The Deli! Revisited by Matt Levine of Bloomberg ...

[Titus Andronicus]

Mr. Levine, the Bloomberg columnist is the best there is when it comes to explaining obtuse and complicated Wall Street conundrums.

A few on here have been scratching their heads over what appears to be an extreme valuation for "Hometime Deli" in the Pink Sheets. Mr. Levine addresses this in his column, particularly the question of why this has not dropped instantly to zero. He seems to be saying that there is so much amateur "funny money" sloshing around the system (The Reddit, Robinhood, Roaring Kitty crowd) who are in this to an extent for the entertainment) are buying it as a joke. He adds that any news is driving stocks higher, even fraudulent stocks.

In any case, here is the relevant portion of his column:

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The deli​ I think there are two interesting questions about David Einhorn’s least favorite deli: Why was it worth so much on Thursday, and why was it worth so much on Friday? Those strike me as very different questions. So. On Thursday, Einhorn’s Greenlight Capital published a quarterly investor letter that mentioned Hometown International Inc., which is a deli, as an example of the insanity of the current stock market: Someone pointed us to Hometown International (HWIN), which owns a single deli in rural New Jersey. The deli had $21,772 in sales in 2019 and only $13,976 in 2020, as it was closed due to COVID from March to September. HWIN reached a market cap of $113 million on February 8. The largest shareholder is also the CEO/CFO/Treasurer and a Director, who also happens to be the wrestling coach of the high school next door to the deli. The pastrami must be amazing. Small investors who get sucked into these situations are likely to be harmed eventually, yet the regulators – who are supposed to be protecting investors – appear to be neither present nor curious. From a traditional perspective, the market is fractured and possibly in the process of breaking completely. Here’s Hometown’s annual report on Form 10-K for the 2020 fiscal year, which really is a majestic thing. It is, as Einhorn says, a single deli in Paulsboro, New Jersey. It “features ‘home-style’ sandwiches, food items, and groceries in a casual and friendly atmosphere.” It managed to have a net loss of $631,356 on total sales of $13,976. It spent $10,124 on “food, beverage and supplies” and, somehow, $126 on labor, which, at New Jersey’s then-current minimum wage for small employers, would have paid for someone to work the register for approximately 12 hours and 15 minutes over the entirety of 2020. Due to Covid-19, Hometown was closed from March 23, 2020, until it “was re-opened on September 8, 2020, with a ‘soft opening’ to a limited audience, prior to its ‘Grand Re-Opening’ to the public on September 22, 2020,” according to the 10-K. So you only needed someone to work the register for like half a year. Still? On the other hand, Hometown spent $170,767 on “professional fees,” which is presumably the absolute bare-bones cost of paying lawyers and accountants for the upkeep of a public company, which, again, Hometown is, despite also being a single deli. It also spent $320,000 on “consulting — related parties.” Here’s the explanation of this expense: Effective as of May 1, 2020, we entered into a Consulting Agreement with Tryon Capital Ventures LLC, a North Carolina limited liability company (“Tryon”) which is 50% owned by the father of Peter L. Coker, Jr., our Chairman of the Board. Pursuant to this agreement, Tryon was engaged as a consultant to the Company, to, among other things, support in the research, development, and analysis of product, financial and strategic matters. The term of the Tryon Consulting Agreement is one year; provided, however, that each party has the right to terminate the agreement upon 30 days’ prior written notice to the other. Pursuant to the agreement, Tryon shall receive $15,000 per month during the term of the agreement, in addition to reimbursement of expenses approved in advance by the Company (See Note 8). Effective as of May 1, 2020, we also entered into a Consulting Agreement with VCH Limited, a company formed under the laws of Macau (“VCH”) which owns in excess of 10% of our common stock. Pursuant to this agreement, VCH was engaged as a consultant to the Company, to, among other things, create and build a presence with high net worth and institutional investors. The term of the agreement is one year; provided, however, that each party has the right to terminate the agreement upon 30 days’ prior written notice to the other. Pursuant to the agreement, VCH shall receive $25,000 per month during the term of the agreement, in addition to reimbursement of expenses approved in advance by the Company Where does it get the money to pay all these fees, besides selling $13,976 worth of sandwiches? “On April 14, 2020, the Company consummated private offers and sales of an aggregate of 2,500,000 shares of common stock to three accredited investors for gross cash proceeds of $2,500,000.” And I guess it pays it back to them in consulting fees? If you took all of this at face value, honestly it would be an amazing and fun story? There’s a deli in New Jersey, run by the local high school’s wrestling coach, and he prides himself on the home-style sandwiches and friendly atmosphere of his deli. He dreams big, for his deli. He decides “you know what I should do is go public and expand internationally,” so he pays accountants and lawyers a lot of money to take his company public. He attracts some Asia-based investors (Macau-based VCH, but also Peter Coker Jr., Hometown’s chairman, who runs “South Shore Holdings Limited, a Hong Kong listed company”), and they put up a couple million dollars, and he also hires them to advise him on (1) “the research, development, and analysis of product, financial and strategic matters,” sure, and also (2) how to “create and build a presence with high net worth and institutional investors,” sure, sure, sure, sure, absolutely, sure.

 

[Titus Andronicus]

I would watch a movie about this story. You could imagine a cheerful heartwarming version in which the advisers come through and he gets institutional investment and expands internationally and delights the entire world with his home-style sandwiches. But I would also be perfectly happy with a gritty seedy version in which the advisers just take his money and he keeps on doing what he’s been doing, selling sandwiches, bringing in $13,976 a year, paying one of his former wrestlers to watch the register for him a few hours a year while he steps away to go to board meetings, dreaming of international success without ever getting any closer to it.

But I am not sure you should take it at face value. I don’t actually know what you should make of it. Dan Mangan at CNBC points out that the lawyer who took Hometown public in 2015 later got in trouble with the U.S. Securities and Exchange Commission “for running a fraudulent shell factory scheme through which sham companies were taken public and sold for a profit.” If you are a company — particularly a Chinese company — that would like to be publicly traded in the U.S., but that would prefer to avoid the scrutiny that comes with an initial public offering, doing a “reverse merger” — acquiring the empty shell of a near-defunct but public U.S. company — is often an easy way to do it. A deli with $13,976 of sales, but with careful and pristine SEC filings, might be rather valuable to a certain sort of Macau- or Hong Kong-based investor.

Not $100 million worth of valuable. This is not a fully satisfying explanation or anything.

Anyway, as Einhorn says, the stock got as high as $14.50 on Feb. 8, for a market cap of $113 million. It closed last Thursday at $13.50, a market cap of about $105 million. These numbers are very high for a company that is, again, a single deli. But you shouldn’t take them too seriously. Over the 12 months ending last Thursday, Hometown traded an average of 331 shares per day, for an average value traded of about $3,900 per day. It would sometimes go for more than a week without any trades. This is a deli. Most of its stock seems to be held by a small group of people, and it trades in the over-the-counter market. It just seems unlikely that very many small investors were “sucked into” this situation. If they were, they put in a few hundred bucks.

But then Einhorn published his letter, and Hometown became the laughingstock of financial media last Friday. And here is what happened:

1. Volume exploded, from 800 shares on Thursday to 42,762 on Friday. By Friday evening, Hometown had traded a total of about 70,000 shares in all of 2021; more than 60% of that trading happened on Friday.
2. The stock was down by 3.1%. It closed at $12.99, for a market capitalization of $101.3 million.

Last Wednesday, when there was a single trade of 200 shares and Hometown closed at $13.90, you might have asked incredulously, “who’s paying $13.90 per share for this deli,” but the answer would have been “exactly one person, for reasons of their own.” But on Friday there were hundreds of trades, and almost half a million dollars’ worth of stock changed hands. And the stock barely budged. People were like “yes, $100 million deli, absolutely, I want to buy that.” Hometown went from a thinly traded pink-sheet deli that nobody had heard of, to a company that everyone had heard of exclusively because it was a poster child for market excess, and … people … bought … it? Like, a whole new class of investors was introduced to Hometown International specifically by a hedge-fund letter saying “small investors who get sucked into these situations are likely to be harmed eventually,” and they looked at it and decided they wanted to be harmed. “Yes, step on my neck, Hometown International.” David Einhorn warned people not to invest in Hometown International, even though it had never occurred to them to invest in Hometown International, but once they were warned not to they absolutely did.

I can’t explain that any more than I can explain what was happening before Einhorn’s letter, but my guess is that the explanations are quite different. Before Thursday, this was a small, lightly traded, closely held company; presumably its handful of big holders wanted it to have a high valuation, and it was easy enough — by trading a few hundred shares — to make that happen. On Friday, it was a meme stock. A small, weird, over-the-counter meme stock, one that you can’t buy on Robinhood or discuss on r/wallstreetbets, but still meme-ish. You buy the deli because it’s funny, and because you think other people will find it funny and buy it. You buy the deli because the thing that makes stocks — or Dogecoin, or NFTs — valuable, in 2021, is attention. Even bad attention.

When David Einhorn wrote about Hometown International on Thursday, it was absolutely not a good example of 2021 meme-stock wildness. It had a comically high price, but on almost no volume; it was weird, but it was not weird in a “why is everyone buying this stock” way. After he wrote about it, sure, now it’s a meme stock. As of 11:30 a.m. today it was up about 3.8%.