Blessed by the Potato

San Francisco does a lot of crazy things: banning happy meals, yellow pages delivery, and even made an attempt to ban puppies. Yet somehow only one of those wacky ideas has stock analysts quaking in their boots — and it wasn’t the owners of McDonald’s.

I’ve held on to Yellow Pages (now Yellow Media) for over 3 years now, and I’ve lost too much money on it already to consider averaging down again. But YLO is once again under attack.

10 years ago if I had much interest in investing, I would have scoffed at owning YLO. Google and the internet will kill off that business model in a year or two, my internet-savvy Google beta-testing younger self would have said. But it didn’t happen like that: sure, some businesses put up a website, and even got indexed by search engines so you could find them. Larger chain stores had enough of a budget to ensure they had a decent site, maybe even an online storefront… but many didn’t, and weren’t in a hurry to get one. For smaller businesses, the website would often be something the owner’s kid put together in his spare time, and may or may not have looked like the mess Geocities left behind.

So there was still a strong demand for ads in the local Yellow Pages, and YLO even started offering to make mini-websites for these local businesses on YLO’s servers. Restaurants could get not just their name, address, and phone number in the directory, but also a copy of their menu, a short video ad showing the premises, and anything else they cared to include. Though a tech-savvy person or 3rd party web designer could maybe have done a better job with an independent site, for a small business owner that one-stop-shop for advertising with YLO didn’t look too bad. And heck, for local results, Google bought the data from YLO in the first place, so you couldn’t get around giving YLO their due.

And I realized that YLO wasn’t going to die off overnight. It wasn’t going to maintain its former glory, for sure, but the print directory has been in a slow decline these past few years, while the internet side has been picking up.

Now maybe a turning point has been reached, and it’s finally going to go over the edge like people were saying a decade ago. Perhaps all at once rather than slowly, like I thought. Maybe Google has opened the web up so much that there’s no room for paid listings and basic sites (some businesses just get a blogger account, put up a single post, and call it a day). Maybe their debt is looking to be so massive that there’s no value in the equity.

It’s certainly being priced that way.

But I still hold on: the directory business revenues were down single-digit-percent each of the last 3 years, and it just looks so cheap. Maybe it’s a value trap. Maybe it always was. It’s hard to pound the table and call it a screaming buy when there are so many legitimate concerns about its future. I think it’s too cheap to give up and let my shares go, but at the same time I can’t say with confidence that it’s a good buy (and perhaps I’m making an emotional attachment error of judgement).

And I said it when it was $5, and when it was $4; I’ll say it again at $2: as a contrarian, it’s hard to get much more negative sentiment than there is for YLO right now.

Also, I looked at a few other stocks lately:

The Data Group Income Fund could be yet another Yellow Media: it’s involved in dead-tree printing, and doesn’t even own RFD. DGI prints material like reports and advertisements for a wide variety of other companies. The yield is beyond juicy: at 13.5%, it’s signalling trouble somewhere. And maybe I have a blindspot for obsolescence, but I don’t really see it. The cashflow has been looking pretty stable, and can support the distribution. The debt levels are higher than I’d like, at something like 5X cashflow, but it’s not exactly facing imminent bankruptcy. This is one I need to think about longer, because the logical part of me is saying this looks like a pretty good risk/return, but the other part is screaming it’s YLO all over again.

Corning (GLW) is a US large-cap that makes glass. All kinds of glass, but in particular the glass that goes into LCD screens. That’s where they make most of their profits from these days, and I honestly don’t hold out high hopes that that particular business line will continue to be as lucrative for the next few years as it was for the last decade when the HDTV upgrade spree was in full swing. However, the stock is starting to look cheap enough that those risks are likely priced in. The balance sheet is strong, and moreover, the company has a strong history of reinventing itself as needed (from lighting to bakeware to fibre optics to LCDs). It was just under $17 recently, and that’s starting to look attractive to me, but I’m going to wait for a while and hope it comes down a bit more to give some margin-of-safety. But I will be watching it.

AvenEx (AVF) was an income trust that was too weird to look at before, a tiny company acting like a large conglomerate, chasing multiple unrelated business lines. It has since converted to a dividend-paying corporation and focused in on oil and gas production. It’s about 50/50 oil and gas (slightly more gas), but if I’m reading the reports right (and I’m still trying to build an ability to analyze O&G stocks, definitely not there yet though) then the dividend (>9%) is covered by just the oily half of the business, which is good because they still have significant hedges rolling off from when natural gas prices were much higher. If natural gas prices move up in the next few years, then they should probably do fine, and that’s kind of how I’m framing the story in my mind: a dividend player where the dividend is covered by the oil, with the natural gas side as a bonus if/when NG prices recover. However, capital spending also has to be made, and if NG prices stay low, then in ~2 years as those hedges roll off, they may be in a tight spot and have to cut the dividend to keep up capital spending. Another issue may be reserve life. I don’t have the geology skills to know if I’m reading this right, but it looks as though they have ~11 years of reserves, which is fine, but their reserves are growing at only about half the rate they’re depleted, and I’m pretty sure for stability the replacement rate should be closer to 1:1. Anyway, attractive dividend yield which at least for the next few years is covered by cash flow, with well-managed debt. Not sure whether to buy in though since it is still a bit outside my circle of competence, and I have no idea what to think of the management (esp. if they’re switching over from managing what was halfway to a REIT into an O&G company).

A new frozen yogurt place opened up called Kiwi Kraze, and they have the guess the weight of your sundae and get it for free deal. So I did, and I did :) That may have been related to the fact that despite officially moving the goalposts back from the “don’t gain” to “lose weight” objective now that vacation is over, I gained weight this week. Grrr. It may be because I had a number of real Cokes enter my inventory (free > calories).

Then there were a tonne of fireflies out tonight on my walk home. It’s truly magical once you realize you’re not having a stroke.

I’m starting to turn negative on my BB. I like the keyboard, and between email, calendar syncing, and the omnipresence of the hivemind, I’m finding a smartphone to be just ever so handy these days, but I think my next one might be a droid. I like BBM, and I want to be patriotic, but I really don’t know anyone who said “hey, I really miss the days of trying to carefully manage system memory in DOS. I wish there was a phone that let me relive that experience.” I’ve got 4 GB free for photos and music, I don’t know why my cache of 160-char SMSes and apps has to stay in the shallow end… Recently, my ringer just stopped working. The little message light would still flash, and most of the time the vibration would still go off to alert me to a call or message, but no audio. From searching online, this is a frightfully common problem with the BB, and there are a host of zany solutions, including turning it off and on, pulling the battery out (which is a different off and on), and yes, trying to clear out the pathetic amount of “application memory” available. Some combination of that and doing this to the part near the speaker ended up fixing it.

Random hilarious conversation snippets:

“What are wild Popples called? Armadillos?” I’m eternally amazed at how the mind works sometimes. Like when trying to think of an animal that balls itself up at a sign of danger, one goes first to Popples, and from there to their wild equivalent, armadillos (though I would have also thought Popples had a strong hedgehog influence). Actually, I’m amazed anyone remembers Popples at all.

Links:

A surprisingly good read on whale poop. (HT: Barry Ritholtz)

John Hempton describes the problem auditors of Chinese RTO frauds faced, that may let them off the hook: in some cases, the banks were in on it. If the banks have lost credibility, what are the implications of that?!

An excellent real-world application of Mathematica. Stupid brownie nuts. “I hate nuts in Brownies.” “Who does that?” “I don’t know, old people?”

The Globe has another article lamenting the limitations of electric cars, this time moaning that the cars can’t handle the all-day all-out testing of an automotive press junket. The author seems to be a bit misinformed, or got his tenses wrong: “pure electric vehicles will be glorified golf carts, useful for short distances, in good weather conditions.” Depending on what you mean by short distances, that’s true: they’re good for commuting within the city, but I wouldn’t count on one for trips to the cottage. But most families in urban areas have two cars (and pretty much all the ones with cottages do), so there is a market for an electric commuter as a 2nd vehicle. But I’m not saying anything new for you guys. Most outrageous was the closer: “The infrastructure necessary for the next generation of volume-produced passenger vehicles will determine their success. […] My money is on fuel cells and hydrogen stations.” I’ll take that bet.

Yet another bank housing analyst turns bearish on Canadian real estate.

And Canadian Business has a bearish article out as well.

A 3D printer using… chocolate. It makes so much sense: it’s a self-binding polymer-type product, so it can form complex 3D shapes (like bunnies), and is well-suited to being put down in layers. Plus, it’s chocolate!

My officemate went out for lunch and had Lamprey. I remarked something along the lines of “ugh, it’s a parasite!” “No, it’s fish!” Well, a parasitic fish!” which lead to looking it up to find out what it does eat.

I had to recoil at the picture of that gaping toothy maw in the picture. “That thing gives me the creeping horrors.”

The creeping horrors, I explained, is a complex and terrible feeling. Not just that it frightens me, but that I am quietly disturbed somewhere deep in the foundations of my self that such a creature exists in the real world, and is not merely the product of a sick mind in a horror movie. Indeed, that such a terrifying visage is so mundane that my friend just had one for lunch. It’s a slow, insidious feeling of subtle horror that gradually eats away at a person from within, at first a mere tingling of disquiet in the back of the head that the universe may not be such a friendly place after all, and ending with all rational thought submerged beneath quivering black jelly of pure evil.

“So is it a bubble? Glancing at popular metrics such as the price-to-income ratio or the price-to-rent ratio, it is tempting to conclude that the housing market is already in clear bubble territory and a huge crash is inevitable. Tempting, but probably wrong. When it comes to the Canadian real estate market at this stage of the cycle, any statement based on average numbers can be hugely misleading. The truth is buried in the details—and there the picture is still not pretty, but much less alarming.

The average house price is still rising by 8.6% on a year-over-year basis. However, take Vancouver out of the picture and this rate slows to 5.6%. Exclude both Vancouver and Toronto and the price increase is only 3.7%.”

So if the country as a whole is close enough to be a bubble that it’s tempting to conclude such, but is really only being driven by Toronto and Vancouver, left unsaid is the conclusion that Vancouver and Toronto are in bubbles — bubbles large enough to skew the averages for the entire country.

I saw someone on BNN make Bennett Environmental (TSE:BEV) a top pick this week. I had never heard of the company before, and I like the phrase “classic value play ala Benjamin Graham” so I decided to have a look.

Irwin Michael isn’t just talking his book in the normal sense — he’s a major shareholder with ~18% control (or rather, his fund is). There was a recent proxy battle with a new board eventually being installed, and the proxy circulars are surprisingly good reads: describing a drama where the old board had next to no ownership stake, and was allegedly trying to get the company to use its cash hoard to buy a company related to a director, or make otherwise bad deals. And speaking of a cash hoard, they have a pretty hefty one: the stock closed Friday at $2.22, and had about $1.65 in cash.

Operationally, the company’s in trouble. When they have business, they generate tons of cash and look fantastic. But the technique they use for soil remediation is energy-intensive and costly, so it only makes sense to fire up the equipment for a large batch of soil. Thus, they stockpile contaminated soil until there’s enough to run a batch for a few months at a stretch. They shut-down in September (10 months ago!) and are still only 3/4 of the way to having enough soil stockpiled to begin another processing run. It’s not a very attractive business if they’re only making money in alternate years, and burning ~$7M/year twiddling their thumbs the rest of the time. Though even then, if they were trading closer to book (i.e., <$1.75) I might take a small position just to see what happens. I won't even bother putting this one on my watch list to see if it gets that cheap though, because with a billion dollars to play with, if ABC Funds wants to put a floor under it at ~$2 they easily can. Mr. Irwin's point was that with a new board and that big pot of cash, they'll go out and buy some other company which will improve their position: maybe something in a related industry that isn't quite so crushingly cyclical. It could be an interesting ride, but I'm not seeing enough safety at these prices to buy in on the what-ifs of an as-yet unidentified acquisition and the merits of a new board and management. Plus, there's a huge question with acquisitions like that: maybe they'll buy a company and the synergies or the price of the deal itself will return more than the cash value to the shareholders. Or maybe they'll over pay for something, burn through the remaining cash while they wait for contaminated soil to pile up, and have to declare bankruptcy. Or maybe something in-between: an acquisition that brings value, but only just enough to make up the difference between the $1.65 in cash and the $2.20 share price, leaving anyone who buys now somewhat disappointed. Anyway, interesting story, but not for me.