Your Hometown Deli is a typical, single-unit sandwich shop in Paulsboro, N.J. It operates in a corner of a boxy, gray and red building mostly occupied by a performing arts school. It sells a selection of cheesesteak and hoagie sandwiches served with chips and other finger foods.
Nearby is “The Monster Factory,” a professional wrestling training school apparently featured in Rolling Stone and the Wall Street Journal. The deli has no full-time employees. Its CEO is Paul Morina, the principal at the local high school where he is the wrestling coach. The company’s vice president is a high school math teacher.
This deli is valued at more than $100 million. Or at least it was until Friday—when its shares plunged 15%, sending its market cap down to $90 million.
The valuation of this local deli has spread across social media since hedge fund manager David Einhorn used the valuation as an example of poor federal regulation of securities—not to mention inflated stock prices. “The pastrami must be amazing,” Einhorn wrote in a letter to investors Thursday.
Maybe, but it doesn’t sell much pastrami if you look at the numbers: The deli generated just $21,772 in 2019 and $13,976 in a 2020 hampered by the pandemic. The combined revenues from those two years, $35,000, is not much more than the revenues generated by a Subway location in a month. An amount, we might note, that has caused some consternation among operators of said locations.
Most of the company’s expenses are in food and beverages—it paid just $102 in labor costs in 2019 and $126 in 2020. It pays $500 per month in rent.
But Hometown generated a loss of $624,438 in 2020, thanks largely to $320,000 in consulting fees, along with $170,767 in professional fees and $124,376 in general and administrative costs. It lost $132,158 in 2019, thanks to professional fees and G&A. The company’s stock is traded over the counter—meaning you can’t simply buy it with your Robinhood app.
It started trading in 2019, though it has been submitting public filings since 2017. Its stock has been increasing steadily in value until it peaked recently at $13.50 per share, with that nine-figure market cap, before its Friday fall.
It has consulting arrangements with multiple companies, one with a Macau company called VCH Limited that charges it $25,000 a month to “build a presence with high net worth and institutional investors.” It has another one with Tryon Capital Ventures, a North Carolina company, that bills it $15,000 a month for “research, development and analysis of product, financial and strategic matters.”
The key sentence in the company’s annual report that could do as much as anything to explain the Hometown’s purpose is this: “Going forward, we intend to seek, investigate and, if such investigation warrants, engage in a business combination with a private entity whose business presents an opportunity for shareholders.”
Later: “We will not restrict our potential candidate target companies to any specific business, industry or geographical location.”
In short, this small New Jersey deli run by the local wrestling coach appears to be the foundation of a shell company that is seeking to merge with another company—sort-of like a SPAC (special purpose acquisitions company) but with an actual holding.
That wasn’t always its goal, however. The deli was first opened in 2014, and its earlier public filings suggest it had expansion plans. “The company’s business strategy is to create a food-centered social environment within the local community that offers higher-quality prepared food and ingredients than is typically found locally,” its 2017 annual report said. “If capital is available, management will select additional Your Hometown Deli locations that appear to support this strategy.”
But revenues have been declining. It generated $76,213 in revenue in 2016 and $50,432 in revenue in 2017. Revenues fell to $32,205 in 2018.
In 2019, the company sold stock to Peter Coker, the chairman of South Shore Holdings, which is listed in Hong Kong and who has a history with investment firms in Asia. Coker is now the chairman of Hometown International, the parent company of Your Hometown Deli.
Most of Hometown’s top shareholders, in fact, have addresses in China, though at least one is in North Carolina.
To Einhorn, the deli is an example of broken markets. “Small investors who get sucked into these situations are likely to be harmed eventually, yet the regulators, who are supposed to be protecting investors, appear to be neither present nor curious,” he wrote. “From a traditional perspective, the market is fractured and possibly in the process of breaking completely.”
UPDATE: This story has been updated to make clear that Paul Morina is the CEO of Hometown Deli.