Archive for September, 2015
Quite a bit going on with our focus stocks this week, so we pushed out an update to be sure the Groove community is aware of all that is going on –
With the stock price increase and significantly higher daily volume traded the last few weeks, we can surmise that the word is finally starting to get out about CVSL. In our last update we mentioned that we were expecting CVSL to test the $3 level and we saw that happen yesterday though we finally saw some consolidation later in the day and CVSL closed down for the day at $2.53. We are gratified to see CVSL finally getting some attention from investors. But even with the recent gains the stock is still trading at a valuation discount to its peers in the direct sales space, where most of the major exchange listed companies trade in the range of 1x revenue. By this measure, CVSL at its current run rate remains undervalued by at least 30%. Yesterday’s consolidation on volume that was more than 10x the normal daily trading volume suggests we are entering a stage where we will likely see more volatility and our expectation in that regard is heightened by the short interest report that came out after the close last night. The short interest for CVSL has ballooned to a level (240,000) that is within 1% the all time record high short interest for CVSL, which occurred in the days following the firing of Longaberger’s CEO. We believe the current (as of today) short interest is significantly higher than what shows in yesterday’s report, as that number was measured on September 15 and we believe that the shorting has picked up tremendously since that time and that the short interest as of today will is substantially higher than it has ever been in CVSL’s history. The confluence of this higher level of short interest with what is obviously a much greater following of CVSL by investors/traders should make for interesting trading over the next few weeks as CVSL winds down what we expect to be a very strong quarter operationally, news about sales results from Agel’s Caspi Gold launch starts to trickle in and the likelihood of the company making open market purchases of its stock increases as we approach the start of Q4 next week. These factors could push the stock up to test the $3 level again in the near term, but regardless of the timing of that retest we are confident that over the long-term CVSL will trade back to a level that more accurately (much higher than $3) reflects the potential for this model as the company’s operating results increasingly show that CVSL should actually trade at a premium to the other companies in the space instead of the current large discount.
Rave Restaurant Group –
Rave reported Q4 and full year earnings before Thursday’s open, with revenues of $13.9 million, an increase of 26.7% YOY and finished with a loss of.6. million outpacing the lone analyst’s estimates on the top and bottom lines. Several notable items from the release –
-Pie Five comparable store retail sales increased 6.7% from the same period of the prior year.
-Pie Five system-wide total retail sales increased 168%, and average weekly sales increased 11.1%, year over year.
-Pizza Inn domestic comparable store retail sales increased 0.2% from the same period of the prior year
We note that this report was for the period ending on June 30, and most of the new corporate stores were opened after June 30, so the big impact of these new stores will be seen for the first time on the next quarterly report. Most of the new stores in the corporate markets of Chicago, Houston and Atlanta area stores were not open prior to June 30, so we expect to see a significant revenue ramp in the current quarter and this should continue for the forseeable future. We remain very bullish on Rave Restaurant Group and note that it is a great example of a stock that is disconnected from the company’s fundamentals, as it has pulled back significantly from its highs for the year despite increasing evidence that the model is working and the company is executing its growth plan very well. While the downward pressure on its share price could continue due to broader market weakness, we note that the company is financially and operationally in great shape with the Pie 5 growth machine hitting on all cylinders and the Pizza Inn ops stabilizing. As such, we view Rave as being undervalued in the 9.25 range where it is currently trading.
Inuvo has continued to show strength in the face of the broader market weakness. The raised targets and estimates by Zacks and additional exposure from various financial media outlets has helped to keep Inuvo shares top of mind among small cap mobile advertising stocks. Here is a good mention from earlier this week at Benzinga – http://www.benzinga.com/trading-ideas/15/09/5858420/top-4-small-cap-stocks-in-the-marketing-services-industry-with-the-highe
Remark Media –
Remark Media shares have been range bound between $4.10 and $4.50 since the announcement of an agreement to acquire Vegas.com. After the market closed yesterday, the company announced that it intended to close the Vegas.com deal today – http://finance.yahoo.com/news/remark-media-plans-close-acquisition-021900659.html
Zacks Small Cap Research is showing some love to the Groove portfolio. Late last week they upgraded both Inuvo and CVSL.
For Inuvo, Zacks has been bullish for many months, but had suggested this quarter might show a slowing of the growth rate due to a slowdown in advertising in the auto sector. However, after Inuvo management’s presentation at a conference last week Zacks raised their revenue estimate to reflect another quarter of 30% revenue growth due to other verticals picking up the slack for auto sector and raised their price target to $3.77.Zacks had been quite bearish on CVSL’s prospects for months, so this is a 180 degree turn and in naming CVSL as a “buy” they suggested that the combination of improving technicals and earnings/revenue estimate revisions to the plus side leads them to believe that CVSL is heading higher. Here is a link to the article – https://finance.yahoo.com/news/inuv-company-affirms-growth-not-152000031.html
With CVSL, Zacks had been very bearish on CVSL’s prospects since its first mention at the beginning of this year. In comments out late last week, Zacks rated CVSL a buy and noted the increasingly positive technicals and recent positive earnings/revenue estimates. Here is a link to a synopsis – https://finance.yahoo.com/news/cvsl-cvsl-continue-surge-higher-083408545.html
CVSL was the focus of an article on Seeking Alpha put out late last week by one of our own that highlighted CVSL’s cheap valuation, improving operational outlook, the potential for a blockbuster product release and the likelihood of several new types of buyers emerging including CVSL itself due to the BOD buyback authorization. Here is a link to the article – http://seekingalpha.com/article/3516486-the-3-catalysts-that-could-move-cvsl-higher
The new product (Caspi) was launched Friday at the Agel 10 Conference in Lyon, France. CVSL chairman John Rochon, the former CEO of Mary Kay and the former top shareholder of Avon called the skin care product line “…the best of my work over 40 years in the skin care industry”, a pretty substantial endorsement from a widely recognized leader in the industry. Here is a link to the PR of the Caspi launch – https://finance.yahoo.com/news/agel-introduces-caspi-skin-care-083000934.html
We remain very bullish on CVSL’s prospects, as Friday’s closing price of $2.18 does not come close to reflecting the turnaround that we believe to be underway at CVSL or the potential for growth there. CVSL’s valuation still reflects a substantial discount to many of the other company’s in the direct sales space, none of which are growing at the rate of CVSL even BEFORE the Caspi launch. CVSL is simply being overlooked by investors due to the newness of its NYSE listing and the lack of Wall Street coverage. The “Buy” rating by Zacks is the first of what we think will ultimately be many mainstream investing/financial outlets who will recognize what is happening and jump on the CVSL bandwagon. We believe that CVSL at $2.18 will look like quite a bargain as the CVSL story gets more exposure over the next few weeks and months and we fully expect to see CVSL testing the $3 level in the near future.
As indications of a slowing Chinese economy and falling stock market continue to reverberate worldwide, we believe that investors should prepare for significantly increased volatility over the weeks ahead. As investors get whip sawed by the day-to-day fluctuations, many are looking for respite and asking the question – do we sell our stock holdings, hold what we have and try to ride it out or buy more stock as most companies’ shares continue to get cheaper. Not surprisingly, we have received multiple inquiries from Groove participants wanting to know what to do regarding our four focus stocks – Remark Media, Inuvo, Rave and CVSL.
First and foremost, we believe that the market weakness reflects concern that a slowing economy in China will cause a slowdown worldwide, pushing Europe and US economies into much slower growth or even stagnation modes. Whether this will actually occur remains to be seen, but the perception of this result will drive share prices in the near term and we think the impact will be great enough to warrant Groove participants taking action.
We have one company that we believe actually stands to benefit in the economic slowdown scenario. CVSL’s direct sales model typically experiences an uptick in sales during economic downturns due to growth in sales representatives that occurs as more consumers seek alternative sources of income. Combine CVSL’s propensity to grow as the economy falters with its recent quarterly report that gave strong evidence that the company’s operations have turned a corner that places the company on much more solid footing than it was back in the first quarter when the stock was trading north of $5 and you begin to understand why we think CVSL shares can and will continue to increase in value in the face of the same economic uncertainties that may cause a pullback in the broader market. Additionally, we note that the company could start to buy back its own shares very soon if it hasn’t already (by our estimation they could have started Friday) and one of CVSL’s largest divisions (Agel) will be rolling out a blockbuster new product at its worldwide conference in France next week. We believe these factors will cause CVSL shares to trade higher as the CVSL story gets more attention and the clear disconnect between the company’s operational/financial turnaround and the its lagging stock price becomes evident.
The bottom line is we believe Groove participants should consider taking gains in other holdings off the table and putting that money to work buying more CVSL shares, as we believe the opportunity to buy shares below $2 will soon be gone.
Rave Restaurant Group
We remain very bullish on Rave’s operations and note that the company’s 7th Chicago area location will open this week along with the second franchised location in Indiana, jut one week after the company opened its first new company owned store in the Atlanta market. We think the rollout of Pie 5’s in Atlanta will be similar to Chicago in that there will be a significant number of units operating in a fairly short period of time. Rave management continues to impress with their rollout of Pie5 franchise and company owned stores, which appears to be accelerating. While we would not be surprised to see more downside when the US markets swoon (did anyone else see that $8.80 best bid for RAVE at one point last Monday morning???), we think sanity will return within days and that those who buy on those sell offs will be rewarded for their patience. We note that the company should report their fourth quarter results (for the year ended June 30, 2015) sometime over the next few weeks and we would not be surprised to see some downward pressure after the report absent blowout numbers given the volatility we are seeing in the broader market and in particular the restaurant stocks. This would be a great opportunity for Groove investors who may have missed our initial call to buy shares to start building a position, because we think any sell off will be short-lived. Rave operates in a niche (fresh casual pizza) that we think is going to be huge over the next 4-5 years and we believe that the company is executing its rollout plan very well. We note that the top and bottom line impact of the new company owned locations will start to make a significant impact on the financials beginning this month, (which is the third month of the first quarter 2016 for Rave’s fiscal year) and then have a huge impact on the second quarter that starts in October. Rave remains a great long-term buy irrespective of short-term market fluctuations and we see it as a $20+ stock within the next 12-18 months. Groove participants with a long-term investment horizon should hold on to any shares of RAVE they own and consider buying more on any weakness.
Inuvo shares have pulled back from higher levels that we think were justified based on the company’s operations and earnings and last week saw significant insider buying when the stock dipped below $2.50. Just under $120,000 of stock purchased over a two-day period has to be viewed as a bullish indicator and investors appear to agree as the shares rallied 6% during last Friday’s sell off. Hopefully the additional Form 4 filed Friday will allow for some carryover momentum this week. Watch closely though, as we are concerned that additional evidence of a slowing economy could hit Inuvo shares and additional broader market declines could impact Inuvo shares as well. As such, we think Groovers would do well to take the opportunity in the $2.70-$3 range (we closed at $2.74 Friday) to take any Inuvo investment beyond those shares representing “house money” to be used as a source of funds to buy more CVSL or RAVE shares.
Remark Media shares have held up well following their announcement of the Vegas.com acquisition. We believe that the investment bankers working with Remark on this deal and others soon to be announced are supporting the stock in the current $4-$4.50 range and we would be surprised to see it trade below $4 due to that support. Should that support wane, we would expect the stock to trade lower and we see limited upside for the shares until more is known about the revenue and income producing capabilities of the acquired assets. Additionally, we expect to see other acquisitions that may further dilute the stake of existing Remark shareholders. As such, we would take the opportunity to sell Remark at today’s $4.50+ range and pare down that position back to “house money”, using MARK as a source of funds to buy CVSL or RAVE shares.