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4 Years and 1,500% Later with CONN
Posted by: Jae Jun (IP Logged)
Date: March 4, 2014 07:36AM

Over 4 years ago, I read Quality of Earnings and it felt like drinking from an ice cold fountain after dying of thirst.

It felt sooooo good.

That’s because it took my understanding and application of fundamental analysis to another level.

But I fell into a problem after reading the book which I’ll get to later. I’m sure you’ll be able to relate one way or another.

One of the first stocks I analyzed after reading the book was CONN’s Inc (CONN) which is a retailer for durable consumer goods like TV’s, appliances, furniture, computers. They also offer credit lines for people to purchase from them.

4 years later CONN was up as high as 1,544% at the beginning of 2014.

This is not a glory or boasting post. In fact, I’ve never held CONN.

Nor is this a “shoulda woulda coulda” “wah wah” post.

4 years and 1,544% later, it’s time to acknowledge my mistake and see what I can improve.

Self Studying Case Studies are Often the Best

CONN – The Behind the Scenes Story

You see, I like to perform case studies of myself. I wish I was Warren Buffett (Trades, Portfolio), or Joel Greenblatt (Trades, Portfolio), or David Einhorn (Trades, Portfolio), or Bill Ackman (Trades, Portfolio).

But I’m not and I admit that.

I have lots of failures, some winners, but most of all, all of them are personal case studies I can learn from and I’m sure my future picks will be also.

When you try to reverse engineer the thought process and situation of successful value investors, you don’t have the full scenario and what went on behind the scenes. But when you do it on yourself, you know what you were thinking at the time.

It’s discouraging at first. Feels like poking a bruise.

But it has to be done and once you get through a few, you get used to the pain.

Had I waited only a year before writing a follow up post on CONN, the sample size would have been too small.

But 4 years is long enough to determine whether a stock was a stud or a dud.

If you don’t agree that 4 years is enough of a sample size, check out statistical significance.

4 Years Ago…

So after having read Quality of Earnings, I was super excited with what I was learning that I wanted to apply it right away.

I even created a valuation spreadsheet that analyzed each part of what was discussed in the book.

That spreadsheet was eventually replaced with what I have now and the inventory analysis section is making a comeback in the upcoming version.

But in my eagerness to use what I had just learned, I focused too much on one set of fundamentals.

My mistake was analyzing the accounts receivables and inventory too much without looking at things in context and how the business was being valued.

In the 4th quarter of 2009, CONN ran into all sorts of troubles as charge-offs and delinquencies rose on its credit program. Ironically, the same issue is why CONN dropped 36% in the last week.

However, the major difference then and now is the valuation.

CONN Valuation Ratios

And here’s the inventory analysis chart that I was so proud of creating.

CONN inventory analysis the first time

When looking at those numbers, I saw big red flags. Honestly, it wasn’t a bad choice to move on considering the information I had on hand.

But therein lies the problem. I believed I knew what was going on with the business just by looking at the inventory and receivables. I had zero working knowledge of what was really going on at the retail level. In fact, I didn’t even go to its website to check out what their product mix was and how their credit business worked.

In hindsight, I strongly believe that more digging and industry knowledge would have helped, but I was being lazy and drew conclusions.

That’s the 1,500% mistake I made with CONN.

oddballstocks recently wrote about humility and knowledge which reminded me to write this post. I’m the so called “arm chair expert”.

My fundamental analysis and application of Quality of Earnings was spot on. The problem was that I was too one dimensional.

Funnily enough, I even looked hard and long at the valuation comparing it to the problems it was facing.

CONN Valuation 2010

Valuation is an art, but the valuation was compelling.

CONN Valuation 2014

Whereas the current numbers don’t look anywhere near as enticing.

Latest Numbers for CONN

In case you are curious and as a comparison, here’s the latest inventory analysis numbers.

(I’ve been working on adding this to the new analysis section of the OSV analyzer. Premium members will get this in the next upgrade of course.)

CONN Annual Inventory Analysis

CONN Q1 Inventory Analysis

CONN Q1 Inventory Analysis

CONN Q2 Inventory Analysis

CONN Q3 Inventory Analysis

CONN Q4 Inventory Analysis

My Lesson I Want to Share with You

Don’t be too much of an arm chair investor. Although SEC filings provide a lot of information, you can’t truly understand the business just by the SEC filings alone.

Use it to understand your limitations and then do some more digging.

So What’s Your Lesson?

Share one of your important lessons with me by leaving a comment in the blog post. If you are reading this via email, come visit the blog and share your thoughts.

I’d love to learn from your lesson too.




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Re 4 Years and 1 500 Later with CONN
Posted by: batbeer2 (IP Logged)
Date: March 4, 2014 08:50AM

Thanks for the article.

>> Over 4 years ago, I read Quality of Earnings and it felt like drinking from an ice cold fountain after dying of thirst.

I'm pretty sure Thornton O'glove mentions that these red flags (including increased inventory levels and/or receivables) should be taken as a reason for further investigation

It seems to me you took them as a reason to not do any further research.

FWIW, I think management spelled it out pretty well in the SEC filings. At the time no one was willing to listen despite their decades-long track record of honest and able management.




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Re 4 Years and 1 500 Later with CONN
Posted by: AlbertaSunwapta (IP Logged)
Date: March 4, 2014 10:51AM

According to the movies, when one is dying of thirst, they often reach for the tainted or poisoned pools of water but any remaining reason prevents them from drinking, then upon findng clean water, they only allow themselves or are only allowed small sips to satisfy them. (The reason is never revealed.)  

So I assume it's best to revist the fountain and take another larger drink when one's thirst has normalized and they can absorb more.   Four years ago, few were drinking normally, instead only risking small sips and likely avoiding even the slightest bit of tainted water.  ;-)

 

BTW, I'd love to see Batbeer2's and OldSchoolValue's list of best prospects side by side to see if there is any overlap.  I would almost guarantee that I would buy some shares in those matches sight unseen.




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Re 4 Years and 1 500 Later with CONN
Posted by: batbeer2 (IP Logged)
Date: March 4, 2014 11:09AM

>> BTW, I'd love to see Batbeer2's and OldSchoolValue's list of best prospects side by side to see if there is any overlap. I would almost guarantee that I would buy some shares in those matches sight unseen.

LOL

Yeah I think that would have worked out pretty well in recent years. There may be some others but off the top of my head, I only know of Solitron that has been discussed as a long at OSV and I've also said some nice things about.

FWIW, I think SODI is not a bad idea today.




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Re 4 Years and 1 500 Later with CONN
Posted by: auburnborn (IP Logged)
Date: March 4, 2014 12:17PM

the stock has not gone up 1500%.  That part you are wrong about in every way. 




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