Cedar Creek on 1847 Goedeker (GOED): “We Were Unconvinced on the Long-Term Prospects of the Business”
Cedar Creek Partners LLC, an investment management firm, published its second quarter 2021 investor letter – a copy of which can be downloaded here. A quarterly portfolio return of 8.6% was recorded by the fund for the second quarter of 2021, below the NASDAQ Index, which delivered a 9.5% return for the same period. However, the fund outperformed the S&P 500 (SPY) Index's 8.4% return, and the Russell Micro Cap's respectable 4.1%. You can view the fund’s top 5 holdings to have an idea about their top bets for 2021.
In the Q2 2021 investor letter of Cedar Creek Partners LLC, the fund mentioned 1847 Goedeker (NYSE: GOED), and discussed its stance on the firm. 1847 Goedeker is a Missouri, United States-based online consumer goods retailer, that currently has a $306.2 million market capitalization. GOED delivered a -58.05% return since the beginning of the year, while its 12-month returns are down by -64.73%. The stock closed at $2.97 per share on July 23, 2021.
Here is what Cedar Creek Partners LLC has to say about 1847 Goedeker in its Q2 2021 investor letter:
"Late in the second quarter we purchased a common stock and warrant position in 1847 Goedeker (GOED). We sold the common stock before quarter end and the warrants early in the current quarter.
1847 Goedeker is an interesting story. The company came public in 2020. It was a small unprofitable online appliance retailer. Revenues were around $50 million. In the fall of 2020, they announced a deal to buy Appliance Connection, a much larger, rapidly growing, profitable e-commerce appliance retailer for roughly $200 million, or ten times its 2020 untaxed earnings. 1847 Goedeker stock steadily climbed. In the first quarter the price ranged from roughly $8 to $11 per share.
Appliance Connection which had earned $20 million in 2020, earned over $19.5 million in the first quarter of 2021 versus $3.9 million in the first quarter of 2020. The problem was Goedeker did not have the cash or apparently borrowing capacity to make the purchase and they had a deadline to meet in order to close. When they finally came to market to raise the equity the buyers stuck it to them. On May 27 the stock closed at $6.07 per share. The offering priced that night at just $2.25 per share plus one warrant for each share exercisable at $2.25 per share. On May 28 the stock opened at $1.87 per share. This is where a few value players jumped in. With now roughly 100 million shares outstanding and an expected run rate of approximately $50 million in earnings, shares were priced at under four times earnings.
We were unconvinced on the long term prospects of the business. Do most people really want to purchase appliances online? We certainly had concerns about the ability of management after it botched the secondary offering. On the other hand, we did see a company that had been experiencing significant growth trading at a single digit price to earnings multiple. Yet, we also recognized that the warrants were a massive overhang for the stock. Astute investors new that upside was partially limited since fully diluted shares were nearly 200 million instead of 100 million, even if the company would receive $2.25 per share in cash for each of the warrants. We started buying at around $2.50 per share, but the stock started running so in the end it was a small position and we sold at $4.10 to $4.30 per share, after what we felt was disappointing growth. Sales were still increasing rapidly but orders were slowing. The sales growth was due to decreased cancellations, or higher fulfillment rates to use their terminology. For example, first quarter orders were 72,600 while second quarter were 73,200. That is sequential growth of less than 1%. With this type of investment, it does not take much for us to get spooked and run for the exits, which we did.
While we focus primarily on the long term we are always willing to take advantage of what we believe are short term mispricings. It does result in short term gains, but short term gains, and the associated tax consequences for investors, are better than no gains."
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Based on our calculations, 1847 Goedeker (NYSE: GOED) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. 1847 Goedeker (NYSE: GOED) delivered a -30.77% return in the past 3 months.
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 115 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.
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Disclosure: None. This article is originally published at Insider Monkey.
