More PBPB thoughts

I guess I should have thought about this prior to executing a trade, but what are my options going forward? It depends on what happens next:

1. The price stabilizes and is flat in the next 6 months. I will probably end up sitting on the Company long-term monitoring performance with earnings releases.

2. The price continues to decrease. I really can’t see it going down much further. For that reason, I see myself holding on to the position, and maybe even purchasing more if it decreases significantly. Again, it will depend on the news and performance.

3. The prices increases quickly over the next 1-2 months. I would probably sell thinking that it’s the short-squeeze, and then expect the price to decrease. I would then repurchase the stock I sold at a lower price. I don’t think this would happen, but it is a possibility with shorts approximating 25% of float.

Purchased PBPB at 19.95/share

PBPB released earnings a couple of days ago, and the market was disappointed especially with top-line growth. The Company has been performing poorly since its IPO. Down 40% after earnings. EPS is negative so P/E is undefined, no dividends. So why did I do it?

Well, like I said previously, the stores are busy when I walk by (mostly during lunch) and I actually do like the sandwiches. Their main competitors are other sandwich shops like subway, jimmy john’s, quiznos, etc. I think that Potbelly sandwiches are typically tastier than any one of those. Furthermore, their geographical footprint is mainly Chicago and DC which means there is room to expand. The stock is 40% down so can it drop even more? Yes, but downside exposure is much more limited. Finally, I also realized that the short position on the stock is high - around 8-9 days worth to cover. That leads me to believe that the stock price is driven down by short-sellers. They’ll have to cover eventually, and if they do then I think the price should increase a little bit. Thereafter, it’s back to fundamentals. 

Previously, I talked about their balance sheet. I realized afterwards that the IPO proceeds will be used to pay off the accrued dividends (duh!). I realized that the balance sheet that I was looking at was pre-IPO. Also, to address the net loss - it appears to me that the Company incurred a lot of SG&A expenses associated with the IPO. I believe that’s what drove the losses - though I’ll monitor what’s happening. I do feel bullish on the stock, though I’m worried about the general stock market. If the market turns, I feel like it may take PBPB with it. The opposite of “a rising tide lifts all boats” type of thing.

PBPB

I recently learned that Potbelly underwent an IPO and that it is a publicly traded company. I found that curious since every time I go to lunch, I either eat there or walk by a store. It’s always super busy. So I decided to look into it as a potential investment. 

My first stop is always yahoo finance for some reason, where I can take a quick glance at the company. Initial reaction was poor since EPS is negative - the enterprise is losing money. I figured I can still read some SEC filings to see what the issues are.

After perusing the most recent 10Q (Financials as of Sep 2013), it looks like the loss is due to a dividend that was accrued due to the IPO and a minority interest share ie. not an issue with operations. Furthermore, the Company generated around $23M of cash on $225M of revenue in 39 weeks. All good signs.

Finally, in those 39 weeks, PBPB spent $20M in capex. The issue now becomes how much cash will be available for growth. Potbelly has basically no debt, so it took out a $35M credit line (which can potentially grow to $55M if certain agreements are met). But it also has to pay out the dividend ($50M). When is it due? Can it pay it in increments?

At the end of the day it is trading at approximately 11x earnings with no dividend payouts. If it can maintain growth, I think it will be a decent investment. 

Portfolio update (GBX)

At the beginning of 2013 I made an investment in Greenbrier Companies (NYSE: GBX) (almost exactly 1 year ago). Today I learned that they have secured a large new contract, which adds to their backlog for 2014. As a result of the news, the Company’s stock price increased 6% (compared with a 0.13% decrease in the S&P500) effectively doubling my initial investment. I figured it’s a good idea to take some money off the table. There’s no real rationale behind this move other than fear of losing my gains, especially since I believe the outlook for the industry (and this Company in particular) is very healthy. The Company has a strong backlog and the US energy boom appears it will keep going for the foreseeable future. 

Only time will tell whether this was a good move. The internets says the overall market is due for a correction. We’ll see.

On going research

After digging around on the sec’s website, I found the following:

I also expect additional SEC documents to be filed that discuss the divestment in much greater detail, including how the transaction will take place.
I’m in no hurry to deploy cash, so I’ll continue to monitor the news and the filings to see what type of information gets released.
Finally, another thought that crossed my mind today is that this company operates in the defense industry, and there is a mid-term election coming later this year where the Republicans may take Congress. They may push for an end to the sequester which further supports XLS as a long-term investment. Need to do further research.

Preliminary investment idea

About three years ago, I read this book which talks about general investment ideas. One of the major focuses of the book is to invest in companies that are being spun off. The rationale behind that idea is that either/both:

1) The spin-off, typically in the form of stock or warrants given to current shareholders, is undervalued with respect to the assets and revenue streams being divested, and/or

2) The spin-off flies under the radar of traditional equity analysts. It is undervalued for a short period of time until analysts and the general market catch up.

Therefore, I’ve recently noticed that Exelis, Inc. (NYSE - XLS) is divesting a portion of its business in the Summer 2014. This is a preliminary idea that I plan to research further and share my thoughts down the road. There is still a little bit of time before the actual divestiture. 

Post #1

It is 1:47pm on January 10, 2014. I’ve decided to commit my finance ideas to “paper” to test whether they pan out. It’s easy to think of great ideas and only remember the ones that have been successful. What happens to all the other ones? Let’s find out.

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