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Geoff Gannon March 25, 2013

Armanino Foods of Distinction (AMNF)

A few people have emailed me asking for my thoughts about Armanino Foods of Distinction (AMNF). I don’t have any right now. But Whopper Investments does:

I think Armanino is undervalued at today’s prices. It’s growing pretty fast and creating tons of value from that growth, so that value gap should (hopefully) grow over time. And, as an added kicker, there’s the potential for a merger at a huge premium, which would be easily supported by the synergy potential, and/or a big special dividend to lever the company up.

I lied. I do have one thought. At one point, Whopper says:

I tend to think that their frozen products fall more into the “commodity” segment than the “branded” segment, but their returns on capital actually suggest other wise. Pre-tax returns on capital are well over 50% and gross margins are in the 35% range. Those tend returns tend to indicate some form of brand strength or competitive advantage.

That’s true. However, it is imperative that when you find empirical evidence of a competitive advantage you back it up with a rational explanation for that competitive advantage.

You always want to combine abstract reason with concrete evidence to prove something’s practical existence.

If you fail to do this, you will end up taking the magic formula approach. Many companies earn excess returns. Some have durable moats. Others do not. It may work out on average to simply assume moats based on high returns on capital. In fact, the historical data Greenblatt used says that the approach did work in the past.

But you must never beg the question. You must never argue that this company has a moat because only a company with a moat could earn the returns this company is now earning.

Instead we must look for both a rational theory and empirical data that are reasonable when considered separately and agree when put together.


Is Quality as Good as Growth?

Where Does a Stock’s Future Return Come From?

Should Buy and Hold Investors Worry about EV/EBITDA?

How Today’s Debt Lowers Tomorrow’s Returns

Why I’m Pessimistic about Stocks


Talk to Geoff

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Geoff Gannon March 20, 2013

How to Read a 10-K

A blog I read, valuepraxreviewed How to Read a Book. I had never read the book before. So I thought I would give it a try. It is – of course – mostly about reading books. And while investors read a lot (in fact, that’s most of what they do) it rarely comes in book form.

Still, a lot of what you’ll find in How to Read a Book can help with reading 10-Ks, S-1s, investor presentations, earnings call transcripts, annual letters, newspaper articles, trade journals, etc.

I think this quote sums up the problem new investors have:

Most of us are addicted to non-active reading. The outstanding fault of the non-active or undemanding reader is his inattention to words, and his consequent failure to come to terms with the author.

SEC reports are not known for being communicative. But in most cases where someone emails me asking about a part of a 10-K they do not understand – the answer can be found in the same 10-K. You just have to read the footnotes, understand how the income statement and cash flow statement and balance sheet relate, and know whether the company is using GAAP or IFRS. With the internet, you don’t even need to know all the actual norms of GAAP and IFRS – since you can always just google “IFRS biological assets” if you’re confused.

This sounds like a lot to keep straight. But if you come to every 10-K armed with a pen, a pad of paper, a highlighter, and a calculator – it’s so much easier. When I see something out of the ordinary I just scrawl “Depreciating too fast?”, “Why did marketing expense double?”, “When was building bought?”, etc. right in the margin.

It is easy to miss the relevance of depreciation method, useful life, residual value, etc. in a depreciation footnote if you read it the way you would read a newspaper article, novel, etc. Most people read most things passively.

Read the 10-K actively.

A depreciation footnote takes on a whole new meaning when you are looking through the 10-K specifically making calculations based on questions you came up with yourself about depreciation. You now read it in the context that matters to you.

Here’s one other great piece of advice from How to Read a Book. Just read the whole thing straight through first. It’s amazing how few people read a 10-K twice. If you’ve ever seen a movie straight through twice – within the same week or so – you’ll realize you missed a lot the first time through. Popular movies are not made to be dense or difficult to understand. But I don’t think there’s anyone who can see even a very superficial seeming movie twice in the same week and not find something in the rewatch they missed the first time through.


Context. The best context in which to analyze something is to already be familiar with it. The first time …

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Geoff Gannon March 12, 2013

Hint: Read the Oldest 10-K

I recently mentioned something in an email that I’m not sure I’ve said before on this blog. I always read the newest and oldest 10-K for a company when I start analyzing it. Reading the oldest 10-K gives you perspective.

This little habit will make you a better investor.

EDGAR has 10-Ks going back to the mid 1990s. So, you’ll have the experience of reading a 2012 annual report and something like a 1996 annual report.

This always gives me added perspective on the business. And it gets my thinking about how the business has changed over time and how it will change in the future.…

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Geoff Gannon March 10, 2013

John Byrne, Former GEICO CEO, Dies

The man who turned around GEICO died:

John Byrne, Geico CEO Buffett Cited for ‘Brilliance,’ Dies at 80

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Geoff Gannon March 9, 2013

News: George Risk (RSKIA) and Ark Restaurants (ARKR)

I only own two American stocks. Both are micro caps. They are George Risk (RSKIA) and Ark Restaurants (ARKR). Both stocks came out with news recently.

Ken Risk, the CEO and majority (58%) owner of George Risk, died. His daughter, already the CFO, was made President and Chairman. His widow was also added to the board.  The company’s record under Ken Risk was extraordinary. His death is a big negative for shareholders.

Ark Restaurants rejected a $22 a share buyout offer from Landry’s. Then Landry’s sent out a press release questioning the motives of Ark’s board.

Here are the latest press releases in each story:

George Risk 8-K

Landry’s Press Release

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