One of the funny things about the stock market is that every time one person buys, another sells,
and both think they are astute. William A. Feather
When I was a student, one of the favorite places to go to eat was an Italian deli. Today, there is a deli chain in Las Vegas called Capriati’s that makes fabulous sandwiches. I don’t eat there very much, but my daughter loves the place. Personally, a nice Italian sub with some chips and a cold beverage makes for a great lunch. All over the world, deli’s are businesses which can have durability if they do a great job of making scrumptious food and taking care of customers. There are many which have been around for generations at one location. Others have grown into quite large enterprises, like Jimmy John’s, which was bought by a private equity company in 2019. At the time, it had over 2 billion in sales. The topic leads us to the little deli which has the investment world suddenly paying attention to it’s existence, courtesy of billionaire investor David Einhorn. So what did Mr. Einhorn say which brought this entity into focus?
In his annual shareholder letter to Greelight Capital investors, Mr. Einhorn commented that stocks can do funny things. As it pertains to deli’s, there is a publicly traded company called Hometown International (symbol HWIN). Last year it did a little less than 36 thousand in sales. The year before, even fewer. Currently, based on the market price, it is worth over one hundred million dollars. With more than a little sarcasm, Mr. Einhorn remarked the pastrami must be “amazing.” In this specific circumstance, Einhorn highlights what makes investing in the stock market interesting. On the surface, one would surmise that one hundred million dollars is probably not an accurate representation of the earnings power of Hometown International. It is possible that the real estate value of the Deli is quite substantial, though one could easily run through the neighborhood comparisons to find out. Maybe the company is developing an interesting product line which it will manufacture at scale? Personally, I would not be a buyer of HWIN at the current market price. More importantly, if you believe this is an extreme example of how there are specific situations where market prices don’t represent the realistic value of a business (way too high in this case), you could also come to a similar conclusion but in reverse. Yes, that would mean the market price of a business is way too low, and the stock could be a bargain. Einhorn used the deli example as a way to exacerbate his main point, which is that regulators of existing financial markets are very much abdicating their responsibility. He mentions Elan Musk and his free pass, along with VC superstar Chamath Palihapitiya as well. If you were to add Dave Portnoy’s recent rant about the lunacy of doge-coin hitting 30 cents, again, it calls into question the role of the financial regulators. With markets hitting new highs daily, there certainly are plenty of assets trading with rich valuations. In the defense of regulators, the SPAC craze has suddenly gotten cold. The SEC is now looking at how warrants of the SPAC’s are accounted for, as well as the projections SPAC sponsors are making on their road shows. It appears that too often, a company with five million in revenues today is projecting 5 billion in revenues three years from now. Just like that, snap, five billion in three years. Hmm, maybe those sponsors have been eating some pastrami from Hometown International?
In the markets this week, the largest banks all posted big earnings beats, helped by the release of accumulated reserves. Chase, Goldman, Wells, Citi, and Bank of America were all part of the party. Coinbase went public at a valuation of nearly 100 billion dollars, almost on par with some of the largest investment and commercial banks in the globe. On the macro front, jobless claims came in at the lowest numbers since the start of the Covid crisis last year. Nice to see and I hope it continues. In the energy area, a draw down of inventory helped oil prices firm. Many believe oil prices will be the data point to watch in terms of inflation expectations. The inflation issue is linked to what happens with interest rates. Interest rates are the discounting mechanism for all assets. All are linked, kind of like mustard, and rye bread with a good pastrami sandwich. Sorry had to get it in there. Next week the earnings parade continues with heavyweights like Coke, JNJ, Abbott Labs, Netflix, Travelers, Verizon and others. On that note, thank you for reading the blog this week, and if you have any questions about investing, please email me at firstname.lastname@example.org.
Yale Bock, Y H & C Investments, its clients, and the family of Yale Bock have positions in the securities mentioned in the blog, Investing in securities involves risk and the potential loss of ones principal. Past performance is no guarantee of future results. All investment decisions should be considered with respect to ones risk tolerance, return objectives, liquidity needs, tax considerations, and one’s overall financial situation. The fact that Yale Bock has earned the right to use the CFA designation does not mean Y H & C Investments will outperform broad market indexes.