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The Sleuth Investor: My Takeaways From Touring Spartan Motors

Summary On December 16th, 2015, I had the opportunity of touring Spartan Motors’ headquarters. The tour was very enlightening and I learned a ton that I wouldn’t have learned sitting in front of a computer screen. Spartan Motors is a very real company with continual improvements in their operations. I recently read a book called The Sleuth Investor. The book was not your typical methodical investment book. No, the book was strictly how to develop a qualitative research style. In fact, I’ve never read an investment book like it before. Pretty much the basis of the book is about how the enterprising investor should not solely rely on SEC statements and press releases. Yes, these statements and PRs are valuable; however, if you want to become a better investor, getting more “exclusive” information can be very valuable. Source: Amazon The word exclusive is a word the author uses a lot in the book; however, by exclusive he does not mean insider information. To the author, exclusive information is getting information that is publicly available, but is not as easily accessible like an SEC filing or PR release. For example: Following the physical movement of a product. Observing company management talking to investment bankers in public. Going to production facilities, offices and other physical surroundings. To some, the methods in the book may seem very unorthodox and time consuming. In fact, I believe many readers will not practice the methods and strategies found in this book. For me on the other hand, I found the book to be very enlightening, and I have started to incorporate the methodologies found in this book, in my own research. As an example, on December 16th, 2015, I did my own sleuthing. Sleuthing in Action with Spartan Motors On December 16, 2015, I went on a company tour at Spartan Motors (NASDAQ: SPAR ). Before I go into detail on the experience that I had, let’s back up the story a bit. I became aware of SPAR from another Seeking Alpha user who messaged me one day, let’s call him User X. User X messaged me a month or so ago pretty much telling me that I should look into SPAR for a variety of reasons. It was a pretty detailed and compelling message and influenced me to look into SPAR. User X’s thesis on SPAR is summarized in the following bullet points. Simple operational-improvement turnaround situation. The product offerings are sound and competitive in nature but management has fallen behind recently. Margins have fallen yet the balance sheet remains strong. Things are changing more rapidly than the market perceives. New management was brought in and a multi-year operational improvement initiative was launched. Overall, the basis of the thesis is derived upon management-driven operational improvement without any consideration of revenue growth. After doing my own due diligence on SPAR using public information such as SEC filings and PR releases, I wrote up a research report. Investors who are not familiar with SPAR should read the report here . I came to similar conclusions as User X. Below is a summarized conclusion of my findings: The new CEO, Daryl Adams’s plan to bring the company back to a state of profitability is already taking effect. They closed down one plant to consolidate operations, took some much-needed restructuring charges, and made operations much more efficient, especially at the Brandon facility. Two out of three of SPAR’s business segments are already profitable. The work currently being done to their unprofitable division (Emergency Response Vehicles (ERV) has improved drastically from new pricing models, operating improvements, capacity expansion, consolidation of production, and developments in the front end process. Even though the company is unprofitable (currently break-even), the dividend is stable due to the strong balance sheet. The strong balance sheet makes this a unique turnaround situation. The new management team is strong and all of the new executives have experience in turnarounds. Management is also aligned with shareholders for all of the executives hold shares in the company. Adams (the CEO) has recently been buying up a decent amount of shares in the open market. Overall, I felt like the company was/is a low risk decent return. Back to my sleuthing. Since I have started to incorporate a qualitative research method mixed with my quantitative process, I have talked to a handful of management teams, IR guys, suppliers and other investors. To say the least, my network has grown and my research skills have improved. Because SPAR was such a unique turnaround situation, and that their headquarters was only an hour and forty minutes from where I lived, I decided to reach out to Adams to see if I could get a company visit. After writing up the original report on SPAR, I sent Adams a message on LinkedIn, in which I gave him my contact. A few days later, Greg Salchow, SPAR’s Group Treasurer sent me an email. Salchow’s response instead of Adams, to me was actually more of a bullish indicator and gave me more respect towards Adams as a whole. The reason why I was pleased that Salchow responded to me instead of Adams derives itself off of opportunity cost. Adams is a busy man. Turning a company around back into a steady state of profitability takes a ton of time and effort. In reality, I was not expecting a response from Adams due to the fact that he is most likely spending the majority of his time working on improving the company. Thus, an email from Salchow meant that Adams doesn’t have the time to talk about company improvements due to the fact that he is on the front line everyday trying to bring SPAR back to being a topnotch firm. The second reason that I was impressed with Salchow responding is because Adams still sees the benefit into giving investors visibility. Despite the fact that Adams is too busy to talk to investors (a good sign), he still sees value into the visibility of his company. Visibility is important for micro-cap companies and Salchow’s response indicates that Adams fully understands this. To make a long story short, I responded to Salchow and we set up a date for a company visit. The Visit Before I went on the company tour, I had a few questions in mind that I would try to get answered. These questions are as follows. Were there attitude and motivation issues when Daryl took over that were hindering efficient production? Has there been acceptance or enthusiasm for management efforts over the transition to a more efficient manufacturing process? And, has there been an increased turnover associated with the changes being implemented? So on 12/18/15, I went on my first public company visit. The unique aspect of the visit was the fact that it was the employee Christmas party/lunch (will get to later). When I got to the facility, Salchow took me to his office so we could chat a little bit before the employee Christmas party/lunch. In our discussion I learned some valuable information. First, if you remember from my original write-up on SPAR, I stated that SPAR contributes around 50% of the UPS (NYSE: UPS ) and FedEx (NYSE: FDX ) builds. From reading the SEC filings, I could not figure out who controls the other half of that market. However, after my conversation with Salchow, I found out that Morgan Olson controls the other half of the market. Morgan Olson is a privately held company owned by J.B. Poindexter & Co . Learning this information was invaluable and I may be reaching out to Morgan Olson soon in order to continue my sleuthing process. My biggest takeaway from the conversation with Salchow was how management is focused on the pricing model. From reading the annual and quarterly reports, one can come to a conclusion that the pricing model is going through a change, in order to better the business as a whole. However, the annual and quarterly reports do not go into detail on what exactly was the issue beforehand and what the solution is to the problem. The following will discuss my takeaway from the pricing model then and now. Before Adams took over as the COO/CEO, it was normal for a customer in the ERV segment to want a custom design, with all sorts of bells and whistles, on pretty much every firetruck that they were ordering. In the past, SPAR provided each customer with what they wanted. There are a few problems that transpired from this. First, since each firetruck order was custom designed by the customer, the time it took to manufacture/build the firetruck increased, drastically. The longer it takes to build out an order, the higher the chance of margins getting squeezed. Remember, from 2012 until now, margins have been in the red. The second issue with customizable builds is that the laborers are more prone to make a mistake. Thus, if a firetruck is a custom build, it is most likely the laborer’s first time building this type of vehicle out. What this means is that the process is not systematic, it will take significantly more time, and if a mistake occurs (depending on how big), they may have to start completely over, thus continuing to eat into margins. To combat these difficulties with custom builds and to make the manufacturing process much more efficient, management has done a few key things. First, they now give customers an option to go with a pre-built out truck, which is much more inexpensive than a custom build and saves time on the manufacturing floor. Urban customers who order > 70 trucks have taken a liking to this method. Having a pre-built out model is a win-win situation for the customer and for SPAR. This benefits the customer due to the fact that the overall monetary cost will be much cheaper and they can have their firetrucks in a much faster time period. SPAR wins from this due to the fact that the manufacturing process is much more systematic (they have seen the time it takes to build out a truck drastically cut down). Not only is it systematic and takes much less time, but in the long run, it will be margin enhancing. Urban customers have responded more positively to a more systematic approach than have the rural customers. The reason is twofold. First, urban customers (like the City of Chicago) order a lot more trucks than rural customers. Secondly, urban customers, on average, go through trucks every five years or so, while rural customers can make a truck last 15-20 years. Thus, rural customers really don’t mind spending more money on a few builds to customize it, since they will get a much longer lifespan out of the trucks over the urban customers. The second way that SPAR has combated customized trucks is by an update to their pricing model. If a rural customer wants a customized truck with a lot of bells and whistles, SPAR will now charge the customer much more money in order to improve their margins. In my opinion, this is a much-needed change that has a ton of potential to turn the company back into a solid state of profitability. This truck was sitting outside of the customer service department. Inside the manufacturing plant there was a significant amount of these being built. After my chat with Salchow in his office, we went out to one of the plants to hear Adams speak in front of the ~700 employees. All employee eyes were on Adams and his speech was very well put together and professional. After the speech, I got to talk to Adams and the CFO Rick Sohm for a few minutes. It was very crowded and busy so I did not have too much time to ask Adams or Sohm any business related questions. However, I did get a sense of their personalities and feel like they are very candid and competent leaders. Salchow and I ended up eating lunch with some other employees and to me it seemed like the transition from old to new management went very well. The employees seemed to be very happy and well taken care of. Overall, there were not really any motivational or attitude issues on the manufacturing floor. From my understanding the issues were from a poor operating methodology mixed with the overstocking of inventory (especially at Brandon). After lunch, Salchow took me on a tour on how the firetrucks and other vehicles were built from start to finish. It was a very enlightening experience and really helped me understand the business model in a much easier fashion than by just reading SEC filings. What I found interesting is that the average order takes around four months to get completed. However, with the new systematic method being instilled upon orders, SPAR has already started to cut back on the time it takes to build out an order. This is a picture of how the firetrucks come in. What is interesting is that the majority of the body is aluminum not steel, which makes for a much lighter and inexpensive body. When we were done on the firetruck build tour, Salchow took me to the manufacturing plant where they put together Isuzu vehicles. In regards to Isuzu, SPAR gets sent the parts by Isuzu (pretty much in a box) then puts the vehicles together. With around fifty laborers in the plant, they can build out around thirty Isuzu vehicles in a day (this really goes to show how a systematic approach can be much more efficient over a custom build). Source: Vehicle Service Pro I did not snap any pictures of the Isuzu plant but these are the vehicles that they are building. SPAR started building these vehicles in April of 2011 and since then, they have built over 20,000. It is remarkable on how fast fifty workers can throw together these vehicles. Finally, the parking lot of the plant is filled with a ton of these completed vehicles. This gave me a sense that demand is strong. If you have ever read Adam Smith’s Wealth of the Nations, you can understand the efficiency of breaking down of large jobs into many tiny components. The Isuzu plant was the end of the tour and my sleuthing was done for the day. Conclusion You can learn a ton about public companies sitting in front of a computer all day and reading annual report after annual report. However, getting into the field and doing qualitative research is a huge eye opener. In the three hours that I was at the SPAR plant, I learned a ton that I could not have learned sitting in front of a computer screen. This was my first experience touring a public company and I plan on continuing sleuthing around in the future. Once you get a taste for how much you can learn in a short period of time sleuthing, it becomes a much-needed part of the research style of an equity analyst. Going forward, I plan on continuing to develop my research style into a heavily quantitative focus, mixed with qualitative sleuthing methodologies.

Capturing Alpha: Scouring Social Media To Gain An Edge

Company news posted via social media can precede press releases. Social media can be used as a tool to establish company relationships. In rare cases, it can even provide tools for uncovering hard financial data. Gaining an edge in the market is hard, especially for an individual investor. There are people making good money and working long hours analyzing economic data and crunching numbers based off of 10ks , so how are you supposed to compete? Maybe by looking at different information altogether. For small and micro cap companies, it seems that more and more opportunities are presenting themselves via social media. This medium can break news that might never show up in a PR, yet it may fall outside the scope of the professionals. I observed this phenomena first hand with a holding in Digimarc (NASDAQ: DMRC ), a tech company looking to partner with major retailers. One Monday, the CEO of Walmart, Doug McMillon, posted a picture to his Instagram account acknowledging that the company was experimenting with Digimarc technology. At the time, the account didn’t even have one thousand followers, and Digimarc wasn’t mentioned directly in the posting. For these reasons, people paying attention found themselves with a great opportunity. Instead of blasting off, the stock seemed to climb as the news spread, eventually peaking at $49 (click to enlarge) Ultimately, events like those will probably be exceedingly rare. There has to be a small company, involved with a large company, where information comes from a verifiable source with a small following. With a little more legwork though, there are still opportunities to uncover information that may be significant to company developments. What follows are two examples of the type of this type of research. The first deals with determining relationships, while the second is the holy grail of this sort of research and yields hard data on company financials. The first instance involves Digimarc again. The company held an online seminar where they explained the capabilities of their technology and took technical questions from potential users of their products. In the chat box, many participants identified themselves and the city from which they were logging in. The benefit of having this information is that the names could then be cross referenced against LinkedIn profiles to get a sense of potential customers for Digimarc. Included in the chat were the following people. Person Company Notes Jeff Rosenzweig Zaptivity Managing Director Klaudia Campos Peel Plastic Products “For over 30 years, Peel Plastics Products Ltd. has been a recognized leader in flexible packaging solutions and process innovation.” Brian Novotny Schwan Food Company Represents lots of brands besides Schwan’s® including Red Baron® , Tony’s® , Freschetta® , Pagoda® , Edwards® , Mrs. Smith’s® Shasta Blaustein Dollar Shave Club Bill Belias Ergonix Company President Ultimately, this information is neat, but it is neither breaking news nor hard data. Digimarc has said that it is basically in discussions with everyone in the industry, and discussions aren’t dollars. Still, that this type of information can be gleaned at all is something to constantly be thinking about. What if this had been a smaller company and the chat had been full of people working for FritoLay? If you turn over enough stones, eventually you’ll find something. The grail of any analysis goes beyond uncovering relationships and into ferreting out actual revenues and expenses. These opportunities are rare, but I came upon one recently. Wizard World ( OTCQB:WIZD ), an events company that holds comic cons all over the country, has recently begun attempting to diversify its revenue stream. One of its new products is the Comic Con Box. A thirty dollar subscription service similar to Birch Box, but which delivers nerdy t-shirts and toys to people on a monthly basis. Massive competitors in the space exist, most notably LootCrate, but Wizard World’s celebrity and artist relationships as well as its brick and mortar conventions give it advantages which could allow it to catch up and emerge as a contender. At the LD Micro Conference in June, CEO John Macaluso mentioned that some day in the distant future the box business could be the company’s leading revenue generator. Since the company’s comic cons are generating more than twenty million dollars annually, this certainly made it sound like early results were promising. The most recently released quarter, however, only captured a fleeting look at Comic Con Box data. Its figures comprised the initial small launch plus one month. Investors following the company were informed that the company had made $132 thousand on sales of the Comic Con Box. A slightly deeper dive into the 10Q, however, showed that the unearned revenue from the sale of future boxes was $124 thousand. Regarding what goes into that number, Wizard World states that, “Unearned ConBox revenue is non-refundable up-front payments for services. These payments are initially deferred and subsequently recognized over the subscription period, typically three months, and upon shipment of the product.” In other words, the $124 thousand represented essentially all July sales plus the remainder of funds garnered from long term subscriptions. Single month recurring subscriptions were not included nor were, obviously, purchases from new buyers occurring after the period closed. At the time three months was the longest possible subscription so it was a guarantee that all of that $124 thousand would be recognized during the next quarter. Additionally, the bottom line prospects were good a well as the p ress release for second quarter results states, “We are now planning to ramp up the volume of boxes shipped monthly, and anticipate this recurring, higher margin revenue stream to continue to grow.” Growth was clearly ramping, and every single box was selling out, but how much was Wizard World increasing the supply by each month? If there was a way to acquire early data points a person could hold a major advantage. At $30 a box, if they had grown to 5,000 units by the end of the quarter, that would represent an annualized figure of close to two million and growing fast. Then I saw this photo posted to Instagram. A celebrity had signed 1,200 items to be placed in future boxes. This certainly wasn’t going to be enough for everyone to get one based solely on the initial revenue figures, but it created a chance for analysis. All that had to be known was whether the 1,200 would be distributed in a single box or across several and the rate at which they were distributed. Luckily, a later post confirmed that the 1,200 would be placed during a single months mailing. From there, all that was left was to determine the percentage of boxes that held the autograph. Uncovering this figure was tedious, but in no way actually difficult. The key to figuring things out was that Comic Con Box encourages people to post videos to YouTube of themselves reacting in real time to the items they’ve received. Watch enough of these, and you have a random sample. (I actually believe that, including prior months where I was simply watching to see people’s reviews of the items, I most likely have watched more of these than anyone else in the world) It’s the same as sneaking into the Comic Con Box warehouse, opening a bunch of boxes, and extrapolating data directly. The only thing to be careful about is that the boxes are truly unopened. Anyone posting a review with the box already open is biased by its content: They may only be posting to show off their autographed memorabilia. The results were as follows: Videos 56 Autographs 22 Percentage 39.29% Projected Boxes Sold 3055 Monthly Revenue $91,636.36 Annualized Revenue $1,099,636.36 Elements that could have skewed that data were if people were more likely to post their videos if they received the autograph (or more likely to post them sooner as I went with the very first uploads) or if this was a particularly popular or unpopular box. It did get supported by a DC Comics tweet which is an account with around a million and a half followers. Ultimately, the fact that around three thousand people received the most recent Comic Con Box isn’t terribly actionable information. It’s slightly below my expectations, but since boxes are selling out this is more a sign of cautious management rather than limited demand. Additionally, this is the sort of exercise that it is useful to make a habit. The idea isn’t that you will be able to make great investments off of every social media investigation. It’s that, as the Digimarc-Walmart event proved, the opportunities are out there, and if you don’t put in this sort of work, you’re guaranteeing you’ll miss out. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks. Disclosure: I am/we are long DMRC, WIZD. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.