Maurece Schiller invented special situations investing 50 years before Joel Greenblatt’s influential book. Help us recognize this unknown value investing pioneer and his work today!

“Since special situations were in a sense created by myself, they were my life’s work and I knew all about them, I decided to write about them.”

Maurece Schiller, 1959

Dear Friends, Colleagues and Value Investors (and many all three!),

If I’m writing to you with my hand out, it’s for a good reason.

Please consider sharing and supporting @tomjacobsinvest’s and my Kickstarter campaign to right the historical record to give Maurece Schiller, an unknown but enormously influential pioneer of special situations value investing, his due. If you don’t know Maurece Schiller, you’re not alone. In fact, I had a similar reaction when Tom introduced me to his works not long ago.

“Maurece who?”, I asked.

After all, as a voracious reader, case-study nut, and decade-long addict of all things value investing, I was fairly certain I was aware of every capitalist worth learning about since the Gilded Age – and doubly so with respect to the key figures instrumental to the creation and development of the discipline we practice. (Not to put a too fine of point on it.)

So why, I asked, should I care about an obscure research director from the 1950’s? If he were so important, why don’t I know about him? I mean, there are some areas where it makes sense to be all about confirmation bias.

But then, thanks to Tom, I was introduced to Mr. Schiller’s out-of-print works from the 1950’s and 1960’s. Long before Joel Greenblatt’s seminal work You Can Be a Stock Market Genius, Maurece Schiller literally wrote the book (or, more accurately, wrote the books) on special situations value investing. Indeed, Greenblatt credits Schiller in his famed Columbia Business School class. “It worked then and it works now,” he says to his students, while holding up a worn copy of Schiller’s work.

But because Schiller lacked the connections to start a large investment fund, had an academic bent, eschewed self-promotion, and was committed to reducing individual investors’ risk, he never became more than a blip on the radar beyond a handful of people. We find it a shame that this incredibly innovative thinker and his painstakingly researched works on value investing have been all but ignored by history.

With all of this in mind, my goal in writing you today is a modest one. We have launched a Kickstarter campaign to fund the re-publishing of Maurece Schiller’s five forgotten works on value investing and special situations.

The success of our project depends on you, like-minded people who not only believe in the special situations discipline Schiller helped create, but also the larger mission of value investing writ-large.

Fortunately, in addition to being an unusually wise and wealthy bunch, ours is a tribe that tends to be especially passionate and generous when it comes to all things education-related. Given this reality, our hope is to reach and even surpass our fund-raising goals. This would allow not only print and electronic editions, but also audio. And we’ve put our money where our mouths are, too.

Please join us to support this long-unappreciated inventor of special situations investing, a visionary who deserves his place among the very greatest value investors. The four horsemen – Graham, Buffett, Klarman and Greenblatt – should become five.

Any amount helps. Plus, at certain reward levels, you and your business, blog, group, social media handles and the like will be recognized in one or all of the five re-published works.

Please join us at Kickstarter today!

Update: wonderfully, our initial goal of raising a modest sum ($10,000) to cover the production run of Schillers first five books (read: interior design, cover design, copyediting, printing expenses, and various other ancillary costs associated with bringing these books to print) was surpassed within a few short days. In fact, truth be told, we ended up hitting the mark before we even had a chance to kickstart the first real leg of Tom and my’s coordinated (multi-leg) campaign push. Talk about unexpected.

In any case, to say we’re humbled by the generosity and grateful for the support doesn’t quite express it (language has its limit as they say). As a thank you, we’ll be we awarding all contributors (new and old) with a soon to be announced gift we’ll disclose soon for those willing to help us cross our revised “stretch goal” of $20k. Note this will cover the production of two of the five books in audio format, alongside a few other “accretive” bells and whistles.

And again, all supporters associated with helping us with both the original and “stretch” goals will be able to walk away with a one of a kind, limited edition gift that they’ll love. Trust me on this. Tom and I just spent the last day and a half debating the merits of different gifts and the two finalists we emerged with have us both delighted. Odds are “above average” you will to!

Part 3…

Editors Note: While I initially started cobbling together part 3 a couple of weeks ago prior to the January 6th press release (see the link below), unfortunately the stock proceeded to shoot up ~15% on something like 10x the average daily volume on the news. Yet given an inexplicable 8% selloff a few days after in the face of what I believe to be a legitimate “game changer,” not to mention a major de-risking event, I decided to go ahead and post what remains for those of you who continue to be interested in the longer-term story at Input – with promises of bringing it all together come next week for part 4.

Keep in mind that while normally I’d take the time to update part 3 prior to posting, due to an unusually busy schedule over the next week I simply don’t have the time. In fact, I haven’t edited it much at all at this point and it’s probably twice as long as it would be if I had the time to refine it the way I’d initially intended. Regardless, hopefully members will find it a worthwhile read despite these shortcomings. I think it will be worth the effort – and again, expect a fully up to date part 4 the week after next.     

At any rate, the positive initial reaction was definitely warranted and largely due to Input’s ability to deploy another ~$16.9m into an additional 26 canola streams in the month of December alone, a data point that is particularly notable in a number of key respects. 

For example, the announcement gets the company almost half way to their full year (2015) guidance of $40m, a mere one month into “deployment season”, a period that typically spans from January to May. This was a surprise to say the least given farmers are typically focused on their operations in the October through December period, not to mention the fact that last year the company didn’t deploy any cash until well into January. Point being, the Jan. 6th update may be the most important event in the company’s history, as it highlights the huge demand for Input’s services as well as the long-term viability of its high quality business model. It also hints at what I’ve believed for some time. Namely, that the size of Input’s total addressable market will prove to be much larger than what is currently reflected in the company’s current quote. 

As always time will tell.

Also, if what follows below comes off as disjointed, keep in mind that certain sections of the original piece have been cut given they don’t reflect the latest numbers, in particular the valuation section and a few others that imo were to “early stage” to bother including. Nonetheless, what remains should be plenty sufficient to drive home why I continue to believe the stock is materially mispriced, even if certain parts are somewhat dated.

So with that, enjoy!

January 6th Input Capital Operations Update Press Release

1 Year Later – An Annual Review 

So what’s new?

At a high level, not much. INP remains the world’s first and only agricultural commodity streaming company (no natural comps) focused on providing farmers with upfront cash in lieu of a multi-year, high-return Canola royalty stream. Streams characterized as much by their ability to mitigate risk as by their ability to generate outsized IRR’s. (check out the Q&A at the end of part 2 for some color in terms of the multi layered and essentially government guaranteed downside protection)

Furthermore, armed with what is now a proven model, a hugely lucrative win/win value proposition, roughly $60m in cash to deploy at highly attractive returns, not to mention an almost stupidly large addressable market relative to its current stream count, Input’s potential to sustain a high rate of increasingly profitable growth in both the short and long-run is utterly tremendous. Yet the company remains poorly understood and substantially under-appreciated.

Continue Reading »

Now onto Part 2 of our ongoing series on Input Capital…
Editors Note: Like part 1, part 2 was originally authored in late 2013 and is therefore dated. Nonetheless, it’s still a great piece for those looking to garner a number of unique qualitative insights into what makes Input special.   
As Input Builds It, the Farmers Will Come

We then arrive at music, the knowledge of harmony. Are the parts concordant with the whole, and is the whole concordant with the world at large? How does the business harmonize with its community, employees, competitors, shareholders and the environment?

                              – Chris Begg, East Coast Asset Management

The thesis at Input remains the same, as it is very much a business that “deserves to win”. And why wouldn’t it! Given the company has created the proverbial key that fits mom and pop canola farmers “productivity unleashing lock”, we envision an environment where everyone involved should thrive. Indeed, we expect the company’s breakthrough value proposition will create tremendous amounts of wealth for all involved – and for years to come.    

As far as shareholders are concerned, we think Input will become a billion dollar business at some point within the next four to five years. And for good reason too. After all, as we lay out below, the path to a billion will require Input to raise ~$250m and deploy $300m to $400m dollars in total, with the difference being the redeployment of internally generated cash flow. As an average stream is ~$1 to $2 million we can reasonably figure there will be ~~150 to 200 individual streams in place at that time.  Yet, each of these streams represents a decision by both the farmer and Input.  As such, part two of the Input Capital thesis will focus on the fabulous economics for both the farmer and Input as well as reiterate the multi-layered downside protection embedded in Input’s business model.

Farm Level Economics: Why the Heck would a Farmer give up 40% to 50% of his most profitable crop?

With over 50,000 canola farmers in Western Canada, the market is not institutionalized with the average farm in the range of 3,000 acres. Modern farming requires a significant amount of capital (land, labor, equipment, seed, fertilizer, water, etc.) which is by no means cheap. Additionally, in a farming family the working capital of a farm is stripped out every generation for Mom & Dad’s retirement.

And while the truck commercials we watch every Sunday during NFL games (Shout out to your Editor’s undefeated hometown KC Chiefs!) romanticize farming, the capital intensity of the business often means a farmer is attempting to keep all the proverbial plates spinning by “robbing Peter to pay Paul”. Perhaps it’s a bank line that is able to be drawn to pay for some new equipment, or taking a new tractor with a note instead of scrimping on high quality seed this year, and so it goes. The truth is the vast majority of Western Canadian farmers are not properly capitalized and typically find themselves busting their tails simply to make ends meet.

You may ask: isn’t there alternative financing available to farmers that doesn’t give a 30% IRR to the financier?  The answer is yes but only for certain types of assets.  Acreage can be mortgaged, equipment financing is available through the manufacturers, and there is seed & fertilizer credit available from the crushers and grain elevators on undesirable terms.

For example, there is only traditional fertilizer credit available two weeks before planting season so the farmers don’t blow the capital on something else… Guess who knows that?  Fertilizer companies.  So the price of fertilizer rises dramatically when the credit is available thus dis-incentivizing the farmer from purchasing the optimal amount.

Continue Reading »

Editors Note: This is the first of a four part series on Input Capital, where the first three posts will be published today with the finale heading your way towards the end of next week. Note that the original thesis outlined below was purchased at C$1.59 in October of last year, with the second posted shortly thereafter at ~C$1.80.

That in mind, naturally certain aspects covered in parts 1 and 2 such as the stated stock price, f/d share count, implied valuation, cash on the balance sheet, and so on are all somewhat dated, and thus will need to be reworked for anyone that’s new to the story here. At least for those of you who’d rather not wait until next week. Even so, one thing remains the same – Input remains a grossly mis-priced and under appreciated high quality business on the cusp of a multi year period of sustained super compounding. So while the stock has run up quite a bit since I took a position, the reality is that Input offers a far better risk/reward today than at perhaps any other point within its relatively short life as a publicly traded company. 

In fact, earlier this month the company announced a number of details that taken together, have not only brightened Input’s longer-term prospects but materially de-risked the business in the process. And yet the market barely noticed, sending the stock up some 15% on roughly 10x normal volume – only to give back about half of those gains since. At any rate, while I’ll dive into these latest developments in detail in a bit, for now let’s keep “first things first” and start at the very beginning to get a better feel for the business and it’s ultimate potential.

So, readers meet Input Capital. Input Capital, meet readers. My hunch is some of you will become fast friends – not to mention make an enormous amount of money together over the next 2-3 years and even then, that’s just the beginning. Indeed, this owner operated snowball is just getting started.

You can mark my words on that!



****Part 1 – A Field of Streams

INP Part 1 Pic 1 copy 

If you build it, they will come . . .

In the constant hunt to bring you recommendations worthy of your hard-earned investment dollars, your editors couldn’t be more pleased to bring you this month’s recommendation: Input Capital Corporation (INP.V, INPCF).

Input Capital is the world’s first agricultural commodity streaming company. Think of it as the Silver Wheaton (SLW) of farming. If you’ve never heard of it, don’t worry. Input’s initial public offering was only two months ago. Most investors don’t even know it exists.

What does Input do, exactly?

Simple: It offers money to farmers to help them finance their farms and become more productive, and in return, Input gets a “stream” on these farmers’ future crop production. Input buys the canola after the harvest at a predetermined and heavily discounted price.  Input’s profit is the difference between the price it pays the farmer and the price canola trades at in the market.

Continue Reading »

After a year-long hiatus, Above Average Odds Investing is back. Our reasons are multifold (I missed you guys!), but for now just know that we’ve got some amazing bells and whistles coming down the pipe. Within the next 1-2 months the site will experience a dramatic overhaul that should usher in a new era for the site/service. To say we’re excited to roll out these changes is an understatement. So stay tuned!

To kick things off right, I’ve included long-time friend of the blog Adam Patinkin’s latest letter to partners. Adam is a CFA Charterholder and is the Founder and Managing Member of David Capital Partners, LLC (“David Capital”), based in Chicago, IL.  Prior to founding David Capital in late-2011, Adam was a member of the investment team at Sheffield Asset Management, L.L.C., a $500M long/short equity hedge fund. At Sheffield, he was responsible for sourcing and evaluating investment opportunities in public securities and commodities markets on a global basis.  Adam specializes in cyclical industries and businesses undergoing substantial structural or competitive change. His equity investment experience covers a wide range of sectors and is augmented by significant work involving commodities, credit, derivatives, and special situations.

I’ve had the pleasure of knowing Adam for a few years now, and in my opinion he is about as brilliant and incisive an investor as there is.  Adam launched his fund with $2M in assets in late-2011, and in about 2.5 years he’s grown it to more than $20M – which speaks to his talent, top notch analytical abilities, and a fund almost certain to have a very bright future.  At 29 years-old, we think he’s a “rising star” in the value world/hedge fund community.

Adam’s quarterly letters usually provide an in-depth write-up on a single investment idea, but in his latest missive he switches gears to share his thoughts on the broader markets.  Adam has generously allowed us to republish his commentary on AAOI (we unfortunately are unable to publish the rest of the letter, including performance metrics, for compliance reasons).

I think it’s a great read and a wonderful way to re-launch the site.  At any rate, we look forward to sharing Adam’s thoughts again in the future (you can count on it) – David Capital is without a doubt a fund to keep an eye on!


David Capital Partners, LLC – 2013 Q4 Macro Commentary FINAL


If your planning to go to the Berkshire Hathaway Annual Meeting the Yellow BRK’ers Meet and Greet is a great event for a first timer and anyone else:

Berkshire Hathaway shareholders from all online communities are welcome to an unofficial gathering on Friday, May 3th, 2013.

You are invited to join as fellow shareholders unofficially gather on Friday, May 3th, 2013 at the DoubleTree Hotel in Omaha to meet and have fun, starting at 4:00 pm and you can linger until 7:00 pm (or longer). There will be a short program at approximately 5:00 or 5:30.

This is a casual atmosphere, with light snacks available. It’s a “happy hour” type of gathering – not a formal dinner or anything of that sort.

The DoubleTree is located on 16th and Dodge. There may be some street parking, otherwise, one can use the parking garage with an entrance from the South at 16th & Dodge street, just east of the First National Bank.

To register for the event: http://yellowbrkers.com/

Jamba Juice (JMBA)
March 4, 2013

Action to take: Buy Jamba Juice (JMBA) up to $3.00 per share.

Target: $8.00-10.00 per share over 3-5 years

Synopsis: Jamba juice presents an opportunity to purchase a high quality owner operated compounding machine at a mid single digit multiple of YE 2013 owner earnings. With a current enterprise value of only ~$180m investors can purchase the company’s owned store base at a sizable discount to true value and get a bevy of high margin, annuity-like recurring revenue streams from their franchise and royalty segments for free.

“The best business is a royalty on the growth of others, requiring little capital itself.” — Warren Buffett, 1978

I was six years old when I first started to learn the wisdom of these words (Eugene here).  My parents had just decided to pursue the American dream of owning their own business.  My father was making a modest living as an entry-level engineer at Mobil (before it became ExxonMobil), and my mother taught math at the local community college.


They had immigrated to the United States from China for their graduate studies, and over the years had scrimped and saved every dollar they possibly could.  So in 1982 they took their entire life savings of $150,000 and opened a small electronics retail store in the local shopping mall called Team Electronics.


Team Electronics operated as a franchise model. My parents were the “franchisees,” the owner/operators of their own individual unit store.  This means that they took their own capital and built and operated the store. Team Electronics the parent company was the “franchisor” and provided the business template to my parents: training, suppliers, advertising, etc.


In return for these services, Team Electronics the parent company would get paid a royalty fee of 6% of all sales.  In return for their hard work, my parents would earn a profit of whatever’s remaining after this royalty fee and all other operating expenses were deducted.


And what hard work it was.  Every waking hour of every day was spent dealing with retail customers, managing employees, escalating rents, learning accounting, tracking inventory, etc.  On weekends I would earn 25 cents for cleaning the store toilet.  On a Friday night after working until 4 a.m. my parents were too exhausted to safely make the drive home, so we stayed at the La Quinta motel across the street.  The next morning we had to be back at the store at 9 a.m. to open.  After many years of extremely hard work, my parents eventually parlayed this rocky start into a successful business and realized their American dream.


It didn’t take me long to realize that it was a much better business proposition to be the franchisor than the franchisee.  For example, in the early years our store might have annual sales of $500,000.  After paying all the expenses, my parents were lucky to take home $20,000.  Based on their initial investment of $150,000, they were earning a 13% return, which doesn’t sound too horrible.  But remember, that’s after risking their entire life savings, both working over 100+ hours per week, taking on all the risk of purchasing inventory and long-term lease obligations, not to mention the stress and headaches of running your own business.


As the franchisor, Team Electronics the parent company would earn about $30,000 (6% of annual sales of $500,000) from my parents’ store.  What did they risk to earn this $30,000?  Almost nothing.  They had already developed the business model template, so all they had to do was provide a few weeks training to my parents and some occasional support.


What if my parents’ store had a bad year and only sold $400,000 of electronics?  My parents would pray to break even, but Team Electronics the franchisor would still earn $24,000.  In other words, to earn this perpetual income stream of $24,000 to $30,000, Team Electronics the franchisor undertook no risk, and invested almost no capital.


Warren Buffett captured a powerful insight in just a few words: “The best business is a royalty on the growth of others, requiring little capital itself.”  Indeed!  It would be almost 25 years later when I first read this nugget of wisdom by Buffett.  But then again I didn’t really need to, because it was already firmly etched into my mind from cleaning toilets.


Framing the Opportunity: The Power of the McDonald’s Franchise Model


Imagine for a moment that you could go back in time and buy a piece of one of the all-time great businesses in the world: McDonald’s (MCD).  Imagine that you could go back to 1968 when it had less than 1000 restaurant locations, before it’s explosive growth to over 33,000 units today.  What makes McDonald’s such a great business?


It has an extremely strong brand and mind-share across the globe. Three times a day at every meal is an opportunity for McDonalds to generate income from almost the entire world’s population.


An equally important reason for McDonald’s business success is its franchise business model.


McDonald’s gets a continuously recurring stream of income from every single item of food consumed in each of its 33,000 restaurants around the world, 365 days a year. From every Coca-Cola that you buy for $1.80, McDonald’s (the franchisor parent company) receives over 20 cents (McDonald’s royalty is 12% of sales).  It’s a business model that is superior even to Coca-Cola itself.


McDonalds’s is truly one of the greatest perpetual annuity income streams in the world.  It is a very low risk, capital-light business model generating income from the sales of each franchisee.  This franchise model virtually ensures that McDonald’s will always generate a profit, regardless of the economy or fluctuating food sales.  In some ways, it’s more akin to a utility in the stability and predictability of its cash flow generation, versus the ups and downs you would find in a typical restaurant business.


Let’s examine a critical phrase from Buffett’s quote, “ . . . requiring little capital itself.”


Given the nature of the franchise model, the vast majority of McDonald’s profits can flow down to the benefit of the shareholders (via dividends, buybacks, or reinvested for growth), without impairing it’s competitive position or future earnings capacity.  This is because the franchisees, like my parents, are on the hook for all of the negative aspects of the business: escalating expenses with inflation, large capital expenditures required just to maintain the physical assets, etc.


All of these negatives consume capital, reduce profits, and make it difficult to grow the business.  Not only do the franchisees bear the weight of having to continually reinvest capital back into the business just to keep it running, but they must also invest all of the capital required to open additional locations.


On the other hand, McDonald’s the franchisor is a much more attractive business because it is not required to expend its capital on these negatives.  It may choose, however, to reinvest a small portion of its profits towards creating a stronger brand.  By doing so, McDonald’s can increase sales at existing locations and encourage growth through franchisees opening new locations.  Thus, the franchise business model creates a strong virtuous cycle of an ever-growing royalty stream of cash, requiring little capital itself.


Another important element of the franchise model is the lack of negative operating leverage.  Negative operating leverage is bad: if sales drop by a few percent, then profits will drop by a much greater percentage.  This is usually due to the burden of large fixed costs required just to stay open for business.


For an example, let’s return to my parents’ small retail electronics store.  In an average year, the store would generate $500,000 in sales, with a gross profit of $200,000 (i.e. 60% cost of goods sold, or a 40% gross margin).  Their fixed costs such as rent, utilities, and employees would be about $180,000.  So, they would be left with a net profit of only $20,000.  Heaven forbid if they had a bad year with sales declining 20% down to $400,000.  The 40% gross margin would then yield a gross profit of only $160,000.  But their fixed costs would remain about the same at $180,000, wiping out all their efforts and resulting in a net loss of $-20,000.  That’s negative operating leverage at work.


Conversely, the franchisor parent company does not suffer from this business problem.  Because it always gets its 6% royalty of sales, it doesn’t matter whether sales were $500,000 or $400,000.  At worst, the franchisor would still generate a profit of $24,000


One last salient point we want to highlight about the superiority of the franchise model is the divergent effect of inflation on the franchisee versus the franchisor.  Buffett alluded to this during the 2011 Berkshire Hathaway annual meeting: “Ideally to protect against inflation, you want a royalty on someone else’s sales so you don’t have to invest any more capital . . . you make money as their volume grows.”


Rising food costs from inflation generally hurts the franchisees operating the restaurants because it crimps the profit margins.  Soon, inflation will force the franchisee to raise prices simply to maintain the same nominal level of profitability.  However, in a perverse twist of economics, what is the franchisee’s pain ultimately becomes the franchisor’s gain.  Because the franchisor receives a fixed percentage of the top line food sales, these price increases will fall directly to the bottom line resulting in higher profits.  In other words, inflationary forces will provide a perpetual tailwind of rising profits, instead of a continuous headwind depressing profits.


What if my parents had invested their $150,000 life savings, not by becoming a franchisee of Team Electronics, but instead by buying stock in the franchisor McDonald’s?  What if they could have bought it in 1968 when McDonald’s had just opened its 1,000th store?


In many ways, this would have been a very low risk investment. By then McDonald’s franchise business model was already perfected by Ray Kroc, was geographically diverse, and was very profitable.  It did not require any unusual creative foresight to see the potential runway of growth.  Indeed, the potential should have been self-evident if only they had fully understood the power of the franchise business model at that time.


Well, it pains me to say that my parents would now be worth over $35 million, and I wouldn’t have had to clean any toilets.


So the question some of you may be asking is: if McDonald’s is so great, why not buy McDonald’s stock now?  Well, it’s already a $100 billion company.  While there’s always some room for growth, the tailwind is not nearly as great as it was 40 years ago.  Also, the stock is not an extremely cheap value, trading at about 18x earnings.


What we want to find is the McDonald’s of 1968: a wonderful business with similarly attractive economic characteristics, set to ride a tidal wave of growth over the coming decade, trading at a very cheap price today that does not factor in any of its enormous potential.  And that, dear readers, brings us to this issue’s recommendation: Jamba Juice (JMBA).


The Jamba Juice Turnaround




Flying low under the radar of Wall Street, Jamba Juice has executed a remarkable transformation over the last four years to become the ideal franchise business model.  Today it is on the cusp of becoming a huge global brand riding the tailwind growth trend towards healthy active living.


Despite relatively few stores (780 units) and low geographic market penetration, Jamba enjoys extremely strong brand recognition, consistently ranking high in association with a healthy active lifestyle, similar to brands such as Whole Foods and Chipotle.  The nearest Jamba Juice to my home is several hours away, yet all of my neighbors have heard of the brand and associate it with healthy fruit smoothies, even though they’ve never actually been to one of the stores.


While many people recognize the Jamba brand, the stock has been completely ignored.  It is a microcap with a market cap of only $200 million. As a publicly traded company, Jamba has had a poor showing for much of its history.


Jamba became public in 2006 as the leading concept store selling fresh fruit smoothies with ambitious plans for growth.  However, its business model at that time was your typical capital-intensive fixed-cost restaurant.  Over 70% of the locations were company owned and operated, and less than 30% were franchised.  In a misguided attempt to grow 30% annually, many operational problems immediately began to surface.  Profit margins at the company-owned units declined from 20% down to below 10%.  Rather than grow, the sales at each store actually declined 8%.  Soon, the company posted losses of $150 million (a lesson in the perils of negative operative leverage).  Within two short years, the stock imploded from $12 to pennies.


In late 2008, Jamba Juice began one of the most remarkable corporate turnarounds we’ve ever witnessed.  First, to avert terminal cardiac arrest the company raised $32 million of cash through a preferred stock issue, bringing some much needed financial stability.  Second, in December 2008 they brought on board one of the best CEO’s we’ve ever seen: James White.


Previously, White worked with one of the greatest executives in the corporate turnaround game, Jim Kilts who orchestrated Gillette’s spectacular success.  Later, White became a brand builder by developing the consumer-packaged goods (CPG) business within Safeway, responsible for brand strategy, innovation, manufacturing, and sales.


Jamba hired White for his skills both as a corporate turnaround specialist for the near-term, and as a brand builder to help drive growth for the long-term.  White is a CEO who is not flashy and does not oversell.  He intensely focuses on the “Plan,” and more importantly, the solid execution of the plan.  Since 2009, this management team has literally made all the right strategic moves, and executed them with remarkable speed and effectiveness.  Let’s take a closer look at some of them.


White’s first order of business was to restore the business to profitability.  If a business is not profitable, over time it will bleed cash and eventually go under.  White had to make the difficult decision, as CEO of a newly public company, to give up on growing revenues for the sake of improving profitability.  Wall Street hates declining sales, and while obviously the correct long-term decision, it can be a painful transition in the short-term.  White’s game plan was to gradually transform Jamba to become a franchisor, because he recognized it was such a vastly superior business model.


To make this transformation, Jamba Juice started to sell many of their poorly performing company-owned stores to franchisees. These poorly performing Jamba Juice units generate less than $500,000 in sales (the better performing stores which Jamba kept generally average more than $700,000 in sales).  By refranchising this store, Jamba would give up these “revenues,” but in return it would get $30,000 (6% royalty fee) each year.


As a franchisor parent company, this $30,000 would be the new number that Jamba would report to Wall Street as revenue.  While much lower, the important point is that this is nearly all profit.  In the process of this conversion, Jamba would sell these units to a franchisee for an average of about $215,000.  With this kind of transaction, White simultaneously killed two birds with one stone: convert a money losing asset into a cash generating machine, and immediately raise some cash to help keep the company afloat.


For the franchisees, they would be getting a Jamba unit a great price.  On average, it takes about $500,000 to build a new Jamba unit from scratch.  So by purchasing this existing unit from Jamba for $215,000, the franchisee got a great deal and is off to a good start.  It’s a mutually beneficial transaction.  It is also encouraging to see that many of these franchisees that bought the units from Jamba were already current Jamba franchisees – signaling that they believed in the strength of the brand and the turnaround efforts.


White’s goal is to eventually make the transformation so that about 80% to 90% of its stores are franchised, and 10% to 20% would remain company-owned (as of today, almost 60% are franchised).  In the depths of 2009, however, over 70% were company owned.  Therefore, White also had to simultaneously focus on restoring profitability at the company owned units.  Within a short period of time, White improved same-store sales, reduced the cost expense of food supplies, reduced the cost of labor, and dramatically improved profit margins.




If all that wasn’t enough, Jamba also desperately needed to diversify away from smoothies.  Selling only smoothies carried many drawbacks.  It concentrated the majority of sales within a narrow window in the afternoon, which caused operational and throughput inefficiencies.  So, the strategy was to create high-quality food offerings that would help drive sales throughout the entire day.  Jamba’s first offering was an award winning steel-cut oatmeal, which was a great success.  Jamba soon expanded to offering wraps, flatbreads, and kid’s menu items.


Growing the Brand Beyond Just Juice


Within three short years, Jamba has transformed its core business from an unprofitable one-trick pony, into a complete quick service restaurant alternative with an extremely strong niche brand associated with healthy active living.  The company has also converted to a highly profitable low-risk capital-light franchise business model.  And the really great news is that Jamba has barely gotten started.  Its goal is to become the leading health and wellness brand in the world.  With the turnaround completed, Jamba can now focus on growing its brand.  Let’s look at some of their strategies and initiatives to illustrate why your editors are so excited about the company’s plans and long-term potential.




Consumer-Packaged Goods: Jamba is extending their brand into every Wal-Mart, Costco, grocery, and convenience store near you.  They are partnering with other companies to develop products such as smoothie kits for home, frozen yogurt bars, trail mix, and energy drinks. These deals are very favorable for Jamba in that they are similar to the franchise royalty model. Jamba gets paid a licensing fee of 3% to 5% of every sale.


Jamba offers their brand name and helps develop the product and marketing.  The partnering companies will be responsible for all the heavy lifting including production, packaging, and distribution.  In other words, the other companies will carry the burdens of fixed-costs, capital investments, and managerial responsibilities.  Jamba simply sits back and collects checks.  Jamba’s expenses for developing and growing this operation are very low – basically just a handful of employees.


Sales growth within this nascent segment has been phenomenal.  Jamba started with home smoothie kits, and sales in 2010 were only a few million dollars. This grew to $50 million in 2011, and is estimated to be $150 million for 2012.  Within a couple more years, this should easily be a $500 million to $1 billion business. Remember that Jamba will get at least 3% to 5% of every sale, and this revenue stream will be almost entirely pure profit.  With a market cap of only $200 million, to say the math is extremely compelling is quite the understatement.




JambaGo:  There is a movement afoot to ban sugary soda like Coke and Pepsi from schools.  It is also a public health concern that kids aren’t getting enough fruits and vegetables, and they certainly don’t like eating what the school cafeteria cooks up.  So who are the tens of thousands of schools across the nation going to turn to for a solution?  Why Jamba, of course!  In fact, Jamba has developed a standalone unit called JambaGo specifically to be installed in schools.  These units blend fresh fruit and non-fat milk to create a healthy but tasty option that kids will actually eat.


The growth has been stunning.  JambaGo is a hugely value-add product that sits squarely at the center of an emerging and growing secular trend.  Jamba started with a few schools in 2011, and grew to over 400 schools by end of 2012.  Management’s stated goal is to have JambaGo in over 1500 schools in 2013.  The potential growth runway for this concept alone is mind-boggling.  Jamba has not penetrated even a fraction of a fraction of the addressable market.


In the United States alone, there are over 100,000 K-12 schools, over 100,000 convenience stores, and over 5000 colleges and universities.  We estimate that each JambaGo unit can earn about $2,000 to $3,000 per year for Jamba.  The economics are very favorable, again, because JambaGo does not require any capital investment from Jamba. The schools pay for and operate the units.  So virtually all of this revenue will be pure profit.


Even more compelling than the economics, is the branding and goodwill that JambaGo can build for Jamba.  Imagine being in front of every kid every day for lunch, and providing the best-tasting menu option available in the cafeteria.  No amount of advertising dollars can buy this kind of brand awareness.


Jamba has many other promising initiatives in development as well.  Management is being highly selective about the location of new store units.  Prime locations will be in airports, universities, and business areas like convention centers.  Each store will then have the highest impact and exposure to the broadest population.


Jamba is developing a smaller format “Smoothie Station” store unit for convenience stores and entertainment venues.  The company has also expanded their product offerings into energy drinks by partnering with Nestle, and into premium hot teas by acquiring Talbot Teas.  Jamba is starting to offer fresh squeezed juice at their stores to capitalize on the juicing craze.  (By the way, this juice bar upgrade has been extremely impressive: for an investment cost of $50,000, this upgrade has generated same-store sales growth of 50% to 100% per store!)


At several locations, Jamba is starting to add drive-thru’s in order to provide faster service and convenience, which will especially help drive growth in geographic areas that aren’t blessed with California weather year-round.  Jamba is also actively engaging the community, such as developing a relationship with the school PTA, to promote health and wellness.




The Jockey


This remarkable transformation is why we say say that James White is hands down one of the best CEO’s ever.  Years from now we believe that case studies will be written in business schools about how White orchestrated Jamba’s turnaround and laid the foundation to build an enduring global brand.  This is the kind of management team that you want to partner with for years to come.  Within three short years, they took a one-dimensional smoothie shop with $150 million in losses, transitioned this core business to profitability, and simultaneously developed multiple new lines of low-risk, capital-light, high-growth initiatives.


When evaluating management, I usually consider two things.  First, did they do what they said they would do?  Check out this extended video from three years ago when White first started at Jamba.  In clear simple English, he laid out his entire plan and future strategy.  It’s almost an hour long, but very well worth it, as you will come away with a deeper understanding of the company and how White operates.




So we can now verify that White did indeed execute his plan in brilliant fashion.  Here we have a CEO who ends all of his presentations with the mantra “Promises made will be kept!”  How refreshing!  Rarely have we seen this level of accountability and execution from a CEO before.  Here’s an episode from Bloomberg Television where White is a mentor to another business owner.  Notice at the end, his advice boils down to “It’s all about the plan.”




Second, does management have any skin in the game?  Do they own a lot of stock options or restricted stock?  Better yet, did they take their own cash and buy shares in the open market?


When White joined Jamba in Dec 2008 as CEO, he was granted a special package of 1.5 million stock options.  Additional options have been granted over the last three years as incentive compensation and bonuses.  More importantly, White has invested over $250,000 of his own cash buying stock in the open market at periodic intervals between $1.02 and $2.01 per share.  While this may not seem like a lot of money if you’re a Wall Street bank executive, it is a very significant purchase relative to White’s after-tax income (annual salary: $550,000).

How Huge is the Potential Growth?


Let’s take a moment to recap here.  We have an opportunity to buy shares of Jamba Juice, one of the strongest brands in the country riding on the growing trend towards healthier eating and living.  Jamba has recently completed a remarkable transformation into one of the greatest business models of all time: royalty fees from franchising and licensing.  The business possesses highly attractive economics with its diversified set of sticky, stable, high-margin revenue streams.  In addition, future growth requires very little capital investment, and thus carries little risk.  Most importantly, this is a low risk investment because, unlike other turnaround stories, we can buy this turnaround after it has already been completed.  Plus, Jamba now has $30 million in cash (over 40 cents per share), zero debt, is cash flow positive, and is headed by an exceptional CEO and management team.


Now let’s consider the future.  Jamba is starting from a low base of 780 store units, and management plans to open about 50-70 new franchise units per year.  Management has stated in presentations that it believes the potential number of store units is 3,700 globally.  We believe that this is vastly understated.  This is the same estimate they used five years ago, and the Jamba brand has certainly grown stronger since.  Of the 3,700 units, about 1,000 are suppose to be international stores.  This is certainly underestimated, as there are plans for 200 units within South Korea alone.


We don’t know exactly how many units the future will hold, but we are highly confident it is well above 3,700.  For frame of reference, McDonald’s has 33,000 locations, Starbucks has 20,000, Burger King has 12,000, and Wendy’s and Dairy Queen each have about 6,000 locations.


While Jamba will never have as many locations as McDonald’s or Starbucks, we think that 5,000 to 6,000 units are definitely possible.  That is more than 6x the current footprint.  Add to that, the royalty fees from the consumer-packaged goods business with multibillion dollar potential, and exponentially growing revenues from JambaGo that will soon be in thousands of schools, and it should start to become very clear that the estimates don’t even scratch the surface of Jamba’s ultimate growth potential.


The great thing about Jamba’s growth runway is that its huge potential is not just theoretical.  It has been demonstrated and proven over the last three years.


Why is it Mispriced?


And the best part of all?  Wall Street has not taken any notice . . . yet.  This microcap with a checkered past has historically reported losses, and its transformation has been under Wall Street’s radar.  As it’s been working through the turnaround, these losses have been rapidly declining.


The primary reason why Jamba’s underlying highly attractive economic characteristics have remained hidden is that the corporate level general and administration expenses are relatively high ($38 million) for such a small company.  This has been a deliberate decision because White wants to maintain a strong platform that can easily scale and accommodate the anticipated future growth.  In addition, this was used to lay the foundation for developing the consumer-packaged goods and JambaGo businesses.


We love situations like this where the stock’s value is obscured from cursory screens, and some extra effort is required to peel back the layers to uncover the gem.  On this point, we will quote from the always fantastic letters of East Coast Asset Management’s Chris Begg:


“ . .The market is less efficient in its ability to look around the corners for businesses that are not yet great, but emerging toward greatness . . we are focused on seeking knowledge of the causes that will produce a meaningful inflection point of change on the economics of the businesses.”  

(Christopher Begg, East Coast Asset Management, Fourth Quarter 2012 Update)


Exactly!  Jamba is rapidly nearing its inflection point.  With Jamba’s expansion and growing cash flows, it will soon achieve enough scale where the corporate level expenses become a much smaller component and no longer mask the underlying favorable economics of this business.  Stay tuned for future updates where we will examine in-depth the power of this hidden fulcrum and how it will soon flow through the underlying business into financial statements.


We expect that when Jamba reports its financials for 2012, it will likely report a profit for the first time.  This will start to attract attention from the institutions.  With the turnaround recently completed, White has been doing more CNBC interviews and emphasizing the company’s plans for growth.  Your editors believe that 2013 will be the year when everyone starts to take notice of Jamba’s remarkable business.

Just How Cheap is This Stock?


Today, you can buy all of Jamba’s stores, transformation, brand name, and future growth for an enterprise value of $180 million at $2.70 per share (enterprise value means the price to acquire the entire business: market cap equity plus debt less cash).  For such a strong consumer brand with so much future potential, that is just dirt-cheap.


FY 2013 Run-rate Estimates


$ Millions Assumptions
Revenue streams
Company-owned stores 47 325 units, 735k sales per unit (5% SSS growth), 20% 4-wall store ebitda margin
Franchised stores 16 525 units (70 additional units), 525k sales per unit (5% SSS growth), 6% royalty rate
CPG products 5 Management estimate (likely conservative, assumes 2% licensing fee on 250m in sales)
JambaGo 3 1500 units, 2.5k per unit
Total Revenue 71
Less Corporate G&A -38
Operating Income 33
Add back D&A +10
Ebitda 43
Less maintenance capex -5 Total capex will be ~10m
Less dividends for preferreds -1 8% dividends on remaining preferred stock
FCF or Owner earnings 37 No debt interestHas $160m of NOL’s, so shouldn’t need to pay taxes for a few years.77m shares outstanding currently90m shares fully diluted in the future


By the end of this year 2013, Jamba should be on track to generate almost $40 million in free cash flow in a normal year going forward.  For a high quality capital-light business like Jamba with plenty of growth ahead, it should deserve a valuation multiple of at least 10x (likely higher at 12x to 14x).  Assuming 10x Jamba would be worth about $5.00 per share, or almost 100% upside from today’s price.  To put it another way, the present valuation stands at less than 5x our estimate of 2013’s year-end normalized free cash flow.  Again, this is just way too cheap no matter how you slice it.


Let’s look ahead three years including some reasonable estimates such as 4-5% same store sales growth, adding 70 new franchise units per year, and growing the consumer-packaged goods business and JambaGo.  Jamba should be able to generate pre-tax cash flows of $70m, and should be worth over $8 to $10 per share – that’s 300% upside in three years.  In future updates we will show in detail how the growth of each of these segments will translate into rapidly rising cash flows.


Even better, we believe that this huge asymmetric upside carries relatively little permanent downside risk.  Jamba is cash flow positive, has zero debt, and has $30 million in cash (over 40 cents per share).  Jamba’s turnaround is already complete, the growth strategies are already proven in the marketplace, and you couldn’t ask for better management.  Finally, its high-margin, capital-light, business model of franchising and licensing helps ensure that the company can remain profitable and survive any economic downturns.


Just for kicks, let’s consider the future value of just one of the nascent hidden business segments.  The sales of the consumer-packaged goods business is expected to be over $150 million for 2012, triple the sales compared to the year prior.  For 2013, management has guided for sales of $250m, but we think that this is severely understated.  We believe that within a couple of years, this segment should generate about $500 million to $1 billion in sales.


Assuming that Jamba gets a 3% licensing fee (also likely on the low end) of $500 million, that’s about $15m of almost pure profit.  This is a very reasonable estimate since management has stated a goal of $15m by 2016.  Indeed, it may prove very conservative, given management’s long history of under promising and over delivering.  Given its secular growth and high-quality capital-light characteristics, the CPG segment should be valued at least 12x, or $180 million.  You read that right – in a couple of years, this one obscure segment alone will be worth more than the entire enterprise value of the whole company today!


We could also run through a similar exercise with the JambaGo segment.  Or consider just the royalties from the franchised units.  Or we could even casually mention the fact that these kinds of asset-light cash-flow generating companies can afford to lever up their balance sheets.  Jamba could easily accommodate some modest debt and buyback half its stock, significantly increasing the earnings power per share.  The future possibilities are just enormous.


For an alternative view on just how ridiculously cheap this company is, we might think about the business as my parents would, like a small business owner.  For $180 million, we would be paying $550,000 for each of the 325 company-owned units.  Paying $550,000 for an existing profitable store is a very low price, since it takes about that much capital upfront to open a new store from scratch.  And each of these stores can generate over $140,000 in cash flow per year yielding a 25% cash on cash return.  It’s certainly a much better business than a Team Electronics store.


Now that by itself would be a fantastic investment opportunity. But don’t forget that in addition we would also be getting some VERY valuable kickers for free: a perpetual 6% royalty on sales from each of Jamba’s 450+ franchised stores, a perpetual 3%-5% royalty on sales from licensing the consumer-packaged goods business, plus thousands of dollars per year from each of the hundreds of JambaGo units.  Yes, you read that correctly: at the current price investors are getting the most valuable pieces of the growing Jamba enterprise for essentially less than nothing!


Summary Recommendation


Buy JMBA up to $3.00 per share.  Our medium-term target is $8 to $10 per share over the next three to five years.  This is a long-term holding, and we expect the business to significantly compound in value over time.  However, this is a microcap stock that can be volatile.  We should always use Mr. Market’s irrational emotional swings to our advantage and be prepared to purchase even more shares at lower prices should we find ourselves fortunate enough to be presented with that opportunity.      




Ryan O’Connor & Eugene Huang                                         

Before we get into the performance I wanted to quickly discuss a few housekeeping notes. If you’d prefer to skip the background and head straight towards the results just click here.

A couple of quick thoughts though before we delve into the numbers…

First things first, I wanted to quickly thank all of the amazing readers of this blog, especially those who’ve taken the time to write me with their thoughts and ideas, to comment and to generally share there thoughts on all things value investing over the years. To say it’s been not only wildly fun but the learning experience of a lifetime is an understatement. I’m quite certain in fact that I’ve learned more from the contacts and lifelong friends I’ve made over the course of the years writing this blog than I’ve ever given back and so for that, as with so many other things in life, I remain eternally grateful for the support and ongoing dialogue.

In fact, when I started this blog years back the idea that anyone would actually read it struck me as borderline preposterous, but life’s funny that way and what began as a humble project to feed my addiction to all things value investing while journaling my investing ideas – and if I was lucky, harnessing the “wisdom of crowds” in my research efforts here and there – has managed to not only surpass those expectations, but in truth ultimately far exceeded even my wildest imagination. So in short thank you, the reader, for making this endeavor such a rich experience and better yet, for making me a much better, more thoughtful investor over the years.

Secondly, I want to provide some context for the creation of the “new” AAOI blog portfolio of which you’ll see here today for the first time. As the natural follow up to the blogs real money Spoke fund, I think some explanation is in order but the goal is in one critical sense the same, meaning its purpose is to continue on in the tradition of tracking my investment performance in the public square over the life of the blog. In regards to the original AAOI Spoke Fund® and its fate, the short answer is that my transition to a new firm in early 2011 along with the dissolution of wealth-front as originally envisioned only a couple of months thereafter made the spoke fund’s continuation an unfortunate impossibility. This was a tough break no matter which way you slice it given the Spoke fund’s consistent history of substantial alpha generation, particularly in light of getting so close to that magical three year hurdle all of us emerging managers naturally look forward to surpassing.

Nonetheless, at the end of the day theres no sense in crying over spilt milk and of course, new opportunities called and so I moved on. That said, within a few months I decided another portfolio was needed if I was going to continue on with the blog as originally envisioned, both because on a certain level I think I owe it to readers in order for them to better gauge whether I’m worthy of their continued support, contributions, time, and energy – and because on a personal level, I wanted to continue on with a portfolio managed solely by my own hand.

Third, I wanted to address that with this new portfolio came a key change of heart as it relates to the wisdom of the original spoke fund’s policy of total transparency (read 24/7 real time access) to the fund’s holdings by the public at large as opposed to the fund’s investors specifically. My obligations to the LP’s I serve must always and everywhere come first.

Why that’s relevant specifically here is because it explains the new portfolio’s policy of only updating the results on an annual, and depending on the opportunity set at any given time, a potentially semi-annual basis thereafter.

So with all that said (if your still reading :)), lets get down to the mission at hand…

Since inception on 9/23/2011 until Feb 1, 2013 the AAOI portfolio has generated a total return of approximately ~55% vs. ~33% for the S&P 500, ~23% for the Russell 2k, and ~(-20%) for the S&P/TSX Venture index.

While my goal has always been absolute as opposed to relative performance, I was particularly pleased with the relative outperformance of the AAOI portfolio vs. the S&P/TSX-V index considering the relatively dramatic differential when over 50% of my holdings were listed on the venture exchange, at least over most of the time period in question.

Regardless, I was more than pleased with the portfolio’s results from an absolute standpoint. While difficult to pin down exactly given the Sandstorm Gold and Star Buffet errors, (after adjustments) it appears the annualized return has clocked in at roughly 40% give or take a percent since inception.

If I can manage to somehow continue at this rate going forward I would obviously be ecstatic, but unfortunately something closer to half the current run rate is likely to be closer to what is achievable on a sustainable basis. That said, I should add that even with all the uncertainty in what I continue to believe is a risk-fraught global economic environment I can’t remember ever being so bullish on the prospects of my current holdings, specifically as it relates to my highest conviction pics. Turning back towards the question of future performance though, if I can manage to generate returns approximating even half the present run-rate over the long-run, rest assured your editor will be more than pleased.

Thanks again for everything and here’s too the next five years of low-risk, high-return investing at Above Average Odds Investing being even better than the last – and rest assured the search for opportunity and hence, for those exceedingly rare, one of a kind “epic investments for posterity” rolls on.


(1) The SSL error is a function of Investopedia’s failure to account for the 5:1 reverse stock split. Regardless, adjusting for the change, the quantity of shares owned should approximate 1700, so the value of my SSL position in the Canadian account is ~$21k, not $93k. Therefore, the Canadian account value should equate to ~148k (220k-72k), not 220k.

(2) Also, in case your wondering why I’m just now publishing these returns given that we are roughly four months past the one-year mark, the answer is twofold. First, originally I had held off in hopes that Investopedia could fix the Sandstorm Gold related error with the goal being to allow me to unveil the portfolio in a cleaner fashion. This seemed entirely reasonable at the time given that all the other journal entries related to the portfolio’s various corporate events had been accounted for, or if temporarily in error, at least promptly fixed by Investopedia’s admin. After about three weeks of trying to get the issue resolved that hope unfortunately turned out to be in vein, and for some reason still inexplicable to me, not possible. Anyhow, given this seemingly non-fixable error I’ve just decided to include an explanation on how I adjust for this above. The other reason was because shortly thereafter I found a handful of ideas (really one in particular) that imo required secrecy and hence necessitated a further delay. For what its worth, with a defined process in place going forward I don’t expect any future delays to be an issue.

(3) The Star Buffet position has recently emerged from bankruptcy and hence has lost the Q in its ticker as it begins trading again as a post bankrupt entity. Unlike with SSL, this change should be be accounted for shortly although, also unlike with SSL, the net effect will be pretty much immaterial in terms of its effect on the portfolio’s performance. I figured I should note it anyway.

(4) As always I also hope readers will point out any errors or discrepancy’s if they come across any, as I’m not entirely certain the Sandstorm Gold issue hasn’t effected the total and annual returns at the margin in a manner that I haven’t considered, but then again I don’t expect it to be material either. To paraphrase Buffett, the goal here was to be approximately correct rather than precisely wrong.

Mark’s latest…

Another fantastic read from Jim Grant

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