4 Years and 1,500% Later with CONN


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Jae Jun

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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, or Joel Greenblatt, or David Einhorn, or Bill Ackman.

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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6 responses to “4 Years and 1,500% Later with CONN”

  1. Shailesh Kumar says:

    Appreciate the candor Jae. You are right to go back and review your misses to see what insights can be gleaned. We should all do this regularly.

    I personally try to understand the business and the industry even before I start looking at the numbers (except for the screening process that shortlisted the stock – but this was not a detailed look at the numbers). Numbers in isolation do not make sense to me, however appealing they might be, without the added context that the understanding of the business provides. The danger with this approach is that many a times I can be tempted to make a macro call and have to remind myself of the discipline.

    Anyway, like I mentioned to Saj yesterday, missing a great stock is still better than catching a bad one …

  2. Brian Flores says:

    Hi Jae,

    Great article. I believe that being honest is not common, and being honest with ourselves is even harder to find: it takes courage and a high degree of maturity to be introspective and recognize our own mistakes.

    On a technical note, I would like to ask why is the decrease in AR looked at as a negative? I am thinking that it is a reflection of more cash being collected (which is positive) and less accrual accounting (which is also positive?). Perhaps I am missing something and I would like to understand your point of view.

    I purchased Quality of Earnings recently and it’s on my list for this year.

    Thanks for your valuable insights Jae, have a great day.

  3. Thanks for the pointer Shailesh. Now if only I can get to your level.. 🙂

  4. Thanks Brian. Appreciate the comment and you just caught onto something there.
    And increase or decrease in A/R or inventory isn’t a bad thing. It’s a grey area. It’s neither good or bad. Just depends on the context of sales.

    What I should try to fix is the color code for when the arrow turns green or red on the inventory analysis chart.

  5. Hi Jae,

    I’m pretty impressed with your humility in writing this.

    I passed on CONN around the same time that you did but my reasoning was that it had too much exposure to the credit markets with how it helped customers finance Customer purchases. Whether that was the right decision or not, I don’t know — but I certainly lost out on this tremendous rise in price.

    Thanks for poking at old wounds. 😉 haha

    Evan

    PS. I’ve found that it’s sometimes really hard to tell in advance which stocks will see big gains and which will disappoint. I though BFS Entertainment would do well given it’s valuation and lack of debt but the company is pretty much still at my buy price 3 years later.

  6. Thanks Evan. I know what you mean about some stocks just not wanting to go up. But look at IFON. Did nothing for many years and then went vertical. Good net nets come around too.

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