All It Was Cracked Up To Be…

One of the toughest decisions when investing in growth companies; is when to sell the winners. The issue is that successful businesses continue to increase in value over time. Therefore, selling means that you miss out on some of that growth. That said; I tend to find that despite having a multi-year forward valuation target, sometimes, a good chunk of that valuation gets realized in a much shorter time-frame. The question then becomes; do I wait for full fair value or do I recycle my money into something that should have a higher return?

In the case of The Joint Corp (JYNT – USA), the shares have appreciated 120% in the past 11 months since I wrote about it—yet, the business is clearly not worth 120% more. While management has done an amazing job of growing the franchise business, dramatically increasing comparable sales and stabilizing the company owned locations, the company is still only slightly profitable and now valued at $110 million. If you ignore the company owned stores that roughly brake even and look at the 359 franchised clinics; even if they each hit $500,000 in revenue and the company gets a 4% average franchise fee, you are only looking at $7.2 million in total recurring franchise fees. That would mean that the shares are now trading at more than 15 times recurring franchise fee revenues.

If you play it forward three years and assume the company gets to 500 franchised locations, at the same economics as before, you get to $10 million in franchise revenue. Unfortunately, they are not yet at 500 locations and franchised revenue is nowhere near $500k per location today. 11 times recurring franchised revenue isn’t exactly cheap either. There is also the consideration of corporate overhead and whatnot—which should hopefully be offset by the company owned locations as they mature.

While I think that JYNT eventually gets to these lofty metrics and exceeds them (I don’t see why they cannot have 1500 locations in 10 years), the shares seem to have priced in quite a lot of this future growth. I wouldn’t blame anyone who wanted to hold on and take part in this growth, but I tend to think that when a healthy chunk of my longer-term upside happens in 11 months, it’s time to exit and find a better use for my capital. (My average sale price was around 8.30 over the past two weeks).

It’s been a good run.

Besides, I just bought a bunch more Tesla (TSLA – USA) puts last week and I have to pay for them somehow.

Disclosure: Long various TSLA puts and TSLA put spreads.

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