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What follows is my entire Actionable post from this morning, as I think it shows my thinking and philosophy, and an example of what I am doing on this effort.√Ǭ† I will not make a habit of posting these in the future, so if you’d like them in a timely manner, the subscription would be the route to take, so all aboard.
There was some very bizarre trading in GAP Friday, as the stock initially sold off steadily all day on very average volume. Then about an hour before the close it went into free fall, before reversing right at the close.
GAP is by definition a mid cap stock, with a market cap of $600 million. It is close to being a small cap because of its depressed stock price.√Ǭ† Additionally, the market itself is in liquidation mode, which means there isn’t a great deal of depth to the buyers. In the case of GAP however, we do know there have been serious buyers and at higher prices, the insiders, Tengelmann, Gabelli funds. However, unlike Berserkers (hedge funds), these folks are not glued to their trading screens every minute.
I can only guess as to the causa proxima of this Friday action.√Ǭ† The was no news to account for it, not even an analyst downgrade that I could spot.√Ǭ† Often folks assume “somebody knows something” with trading like this, but I think I have illustrated time and time again over the last several years of Winter Watch that “they” usually do not.
The only thing that makes much sense was that a large margin account was liquidated by a clerk, and late on a Friday afternoon, when few were around.  Or it could have been a large automatic sell stop at market put on by an amateur, a Berserker, and or someone very sloppy. There were just hundreds of 100 and 200 shares electronic trades hitting the market as if in a que, and the market makers weren’t there either, really failing their function. It just looked too indiscriminate, and you rarely see this kind of action unless there is announcement or some actual event.
If someone wanted to sell say 300,000 aggressively (my guess of the causa proxima), they could have shopped it, and maybe a 40 cent haircut would suffice. But doing this late Friday afternoon when the market in general was quiet and shutting down, does not quite compute. I have a device on my Schwab Street Smart Pro, and it showed a number of larger trades including one for 268,000 on upticks near the close and AFTER the close, as if someone got word. There was one for 75,000 and a couple 25,000 all on firmer AH prices. In fact look at where the real volume spike was on the one day chart, right at the close, when it came back. By the way use Yahoo’s interactive chart for this, you need to download Adobe 9.0 Flash.
This could get to be a pattern down the road, in lots of issues. The market has a very chunky liquidation process going on it. If there are margin calls as well, who knows what (and when) could get dumped. As well, the Johnny Come Lately “analysts” (and short sellers) have finally figured out there is a serious recession, and now that the stocks they cover have already been blasted 30-50%, they downgrade them.
I am LOOKING FOR this! My personal situation is that I have far too much money sitting in 1.8% yielding T-Bills. I am HIGHLY LIQUID now. I am not invested much, and am looking to put money to work. Thus my mindset is different from those scrambling with margin calls, and cutting losses. Keep that in mind if you use me much for ideas.
I have decided based on this to set up a second tracking screen of names as an alert that I might buy on an indiscriminate blue light special like this, or even as reaction to two cent earnings misses. I will try and send out brief actionable alerts, but may not have time for immediate write ups in that kind of situation.
But, let me describe an example of the kind situation, PF Changs (PFCB), that I am looking at looking as candidates,√Ǭ†√Ǭ† Yes, I am actually looking at consumer discretionary restaurant stocks going forward. In this case I am applying the Peter Lynch principal. I love this restaurant personally. I hung out there and took dates there when I lived in Portland, Oregon’s Pearl District. Somehow it really fit my demographic, and yes the dates there were a success. They also have a healthy menu section, which has appeal.
Early this year, I created a game theory whereby I would use a company performance in the 2Q and 3Q as a litmus test. If they held up well in this consumer environment, that is a good thang. And I have news for the analysts, the consumer recession didn’t just get started, it been here all year in spades. There was little doubt in my thinking that a company like PFCB could not maintain its prior trends, that was a given. And in fact in 2Q they did not. However, results were solid, business has not evaporated at all, impressive to me because I have a lower jump bar in place. Additionally the worst of the Mad Max price pressures for one of their key input costs was the worst in 2Q and has since abated.
Rice:
Additionally, I also determined that there was no way I would pay 18-20 times earnings for a consumer discretionary stock, even a high quality one.   But if I could pay 12 times earnings for a name like this I would be thrilled.  I think 1.30 (company is guiding 1.36-1.42) represents the baseline recessionary earnings for PFCB, so that would be around 16.  Once again the implied volatility in the naked puts are high at 70. So if this stock broke enough I would try and sell the 17.5 strike put, and create around an 16 entry price if exercised.
So what is the set up here? First, PFCB has a short seller pile on galore representing 40.7% of float. Personally in the near term I think they may win, but then what, how do they get out?√Ǭ† Management insiders hold a decent stake of 6.7%. We are getting the analyst downgrades, and Friday after the close, one of the annotated high fliers, Chipotle imploded promising some weaker prices next week for restaurants in general. You don’t get great prices with cheery outlooks.
PFCB has $528 million of real estate on the books, and is modestly leveraged with $190 LT debt. In effect they are a conservative real estate developer (with purpose, not speculative) and first class restaurant operator. I have little doubt that they make good RE purchases and when they develop, their cache adds additional value to the properties. I would argue that the $528 million number may be conservative as a result. Over half their Bistros are pre-2003 transactions, and I think they have a great knack for picking locations. In the past when I have seen theirs, I have exclaimed, “Now that’s where I’d put a restaurant!”. It is also likely that PFCB would ratchet up stock purchases if the stock sold in the teens.
click to enlarge:
Portland PF Changs location in my old neighborhood, that is Whole Foods across the street. Incidentally book value on WFMI is 10.73, and estimates next year are 1.09. I would aggressively buy WFMI at 12-13.
Typical PF Changs interior:
Book value is stated as 12.94. Operating cash flow is $140 million, and free cash flow is $40 million.  So if I can get into this with an enterprise value (add debt to market cap) of under $600 million, then you should be able to see the merits as a business. Mentally just picture this proposition being offered to you directly from management, if one of these jettison situations materializes. Would you accept it?
Basically I am engaging in this mental process on about everything I look at. As such I am not interested in using stop losses, as the volatility in this market will in fact probably stop me out. Then what? Instead, I would likely want to accumulate more, at least if my assumptions are correct. For example in the GAP episode, I saw strange trading, but nothing that changed my analysis.  If you feel you need to hedge against loss and as GAP illustrated Friday strange things can happen, then sell covered calls, the premiums are great.
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