Archive for February, 2016
A very well written article by Hedge Fund analyst Henry Davies makes a strong fundamental case for CVSL’s (now JRJR Networks) potential as a ten bagger if future execution is in line with recent results, but shows how returns could be even greater if management returns the acquired businesses to industry standard margins. The article also shows how subpar execution that results in EBITDA margins at only 10% could make the current value as low as $2.59. The article is very thorough and does a great job of plotting the different valuation scenarios based on the differing performance metrics achieved. Also, I think the author also does a good job of making the case for JRJR chairman and CEO’s status as a whale in the direct sales industry, citing Mr. Rochon’s 92% IRR over 27 years through his Richmont Holdings investment vehicle. Such returns significantly outpace the long term return for most of the hedge fund managers usually tossed around in the whale watching discussions. So while the article does a great job of making the core JRJR case, it does not discuss the elephant in the room that many (including JRJR management apparently) believe to be the real reason shares have been mired in such a low trading range. It appears that right before the Agel executive departures mentioned in the article were announced, some very aggressive and somewhat sophisticated short sellers established a short position of just over 2 million shares. Around that same time, an unusual trading pattern emerged and since has been occurring almost daily – CVSL shares would trade higher on smallish volume all day long but then sell off in the last ten minutes of trading on volume that exceeded the volume of the previous six hours and twenty minutes combined in what appeared to be an attempt to push the stock back down into the red. CVSL/JRJR hired Share Intel, a “trading forensics” firm to investigate the situation, presumably due to the aforementioned factors and because its stock was continuing in a general downtrend in spite of demonstrable improvement in the operational performance of the company’s key divisions. We have discussed the hiring of Share Intel and some of these details in this forum previously, but one of our contributors wrote a nice synopsis over the weekend so we are including the highlights along with updated specifics on relevant share counts below.
CVSL had shown marked improvement in every major significant measurable including operating margins, number of active sales reps, balance sheet and most importantly, increasing quarterly revenue by 50% year over year with the expectation of a vastly improved bottom line. As evidence of these operating improvements trickled forth over the course of the last six months, the stock traded lower and lower, even down below $1 vs. the $6-$8 range it traded when the company was struggling so mightily earlier in 2015. So the company turned to Share Intel to get answers and a share imbalance in excess of 2 million shares was discovered through their investigation. In a recent conversation with CVSL chairman John Rochon, he made it clear that he believes share imbalance represents a naked short position, describing it as being established by “manipulators” and as being done offshore so it doesn’t show up anywhere except as an imbalance. But Mr. Rochon said that at some point the manipulators would have to prove that there is a borrow in describing what he called a “prescription” for curing the ills of naked short selling and he said further that there are a number of steps that a company with rational management often takes when they are under such an attack. Mr. Rochon mentioned a similar scenario that occurred when he was on the board of a smaller company (Youngevity – OTCBB: YGYI) that discovered a large naked short position had been established. While we can not say with certainty that the price increase that followed the discovery of that short position was driven by a naked short squeeze, we do know that the company implemented a few of the steps in this “prescription” and by the time the naked short position was covered, the little $5m revenue company with a $25m market cap had seen it’s market cap swell to nearly $800 million. While CVSL is 5x the size YGYI was then from a revenue standpoint, CVSL’s market cap is only slightly higher ($34m) than YGYI’s was when it discovered the large naked short position. In the weeks since our conversation with Mr. Rochon, CVSL has announced what appears to possibly be the first part of this “prescription”, as CVSL pre-announced a very solid top line range for Q4 2015 ($49-$50m) and also announced that the company will be changing its name, stock symbol and cusip number, steps that appear to be very similar to happenings that occurred in the lead up to YGYI’s enormous increase in price.
Reader’s should not miss that CVSL’s revenue pre-announcement suggests that the company is tracking on a $190m-$200m revenue run rate for 2016 if there are no additional acquisitions and we believe the prior quarter’s trend towards improving margins in each division could result in the company reporting its first profit in 2016. Absent the manipulation of a naked short seller, it is difficult to imagine how a company approaching profitability with a nearly $200m annual revenue run rate and enough cash on its balance sheet to buy back its entire public float at a double digit premium to current prices might find itself with a $35 million market cap. But that is where CVSL is currently trading and it will be interesting to see if the 2 million + share naked short position will be covered over the next few weeks as the DTC accounting and share exchange process gets underway.
Reported Short Interest per report of 1/29/16 – 265,000
Naked Short Interest per SI report of 2/01/16 – 1,950,000
Total Short Interest per reports of 2/01/16 – 2,215,000
10 Day Average Trading Volume as of 2/15/16 – 82,975
Trading Days to Cover if 100% Cover Transactions – 27
Trading Days Until DTC exchange Process (Expected) – 5-7
While Mr. Rochon never flatly stated that the company was going to make an attempt to squeeze out the naked short position, his manner of discussing the situation made it clear that he was more than a little perturbed and I would even say offended that speculators would target his company as a candidate for naked short selling. I was left with the distinct impression that the company would pursue every known legal means of eradicating a naked short position and that they might even develop a few new ones. With the trading volume drying up over the last few weeks and the 10 day average volume (as of 2/15/16) at 82,975 shares, any attempt to buy a significant number of shares in the projected 5-7 days before the DTC accounting and reissue process takes place seems likely to push the shares significantly higher. At that average daily volume, it would take 27 trading days (over 5 weeks) of 100% buy to cover transactions to cover the full 2,215,000 share short position. One would assume that normal buyers and possibly even short term momentum traders may attempt to buy shares during this period as well, potentially exacerbating an already illiquid situation. Altogether, this unusual set of circumstances should make CVSL/JRJR a very interesting stock to watch over the next few weeks. If the company’s steps do lead to a short squeeze, it will be interesting to see at what price the short interest will begin to cover and also if the frenzied buying that sometimes occurs in those situations emerges to push CVSL/JRJR to a price that is as out of whack on the upside as the current valuation appears to be on the downside.
As of the open on February 17, Groove participants now control 19% of CVSL’s publicly traded float, up from 15% in our last CVSL update on January 29. The buying among our community participants has accelerated significantly since CVSL management released the $49-$50m expected revenue range for Q4, as this wholly put to rest the most damaging of the rumors that we believe were being spread by short sellers – that the company had experienced a significant downturn in Q4. The indicated revenue range makes it clear that CVSL is actually performing better than expected and the company’s responsiveness in taking the aggressive actions we proposed to address the naked short selling situation gives us confidence that they understand the importance of protecting shareholder value. Additionally, discussions among several active CVSL owners in our group have led to several ideas that we are culling to craft the best combination for additional recommendations to CVSL management – steps that will further ensure that those who would use illegal methods to try to push CVSL shares lower than they should trade on its merits will determine that it is in their best interest to ply their craft elsewhere. We are completing a comprehensive due diligence review of each proposal and we will share what we learn with the broader community shortly.
CVSL shares represent a tremendous bargain trading at just over $1 which equates to a $35 million market cap for a company that we expect to produce $190-$200m in revenue over the next 12 months. The public float of CVSL/JRJR is rapidly being acquired by savvy investors and they may soon be joined by short term traders and short sellers seeking to cover part or all of their bet prior to the DTC share accounting and reissue process that will start over the next couple of weeks. In summary, CVSL/JRJR represents a very cheap stock given its stock price / market cap relative to its operational performance and prospects, but there are near term developments that may bring other investors / traders into the fold to compete for the remaining CVSL shares in the public domain.
1) Inuvo – Inuvo reported a strong Q4 last week with top line results outpacing expectations and the company reporting a 36% increase over Q4 in the prior year and a 42% increase for the full year 2015 vs. 2014. The GAAP eanings of 3 cents per share for Q4 was in line with analyst’s expectations and the company reported full year GAAP earnings of 10 cents per share, up over last year’s 9 cents per share. In the several trading days since this very positive earnings report was released, Inuvo’s stock has fallen 16%, from $2.50 down to today’s closing price of $2.10. While the overall market action seems to be dictating the trading direction for most stocks over the last few weeks, we believe that the downward pressure in Inuvo shares reflects investor impatience rather than some concern about the quality of the earnings. Inuvo used its bountiful cash flow to pay off the entire remaining bank debt. Also the company reported revenue of $6.5 million for the month of January 2016, a significant uptick over January 2015’s revenue and we believe that this growth suggests that the company’s push for greater adoption of its Sitelinks offering is taking off. Additionally, there is talk of significant wins in bringing 0n new high traffic publishers that are likely driving these gains. While the company has competitive reasons for not announcing these new deals, investors should not overlook the obvious long term implications of this growth in terms of margin and valuation expansion. We think Zack’s analyst Lisa Thompson’s note on the quarter makes a strong case with her $4.25 price target that expands to $8.50+ if Sitelinks starts to gain significant traction. Inuvo’s sitelinks appears to be gaining traction and regardless to what degree that proves out, Inuvo is dirt cheap at $2.10. We will be surprised if we do not see buyers emerge (including insider activity) with Inuvo trading this low.
2) Remark Media – there was been very little to report on since our meeting with management two months ago at the LD Micro conference. We are still awaiting the first earnings report that will include Vegas.com results and we continue to believe that this aspect of the company’s report will determine the direction of MARK shares. Of course, in the near term nearly all stocks are being negatively impacted by the broader market melt down and Remark is no exception, with the stock actually breaching the previously solid $4 floor today that had been in place since days leading up to the announcement of the Vegas.com acqusition. Potential catalysts (beyond a good Vegas.com report) include some movement on the Sharecare position (like the sale of some or all of the stake, IPO announcement or some liquidity event that brings the value of Remark’s 5.2% stake in Sharecare more clearly into focus) or some news on Kan Kan that helps investors to better ascertain the potential for value creation there. We have more urgency to watch Remark when it trades down below $4 as that could prove to be very cheap very soon if positive events unfold with Vegas.com, Sharecare or Kan Kan.
3) Rave Restaurant Group – Rave continues to impress us with its operational performance and the stock continues to be a disappointment as the broader market sell off takes its toll and the restaurant stocks continue to take the full brunt. We expect the company to report Q2 earnings over the next few days and while we do expect to see enormous year over year growth in Pie Five system sales, we expect to continue to see a challenging environment for Same Store Sales, as the SSS base is still almost entirely in Texas markets. We believe that those markets will continue to face disproportionately difficult consumer trends due to the impact of declining oil prices on employment and consumer confidence in those areas. RAVE is a very very good buy in the low $5’s (where it traded today) for long term investors who can look 12-18 months out, see past the stock market volatility and appreciate the value that is being created by the Pie Five rollout. A proper assessment of the value of one of the fastest growing players in the fast casual pizza space puts RAVE substantially higher than where it is trading today.
4) CVSL – we are working on a more in depth update for CVSL given all that is going on there. Stay tuned.