Swimming in troubled waters

By Jeffrey Cohen, Investment Advisor Representative
US Advanced Computing Infrastructure Inc.
​May 20, 2022

It occurs to me that I will go to extraordinary lengths to avoid finishing a white paper, calling or writing potential clients, or 'gasp' programming our model. I will perform fundamental analysis on stocks. I look for signs that 'this time is different' when I know it is the same. That the laws of finance and economics are as constant and true as the laws of physics and behavioral science.

Yesterday I researched a MEME stock named Big Bear AI. This is a government contractor to the DoD and other agencies that require secure decision support services and software. This is like our business, except they have ongoing projects and we are entering the field. This company has a cost and revenue model that yields no economic profit. This was true before they went public, and is now slightly worse off due to the costs of being a public company. BTW, great mission and we support them 100%, but we cannot justify their current stock price at $10.

Yesterday we also researched Vroom, a used car dealer and eCommerce platform that is moving into used car financing (as a keeper of the paper on their books). The due diligence was not positive for us, and we said so on Twitter. I heard from an analyst that I was likely wrong and they shared a more optimistic point of view. I responded with the bare bones of our analysis.  This unfortunately is not a buy for us at the current price of $1.50. Today, we looked at how their bonds were trading. They were clever and issued 0.75% bonds. This morning they yield 29.47%. This company spent $417M of their cash last quarter on acquisitions, losing money in operations and the like. Imagine if they would have bought back their debt which last traded at $33.80. What a great way to increase shareholder equity! Well, they didn't do that...the $417M is gone...and now they need to find room on their balance sheet to hold consumer used car loans, as a borrowing cost of 29.47%.

Today we looked at Party City Holdco. We like this business. They sell party supplies, costumes, and in a word, fun. They do about 1/4 wholesale and 3/4 retail in large US stores. My daughter worked there after school one year. Cool place. The stock is down to $1.18 today and we cannot justify the purchase based on current performance. They owe too much money $1.346.7B in long-term obligations along with other debt. The interest payments will be unbearable, especially as their core business operations are now unprofitable due to inflation.  Adios Mios, and their debt trades at $74 for every $100 of debt yielding 18.732%. They redid their financing so they only owe ~$23M in 2023 which they can likely pay off, then have a breathing spell until 2025. That is not what we are worried about. Assuming they can pay their debt, tighten their operations, make their interest payments, and carry on, how likely is it that trade partners will finance new inventory? Once their trading partners stop extending seasonal credit, then they have to make use of their $135M in available borrowing capacity (SEC FILING HERE) which won't last long.  We hope they make it, but cannot invest our money in their stock.

We are still hopeless romantics with money invested in a biotechnology dream of the company that cures cancer, solves obesity, and helps those with chronic skin rashes due to inflammation. Everyone has to have at least one dream, and ours is here in Corbus Pharmaceuticals. I think this stock is equally likely to be $1.00 as it is to be delisted by 12/31/2022. It trades at $0.33 as we write this.

Now, what we realize is that there are stocks of companies that make a profit which we should be analyzing. They may not have a huge Twitter following and we may not get MEMEs or .GIFs posted with apes or Leonardo DiCaprio. This is disappointing to us, we like seeing those. 

To be continued while we analyze one more 'troubled' company. So far, so good actually.