Sunday, January 29, 2012

They Don't Always Ring a Bell at the Top But They Sure Eat a Lot of Steak

Here's the thing about IPOs. They are about supply and demand. Yeah, sure, access to "permanent" capital, "liquidity events" for the founders and the Mitt Romneys, recapitalizations, and so on, but, fundamentally, they are about supply and demand. Offer too much stock, and it might be a flop (see GRPN's "float" in their I"P"O). Generate robust demand, and it might pop. But by the time a company gets to that stage, it has been scrubbed, polished, shopped and priced to perfection (which is why Uncle Warren does not play the game). Demand comes in cycles, and high beta companies usually go public later as they need to show a good upswing in results.

The Facebook IPO filing hogged all the attention this week, but what caught my eye was Del Frisco's, a steakhouse chain, filing an S-1 for a $100 million IPO. Uncle Lehman (now trying to pay off his creditors) has bought me meals in the Del Frisco's across the street. Great place.

But what does it indicate about "the cycle"? Steakhouses are "expense account" locations: business lunches, deal closing dinners, awards banquets, top sales teams doing the single-malt tasting menu, you name it. It is all "high beta" spending, and it all (or nearly all) goes away when the purses tighten.

What does history show? Let's look at the comps.

Morton's (MRT), a larger steakhouse chain, went public in early 2006 in the $16-$17 range, just as the national housing prices peaked. Do you remember 2006? The housing bubble was in full swing, everyone made "product", from the mortgage broker to the securitization machine, and the times were good, and the purses were loose. MRT then went on to drop to the $1.60-$1.70 range in early 2009. This is a 90% loss for the IPO buyers who held. The company was just taken private at $6.90/share but at least you can enjoy their internet-only NYC surf-and-turf three-course special at $109.99 for 2 through March.

Ruth's Chris (RUTH), also larger than Del Frisco's, went public in the summer of 2005 above the initial range, at $18/share. The IPO was in the $200 million range. RUTH tanked to $0.75 or something in early 2009, so call it a 95% loss for an IPO-price buyer. The stock is currently in the $6 range. Their Midtown location is running a $44.95 filet-and-lobster tail special for Valentine's Day, so get with the program (and do not take her to White Castle's Valentine Day specials, seriously).

But the icing on the cake is... Del Frisco's themselves. They filed their first ever S-1 on October 23, 2007, barely 12 days after the S&P500 index reached its all-time high of 1,530. The registration was withdrawn in December 2008. No, I am not making it up, and, yes, the irony is juicier than anything you can pick out from their menu.

They don't ring a bell at the top but they do eat a lot of steak.

Wednesday, January 4, 2012

Thoughts for 2012 and Selective Review of 2011

Thoughts for 2012 (some more serious than others):
- Flash mob acceleration makes standard retail an even less desirable place to be; retailers blame evil short-sellers for organizing the mobs
- The "better burger" and the soft-serve ice cream waves top out, there might be an IPO or two (Smashburger, Red Mango)
- Carl Icahn buys a ton of treasurys, demands seats in Congress, asset sales
- Apple somehow takes over your TV, car and fridge
- Hillary for VP; gets elected and takes "the suitcase" away from the O-Fail
- Brazil starts to look uglier than most think possible
- 100 m sprint record broken in London 2012
- Social media and tech start-up rapid valuation deflation
- Germany wins Euro 2012
- Chris Christie weight loss surgery during his summer vacation fuels 2016 speculations (promptly denied)
- Since every hedge fund strategy is negative for 2011, many expect mean reversion in 2012: the reversion does not happen
- US ISPs tighten data limits + USPS down to three delivery days = NFLX in the teens
- The Fed is sued by a pension funds group led by CalPERS for causing severe underfunding by rate manipulation
- Some widely despised sector does really well (financials, sovereigns, old telcos, big pharma?)
- Department of Education requires that colleges take "first loss" position in any student loan; this leads to differential pricing by major and a big decline loan availability for worthless/hobby/lifestyle degrees
- Surge in specialty spirits: ouzo, calvados, grappa, cachaca, etc.
- TSA-free/fly-at-your-risk airline fails to take off due to red tape
- Obama caught smoking with Carla Bruni, Michelle disapproves and flies coach back home
- Twitter still can't figure out how to make money, introduces a paid 240 character account; paid individual "pimped tweets" displayed in color and flash
- Unsynchronized transmissions and carburated engines make a comeback with enthusiasts
- ACLU sues school districts on behalf of American Muslims juveniles who feel excluded from football because of the "pigskin"
- Major newspaper takes a position against veteran privileges based on non-draft, paid military
- Perry, Palin and Santorum co-author a book on evolution, promote it with a trip to the Galapagos Islands
- Payroll deductions renamed from abbreviations to "old people pay", "old people healthcare", "Middle East occupation", etc.
- Cocktail food trucks (these really are coming)

Looking at my meager blog postings over 2011, here are a few things that make me look good. Not that I can eat that: inflation-positioning, even with good sized TIPS and cash/opportunistic holdings, was a disaster in the 2nd half of the year.

January 2011: Stay away from the Crumbs Bakery reverse-merger IPO. The stock gyrated in the low teens after the transaction closed later in the spring, prior to tanking to $3-$4 range. Who knew?
April 2011: Are we at the peak? This was a well-timed listing of current events pointing to a peak in economic activity. The US has not gone into a double-dip but we are not seeing mega deals, big resource mergers, and so on. Follow-up post in June, M&A Activity Indicative Of Peak Cycle
May 2011: The Ira Sohn Conference Lemming Trade: from the charts there, HOGS $15 to $8 now, CIT $44 to $34, MBI $9 to $12 (this one is up on the legal developments), BPI $26 to $24 (not bad, and a great story about the guy presenting it), MMC $30 to $32, AON $52 to $46. As discussed, one should not be following blindly (unless it was for a quick trade)
June 2011: Howard Marks is Selling, Should You Be Buying? Oaktree's filing was not a good harbinger. I discuss why.
July 2011: Coffee Stocks: Do Not Burn Your Fingers. This post discussed some of the hot coffee stocks. JVA, JCOF, JAMN, CRVP have all tumbled since then (some were on their way down already); the real businesses (SBUX, THI, PEET) soldier on, while the grandfather of all hot coffee stocks, GMCR is... well...GMCR.

With that, good luck in the new year.