Tag Archives: HABT

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.

2015 Year in Review

My winning streaks (of both positive returns and beating the averages) came to an end in 2015. I was down 34% in 2015, compared to the S&P 500 which was down around 2%.  Yet I feel better about the risk/reward of my portfolio going forward than I ever have.

I entered 2015 with positions in AA, GTIM, SFM, HABT and YELP, with around 12.5% cash.

My first move of 2015 was to sell YELP in mid January for around a 7% loss. I had just bought YELP near the very end of 2014, but was starting to become nervous about the overall markets and wanted to raise cash, and YELP was my smallest and lowest conviction idea.

2015-yelp1

In mid February I sold my entire position in AA, largely because I thought other ideas had better risk/reward. I made around 35% on AA. I put some of the proceeds into more GTIM and raised my cash position some more as I continued to grow concerned about the overall markets.

2015-aa1

In early May I sold my entire position in SFM. SFM had been a core position for awhile, but by the time I sold I had become convinced that the story had fundamentally changed for the worse. I put some of the proceeds into RAVE, and raised my cash levels yet again.

2015-sfm1

At the end of May I sold my entire position in HABT, and I added another new position, BSQR. Despite adding a few new positions which I thought had attractive risk/reward, I was still worried about the overall markets and so wanted to maintain alot of cash. So that led to my opting to sell HABT. I made around 15% on HABT.

2015-habt1

Near the end of July I sold my entire positions in RAVE and BSQR. I continued to grow concerned about the overall markets and wanted to pare back to my highest conviction ideas. I lost around 7% on BSQR and 4% on RAVE. This also marked the high point for my cash levels on the year at around 40%.

2015-rave1

2015-bsqr1

In August I bought and sold a position in GM-B warrants. Despite my concern about the overall markets I thought the risk/reward warranted a position, but I shortly afterwards had a few ideas I liked better, so I sold. I lost around 5% on the GM-B warrants.

2015-gm1

Near the end of August I established a position in a new stock, NEWM, and in early September I bought an unnamed nano-cap stock. By mid September concern about overall markets caused me to want to pare back to my highest conviction ideas again so I sold both positions. I broke even on NEWM and lost 5% on the unnamed nano-cap.

2015-newm1

At the beginning of October I bought positions in BABA, BIDU, and HABT. Despite my concerns about overall market conditions, I felt the long term prospects of these companies were sound and their sell-offs were overdone. I sold all three positions a few weeks later for 10-20% gains.

2015-baba1

2015-bidu1

2015-habt2

The only stock I never sold was GTIM. In fact I added to it as I was selling my other positions. I added to GTIM in July, August, and November. GTIM is my only current position.

2015-gtim1

2015 was largely about managing the portfolio to weather growing concerns I had about overall market conditions while still trying to find ideas I felt had attractive risk/reward profiles. So I tried a few new positions while selling off others. Ultimately I could not gain enough conviction in those ideas and my market concerns caused me to concentrate in the only idea I did have strong conviction in – GTIM.

Overall I think I had the right idea, but my execution was slightly off. I feel if I had I executed slightly better it would have made a significant impact on my performance for the year. I feel good about closing out the positions I entered the year with when I did. YELP, AA, SFM, and HABT were all significantly lower after I sold them. Likewise I was happy closing out most of my new ideas when I did. In some cases the fundamental stories had deteriorated or were not as strong as I originally thought, and in other cases they were not the types of holdings I wanted going into what I thought would be worsening market conditions. All the positions I sold saved me from significant losses.

GTIM, the one position I held on to, was the major negative contributor to my performance for the year. I maintained my GTIM position, and even added to it, because I felt the long term risk/reward was very attractive. Even at $10, I thought GTIM could still be a 5-10 bagger in the long run, and the downside risk was limited to perhaps 50% at worst. Although I was prepared for GTIM to decline 50%, I wasn’t really expecting it to drop that far, which is partially why I did not sell any at $10. Attempting to avoid a potential 20% decline did not seem worth taking the tax hit. And when GTIM did fall 20% from its high, I only saw downside risk of about another 20%, not an additional 50%. So selling again did not seem worth it for tax reasons. Instead I decided to start adding to my position, as the long term risk/reward had only gotten better.  I saw the worsening technicals but thought fundamentals would win out. If I had it to do over, I would have paid more heed to the technicals. I probably still would have started adding too early, but I would have added more shares around the $4 level when GTIM had started to base.

Besides making my average cost on GTIM more attractive, another benefit would have been having more cash available for the few trades I did have strong conviction – my purchases of BABA, BIDU and HABT in October. Not only could I have made those positions larger, but with larger positions I might have held at least a portion of them longer into their rallies, both of which would have significantly improved my performance for the year.

As it stands, I was down 34% for 2015, compared to the S&P 500 which was down about 2%. The main lesson I take from 2015 is respecting technicals, no matter my level of fundamental conviction in an idea. Had I done that my performance for the year would have been much closer to the S&P 500, and my upside would be that much greater.

As I stated at the beginning of this post, I feel as good about the risk/reward of my portfolio as I ever have, and am comfortable holding just GTIM going into 2016. I will review my current thinking on GTIM and what else I have on my radar in another post.

Sold BABA, BIDU, HABT

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.

Bought BABA, BIDU, HABT

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.

Sold HABT

I sold my entire position in HABT this week. Several reasons contributed to my decision.

1) I wanted to maintain a comfortable cash position, and after buying BSQR my cash had gotten pretty low.

2) Although I believed strongly in all the positions I held, I thought it probably best if not all of my holdings were in the same sector (restaurants). Between HABT, GTIM and RAVE, I felt the risk/reward on HABT was the least attractive.

3) Watching HABT’s trading since its IPO, along with observing how other restaurant stocks (including recent IPOs) have been trading, my thinking started shifting a bit that it might be more profitable to swing trade HABT than hold it over the long term. I think buying HABT in the low $30s and selling in the high $30s, perhaps with an upward bias over time, could be very attractive. While my preference is still to hold positions for long term capital gains, any swing trade or shorter term strategies I might pursue would be done in my tax deferred accounts.

So, those were my reasons. I made around 15% on HABT, so not bad. I could have done much better swing trading HABT a couple of times since I first bought, but that was not my strategy when I bought. As I mentioned, I will be keeping HABT on my radar. With this sale, my cash position is now around 20%.

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.

Added some more HABT, sold ZU

I decided to accelerate the building of my HABT position slightly because it seemed to me that $30 was pretty strong support. So I bought a little more HABT today, bringing me to about half of my full target position.

At the same time I wanted to maintain a fairly healthy amount of cash so I decided to sell ZU. It was really the only thing I could sell. I consider AA a core holding for the next 10 years, and a necessary balance to all my consumer stocks. I also think SFM and HABT could be core long term holdings as they expand across the country. GTIM might not end up being a core holding, but I think it is in the very early phase of rapid growth so I want to hold on to it here.

I think ZU will do well over the next year or two, but after that I was less certain about its longer term growth than my other holdings.

Bought a little HABT

I went ahead and initiated a small position in The Habit today – around 1/5th of a full position.  I had planned to buy only if HABT dropped to $30, but I wasn’t so sure it would get there, so around $34 seemed like an OK price to start a partial position. Every $3-$4 drop from $34 I would buy an additional 1/5th.

I would have liked to have gotten shares cheaper, but I strongly believe in HABT’s long term prospects (over the next 5-10 years). I am prepared for HABT to remain range bound for a year or so while it grows into its valuation, but in the long run I think it could be a 5-10 bagger.

Of all the better-burger places that have been rumored to be considering IPOs (such as Five Guys, Smashburger, and Shake Shack) I like The Habit’s prospects the best. I also like The Habit’s prospects much better than any of the other restaurant IPOs of recent years (such as LOCO, ZOES, NDLS, PBPB, etc).

Besides the small base it is starting from and thus tremendous growth potential, some of the other things I like about The Habit are its 42 consecutive quarters of same store sales growth, the fact it came out on top in a recent Consumer Reports survey of favorite fast food places in the burger category, and the fact that its average check is on the low side for fast casual restaurants.