Khrom Capital new position... any ideas?

[Tim Eriksen]

Per SEC Form D's that have been filed, they have sold ~$90m worth of subscriptions when you tally the three offerings...not sure where the $40m is coming from.

 

http://www.sec.gov/Archives/edgar/data/1586094/000158609413000001/xslFormDX01/primary_doc.xml

 

It is my understanding that you do not aggregate historical Form D's.  The figures are to-date amounts since beginning.

[InvestingOnSale]

It strikes me that Eric's description of the mystery business is very compelling, and, even if one could not figure out exactly which business he was talking about, one could do well by finding businesses with similar characteristics:

- disrupting a large industry

- small share of a growing market

- a clear and increasing competitive advantage, that should help solidify it as the dominant player in its space (It is interesting to me that Eric's company has only 0.3% of the market, yet he has reason to believe it is the "dominant" player.)

- an astute and well incentivized board of directors (this one is interesting; few investors focus on the incentives of the Board)

- run by an extraordinarily intelligent CEO who has a clear strategic vision and has created an outstanding corporate culture

- focus on long-term profitability

- long-term investment horizon necessary due to a potentially “messy” stock price over the next few years.

- cash-rich balance sheet

 

Cimpress (CMPR) fits a lot of these characteristics. (Khrom has written about it in the past, so it is unlikely to be the mystery company.)

[JBTC]

Someone already mentioned LC - looks a good fit. It's clearly the leader as of today although I am less sure about the sustainable competitive advantage part...

[roughlyright]

His letter came out today. It is OnDeck capital. Ticker: ONDK

[kab60]

Could you post the letter? T

[augustabound]

Could you post the letter? T

 

Someone posted it to reddit's security analysis sub this morning.

https://www.docdroid.net/cNUSmYz/khrom-capital-2015-letter.pdf.html

[kab60]

Thanks a bunch - it seems like a very interesting idea. It says On Deck CEO has all his net worth in the Company; anyone know how much that is?

[Phaceliacapital]

Bloomberg gives me USD 2 mn .. "Average price paid"  USD 16

[muscleman]

Thanks a bunch - it seems like a very interesting idea. It says On Deck CEO has all his net worth in the Company; anyone know how much that is?

 

You have to be careful. OnDeck reduced its loan loss provision/revenue ratio substantially after the IPO. All the net income growth comes entirely from that.  :)

[kab60]

Thanks a bunch - it seems like a very interesting idea. It says On Deck CEO has all his net worth in the Company; anyone know how much that is?

 

You have to be careful. OnDeck reduced its loan loss provision/revenue ratio substantially after the IPO. All the net income growth comes entirely from that.  :)

Thanks a bunch. Maybe we should start at thread. I'm going through the 10K at the moment. Where'd you find that?

 

EDIT: Are you talking about about the provision rate and reserve ratio falling in FY15? Both went up in 2014 compared to 2013 and then down in 2015. Provision rate is 0,2 pct. lower than 2013, but reserve ratio is 0,8 pct. higher. I haven't studied many financials, so it's hard for me to judge whether it reflects real changes in their credit risk (their 15 days+ deliquency ratio has come down from 7,6% in 2013 to 7,3% to 6,6% last year). Which is also why I'd like a lot of management skin in the game.

[kab60]

Not sure what to think of this (it sounds plausible, but I might be a sucker) - fromQ4 CC:

 

"Now, in terms of the provision, the provision rate decrease in terms of where the target is. We took it down from 6% to 7% to $5.5% to 6.5%. And I want to reiterate that that's really structural in nature. The efficient frontier that we've always defined has been -- it's assumed a static mix to the extent the mix changes and certainly we've seen a significant change in the mix both from a channel perspective, product perspective over the last two years. The efficient frontier just naturally and mathematically changes where it is.

 

So because the strategic partner and direct originations went from in 2013 really being less than 50% of originations and in 2015 now it's over 70%, that's had a significant impact on the provision rates and really where efficient frontier is. So, it's not that we're taking -- that we're changing our risk tolerance, it's just that we're being more profit maximizing given the mix shift at the 5.5% to 6.5% level."

 

[muscleman]

Not sure what to think of this (it sounds plausible, but I might be a sucker) - fromQ4 CC:

 

"Now, in terms of the provision, the provision rate decrease in terms of where the target is. We took it down from 6% to 7% to $5.5% to 6.5%. And I want to reiterate that that's really structural in nature. The efficient frontier that we've always defined has been -- it's assumed a static mix to the extent the mix changes and certainly we've seen a significant change in the mix both from a channel perspective, product perspective over the last two years. The efficient frontier just naturally and mathematically changes where it is.

 

So because the strategic partner and direct originations went from in 2013 really being less than 50% of originations and in 2015 now it's over 70%, that's had a significant impact on the provision rates and really where efficient frontier is. So, it's not that we're taking -- that we're changing our risk tolerance, it's just that we're being more profit maximizing given the mix shift at the 5.5% to 6.5% level."

 

You should start a thread for OnDeck. My take after looking through over 200 bank statements is that whenever the provision ratio goes down, it doesn't smell good. The reserve can remain high merely because they haven't charged off the losses from the reserves. It doesn't mean anything.

 

Another problem is that when a bank is growing too fast, the growth can hide the delinquency problems. For example if your bank is growing loans at 20% a year, and if the loans usually perform for two years before they default, then you can look really good for the first 3-4 years. The growth of the new loans in year 3 will hide the delinquency problems for loans made in year 1.

And if they find this problem, they can lower the underwriting standards to accelerate loan growth, so the problem will be hidden for even longer. Eventually it will be a grand bust.

 

I am not saying OnDeck is sentenced to this game. But I have concerns that I don't know how to dig further to fully understand.

[Graham Osborn]

Not sure what to think of this (it sounds plausible, but I might be a sucker) - fromQ4 CC:

 

"Now, in terms of the provision, the provision rate decrease in terms of where the target is. We took it down from 6% to 7% to $5.5% to 6.5%. And I want to reiterate that that's really structural in nature. The efficient frontier that we've always defined has been -- it's assumed a static mix to the extent the mix changes and certainly we've seen a significant change in the mix both from a channel perspective, product perspective over the last two years. The efficient frontier just naturally and mathematically changes where it is.

 

So because the strategic partner and direct originations went from in 2013 really being less than 50% of originations and in 2015 now it's over 70%, that's had a significant impact on the provision rates and really where efficient frontier is. So, it's not that we're taking -- that we're changing our risk tolerance, it's just that we're being more profit maximizing given the mix shift at the 5.5% to 6.5% level."

 

You should start a thread for OnDeck. My take after looking through over 200 bank statements is that whenever the provision ratio goes down, it doesn't smell good. The reserve can remain high merely because they haven't charged off the losses from the reserves. It doesn't mean anything.

 

Another problem is that when a bank is growing too fast, the growth can hide the delinquency problems. For example if your bank is growing loans at 20% a year, and if the loans usually perform for two years before they default, then you can look really good for the first 3-4 years. The growth of the new loans in year 3 will hide the delinquency problems for loans made in year 1.

And if they find this problem, they can lower the underwriting standards to accelerate loan growth, so the problem will be hidden for even longer. Eventually it will be a grand bust.

 

I am not saying OnDeck is sentenced to this game. But I have concerns that I don't know how to dig further to fully understand.

 

Uh oh!  Better luck next time Khrom..

[Foreign Tuffett]

Anyone know what has become of this fund? I know it's still active, but there's next to no publicly available info more recent than early/mid 2016.

[stahleyp]

I'd assume it hasn't done well. According to his filings, he has just a bit under $40,000,000 in assets. About the same level he had in 2014 a bit more than he had in 2014 (depending on what you're looking at). His filing says about $31,000,000 then but a forbes article says about $40,000,000.

[Txvestor]

Well, he did plug SHOS and ONDK and he tends to concentrate. So putting those two things together it doesnt surprise me that he still has $40M AUM.