My Own Analyst

Lots of Supply of ENV

ENV filed a $250mm shelf, allowing them to issue debt or equity.  Given the large size relative to the market cap of $450mm, this is rather interesting.  Perhaps they are looking at doing a very large acquisition.  Done correctly, it could be very bullish, but it could also be a risk.  

Interestingly, at the same time, there are 8.5mm shares about to be offered, which is about 25% of the company.  It's not the company selling - it's mainly private equity fund holders (probably tax-driven).  It creates an interesting dynamic of being able to buy the stock probably in the low 13s.  I like the company, but I feel like it's a tad expensive here for now.

 

Envestnet Posts Solid Quarter

ENV is one of my higher-confidence names in top 20.  In case you haven't looked into it, it is a platform for registered investment advisors, with over $80 billion under management or advisement.  The growth is stellar, though the valuation is rather high on a PE basis.  This year's earnings are depressed by some strategic acquisitions that they closed earlier.  This is a hidden gem in my view, with powerful trends working in its favor.  Every single day new advisors are leaving Merrill Lynch or Citi and forming their own company.  ENV allows them to be small but look big to their clients in terms of processes and products.  

Their sales growth was better-than-expected by a little, with a slight beat on EPS.  I think that ths stock will often be too rich for me to want to own a lot in the model, but the target is a moving target (pun intended).  I will review this weekend, but every month the target should go up about 2% - it's growing that fast.  I wish I could say that about all of the stocks in Top 20!

8-K Filing on Top 20 Name

EZPW, which has been troubling me with its poor performance, disclosed a few things tonight that don't bode well.  First, the CFO is out, with another senior executive taking on that additional responsibility.  I really liked the old CFO - this past one wasn't so great.  Still, it won't likely be well received.

Second, the advisory fee, which is somewhat controversial, has actually been increased to $7.2mm from $6mm per year.  The filing went to greater lengths than historically to justify it, but it won't sit well with outside shareholders.  Worse, there was an allusion to "strategic challenges ahead".

Third, there was a change to the compensation plan that allows the Board to make bonuses ex certain factors.  I guess this means we should expect these certain factors (write-downs, etc.).

I am pretty disappointed - it was stinking up the joint yet I stayed with it because it is extremely cheap.  I can't sell it out of Top 20 Model Portfolio without some idea of where it will trade, so I will likely address it Monday when things settle down.  Support is as low as 18, but perhaps it won't be that bad.  

That's Why They Call It Speculation

Wow, looking at the details of the bailout on Knight, clearly they were desperate, as the deal to save KCG was essentially done to save the jobs and not the shareholders.

Apparently they issued a convertible note struck at just $1.50, and it pays 2%.  These are rough calculations, but here is what happens to TBV and to EPS.

On TBVPS, the diluted share-count rises from 96mm to 366mm.  The new equity value of the firm is 1 billion, so the result is about $2.75 per share.

On EPS, the calculation is harder, as it's difficult to tell what happens to sales now.  I project that ultimately it will be less impactful, but, in the near-term, let's assume earnings decline 20% from what was previously expected.  The interest will impact them by $8mm a year, but they won't be paying any taxes for quite some time.  Running these calculations on the new share-count, I am coming up with about .50 per share.  10PE would get $5.

The stock is trading at $3 today as the shock of "$1.50" hits the market.  Who knows how it plays out in the short-term, but the liquidity event is OVER.  I guess one more unresolved issue is potential fines, but I doubt they will stick it to the company that is #1 with retail orders.  This was really a fluke - a one-time freakish event, a perfect storm.

I thought that the "below $4" level was good before, and now I know it is in the long-term.  The stock, though, could take time to work and is probably not a great speculation unless it drops back to $2.50.

Knight Lives to See Another Day

Anyone who dabbled in KCG is likely going to be happy...

http://www.bloomberg.com/news/2012-08-05/knight-said-to-get-400m-infusion-in-sale-of-convertibles.html

 

Cardiac Call

I don't know if anyone got involved with KCG (Knight Capital), but it has been highly volatile.  There is a huge franchise here, and this is classic game theory.  No one wants to pay a lot, and if only one buyer cares, they will steal it.  Cantor is rumored to be a buyer.  The tangible book value is 10 after the loss.  The earnings power is huge, even if they permanently lose some customers.  The estimate (before this week) was to earn .85 this year and 1.35 next year.

After I called it out yesterday, some brokers quit using them.  Ameritrade is back apparently.  If they don't go under, it could be a double.  Maybe I am off , but I view this as an option at 4, with a 1/3 chance of zero and a 2/3 chance of 8 or higher.

A Highly Speculative Trade

Not an official recommendation, but Knight (KCG) is trading below 4.  The company is out of its disaster, quantifying the loss at $440 mm.  The tangible book value drops from $10 roughly to about $5.50.  Cash on the balance sheet at 6/30 was $550mm.  This could end poorly, but the likely scenario is that they are rescued at a higher price than $4.  I think that this could yield 50% over the next couple of days.

JPM Question

Carlos wants to know what I think of JPM below 35 after the slight pullback.  I think that there is a lot of fear about the size of the loss, and I don't think it matters one way or the other, as this is a "one-time" event.  I see big support near 34 and think it can get to 39 after they report.

MAIN - Secondary Offering

Some of you may recall that I attended a luncheon with the CEO of MAIN earlier this year and predicted that they would do a secondary (http://ab.typepad.com/my_own_analyst/2012/03/the-main-thing.html).  At the time, I suggested that TCAP or FSC were better investments.  Since then, MAIN has been crushed, and now they have announced a $80mm secondary, which is substantial (more than 10% of the company's equity value).  This is a premium BDC and a great income story.  The stock is about 22.50 today.  I like it at 21.50 should it get there, but, if you own TCAP, sell it to buy MAIN here.

Dimon Dazzles: Buy Banks

What a tough spot JPM CEO is in, but he is handling testimony well this morning.  I know I said the stock was likely a buy when the news broke and that it has traded lower, but this seems like a great chance to grab the stock amidst lots of negative sentiment.  Perhaps a better play is BAC, where we have our ST trade.  It's nice to be out of the limelight!