2022 Mid-Year Update
I decided to do something different with my life by starting a newsletter eight months ago and this post serves as an update on my progress so far. Let’s start off by looking at some content and subscriber statistics.
Content
I knew going into this that I wanted to focus on long form writing and a diverse range of businesses. The results tell me that I’ve done a good job of sticking to both as I’ve averaged close to 4500 words per writeup and researched everything from a <$60 million market capitalization business in Flanigan’s all the way to one with a $12+ billion market capitalization in DocuSign. I count one restaurant chain (Flanigan’s), one bank (Plumas), one grocery store chain (Grocery Outlet), one gaming and competition business (Best of the Best PLC), one pure SaaS businesses (DocuSign), one hybrid SaaS and FinTech business (dLocal), one MRO product distributor (GIC) and four retailers although each one has a different strategy than the others; Valvoline is considered an auto parts retailer, Briscoe Group is a hardline and softline retailer in New Zealand, Revolve Group is an online fashion retailer and Hour Loop is a third-party seller on Amazon.
The screencap below shows my wordcount per writeup, total wordcount and average wordcount per writeup. Please note that the word count totals with the red triangles in the top right corner of the cell include words from updates about those businesses.
Subscribers
That’s right, I only have 43 subscribers so far. I had a feeling that starting a newsletter, especially one focused on long form writeups from a non-promotional author, would be an uphill climb. I also pass on a lot of the businesses that I writeup, so I think that puts an additional drag on potential subscribers. On the flip side, it puts wind in my sails every time I get a new one. I try to be as humble as possible, but it makes me feel good knowing there are people out there who take the time to read my writeups.
Takeaways Over the Last Eight Months
1. I’ve noticed two areas of improvement that I need to focus on. The first is to be a better writer. This includes being more concise, using correct grammar, structuring my sentences better and having a more diverse mix of words. I’ve had family members read my writeups before and after I publish them to provide feedback. I often think about how I could’ve written so terribly or made such obvious grammatical errors after they pointed out mistakes. There aren’t any excuses here. I just haven’t been good enough in that regard. The second area of improvement is incorporating more outside sources in my research. I’ve moved away from this over the last month or so. I get outside information from research databases, Google searches and the occasional Twitter post so I need to refocus and stay committed to that strategy.
2. The focus of the newsletter was and still is about learning. In the “About” section on the main page of my Substack I wrote, “The purpose of my writeups is twofold. First, I want you, the reader, to learn something. Second, my purpose is to refine my craft in hopes of one day finding a great business to invest in. I’m doing what I can to live out Peter Lynch’s “The person that turns over the most rocks wins the game” quote. This remains true and I don’t plan on changing the focus anytime soon.
3. Researching and writing about businesses has given me an outlet to clear my head and feel productive. I’d go as far as saying that it’s been therapeutic. Plus, I’ve gained all kinds of knowledge that I wouldn’t have otherwise. I’ve learned what makes a good bank, how a business could have a win-win business model without the profits to match, the consequences of stock-based compensation, how profitable subjectivity can be and so much more.
4. I’ve never done anything in my life as intellectually stimulating as researching business and writing them up. None of my jobs have required much thinking or creativity so it’s nice to finally be doing something that does. I was also nervous and had concerns about burn out before starting the newsletter. After eight months I can say that I have mostly overcome the nervousness and have yet to experience any kind of burn out. I continue to be genuinely interested in what I do.
5. How long can I keep doing this? I think about this question more often than I should. I stated above that I haven’t felt burnt out since I started, but that’s not to say that I won’t experience it at some point in the future. I’m aware that if I cannot figure out a way to monetize my efforts then I will have to do something else. I do not want to feel like I’m spinning my tires in the mud. I will reevaluate this question at the end of the year.
6. I would like a mentor. To be clear, I want one that can provide actionable insight and show me what I need to do to start monetizing my efforts. I’ll tell ya a story about trying to find one. I found a potential candidate through a New York City funded program not long after I moved here. He was a retired bond trader and seemed like a nice guy. I met him for drinks to discuss what I was looking for in terms of my career and from a mentor. I told him about my background, lack of “professional” experience, my desire to get paid to invest in a few good ideas a year, etc. He told me in a very polite and kind manner that he didn’t know how to help me and that was the last time I ever saw or talked to him. I want to avoid a situation like that in the future. I haven’t had any success in finding a mentor since. I’ve sent cold emails to people I admire, but this strategy hasn’t yielded any results either. Moreover, my social network doesn’t include one person who does what I want to do. Perhaps I’m being too picky or need to reframe my problem. However, if you know of anyone who’s willing to help, then please let me know or give them my email or Twitter account and tell them my DMs are open.
7. The last takeaway that I will mention is the lack of feedback from my readers. I have not had one person reach out to me or provide feedback about my writeups. Maybe I shouldn’t complain considering how much I value my time, but it was something that I noticed.
Business Updates
In this section, I will provide an update on each business that I’ve written up so far.
Flanigan’s Enterprises (NYSEAMERICAN: BDL)
Flanigan’s will always hold a special place in my heart. I have kept tabs on it for over six years now. It has the distinction of being the first business that I did in depth research on. So, what has it been up to since my post from December of 2021?
Fiscal year (FY) 2021 saw much improvement versus FY 2020. Per p. 42 of the FY 2021 10-K, “Total revenue for our fiscal year 2021 increased $24,330,000 or 21.54% to $137,307,000 from $112,977,000 for our fiscal year 2020 due primarily to increased package liquor store and restaurant sales, increased menu prices and the comparatively more adverse effects of COVID-19 on our operations during our fiscal year 2020 as compared with our fiscal year 2021 and notwithstanding the fifty third week in our fiscal year 2020.” Net income attributable to stockholders also increased significantly. Per p. 45 of the FY 2021 10-K, “Net income attributable to stockholders for our fiscal year 2021 increased $10,674,000 or 961.62% to $11,784,000 from $1,110,000 for our fiscal year 2020 due primarily to the forgiveness of debt of the PPP Loans and increased revenue at our retail package liquor stores and restaurants, offset by higher food costs and overall expenses. As a percentage of revenue, net income attributable to stockholders for our fiscal year 2021 is 8.58%, as compared to 0.98% for our fiscal year 2020.” Almost all the increase in net income was due to a gain on the forgiveness of a PPP loan so I wouldn’t frame the huge jump in earnings as a new normal; it seems like more of a one-time boost. Flanigan’s FY 2021 returns on invested capital (ROIC) were under 10% if you back out the one-time PPP loan forgiveness. I think this is a more conservative and accurate depiction of Flanigan’s ROIC. Real free cash flow (RFCF) for FY 2021 came in at ~$2.9 million.
The first two quarters of FY 2022 have seen mixed results for the business. Revenues were up ~20% for each of the first two quarters. Net income in Q1 FY 2022 was up almost 400% versus Q1 FY 2021, but this was due almost entirely to the forgiveness of PPP loans. Net income in Q2 FY 2022 was down almost 77% versus Q2 FY 2021 because there was no forgiveness of PPP loans and profits were derived entirely from operations. Net income over the first 26 weeks of FY 2022 was down almost 22% versus the same period in FY 2021. Finally, the business has opened two new limited partnership restaurants since FY 2021 year-end bringing the total number of locations to 29. As I said at the end of my original writeup on this business, Flanigan’s continues to chug along. It still does not meet my investment criteria due to its low ROIC and lack of new locations.
What about its stock price? It closed at $33.79/share on 11/17/2021 which was the date I published Part II of my writeup. Its closing price on 7/5/2022 was $30.00/share giving it a loss of 11.21%. With its current market capitalization of ~$55 million, the business trades at a 19x multiple of RFCF.
Disclosure: I do not own shares in Flanigan’s Enterprises.
Plumas Bancorp (NASDAQ: PLBC)
Plumas continues to be the only stock that I own which is due entirely to my lack of disposable income 😂. 2021 was a banner year for the bank. Per the 1/19/2022 Press Release linked here, Plumas set several company records. The screencap below is from the financial highlights section of the press release linked above.
Three statistics that aren’t shown in the screencap above, but deserve mentioning are Plumas’ percentage of non-interest bearing demand deposits, return on equity and return on average assets. As of year-end 2021, 51% of Plumas’ demand deposits were non-interest bearing. Its return on equity was 17.8% and its return on average assets was 1.52%. These three ratios plus the statistics in the screencap above indicate another year of excellent performance.
The first quarter of 2022 saw Plumas carryover its performance from 2021. Shown below is a screencap of its financial highlights from the Q1 2022 Press Release which is linked here.
Plumas’ percentage of non-interest bearing demand deposits stood at 51%. It’s return on equity was 17.6% and its return on average assets was 1.42%. Like I said above, these three ratios plus the statistics in the screencap above indicate excellent performance at the bank.
Plumas also issued a press release a couple of weeks ago highlighting the awards it has received due to its continued performance. A link to the press release can be found here and a screencap describing the awards is shown below.
A link to Plumas’ most recent investor presentation can be found here. I highly recommend reading it to learn more about the business.
What about its stock price? The stock price closed at $32.82/share on 12/17/2021 which was the date I published my writeup. The stock closed at $27.23/share on 7/5/2022 which is a loss of 17.03%. With its current market capitalization of ~$160 million, the business trades at ~7x earnings. I believe that this is a superb business at a great price and would buy more shares if I had the money.
Disclosure: I own shares in Plumas Bancorp.
Grocery Outlet (NASDAQ: GO)
2021 saw results at Grocery Outlet slowdown compared to its results in 2020. This was due to COVID restrictions being lifted which led to people shopping less for groceries. Sales were down almost 2% to $3.08 billion in 2021 from $3.13 billion in 2020. Net income declined ~42% year over year (YoY) from $106 million in 2020 to $62 million in 2021. Grocery Outlet opened 36 new stores in 2021.
Results from Q1 2022 indicated mixed results for the business. Sales were up 10.5% YoY from $752 million to $831 million. Unfortunately, net income was down. It decreased ~39% YoY from $18.9 million to $11.5 million. Grocery Outlet opened 4 new stores during the quarter.
Grocery Outlet’s payments to its Independent Operators (IOs) continue to be a drag on financial performance. I say this because its returns on invested capital (ROIC) were below 10% in 2021 while real free cash flow (RFCF) was ~$24.5 million. I did not see an update in the 10-K or the 10-Q regarding the IO payments which tells me management is still committed to this strategy. This will be a drag on the business’ performance no matter how much it grows and for that reason I still am not interested in buying shares.
What about its stock price? It closed at $27.90/share on January 7, 2022, which was the date I published my writeup. Since then, it has run up to $43.10/share which was its closing price on 7/5/2022. That is an increase of 54.48% for those of you keeping track at home. I’m not sure why the market thinks this business is worth $4+ billion given how capital intensive it is, how low the returns on capital are and its eyewatering 163x RFCF multiple. I won’t stress over it though. Grocery Outlet is an easy pass for me.
Disclosure: I do not own shares in Grocery Outlet.
Best of the Best PLC (LON: BOTB)
FY 2022 was another excellent year for BOTB. The screencap below shows its financial highlights from the FY 2022 Preliminary Results document posted on 6/16/2022. You can find a link to the document here.
One additional positive highlight not mentioned above is that the business has been able to pass along price increases to its customers. Per p. 4 of the Preliminary Results, “In an environment where inflationary pressures are well documented we have sought to protect our margins not only through tight cost control, but also by passing on increased car manufacturer RRPs, in the form of slightly increased ticket prices. With our low ticket prices, these increases often amount to only 5p - 10p and customers have been understanding.”
BOTB provided an update on its long-term strategy on p. 4 of the Preliminary Results where it stated, “BOTB now has a customer base of over 1.8 million contactable players, which supports existing competitions and which we believe can also provide us with new revenue opportunities. We have previously identified the potential to introduce new products (other than competitions) to our customers, to leverage our database by building revenues streams from third party advertisers and partners, and to seek additional partnership and possibly white-label opportunities with e.g. football clubs, insurance companies and others. We are pleased to have recently recruited a full time Partnerships Lead to spearhead this effort, and whilst it is still early days, some interesting ideas and leads are starting to develop.” This is an exciting development and something that I was a bit concerned about with the business. Given how profitable it continues to be, I think management would be totally right in branching out and evolving the BOTB brand and its products.
The business also issued an update on its customer acquisition difficulties on p. 5 of the Preliminary Results where it stated, “As previously reported, customer acquisition during the financial year has been less efficient than in prior periods, both as a result of Apple’s iOS 14 release affecting audience targeting, alongside material increases in CPMs particularly on Meta Group platforms. Despite this, we continue to see a positive ROI when measuring cost per acquisition against the 24-month lifetime value of newly acquired players. We remain focused on optimisation and investment in the most efficient and trackable digital channels, supported by traditional media, to acquire new players and retain existing ones. At the same time, we have continued testing new channels focused on raising brand awareness, allied with the appointment of an agency to improve our SEO.” This was a much-welcomed update considering how big of risk acquiring customers posed in the interim results from October of last year.
BOTB made a change to its Board of Directors. Per p. 5 of Preliminary Results, “The Board continues to place significant importance on independent corporate governance and as a result David Firth, an existing Independent Non-Executive Director, was appointed Independent Non-Executive Chairman on 1 October 2021. In addition, and as separately announced today, the Company is pleased to announce the appointment of Joanna (Jo) Bucci as a further Independent Non-Executive Director, who will join the Board on 1 July 2022. Jo is a commercially astute operator with proven success leading major business transformation and business growth, with extensive experience in sport, gaming, lotteries and media. She was responsible for the UK launch, growth and global brand development of the Peoples Postcode Lottery, the world’s second largest privately funded organisation for good causes. In 2019, Jo was appointed General Manager of The Sun Newspaper, where she was responsible for financial performance, as well as setting and implementing brand strategies for long-term multi-platform growth. Further details are set out in the regulatory announcement covering Jo Bucci’s appointment.”
The business describes its tender offer in more detail on the following page (p. 6) where it states, “The Company is announcing today that it intends to return surplus cash to Shareholders by way of a tender offer, pursuant to which finnCap Ltd, the Company’s broker, will purchase, as principal, up to approximately 11.11 per cent. of the Company’s Ordinary Shares (1 Ordinary Share for every 9 held) at a price of 600 pence per Ordinary Share. These Ordinary Shares may then be purchased from finnCap by the Company pursuant to a Repurchase Agreement.”
BOTB’s returns on invested capital were down materially in FY 2022 to 53%, but this figure is still higher than every other business I’ve researched so far.
What about its stock price? It closed at £4.15/share on 2/8/22 which was the date I published my writeup. The stock price closed at £4.84/share on 7/5/2022 which is an increase of 16.62%. Real free cash flow (RFCF) for Fiscal 2022 was just under £4.20 million. With its current market capitalization of ~£45 million, the business trades at a 10-11x RFCF multiple which is more than reasonable in my opinion. I remain very bullish on BOTB.
Disclosure: I do not own shares in Best of the Best PLC.
dLocal (NASDAQ: DLO)
dLocal has continued its prodigious growth and financial performance since I wrote it up. The first screencap below shows its Q4 2021 and full year 2021 results. The second screencap shows its results from Q1 2022. Both screencaps can be found in dLocal’s Q4 2021 Report and Q1 2022 Report which are linked here and here.
Per both reports linked above, dLocal now boasts 700+ local payment methods and 400 merchants while operating in 37 countries; it has added Tanzania, Uganda, Pakistan, Ivory Coast and Rwanda since I posted my writeup. Customer concentration has decreased as the business has grown. Its top ten clients now make up 56% of revenue versus 73% in 2018.
The business continues to achieve high returns on capital. (ROIC). ROIC was materially lower in 2021 due an increase in retained earnings and additional paid in capital which in turn increased the total equity, but it was still north of 25%. Updated ROIC results from the last three years are shown in the screencap below.
In addition to its ROIC, real free cash flow (RFCF) came in at just under $100 million which is an increase of ~25% from 2020. If there’s one thing to keep an eye on with this business in addition to the red flags I wrote about, it would be its share count. Per the Q1 2022 Report, the number of diluted common shares was 313,000,000+ which was an increase of ~6% from 294,000,000 shares at the same point last year.
What about its stock price? It closed at $32.55/share on 3/1/2022 which was the date I published my writeup. The price closed at $28.66/share on 7/5/2022 giving it a loss of 11.95%. Its current market capitalization is ~$9 billion which is a 90x multiple to RFCF. My love for the business remains, but the price is too dear.
Disclosure: I do not own shares in dLocal.
Valvoline (NYSE: VVV)
Valvoline’s Retail Services experienced year-over-year sales growth of 36% and 23% for the first two quarters of FY 2022 respectively. Retail Services easily made up more than half of “adjusted EBITDA” in both quarters which showed further progress in the business’ shift from being product based to service based. Although I was holding out for one, there has been no further update about the separation of the Retail Services and Global Products division.
I will keep this update brief as I have no further information to provide on Valvoline that I think is of value. For that reason, I will not discuss its stock price since I posted my writeup because I’m only interested in the Retail Services division going forward.
Disclosure: I do not own shares in Valvoline.
Global Industrial Company (NYSE: GIC)
Global Industrial made its update infinitely easier by providing a table showing its key performance indicator results from Q1 2022 versus Q1 2021. The table is shown in the screencap below and is taken from p. 21 of the Q1 2022 10-Q. Sales, gross margins, operating income and net income are all up YoY.
Barry Litwin, the CEO, provided an update on the “Accelerating our Customer Experience” (ACE) initiative in the Q1 2022 Press Release where he stated, “Execution of our ACE strategy is strengthening our customer-focused culture, driving top line growth and delivering sustainable improvements in profitability. We are making further investments that will position us to expand market share and capitalize on our growth opportunities. We are committed to driving operational excellence, leading in digital innovation, and investing in our people, private brands and distribution operations. A focus on the customer continues to guide everything we do, allowing us to elevate Global Industrial's position as a trusted partner and enhance the service and experience we provide to our customers.” You can find a link to the full press release here.
Both the table in the screencap above and Mr. Litwin’s comments on the ACE initiative are encouraging signs for Global Industrial, but what about its stock price? It closed at $36.20/share on 5/4/2022 which was the date I published my writeup. The stock price closed at $33.78/share on 7/5/2022 which is a loss of 6.69%. Its current market capitalization is ~$1.3 billion which is a 33x multiple to RFCF. I’m going to pass on the business because I think its current valuation is in line with the value compounding rate that I showed in my writeup.
Disclosure: I do not own shares in Global Industrial Company.
Briscoe Group (NZX: BGP)
I have nothing to update regarding Briscoe Group. The business only posts interim (half year) and full year results. Its interim results will not be posted until the end of July or early August. I will do my best to provide an update on the business and its stock price then.
Disclosure: I do not own shares in Briscoe Group.
DocuSign (NASDAQ: DOCU)
DocuSign has had a wild ride since I posted my writeup on 5/24/2022. On 6/9/2022, the business posted its 10-Q for Q1 of FY 2023. The financial highlights are shown in the screencap below.
DocuSign also made a host of executive appointments which are shown in the screencap below.
Since posting its 10-Q, DocuSign has been in the news and not for the best reasons. The business has made headlines because of employee turnover. Salespeople have been leaving DocuSign in droves as the stock price and overall growth at the business declined. Dan Springer, the CEO, commented on the headwinds the business is facing post-COVID in the Q1 FY 2023 conference call where he stated, “First off, I would agree with the assessment that initially probably underestimated, I underestimated sort of the impact in the post-COVID sort of demand acceleration and maybe how dramatic that was. Clearly, we saw the business growth rate practically doubled and we doubled the size of the Company in sort of like six or seven quarters. So, it wasn’t that we were not aware of the dramatic economics of it, I think we just didn’t understand what portion of that would be things like one-time use cases or an acceleration where people bought in a more fulsome way, so that the removal of that very, very strong tailwind, effectively, felt like a headwind. So, I think that’s absolutely a fair articulation of my misunderstanding of how dramatic that was.” A link to a transcript of the conference call can be found here. For some unknown reason, DocuSign increased its employee count by 26% to 7,642 versus the same period in FY 2022. Most of its employees continue to be in sales which begs an interesting question that I’ve seen several times on Twitter: Why does DocuSign need so many of them? I cannot wrap my head around why the business is doing this. The most newsworthy event happened on 6/21/2022 when it was announced that Dan Springer, the CEO, would be stepping down and replaced on an interim basis by Mary Agnes "Maggie" Wilderotter. A link to the full press release regarding Mr. Springer’s departure can be found here. This wasn’t the most shocking thing that happened in corporate America in first half of 2022, but I don’t think a lot of people were expecting it.
Besides the loss of a large chunk of its sales force and its CEO, DocuSign is still issuing a ton of stock-based compensation. I mean a ton of it. Per the Q1 FY 2023 10-Q, stock-based compensation was $110 million! The decision to pay out such generous sums in stock-based compensation is frustrating to say the least. It does not seem like management cares about its shareholders with continued payments like this. The highlighted section in the screencap below shows the breakdown of DocuSign’s stock-based compensation for Q1 FY 2023 and is taken from p. 11 of the Q1 FY 2023 10-Q.
What about its stock price? Well, it continues to crater. Since I posted my writeup on 5/24/2022, it is down 8.94% from a closing price $71.73/share to a closing price of $65.32/share on 7/5/2022. The stock price is down over 77% in the last twelve months. Even with this huge drop, DocuSign remains expensive in my opinion. The business trades at >6x revenues which is, at best, a hopeful valuation considering the slowdown in revenue growth. This combined with the ridiculous amounts of stock-based compensation make DocuSign an easy pass.
Disclosure: I do not own shares in DocuSign.
Revolve Group (NYSE: RVLV)
Revolve continued to perform well in the first quarter of 2022. Per the Q1 2022 10-Q linked here, the business saw sales increase 58% YoY from $178.9 million to $283.5 million. Sales from the Revolve segment were up 56% YoY from $152.2 million to $237.7 million. Sales from the FWRD segment were up 71% YoY from $26.7 million to $45.8 million. Active customers, total orders placed and average order value were all up YoY as well. Net income was relatively flat at $22.6 million due to a normalized tax rate of 22%. The business also generated $51+ million in real free cash flow which was a 62% YoY increase from $31.5 million in 2021.
Not much else needs to be said about Revolve given its continued performance. The second quarter is usually the busiest of the year so I will be excited to see its results in August.
What about its stock price? It closed at $32.06/share on 6/7/2022 which was the date I published my writeup. The stock price closed at $28.82/share on 7/5/2022 meaning it is down 10.11%. Its current market capitalization is ~$2 billion meaning that it trades at a 36x multiple to RFCF. I continue to be bullish on Revolve’s long-term prospects.
Disclosure: I do not own shares in Revolve Group.
Hour Loop (NASDAQ: HOUR)
Hour Loop saw lots of growth in the first quarter of 2022. The screencaps below, taken from the Q1 2022 Press Release linked here, did a better job of describing Hour Loop’s first quarter better than I can so I thought it was appropriate to post them.
Hour Loop’s management doubling headcount to expand the business was an encouraging sign and it makes sense that the business wasn’t profitable in Q1. However, I’m still going to pass on it because of the questions and concerns that I have from my original writeup. None of them were answered in the press release or the 10-Q and I still have not heard back from its Investor Relations department.
What about the stock price? It is relatively flat since I posted my writeup two weeks ago.
Disclosure: I do not own shares in Hour Loop.
That’s all I got for today. I hope that you all had a wonderful July 4th weekend.
Thanks again as always for reading. If you liked this writeup then please feel free to share it and subscribe!
Please reach out to me at possiblevalueresearch@gmail.com, @PossibleValue on Twitter and @Heshy on MicroCapClub with any comments, concerns or questions. Lastly, don’t forget to tell someone that you love them.
*** Remember that this isn’t investing advice. Consult a trusted financial or investment advisor before making any kind of investment decision. ***