Category: Buys

Gulfport Energy

Published on:
May 26, 2019
Last Update:

"Four bucks a gallon - that's insane!," said Jim, a colleague. "My commute is over 25 miles each way. Let me tell you Noam, and I did the math, my monthly gas bill just increased by $300."

I had no idea that gas prices were up. I often cycle to work and when I do drive a car, I rarely pay attention to the gas bill; the Subaru is gas-efficien enough. Intrigued byJim's lamentation, I went to the local gas station in California and saw that a gallon of gas, indeed, now costs $4.55.

A raising gas price is a business problem[1] for certain industries. So I returned to my desk and looked for publicly-traded companies that explore, develop and sell the commodity.

What gas companies are selling for

The initial results were unexciting. WPX Energy (WPX on Nyse), a natural gas liquidity company with market capitalization of $5,230 million, traded at 23 times the trailing earning and at a 20% premium to reported book value.

Cabot Oil & Gas (COG on Nyse), with a market capitalization of $11,000 million, traded at a more reasonable, 15 times the trailing earnings but at a whopping 5 times the reported book value.  

QEP Resources (QEP on Nyse)market capitalization of $1,760 million, was slightly at a discount to book value. But QEP reported losses in 2018, 2016 and 2015.

So did Oasis Petroleum (OAW on Nyse). With a market capitalization of almost $2,000 million, the company traded at par but reported losses in 2018, 2016 and 2015.

Frustrated for wasting two hours of sifting through the financial statements of natural gas companies, I screened for companies - without a specific industry in mind - that traded at 90% below their-5 year stock price high[2].

Finding Gulfport Energy

One of the first companies that appeared on the list was Gulfport Energy Corporation (GPOR on Nasdaq). The stock traded as high as $75 in 2014 and was now exchanging hands for about $6 a share, a drop of over 90%. Curious to understand the reason for the sharp decline, I downloaded the 10-k report.

Gulfport's share price decline over past five years

I  learned three of three things: First was the reason for the decline in stock price. Over the past ten years the price dropped for all the commodities sold by Gulfport: Oil price per barrel is down to $49 from $68; natural gas price is down to 53 cents from 96 cents; and gas price is now $2.47 from $6.90.  

The second issue was that the company's assets wildly grew. Gulfport's total assets increased to $5.8 billion from $2.7 billion five years ago, a compounded growth of 16%. But the equity increased to $3.3 billion from $2.69 billion, a compound growth of 4% [3].

Third, management had repurchased the stock at $8.81 at the end of last year and had budgeted to buy additional stock, up to $200 million worth, in the next two years.

I estimate that the company may buyback the stock without incurring any debt, simply by using free cash flow and perhaps selling non-core assets, such as the 9,829,548 shares Gulfport owned in Mammoth Energy (TUSK on Nasdaq.)

Gulfport Energy 5-year financial results

A back of the envelope calculation tells us that just the share repurchase program may result in an increase of 30% to 50% from the current price of $7 (write to me if you would like to see how I calculated this).  

The gatekeepers

Yet what stands between the investor, yours truly now owns 1,500 shares, and the income from the natural gas and oil reserves is a board of directors that could easily win the worse capital allocator award, if there ever was one.

Since 2010 Gulfport’s board issued 138 million shares (read: diluted shareholders) at weighted price of $30. Since 2010, the company added to its equity base $3.19 billion; now the entire company can be bought for $1.19 billion, about a third of the price.

Surprisingly, perhaps, half of the board, four of the available eight board seats, is still running the show. Mr. David Houston has been a director since 1998. Mr. Ben Morris has been with the company since 2014. Mr. Craig Groeschel has been with the company since 2011. Mr. Scott E. Streller has been with the company since it became publicly traded in August 2006. As I wrote in A Docile Animal in Captivity, it is not easy to replace the gatekeepers - even ones with such dreadful track records.

In an industry fraught with technical terms such as "Proved Reserved" (page 3 of the recent 10-k report) and "Midstream Gathering"(page 62 of the recent 10-k report), natural gas investors, by default, know less about the business than the gatekeepers.

There are also uncertainties that management cannot plan for but only react to. Among those include supply and demand imbalances and future regulatory and political changes.


Why is there such a wide gap between GPOR's market price and value? Why did investors not complain about the board’s dismal performance? The advent and popularity of passive[4] investing, I believe, is at fault.

Blackrock, via its iShares ETF product, owns 24 million Gulfport shares. Dimensional Fund Advisors, another ETF provider, owns 15 million Gulfport shares. The quantitative firm, LSV Asset Management, owns 9 million shares. In total, over 58 million shares (about 36%) of the available 159 million shares are owned by passive investment funds.

It is little surprise they haven't noticed the gap.

FOOTNOTES: [1] The legendary value investor, Phillip Fisher, once said that "The successful investor is an individual who is inherently interested in business problems. [2] In other words if a stock reached $100 over the past 5 years and was now trading at $10 - it would appear on the list. [3]This was a decent growth track record, especially when considering the company took an impairment loss (which reduced the equity balance) of $715 million in 2016 and $1.44 billion in 2015. [4] Passive investing is performed by those who track quoted prices, and not quoted values.

Pull a Ratner

Published on:
May 18, 2019
Last Update:

Investing in the common stock of Signet Jewelers (SIG on Nyse) is not for the faint of heart. While the price to adjusted earnings ratio is less than 10 times and the price to adjusted book value is less than half, to buy the common stock of any jewelry company is to put a leap of faith that management will never mention (truthfully or jokingly, as it may) that the product is "total crap". Instead management must convince us that diamonds are forever.

In this essay, I write why I bought the common stock of SIG at $21 per share and why I believe the value of the stock is nearly twice as much.

Why I bought SIG

The company trades at 7 times the adjusted earnings per share. Let's assume that a year from today, the company will report on $5,950 million in sales, a 5% decline in sales compared to the latest financial filings.

We use ratio of cost of sales to revenue of 65% and a ratio of SG&A to sales of 30%. Signet's management expects that the interest expense this year will be $42 to $46 million, so we use a higher amount of $50 million to be on the conservative side. We arrive at pre-tax earnings of $247 million. After a 30% federal tax rate (we use a higher tax bracket that the 2019 tax bracket of 21%), the 2020 net earnings are $173 million or $3 per share.  

Table 1: What I estimate SIG will earn in 2019

Compare to both Signet's peers and compared to the company's market valuation in past years, a 7 times earnings ratio is cheap. Tiffany's (TIF on Nyse) and Fossil Group (FOSL on Nyse) trade at 20 times the earnings. Foot Locker (FL on Nyse) and Capri Holdings (CPRI on Nyse) trade at 12 times the earnings. Over the past decade, SIG’s earnings ratio was between 11 to 18 times.

The company is trading at a hefty discount to adjusted tangle equity book value too. While management reports to shareholders on tangible equity of $1,255 million, or $22 per share, investors are encouraged to adjust the equity balance. The adjustments are for deferred revenue and treasury stock.

The reported $966 million in deferred revenue, viewed as liabilities by the accountants, are a non-cash outlay. Signet offers its customers Extended Service Plans (ESPs) that are in effect lifetime warranty agreements. It collects cash from the customers when ESP is sold but reports the income slowly over the years (55% of the revenue is recognized within the first two years).

In 2019 the company sold $395 million of ESPs and the deferred cost (read: the cost to service those warranties) was $99.2 million. There is, in my opinion, about $666 million or $17 per share to be added back to the equity.

In 2019 management reported on a deficit of $1,027 million in the equity balance associated with the 18.1 million shares in treasury stock (read page 68 of the 10-k report.) But just as Signet bought back the common stock (the company a weighted average of $56 per share) Signet can sell the stock again. I consider Signet's treasury balance an asset. So I adjusted the equity the balance by adding back the 18.1 million common shares that Signet can sell at, say, $15 share. So $271 million or $5 per share can be added back to the equity.

Adjusting for the deferred revenue and for the treasury stock, we get an adjusted equity balance of $2,192 million or $42 per share. At $21 per share the stock traded at half the adjusted equity book value.

Before we move on to the Signet's risks, consider a comparison of peer companies’ valuation and Signet's past valuation. TIF trades at over 25 times the book value (an stark example of how the stock market values its remarkable brand). FOSL trades at 1.3 times the reported book value. FL trades at 2.7 times the reported book value. And CPRI trades at 3 times the book value. Historically, SIG traded at two times the reported book value.

Table 2: Peer group valuation comparison

The risks

A terrific book by Gerald Ratner's The Rise and Fall...and Rise Again is the true story of how a prosperous company, run by a dedicated manager, fell into oblivion. It is also the story of its demise largely because of Ratner's two words spoken to crowd in the Institute of Directors. The two words were Ratner’s description of one of the company’s products - a cherry glass that cost 4.95 pounds - and was "total crap" according to him. In short, In an industry where branding matters and customer perception is everything, the biggest risk is the one we have yet heard of.

In the final part of this essay, I will mention a few risks that we can understand and foresee.

The first risk is Signet's executive management's turnover and executive compensation. The two 'shake ups' in management were the departure of the CFO and the entrance of a new CEO, Gina Drosos. While she has been with the company since 2012 (on the board of directors), her compensation is just too much. She is paid 252 times the company’s median salary - a whopping $8.89 million per year. Only time will tell if she is worth it.

The second risk is that the industry is changing. Wall Street analysts deem buying diamond jewelry by visiting a local shop a thing of the past. And millennials are delaying marriage which hurts jewelry sales according to WSJ. E-commerce sales are only 11% of Signet's reported sales.

The third risk is Signet's Animal Spirits, which I will write more on next week. Signet acquired (and managed to write off) two large transactions in the past five years. It bought Zales in 2014 for $1.4 billion of which $1.2 billion was borrowed. It also bought Re2Net in 2017 for $365 million and borrowed $350 million. It also raised preferred equity of $619 million last year and sold the entire receivables portfolio. So to predict the journey the board will take current investors is a guessing game.

The fourth risk is the litigation risk. Over the past decade, CNN reports that the company has been charged with gender racial charges and of misleading consumers. The claims have yet to clear.

Superior Industries International

Published on:
May 12, 2019
Last Update:

Act one:  An acquisition gone wrong

Investors were shocked when Superior Industries International (SUP on Nyse) announced a $760 million acquisition. Up to that May 2017 dispatch, Superior was considered a conservative, docile company run by straight -laced, prudent management. The company had zero long term debt, showed a leverage ratio of less than 25% and was not paying interest expense. To put in perspective - the size of the company acquired, Uniwheels, represented 140% the size of the buying company, Superior that is.

Shocking was not only Superior's Animal Spirits but also the price management had paid. To buy Uniwheels, management booked $286 million in goodwill (read: the premium paid over the fair value of the assets) and $205 million for intangible assets: the brand ($9 million), technology ($15 million), trade names ($14 million) and customer relationships ( $167 million.)      

Shareholders immediately questioned the deal. The monstrous size of the transaction was wrong. The price paid for the acquisition was wrong. And surely how the acquisition was financed was wrong too. To acquire Uniwheels, Superior borrowed $669 million and agreed to pay a weighted interest of about 6% per year.

Lenders, I speculate, must have required a fat equity base, so Superior raised preferred equity too. It sold $150 million of preferred stock, redeemable at a conversion ratio of $28.162. The preferred stock holder (TPG Growth II Sidewall LP) was promised a 9% dividend rate per year. Common shareholders were unhappy.

"I wish we weren't holders of 1.4 million shares," lamented Steven Borick in the last earnings call. "We're highly disappointed in the stock price and certainly the cut in dividend. And I'm voicing this opinion on this line for those that are listening that we feel the acquisition was very poorly timed." Borick knows  the business. He was Superior’s Chief Executive Officer (his father founded the business 60 years ago.)


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Act two: The market's response

Since that May 2017 announcement, the market discounted the price of the stock by over 75%. Prior to the acquisition, the company traded as low as $20 and as high as $30. A year after the announcement, the stock traded as low as $15 and as high as $22. It now trades at less than $6 a share.

The penalty was warranted. And a comparison of 2018 operations to 2015 operations explains why. If we go back in years, in 2015 the company reported pre-tax earnings available to common shareholders of $35 million or $1.39 per share.

Fast-forward to 2018 and the company reported pre-tax earnings of $32 million or $1.42 per share. The company reduced the number of outstanding shares from 26.1 million to 25 million during this time. All well.

But in 2015, Superior did not carry any preferred equity. TPG Growth, the current preferred stock holder, is now paid prior to common shareholders. And so, $32 million in pre-tax earnings went to TPG's bank account. The common stockholders were left with a minuscule pre-tax earnings of $3.6 million, or $0.14 per share.

GPORT five year financial results
Table A: A five-year look of Superior's financial results

The timing of the capital allocation decision was questionable. As Superior purchased Uniwheels, more uncertainty prevailed in the Euro zone. The key word "trade wars" is now googled 10 times more compared to five years ago, when the word “Brexit” was yet to be coined.  


Founded in 2004, by Charlie Tian PHD, GuruFocus provides institutional-quality financial stock research for the individual investor.

GuruFocus hosts many value screeners and research tools and regularly publishes articles about value investing strategies and ideas. One of the features I use most is the 30-year financial information on businesses. Visit the 30-year analysis on Superior Industries to see more.


Act three: Why I bought SUP

Fully aware of the above risks, I went ahead and bought Superior's stock. First: On a per share basis, I paid less than what Superior paid for Uniwheels. Superior paid 1.5 times the Uniwheels sales. I paid one tenth of the 2018 sales. The same applies to the pre-tax earnings multiple. Superior paid 4 times the pre-tax earnings of Uniwheels. I paid 1/2 times the multiple of the two companies.

While Superior reported $0.29 in earnings per share for 2018, an earnings multiple of 20 times, the careful reader would note that Superior’s operating expenses included a non-cash item called amortization for intangibles.

This non-cash amortization expense was $26 million or $1.03 per share. I added back the expense and the adjusted price to earnings ratio was less than 10 times (management projects to amortize of $20 million each year until 2023).

Second: the company's management is buying back the stock. Stebbins, the prior CEO, recently bought 31,249 shares at a price of $8 per share. Matti Masanovich, Superior’s CFO, bought 29,050 shares at $8.34 per share. James Strauss, a director, bought 69,757 shares at $8.53 per share.

Table B: Large holders of  the stock

Third: Mario Gabelli is a shareholder too. His fund, GAM Investments, disclosed last year that it owned 375,000 shares of Superior, which cost the company a total of $6 million or about $16 per share. In short, I am in good hands.

Hawaiian Airlines

Published on:
April 22, 2019
Last Update:

Ever since Warren Buffett disclosed an ownership stake above 10% in Delta Airlines, Wall Street is mad on airline stocks. Since his announcement, the NYSE Arca airline index, an index that tracks the performance of publicly traded airline companies, is up by 2.74%. So, this week I looked at buying Delta shares but ended up owning shares in Hawaiian Airlines instead. And this story is the subject of this week's meditation.


In January of this year, I flew to New York with Delta. It was a fantastic experience. The airplane left the terminal on time, the staff was courteous and professional, the seats were comfortable and the breakfast served in the Delta lounge at JFK was so remarkable that I practically ate for two people. It does not surprise me that Delta was named the top U.S. airline in the WSJ's Middle Seat Scorecard.

Was flying with Delta a wonderful experience? Yes. But is Delta's stock reasonably priced? No. At $57 per share, Delta Airlines (DAL on Nyse) trades at a 15-year high. In 2018 the price peaked at $60.71 which is not far from its current pricing. Delta shares trade at about 9 times the 2018 earnings per share and about 2.5 times the book value. Compare that to Hawaiian Airlines, which trades at less than 6 times the 2018 earning per share and at about 1.4 times the reported book value.  

For Marty Whitman, of Blessed Memory, purchasing a stock at 1.4 times its book value would be outrageously expensive. He emphatically wrote, "At Third Avenue, we only acquire interest in companies where the common stock is selling at prices that reflect a discount from readily ascertainable Net Asset Value as of the latest balance sheet date."

So, to meet his standards, I was determined to adjust the book value. Reference page 33 of the 10-k report where management says that, "$603.7 million of our current liabilities are related to our advanced ticket sales and frequent flyer deferred revenue, both of which largely represent revenue to be recognized for travel within the next 12 months and not actual cash outlays." Post the adjustment for non-cash outlay, at the $27 per share, Hawaiian trades at par.


Webflow is the way to design, build, and launch powerful websites visually — without coding. While working full-time, at nights I developed Pen & Paper using Webflow.Webflow empowers you to create for the web.

In their words: "In today's web, the means of production lie in the hands of the few. We want to change that, and help create a more beautiful, diverse web. We want to democratize access to the tools and knowledge required to build beautiful, well-coded websites, web apps, and - eventually - digital products of all kinds."


Hawaiian Airlines valuation    

Reflecting on another of Whitman’s famous sayings, "A bargain that stays a bargain is not a bargain," I wondered whether Hawaiian’s current valuation was appropriate. Between 2015 and 2017, the average price to earnings per share were 13 times. And during that 3-year timeline, the average price to book value was 3 times.

Not only is Hawaiian’s current valuation below its prior years' valuations, it is also less than what low-fare airline companies, such as Allegiant AIR (ALGT on Nasdaq) and Spirit Airlines (SAVE on Nyse), are trading for. With a market capitalization of $2.21 billion, ALGT traded at 14 times the earnings per share and 3 times the book value. With $3.71 billion in market capitalization, SAVE traded at 24 times the earnings per share and 2 times the book value.

Not a single airline traded at less than double digits valuation to earnings per share, the average 10-year EPS for the Hawaiian's peer group was $2.49, practically identical to Hawaiian’s 10-year earnings per share of $2.53, not a single airlines traded at less than 2 times the book value, the average 10-year earnings per share for the peer group was 18 times and the 10-year average earnings per share for Hawaiian was 11 times.


Founded in 2004, by Charlie Tian PHD, GuruFocus provides institutional-quality financial stock research for the individual investor.

GuruFocus hosts many value screeners and research tools and regularly publishes articles about value investing strategies and ideas. One of the features I use most is the 30-year financial information on businesses. Visit the 30-year analysis on Hawaiian Airlines to see more.


Hawaiian Airlines management

Hawaiian’s current valuation is attractive. But its management is even more. The first noble thing management did was to buy its own stock. In the fourth quarter of last year, management bought 1.42 million shares at about $33 per share, which cost the company $48.96 million. The board of directors budgeted up to $100 million by December 2019. And an additional $100 million may be bought by December 2020.

The second noble thing is that management shares with readers how it measures the performance of the business. Management shares metrics, such as Passenger Revenue Per RPM, also known as Yield in the industry, which measures how much profit is earned for every mile of flight. It also explains in detail what the RAPM is (Passenger load factor per Available Seat Mile, a measure that tracks efficiency). For the long-term investor, reading annual reports from Hawaiian has an educational purpose.

Peter Ingram, Hawaiian’s boss, has been with the company since November 2005. He owns almost 300,000 shares now worth about $8.7 million. He is the largest private shareholder excluding Larry Hershfield, who owns about 350,000 shares. As a side note, Hershfield is the founder of Ranch Capital, an investment fund that specializes in growth opportunities.


The current hype over airlines stocks, like most things in life, is temporary. Students of financial history will note that Delta sought protection from its creditors under Chapter 11 in September 2005. Two months prior to that, Hawaiian filed for Chapter 11 for the second time in its history.

Legendary value investors, such as Peter Lynch, Mario Gabelli and Warren Buffet owned U.S. Airways stock that went into bankruptcy too. Perhaps, Richard Branson, founder of Virgin Airlines, got it right. "If you want to be millionaire," he once said, "Start with a billion dollars and launch a new airline.” With my purchase in Hawaiian, I look forward to proving him wrong.

Did Video Kill the Radio Star?

Published on:
April 14, 2019
Last Update:

“LET’S GET GROOVINNNNN,’’ shouts Didi Harari, a popular Israeli broadcaster.“We have an AMAZINGGG show for YOUUUU. We interviewed Lionel MESSSSIIIII and we have some new, exclusive songs to play. SOOOOOO stay tuned!”

Radio stations in Israel haven’t changed much since I was a teenager. On 88 FM you can still listen to jazz and soft rock. On 103 FM you will only hear songs in Hebrew. And on Israel’s most popular radio station,91.8 FM, all you hear pop, from Ariana Grande and Coldplay to The Idan Raichel Project.

The lack of change in radio listening habits is strange. Mind you, Israel is often referred to as a nation that embraces technology and pioneers innovation. I challenge you to walk around Tel Aviv and find a single person not glued to a digital screen. Spotify opened its services a year ago. Companies, such as Microsoft, Apple and Intel, have opened research and development centers. To paraphrase Watson, it is a quite the peculiar incident that radio stations are thriving in Israel.

 When I was in college, a professor once explained what “OII” is.The three letters represent three words: “Only In Israel.” What he meant by that is there are times when logic fails and only the mystical “OII” can explain. Was radio’s popularity an “OII” phenomena? I pulled a few 10-k reports of publicity traded broadcasting companies to learn more about the  industry.  

The broadcasting industry

The radio business is simple: payments from advertising companies generate revenue for the radio stations. The income formula: number of ads multiplied by the price per ad. That price in return is the number of location stations, the supply and demand and the size of the market. The expenses include payroll and maintenance of the equipment.

Broadcasting rights are the largest asset on the balance sheet of radio companies. Broadcasting rights are the radio station’s exclusive license to broadcast over the radio. These contracts are typically granted for 8 years. And since the U.S. government, through the Federal Communications Commission, heavily regulates the market, there are many rules that radio station must follows. For example, under the ownership rule, in markets with 45 or more radio stations, ownership is limited to 8 commercial radio stations, no more than 5 of which can be either AM or FM.

The stock investment research website, Value Line, provided the following list of radio companies : Saga Communications (SGA on Nasdaq) had a market capitalization of $201 million. Ascent Capital Group (ASCMA on Nasdaq) had a market capitalization of $9 million. Emmis Communications (EMMS on Nasdaq) had a market capitalization of $48 million. Salem Media Group (SALM on Nasdaq) had a market capitalization of $75 million. Townsquare Media (TSQ on Nyse) had a market capitalization of $98 million. And Beasley Broadcasting Group (BBGI on Nasdaq) had a market capitalization of $108 million.  

Beasley Broadcasting Group

Only Beasley caught my attention. Founded in 1961 and located in Naples, Florida, the company’s pre-tax income increased from $3.8 million in 2014 to $29.3 million in 2018, an annual compounded growth of 50%, while the compounded growth in outstanding shares was less than 5%. The ratio between pre-tax income and net tangible assets was adequate, too. Excluding 2014, when the ratio was 3%, the pre tax to net tangible assets ratio ranged from 18% to 15% over the four years.  

Source: Public filings and author's calculations

Beasley, which trades at less than $4 and less than 10 times the cash flow per share, has a few winning radio stations. In Philadelphia, Pennsylvania, it owns WMGK, which is rated second out of the 36 radio stations available in that region. That stations plays classical rock for the most part.

In Boston, Massachusetts, Beasley owns WBZ-FM, ranked second of the available 40 stations where you can listen to sports commentary. In Tampa, Florida, Beasley owns the country music station,WQYK-FM, ranked third of the available 42 stations in that region. And in Fort Myers, Florida, Beasley owns WJPT, which is ranked second of the 25 available stations.

Yet the ownership of Beasley's common stock comes with risks. The first risk is that between June 2019 and April 2022, radio licenses will be renegotiated. This may have an adverse affect. The second risk is that advertising is a discretionary expense. In a downturn, this is one of the line items that companies slash. This will undoubtedly hurt Beasley. The third risk is that Beasley will need to repay $247 million in 2023 and fourth, that the U.S. Congress, in a new ruling reviewed by Congress, may require companies such as Beasley to pay additional royalties to record labels.


In the “frequently asked questions” section of Galgaltz , Israel’s most popular radio station, a listener asked, “Who needs  traffic reports when I can simply turn on Waze or Google Maps and see the live traffic for myself?”  

Based on market surveys, Galgaltz answers, most listeners simply prefer to hear traffic news over the radio. “This must be the power of radio -it has a medium that builds a community,” it concluded, “and the will of our listeners to feel that the traffic bottleneck they are in is not them only, probably, but the problem of many.” 

I cannot verify whether Galgaltz’s response, that people feel a sense of community by listening to the radio, is true. But I do know that if tomorrow, for any reason, radio stations shut down, there would be a tremendous outcry.

This is because there are many people, both in U.S. and in Israel, without smart phones. According to Pew Reserach Center, 11% don't use the internet. These people cannot access news media and radio serves as a free resource. Also, we are creatures of habit. My parents, while they do own smart phones, listen to the news over the radio. And finally, I agree with Galgaltz that radio does provide a sense of community. This is because, as Rabbi Jonathan Sacks once said, a community is where someone notices if you are gone.