Tag Archives: CMG

GTIM Valuation and Industry Comparison

I decided to do a more in-depth valuation analysis on GTIM to demonstrate why I think it is so attractive currently.

Before getting into it however, I wanted to mention that there were more insider purchases last week. The CFO bought 30,000 shares and the CEO bought 5,000 shares. The June quarter earnings should be good. June is a seasonally strong quarter, it will have more than double the Bad Daddy’s restaurant operating weeks year over year, there will be no acquisition costs unlike last year, and with only one Bad Daddy’s opened during the quarter and the delay in the next opening, pre-opening costs should be down. So adjusted EBITDA should be strong. Hopefully that gives the stock some support, but regardless of whether it does or not I still believe the long term picture is very bright for GTIM, which I think my valuation analysis will show.

To perform the analysis I looked at all the US listed restaurant stocks I could find which had share prices above $1, positive EBITDA, and were regularly reporting. I ended up with a comparison group composed of slightly over 50 stocks.

I compiled statistics on several measures of valuation including price to sales, trailing and forward PE ratios, and EV/EBITDA ratios. I decided the best measure to use was EV to adjusted EBITDA. For most of the stocks in the group EBITDA and adjusted EBITDA were very close. However for the smaller, faster growing companies there were more significant differences between EBITDA and adjusted EBITDA due mainly to pre-opening costs being a higher percentage of operating income. If these smaller companies weren’t expanding so quickly they would be showing greater earnings, thus I felt that using EV/adjusted EBITDA made for a fairer comparison.

I thought the best way to visualize the data was to plot EV/adjusted EBITDA versus the long term expected growth rate, resulting in a sort of PEG ratio, except using EV/adjusted EBITDA. To calculate adjusted EBITDA, I started with the ttm EBITDA from Yahoo Finance, which it gets from Capital IQ. To arrive at adjusted EBITDA I added ttm pre-opening costs, obtained from company filings. I did not make any other adjustments to arrive at adjusted EBITDA. The long term expected growth rate is the 5 year expected growth rate, also from Yahoo Finance, which it says is from Thomson Reuters.

I also compiled statistics on store counts, restaurant level operating margins, and sales per square foot from company filings. These statistics help gauge how realistic the long term expected growth rate is. Smaller store counts mean longer runways for growth, strong restaurant level operating margins can be indicative of a concept with strong consumer appeal, and high sales per square foot can indicate strong cash-on-cash returns (which were not readily available for all compaines otherwise I would have listed it instead of sales per square foot).

Now I can describe the chart below. On the Y-axis is the 5 year expected growth rate. On the X-axis is the EV/adjusted EBITDA ratio. Next to each data point is ticker symbol, number of worldwide store units, restaurant level margin, and sales per square foot. Lastly the colored backgrounds indicate long term expected compounded annual stock returns (more on this in a bit).

At a given EV/adjusted EBITDA ratio, a higher growth rate is favorable. Likewise, at a given growth rate, a lower EV/adjusted EBITDA ratio is favorable. Therefore, generally, the more towards the upper-left area of the chart the better it is, and the more towards the lower-right area of the chart the worse it is.

The blue diagonal lines are drawn at constant EV/adj EBITDA to growth ratios of .5, 1 and 2. This is referred to as the PEG ratio when using PE ratios, but here I am using EV/adj EBITDA instead. The idea is the same, though. A ratio of 1 (meaning the valuation ratio is equal to the growth rate) is generally considered fair. A ratio of .5 (meaning the valuation ratio is half the growth rate) is considered inexpensive, while a ratio of 2 (meaning the valuation ratio is double the growth rate) is considered expensive. So again, being above and to the left of the 1 line, and especially the .5 line, is good, whereas being below and to the right of the 1 line, and especially the 2 line, is worse.

Lastly the colored backgrounds indicate expected long term annual compounded stock returns if the company grows earnings at the expected rate for 10 years and trades at a valuation ratio equal to its growth rate at the end of those 10 years. For example, consider a stock which currently has an EV/adj EBITDA ratio of 10 and an expected long term growth rate of 20%. It is in a green region (an expected compounded annual return of between 20% and 30%). So if the stock grew earnings 20% a year for 10 years, and at the end of those 10 years traded at an EV/adj EBITDA multiple of 20, the stock price would appreciate from both the increase in earnings and an expansion of its multiple, resulting in a 20-30% compounded annual return. Conversely, stocks which currently have a relatively high EV/adj EBITDA multiple compared to their growth rates would sit in orange or red regions, actually resulting in negative annual compounded returns if the stock grew earnings at the expected rate for 10 years and traded at a multiple equal to that growth rate at the end of those 10 years.

Restaurant-Group-2

The average EV/adj EBITDA ratio for the group is 12.43 with a standard deviation of 7.19. The average expected growth rate for the group is 15% with a standard deviation of 6.2%.

GTIM compares very favorably to the group. It is nearest to the upper-left corner of the chart, and is one of only two stocks in the darker blue region (40-50% compounded annual return). This is due to GTIM’s high expected growth rate (30%) compared to its EV/adj EBITDA ratio (12).

Just to show what a difference pre-opening costs can make for smaller, faster growing companies, the average difference between EBITDA and adjusted EBITDA for the entire group is 6% (adjusted EBITDA is 6% higher than EBITDA) whereas for GTIM the difference is 100% (adjusted EBITDA is double EBITDA).

The number of units, restaurant level margin, and sales per square foot listed for GTIM are for Bad Daddy’s only since Bad Daddy’s will come to represent the vast majority of GTIM’s growth and sales. With only 17 Bad Daddy’s units, GTIM has the longest runway by far, and the restaurant level margin is solid at 15.9% compared to the group average of 18.0%, and the sales per square foot is above average at $693 compared to the group average of $587.

If GTIM can grow as expected I have no doubt the stock will provide spectacular returns. So I wanted to review once more the reasons why I think GTIM will grow as expected.

  • I think Bad Daddy’s is taking share from all the large, established casual dining chains such as Applebee’s, Chili’s, Outback Steakhouse, Olive Garden, etc.
  • I think Bad Daddy’s is appealing to millenials who like trying new places instead of going to the aforementioned chain restaurants.
  • Reports suggests that contrary to the popular narrative, millenials are increasingly moving to the suburbs. However they still want the things urban living provides ready access to – farm to table restaurants, craft beers, walk-able areas. There is even a name for it – “hipsturbias.” This is fueling demand for the types of lifestyle centers that Bad Daddy’s is locating in.
  • I like that Bad Daddy’s is positioned in the casual dining space instead of the overcrowded fast casual space.
  • User reviews for Bad Daddy’s continue to be very good.
  • Bad Daddy’s is proving itself. The locations opened so far are meeting the target economic model.
  • With only 17 locations so far, the runway for growth is very, very long.
  • I think there are some trends favoring the restaurant sector such as increased eating out versus cooking at home, consumers increasingly spending on experiences as opposed to goods, and more recently lower commodity prices.
  • I feel I can understand restaurants fairly well and I do not think they can be “Amazoned.”
  • I think management really gets it. On the most recent earnings call they mentioned where they believe their sales are coming from. They mentioned that they don’t want to appear anything like a chain restaurant. They mentioned that they don’t want to do any big media advertising for Bad Daddy’s for fear of ruining the local, independent feel. They mentioned Texas Roadhouse as a model for using local and social advertising. Texas Roadhouse (TXRH) is one of the few restaurant stocks near an all time high, so I would be very happy if GTIM could emulate TXRH’s success.
  • I think management has really zeroed in on where to place new locations. Management has mentioned how the best leading indicator for store openings is the level of outperformance of competing local chains. Coincidentally I happened to catch a feature on Nightly Business Report the other day on the CEO of Texas Roadhouse where he mentioned that that was one of his best indicators for new location success as well.
  • I think management is honest and forthright in its communication. Having held the stock for around 21 months now, and having listened to numerous conference calls and presentations, and having increased my knowledge of the restaurant sector, I feel that management has been transparent, has largely delivered on what they said they would, and has not clammed up when addressing their problems. I also feel that management is long term oriented, and are good capital allocators.

2014 Year in Review

I started 2014 with holdings in  several bank warrants (BAC-WS-B, STI-WS-B, ASBCW, VLYWW), old school tech stocks (IBM, INTC, CSCO), a Chinese online game publisher (KONG), and a couple of Vanguard ETFs (VXF and VXUS). By the end of 2014 my portfolio was completely turned over with none of those holdings remaining.

My first move of 2014 was to go long Alcoa in mid January. I added some more AA afterwards but the bulk of my holdings were bought in this first purchase. I thought AA would be a good balance to the rest of my portfolio and could become a core holding.  Thus far it is proving to be.

In February I began initiating small positions in several small to mid-cap growth stocks (SFM, YELP and BNNY). My intent was to average into the stocks I grew most confident in over time. I also bought some calls on KongZhong, expecting the stock would benefit from the release of Guild Wars 2 in China.

Near the end of February I sold my large cap tech stocks (IBM, INTC, and CSCO), to raise cash. I was pretty much break even on all three. I added Zillow (Z) to my collection of mid-cap growth stocks.

IBM

INTC

CSCO

In March I sold two of my bank warrants (BAC-WS-B and VLYWW). I just broke even on both. I wanted to raise more cash and position my portfolio more conservatively.

BAC-WS-B

VLYWW

Near the end of March I added a couple more high growth mid-cap stocks to my holdings with DATA and FEYE.

Near the end of April I bought a couple large cap growth stocks – AMZN and CMG.

By early May growth stocks had been beaten down so low that I thought it best to focus on my best ideas in that space and significantly accelerate my averaging into those names. So I sold BNNY, FEYE, AMZN, and CMG. I was down varying percentages on them when I sold, but they had not become meaningful portions of my portfolio so it was not really material to my overall return for the year. I also sold my KongZhong shares and calls. Those were more meaningful positions, and I made around 10% on both the shares and calls. I used the cash I raised to buy a lot more of the stocks I thought were my best ideas – SFM, DATA, YELP, and Z.

BNNY

FEYE

AMZN

CMG

KONG

In the second half of May I added some large cap growth stocks back to my portfolio, buying back AMZN, and adding BIDU, LNKD, and also VIPS.

In early June I decided to dedicate a portion of my portfolio to buying stocks with insider buying. I added DKS, TFM, and MTDR.

In the first half of July I made several more moves. I sold my remaining bank warrants (STI-WS-B and ASBCW). Those were big positions which I made 50% on each. I also sold my insider buying stocks (DKS, TFM, and MTDR) because I wanted to increase my focus even more. I was near break even on all three and again none of them were big enough positions to make a difference to my overall returns. In July I also added yet two more high growth stocks to my portfolio (ZU and TWTR).

STI-WS-B

ASBCW

DKS

TFM

MTDR

At the end of July I sold Z. I had intended Z to be a long term holding but it ran up so fast I decided to sell. I ended up catching the top almost exactly, locking in big gains and avoiding giving them back.

Z

To start August I added another growth stock, SGEN.

In early August I also started building a position in a micro-cap stock, GTIM, which I continue to hold.

In the second half of August I unloaded most of my growth stocks. I sold AMZN, TWTR, LNKD, BIDU, VIPS, YELP, and SGEN. Like Z I had intended them to be longer term holdings but they ran up so much in so short a period of time that I couldn’t resist locking in profits. I made between 10% and 50% on these trades, with most of them between 30% and 50%. At the same time I added to my SFM, DATA, ZU and GTIM positions, and established a new position in AWCMY.

AMZN2

TWTR

LNKD

BIDU

VIPS

YELP

SGEN

In mid September I sold DATA, same story of too fast a move up as my other growth stocks I sold.

I didn’t make many moves after that until November, when I sold AWCMY, after deciding the falling Australian dollar was too strong a headwind to battle. I was near break even on this trade. I also added a little to some of my existing positions.

AWCMY

Towards the end of November I bought some shares in The Habit, a new IPO. I had an order in on the IPO day but the stock opened above it so it was not filled. However when the stock came down several days later I began building a position.

Near the end of November I sold ZU, taking a small loss but deciding to focus on my very best ideas.

In December I bought a little Lending Club (LC) and an unnamed micro-cap stock, both of which I sold a week later. Neither was meaningful to my returns. And near the very end of the year I went long YELP again.

I also sold VXF and VXUS in stages throughout the year. I had intended for them to be a core and growing part of my portfolio over time, but as I found more opportunities I liked in specific stocks I sold off these two ETFs. I made a small percentage on both of them but they weren’t significant to my overall returns.

2014 was a year with a lot of turnover in my portfolio. I could have timed some of my entries and exits slightly better, but overall I am happy with all the moves I made. I think it was the right decision to exit all the positions I started the year with in favor of the new opportunities throughout the year. Overall I think I did a good job of buying when I thought the risk/reward was favorable and selling when it had become much less so.  And I think I am positioned well at year end with all the positions I am holding going into 2015 having favorable risk/reward profiles. AA and GTIM are both around 25% of my portfolio, SFM and HABT are both around 15%, YELP is around 7.5%, and I have around 12.5% in cash.

AA

SFM

GTIM

HABT

YELP2

In my past year in review posts I ended with some statistics about my trades. This year I went ahead and calculated my returns for this and prior years.  I have a few accounts in which I do my investing, some retirement and some taxable, and I had to account for contributions and withdrawals, so it took awhile to accurately figure out.

I calculated that my return in 2014 was roughly 44%. Here are my returns since I started this blog, and a comparison to the S&P 500 with dividends reinvested.

Year / TSAnalysis / S&P 500 / delta

2011 / +171% / +2% / +169 points

2012 / +22% / +16% / +6 points

2013 / +63% / +32% / +31 points

2014 / +44% / +14% / +30 points

In 2011 I had the majority of my portfolio in a stock which I got a triple on in a couple of months (COOL), which was the main driver behind my phenomenal return that year.

In 2012 I again had a trade which I got a triple on (warrants on UBSFY), however it was not as large a portion of my portfolio this time. I had a major position (KONG) I held for 7 months which I ended up just breaking even on. Still, I ended up beating the S&P 500 return by 6 points so I can’t complain.

In 2013 I had quite a bit of turnover, much of which didn’t contribute to my returns. However I had another significant position which I ended up getting a triple on (ROICW), which was the main driver of my strong return in 2013.

I am perhaps most proud of my performance in 2014. Unlike 2011 through 2013, most of my potential home-run plays in 2014 (such as my bank warrants, KONG options, and AWCMY) didn’t work out as well as planned yet I still managed to handily beat the S&P 500. My 2014 return was driven by strong gains in GTIM and AA, and well timed trades in several growth stocks.

My goal for the years ahead will remain to maximize after tax returns while minimizing risk. However I do not expect to continue to beat the S&P 500 by as much as I have the past four years, especially as I continue to increase my emphasis on after tax returns and minimizing risk.

Mid Year Review Part I

My portfolio has gone through quite a few changes in the first half of this year so I decided to do a mid year review again. In this part I wanted to cover all the positions I closed out in the first half of this year and in a second post I will go over the stocks I continue to hold going into the second half of the year.

As a reminder, I started 2014 with holdings in BAC-WS-B, STI-WS-B, ASBCW, VLYWW, IBM, INTC, CSCO, KONG, VXF, and VXUS.

In late February I sold my tech stocks – IBM, INTC, and CSCO.  I only held them for around 3 months, having bought them in early December. I only made a couple percent on each of them. My main reason for selling them was to raise cash for other positions I had started to open. INTC has moved up a bit recently, while IBM and CSCO have mostly traded sideways since I sold them.

In early March I sold my BAC-WS-B warrants. This was a position I had held for close to a year, buying my original positions in April and June of 2013.  BAC shares themselves performed decently over that time frame, moving from around $13 when I bought the warrants to around $16 when I sold them, or around a 23% gain. The warrants didn’t move much however, and I ended up barely above break-even on them. I listed that possibility (that the underlying stock may advance, but not enough to move the warrants) as a risk when I bought the warrants, and that ended up being the case. With one less year, roughly, left on the warrants, I started to worry that with another year of sideways to slight upward movement in the underlying, or worse yet a decline, the warrants could suffer. That ended up happening when BAC had a correction back to around $14.50 and the BAC-WS-B warrants fell around 20% to around $.73. So selling turned out to be a good move.

A week later in mid March I sold my VLYWW warrants. This was a warrant play on a smaller regional bank, Valley National. I opened this position in Aug 2013. These warrants expire in June 2015, so they were riskier than my other bank warrant holdings which didn’t expire until October 2018. This was a small position which I was willing to hold until expiration for their home run potential. However I started to see other trades which I thought had better risk/reward profiles so when I saw an opportunity to exit this position at break even I took it.

In early May I sold my holdings in KONG (they recently changed their symbol to KZ) – both the shares I had purchased in November 2013 and Sep $10 calls I bought in February 2014. I had strong conviction that KONG would reach around $15 when Guild Wars 2 officially launched in China. After all, KONG spiked to $15 in September of 2013 just on the announcement of open beta testing for Guild Wars 2. KONG only reached a high of around $12 about a month before GW2’s release, however. Had I sold my shares and calls then I would have made a nice profit, but my conviction was strong that KONG would reach around $15 so I didn’t. However when KONG continued to act weak after GW2’s launch I decided to sell, settling for around 10% gain on both the shares and calls.

Also in early May I sold some new holdings I had started buying just a couple of months earlier. In the first quarter of 2014 I started establishing small partial positions in several mostly small to mid cap higher growth stocks which I thought would make good multi-year holdings. At the time I thought these stocks were expensive so my aim was to open small initial positions just to become familiar with them and average into larger positions if they pulled back. By May these stocks had pulled back significantly, and I had gone through my first earnings reports with them. I wanted to accelerate my averaging into those stocks that I had become most confident in and sell the others. Those others included CMG, BNNY, and FEYE. I lost varying percentages on those three names, but they were all small positions and so the losses were not meaningful to my overall portfolio.

Collectively the positions I sold in the first half of 2014 accounted for roughly half of my portfolio. That freed up a lot of cash to deploy, which leads into my next post.

Portfolio Changes

I made some changes to my portfolio this week.  The drop in small cap/momentum stocks has significantly improved their risk/reward profiles in my opinion.  With most of them already having reported Q1 earnings, I sorted through which ones I thought were really the best long term plays.

I settled on four which I felt most confident about – Sprouts Farmers Market (SFM), Tableau Software (DATA), Yelp (YELP), and Zillow (Z).  All four reported great earnings which validated my original investment thesis on them.  I think Sprouts will be a long term winner in organic foods – I think Whole Foods is still too expensive and the older traditional supermarkets and Walmart will have trouble gaining significant mindshare in organics.  I think Tableau has a nice niche and clear lead in data visualization which I think is a large market but not as crowded as some other software/cloud spaces.  And I think both Yelp and Zillow are increasing their leads in their respective spaces and both have long runways still and many avenues for expansion. I wanted to increase my exposure to those stocks while still maintaining the same or greater cash position I had.

So I sold Annie’s Homegrown (BNNY), Fireeye (FEYE), Amazon (AMZN), and Chipotle (CMG).  I also sold KongZhong (KONG) – both the shares and Sep $10 calls I had bought.  Annie’s hadn’t reported earnings yet, but I wasn’t as confident in their ability to successfully expand their product line and I thought Sprouts was a safer play on organic foods. Fireeye was a tough decision to sell.  It was down so much I felt there was little downside left, and I really felt the Mandiant acquisition was great.  In the end however I decided their product being so expensive might lead to a longer sales cycle giving competitors time to catch up. There was nothing really wrong in my mind with either AMZN or CMG, just being more mature and not having dropped as much recently, I felt they wouldn’t bounce back as much on the upside either.

As for KONG, my plan had always been to hold the shares until around GW2’s release and then sell for hopefully around $15, for around a 50% gain.  With the drop in the small cap/momentum stocks I mentioned I felt those now had more upside potential (around 50% in the short to medium term and even more in the longer term) and thus had more attractive risk/reward profiles. Now it may well turn out that when KONG reports earnings in a couple weeks the stock takes off, but I will be OK if that happens.

On the KONG calls, I could have had more than a double on them had I sold them when KONG reached $12 recently.  However at that time I felt that KONG would continue to steadily increase to $15 leading up to Guild War 2’s official launch.  That turned out not to be and I don’t like holding options with only a few months remaining until expiration so I decided to just sell them for a small profit.

I ended up losing about 40% on FEYE, losing 10% an BNNY, breaking even on AMZN and CMG, and gaining around 10% on both my KONG shares and options.

So I used some of the proceeds from those sales to increase my pace of averaging into DATA, SFM, YELP, and Z. I suppose that kind of defeats the purpose of dollar cost averaging, but I really felt that current levels for those stocks were quite attractive here.  I also bought a little more Alcoa (AA).  I also saved a lot of cash, bringing my cash position up to around 35%.  I will continue to average into my small cap holdings over several months, perhaps until the end of this year, and will also continue to maintain some cash for any other opportunities which may arise.

Initiated positions in AMZN and CMG

Today I initiated long positions in Amazon and Chipotle.  Like with my other recent additions these are small initial positions which I plan to dollar cost average into over time.  Both recently fell after earnings on concerns which I don’t think will affect their long term growth prospects.  And while CMG and especially AMZN are larger market cap than I am usually interested in, I think both still have significant growth potential.

In Amazon’s case I think there is still significant room for growth in online shopping, and I like the prospects of all the other areas AMZN is into from Kindle, FireTV, video streaming, Amazon Web Services, Amazon Fresh, Amazon Pantry, etc.  I have a lot of confidence in Jeff Bezos long term thinking for the company.

In the case of Chipotle, there is still room for the number of Chipotle units to almost triple, and I think new concepts Shophouse and Pizzeria Locale can provide significant additional growth.  I can see both of those being successful and Chipotle becoming a successful conglomerate of brands, kind of like Yum Brands, except in the fast casual restaurant space,where the growth is.  I looked at several smaller cap companies, many of which completed IPOs in the last year or so, which were positioning to be ‘the next Chipotle’ but none of them looked like it to me so after Chipotle’s recent correction I decided the original was the best play.

I think both AMZN and CMG could as much as triple eventually, and downside is probably around 50% or so from current levels, so I like the long term risk/reward ratios for both.

As growth/momentum stocks have continued to correct recently I have also continued to dollar cost average into my other recent additions – SFM, BNNY, YELP, Z, DATA and FEYE.  I don’t know how low these stocks will get before the correction is over, but most of these stocks are already down 40-50% from their peaks and I think further downside risk is maybe another 50% from current levels whereas over the long term I think these stocks could become 3, 5, or even 10 baggers.  So again I like the long term risk/reward ratios here and will stick with them for the long term as long as I think their fundamentals remain strong.