Friday, August 5, 2022

No Creativity needed

I met an analyst who knew every detail about Clorox (the company and its ubiquitous disinfectant have the same name). 

He knew what every product line was, where they are manufactured, what chemicals are required, which suppliers are used, and more, down to the trucking companies that serviced each manufacturing plant.

But he was almost always wrong on the direction of the stock price.

He was wrong so often that I quietly labeled him as having a "reverse golden touch". Whatever he said the stock would do, bet on the opposite.

The analyst understood the business but failed to understand the stock.

Knowing the business is not the same as knowing the stock. 

They overlap, but they are not the same.

To know a stock is to know what moves it. 

Investors, especially of the institutional breed, would say earnings, and quote Buffett and academic research along the way.

But if everyone thinks only earnings matter, it won't. 

To have an edge would mean transcending earnings to elements that predict earnings. After everyone knows those elements, the edge would have to transcend again.

And the cycle repeats.

This is why the markets are so competitive, and attract participants of a similar nature.

If you think that standard fundamentals matter most in a stock, you don't know the stock. 

Let's get back to the topic. How do you know what moves the stock? They aren't the same for every stock. And you can't know for every stock.

I think it's perhaps easier for stocks that exhibit some form of extreme qualities. It is those extreme qualities that move the stock.

Take Apple. What is its signature product that accounts for its extreme success? That moves the stock.

I may know what moves the stock, but it does not mean those elements are knowable.

That sounds cryptic, so hear me out. Knowing what does not mean knowing exactly what.

Take Apple again. iPhones matter a lot for Apple stock. But there is no way for me to predict iPhone sales correctly.

It's about the important and the knowable.

To know a stock is to know not only what is important, but also the chances of you being accurate on those.

A stock that I think I know is Alliance Creative Group Inc (OTC: ACGX).

ACGX designs packaging, provides printing services and packaging materials, and fulfills orders for consumer goods. It operates out of 7 warehouse locations.

Think of ACGX as the first stop for emerging consumer brands. ACGX works with young brands to design and print packaging for their products. When products are sold online or elsewhere, ACGX also fulfills orders by sending the products to buyers.

ACGX is extremely small and cheap. It trades with a $400,000 market cap and .73x tangible book

Between 2011-21, gross profit was unchanged because of competition and mismanagement.  What has changed is expectations. In 2011, it traded at 50x book. Today it is about 1.5% of that.

Among the company's questionable decisions is an expansion into trucking. The capital-heavy economics of trucking made it difficult to manage. Management finally sold the segment in 2019.

Another bad decision was in acquisitions. ACGX bought and invested in PeopleVine (a CRM platform) for about 400-500k (at or exceeding its market cap today), which does not seem to generate revenues and should be sold or written down.

ACGX isn't thriving, but has survived the business cycle and is even sprouting young shoots of growth. Tangible book per share has almost doubled since Covid-lows in 2020. Revenue grew 19% in 2021 and another 11% in q122. Gross and operating margins have stabilized. It is even cash flow-positive.

Its industry is very competitive but has tailwinds. The digitization of commerce and dynamics of the creator economy make creating, marketing, and distributing a product fairly easy with decent unit economics. This should allow emerging brands to proliferate (as seen on YouTube/Facebook/TikTok), and support ACGX and peers.

It may even stand out from peers with its roster of high-profile consumer brands including Uber, Kroger, Aldi, and Paul Mitchell.

CEO/Chairman Louis is the key insider, who seems ready to see through the turnaround by maintaining a significant stake (100% of preferred stock and 67% overall) since becoming CEO in 2011.

Metrics at the extreme underscore the opportunity:

  • Extremely low valuations: ACGX trades at only .1x LTM sales, .5x GP, and .73x TB. In its heyday, .5-1.0x sales were common. Just reaching half of the lowest in the range is enough for a 150% return.
  • Extremely small: Very few investors look at sub-$1m companies. The smaller the company, the fewer investors involved, the easier to find under-valuations.
  • Extremely discarded: The stock has traded in a narrow range since 2020 (except for a brief period in 2021) near all-time lows. The more discarded the stock is, the lower expectations are, the lower the hurdle required for the stock to move.

ACGX banks on being creative to be competitive. But investors do not need to be creative to make good bank on its stock.