Company Notes Digest 6.10.16

Each week we read dozens of transcripts from earnings calls and presentations as part of our investment process. Below is a weekly post which contains some of the most important quotes about the economy and industry trends from those transcripts. Click here to receive these posts weekly via email.

This Week’s Post: Fed Chairs and Microcaps

Janet Yellen set the tone for the week with a speech on Tuesday that was received as dovish by the market. Yellen did say that she believes that policy should stay accommodative, but she also acknowledged that the accommodation should be removed before fully meeting policy goals.

This week’s post also contains a number of quotes from the LD Micro conference which we attended this week in Los Angeles. LD Micro, which maintains the LD Micro Index, brings together a few hundred micro cap companies twice a year to meet with investors. We met with a couple dozen management teams over three days. It is a fascinating space with one-of-a-kind personalities.

The Macro Outlook:

The consumer is in a good space

“So the consumer is in a good space, and the business sector, small, medium, large, credit is good, and markets are wide open. So it looks good, and I think I want [growth] to be more than 2%. It might actually be accelerating a little bit now. I mean, it’s obviously hard to tell, and I’ll leave it to the economists to figure out whether that’s true or not.” —JP Morgan CEO Jamie Dimon (Bank)

The auto industry is doing well after a slow May

“auto industry continues to do well even after a slow May. I think that most people in the industry are thinking that the sales this year are going to be 17.3-17.4 something in that range” —Sirius XM CFO David Frear (Satellite Radio)

Lululemon said that mall traffic trends have improved somewhat in the past couple of weeks

“traffic was softer in the first quarter versus what we saw in Q4, and it was softer late in the quarter as well, and that persisted in the first couple of weeks of May, in Q2. We have seen the traffic trends improve in the last couple of weeks.” —Lululemon CEO Laurent Potdevin (Yoga Pants)

Debt capital markets have opened back up even for struggling industries

“The market has improved, the capital markets have improved significantly, particularly the bond level. So we are monitoring those conditions and we’ll look to refinance debt as it makes sense economically, but our real focus is on deleveraging.” —Freeport McMoran CFO Kathleen Quirk (Mining)

Conditions have improved but the Fed still has many questions

“Over the past few months, financial conditions have recovered significantly…Unfortunately, as I noted earlier, new questions about the economic outlook have been raised by the recent labor market data. Is the markedly reduced pace of hiring in April and May a harbinger of a persistent slowdown in the broader economy? Or will monthly payroll gains move up toward the solid pace they maintained earlier this year and in 2015? Does the latest reading on the unemployment rate indicate that we are essentially back to full employment, or does relatively subdued wage growth signal that more slack remains? My colleagues and I will be wrestling with these and other related questions going forward.” —Federal Reserve Chair Janet Yellen (Central Bank)

Yellen feels that a modestly accommodative policy is still appropriate

“Although the economy is now fairly close to the FOMC’s goal of maximum employment, I view our modestly accommodative stance of policy as appropriate for several reasons. First, with inflation continuing to run below our objective, a mild undershooting of the unemployment rate considered to be normal in the longer run could help move inflation back up to 2 percent more quickly. Second, a stronger job market could also support labor market improvement along other dimensions, including greater labor force participation” —Federal Reserve Chair Janet Yellen (Central Bank)

However it takes time for monetary policy to affect the economy so accommodation should be withdrawn before goals are fully reached

“These motivations notwithstanding, I continue to believe that it will be appropriate to gradually reduce the degree of monetary policy accommodation…Because monetary policy affects the economy with a lag, steps to withdraw this monetary accommodation ought to be initiated before the FOMC’s goals are fully reached.” —Federal Reserve Chair Janet Yellen (Central Bank)

Could inflation already be rebounding? HD supply was the first company to cite commodity cost inflation as a headwind in a long time

“Commodity cost inflation is another short term gross margin headwind in this environment” —HD Supply SVP Will Stengel (Industrial Distributor)


Chinese consumers are the “most discerning” in the world

“We looked at it too much like a developing market as opposed to the most discerning customers in the world.” —Procter and Gamble CEO David Taylor (Consumer Packaged Goods)


Real interest rates are currently negative

“The current actual value of the federal funds rate…measured in real terms is…somewhere around minus 1 percent. With the actual real federal funds rate modestly below the relatively low neutral real rate, the stance of monetary policy at present should be viewed as modestly accommodative” —Federal Reserve Chair Janet Yellen (Central Bank)

Sarbanes Oxley had a meaningful effect on small companies’ appetites to go public

“Sarbanes Oxley changed the IPO process. IPO used to be something that people celebrate, now it’s something people avoid….Being public doesn’t mean you have access to capital…going out there with a $100-200m valuation you’re asking to be orphaned.” —Firsthand Tech Value (SVVC) CIO Kevin Landis (Closed End Mutual Fund)


The line between E-commerce and physical commerce has blurred

“I don’t think E-commerce is a relative metric anymore, I think the metric is commerce. About 2 years ago, the line between digital commerce and physical commerce became almost meaningless. If I go into a store and I scan something and I walk out of the story and buy it online, which a lot of people do, is that commerce or E-Commerce? And if I buy something on E-bay and I pick it up in the store, is that commerce or E-commerce? That’s the pie, and it’s huge. It’s 17 trillion dollars.” —Ebay CEO Devin Wenig (E-commerce)

Amazon sets the standard for E-commerce for everyone

“Amazon says they’ll get the product to the customer same day…we have to get as close as possible to Amazon whether we like it or not” —Cafe Press (PRSS) CFO Garett Jackson (Microcap E-Commerce)

Amazon is advantaged because they’re allowed to operate at 1-2% operating margins

“They’re, I’d say, short-term they’re advantaged because they don’t have the same earnings hurdles that many traditional retailers have today. So you have retailers that are out there, they’ve been making 8% to 15% operating margins and all of a sudden Amazon is coming in with 1% or 2% operating margins and eating their lunch. I mean, it would be an interesting world to see if all the other retailers lower their operating margins to 1% to 2%, what would the fight look like. So it is a little bit of an unfair fight, right, because Amazon is not being held to the same standards from a profitability point of view. But today the market’s allowing that and actually rewarding that.” —Restoration Hardware CEO Gary Friedman (Home Furnishing)

But you have to maintain pricing discipline if you want to make money

“you don’t make your product available for free and if they don’t want to pay for it then they won’t be your customer. I think that’s okay. Automakers aren’t going to give away cars for free. So millennials are going to have to buy cars, I’m pretty sure shoe makers aren’t going to give away shoes for free. So millennials are going to have to buy shoes. And so you know the people who continue to give away their content to not just millennials, to anybody for free, well that’s the choice they are making.” —Sirius XM CFO David Frear (Satellite Radio)

Department stores’ struggles have opened real estate opportunities for others

“Given what’s going on with some of the department store brands and big box retailers, there is a lot of real estate becoming available in markets to meet our criteria…as landlords and developers pivot towards more entertainment options versus traditional fashion retail and mall, we are in a good position to capitalize on these opportunities.” —Dave and Busters CEO Stephen King (Restaurants)

The center of the grocery store is shrinking in favor of fresh offerings

“I don’t think there is any doubt that retailers are — will overtime contract their center-store as perimeter and products that they can be differentiated in, become more important.” —UNFI CFO Michael Zechmeister (Food Distributor)

Sirius XM’s CFO said he believes that Pandora has the best business model of any of the digital streaming music companies

“among the streaming companies, I think that Pandora has a better opportunity for a solid business models than the interactive streaming guys do. I think with the interactive streaming the fact that the music labels and then your content distribution network take over 80% of your gross, it’s really tough to ever make money in that. Pandora operating under the compulsory license of the DMCA compliant service is a the better opportunity to make money.” —Sirius XM CFO David Frear (Satellite Radio)


You don’t actually want to be first in tech

“You don’t actually want to be first in tech. Take Lotus 123. Who made more money, Lotus or Excel?” —Destiny Media Technologies (DSNY) CEO Steven E. Vestergaard (Microcap Tech)

Large tech companies squeeze the vitality out of acquired startups

“Oracle is like the mythical character that is 1000 years old that sucks the youth out of its victims.” —Firsthand Tech Value (SVVC) CIO Kevin Landis (Closed End Mutual Fund)

Dave and Busters hasn’t seen strong adoption of the VR games that it has invested in

“we have tested some VR products and I would say that our results are not compelling…I think that what we have seen so far is that the content is such that people are likely to do it a single time and then not repeat…so it has some novelty value…people are willing to try it but they don’t tend to play it over and over.” —Dave and Busters CEO Stephen King (Restaurants)


Negative attention continues to affect Valeant’s operations

“Unfortunately, negative external attention come – continues to adversely impact the business and our reputation with patients, physicians, and all of you, our shareholders as well as our distracted organization.” —Valeant CEO Joseph Papa (Pharmaceutical)

Tax advantages have led a lot of pharma manufacturing to Puerto Rico

“Every pharma manufacturer is in Puerto Rico. The island is built around the manufacturing of Pharmaceuticals” — Pharma Bio Serv (PBSV) CEO Victor Sanchez (Microcap Pharma Consulting)


Ford is changing its focus from cars sold to miles travelled

“our business model was always around how many units we sold, right, we’re now really thinking about it around vehicle miles travelled. When something becomes available at a lower cost, guess what, people use it more. You’ll have vehicles on the road 24/7 that rack up miles and need to be replaced more. So we’re going from an automobile company to an auto and mobility company.” —Ford CEO Mark Fields (Auto-mobility)

Boeing said the aerospace market remains solid

“The underlying aerospace market is a strong one. Commercial aircraft market paced right now by global passenger growth, continuing to run at about a 7% year-over-year growth rate…So, underlying market strength remains solid.” —Boeing CEO Dennis Muilenburg (Aerospace)

Materials, Energy:

Oil companies will still go bankrupt at $50 oil but the collateral may be better than people think

“oil seems to be stabilizing about 50. You’re still going to see bankruptcies. You’re still going to see reserves go up. I still believe a lot of those reserves will never be needed, that there’s more security in collateral behind some of those loans than people think.” —JP Morgan CEO Jamie Dimon (Bank)

Dave and Busters mentioned weakness in Texas

“Like many others we did experience softness in Texas…We attribute the softness to the impact of cannibalization…along with economic pressures related to the oil industry.” —Dave and Busters CEO Stephen King (Restaurants)

Copper companies believe that it will be difficult to grow copper supply

“we feel very positive about the long-term outlook for copper…we really take comfort in looking at the copper market is that the supplies of copper are very hard to come by…It takes a very long time to develop new sources of supply…we know that the current price of copper of just over $2 a pound is not sufficient to create new investment. Everyone in the industry is cutting back investment, trying to reduce cost, but that’s going to have a meaningful impact we believe on the industry as we go forward. The new mines or the expansions that were being pursued are largely coming to an end and it takes a long time for new supplies to be developed, if they can even be developed.” —Freeport McMoran CFO Kathleen Quirk (Mining)

Miscellaneous Nuggets of Wisdom:

Build a team that protects each other when the going gets tough

“When the bullets start flying you need people who have your back.” —Cel Sci Corporation (CVM) CEO Geert Kersten (Microcap Pharma)

All business is about building relationships

“There are five ways to make money: #1 is talk to people, #2 is talk to people, #3 is talk to people, #4 is talk to people, #5 is talk to people. You gotta pick up the dang phone.” —Cel Sci Corporation (CVM) IR Consultant Ken DeVane (Microcap Pharma)

There’s only one way to predict the future

“The best way to predict the future is to invent it.” —Alphabet Chairman Eric Schmidt (Moonshots)

Full transcripts can be found at