamentals are as good or better than at any time since I bought my first shares, as evidenced by GTIM’s recently announced preliminary results.

I also think GTIM’s valuation currently is as attractive as it has been since I’ve owned shares. When I first bought shares around 15 months ago, GTIM was trading at around .7x forward EV/sales (since GTIM is an extremely small, emerging story, I like looking at EV/sales instead of earnings based metrics. I have confidence that earnings will follow sales growth since GTIM’s key metrics like restaurant level contribution, sales per square foot, and same store sales are healthy).

Despite dilution, GTIM is now trading at a similar forward EV/sales ratio as it was 15 months ago. However GTIM now owns Bad Daddy’s, has a wider store base, has continued to prove the concept for an additional 15 months, and has a fuller pipeline of stores in development.

Growth stocks, small cap stocks, and restaurant stocks have all been out of favor of late. Still, I never expected GTIM to fall all the way back to the $4 level (GTIM’s CEO bought some shares recently around $6). If I did, I would have sold some shares around $10 (despite my inclination to hold for very long term gains and defer taxes as much as possible) just so that I could buy back twice as many shares at current levels. While I did not do that, at least I had some cash on hand so that I could add some shares at current levels.

I still think GTIM could be a multiple bagger over the next several years. In that sense it doesn’t matter as much what GTIM does in the short term. However the difference between shares bought at $10 and shares bought at $5 could ultimately result in having either a 5 bagger or a 10 bagger on those shares, which is huge. I am now down to around 10% cash.


I sold BABA, BIDU, and HABT this week. I made around 10% on BIDU and HABT, and around 20% on BABA. Not bad for only a couple weeks – annualized those are huge returns. They are also pretty good not annualized, compared to how the major averages and the long term portion of my portfolio have done so far this year. So I was content to book the relatively easy gains and go back to a higher cash position again and wait for another opportunity to arise.


This week I bought Alibaba, Baidu, and Habit Burger. They (along with others) have been on my radar for awhile as they got cheaper and cheaper. Finally I couldn’t resist taking an initial position in each. BIDU and HABT I have owned before, whereas this is the first time I have owned BABA.  What made these three attractive to me now among all the stocks on my watchlist is that all of them were down around 50% from their highs, I am very confident that each will grow for years (if not decades), and all three have strong balance sheets. Each is around a 2% position, and I would average down on any of them if they were to fall around 15-20% from my entry point. With these moves I am around 15% cash.

Site update

[edit 2/5/16 – The blogroll returns page was removed as I no longer planned to update it.]

I added a new page to the blog. The Blogroll Returns page is a compilation of portfolio returns from blogs which self-report results. If you know of other blogs which should be added, please contact me.

If you are looking for my current holdings, I moved them from the sidebar to the About page, which also now includes my annual returns. My contact info has also been moved to the About page.

Lastly, I added several more podcasts and blogs to the Resources page.

Long New Media Investment Group

The new position I added last week and this is New Media Investment Group (NEWM). New Media is in the business of owning local newspapers and websites, and providing digital marketing services. It was a spin-off from Newcastle Investment Corp in February of 2014.

I like local newspapers as an out of favor industry where things are not as bad as believed. I favor the smaller, more local outfits, which I believe will face less competition from other news sources.

Print advertising is in secular decline, but the rate of decline appears to have stabilized. NEWM’s model is to acquire local papers at between 3-5x EBITDA. Since their spin-off NEWM appears to be executing well on that strategy. You can read more in their most recent presentation.

I liked NEWM here for several reasons. It is back near its spin-off price around $14, down from its all time high around $25, despite improved financials. At my average price of a little under $15, it pays nearly a 9% dividend, which is well covered by free cash flow. The balance sheet is in decent shape. There was insider buying by both the CEO and CFO a couple weeks ago. Leon Cooperman (a respected value investor) is a 10% owner and has also been a buyer the past two weeks. NEWM also has around $200 million in NOLs and owns around $200 million in real estate.

Often very high dividends are a red flag, an indication that the business is in trouble. A double whammy of a reduced/eliminated dividend and stock price depreciation could occur. In the case of NEWM I think the dividend is safe, and even likely to grow.  So I do not see much downside from current prices.

If things work out on the upside, I think the dividend could grow modestly over the next few years and the stock could appreciate to where the dividend yield is around 5-6%, resulting in a total return of around 100%. The worst case scenario I see is skepticism remaining high, causing the stock to continue to trade near its current 8-9% dividend yield. So overall I see the potential for a double with minimal downside, resulting in a favorable risk/reward ratio.

I like NEWM better than its peers (such as GCI, NYT, TPUB, JMG, LEE, etc) because it is among the largest operators of smaller town papers with the least exposure to larger metropolitan/regional papers, and also because of the dividend and insider buying.

While the GM-B warrants I sold had more upside, they also had more downside, and in the current environment I felt trading some upside for less downside was the right move. I also added some more GTIM this week. With these moves I am now at around 10% cash.

Sold GM B Warrants

I sold my GM B warrants this week. Nothing changed in my assessment of them, but I came across another idea I liked better. I didn’t wan’t to sell any GTIM and I didn’t want to reduce my cash level any further at this point so I decided to sell the GM warrants. I lost about 5% on the position. I want to buy a little more of the new position still, so I will write about it afterwards.

New position – GM B Warrants

I bought some GM B warrants this week under $14. I like GM’s fundamentals for the next several years. GM is widely covered so I won’t go over the fundamentals much other than to say I think it is undervalued here and I don’t think we are near a cyclical peak in auto sales, based on pent up demand, average age of cars on the road, improving employment figures, etc. Even if growth isn’t much from here I think a leveling off is more likely than a cyclical downturn. I also think GM’s quality is vastly improved and their leadership in trucks and SUVs is a positive. Mary Barra seems like the right leader for GM, and I think worries about the ignition switch problem, slowing sales in China, and a cyclical downturn in North America have provided an attractive entry point here.

The reason I established a position in the B warrants this week is because I thought the risk/reward was particularly attractive. Technically GM looks like it has good support around the $30 level, both from a long term support line and the 200 week moving average. Fundamentally I think there is good support with the dividend yield around 4.5%. There are a couple value investors with positions in GM (Berkshire Hathaway, Doug Kass, Mohnish Pabrai) and there was some activist investor activity recently which helped return more cash to shareholders. So if GM were to fall far from the $30 level I think it would quickly find support from an even higher dividend yield, and it becoming even more attractive to value investors.

The B warrants appeared to offer an especially attractive risk reward with where they were trading this past week. The B warrants have a strike price of $18.33 and expire in July 2019. During the past week they were at times trading only $0.50-$0.60 above intrinsic value, with around 4 years until expiration. That is only around $0.12-$0.15 per year to benefit almost dollar for dollar from any appreciation in GM’s shares above current prices.

When I have found these sorts of situations in warrants in the past where they are trading mostly at intrinsic value with very little time premium, and there is a long time remaining until expiration, they have proven not just to be bargain priced, but also a contrarian indicator of sorts. Perhaps the market is so doubtful of the underlying company’s future potential that they believe the underlying shares are likely to trade down and thus the warrants should not carry a premium over intrinsic value. However this could prove to be a beneficial time to go long among the prevailing pessimism.

The last time I encountered such a situation was my trade on ROIC warrants. The warrants were trading only a couple of percent above intrinsic value with almost two years remaining until expiration. Soon after a roughly 17% move in the underlying caused the warrants to more than triple.

On other occasions I have noticed warrants which appeared to be trading significantly below almost equivalent call options. Such was the case with my trade on Ubisoft warrants, which also produced a triple. This also appears to be the case with the GM B warrants currently. There  are Jan 2017 $18 calls on GM which traded last around $13.50 ($13.20 bid, $14.10 offer). The B warrants also traded as low as around $13.5 last week.  Remember that they have a strike of $18.33 (pretty close) but don’t expire until July 2019, around 30 months later. Compared to the Jan 2017 $18 calls, the warrants cost the same for basically the same strike price, but offer an expiration around 2 1/2 years further out.

The GM B warrants don’t have as much leverage as my previous ROIC and Ubisoft warrant trades, but with nearly 4 years until expiration and my belief that GM is undervalued I think the upside is significant, especially in comparison to the downside. I could easily see GM trading at $50-$60 in the next couple years, which would result in a triple in the warrants. I don’t see GM heading much lower than $25 and if that were to occur it seems unlikely to stay there long as it would be approaching a 6% yield at that price. So I think the downside in the warrants could be limited to around 30% or so resulting in an attractive risk/reward ratio.

With my purchase of the B warrants I am down to around 20% cash. I would be willing to double down on my position in the warrants if they were to drop significantly. I didn’t anticipate using my cash so soon, especially with the market looking weak of late and many stocks I follow taking hits after earnings. However I felt strongly about the risk/reward of my recent moves.

Turning over Stones