EXEL Could be a 3-Bagger, and has Only Limited Downside

The current price provides a great entry point for investors in Exelixis, Inc. (EXEL). Since the company is not profitable the stock price moves closely with news and events that impact future business prospects. The most important events are those related to clinical trials. There are many possibilities with potential to unlock value for the shareholders.


  • Positive results in one or more of the company’s five phase-three trials
  • The company could be acquired
  • Treatments going to market could have better than expected returns
  • The high amount of leverage provides more upside to the long position

To read the full article click here: EXEL article

Parked in Cash but Will Keep Blogging Ideas.

I apologize that I have not updated the blog recently. The truth is that I am bearish right now, which is evident by recent sell posts. I do have a few long ideas that I will share soon, but right now is a good time to have money parked in cash. In addition to my job and blog, I have started writing company reports for SmallCapIR. I release reports periodically, and I will start including those on the blog as well under the category – Published Reports. These new reports will be a little bit longer 3-5 pages, and I will write them in weekend. I usually follow a stock a bit longer before blogging about it.

Updates are coming soon.

Methanex Corp. is a Market Leader with Potential to Unlock Value

The current stock price for Methanex Corporation (MEOH) provides a solid entry point for investors. Declining methanol prices, and a plant shutdown in Eygpt created a stock pullback from recent highs.  These problems are temporary and even in a bear case the company offers normalized 2015 FCF yields of ~9%. MEOH has the potential to unlock further value if methanol prices increase, if U.S. assets are converted to an MLP structure, if a natural gas feedstock contracts can be obtained in Chile, or if positive NPV projects are undertaken. I would wait until after the Q2 earnings release to buy-in as a negative surprise is more likely than a positive surprise.

To read full write-up click here: MEOH Write-up

Energous Corporation – Cool Technology, but Potential Market is Too Small

Energous Corporation (WATT) attracts speculative investors who are interested in the company’s upside potential. I do not believe it will materialize. Bulls do not understand the difficulties that WATT will face related to competition, regulatory approval, getting to market on time, and monetization of its technology. As WATT does not yet have any revenue, stock price movements will be driven by events related to the companies deteriorating future business prospects. There are numerous points in the future when investors could be let down. I expect mass selling when lockout periods end in September 2014 and March 2015.

To read the full write-up click here: WATT Write-up

Cannabis Sativa, Inc. – Time to Make Some Deals

Cannabis Sativa Inc. (CBDS) is a development stage company that hopes to capitalize on the legalization of marijuana. The company started business in April of 2013 through a reverse takeover1. It acquired an exchange listed shell company and sold off the shell’s assets as a way of side stepping the heavily regulated IPO process. CBDS’s products include herbal skin care, formulas, edibles, topicals, delivery systems, and recipes related to cannabis. The feature products are cannabis lozenges, and its “Skin Garden” skin care line. The lozenges use a strain of cannabis called NZT, and they begin to act in 5-10 minutes. This is in contrast to other edibles that take up to an hour to act. CBDS has patents pending on powerful strains of cannabis to be used in products.

To read the full report click here: CBDS Report

CONN: Growing Only by Loosening Credit Standards

Conn’s (CONN): A retailer and subprime lender with 79 retail stores selling mattresses, appliances and electronics. It operates in low-income areas where it offers financing for overpriced products at high rates. This short is crowded but is still a good idea. Market Cap $1.5B.

Short thesis:

  1. Its recent growth has all come from extending more credit and loosening credit standards.
  2. When valuing the subprime credit and retail businesses separately as opposed to viewing CONN as a growth retailer, a sub $30 value is more appropriate.
  3. It is unclear how well CONN will mange the increased credit risk. Large losses could occur in the accounts receivable (AR) portfolio.

1. The AR portfolio was $1.07B on Jan. 31, 2014, up 44.1% from the prior year. Average account balances are up over 28% in the last two years, while credit scores and down payments have dropped. CONN has posted positive net income for two straight years after two years of losses, but at the same time cash flow from operations (CFO) has been negative in the last two years. This growth is unsustainable as CONN had CFO losses of ($210M) last year and has only $295M of available debt under its credit facility and minimal cash.

2. The company should be viewed as a retailer and subprime lender by the market. When applying separate valuations for these two businesses, a price below $30 would make more sense. Income before taxes from the credit segment slipped from $28.5M to $12.5M in the most recent year. With bad debt increasing in the most recent quarter, the credit segment had a ($6.5M) loss. The decline in quality of the credit segment and lower multiple associated with subprime lending should bring the valuation down.

3. Bad debt expense will certainly go up, but it is unclear how much this problem will be compounded by repeat customers and growing debt burdens per customer. ~60% of payments are made at store locations, which could pose additional credit problems when closing stores.

Next Steps: I plan to research the AR portfolio and lending standards. There is an advantage to be gained by understanding the quality of the AR portfolio better than Wall Street.

Potential Catalysts: Missing guidance as bad debt piles up and growth slows. As problem loans are given time to surface, the street will have more reason to value the two businesses separately, creating multiple compression.


LifeLock: A Low Value Add Service Company Facing Headwinds

LifeLock (LOCK): An identity theft protection company, using a subscriber model that is marketed directly to consumers. Market cap $1.2B.

Short Thesis:

  1. This company could potentially be exposed for lacking a value-added service, fraud, or false advertising…again.
  2. It is competing in a bad space; the industry has slow growth, is competitive, and is becoming saturated.
  3. It is promoted and valued as a growth tech stock, but it is clearly in the services space.

1. Industry experts have been quoted saying that LOCK’s basic level service package is useless. It offers no services that a consumer could not easily do himself. Examples are that consumers could monitor their own credit or add themselves to do-not-disturb lists. Most subscribers use the basic package. Even more expensive services are also of little benefit. For example, wallet protection where the company will call your credit cards for you when your wallet has been stolen. The company was fined by the FTC in 2010 for deceptive advertising, which could happen again. Since its services do not offer much to consumers the company must resort to questionable advertising to convince customers of the need for its services. LOCK does not even protect consumers from wage or tax fraud, which are the FTC’s two most common types of identity theft. However, people may continue to pay for the services unless a regulatory body steps in.

Robert Maynard, cofounder, left the company in large part due to his checkered past of bad business practices, fraud, and arrests. Anyone who would collaborate with this person in my mind is suspect. I think the company is at high risk of accounting fraud and bad business practices. I also believe that the ~$400 estimated value per customer is alarming. I would like to research how competitors calculate customer EV. I would also like to dig further for any aggressive accounting practices.

2. A negative earnings surprise could occur because growth in the industry is slow and the cost to acquire new customers is becoming more expensive as the market becomes saturated. The identity protection space is $3.5-4B and growing slowly. IBIS World predicts 4.2% growth this year. Competition is fragmented and fierce; there are 79 players in this space. Large banks service 50% of the current demand. LOCK has been aggressively building market share by increasing advertising spending. The cost to acquire a new customer is up to $160; this is in contrast to $150 at the end of 2012. This is a major expense since the average subscriber pays only $10.81 a month.

Identity protection is a commoditized product. Competitors use the same data and services for information, making it harder for LOCK to stand out.

The B2B revenue (~6% Revenue) is shrinking because of increased regulation. COF settled a $215M suit related to deceptively providing identity/fraud protection for similar services.

3. LOCK is touted by management as a growth tech company, but it is clearly in the services space. Its valuation is way out of line with INTX, the only true pure-play competitor. This is due partly to the fact that INTX competes in the shrinking B2B space, but INTX could easily replicate LOCK’s business model.

Next steps: I plan to dig deeper into competitors’ plans, expected value per customer calculations, and regulatory developments.

Potential catalysts: Missing top and bottom line guidance, a multiple correction from the street after pricing LOCK as a services company, and FTC/legal sanctions.