The Bizarre Tale of the $100 Million Deli

The bizarre tale of the $100 million deli... The most egregious example of speculative excess in the markets today... It's more complicated than it first appears... The seedy connections – and what they could mean... A warning about this stock... Ending on an upbeat note... A great CEO's final shareholder letter...

Hopefully, this is as crazy and weird as it'll get in the financial markets...

But don't hold your breath.

You're about to read a few details on what I (Dan Ferris) believe is the most egregious example of speculative excess in the financial markets today. The fact that it also comes with a mysterious – and possibly sinister – twist only adds to its entertainment value.

So sit down and hang on... you're about to hear the bizarre tale of the $100 million deli.

That's right...

A single delicatessen in rural New Jersey is valued at more than $100 million in the stock market today...

The company is called Hometown International.

It's headquartered in Woodstown, New Jersey... a town with a population of roughly 3,500. And its stock trades over the counter ("OTC") in the U.S. with the ticker HWIN.

Hometown's entire business is owning and operating one location in Paulsboro, New Jersey... a town with around 6,000 residents that's about 20 minutes from Philadelphia.

The deli opened in October 2015. And it's not exactly raking in the sales...

According to Hometown's latest annual report, the company's 2019 sales totaled $21,772. (I'm not leaving out any zeroes.) Like most restaurants across the U.S., the deli was closed from March to September last year because of COVID-19... So it did just $13,976 in sales for the year. That's a little more than $35,000 in sales over the past two years.

During that same period, Hometown reported net losses totaling around $756,000. Again, I haven't made any typos or left out any zeroes... It sold $35,000 and lost $756,000.

We'll get to more on how it did that later. But stay with me because here's the kicker...

Right now, Hometown has about 7.8 million shares outstanding. And the stock currently trades for about $13.25 per share... giving it a market cap of roughly $103 million.

That's all you need to know to view this as one of the worst examples of speculative excess in the markets today. I don't care how good the pastrami is... There's no way a single deli that loses 21 times what it sells is worth $1 million, let alone more than $100 million.

But this tale doesn't end there. It's much funnier and weirder than that...

Hometown's board has three directors... And each of the directors has a brief biography in the company's 2020 10-K filing with the U.S. Securities and Exchange Commission ("SEC").

Paul Morina is Hometown's CEO, chief financial officer, and treasurer. Morina's bio is impressive – that is, if you're looking for a great wrestling coach for your local high school.

In addition to serving as Paulsboro High School's principal since 2008, Morina has been the school's head wrestling coach since 1986. Over that span, he has led the Red Raiders to more than 1,000 victories... winning "25 class state championships, 24 district championships, and 25 conference titles." Morina was also named State Wrestling Man of the Year by Wrestling USA Magazine in 1994.

Armed with this knowledge, it makes sense that the Hometown deli shares its property with "The Monster Factory" – a professional wrestling training school in business for more than 30 years. It has been called "the world's most famous wrestling school" and has appeared in Rolling Stone, Newsweek, and the Wall Street Journal. (That's all in the 10-K, too.)

Morina can throw you flat on your back in the early afternoon... and then make you a mean pastrami sandwich to take home for dinner. That's a talent not to be trifled with.

The second director profiled in the 10-K is Christine Lindenmuth...

Lindenmuth is listed as Hometown's vice president and secretary. According to the 10-K write-up, she has taught math at Paulsboro High School for the past nine years.

Lindenmuth is also a representative for the Penns Grove chapter of the New Jersey teachers union. If you've seen the Martin Scorsese movie, The Irishman – which deals with the death of union boss Jimmy Hoffa – you know union folks can be a pretty tough bunch. So remind me not to mess with Lindenmuth... lest I get a visit from a coupla good fellas, gabish? (And don't waste your time writing in to tell me it's "capisce"... We've had this argument before.)

So far, this tale is a little weird and highly amusing... A small-town New Jersey deli run by a couple of high school teachers has done roughly $35,000 in sales and lost $756,000 over the past two years... And yet, it's somehow valued at $100 million in the stock market.

Once again, if that were the whole story, it would be another crazy sign of the highly speculative times we're living in. It would be just my latest example to share in the Digest...

It's on par with Dogecoin, the cryptocurrency currently valued at $30 billion whose primary attraction is its relation to a popular Internet meme featuring a cute dog. And of course, we can't forget about GameStop (GME), the brick-and-mortar video-game retailer that rose from the dead to be valued in the market for more than $23 billion at one point this year.

We've written ad nauseam in the Digest about the speculative froth everywhere in the stock market. So the Hometown deli in New Jersey is just another fun example, right?

I don't think so.

Here's why the tale of the Hometown deli is more complicated than it first appears...

First, Hometown International is far from a liquid stock... You'll rarely see more than a few hundred shares exchange hands each day. And some days, it doesn't trade at all.

The company issued 2.5 million shares at $1 each about a year ago – on April 15, 2020. Given that information and the tiny volume, it brings up the question... How did it get from $1 to more than $14 recently? (We'll get into some of the insinuations about that later on.)

Second, the already absurd valuation is actually about 19 times higher than it looks...

You see, in addition to its outstanding shares and options totaling around 7.8 million, Hometown also has – hold your lunch down – 155.9 million outstanding warrants... all currently exercisable. Add it all up and the fully diluted share count is 163.7 million shares.

Remember, shares currently trade at about $13.25. So when you multiply that by 163.7 million shares, the fully diluted equity value of a single deli run by a wrestling genius and a math teacher is actually a little more than $2.1 billion. (Hat tip to Bloomberg's Matt Levine.)

Again, that's billion... with a "b."

At the more than $100 million market cap, Hometown's stock trades at around 4,600 times 2019 sales. (The company reported net losses both years.) That's small potatoes, though... The company's fully diluted $2.1 billion valuation comes to more than 96,000 times sales.

In his latest investor letter, hedge-fund manager David Einhorn set the spotlight on Hometown. And he cited what I interpret as a possible reason for the exorbitant valuation...

The pastrami must be amazing.

It sounds crazy, but hear me out...

Regular Digest readers know that some of the highest price-to-sales (P/S) ratios in the market over the past year have come from Software as a Service ("SaaS") companies.

The SaaS business model generates recurring revenue. We've sung the praises of this approach in the Digest before. And many SaaS companies are growing rapidly, possibly justifying their high P/S ratios even in an era where valuations are going through the roof.

What if we viewed the Hometown deli in a similar way?

If we see Hometown as an innovative, "Pastrami as a Service" ("PaaS") company, it might help explain the crazy valuation... I'm just spitballing here, but I could easily see customers paying a monthly subscription fee to get some of that juicy pastrami a few times each week. That PaaS angle sounds like it would warrant a valuation of 96,000 times sales, right?

OK, all jokes aside, this is where the tale of the Hometown deli takes a sinister turn...

The third reason Hometown is not on par with GameStop or Dogecoin is the bizarre details surrounding who owns the stock, what their cohorts have done in the past, and what they might be up to today...

Remember I said the company's 10-K profiled three members of its board of directors?

The wrestling coach and the math teacher were two of them. While their 10-K mentions conjure up images worthy of Marty McFly discovering 1950s small-town America, the chairman's bio feels a bit more like one of the villains in the latest James Bond spy saga.

The third bio is for Peter Coker Jr., who is listed as Hometown's chairman of the board.

This part of the story is far too big and complex for one Digest... But I can definitely give you enough of the bizarre details reported recently by CNBC's Dan Mangan (Hats off, Dan!) to suggest that Hometown's small-town façade might be a cover for shady activities.

Now, I'm not a lawyer or a criminal investigator, so I can't know for sure if anything illegal is actually going on here. I'm just looking at all the facts as they're presented. And indeed, it sure seems that this could be why a tiny, loss-making deli is a public company at all...

Mangan reports that Coker and his father, Peter Coker Sr., are big Hometown shareholders. They're connected with two overseas entities – one in Hong Kong and one in Macau. In other words, they're tied to two places where rich people and criminals like to hide money.

And according to Mangan, Hometown is connected to another thinly traded OTC stock called E-Waste (EWST). Interestingly enough, E-Waste's share price has soared lately, too, giving it a market cap of around $85 million recently... despite having no business operations.

That's not all...

Tryon Capital Ventures – a North Carolina-based limited liability company founded and managed by the elder Coker – has a consulting contract with Hometown. Under the deal, Hometown pays Tryon $15,000 per month. (Overall, according to its 10-K, Hometown has paid more than $500,000 in consulting and professional fees over the past two years.)

In addition, E-Waste pays Tryon $2,500 per month for consulting services.

That might sound like a waste of money, but it isn't necessarily illegal. Companies all over the U.S. burn money needlessly on consulting deals. Here's where it gets interesting...

Tryon was used in a scheme to create sham consulting deals that obscured illegal campaign contributions to Bev Perdue, the soon-to-be governor of North Carolina, back in 2008. Coker Sr.'s former partner, Peter Reichard, was convicted in 2011 for his role in the scheme.

And a quick glance at the company's annual report shows that $320,000 in consulting fees went through Hometown into the pockets of the Coker family.

It sure seems that Hometown is much more than just the latest zany example of speculative excess. It doesn't seem like it has much to do with making pastrami sandwiches at all.

If Mangan's reporting is accurate – and we have no reason to believe otherwise – the obvious follow-up question is...

Are Tryon's consulting deals with Hometown and E-Waste legit... or are they just like the company's sham deals from a decade ago?

Yesterday, OTC Markets Group moved Hometown from the mid-tier OTCBQ trading platform to the "pink sheets" – the least prestigious OTC trading venue – due to public disclosure "irregularities." Officials wouldn't say whether they had contacted the SEC or not.

So we'll see if the SEC... the No. 1 watchdog on Wall Street... and the same folks who let notorious swindler Bernie Madoff off the hook five times in nine years... will get on this case to figure out if there's real fraud or some other type of crime going on here.

No matter what happens, Hometown's stock is likely headed for much darker days...

Whether most (or any) Hometown shareholders are innocent bystanders or not, it's reasonable to expect the stock to collapse soon. The mystery has now been uncovered...

A single deli with $21,000 in annual (pre-pandemic) sales and six-figure net losses isn't worth much at all – and certainly not $100 million. That's true no matter how good the pastrami is. (I'm still open to the possibility that it's really that good... But I'm skeptical.)

But assuming the stock is not a "zero" and that the business could survive a major scandal, the downside will still take current shareholders somewhere near the ninth circle of Hell...

You see, if all 155.9 million outstanding warrants were exercised and the market valuation fell to a mere 100 times sales, Hometown's shares would trade for around $0.013 each. And remember, the warrants are exercisable right now... So let the landslide begin.

And at a P/S ratio of just 1 – which is arguably still expensive for a loss-producing, single-location restaurant owner – you wouldn't find the share price with an electron microscope.

One last warning about Hometown...

Don't even think about shorting a stock that is this illiquid. If it can go from $1 to $13 per share, it can certainly go higher... Remember, never confuse a bull market with brains.

Hometown is the novelty story of the week. But I wouldn't be surprised to see it return to the headlines again several months down the road... or perhaps become a typical bear market story one day (that is, if we ever get a bear market again).

It seems to have good potential to blow up and make even bigger headlines. Time will tell. In the meantime, please just avoid it, and be happy watching the fireworks from afar...

You'll sleep much easier.

Now, reporting all this nasty business in the markets is exhausting... And I'm sure it's not making you happy as you read it. It certainly isn't the way to go into a nice spring weekend.

So let's change direction and end the week on an upbeat note...

As you'll see, this is a wonderful story of massive success and wealth creation.

Regular Digest readers know that I write a lot of negative stories... I share somber tales about how overvalued stocks and bonds are, how the SEC failed to go after Madoff, about crazy situations like Hometown, and countless other not-so-pleasant market realities.

But I'm really an optimist at heart... And I'll be the first to tell you that optimism is an essential trait for anyone who wishes to make money in the stock market and hang onto it.

Stocks are bets on the success of businesses. Many businesses fail, so betting on any particular one is not without risk. You must be optimistic in order to place that buy order.

For any flaws you might perceive, one company that I want to discuss today has rewarded optimists for 24 years... And frankly, it's one of the greatest businesses in recorded history.

I'm talking about e-commerce giant Amazon (AMZN).

Last week, Amazon founder and CEO Jeff Bezos released his final annual letter to shareholders...

Back in February, Bezos announced that he's stepping down after serving as the company's CEO since he founded it in 1995. In the third quarter of this year, he will become Amazon's executive chairman, and Amazon Web Services CEO Andy Jassy will take over the top job.

Before we look at Bezos' letter, though, let's look at how Amazon's stock has performed since the company went public on May 15, 1997. As you can see, it has been quite a ride...

The stock ended its first day at a split-adjusted price of $1.96 per share. It closed today at $3,340 per share. So if you would've invested in Amazon from Day 1 and held on, you would've made more than 1,700 times your money. That's a return of about 171,000%, or 36.5% compounded annually... enough to turn every $10,000 into more than $17 million.

In his 2020 shareholder letter, Bezos described the simple philosophy that has made Amazon so successful...

If you want to be successful in business (in life, actually), you have to create more than you consume. Your goal should be to create value for everyone you interact with. Any business that doesn't create value for those it touches, even if it appears successful on the surface, isn't long for this world. It's on the way out.

Whether he intended to do it or not, Bezos has reduced the power of markets to improve human life to a single kernel of truth... Create more than you consume.

It's timeless wisdom on par with the Golden Rule ("Do unto others as you would have them do unto you"). And it's true... Anybody who knows anything about building wealth by any type of legitimate means knows that you must first create more than you consume.

Amazon built a powerhouse over the past 25 years or so by executing on that single idea...

As Bezos recounted in his 2020 shareholder letter...

We've come a long way since [the beginning]...

Last year, we hired 500,000 employees and now directly employ 1.3 million people around the world. We have more than 200 million Prime members worldwide.

More than 1.9 million small and medium-sized businesses sell in our [Marketplace], and they make up close to 60% of our retail sales. Customers have connected more than 100 million smart home devices to Alexa. Amazon Web Services serves millions of customers and ended 2020 with a $50 billion annualized run rate.

In 1997, we hadn't invented Prime, Marketplace, Alexa, or AWS. They weren't even ideas then, and none was preordained. We took great risk with each one and put sweat and ingenuity into each one.

In other words, Amazon has always focused on creating more than it consumed. In his letter, Bezos ran through the value that Amazon created for various stakeholders in 2020...

• Shareholders – $21 billion (Amazon's 2020 net income)
• Employees – $91 billion (total employee compensation and benefits)
• Third-party sellers – $25 billion (low end of profit estimates from selling on Amazon)
• Customers – $164 billion (in time saved and more for Prime and AWS members)

Adding it all up, that's $301 billion in total value creation. And that's just in 2020.

Meanwhile, Amazon's sales totaled $136 billion last year. So in other words, the business created about $137 billion more value for all stakeholders than it received in sales.

It's the effect of more than two decades of compounding... And I'm not just talking about the huge, compounded returns on Amazon's stock, which has resulted in more than $1.6 trillion of value creation for shareholders. I'm talking about the entire business... all of the value that it creates annually. The whole operation is a massive exercise in compounding.

And importantly, Bezos designed it that way from the beginning...

Bezos knew what he was doing from the start. In his first shareholder letter in 1997, he laid out a simple set of principles to keep customers first and focus on long-term value creation.

Now, this idea in itself isn't so unusual... A lot of CEOs publish similar thoughts. But what really set Amazon and Bezos apart over the past two-plus decades is that he republished that first shareholder letter every single year, right alongside each new letter.

I can tell you from a few decades of doing equity analysis that most public companies don't want you to remember what they said last year – let alone every single word from 24 years ago. They want to be able to distract you with a new narrative if they couldn't live up to their original principles.

On the other hand, Bezos created a massive feedback loop among Amazon stakeholders...

By republishing that first shareholder letter every year, he invited the world to measure his company's progress against an objective, unchanging benchmark. "Moving the goalposts" doesn't exist at Amazon... at least not in relation to that original letter from Bezos.

It's right there in black and white for all to see.

That first letter was like an investment upon which Amazon has continued to compound all manner of value – for shareholders, employees, third-party sellers, and most of all, customers. Sure, that investment involved risk... But Bezos was optimistic – and he has remained so for more than two decades. And optimistic followers have thrived as a result.

If you've never read a shareholder letter from Bezos, I encourage you to read this one. And if you can, read them all... It's like earning a free MBA in long-term business value creation.

So as we head into this nice spring weekend, I'll leave you with this word of advice...

Be more optimistic. Enjoy Bezos' letters. Always look to create more than you consume. And please... stay away from anything that smells remotely like Hometown International.

(And I'm not talking about the pastrami!)

New 52-week highs (as of 4/22/21): Automatic Data Processing (ADP), Brown & Brown (BRO), Crown Castle (CCI), Quest Diagnostics (DGX), IQVIA (IQV), Ingersoll Rand (IR), 3M (MMM), S&P Global (SPGI), Seagate Technology (STX), United States Commodity Index Fund (USCI), Visa (V), and Zimmer Biomet (ZBH).

In today's mailbag, more feedback on the great debate about bitcoin and gold between billionaires Michael Saylor and Frank Giustra. Did you miss it? You can now watch it on our YouTube channel. And as always, send your thoughts to us at feedback@stansberryresearch.com.

"Excellent work by all involved and very good points made on both sides. Daniela, you were perfect in your role as moderator, and Porter made another great move in bringing you to the Stansberry family." – Paid-up subscriber Tom G.

"I must say, one of the best debates. Sadly, I think that Saylor wasn't able to answer correctly the Security/Governments issues. I am not criticizing the intelligence of his analysis. But it wasn't well debated/explained. He has to get out of the preaching rhetoric.

"For Giustra, I think we have a deep lack of knowledge of the algorithm being BTC. I do profoundly agree with Giustra: Saylor and [some bitcoin owners] are extremely benevolent. The authorities will never ever allow decentralized currency.

"I am a Stacker and in BTC, [by the way]." – Paid-up subscriber Hugo B.

Good investing,

Dan Ferris
Medford, Oregon
April 23, 2021