Talk to Me Like I am Stupid: Public Valuation Edition

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63 Responses

  1. Avatar Kimmi says:

    “Are we living in a time that is rich in capital but low on ideas?”
    … yes and no. We are living in a time that AAA+ isn’t giving the rate of return the market demands.
    Cheese truck is irrelevant to this question, though.
    Zipcar sold for oodles in its first public offering too. Crashed soon after (down to Sane Pricing).Report

    • Avatar morat20 says:

      Classic bubble. Too much investment money chasing too few good investments.

      T-bills are still flat, if you go with the next least risky — it’s what — municipal bonds, insurance companies, which might get you to 3% a year.

      All the money — and there is a LOT of capital sloshing around — is chasing 5% or greater, even as inflation is flat.

      Saw the same thing in the 90s. wasn’t worth more than Norway. Only difference here is it isn’t irrational exuberance in some magic ‘thing’ but just way, way, way too much money sloshing around looking for returns.

      It’s a problem that’s not going to go away anytime soon.Report

      • Avatar Kimmi says:

        There’s always a scammer willing to take someone stupid to the cleaners.
        Throw enough money at “Find AAA+ at 5% return” and someone will make it happen.
        Fair, Square or Moral Need Not Apply.Report

  2. Avatar Damon says:

    Don’t forget that there’s several dozen more trillions of recently printed money out there as well. Dollar’s loosing purchasing power. Gotta invest it SOMEWHERE. Pump it up, sell. Let the next sucker take the hit. Oh, that sounds like the housing crisis we just went though.Report

    • Avatar Kimmi says:

      If you pick your suckers right, you can get more shmucks for the next go round.
      Deliberate actions often come with destructive consequences.Report

    • Avatar morat20 says:

      We’d be seeing inflation, not the the inability to hit a 2% target. The Fed can’t hit 2%. Their target USED to be 3%.

      We’re flirting with deflation, still.

      It’s not the QE money — it’s the absolute lack of anywhere to put the bulk of investment capital. They won’t take the 1% or 2% rates they can get, so they’re blowing up the market chasing after 5%. It’s a standard bubble, driven by excessive capital.

      But hey, what can you do? Too big to fail means socialized risks and privatized profits, all on the taxpayer’s dime. Who’s gonna stop that? Because ‘too big to fail’ is darn right. Nobody sane is willing to accept what happens when the whole financial industry craps out. But nobody’s willing to take the steps to stop it, either.Report

      • Avatar North says:

        It’s not just too big to fail. The US is the only huge economy that’s safe to dump your bajillions into. If you’re a foreign bazillionaire or you’re managing a fund for the same where do you put that money? The Ruble; are you high? Assuming Uncle Vlad doesn’t steal it at the rate Russia is going it’s going to be worth nothing. The Yuan? You’re one policy change in the CPC away from the Chinese dissappearing every penny and even if they don’t the Chinese financial system is even more opaque than their air. You might as well set it on fire. Canada, Israel, Brasil, Switzerland? Too. Small. No. Room.
        That leaves the Euro, which has the potential to blow apart if the Germans don’t realize what side their bread is buttered on or if the Greeks fail to temper their greed and foolishness.
        So finally that leaves the US dollar; big, stable, reliable and secure. So you put your treasure into greenbacks and then try and figure out how to make a return on them.Report

      • Avatar Saul Degraw says:


        How are countries like Canada and Israel too small?

        What about the Scandanavian countries (Sweden is not in the Euro)? Japan? The UK? Kenya? South Africa? India?Report

      • Avatar Damon says:

        I would have been fine to let it all burn.Report

      • Avatar morat20 says:

        I would have been fine to let it all burn.
        In much the same way people who didn’t live through, say, the whole ‘polio’ thing are iffy on vaccinations, i would assume. In short: You’re okay with it all burning either because you’ve never bothered studying even recent history (1929 comes to mind) or because you’re convinced you’d somehow be immune if the whole apple-cart was upended.

        The Great Recession was bad. Allowing the financial system to fail fully? At least an order of magnitude worse.Report

      • Avatar Chris says:

        The biggest of those is a little more than a fourth the size of the U.S. economy and is, I believe, still in the midst of a decades-long recession.Report

      • Avatar Malarche says:

        “you’ve never bothered studying even recent history (1929 comes to mind)”

        Please, Uncle Morat, tell us again about the horrible bear market, the vacuum cleaner guy, and the heroic Rosy Felt, who saved the American economy in only 13 years!Report

      • Avatar North says:

        Saul, India has too much squidginess with their capital markets; their red tape is legendary. Putting money in would be hard, getting it out even harder. Big strike out for your average TMH (tender of money heaps).
        Canada and Israel are fine places to stick your money but they’re small (economy and market wise). This isn’t to say that people don’t invest there; they do; but if you put too much money in a small country the exchange rate goes wingdings and the cost of instruments soars and you have nothing to buy. See Switzerland for instance. The Scandinavians are similarly small, also Sweden is a petro-state. If you’re petro-wealthy you don’t then put your nest egg in the economy of a petro state- that’s stupid and the TMH’s are severely risk averse and far from idiotic.
        England and Japan are bigger but they both have debt and recession problems (Japan has a serious demographic problem). England, however, is pretty much bought out as a financial haven; mostly by Russian TMH’s hiding their money.

        What you want is a gigantic economy with lots of stocks and company’s and debt to buy but with a healthy balance sheet, a strong taxpayer base and excellent governmental stability and a proven history of a stable currency and debt repayment. Being the global reserve currency also helps. AKA the USA. That’s where the TMH’s park their money. That’s why there’s so much money sloshing around but no inflation worth speaking of.Report

      • Avatar morat20 says:

        Please, Uncle Morat, tell us again about the horrible bear market, the vacuum cleaner guy, and the heroic Rosy Felt, who saved the American economy in only 13 years!
        Ah, yes. A poor attempt at sarcasm. The refuge of those who have no actual rejoinder.

        But go ahead — given the size of the US financial sector in 2007, do explain what ‘allowing it to fail’ would have looked like. I’m eager to hear how you see that alternative scenario go down.

        You quite obviously have an opinion. Do share it.Report

      • Avatar Damon says:


        All empires fall. The fall is rarely quiet. I’ll let it all burn around me knowing I’ll die as well. I have no illusions that I’d make it through it. But I’d have the satisfaction of watching the quislings realize that they’re going to be sacrificed as well. Their despair is enough. And maybe something better will come from it. Either way, I won’t be in a position to give a damn.Report

      • Avatar LeeEsq says:

        @north, do you have the tendency to be the most capitalist member of LGBT circles you participate in?Report

      • Avatar LeeEsq says:

        @north, I don’t mean the above as an insult but ask out of genuine curiosity.Report

      • Avatar North says:

        @leeesq Far far from it Leeesq, I’m no libertarian and view capitalism with what I like to think is a pragmatic realistic resignation. Why do you ask?Report

      • Avatar Malarche says:

        Uncle Morat,

        Obviously your comment suggested that you’ve studied the Great Depression closely. I suspect you might be a trained economic historian no less, unlike the great unwashed masses limited to what they learned in their high school history clases, and I do love sitting at the feet of experts (as long as they’ve trimmed their nails, o’ course).Report

      • Avatar Kimmi says:

        London’s real estate seems to make people happy.
        It’s not petrodollars, but it does work as an alternative reserve currency.Report

      • Avatar Kimmi says:

        Killing the quislings? Would you be holding the gun?
        I don’t guarantee the deaths of anyone that I don’t personally have a hand in killing — and that goes triple for the rich and powerful.

        AIG’s board had plans ready to bugger the hell out of the country — did you?Report

      • Avatar Damon says:


        By definition the rich and powerful aren’t quislings. And I’m not advocating killing them. I’m saying that when the empire falls, those who sold out and thought their position safe, will realize that it’s not a safe as they thought, and they’ll have the same fate as the rest of us.Report

      • Avatar Kimmi says:

        Who on earth do you think has sold out?
        Surely you know the rich are smarter than to simply BUY help.
        Carrots and sticks work far better than carrots alone.Report

      • Avatar Damon says:

        Perhaps your reading “sold out” too literally.Report

  3. Avatar Kolohe says:

    Finding crazy valuations in the OTC market is like finding drunk people at a Mardi Gras party.Report

  4. Avatar Kazzy says:

    Because, to most investors, it doesn’t matter if they actually think the company is worth that. What matters is if they think enough other people will think the company is worth more tomorrow so that they can sell at a profit.Report

  5. Avatar Kolohe says:

    The most telling thing in the financials is a 1.3 million dollar “consulting expense” in the first 9 months of calendar 2013. The second most telling thing is nearly 700K in deferred compensation as of Sep of last year. (this last one would be more telling if one knew if they are stiffing the line workers or if it’s management giving themselves a salary to lay claim to later if and when this thing goes belly up)Report

  6. Avatar Kazzy says:

    A question for you, Saul…

    When you post these TTMLIS, are you actually asking people who understand a topic you are unfamiliar with to dumb it down for you? Or are you trying to explain how wrong you think something is? Because your post seems to be as much about why this particular company was valued as it was as it does about the problems you see with companies going public for funding. Which is cool if you want to talk about that, but presenting it as one when you want to do the other is a little misleading.Report

    • Avatar Saul Degraw says:

      I want a legitimate explanation but in this case I think a cheese truck company might not be the best use of the stock market.Report

      • Avatar Malarche says:

        I think a cheese truck company might not be the best use of the stock market

        Damn right! The stock market is for porn!

        or put elseotherwise, what fuking ‘ell do you think “the use” of the stock market is, anyway?Report

  7. Avatar Kazzy says:

    When I think of “market manias” (which not all or even most forms of investment fall into), I think it is really easy to assume that everyone loses when the bubble pops. But that isn’t the case. The only people who really lose are the ones left holding the bag at the end. If a particular Beanie Baby changes hands four times, each time selling for more, before everything goes belly up, only the last guy ends up screwed. Financially, at least. But people who engage in such speculative investments are usually seeking more than a straight return on their investment. They’re seeking thrill and excitement. If they weren’t, they’d probably follow different investment patterns.

    This isn’t to say people don’t end up in dire straights when frenzies dissolve. Many certainly do. Only to say that we look at the Beanie Baby craze and think, “Man, everyone lost their shirt on that,” and that simply isn’t the case.Report

    • Avatar morat20 says:

      When “Flip Your House” showed up on my TV, I knew the smart money was gone.

      If investment opportunities are being sold to the masses, printed in the paper and pimped on your TV (like ARM’s for your mortgages. Thanks, Greenspan!), that’s getting the rubes to buy you out before the crash.

      Nobody says “I’ve got this great investment opportunity, 7% a year guaranteed, let’s tell the public about it“. Common knowledge means you’re too late.

      If you can’t see the sucker at the table, it’s you.Report

      • Avatar Kazzy says:

        There was that guy used to run those infomercials we he’d sell you a book for $39.95 that would make you rich. And then he pointed to his house and cars and say, “Don’t you want to be rich like me?” And it was painfully obvious to even 12-year-old Kazzy that he got rich selling books full of nonsense for $39.95. But too many people thought he used what was in the book to get rich. Sigh…Report

      • Avatar Kolohe says:

        He’s now a moderately successful professional poker player.Report

      • Avatar Glyph says:

        “Like two sealed copies of expansions
        I’m like Tom Vu, with yachts and mansions”Report

      • Avatar Bill O says:

        …and the clues are everywhere, if only we take the time to notice, and think. I had a pretty good idea the last gold run was on its last legs when, the day our nearby brand-spanking-new-super-double-extra-mega grocery store opened, there was no on-site bank branch, no ATM even, but there was a kiosk where you could buy and sell gold and silver. The ATM has arrived; all that remains of the kiosk is the sign…Report

  8. Avatar Randy Harris says:

    Because there is a very slight chance of a scenario like this five years from now:

    1000 trucks
    500K annual sales per truck
    10% profit margin
    50 million annual net profit

    Plus potential for even more growth, including franchising opportunities.Report

    • Avatar Kolohe says:

      Also, they are using the capital infusion* provided by the OTC listing to buy some Ruby’s Diner franchises in Pennsylvania

      *more likely, the liquidity – the OTC site only shows about 5 thousand (out of 18 million) non-insider** trades since the listing. And a bid ask spread as of this morning of 2.50 vs 5.80 (880×220). I don’t think they really got any cash yet, but can use the valuation as collateral for new debt and debt rollover.

      **my favorite thing in the financials has been that an early angel investor is named Oscar Mayer.Report

    • Avatar Glyph says:

      1000 trucks
      500K annual sales per truck
      10% profit margin
      50 million annual net profit

      That’s a lotta chedda.Report

  9. Avatar Malarche says:

    “market skeptics often seem powerless at combating market mania.”

    Whom I gonna listen to, a guy who admits to being a market skeptic and admitting he doesn’t know how things work, or a guy who has money to go big into grilled cheese trucks?

    But investments like this go bust all the time! Yeah, and the people who throw their money into investments still own all the mansions and yachts, and all you own is your little corner of internet skepticism.

    How’s that for talking to you like you’re stupid?Report

    • Avatar Saul Degraw says:


      I was reffering not Reinholtz who wrote the Bloomberg view article, not myselfReport

    • Avatar morat20 says:

      Donald Trump, for instance, somehow keeps being rich despite being a horrible, horrible investor.

      I’m pretty sure everything he’s ever done has gone bankrupt. I suspect that circle is squared in that Trump loses OTHER people’s money, and whatever money of his own he loses he manages to get back in ‘fees’ from the other chumps.

      I’m pretty sure the greatest con in America is the stock market. Back when investing in companies meant investing in companies (and getting a % of their profit), not so much. These days? It’s playing red and black on a giant roulette wheel, and the House is the guys making your bets for you.

      They get rich on randomly shuffling everyone else’s money around. Plenty of sizzle, but I suspect the actual steak is buried in the weeds as a tiny percentage of all the frenzy.Report

      • Avatar Kimmi says:

        Donald Trump isn’t terribly rich. He CONTROLS a lot of money, which is why he can get a private jet, etc. It’s not his money in the first place, though.Report

  10. Avatar Tod Kelly says:

    Like your last couple of TTMLIS posts, I’m not sure you’re using the concept correctly. But on the chance I’m reading you incorrectly, I’ll try to go ahead and answer your question, since this is kind of in my wheelhouse.

    When you look at IPOs, you need to be aware that people looking to make large scale capital investments are taking several things into consideration:

    1. Is the IPO part of a larger trend/change in technology/etc, and if so, what part of the cycle is that trend in?

    2. What is the history of the executive team manning the IPO?

    3. How big of a risk/investment is being asked?

    When you look at it in this light, the grilled cheese truck isn’t s outlandish, because here is what you aren’t seeing in the blog post you linked to:

    1. They believe that carts are a growing trend in food service that will continue to grow. After all, you can potentially create the same amount of revenue as you can a Dairy Queen or Subway, but with a fraction of both infrastructure and operating costs. This is a risk that may or may not pan out, but it is not an outlandish one.

    2. You are seeing $108 million, but this is no doubt a large group of people who are investing far, far less — and because of where food carts are in their cycle, all of those people no doubt have a similar sized stake in a variety of other similar ventures. So they don’t need Grilled Cheese to succeed as planned, they just need one of those, say, 20 food truck chains to succeed.

    3. The financials are certainly less than perfect, but they are very sparse. There is no real info there, and you have to assume the investors got more than what you are seeing. Are they in the red because they are selling a sandwich that costs $3.00 to make for $2.00, or are they in the red because they are putting a tremendous amount of cash into capital investment? It’s impossible to know from what you see, but based on the business model (looking to buy and equip a hellah lot of specialty trucks and capital investors willing to pony up $100 mil) it’s a fair bet that it’s more of the latter than the former.

    4. The management team they have in place looks pretty damn solid. It’s a good bet that the reason this company has gone out of the gate as well as it did is that there are a lot of investors who believe that if there is going to be a team that makes money making a large cart chain, this is the team that will be able to figure out a way to do it.

    Now, none of this means that this company is a lock for success — but then no IPO ever is. Amazon went years after it’s IPO being a loser from a profitability standpoint, but that’s not what investors were looking for — they were looking for the online retailer who would be left standing at the end of the day. And every investor in Amazon had investments in their competitors. Similarly, the cheese truck may be the food cart Amazon — or it might not. And food carts might be the next way we buy fast food — or it may not. Such is the dice rolling of investing.

    So even while I’m not going to go out and buy stock in this company, I totally see why those who do it for a living are doing what they are.Report

    • Avatar Burt Likko says:

      All good points; I agree that one might rationally decide to make an investment, and indeed one might rationally decide to call this a higher-risk investment and justify a higher price per share than you or I might be willing to accept, perhaps based on nothing more than the reputation of the directors. (I’m not entirely sure what Gen. Wesley Clark brings to the table even in terms of logistical know-how, but I agree he’s merely the most famous of several pretty prominent names on their board.)

      A lot of money is moving through the company. If you look at the real 10-Q filing, they’re taking in an average of $331,865 a month in revenue.

      Still, the end result of a market cap of nearly a tenth of a billion dollars (18,037,158 shares that closed at $5.53 on 2/9/14 = $99,745,483.74 market capitalization, insert image of Dr. Evil twisting his pinky finger here) for a handful of grilled cheese trucks looks rather silly, and so do the financials that suggest the company is absolutely bleeding dollars at the moment and has been for at least nine months now: their cost of sales is $306,848 a month and their operational overhead is $319,697 a month.

      Now, I’d like to point out something that in the OP seems incorrect: the OP says that there are a total of four trucks out there in the world selling grilled cheese sandwiches. That’s pretty clearly not true; looking at their calendar for tomorrow (February 10) they will have at least seven trucks operating simultaneously in the four market areas they’ve identified.

      The operational overhead is unlikely to increase substantially as new trucks are added to their fleet. But if seven trucks generate an average of about $3,600 a month in profit now, then two things need to happen: upper-level operational costs have to decrease and marginal income per truck needs to increase. Right now, the trucks are operating at a revenue-COGS margin of about +7.5%, and that’s not a bad foundation to start from.Report

      • Avatar Tod Kelly says:

        I’m going to guess that Mr. Westmoreland is there for the express purpose of opening doors (and wallets).Report

      • Avatar Kimmi says:

        The key word everyone seems to be missing is Franchise. This is a brand, and it’s a brand they intend to sell to people who will run their own truck.

        If you believe that a grilled cheese truck is a good idea — at all, then this has some real promise.

        Clark’s a fine logistician (I know someone who works in that field) — but I sense that they’re tapping him to find/vet decent veterans to run the franchises.Report

      • Avatar Burt Likko says:

        The 10-K makes evident both of these points — they’re hoping to franchise and have one franchise going right now, and Clark’s role is principally to recruit veterans to become franchisees while there is some sort of Federal incentive subsidizing their doing so. I glossed those points over in my comment below because the biggest problem seems to me to be a top-heavy compensation scheme that needs reform if the enterprise is going to survive.

        The one franchise they’ve started owes a $250,000 one-time license that the company has deferred collecting, and also seems to have agreed to a 6% rake from the gross revenue, which is pretty standard for a better-known franchise like a McDonald’s or a KFC. But also looking at the per-truck gross and net, that makes the prospect of running such a franchise nearly a break-even proposition; the franchise fee would have to be amortized over twenty years in order to make this even an own-your-own-modest-job sort of proposition.Report

      • Avatar Kolohe says:

        “I’m going to guess that Mr. Westmoreland is there for the express purpose of opening doors (and wallets).”

        He’s just there to win hearts and minds? What could go wrong?Report

    • Avatar Burt Likko says:

      Upon further reflection, if I were looking to invest my money in this company, I’d be very worried about the executive level expenses. Start on page 41 of the the most recent 10-K and you’ll see some gold-plated compensation packages, especially for General Clark (whose job seems to be selling franchises to veterans) and Goldstein (whose job seems to be private equity placements). The lowest annual executive compensation I can see is $810,000 per year between four guys, each of whom has been given options as part of their compensation packages; the fifth appears have agreed to an all-option agreement (not that as an investor, I’d be thrilled with that, either, as compensating all of these executives will dilute even the already strongly-capitalized stock by about 20%).

      The 10-K notes a total accumulated operational deficit in excess of seven million dollars and acknowledges real doubts about the company’s ability to sustain operations as a going concern. And my read of the operations above was incorrect — what we’re seeing is the result of nine, not seven, trucks generating revenue. Seven are serviced out of a single “hub” which does the primary cooking in Gardena (a suburb to the southwest of Los Angeles). Given that it looks like each truck generates something on the order of $2,000 to $2,500 in profit-over-operational-overhead, and that has to support a superstructure of not less than $810,000 a year, but likely as much as half again that amount since the stock price is above the threshold of $5.00 per share, all in executive compensation.

      Simply put, they’re paying the guys on top too much, too fast. Executive compensation is gobbling up all the earnings, which means that the only way to grow the business to a level when it can be sustainable is more equity dilution — and indeed, they’re looking to sell another $5,000,000 in common stock right now. That money is money that they’ll need to invest in more capital (expanding the fleet of trucks and “hub kitchens,” staffing them, insuring them, licensing them, and provisioning them). There are limits to my business acumen, but I can puzzle that much out all on my lonesome, thanks very much, and if I had money to invest I’d be looking for a safer sort of investment than this.Report

    • Avatar Brandon Berg says:

      How is this an incorrect use of TTMLIS? Isn’t it just asking for a simple explanation of something you don’t understand?Report

  11. Avatar LWA says:

    Is one of the trucks owned by a Mr. Gustavo Fring?Report

  12. Avatar Doctor Jay says:

    For me, clicking through and finding that this company is traded over-the-counter is all I really needed to know.

    Shenanigans are afoot, guaranteed. Somebody in a boiler room somewhere is making calls to suckers, I mean, investors and telling them the inside scoop about how they are about to explode.

    I once worked for a company that had one of its brand new investor pictured in a perp walk on the cover of the NY Times for just this sort of thing. That was right after my co-worker had gone to Florida to do an install to support said boiler room.Report

  13. Avatar ScarletNumber says:

    Insert Abe Simpson saying “I am not a crank.”

    Abe Simpson never said this.Report

  14. Avatar zic says:

    Valuation is interesting; and how you value something depends on your reason for establishing a value.

    Here, the value seems to be not based on current earnings so much as potential, future earnings. This is really common; remember, Amazon just made a profit for the first time recently. Releasing the stock for sale in an IPO is a tool to generate capital to grow a company; so the value isn’t earnings/assets, it’s potential value after the company has grown using that capital. For older companies, the value often fluxes with the changes in share price, dividends, etc.

    But valuations happen for other reasons, and with privately-held companies they’re more mysterious. A new round of investors joining a closely-held corporation generates a valuation; the first round of investment is usually the first valuation a private company has; and the value of a company will change with each ongoing round of investment from private investors. Another thing that triggers a valuation is settling an estate; a company’s owner dies, and heirs inherit, so the company need to be valued to settle any potential estate taxes. I offer these two examples because in the first, the value is literally determine by the investment amount, based on numbers before investing, and people generally want to go high; in the latter, where there’s some potential tax liability, you want to go low.

    Short of looking at the prospectus, I cannot say how the grilled-cheese truck business plans to make money, but the influx of cash from the sale of stock is the capital it will use to potentially become profitable. And if that doesn’t happen, if the whole thing goes belly up, the investors will get to write off the losses on their taxable income.Report

  15. Avatar Brandon Berg says:

    When a company has a market capitalization of $100 million, we tend to say, as shorthand, that investors value it at $100 million. That’s kind of true, but there’s an important detail being obscured in that shorthand, which is that it’s not the average investor who values it at that price, but the investors who are most bullish on that stock relative to other stocks. Which is to say, the investors who own a stock value it more, often much more, than the average investor.

    There’s a phenomenon in auctions (and stock markets, which are like auctions in relevant ways) called the Winner’s Curse. Suppose you’re auctioning an item worth $10,000. But no one knows this for sure. The bidders privately speculate on what it might be worth, and each one comes up with a different estimate. Some bidders underestimate its value, and some overestimate. The auction goes to the high bidder, so the item ends up being sold to a bidder who overestimated its value, who must pay more than it’s actually worth. Since the winner of the auction usually gets a bad deal, it’s called the Winner’s Curse.

    There’s a similar phenomenon in the stock market. I suspect that it’s more pronounced with small-cap stocks, because the smaller a stock’s market capitalization is, the fewer overexuberant investors it takes to inflate the price.

    None of this is to be taken as disagreement with any of Tod’s points, but that’s one mechanism by which stocks can become overvalued.Report