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Jason Knapp

There's Something Rotten at J. Alexander's. Why I'm Selling Fidelity National Financial Ventures $FNFV

As someone who consistently writes about investing, I feel an obligation to follow up on investment ideas that I have talked about in the past.  That obligation extends to when the ideas work out perfectly and when they don't.  Today I am going to talk about an idea that ended up being profitable, but definitely did not turn out the way that I had intended.

In late May I wrote an article about Fidelity National Financial Ventures$FNFV upcoming spinoff of the restaurant chain J. Alexander's:

A Hidden Way to Invest in One of the Hottest Trends in the Market Today

The thesis behind this write-up was that the venture capital arm of an insurance company called Fidelity National Financial $FNF was in the process of spinning off a successful restaurant chain at a time when many restaurants are being afforded sky high multiples by the market.  The trade actually worked out quite well, with $FNFV returning 4.37% versus a loss of 1.95% for the S&P 500 since I purchased shares.  Annualized that amounts to a return of around 24%.  As MacGuyver would say (man I loved that show)..."I'd rather be lucky than good."

A chart of $FNFV (blue) vs. the S&P 500 (red) since my purchase on 5/6/2015 (click to enlarge)

I live in the Northeastern U.S., where there are no J. Alexander's locations, so I have never personally been to one.  However, I did quite a bit of research on the chain and by all accounts its restaurants are great.  Its reviews on sites like Yelp!, Open Table and Trip Advisor were all extremely positive. I asked several friends in other states what they thought about the chain and they all liked it.  Heck, the J. Alexander's location near Memphis, Tennessee is even my mother's favorite restaurant.

Not only was there overwhelming anecdotal evidence that the chain was successful, the numbers backed it up.  J. Alexander's has reported twenty-one consecutive quarters of positive same-store sales, with margins growing from 11.4% to 13.9% along the way.  Statistics like these would be the envy of many public restaurant companies.  

Despite all of this positive data, a recent filing by Fidelity Financial Financial Ventures leads me to believe that something is amiss at J. Alexander's.  Investors who pay premium multiples for public restaurant chains, such as Shake Shack $SHAK or Habit Restaurants $HABT are really looking for one thing...growth.  And there is absolutely no growth going on at J. Alexanders.  Even worse, the company's namesake restaurants are actually going through a major re-branding.  In a fairly quiet filing with the SEC this week, the about to be spun off J. Alexanders' announced plans to transform as many as half of its 29 namesake locations into a new concept called Redlands Grill.

Huh?  How can this be?  I don't care what the new concept is or how good it sounds, my thesis was that J. Alexander's was a successful, growing restaurant chain and the spinoff was a secret way to get into it.  If the company's management feels the need to completely scrap half of J. Alexander's current locations either that theory was horribly wrong OR the company's management is horrible.  Either way I don't want to be involved.  As a result, I sold my position in $FNFV this morning pre-spinoff for a small gain.

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