Wolf at the door ... let him out (WOLF)

This stock has been trying to get my attention for days, whining at the door, trying to get out and be free to go die in the woods alone.

I guess it's finally time I give Great Wolf (WOLF -- get free real time quote from ADVFN) his wish. Not a bad concept, seemingly an ambitious and aggressive growth plan, and a truly new kind of product ... all things I like. But they can't seem to get it right, so I've decided to move this tiny bit of cash on to bigger and better things.

I did post a little writeup on WOLF after their last earnings report in August, and I was disapointed but going to hold on for a year. Well, it turns out that was a lie -- I'm more disappointed now, and I'm not going to hold for even another day.

I opened my position in Great Wolf without understanding the company very well, which is usually a mistake -- especially with a recently IPO'd company that hasn't yet settled into the ways of the market. Thankfully, I never added to that position, but I did continue to learn more and more about the company. Frankly, I was on the fence until I saw their latest news.



Great Wolf announced on Tuesday that they will be forming a "joint venture" with a REIT to buy controllling interests in two of their waterparks, with a continuing agreement for WOLF to manage those parks.

Now, this might be a brilliant management move -- certainly hotel chains have been doing this for years, Marriott would much rather make money managing hotels than have to have all their money sunk into the real estate and building ownership. But this smells funny to me for a new, small company like Great Wolf, and it's enough to turn the tide and get me out of the stock -- even though it had shrunk to such a small position that, frankly, paying the commission actually made a dent.

What are the positives for Great Wolf in this deal? The only real plus I see is cash -- they get to pull some of the money they had sunk into these properties out and use it for expansion, and they might be developing a relationship with this CNL REIT to help fund other parks.

The negatives? The main one is that they lose control of their park in the heart of the indoor water park world, and of two of their parks in their proven heartland, the midwest, in order to fund expansion into the rest of the country, where their brand is so far insignificant and the concept has yet to be proven. That means bigger risk.



In addition, this has the scent of desperation to it -- WOLF has had a very rough time in it's first year as a public company, they have not yet shown that they really "get" how to communicate with investors and how to be open, honest and clear in their communications. I certainly don't think they've done anything unethical, but they've made lots of mistakes, especially in providing guidance and using the time-worn weather and holiday excuses for earnings misses.

But really, it looks like those of us who bought in -- and there were probably a bunch, it turns out that this was recommended by a Fool newsletter not long before I bought in, though I wasn't a subscriber at the time -- really overestimated the ability of this company to stand out from the pack and grow.

In the end, what kills WOLF as an interesting investment for me is the fact that they can't seem to compete effectively in areas where there are multiple waterparks, and so they're expanding to areas where indoor waterparks are unknown -- but expanding from a position of weakness. I would be much more comfortable if they were selling an interest in dominant properties or were clearly the best performer in their core areas, but that really doesn't seem to be the case. That calls into question their ability to be a leader long-term, because there's not much to keep the big entertainment companies from opening their own indoor waterparks if the concept does indeed get proven nationwide -- no one is going to be afraid to enter the WOLF's territory if Great Wolf has already shown it has trouble defending it's position.

So, chalk this one up in the loss column ... and start looking for where to put that money. Is it something I already own that looks promising today (and with the bloodbath in my portfolio the last two days, there are a few attractively priced candidates), or is it something new? I'll let you know when I figure it out, and if you've got ideas I'd love to hear them.

Oh, and let's close with the bitter details -- I bought Great Wolf on May 3 at $20.85. Sold today at $9.46. Ouch. At least I won't have to see that red line in my portfolio anymore.

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Earnings Updates

About half of the companies I own have reported their quarterly earnings, and it is a decidedly mixed bag. I'm going to do a quick summary of how they did, and what I'm thinking about the companies going forward.

So what has happened of significance so far this earnings season?

First, the best ...

Middleby (MIDD) clobbered the baked-in estimates, and showed that CEO Selim Bassoul is still on top of his game at this maker of commercial ovens and cooking equipment. I was lucky enough to buy into this great company earlier this year when it faltered slightly while the founding family was trying to sell out their holdings -- bought some at about $46 and more later on at around $50 over the winter (I found out about this company because it was a Motley Fool Hidden Gems recommendation, one that has since been re-recommended -- that's a great newsletter and I recommend at least giving it a free trial).

Middleby keeps some of the fun in investing by never pre-announcing their earnings release date, so one day the market closes and a lovely surprise bounces up on your browser, as happened last Thursday afternoon. Sales up 15%, international growth still doing great, earnings well above the estimates of the few analysts who follow MIDD ... even with increased debt, which we knew about due to the buyout of the founders shares, and slightly lower margins and higher costs largely due to the acquisition of NuVu and higher steel prices, it's all good news.

Now, some of that might be overstated -- some of the second quarter growth was backlog from Q1's big order volume that squeezed in before a price increase, some of it was from the NuVu acquisition, but I still like the growth going forward. Middleby's fast, efficient, patented cooking systems are being used by many of the restaurant chains that are quickly carpeting the globe with familiar logos and food products, and that doesn't appear to be anywhere near an ending point. Dining out is an international phenomenon, one that certainly began in the United States but that has legs around the world -- and familiar brands that roll out huge numbers of shops with Middleby cooking equipment are leading the way. Even something as seemingly unrelated as energy prices can help Middleby, because higher energy costs mean that the more advanced but much more energy-efficient Middleby ovens are just that much more appealing for restaurant buyers.

And the worst ...

Great Wolf (WOLF) -- bigger, and unfortunately much badder. I was one of I believe four shareholders to not sell out on their latest earnings release, and that could have been a mistake. Thankfully, my WOLF position was relatively small (and is smaller still now) since it's a pretty new portfolio position that I haven't gotten around to really filling out yet.

Normally, if I saw a stock drop like this that I owned and was confident in it would be extraordinarily tempting to buy ... and when I saw the ticker drop like a stone, that was indeed my first reaction, I thought we might just be dealing with a management team that was having a hard time getting to know the "underpromise, overdeliver" Wall Street culture.

Then I read the earnings release, and while I'm holding on because it's not worth selling such a small position and I still have some hope for the company, this one is not going to rocket back up the charts anytime soon. Not only was this a rough spring for Great Wolf in terms of competition eroding their occupancy rates in the few places where they face competition, but man oh man oh man, their occupancy rates fell EVERYWHERE over this six month period, and they weren't exactly super high to begin with. Check out the earnings release here and scroll down to the individual resort results -- nothing promising there.

Now, the silver lining is that Great Wolf is expanding into some very promising areas -- their Williamsburg location openened recently and is getting pretty high room rates, though occupancy is not great yet, and they have very promising parks opening in their core midwestern region -- a partnership park in Ohio and a franchised location in Niagara Falls, Ontario -- as well as some brand new locations that will really be the test of the concept. If they can succeed in the Poconos and in the Pacific Northwest, where the indoor water park is a heretofore unseen novelty, I'll feel much better about their long term future.

So, it's possible that this is a great buying period (A.G. Edwards downgraded it right before earnings, and upgraded it right after with the stock almost 40% lower) ... but not for me, not yet. I'll revisit this holding next year around this time and see how they're doing. The guy who recommended Great Wolf for the fool's Rule Breakers around the time I bought in, has a writeup on his disappointment here, and there's a news article with some quotes from management that are a little less gloomy (though they also give weight to the concern that dependence on leisure spending from the midwest may be a problem for a while with automaker troubles).

And all the rest ...

Akamai (AKAM) reported a great quarter and it looks like the acquisition of Speedera is going to be just as good a decision as we had hoped, though short term cash flow and margins might be a little lower than some were dreaming of. AKAM bumped up a bit on the solid but not breakout news, and I'm happy to keep holding on. Quarterly numbers from the Fool here. Guidance upped about 10%, so it's trading at a pretty fair PE of 30 or so for the current year -- not bad for the growth I expect we'll continue to see.

Marvel (MVL) reported a slightly disappointing quarter, and fell a small amount -- really not significant in the grand scheme of things. Earnings were a little lighter than last year and the spiderman 2 licensing cash flow wasn't quite as long lived as some analysts had hoped -- hard to get worked up about it. They're still backing earnings estimates of a bit over a dollar for the year, which means they're pretty close to a market multiple even in a year when they don't have a blockbuster franchise release (F4 has been a solid hit so far, but it's certainly neither an X-men nor a Spiderman when it comes to blockbuster ticket sales or licensing -- we'll see the next X-Men next year, and Spidey 3 the year following ... plenty of reason to buy huge potential at a fair price right now if you're interested).

MEMC Electronic Materials (WFR) reported a slight drop in earnings, but what I'm looking for from them is in the future -- the next 6 months to a year. Now that the backlog is almost worked out of world semiconductor inventories and business is beginning to boom again, what kind of advantage will WFR be able to gain from having their own low-cost supply of polysilicon? And even without the impact of that, world demand for wafers should be very strong. Earnings made the shares drop slightly, but investors, including me, are mostly interested in what happens for the next year -- is the semiconductor recovery for real? If so, WFR and FORM will boom. According to MEMC's CEO, the company's results may indicate "the bottoming quarter" after a 9-month industry slowdown due a surplus of inventory. I hope he's right.

Formfactor (FORM) reported just a few days after I did my company writeup, and altough the stock tumbled a bit due to delays in the new plant going online, my opinion hasn't changed -- I'm still happy with them, and the market has already found some of the love it had lost for FORM, it has recovered about half of it's earnings-miss fall.

Vertex Pharmaceuticals reported too ... but I don't much care about their quarterly earnings, for this one and all my other biotechs the earnings matter much less (they're all still losing money, though PDLI is close to going cash-flow-positive) than the results of their ongoing clinical trials. The trial results will move the stocks, the earnings almost never do unless they're wildly surprising. VRTX's report was pretty much as expected, and, most importantly, all of their trials for potential blockbuster drugs are on schedule -- nothing pending that should be a big surprise or impacton the stock in the next few months as far as I can tell.

Next Week

I'll have to do this again in a week or two -- I'm taking a no-market-info vacation, which is painful for info addicts like me, and during that time earnings should come out for Click Commerce, CV Therapeutics, Exelixis, FARO Technologies, Lions Gate Films, Protein Design Labs, Rofin-Sinar Technologies, Shanda, Taser and Universal Display. Almost all of these companies are reporting on either Monday or Tuesday of next week, so I'll at least have to read a paper or two while lounging at the beach.

And to add to that, Netease reports tonight (preview from ChinaStockBlog), and Overstock and Radyne tomorrow ... and the biggest quarterly non-event of all, the Berkshire Hathaway quarterly earnings release, is coming at the end of this week. This is way too much to absorb if you're planning on acting on the information that all these companies release, so I guess it's a good thing that I almost never react to quarterly earnings -- my account isn't big enough that I can afford to do much active trading, and I generally use a long time horizon when evaluating my portfolio companies (with some exceptions).

Unless management loses my confidence, or I see a trend developing that counters my long-term investment thesis for a particular company, I'm not going to buy or sell based on whether they hit or miss their numbers (though I am often tempted to buy when companies have short term problems that impact their share price -- as I wrote about in Catch a Falling Knife -- it turns out I should have jumped on FARO when they fell, and on Formfactor when it fell a bit later ... Shanda's still roughly where it was when I wrote that, and I have bought a small position in Jan 06 $40 call options in lieu of more shares to leverage my firm belief that it's got to eventually stop being the most undervalued tech company in China and break out of the top of this trading range it's stuck in).

But that's not to say that I don't watch earnings pretty closely, and still get excited to read up on what my companies are doing and have my choices reinforced by good news or challenged by bad news -- that's just human nature. So here's looking forward to a strong week of earnings releases, and a dozen or so good conference calls with enthusiastic, optimistic management teams. I'll write about what I think of what happened in about two weeks.

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