Would you pay $100 million dollars for this Grilled Cheese Food Truck?

Grilled Cheese and $100 Million of Irrational Exuberance
Grilled Cheese Truck market valuation may be a sign of excess in financial markets.
Bloomberg, February 5, 2015

If you have been a regular reader of mine, you are probably familiar with several things about me: First, you know I have been a steadfast bull during the entire rise in the stock market. It isn’t that I am such a genius or especially lucky. I just would rather not guess when the bull run is over, and instead let the markets tell me when the time to exit is upon us.

Second, you may have noticed my deep fascination with investor behavior and the cognitive errors to which you humans are subject. I have spent almost two decades observing the never-ending battle between capital-market participants and their own flawed wetware.

Last, I try to achieve some level of self-awareness — call it enlightenment — regarding my own selective perception, biases and cognitive shortcomings. That small measure of humility means I am constantly reassessing my own outlook, trying to identify indicators that are contrary to my own market positions.

Which leads me to today’s topic: Signs of excess and froth in the equity markets.

Exhibit 1: Grilled Cheese Truck Inc., which began trading on the pink sheets last week after receiving OTCQB certification.

Let’s look at the fundamentals of the Ft. Lauderdale, Florida-based company. Based on the 18 million shares outstanding and a recent stock price of $6 the company has a market value of about $108 million. No matter how much you like grilled cheese — and I like a good GAC BAC TOM¹  as much as the next guy — I can’t see this as a reasonable valuation.

If you go to the company’s website, you will learn that “The company currently operates and licenses grilled cheese food trucks in the Los Angeles, CA area and Phoenix, AZ and is expanding into additional markets with the goal of becoming the largest operator in the gourmet grilled cheese space.”  You can see an interview with the founder here. The company employs military veterans, and it even lists retired General Wesley Clark as vice chairman.

However, according to the company’s financial statements, it has about $1 million of assets and almost $3 million in liabilities. In the third quarter of 2014, it had sales of almost $1 million, on which it had a net loss of more than  $900,000.  The story is much the same for the first nine months of the year: $2.6 million in sales and a loss of $4.4 million.

But forget the losses for a moment, and make the generous assumption that it will have sales of $4 million this year. This means its shares trade for more than 25 times sales, a very rich valuation.

Which brings me back to my original comments regarding looking for contrary indicators to my bullish posture. I can’t think of a more interesting sign of the old irrational exuberance in equity markets than a publicly traded grilled cheese truck (four in this case) business trading at a $100-million-plus valuation. That sort of thing doesn’t happen unless there is significant excess in the markets.

I have nothing against Grilled Cheese Truck — based on the menus the food looks delicious — and I hope they send one of their trucks to New York so I can enjoy one of their grilled cheese sandwiches with all the fixin’s. I suspect, however, that the stock may leave a bad taste in investors’ mouths.

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1. That’s diner speak for Grilled American Cheese with Bacon and Tomato

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I originally published this at Bloomberg, February 5, 2015. All of my Bloomberg columns can be found here and here.