China says "Gini" won't risk unrest
Those stats should be put to a test
State numbers just lie
Portray a growing pie
Fudging numbers, like us in the West
Sunday, January 20, 2013
Saturday, January 19, 2013
Report from Brown University's West Coast Accelerator 2013
I attended a terrific entrepreneurial event today down in Silicon Valley at the invitation of my entrepreneurial colleague Jonathan Speed. He's the driving force behind the West Coast Accelerator of Brown University's Entreprenuership Program. Brown University students get expert mentoring from technology executives and pitch their business plans to a panel of VCs. The presenting teams deserve mentions here.
Consignd applies social media endorsements to e-commerce in consignment goods. Boutique product designers have a difficult time with branding and distribution in e-commerce. Consignd enables consolidated blogger endorsements of products offered for retail purchase. I can see how this would appeal to people who buy stuff after following power users of Pinterest and other social media sites. Popular bloggers could also use it to monetize their social media feeds by making product endorsements.
Durgood is an online product recommendation site for buyers of durable goods. Existing product review sites don't fully address non-obvious nuances like a home space's size constraints. If you've ever bought a refrigerator or microwave without first measuring your kitchen door's swing radius, you'll understand how easily you can make a poorly sized purchase with many product reviews online. Durgood users are presented with qualifying questions on their budget size, lifestyle, and home space to present them with workable product selections.
Elevate is an umbrella brand for athletic apparel and equipment serving disabled athletes. The current market for disabled athletes is fragmented with no clear pipeline for innovative products. Elevate intends to license limited-run specialty equipment and donate a portion of its profit to disability awareness projects. I noticed that this startup has a page on Start Garden, a funding project that selects portfolio candidates through crowdsourcing. That's a unique twist on crowdfunding, and financier Rick DeVos is willing to see his VC fund's capital allocation decisions made by the public.
Exersaur is designing an interactive watch that encourages children to exercise through social gaming. I couldn't find a corporate website for Exersaur, but they do have a page at Brown's SII Hub. The point of connecting the watch's animated character to an online community is to motivate children to track their fitness goals. I've heard a lot about gamification at plenty of Silicon Valley technology conventions. Pretty soon you'll be seeing game-like competitive metrics in your corporate performance evaluations, so getting your kids started early might help them win the corporate rat race as adults.
gSuccess is a mobile app developer for the standardized collegiate entrance exam market in China. I couldn't find their official website, but descriptions of their concept are available at the MIT $100K Competition and the Dell Social Innovation Challenge. Their concept is to incorporate study materials into apps that provide customized performance feedback and tips for improving test scores. I'm curious about the price points of typical Chinese middle class mobile app users, and whether their rising per capita incomes will get them as addicted to downloads as Americans.
LoveGov is a non-partisan political information platform that matches voters to causes they can support. User-generated data from political preference questions and demographics will create a community of interest to political campaigns and public causes. I think a whole host of user-driven sites with a narrow focus will spring up as Facebook exercises more control over the broad range of content now posted there by users. Flagging controversial Facebook wall posts will eventually drive those users to niche services that welcome their preferences.
The folks running this incubation program are doing everything right. The best practices of many leading academic incubators include matching business students with university scientists who want to commercialize technology developed locally. I think university-run incubation programs can really benefit from connecting entrepreneurs with technologists at government labs. I'm specifically thinking of DOE Innovation Hubs and wondering whether their scientists are in contact with sharp business students. The Livermore lab community has been a prominent participant in a public-private partnership that commercializes energy technologies. If I were a student today, I'd check out Technology Ventures Corporation for the latest government research that deserves to be made into a viable business.
Well done, Brown students. Your concepts reminded me of a business plan competition I participated in as a senior at Notre Dame in 1995. My idea for copyright protection marks in digitized intellectual property briefed well but didn't win the top prize because I didn't have the coding experience to make it viable. I had a virus-based idea that would have been too much trouble to execute in the portable media market. Leading book publishers and movie studios were just about to beat me to the punch anyway with their own watermarks, so I wouldn't have had a chance to license it out even if I had made a finished product. Every viable business idea has a correct time to launch.
Full disclosure: I have no financial positions in any of the startups mentioned, nor was I remunerated in any way for this article.
Thursday, January 17, 2013
Wednesday, January 16, 2013
The Haiku of Finance for 01/16/13
Mortgage help program
Just a stealth banker bailout
Caveat fine print
Just a stealth banker bailout
Caveat fine print
Tuesday, January 15, 2013
Report From 3rd Annual New Paradigms to Fund Life Science Innovation Conference
I sure do get lucky sometimes. Last week JP Morgan held its famed health care conference in San Francisco. I didn't get invited to that one but I scored something just as valuable. I got to sit through several sessions of the 3rd Annual New Paradigms to Fund Life Science Innovation Conference at the Marines Memorial Club. I didn't have time to attend the entire conference due to my meeting schedule but I enjoyed the funding panels. My synopsis is below, with my own special insights in italics.
The panel on "Government Investing Opportunities to Fund Life Science Innovation" had experts from the National Institutes of Health and National Cancer Institute. They put real teeth in the old saying, "I'm from the government and I'm here to help." The NIH maintains a free biobank for research and uses its grant program to leverage other government resources in gene therapy, cell therapy, and production assistance. The NCI manages an active portfolio of about 50 SBIR (Small Business Innovation Research) grants and also offers bridge financing and regulatory assistance. The advantage of government agency SBIR grants is that they are non-dilutive funding that doesn't take IP away from a developer. NCI even sponsors an investor forum matching successful Phase 1-2 startups with investors who will fast-track their product. Hey, last year they held it in Santa Clara, so I ought to see if I can attend this year.
The panelists had a consensus on how biotechs execute successful fundraising. Startups should have a good team, IP amenable to protection, and an explanation of how the proposed product meets an unmet market need. My own interpretation of "good team" encompasses someone who is scientifically qualified to invent a device or discover a drug, plus a capable executive with serial entrepreneur experience. Several years ago when I first started studying startups, I noticed the successful ones had teams with both scientific and managerial skills. That insight comes in handy when making investments, and one panelist observed that academic researchers have little understanding of commercialization or manufacturing. This is why the best business schools create partnerships between their MBA candidates and their own university research labs. These partnerships create business models for commercializing the lab researchers' tech and are favorites to win business plan competitions.
NIH gives startups guidance prior to submitting their SBIR grant request. I'm thrilled to see government agencies focus their grant funding on the successful commercialization of a product rather than just keeping startups alive. Heaven help us if the SBIR process turns into a make-work program for unemployed scientists. The panel mentioned the "numbers game" aspect of successful grant funding, with only 15% of grant applications getting funded, so startups need to work hard on their grant applications. One panelist mentioned that DOD grant makers are risk-averse, so having a strong relationship with DOD is the key to getting their research grants.
I learned a new acronym from this panel: STTR, i.e. Small Business Technology Transfer, a program for fast-tracking the commercialization of federally funded research. I also learned that many biotech startups are "virtual" but many grants require much work to be done internally. Hmmm, that places virtuals at a disadvantage because they outsource things like clinical trials. The government's workaround is to have the startup directly expense on their budget some functions outsourced to contract research organizations. Startups who outsource functions must write deliverables into those contracts and enforce non-payment for lack of progress.
One panelist mentioned HHS's Biomedical Advanced Research and Development authority (BARDA) as a funding source with the caveat that its mindset favors the military's "quad chart" briefing system. That makes sense to me if BARDA's mission is to fast-track biological warfare countermeasures that must support interagency efforts with DOD. The takeaway is that startups must learn to summarize their value proposition in one slide with a picture of their drug or device, its costs, and their deliverables.
The panel noted that SBDC-funded consultants can help walk startups through grant writing. Startups must frame their investment pitch in a way that non-expert angels and family offices understand, and SBIR grant success gives credibility as a form of peer-reviewed validation. The NIH panelist noted the impact of leaner federal budgets, with the expectation that a sequester would reduce its budget by 8.2%. NIH would likely cut current grants, reduce actual contract awards to 90% of their authorized level, and reduce the number of years for a contract to run. The panel also said that startups can increase their chance of successful grant funding by having more preliminary data.
The next panel had an interesting title: "Patient Advocacy Group and Passion Capital." I had this mental image of hot nurses making out passionately with their patients, but alas that wasn't discussed today. The panelists did mention what their organizations do: The Thiel Foundation funds innovation capital for radical early-stage startups; the Cystic Fibrosis Foundation does venture philanthropy to de-risk new treatment methods for their typical patients; FasterCures is a think tank that coordinates venture philanthropy funders and develops new financial instruments.
This panel agreed that venture philanthropy is now part of Big Pharma's ecology because it helps de-risk innovation. Some venture-philanthropists run clinical trial networks, patient registries, and other projects that help de-risk startups beyond just funding. VP is not for the faint of heart because investments do fail. Great risk remains in rare and orphan diseases. Investors must see a developmental pathway to a viable drug. VPs can fill the gap left as VCs retreat from early stage pharma funding. VPs can take the tech they funded to corporate partners who can fund further development pathways. Big Pharma has stepped in to the venture space to cherry-pick promising drug ideas, partly because they are reducing their own in-house development infrastructure.
The next panel was "Crowd Funding Options: How to Raise One Million." Ooh, goody, one of my favorite subjects. The panelists all have startup backgrounds themselves, seeing niches in home equity finance and donor-advised funding that they could fill. One of the CEOs argued that crowdfunding enables private equity investors to adopt a diversification approach to a portfolio. IMHO this is a sea-change mentality from traditional pure play approaches in PE/VC. The advantages that VCs bring to a startup besides money include mentoring and connection with other centers of influence. It's good that entrepreneurs can access diverse sources of capital, but they need to know that the advice they get from nickel-and-dime investors will be nearly non-existent. The JOBS Act updates Title III general solicitation rules and opens venture investing to non-accredited investors. Entrepreneurs must use digital media to package their pitch attractively. There is a fraud deterrent mechanism to answer critics alleging the JOBS Act generates a criminogenic business climate: Funds raised on a crowdfunding platform are escrowed until the startup meets its funding target, and funds are returned to donors/investors if the target goes unmet by a deadline.
There's a rule in crowdfunding: "Expect to lose your money," because it's risk capital. One panelist mentioned that fraud is more prevalent now in regulated finance, as per Bernard Madoff and home mortgage lending. I wonder whether the panelists read my article on the JOBS Act from last year, because they echoed some of the themes I raised. Crowdfunding forces transparency by enabling public chatter in social media.
Startups can prove their valuation by generating social media buzz from their prospective market, thus proving the existence of demand that will drive sales. One suggestion was to attract heavy Twitter users to a high-profile event and get them Tweeting about your idea. Another panelist theorized that Millennials turned off by the stock market will instead invest in crowdfunded portfolios of projects. Entrepreneurs can "build a wave" by offering freebies to early adopters who can spark passion in a product. Perks, rewards, and bonuses attract people. IMHO a crowdfunding platform that enables gamefication will attract startups and investors by the truckload.
I asked my only question of the conference at this panel: "There's talk of large brokerages looking to acquire crowdfunding portals. What qualities will make crowdfunding portals attractive to an acquirer?" The panel answered that big banks don't yet see the intersection of social media and finance. Portals will prove their value by attracting capital and deal participants. I'm hereby summarizing this value proposition: An attractive portal turns cash flow (funding from non-accredited investors) into deal flow (IPO and acquisition candidates for investment banks). You heard it here first at Alfidi Capital.
The final panel I was able to attend was "Biotech's Migration Outside the USA: Where are the Emerging Opportunities?" I don't invest much outside the U.S. but some of the cultural insights from this panel are useful to international investors. Returning Chinese expatriates who were educated in the West bring life science expertise back home. "Venture tourists" can visit startups outside the U.S. but the difficulty in doing deals varies by country. Innovation as an ecosystem is attuned to local culture and takes a long time to create. IMHO the rule of law is indispensable, so I wouldn't go looking for innovation in junta-ruled places like Myanmar; instead show me a locale that's at least one decade removed from authoritarian governance. The U.S.'s NIH investments in R&D infrastructure really do matter. Once again, show me a country that has such a nationally-sponsored laboratory system in place. Several panelists mentioned the risk aversion of many traditional Asian cultures as a deterrent to startup investing, and that educated Chinese professionals make unlikely entrepreneurs because failure is considered shameful.
I had to split for another meeting but this conference was a great deal. I wish I could have stayed for the Biotech Idol pitches because I love hearing directly from entrepreneurs. See you next year, biotech all-stars!
The panel on "Government Investing Opportunities to Fund Life Science Innovation" had experts from the National Institutes of Health and National Cancer Institute. They put real teeth in the old saying, "I'm from the government and I'm here to help." The NIH maintains a free biobank for research and uses its grant program to leverage other government resources in gene therapy, cell therapy, and production assistance. The NCI manages an active portfolio of about 50 SBIR (Small Business Innovation Research) grants and also offers bridge financing and regulatory assistance. The advantage of government agency SBIR grants is that they are non-dilutive funding that doesn't take IP away from a developer. NCI even sponsors an investor forum matching successful Phase 1-2 startups with investors who will fast-track their product. Hey, last year they held it in Santa Clara, so I ought to see if I can attend this year.
The panelists had a consensus on how biotechs execute successful fundraising. Startups should have a good team, IP amenable to protection, and an explanation of how the proposed product meets an unmet market need. My own interpretation of "good team" encompasses someone who is scientifically qualified to invent a device or discover a drug, plus a capable executive with serial entrepreneur experience. Several years ago when I first started studying startups, I noticed the successful ones had teams with both scientific and managerial skills. That insight comes in handy when making investments, and one panelist observed that academic researchers have little understanding of commercialization or manufacturing. This is why the best business schools create partnerships between their MBA candidates and their own university research labs. These partnerships create business models for commercializing the lab researchers' tech and are favorites to win business plan competitions.
NIH gives startups guidance prior to submitting their SBIR grant request. I'm thrilled to see government agencies focus their grant funding on the successful commercialization of a product rather than just keeping startups alive. Heaven help us if the SBIR process turns into a make-work program for unemployed scientists. The panel mentioned the "numbers game" aspect of successful grant funding, with only 15% of grant applications getting funded, so startups need to work hard on their grant applications. One panelist mentioned that DOD grant makers are risk-averse, so having a strong relationship with DOD is the key to getting their research grants.
I learned a new acronym from this panel: STTR, i.e. Small Business Technology Transfer, a program for fast-tracking the commercialization of federally funded research. I also learned that many biotech startups are "virtual" but many grants require much work to be done internally. Hmmm, that places virtuals at a disadvantage because they outsource things like clinical trials. The government's workaround is to have the startup directly expense on their budget some functions outsourced to contract research organizations. Startups who outsource functions must write deliverables into those contracts and enforce non-payment for lack of progress.
One panelist mentioned HHS's Biomedical Advanced Research and Development authority (BARDA) as a funding source with the caveat that its mindset favors the military's "quad chart" briefing system. That makes sense to me if BARDA's mission is to fast-track biological warfare countermeasures that must support interagency efforts with DOD. The takeaway is that startups must learn to summarize their value proposition in one slide with a picture of their drug or device, its costs, and their deliverables.
The panel noted that SBDC-funded consultants can help walk startups through grant writing. Startups must frame their investment pitch in a way that non-expert angels and family offices understand, and SBIR grant success gives credibility as a form of peer-reviewed validation. The NIH panelist noted the impact of leaner federal budgets, with the expectation that a sequester would reduce its budget by 8.2%. NIH would likely cut current grants, reduce actual contract awards to 90% of their authorized level, and reduce the number of years for a contract to run. The panel also said that startups can increase their chance of successful grant funding by having more preliminary data.
The next panel had an interesting title: "Patient Advocacy Group and Passion Capital." I had this mental image of hot nurses making out passionately with their patients, but alas that wasn't discussed today. The panelists did mention what their organizations do: The Thiel Foundation funds innovation capital for radical early-stage startups; the Cystic Fibrosis Foundation does venture philanthropy to de-risk new treatment methods for their typical patients; FasterCures is a think tank that coordinates venture philanthropy funders and develops new financial instruments.
This panel agreed that venture philanthropy is now part of Big Pharma's ecology because it helps de-risk innovation. Some venture-philanthropists run clinical trial networks, patient registries, and other projects that help de-risk startups beyond just funding. VP is not for the faint of heart because investments do fail. Great risk remains in rare and orphan diseases. Investors must see a developmental pathway to a viable drug. VPs can fill the gap left as VCs retreat from early stage pharma funding. VPs can take the tech they funded to corporate partners who can fund further development pathways. Big Pharma has stepped in to the venture space to cherry-pick promising drug ideas, partly because they are reducing their own in-house development infrastructure.
The next panel was "Crowd Funding Options: How to Raise One Million." Ooh, goody, one of my favorite subjects. The panelists all have startup backgrounds themselves, seeing niches in home equity finance and donor-advised funding that they could fill. One of the CEOs argued that crowdfunding enables private equity investors to adopt a diversification approach to a portfolio. IMHO this is a sea-change mentality from traditional pure play approaches in PE/VC. The advantages that VCs bring to a startup besides money include mentoring and connection with other centers of influence. It's good that entrepreneurs can access diverse sources of capital, but they need to know that the advice they get from nickel-and-dime investors will be nearly non-existent. The JOBS Act updates Title III general solicitation rules and opens venture investing to non-accredited investors. Entrepreneurs must use digital media to package their pitch attractively. There is a fraud deterrent mechanism to answer critics alleging the JOBS Act generates a criminogenic business climate: Funds raised on a crowdfunding platform are escrowed until the startup meets its funding target, and funds are returned to donors/investors if the target goes unmet by a deadline.
There's a rule in crowdfunding: "Expect to lose your money," because it's risk capital. One panelist mentioned that fraud is more prevalent now in regulated finance, as per Bernard Madoff and home mortgage lending. I wonder whether the panelists read my article on the JOBS Act from last year, because they echoed some of the themes I raised. Crowdfunding forces transparency by enabling public chatter in social media.
Startups can prove their valuation by generating social media buzz from their prospective market, thus proving the existence of demand that will drive sales. One suggestion was to attract heavy Twitter users to a high-profile event and get them Tweeting about your idea. Another panelist theorized that Millennials turned off by the stock market will instead invest in crowdfunded portfolios of projects. Entrepreneurs can "build a wave" by offering freebies to early adopters who can spark passion in a product. Perks, rewards, and bonuses attract people. IMHO a crowdfunding platform that enables gamefication will attract startups and investors by the truckload.
I asked my only question of the conference at this panel: "There's talk of large brokerages looking to acquire crowdfunding portals. What qualities will make crowdfunding portals attractive to an acquirer?" The panel answered that big banks don't yet see the intersection of social media and finance. Portals will prove their value by attracting capital and deal participants. I'm hereby summarizing this value proposition: An attractive portal turns cash flow (funding from non-accredited investors) into deal flow (IPO and acquisition candidates for investment banks). You heard it here first at Alfidi Capital.
The final panel I was able to attend was "Biotech's Migration Outside the USA: Where are the Emerging Opportunities?" I don't invest much outside the U.S. but some of the cultural insights from this panel are useful to international investors. Returning Chinese expatriates who were educated in the West bring life science expertise back home. "Venture tourists" can visit startups outside the U.S. but the difficulty in doing deals varies by country. Innovation as an ecosystem is attuned to local culture and takes a long time to create. IMHO the rule of law is indispensable, so I wouldn't go looking for innovation in junta-ruled places like Myanmar; instead show me a locale that's at least one decade removed from authoritarian governance. The U.S.'s NIH investments in R&D infrastructure really do matter. Once again, show me a country that has such a nationally-sponsored laboratory system in place. Several panelists mentioned the risk aversion of many traditional Asian cultures as a deterrent to startup investing, and that educated Chinese professionals make unlikely entrepreneurs because failure is considered shameful.
I had to split for another meeting but this conference was a great deal. I wish I could have stayed for the Biotech Idol pitches because I love hearing directly from entrepreneurs. See you next year, biotech all-stars!
Monday, January 14, 2013
Dart Mining (DTM.AX) Exploring for Metals
Dart Mining (DTM.AX) is developing Mo / Cu / Ag deposits in Australia. I've finally figured out that small Australian companies name their head cheese Managing Director instead of CEO. Dart's MD has worked in mining engineering and various sectors supporting the mining value chain, and its Chairman is a geologist. That's pretty cool.
Their most advanced property right now is their Unicorn project, with power, water, and roads already nearby. The MII grades for each of those three metals are very low compared to world averages for new discoveries. IMHO the company will have a hard time making that project viable if metal prices collapse, even if the planned mine has a low strip ratio. Their other projects are still exploration targets with no 43-101 data although a couple of their drill results show promising Au grades. Dart Mining is benefiting from local government grants that help fund its early exploration program, which is undeniably helpful in conserving investors' cash.
Their 2012 annual report shows their burn rate has doubled to over $1M/year since they stepped up their drilling programs. They had just under $3.5M in cash on hand on June 30, 2012, giving them about three and a half years in which to strike valuable grades at any of their active projects.
Dart Mining trades under a dime right now but they have plenty of time to discover valuable deposits. I'd like to see what their drilling programs find later in 2013.
Full disclosure: No position in Dart Mining at this time.
Their most advanced property right now is their Unicorn project, with power, water, and roads already nearby. The MII grades for each of those three metals are very low compared to world averages for new discoveries. IMHO the company will have a hard time making that project viable if metal prices collapse, even if the planned mine has a low strip ratio. Their other projects are still exploration targets with no 43-101 data although a couple of their drill results show promising Au grades. Dart Mining is benefiting from local government grants that help fund its early exploration program, which is undeniably helpful in conserving investors' cash.
Their 2012 annual report shows their burn rate has doubled to over $1M/year since they stepped up their drilling programs. They had just under $3.5M in cash on hand on June 30, 2012, giving them about three and a half years in which to strike valuable grades at any of their active projects.
Dart Mining trades under a dime right now but they have plenty of time to discover valuable deposits. I'd like to see what their drilling programs find later in 2013.
Full disclosure: No position in Dart Mining at this time.
Relative Value of Leading Pawn Shop Stocks
Tough economic times drive demand for unconventional financial services. Pawn shops cater to desperate borrowers who have low credit scores, troubled financial histories, and other problems that make them unsuitable risks for mainstream banks. Opportunists can open their own pawn shops or invest in existing ones, including some that trade publicly.
Cash America International (CSH) is trading at about the mid-point of its 52-week range. Its long term debt is almost five times its net income (far above the 2x level I prefer) and fluctuates wildly from quarter to quarter. It has positive FCF but that fluctuates too, and I wonder why their capex is non-negligible if their business model is based on franchising (i.e., the franchisee should be paying the upfront store costs). Its 5yr EPS growth and 5yr ROE are respectable but they're not beating their sector average. That's too bad, because Cash America offers other non-storefront service like tax filing and insurance that can appeal to low income "non-banked" clientele.
EZCORP (EZPW) is trading toward the low end of its 52-week range but has a P/E of just over 7; that's bad news for trend followers but good news for value investors. Its net income has shown a distinct upward trend for three years and its balance sheet has a manageable level of long term debt. FCF is strongly positive. Their product lines are very simple, focused on various types of loans for goods with no other services. EZCORP's recent purchase of online lender GoCash reflects this loan focus. Their 5yr EPS growth and 5yr ROE are remarkably high, beating the sector average. I must admit, I'm impressed.
First Cash Financial Services (FCFS) trades at a P/E of 20 and is near its 52-week high; my gut tells me it's probably overpriced on those metrics alone. Their net income has risen dramatically in the last three years. They did an excellent job reducing their long term debt to zero in 2011 only to allow it to balloon again this year. That debt is still manageable (less than 2x annual net income at present) but erratic changes like that are worrisome. FCF is positive and their 5yr EPS and ROE figures are strongly outperforming the sector. One strategic disadvantage of First Cash is its brand confusion. They have five different brands but their services are so similar that such a brand family complicates their marketing message.
The three companies above taken together have a combined market share that does not come close to sector dominance, so none of them have strong pricing power. Gaining pricing power in a sector like this is nearly impossible because product inventory is so unpredictable in quality and turnover time. Winning in a sector that emphasizes discount goods means reliance on brand strength (i.e., whichever has the best word of mouth in low-income demographics) and physical location (i.e., near HUB zones, Section 8 housing, and other areas with low costs of living). The whole sector is highly fragmented and localized, so despite some opportunity for consolidation through acquisition these national chains have little incentive to do so. Economies of scale in financial services come from consolidating back-office functions, and pawn brokerage is mostly a front office affair.
I suspect that peer-to-peer lending will soon pose a major competitive threat to pawn broking. It won't undermine the high-end segment where large loans are collateralized with luxury goods but it will affect smaller loans. P2P lending is cheaper for the borrower and more transparent for the lender. It is more of a threat to smaller pawn shops that lend small amounts (under $5000) and do have other complementary business lines.
Pawn brokers aren't the only financial players who can profit from the pain of distressed borrowers. Investors can make some bucks from this growing sector.
Full disclosure: No position in any stocks mentioned at this time.
Cash America International (CSH) is trading at about the mid-point of its 52-week range. Its long term debt is almost five times its net income (far above the 2x level I prefer) and fluctuates wildly from quarter to quarter. It has positive FCF but that fluctuates too, and I wonder why their capex is non-negligible if their business model is based on franchising (i.e., the franchisee should be paying the upfront store costs). Its 5yr EPS growth and 5yr ROE are respectable but they're not beating their sector average. That's too bad, because Cash America offers other non-storefront service like tax filing and insurance that can appeal to low income "non-banked" clientele.
EZCORP (EZPW) is trading toward the low end of its 52-week range but has a P/E of just over 7; that's bad news for trend followers but good news for value investors. Its net income has shown a distinct upward trend for three years and its balance sheet has a manageable level of long term debt. FCF is strongly positive. Their product lines are very simple, focused on various types of loans for goods with no other services. EZCORP's recent purchase of online lender GoCash reflects this loan focus. Their 5yr EPS growth and 5yr ROE are remarkably high, beating the sector average. I must admit, I'm impressed.
First Cash Financial Services (FCFS) trades at a P/E of 20 and is near its 52-week high; my gut tells me it's probably overpriced on those metrics alone. Their net income has risen dramatically in the last three years. They did an excellent job reducing their long term debt to zero in 2011 only to allow it to balloon again this year. That debt is still manageable (less than 2x annual net income at present) but erratic changes like that are worrisome. FCF is positive and their 5yr EPS and ROE figures are strongly outperforming the sector. One strategic disadvantage of First Cash is its brand confusion. They have five different brands but their services are so similar that such a brand family complicates their marketing message.
The three companies above taken together have a combined market share that does not come close to sector dominance, so none of them have strong pricing power. Gaining pricing power in a sector like this is nearly impossible because product inventory is so unpredictable in quality and turnover time. Winning in a sector that emphasizes discount goods means reliance on brand strength (i.e., whichever has the best word of mouth in low-income demographics) and physical location (i.e., near HUB zones, Section 8 housing, and other areas with low costs of living). The whole sector is highly fragmented and localized, so despite some opportunity for consolidation through acquisition these national chains have little incentive to do so. Economies of scale in financial services come from consolidating back-office functions, and pawn brokerage is mostly a front office affair.
I suspect that peer-to-peer lending will soon pose a major competitive threat to pawn broking. It won't undermine the high-end segment where large loans are collateralized with luxury goods but it will affect smaller loans. P2P lending is cheaper for the borrower and more transparent for the lender. It is more of a threat to smaller pawn shops that lend small amounts (under $5000) and do have other complementary business lines.
Pawn brokers aren't the only financial players who can profit from the pain of distressed borrowers. Investors can make some bucks from this growing sector.
Full disclosure: No position in any stocks mentioned at this time.
Financial Sarcasm Roundup for 01/14/13
There are many analysts and commentators in the financial sector. If any of them are more sarcastic then me, I haven't seen them yet.
Wealthy people are increasingly turning to pawn brokers for fast cash. This is great news! Some rich people pride themselves on conspicuous consumption, and now the reverse is equally conspicuous. I don't feel sorry for the Hollywood stars and musicians who pawn their bling. Their agents had every opportunity to hook them up with competent financial planners. Non-celebrities who pawn high-value items probably have something to hide, like a bad credit history that a bank would shun. The companion piece on spoiled rich kids tells me everything I already knew about human nature. People say they want to work hard but rarely do. They say they want their kids to have strong ethics but cave in to their every whim. Our species seems to be hard-wired for hypocrisy. Something in our genes gives us a Dr. Jekyll / Mr. Hyde predisposition to take impulsive action and then rationalize it afterwards. Anyway, maybe wealthy people can pawn their spoiled kids' trinkets next once they run short of bling. The brats don't deserve to inherit any of it anyway so the parents might as well haul it off.
Some Greeks may wish they had expensive stuff to pawn off. Desperate Greeks are illegally chopping trees to get wood for heating. Plenty of Americans will be following suit in a couple of years. Sedentary suburban lives mean Americans' survival skills have atrophied and not everyone owns proper hand tools. How about a government stimulus program to retrain people for careers in urban scavenging? It sure would be good for sales at Home Depot, especially if the funds are programmed into EBT cards. Yeah, I know, it's poor taste to ask people to prep for an obvious contingency.
Bankruptcy is one obvious contingency for the financially strapped. Even bankrupt businesses are forced to pawn themselves. Impatient banks are forcing busted businesses to find buyers ASAP or lose their last remaining lifelines. The hidden context is the strong position of banks as senior creditors thanks to TBTF status. Any subordinate creditor of a troubled company can expect to be pushed around in Chapter 11 thanks to Dodd-Frank.
Senior creditor privileges aren't the only advantages the SIFIs have under captured regulatory regimes. JPMorgan may or may not release its report on how the London whale lost billions, depending of course on how the bank's senior officers feel on a given day. The UK's concern for privacy protection comes pretty late after the disclosure of the names of the Whale, his team members, and the senior executives who did not supervise his trades. Those top dogs are still on the job, minus a few token terminations, and they have learned nothing. Rest assured that business will continue as usual.
Business here at Alfidi Capital will also continue as usual. I've learned a lot from reading about the mistakes of the people above.
Wealthy people are increasingly turning to pawn brokers for fast cash. This is great news! Some rich people pride themselves on conspicuous consumption, and now the reverse is equally conspicuous. I don't feel sorry for the Hollywood stars and musicians who pawn their bling. Their agents had every opportunity to hook them up with competent financial planners. Non-celebrities who pawn high-value items probably have something to hide, like a bad credit history that a bank would shun. The companion piece on spoiled rich kids tells me everything I already knew about human nature. People say they want to work hard but rarely do. They say they want their kids to have strong ethics but cave in to their every whim. Our species seems to be hard-wired for hypocrisy. Something in our genes gives us a Dr. Jekyll / Mr. Hyde predisposition to take impulsive action and then rationalize it afterwards. Anyway, maybe wealthy people can pawn their spoiled kids' trinkets next once they run short of bling. The brats don't deserve to inherit any of it anyway so the parents might as well haul it off.
Some Greeks may wish they had expensive stuff to pawn off. Desperate Greeks are illegally chopping trees to get wood for heating. Plenty of Americans will be following suit in a couple of years. Sedentary suburban lives mean Americans' survival skills have atrophied and not everyone owns proper hand tools. How about a government stimulus program to retrain people for careers in urban scavenging? It sure would be good for sales at Home Depot, especially if the funds are programmed into EBT cards. Yeah, I know, it's poor taste to ask people to prep for an obvious contingency.
Bankruptcy is one obvious contingency for the financially strapped. Even bankrupt businesses are forced to pawn themselves. Impatient banks are forcing busted businesses to find buyers ASAP or lose their last remaining lifelines. The hidden context is the strong position of banks as senior creditors thanks to TBTF status. Any subordinate creditor of a troubled company can expect to be pushed around in Chapter 11 thanks to Dodd-Frank.
Senior creditor privileges aren't the only advantages the SIFIs have under captured regulatory regimes. JPMorgan may or may not release its report on how the London whale lost billions, depending of course on how the bank's senior officers feel on a given day. The UK's concern for privacy protection comes pretty late after the disclosure of the names of the Whale, his team members, and the senior executives who did not supervise his trades. Those top dogs are still on the job, minus a few token terminations, and they have learned nothing. Rest assured that business will continue as usual.
Business here at Alfidi Capital will also continue as usual. I've learned a lot from reading about the mistakes of the people above.
Sunday, January 13, 2013
The Limerick of Finance for 01/13/13
Hucksters are so brazen and bold
Fleecing fools once their story is told
Hold on to your coin
It's their plan to purloin
Finding suckers will never get old
Fleecing fools once their story is told
Hold on to your coin
It's their plan to purloin
Finding suckers will never get old
Saturday, January 12, 2013
Friday, January 11, 2013
The Haiku of Finance for 01/11/13
Secret Fed credit
Trillions to prop up bad banks
Buffett bets on it
Trillions to prop up bad banks
Buffett bets on it
Old Bailout Lies Will Be New Again In 2013
Everything old is new again. You've probably heard me say that before but it never gets old when I'm the one saying it. The Taibblog nails the evidence behind the secret multitrillion-dollar Fed lending that saved the largest banks in 2008. Know that the largest recipients never disclosed the sums they borrowed. Know that the same bailout recipients also participate as the primary Treasury dealers. Know that those dealers earn riskless profits from the spread between their zero-cost borrowing and positive yields on Treasuries they hold. Know that the TBTF SIFIs have not changed their behavior at all.
We can expect the next phase of the unresolved crisis to come unannounced. The watchdogs are asleep and the crony capitalists have distracted us with self-serving platitudes. No less a personage than Warren Buffett assures us that his favorite banks will not get the country in trouble. He is too clever by half. He secured his banks with bundled campaign contributions to last year's successful Presidential contender. He will be rewarded with bailouts for his banks if they get into trouble, so he is disingenuously correct by saying the banks won't be getting the country into trouble. The country got itself into trouble by handing control of the government to Wall Street. There's no going back now.
We can expect the next phase of the unresolved crisis to come unannounced. The watchdogs are asleep and the crony capitalists have distracted us with self-serving platitudes. No less a personage than Warren Buffett assures us that his favorite banks will not get the country in trouble. He is too clever by half. He secured his banks with bundled campaign contributions to last year's successful Presidential contender. He will be rewarded with bailouts for his banks if they get into trouble, so he is disingenuously correct by saying the banks won't be getting the country into trouble. The country got itself into trouble by handing control of the government to Wall Street. There's no going back now.
Big Winners In Greenwashing
Today's "Lost In The Wash" seminar on sustainable products at the Commonwealth Club got me thinking about how sustainability (or lack thereof) impacts a company's bottom line. Consumers can search for sustainable products by using the GoodGuide and businesses can engage the services and networks of BSR to make their supply chains greener. One comment from the panel revealed how funny consumers can be; about 70% of consumers say they want to buy sustainable products but less than 3% actually buy them. Consumers may not know where to get information on green products. Corporations know how to make their stuff greener, but it may not make much difference to their bottom lines.
Companies that make inflated claims about their products' sustainable impact greenwash their brands. Irate consumers full of righteous indignation can rate the most egregious advertisements on the Greenwashing Index. The economy rates these advertisers on their profitability, as reflected in financial statements. Do the greenwash ratings match up with financial performance? Let's see.
GE got a bad greenwash rating in 2009 for its Ecoimagination campaign. GE's stock was tanking in 2009 along with the rest of the market, but it has recovered since then and its five-year ROE has been pretty healthy (despite negative EPS growth). Chevron also got hammered for a couple of its ads but its stock has also rebounded nicely from 2009, along with very healthy EPS and ROE. Outrage from vocal green consumers didn't hurt investors in these alleged big greenwashers.
The advertising ratings are subjective but the financial results are not. The FTC has crafted some handy-dandy guidelines for making environmentally friendly claims in advertisements, so IMHO the folks at the Greenwashing Index should recalibrate their scoring system to match those guidelines. The index's ad submissions are too small in number to be statistically significant so I can't take them seriously as a measure of consumer sentiment. Some media-savvy activist sites can punch above their weight.
TerraChoice (part of Underwriters Laboratories) publishes a much more comprehensive "Sins of Greenwashing" report. The 2010 report unsurprisingly refrains from naming any corporate violators. That's a smart move for a consulting company catering to the Fortune 500. Reading up on all of the new standards and labels provides corporate marketers with plenty of rebranding targets that go way beyond the Good Housekeeping Seal of Approval (and BTW there's a Green Seal too).
The big winners from greenwashing aren't necessarily the consumers who are worried about the processed foods they stuff into their pie-holes, or even the uptight activists who make careers out of making life difficult for job creators. The real winners are the corporations who can re-brand themselves to fit a hip trend and the consulting firms that help them pull it off. The focus on greenwashing has created another marketing niche. Nice work, if you can get it.
Companies that make inflated claims about their products' sustainable impact greenwash their brands. Irate consumers full of righteous indignation can rate the most egregious advertisements on the Greenwashing Index. The economy rates these advertisers on their profitability, as reflected in financial statements. Do the greenwash ratings match up with financial performance? Let's see.
GE got a bad greenwash rating in 2009 for its Ecoimagination campaign. GE's stock was tanking in 2009 along with the rest of the market, but it has recovered since then and its five-year ROE has been pretty healthy (despite negative EPS growth). Chevron also got hammered for a couple of its ads but its stock has also rebounded nicely from 2009, along with very healthy EPS and ROE. Outrage from vocal green consumers didn't hurt investors in these alleged big greenwashers.
The advertising ratings are subjective but the financial results are not. The FTC has crafted some handy-dandy guidelines for making environmentally friendly claims in advertisements, so IMHO the folks at the Greenwashing Index should recalibrate their scoring system to match those guidelines. The index's ad submissions are too small in number to be statistically significant so I can't take them seriously as a measure of consumer sentiment. Some media-savvy activist sites can punch above their weight.
TerraChoice (part of Underwriters Laboratories) publishes a much more comprehensive "Sins of Greenwashing" report. The 2010 report unsurprisingly refrains from naming any corporate violators. That's a smart move for a consulting company catering to the Fortune 500. Reading up on all of the new standards and labels provides corporate marketers with plenty of rebranding targets that go way beyond the Good Housekeeping Seal of Approval (and BTW there's a Green Seal too).
The big winners from greenwashing aren't necessarily the consumers who are worried about the processed foods they stuff into their pie-holes, or even the uptight activists who make careers out of making life difficult for job creators. The real winners are the corporations who can re-brand themselves to fit a hip trend and the consulting firms that help them pull it off. The focus on greenwashing has created another marketing niche. Nice work, if you can get it.
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