Posts In: Gannon on Investing

Geoff Gannon September 22, 2018

Geoff’s SEC Filing Notes for: Resideo (a Planned Honeywell Spin-off)

Notes on Honeywell’s planned spin-off of Resideo Technologies

I’m trying something new here. A lot of you want to see more “initial interest” write-ups from me. But, those write-ups are actually step two of my investment process. I first read a 10-K (or, in this case, a spin-off document) on EGDAR and mark-up that SEC filing. I make my notes directly on the 10-K through a combination of highlights and questions, comments, etc. in the margin and at the bottom of the page. I never put these highlights and scribbles into any sort of formal document. But, I thought I’d try doing that here with Resideo so Focused Compounding members could see what my notes would look like if put in a single document.

It turns out such a document runs to over 6,000 words. So, my “notes” are much longer than any write-up I’d create out of them.

I’ll do an “initial interest” write-up of Resideo later this week.

For now, here are my notes:

Notes on Honeywell’s planned spin-off of Resideo Technologies

By the way, I’m going to let Andrew tweet out these notes, I may share them on my blog, etc. Any write-up I do of Resideo (like an “initial interest” post) will be exclusively for Focused Compounding members. But, at least for more liquid stocks like Resideo, I think we’ll share the notes widely.

In the comments below, let me know if you found these notes interesting and whether you’d like more SEC filing “notes” posts from me. In the future, I can do one post with my notes first and then a second initial interest post later. But, I won’t do that unless I get feedback from members saying they have an interest in seeing these notes.

Notes on Honeywell’s planned spin-off of Resideo Technologies

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Geoff Gannon June 17, 2018

There’s Always a Simpler Problem to Solve

 

To Focused Compounding members:
As a stock picker, when you’re first faced with the decision to buy or not buy a stock – it seems like a complicated question. Consider the mental math problem of 54 times 7. There are a couple ways of tackling this problem. The simplest though is to multiply 50 by 7, getting 350 and then multiply 4 by 7 getting 28. You add 350 to 28 and get 378. There are several ways of solving this problem. However, in actual practice, the method I laid out is the best. Sure, the answer is exactly the same as if you first multiplied 7 by 4 getting 28 to start. However, if your brain hits a snag while keeping track of the problem you’re solving you would, in the first case, already have the number 350 and therefore be just 7.5% below your target even if you gave up right then. Using the second method, your first step would only get you to the number 28. You’d be 92.5% below your target at that point and the only other bit of information you’d have is that the answer “ends in 8”. Knowing an answer ends in 8 might be useful on a math multiple choice test – but not much else. However, being just 7.5% shy of of an answer – and knowing you’re below the answer, not above – is often helpful in real life. The step “50 times 7” is simple and informative. The step “4 times 7” is just as simple, but far less informative. When analyzing something, the step you want to take next is the one that maximizes both the simplicity of the step and the value of the information you get by performing that step.

I said “…the only other bit of information you have…” back there. And that might be a helpful way to think of solving stock analysis problems: as taking steps that get you “bits” of information. What bit of information is most valuable to me? At the end of the day, a stock picker needs to decide only two things about a stock: 1) buy or don’t buy and 2) how much to buy. How much of your portfolio to put into a stock is an incredibly complex problem. A simple rule like always putting the same amount of your portfolio into every stock you buy can set that complex problem aside while you try to solve a simpler problem. Even then, you’re left with the complex problem of trying to guess what compound annual return this stock will provide should you buy it. How can you simply this problem? Well, you can take a problem that requires a quantity as the answer and turn it into one that requires only a greater than or not greater than answer. At any point in time, your portfolio will already have stocks in it. Assume you have no cash. You …

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Geoff Gannon March 14, 2018

Pendrell (PCOA) Follow-Up: Reading into a CEO’s Past and the Dangers of “Dark” Stocks

A member commented to the write-up I did yesterday on Pendrell. I think the comment and my response are worth making into a full follow-up “memo”.

So, here they are:

“Geoff,

This company definitely seems promising. I saw the blog post from Hidden Value that you retweeted and ended up buying a small starter position in the company after reading the 10k. That was before even seeing that you ended up writing a post on it.

I’m struggling to decide how to size the position right now, but really I have two open questions I’m working on.

  1. How big of a cash flow business can Pendrell reasonably acquire using their current cash position?
    2. How will the experience of being a “private” shareholder in Pendrell differ from owning stock in a more public position that files with the SEC?

Some further development of those two points:

  1. I know you assumed that they’d purchase the company with 100% cash equity. That seems like a very conservative assumption. If they’re going to behave and operate as a private corporation, there is no reason we can’t view PCOA as basically a private equity investment without the 2% management fee.

In that situation, wouldn’t they be likely to use leverage in an LBO like purchase? They could use somewhere between 30-50% cash with the rest being debt. That could change your EBIT target from 15 million per year, to something like $30-40 million per year. Therefore, the unleveraged 10.4 P/E could be something like a leveraged P/E of 4-6.

While management hasn’t guided to the use of debt versus all-cash transactions, I don’t see why they would choose to use all cash. By using leverage, they can better take advantage of their deferred tax NOL asset.

Obviously, this is purely an upside discussion, but you’ve already discussed the downside. (minimal)

  1. Although the company won’t file financial reports with the SEC, do private companies still usually prepare financial statements but not issue them publicly? Perhaps only to shareholders? Or should I assume I’ll not receive any regular updates at all about the financial condition of the underlying company while I hold this stock?

Geoff, any insight you can provide on those points would be most appreciated. Thank you for bringing the stock to my attention through your tweet.”

First of all, this is a reminder to all the members reading this to follow me on Twitter (@GeoffGannon). You can sometimes – if you pay attention to what I re-tweet, tweet, etc. – get an idea of what sort of things I’m reading about and even sometimes which particular company I’m current analyzing. Many times, nothing will come of it. This time, a stock write-up came of it.

 

 

Is an Unlisted, “Dark” Company Public or Private?

Just to be clear on the terminology, Pendrell is now an over the counter stock that doesn’t file with the SEC. It says it “went private” and that’s true in a sense. You need to get …

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