MTXX: One’s Trash Is Another Man’s Treasure

Business Description

Matrixx Initiatives Inc. (MTXX) develops, produces, markets and sells innovative, over-the-counter (OTC) healthcare products with an emphasis on those that utilize unique, novel and/or proprietary delivery systems that provide consumers with “Better Ways to Get Better ® .” Through our subsidiaries, we market and sell products under the Zicam ® brand. Their offerings are

(1)      cough and cold category: Cold Remedy

(2)     Allergy/Sinus

(3)     Cough and Multi-Symptom relief; and other cough/cold.

Current Events

If anyone watched CNBC or read WSJ in the last month (June 16, 2009), ZICAM was attacked about their swab and nasal injection security. Why? FDA said hey you guys have a big problem; there have been complaints about people losing their smelling ability. So the stock was really hammered:

The stock went down from around $20 dollars to about $5, roughly 70%. Why did it decrease so much?

(1)     Smart money left and people over reacted because of FDA letter, creating a huge drop in price.

(2)     There are two questions regarding Esco’s future. Since there cold remedies contribute about 71% of there sales, how will this affect the top and bottom line of the company.

Therefore, the biggest unknown is how much this will affect the sales, and also how much can they cut down their sales.  This will clearly affect their earnings potential. So I mapped out a couple of scenarios, all of which do not look very well. To keep it conservative, I am going to assume sales will decrease 40%, and recurring expenses are around where they are, which gives me an earnings that is negative that will equate to negative cash flow. Fortunately, the company has a $8MM revolver that ends July2009, assuming they do not extend it. Though I do not think this negative earnings will continue on a long term basis, I am not comfortable holding this security anymore and sold the majority of my position (I bought shares that averaged around $4.70.)

MTXX graph

Some people thought I was crazy, and my investment thesis was quite simple because people were overreacting about the news the stocks traded below their net-net working capital. Looking at worst case scenario, the company will file bankruptcy and liquidate— which is highly unlikely. If the firm was to do so, the firm would liquidate their assets. I calculated the net-net working capital, which is a current liability minus total liability (no long term debt). Out of their whole current assets, 60% is cash and short term investments (money market), which mean their current assets, are quite liquid. At a net-net working capital per share of $5.22 and buying at an average price of $4.70, this was a no brainer. I was only looking to pick up a quick 10-11% because people were overselling the security, and ended up with a 22% gain.

Excel

I would not be surprised if the net working capital per share level is retested, but thought it was an interesting + positive story for a company that is not having the best of news this past month.

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The Market (Part 1)

The last couple of years, hibernation took the best of me, but now I am back! For awhile, I was perplexed by the economy and I have been taking the time to analyze and understand the new destination of where we are headed.

Mr. Market has been quite on a tantrum this past year. First, he was trying to understand what was going on. As you can see from the graph below, things were hectic (according to VIX—the fear index). VIX was above 20 when the average has been around 10 -12. Then, a whole mayhem occurred, Lehman, AIG, Fed’s quantitative easing policies, and just complete fear shook the market to level that were unreal (LIBOR above 4-5% and OAS spreads for AAA investment grade names were trading as if they were BBB, some even as if they were junk. Now as things are starting to subdue many people are trying to navigate the current market.

VIX

VIX

Currently, the yields are ridiculous low right now with 1 year rates around .44—a lot can be said on what the government has been doing (buying up treasuries on the short end). So the question is why am I going on a rant on how the economy has been doing? Well there are certain macro factors to consider—inflation, dollar weakening, commodity prices, the future of securitization, and the emerging markets.

Mr. Market has shown us ups and downs throughout this year many opportunities were presented. At one point, there were stocks trading as if they were options (financial firms, energy). Opportunities exist one just have to search because individual companies can do well even in an industry that is not performing very well. Some plays I will discuss in my next several posts will be bankruptcy and distressed debt. Some say it is too early to jump on that ship—I say sometimes the market doesn’t assess risk correctly. So let’s see if we can crush Mr. Market with his tantrums and pocket some awesome returns.

Economy Outlook provides Opportunities

The outlook of the economy has shown nothing more than what many people can refer to as the perfect storm. There is a weak financial system many stemming from the real estate correction/bust, consumers’ purchasing power is dwindling, as seen through AXP and Tiffany’s, there is a weak dollar and the risk of the rise of inflation.

Yes, there are many opportunities for the long term in many sectors here for your portfolio; it is important to look at short term possibilities. We have seen that prices of business are dropping and when prices of decent business decline due to market conditions, it creates great buying opportunities due to fact that they may become acquisition targets in the short term.

MGM (acquisition .. short)

Let’s take a look at MGM. At the moment there is a tender offer for 80 dollars. It is currently trading at 68 dollars. Best case scenario is 17% return. If you remember the Dhando Investor method, Heads vs, Tails à Head you win a lot, Tails you win a little. Obviously this price is not set on stone, but the stock has traded between $61.17 and $100.50 over the past year and I believe can provide substantial profit in the short term.

NAK (short and long benefits)

I am a huge fan of this company. It holds the Pebble Project which will be magnificient: holds gold, copper, and moleynebum . With the risk of a recession, and the weakening dollar, people retreat to precious metals. Also, remember, Anglo American, the mining giant, has taken partnership with this company. If you look through my past articles, I value this stock over its current price. I would recommend some 3 month calls for the current price and let the call option speak for itself. It will increase in value. Believe me. The market hates uncertainty, and this company has one uncertainty. How big is the Pebbles Project, there is high uncertainty but low risk because you can liquidate the company right now and still get more the company than what it is trading at right now. HELLO, it is screaming opportunity.


I’ll end with a quote. Buffet said, “

Be fearful when others are greedy and greedy only when others are fearful.”

Apologize for the lack of Maintenance

Hello readers,

My laptop has been broken for a month or so, and it has been hard to write articles. I have been up to date with the market and have really been focusing on how to improve my articles. I will be back shortly as I am trying to figure out what kind of lap top I would like to purchase.

If you have any suggestions please do share.

I ll be back Soon.

Xavier

Limited Brands

Recently, I have been assigned to a sector in college club. Very out of the norm for me since I normally just let ideas naturally come to me. So I did research in the retail sector as well as Luxury Goods. One of my female friends talked about Victoria Secret and their fabulous way of selling their goods. I did some more research and realized the true potential of this company.

The reason why has to do with one to two things, the main reason at the moment is that the apparel division is being sold / liquidated and actually hide the value inherent in the company’s other businesses. The earning that have been reported, has been decreased due to their apparel business.

Limited Brands consist of three business segments. First you have your infamous Victoria’s Secret, Bath & Body Works, and Apparel. The company owns Mast industries which is a 3rd party distributor for current and former Limited Brand subsidaries. LTD also owns some incubator concepts such as white candle. Mast are planning to also be a sourcing agent with other companies outside the limited brands. Limited Brands has had some difficulty with their apparel clothing section. Given the well-known brands of their apparel section, their sourcing agent, and incubators concept, these businesses could be worth much more than the current trading stock price if they were sold to a buyer willing to invest in the stores and in a good merchandising team.

Within Bloomberg, it is stated that:

July 9 (Bloomberg) — Limited Brands Inc. agreed to sell 75 percent of its namesake clothing chain to buyout firm Sun Capital Partners Inc. to focus on Victoria’s Secret lingerie stores and its body lotions unit.

As mentioned earlier the price of the stock has been highly undervalued because apparel division have ignored the huge potentials of the welll known subsidiaries of Limited Brands. The long term value has been construed for several reasons:

  1. Management estimated an increase in inventories of 40%-50% – the companies focus lies within the out of stock and provide increased sales with (reasonless items)
  2. The competition for Victoria Secret and Bath Body Works has increased due to JC Penny’s, TGT, and WMT — these competitors have hardly no impact and Victoria Secret has for the time being providing promotional strategies to increase loyalty among customers and discourage their competitors for the time being.Also La Senza was just recently acquired (Canadian Based)
  3. Profit margin has slightly decreased due to the promotional levels

So of course people are going to sell? Short term outlook does not look promising.What about the good things going for LTD? Well let’s check it out, they just pretty much sold the important losing subsidiary, apparel. Look at Victoria’s secret advertising campaign PINK casual wear which has been a success overall. From other sources I have read there are potentially thinking about PINK stores. They are currently expanding their international market, first in Canada for lingerie and now there are many international growth opportunties which will increase its future earnings.

A great opportunity comes from Mast’s ability to grow its sourcing agents and sales through its subsidiary. MAST which could potentially be spun off, they are managing it and growing the company outside of LTD can provide more of an amazing opportunity. Let’s keep in mind that the CEO has an impressive record with his retail concepts, look at his awesome creations BBW, Victoria Secret, Express, Limited Brands former Abercrombie and Fitch. All that have worked out well, and some that have been sold off or spun off. I trust the management and I trust the future outlook of LTD.

It is pretty simple the stock is trading at the $22 dollar range, yet the two companies that management is going to only focus is worth more that its Market Cap and Net Debt. Also,the Apparel division is worth an additional extra dollar + as a conservative estimate.

The future outlook, this stock can is worth around the 28 … 29 dollar range. If you want a full depth analysis please let me know. I gave a direction where to look.

Well that’s a plain, simple, and to the point description / outlook.


Be Greedy Only When Others Are Fearful!

Warren Buffet could not be any more wiser. After reading some headlines on certain stocks I watch. Northern Dynasty (NAK) happened to appear in Motley Fool. As you may already know, I am a huge advocate of Northern Dynasty Long-term.

In the short run, after I wrote an article on it, it was around $16 dollars and it went as low as seven dollars. The analysis has not changed, actually so many people became speculators and invested in the stock because they thought Rio Tinto was going to buy it out, but Anglo-American became a partner and most people did not like the deal.

Anglo-American is covering the costs and helping to determine and finance the exploration of the true potential of the Pebbles project. The $1.5 billion dollars transaction to ensure Anglo-American should be completed by a multi-step pay-off in 2011.

Anglo American considers

Pebble’s Project as one of the world’s largest copper-gold-molybdenum deposits, Pebble has the potential to be a world-class operation. The project offers Anglo American a unique opportunity to be involved in a very long life, low operating cost mine.

As Mohnish Pabrai would say, Northern Dynasty is a low risk and high uncertainty. And what does people in the street do with high uncertainty? They bash it with all their mite, and the stock price depresses. Fortunately, investors, like us, have the opportunity to invest sums of money to have it grow! I would recommend checking out some of them options, some do provide excellent opportunities.

Motley Fool said

There’s one problem with going against the grain on Wall Street: When professional traders get pessimistic, their grim outlook can become a self-fulfilling prophecy — at least in the short term. The more desperate institutions become to abandon a stock, the lower the price they’ll accept to get rid of it. And as their “ask” prices drop, the “bid” prices of buyers will fall in tandem, creating the very price decline that they feared in the first place.

Until the selling stops.

If your analysis of a company stays the same, and you truly believe that stock in the long run will outperform many other companies and will let your money grow.

BE GREEDY and buy some more!

Read Contrarian Shopping List by Motley Fool, excellent article.

Bargain Stock Found by Accident

Someone asked me about what I think about Pengrowth Energy Trust. Pengrowth Energy Trust operates an oil and gas royalty trust. The company pretty much engages in acquisition, ownership and operation in oil and natural gas properties.

I am not sure how I feel about the market due to the fact that there have been many explorations in the near future that will fudge with the supply and demand of the company. Also, there has been a recent issue with the tax return with royalty trust that may arise as a big problem. PGH will take a killing hit on their stock price because the dividends will not support itself for the short run. The old tax was only like 10%, now it is going to be north of 30 percent. If you are worried about short run transactions then do not buy or hold this stock. I think a really good company in energy is CHK. Chesapeake Energy is a big cap company that is one of the largest producers of natural gas. The company has an excellent management team and strong business fundamentals that put them in the best position than anyone else in the industry.

Chesapeake energy is quite interesting due to their hedging techniques. According to their site,

their hedging programs reduce the risks inherent in acquiring and producing oil and natural gas reserves [since they acquired many territories over the last few years,] commodities that are frequently characterized by significant price volatility. [Chesapeake] believes this price volatility is likely to continue in the years ahead and that they can use this volatility to the companies’ benefit by taking advantage of prices when they reach levels that management believes are either unsustainable for the long-term or provide unusually high rates of return on our invested capital are very good in hedging.

Based on past results, they are good managing their reserves. They have the best technology in the natural gas. In a commodity industry, it is all about having a cheaper cost and Chesapeake has that cheaper cost, therefore giving them an edge over their competitors. The company is suppose to increase there reserves at a teen percentage. How do I know that they will reach their targets? Due to past results, the managers have always underestimates so they can outperform. The reason it is so cheap because they have a lot of debt and made a lot of acquisition. They are not risky at all because they are paying off their debts and their acquisition will pay off their debt. Also, CHK is really really cheap. They are now pretty much a monopoly in the Midwest. It should be a 40 dollar to a 60 dollar stock but it is trading at 33 dollars. Worse case scenario you have a 70 cent to dollar.

For more information please do read Motley Fool article: Click Here

I do not own this stock, and a special thanks to my friend Eric who gave me guidance to this analysis


August 2019
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