Let The Investor Letters Roll In

It’s my favorite time of the year … Hedge Fund Annual Letters! We’ll spend the next few weeks reviewing our favorite value managers’ letters. We talk about broad market concepts, specific investment ideas and what companies they love most.

Before we dive in, make sure to listen to our latest podcast episodes:

Here’s the letters we’re covering this week:

    • Woodlock House Capital Letter
    • Vlata Fund
    • East72 Capital
    • RV Capital

Let’s get to it!

January 15, 2020

Y’all Are Record Long: Shoutout to Alex at Macro Ops for this week’s stat of the week. According to SentimenTrader, “y’all bought to open 21.6 million speculative call options. That’s the most *ever*. Your previous record was 19.7 million during the week of Jan 26, 2018. Your total bullish / bearish volume was the most since March 2000. So…wow.”

Greedy when others are fearful and fearful when others are greedy. Well, we know which way the “others” lean. How will we react?

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Investor Spotlight: Letters Galore!

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We’re covering four investor letters this week. We’ll highlight the main theme of each letter as well as individual stocks mentioned.

Woodlock House Capital: +12.43% 2019

Chris Mayer ended the year up 12.43%. In his words, “If I could lock in a 12.43% return every year for the next 30 years, I’d take it.” We agree, Chris!

Woodlock House invests in high quality, low risk assets. To help him focus on such ideas, Chris uses the acronym CODE …

Cheap (Undervalued)

Owner-operator (skin in the game)

Disclosures (easy to follow)

Excellent financial condition

CODE is a great addition to anyone’s investment process. What’s not to love about each of those characteristics?

Portfolio Overview

Woodlock House owns fifteen stocks. The top five makes up around 42% of the Fund. Chris didn’t name all his stocks, but he mentioned eleven. Six old names and five new ideas.

The Old Names:

    • Howard Hughes Corp. (HHC)
    • Exor (EXO)
    • Bollore (BOL)
    • Fairfax Financial (FFH)
    • Fairfax India (FIH-U)
    • Air Lease (AL) — reduced position to 5.5%

As the above list infers, Chris spends a lot of time looking at international companies. In fact, a mere 35% of the Fund’s capital invests in US-listed names. Now onto the new names. Chris uses his CODE acronym for each new investment.

The New Names:

InterContinental Hotel Group (IHG.LSE)

JD Weatherspoon (JDW:LSE)

Next, Plc. (NXT:LSE)

Texas Pacific Land Trust (TPL)

AO. Smith (AOS)

Vlata Fund: +25.40% in 2019

Daniel Gladis returned 25.40% for the Vlata Fud in 2019. Since the Fund’s inception eleven years ago, Gladis’ returned 368.4%. That’s 33.50% annualized returns. Not bad!

Real-Time Intrinsic Value Estimation

Gladis spent the majority of the letter defending his choice to report estimated portfolio value along with NAV. In other words, Vlata Fund tells their LPs what the portfolio’s worth on an NAV (market) basis AND an intrinsic value (estimated) basis.

Here’s Daniel’s reasoning (emphasis mine):

“In the end, the following argument was what decided our internal debate: I consider the information on value to be very important and I also use it in portfolio management. How could I as a shareholder justify keeping that to myself and not provide it to the other shareholders? We did not find a satisfactory answer to that question, and therefore we began to publish data on the portfolio’s value.”

What’s interesting about this idea is its application to portfolio management. For instance, when the NAV is much lower than estimated intrinsic value, that might be a time to buy. Or, if NAV mirrors intrinsic value its a sign of a fair-priced portfolio.

Daniel offered two ways for investors to interpret the NAV-to-Intrinsic Value delta:

    1. The value development is a good indicator of future returns
    2. If you see that the difference between value and NAV becomes extreme, you can use it to plan your own investments.

This makes intuitive sense. But it goes against the mindset of so many investors. Investors tend to pile into a Fund after great returns. Yet they flee the scene after one bad year. But, if you have an idea of the Fund’s intrinsic value compared to its current “market price”, it changes things.

Portfolio Overview

Gladis doesn’t offer his portfolio in a direct way, but we can back into some holdings from his letter. Here’s a list of the holdings he reveals:

    • Samsung (005930)
    • Sberbank (SBER.RU)
    • BMW (BMW)

East72 Capital: -6.15% Q4 2019

Andrew Brown and Marc Lerner returned -6.15% in Q4 2019. If you take away their short position in TSLA, the Fund returned a positive 6.15% for the quarter. The majority of the letter deals with the company’s long-standing investment in Exor (EXOR).

Deep Dive Into Exor NV

Brown and Lerner offer six reasons why they continue to hold EXOR (direct from letter):

    1. EXOR is now moving to extract added value from CNH, through an intended spin-off of its US$13billion “on-highway” bus and powertrain business …
    2. CNH has been placed on a path to far higher margins across the two businesses intended to double pro-forma earnings over four years; if achieved this would give scope for a significant $4-$8billion uplift in the value of Exor’s holding;
    3. EXOR continues to reduce its dependence on the value of the traditional ICE (internal combustion engine) auto business of Fiat via more capital extraction (two dividends paid in May 2019 and the further $1.78billion attributable dividend payable late in 2020 on merger with Peugeot)
    4. EXOR’s debt to gross asset value is down around 13% (gross) and 10% (net) – the lowest since the PartnerRe acquisition in 2016
    5. The equity market’s pricing of Exor shares seems to have ignored the significant uplift in the price of reinsurance company stocks in the past year.
    6. Exor is still cheap on the basis of the price of current portfolio investments without imputing any uplifts from the initiatives highlighted

New Investment: Yellow Brick Road Holdings (YBR.ASX)

East72’s newest investment is Yellow Brick Road Holdings (YBR). The company provides wealth management advice to retail and SME clients in Australia.

Here’s East72’s take on YBR’s history:

“Over the past two years, YBR’s inability to consistently produce a profit, partly brought about by unsustainable overheads designed to grow the group, allied to a decline in the home loan market, has seen the company’s share price decimated, falling by over 90% at one stage from the placement price in 2014. Moreover, previously supportive shareholder Macquarie Group divested its shares at prices between $0.09- $0.14 in mid 2018.”

Brown and Lerner think the future will look much different than the past. According to the duo, YBR can increase revenues and profits from four areas:

    1. Vow, a lower margin high volume mortgage aggregator
    2. YBR franchisees acting as brokers
    3. Resi MOrtgage Corporation
    4. Resi Wholesale Funding which manufactures mortgages

East72’s position in YBR is around 1/3rd of their estimated $0.22/share capital cost. Here’s the rest of their valuation pitch:

“In total this suggests YBR to be worth ~$0.20/share, prior to proving the existing structure can provide sustainable growth.”

RV Capital: +31.20% 2019

Robert Vinall returned 31.20% in 2019, beating the DAX by 5.70%. Since inception,. Vinall’s returned a whopping 649.6%, or 19.6% annualized. This compares to the DAX’s 7.6% annualized return during the same period. Not bad!

Robert’s letter is great. He discusses his dinner with Charlie Munger, a trip to South Africa and a new investment.

Diversification with Charlie Munger

One of the biggest takeaways for Rob from his dinner with Munger was on the topic of diversification. According to Rob, Charlie explained that one needs a mere two stocks to have proper diversification. Two stocks. Even a manager like Rob looks over-diversified with his ten stock portfolio.

Robert believes in his diversification methods, saying, “Despite Charlie’s admonitions, I have no regrets about holding around 10 stocks.”

Pessimism in South Africa

Earlier we discussed how investors are very optimistic about US markets. The reverse is true in South Africa. Everywhere Rob went he saw one thing: Pessimism. Rob mentions, “The people I met in SA were overwhelmingly pessimistic.”

This type of news should make our ears perk up as value investors. Greedy when others are fearful, right? Rob agrees (emphasis mine):

If I put my investor hat on, the best time to invest in a country is when the mood seems darkest. Investors in Zimbabwe or Venezuela may beg to differ, but these countries strike me as exceptions that prove the rule. Cycles move in, well, cycles, not precipitously to the bottom. Germany, when I moved there in the late 90s, was the sick man of Europe. More recently, Greece was considered the basket case to end all basket cases. Cycles turn.”

I agree. Robert also discusses a new South African company that got his attention, Discovery (DSY).

Discovery (DSY): Health & Life Insurance

DSY is a health insurance platform aimed at improving the health of its members. Through incentives, the company works to lower insurance costs, increase life expectancy and reduce hospital visits.

According to Rob, the model works due to Shared Value. As the business thrives, so does its end customers.

DSY’s rolling out its platform, Vitality, to 14 insurers across 23 markets. Their goal is get 100 million people 20% more active. So far the model’s working. The company generated over R1.2B in 2018, paid a 1.78% dividend and sports attractive 14% pre-tax margins. Mr. Market’s offering DSY at 12x current earnings.

Rob doesn’t own DSY. He prefers tracking a company for years before making an investment.

Here’s what the charts look like …

RV’s Newest Investment: Wix.com (WIX)

Robert runs WIX through his list of investment questions:

    1. Does management set the right example?
    2. Is the moat widening?
    3. Is the price attractive?

According to Rob’s thesis, WIX checks off every box.

    1. Almost every senior executive at WIX has been with the company since the beginning.
    2. WIX sports five areas of competitive advantage (moat-widening):
      • User stickiness
      • Cost Advantages
      • Data Advantages
      • Brand
      • Culture
    3. Robert estimates WIX will be worth $200/share by 2024 assuming steady-state FCF of $900M.

Here’s the chart …

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Resources of The Week: Table Stakes & Expectations Investing

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Brent Beshore wrote a great piece on how to “unlock” a small business. Asking the right questions is vital to any investment decision. Brent categorizes the questions by topic (Operations, Finance and People). Here’s his list of Operations questions:

I’ll leave it to you to read the rest!

Expectations Investing Tutorial

I’m sure I’m late to the party, but Michael Mauboussin’s 11-part tutorial on Expectations Investing is fantastic. Best of all, it’s free. You can start the course here. As a teaser, here’s the difference between Expectations Investing compared to traditional investment thinking:

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Tweet of The Week: All The Accounting You Need

 

That’s all I got for this week. Shoot me an email if you come across something interesting this week at brandon@macro-ops.com.


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Akre’s Take on Selling, Market Delusions and Float

I went 3-for-4 in my weekend football picks. Not bad. Now if only I put some money on those convictions! As a Redskins fan, I’m a big Kirk Cousins guy. Would love to see him win a Superbowl.

Let’s get to a housekeeping note. I’ll be in Charlotte, NC until Jan. 24th. If you’re a Value Hive reader that lives in the Charlotte area, please reach out. I love connecting with other like-minded investors.

Check out our latest podcast episode: Joe Boskovich & Brian Laks, Old West Capital Management

As of Monday morning the podcast reached 500 total plays! Thanks for making this a great experience. I’m having a ton of fun and look forward to our future guests.

Here’s what we got in store this week:

    • Akre Capital on (Not) Selling
    • Aswath Damodaran’s Big Delusion
    • Yet Another Media Guide Pt. 4
    • Value Investing w/ Options
    • JPM’s Guide To Markets

Let’s get to it!

January 08, 2020

Nevada Cashing In On Bets: Sports betting is exploding across the US. The relaxation of regulations have created an ideal environment for speculators and fans to place bets on various games. One state that’s loving this? Nevada.

The Gambling Capital of the US took $614M in bets in November. That beat its previous all-time record by 3%.

Who do you have this weekend? Send me your picks!

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Investor Spotlight: Chuck Akre & The Art of (Not) Selling

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Chuck Akre is a tremendous value investor. He’s also a staunch advocate for not selling investments. Holding for the long haul. I found an article from Chuck’s investment website, Akre Capital Management.

The article discusses the importance of not selling. Yet at the same time, the article provided rules for selling. Let’s dive in.

Why You Should Hold On

We know about compound interest. But how often does the concept come into play when thinking about our sell decisions? At Akre Capital, it’s the foundation of their investment process (emphasis mine):

“Our investment philosophy involves concentrating our capital in a small number of what we believe to be growing and competitively advantaged businesses. These kinds of businesses are rare and are only periodically available for purchase at attractive valuations. With that in mind, we do our best to hold on for the long term, so that our capital may compound as the businesses grow.

A penny doubled every day for a week turns into $1.28. The second week? $163.84.

But holding isn’t easy. In fact it’s the hardest decision we must make. As value investors, it’s (relatively) easy to determine when to buy. There’s an intrinsic value and the current market price.

Yet when we sell, we’re making a bet that the future of this company won’t be as accretive as its past. Put another way, the current price doesn’t hold an ideal risk/reward ratio. This is where the power of holding emerges.

Back to the article … “Holding on means resisting the temptations to sell — and there are many. We tune out politics and macroeconomics. To the surprise of many, neither valuation nor price targets play a role in our sell decisions.”

Rules for Selling

The article dove into some reasons why Akre Capital would sell an investment. This isn’t an exhaustive list, but a guidepost.

Rule #1: Slowing Growth

    • Akre’s Reasoning: To generate above-average returns over the long term, we believe we must invest in businesses that are growing sustainably at above-average rates. When growth slows, we expect our returns will as well.

Rule #2: Loss of Competitive Advantage

    • Akre’s Reasoning: “The moat must be dredged every now and then. Failure to do so may cause competitive advantage to weaken or disappear altogether.”

Rule #3: Management Fails Expectations

    • Akre’s Reasoning: “[A]t some point, we have to make a call, and a new management team that falls short of our expectations might cause us to sell.”

More Akre Resources

If you’re a fan of Akre, you’re going to love these two YouTube videos:

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Movers and Shakers: Aswath’s Big Delusion & Pt. 4 of Media Guide

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Aswath Damodaran released a great article on Big Market Delusions. In it, he outlines the ingredients necessary for market delusions to form. He provides examples of recent IPOs to confirm those claims.

The Recipe For Market Delusion

Damodaran describes three criteria needed to form market delusions:

1. A Big Market

Large markets heal all business wounds. At least that’s what some people think. Damodaran notes large market examples: dot-com bubble, online advertising and marijuana industries. Each industry had one thing in common. They all described their end markets as very large.

How will cannabis companies make money? No worries, the market is so large it’ll take care of itself. What’s Uber’s plan for monetization? Doesn’t matter. Have you seen their TAM?

Damodaran’s Take: “In each case, the logic of impending change was impeccable, but the extrapolation that the change would lead create huge and profitable markets was made casually.”

2. Overconfidence

Overconfidence is one of the worst sins in the investing game. According to Damodaran, big markets amplify the effect of overconfidence. Why is that? Daniel Kahenman offers three reasons:

    • Overconfidence is ubiquitous
    • Overconfidence metabolizes anchoring biases
    • Overconfidence is rooted in our evolutionary DNA

Damodaran’s Take: “Big markets attract entrepreneurs, over confident that their offerings will be winners in these markets, and venture capitalists, over confident in their capacity to pick the winners.”

3. Pricing Game

There’s a difference between value and price. Most venture capitalists (and PE shops) price companies. They don’t value them. In other words, most investors figure out how much similar companies were sold for in the past, and then apply a similar multiple.

They’re not valuing the business’s cash flows. That could be because most of these high-flying companies don’t have positive cash flows.

Damodaran’s Take: “There is no attempt made to flesh out the “huge market” argument, effectively removing any possibility that entrepreneurs or the venture capitalists funding them will be confronted with the implausibility of their assumptions.”

Shared Elements of Market Delusions

We know what it takes to create big, market delusions. But what are some of the shared symptoms of these markets? What can tip us off? Damodaran answers these questions for us.

Here’s the four elements of big market delusions:

Element #1: Big Market Stories

Damodaran’s Take: “In recent years, the big markets have gone from just words to numbers, as young companies point to big total accessible markets (TAM), when seeking higher pricing, often adopting nonsensical notions of what accessible means to get to large numbers.”

Element #2: Blindness to Competition

Damodaran’s Take: “When the big market delusion is in force, entrepreneurs … and investors generally downplay existing competition …”

Here’s the biggest issue with these big market companies. If the market in fact is as large as they say, that must attract competition. Competition drives prices (and margins) lower to arrive at equilibrium.

Element #3: All About Growth

Damodaran’s Take: “When enthusiasm about growth is at its peak, companies focus on growth, often putting business models to the side or even ignoring them completely.”

Bruce Greenwald stresses this idea in almost every lecture. Growth for the sake of growth isn’t good. If that growth doesn’t generate returns above your cost of capital, it’s value destructive.

Element #4: Disconnect from Fundamentals

Damodaran’s Take: “Put simply, the pricing losing its moorings in value, but investors who look at only multiples miss the disconnect.”

A business is worth its future cash-flows discounted back to the present. This doesn’t mean we can’t use multiples in our process. But Damodaran’s right. If we only use multiple analysis, we miss the true underlying value of the company. Multiples don’t pay bondholders. Cash-flows pay bondholders.

Andrew Walker: Free Radicals in Media

Andrew Walker keeps cranking out new parts to his Media Guide. At this point, I’m expecting no less than a 15-part series. Followed soon after by a 12-part mini-series breaking down the length of the series.

In Part 4, Andrew discusses a “free radical” company, AMC Entertainment (AMCX). Let’s head to the blog!

A Cheap Radical Amongst Us

John Malone coined the term ‘free radical’ to a media company that is too small to survive, but offers value as a take-out candidate.

Andrew thinks AMCX is that free radical.

He notes that the company’s cheap on statistical measures (emphasis mine):

“Any discussion of AMCX probably has to start with one obvious point: it is cheap. Really cheap. Revenue, earnings, and free cash flow have grown every year for the past five years. From FY15-FY19, the company will have generated >$4b in unlevered FCF. The company’s EV is currently ~$4.7B. That’s really cheap.

But here’s the kicker. Andrew doesn’t think AMCX is as cheap as it looks.

One-Trick Pony

AMC relies on The Walking Dead for most of its viewership. It’s not close. Walking Dead related programs account for over 4M viewers. The next closest? Better Call Saul with 1.48M viewers.

Andrews describes this problem, saying, “Their key franchise ratings are declining, and I suspect they are significantly over-earning versus the value their channel currently delivers. Incremental margins are pretty high for a media company; I wouldn’t be surprised to see their fees cut as their next rounds of deals are negotiated, and if that happens AMC could go from looking really cheap to pretty expensive in a hurry.”

Two Reasons To Buy AMCX

According to Andrew, there’s two reasons why investors would buy AMCX:

    1. The company will melt slower than market expectations
    2. You think AMCX will be acquired by a larger company

The stock’s battering against its 50MA right now. A breakout above that trendline would get me interested in a shorter-term “melt slowly please” trade.

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Resources of The Week: 1988 Akre Letter & JPM Guide To Markets

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Akre’s Investor Letter

If you haven’t noticed, I’ve been on a Chuck Akre kick as of late. That theme continues with this week’s resource: Akre Capital 1988 Investor Letter

The entire letter’s worth the read. Here’s a few of my favorite nuggets:

    • “Our resulting style in the partnership is to try and find outstanding businesses, to understand their true value, and when the price is reasonable, purchase shares.”
    • “The practice of not losing money is significantly advanced by the selection of superior businesses, because as we just pointed out, their royalty keeps on working in spite of general business conditions and isolated poor managerial decisions.”
    • “The fewer investment decisions we make, the less exposure we have to making mistakes. Obviously, these decisions that are made must be correct, which is why we spend so much time trying to understand the quality of businesses.”

JPM’s Guide To The Markets Q1 2020

H/T to Alex at Macro Ops for sending out the link to JPM’s Guide To The Markets.

You can check it out here if you’re interested. It’s 71 slides of interesting content.

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Idea of The Week: Value Investing Through Options

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I stumbled upon a 2016 ValueWalk interview with Chris Abraham. Chris runs CVA Investment Management. CVA runs a long-term, all-cap, value oriented investment portfolio. That’s not what’s interesting. What’s interesting is their use of options as insurance float.

How To Create Your Own Float

Chris describes how he creates his own Berkshire-like insurance float:

“If you find a security that is undervalued and has a margin of safety, generally speaking there will be an even bigger mispricing in the options. To profit from this you can sell put spreads or buy call spreads – the former eliminates the tail risk. If you feel comfortable just selling naked puts that will help you generate even more float, but you have to be comfortable buying the stock at the set price if it comes to it.”

Chris’ Investment Process with Options

Chris’ investment process focuses on finding mispricings on the equity side. If there’s a mispricing on the underlying equity, the derivatives could show a wider discrepancy. From the interview:

“Sure, let’s say a stock is trading at $100 and under my valuation I believe it’s worth $130 to $150. If I can sell puts at $85 and collect $8 in premium, a premium that expires in one year, to me that would be very attractive. In this scenario my net buy price, if I were forced to buy, would be $77, otherwise the options will expire and I get to keep the float. In this specific case, assuming I’m buying this competitively advantaged company at a 40-60% discount, I would be ok selling the puts outright and not put spreads because I would be happy to own the stock at $77.”

This is such an interesting strategy, and one that I plan on writing about in more detail. Keep your inboxes open for that article.

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Tweet of The Week: All The Accounting You Need

 

That’s all I got for this week. Shoot me an email if you come across something interesting this week at brandon@macro-ops.com.


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Contrarian Investing in Europe, Japan & Commodity Cyclicals

If you’re reading this, congrats! You survived your New Years Eve party. We’re excited for the new decade at Value Hive. In four months we’ve grown our subscriber base, started a podcast and solved world hunger met tons of interesting people.

Our goal for the next decade is simple: Deliver curated, value investing news straight to your inbox. For free. Forever.

Before we dive into this week’s issue, check out our latest podcast episodes:

Here’s what we got in store this week:

    • Steven Wood’s Plan For 2020
    • Machines Beat Analysts
    • Cyclical Stocks Win Big
    • Value Investing in Japan & Europe

Let’s get after it!

January 01, 2020

New Year New Me: We didn’t always celebrate New Year on January 1. In fact, our ancestors celebrated at a much different time. Here’s your first trivia question of the new decade … What date did people celebrate New Years before we switched to January 1?

This is the hardest one yet, so good luck!

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Investor Spotlight: Greenwood’s Purpose Driven Decade

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Steven Wood ended 2019 with an inspirational call-to-action. The end of 2019 marked a full decade of Greenwood’s business history. Steven’s ringing in the New Year with a defined mission statement and purposeful vision.

The Catalyst He Always Wanted

Steven reaffirmed Greenwood’s purpose and goals for 2020 in his latest blog post. Here’s the mission statement:

Our purpose is to be the catalyst that helps our investors, companies and team members perform at the top end of their range of possibilities.

Most retail investors can’t enact change within a public company. A 5% position in a $5M nano-cap company requires a $250K investment. That’s a lot of money for retail investors.

But there’s one part of Steven’s mission statement weekend warriors can use. It’s the idea of thinking in possibilities, not binary outcomes.

Thinking In Possibilities

Stocks are ownership shares in actual businesses. Because of this, there’s a myriad of outcomes that can arise over time. When analyzing a stock, you should think of the various downside and upside potential. Suggesting one downside case and one upside case isn’t enough.

There’s a few ways I’ve added possibility-analysis into my process:

    1. Run multiple DCF and EV/EBITDA valuation models
    2. Look at the ranges a stock has traded in the past
    3. Read more bear thesis write-ups on my long ideas

Where Steven Wants To Enact Change

Steven mentions three companies in his year-end blog post:

    • TripAdvisor (TRIP)

The stock is at its lowest level since 2013. The last time the stock was here, it shot to over $100/share. I’m not saying that will happen this time. But it’s worth thinking about.

Steven isn’t the only value investor thinking about TRIP. Andrew Walker (@AndrewRangeley) tweeted his thoughts on TRIP after his honeymoon to Vietnam:

The stock trades for 36x current earnings. Expensive on the surface, I know. But looking a year out, the company appears cheap at 16x earnings and 7.5x EBITDA.

    • Rolls Royce (RR.)

Rolls Royce (RR.) stock hasn’t moved since 2012. The S&P’s up over 140% in the same time frame. Not good! What’s to blame for the laggard performance?

RR isn’t operating well. Here’s the lowlights of the last year’s performance:

    • Gross margin down ~10%
    • Operating Profit down from $1.1B to -$1.1B (7% to -7% margin)
    • EPS down from $1.89 to -$1.21
    • ROA down to -8% (from 12% in 2017)

Revenues continue to grow. It’s gross profit and operating profit that are the problem. If Steven can fix things at RR, he should see handsome profits.

It wasn’t that long ago when RR generated near $1.5B in operating profits (2013).

    • Short Boeing (BA)

Boeing’s another stock that’s gone nowhere over the last two years. The stock trades within a well-defined (tight) range. Steven’s short BA for a plethora of reasons, which you can find here. He’s also a public critic of BA’s management change:

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Movers and Shakers: Robots Win & Cyclical Stocks Outperform

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If you’re a Wall Street analyst at a big investment bank, you may want to skip this section. An MIT forecasting model produced better sales projections than human analysts. This isn’t surprising. And we’ll see why this is a good thing for value investors, like ourselves.

MIT Model: 1 – Humans: 0

MIT is at it again. This time their research team developed an automated model to forecast business sales.

In true Dwight vs. Computer fashion, MIT went head-to-head with human analysts. The results weren’t pretty for us humans.

The task: Predict earnings of more than 30 companies

The result: Model outperformed combined analyst estimates 57% of the time

Here’s the kicker. The computers worked with less data than their human counterparts. The analysts had access to alternative data. Such data included:

    • Credit card purchases
    • Location data from smartphones
    • Satellite images of retail parking lots

The computers only had access to public information. And they outperformed the analysts.

This makes me wonder … how much value-add is this ‘alternative data’ if it fails to beat a computer using public data?

What This Means For Analysts

It’s clear that computers can perform most tasks better than humans. Yet when it comes to investing and analysis, it’s hard to find places computers don’t have an edge. But there are places where humans remain advantaged. They include:

    • Small, private market businesses
    • Micro-cap and nano-cap public companies
    • Illiquid/dark/grey stocks

Stay in these markets and you won’t have to worry about computers taking over. These markets don’t have adequate data to feed models. The information arbitrage advantage endures.

Verdad Capital: Contrarian Investing in Cyclicals

Blackstone, KKR and Texas Pacific Group. What do these PE funds have in common? They all made stupid money buying cyclical, commodity companies at the bottom of a cycle.

Verdad Capital’s newsletter offers a couple examples:

    • Blackstone’s $640M investment in Celanese (returned 4x)
    • KKR & Texas Pacific Group’s power plant investment returned 6x original price in less than a year

Buy … High? Sell … Low?

Cyclical companies are a bit different. They’re cheap when they look expensive. And they’re expensive when they look cheap.

In other words, cyclical stocks will trade for higher multiples at the bottom of a cycle than at the top. Let’s pick up from Verdad’s letter (emphasis mine):

“For example, when oil prices were below $37 a barrel (bottom quartile), Exxon traded at an average multiple of 8.2x, but when oil prices were above $88, Exxon’s EBITDA multiple fell to an average of 5.7x. Similarly, when the number of new homes under construction was below 772,000 (bottom quartile) DR Horton and Lennar traded at average multiples of 21.7x and 34.5x, but they reverted to 8.1x and 9.4x respectively when the number of new homes under construction surpassed 1,072,000 (top quartile).”

This is important to understand. As value investors we have a tilt towards investing in low P/E or low EV/EBITDA companies. Yet with cyclicals, we need to reverse that thinking.

How To Take Advantage of Cyclicality

Verdad offers clues on how to profit from these industry cycles, saying “While investing in cyclical industries ten years ago would have been a poor decision, our research suggests some opportunities may exist today.

Verdad sees opportunity in semiconductors and independent power producers. They offer a final reminder to investors:

“Some investors avoid these cyclical industries because of their wild and unpredictable fluctuations, but these data suggest that using economic data to evaluate investment opportunities in cyclicals and buying at economic troughs can provide above-market returns.”

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Resource of The Week: Job Satisfaction & Firm Value

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Looks like scanning Glassdoor reviews before making investments pays off after all! Early this week I stumbled upon The Link Between Job Satisfaction and Firm Value, With Implications for Corporate Social Responsibility. The whitepaper reveals a link between job satisfaction and firm value (stock performance).

There’s clear limitations to the research. Not every company was surveyed, the criteria for “best places to work” is subjective, amongst other things. Nevertheless, here’s what the returns looked like from the best places to work:

    • 380bps alpha over the risk free rate
    • 230bps alpha controlling for industries
    • 290bps alpha controlling for firm characteristics

One of those “Best places to work” companies was Google. So there’s a bit of an outlier issue.

But the point remains. When given the choice, invest in places that love their employees, and their employees love them.

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Idea of The Week: Gems in Japan and Europe

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valueDACH released their latest interview with Alex Roepers. Alex is founder of Atlantic Investment Management. Alex chatted about the following topics during the 24-minute interview (via YouTube description):

You can’t go wrong with a valueDACH interview. I’m excited for their content in 2020.

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Tweet of The Week: Long Cast Advisors Asking The Real Questions

That’s all I got for this week. Shoot me an email if you come across something interesting this week at brandon@macro-ops.com.


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Druckenmiller’s Portfolio, Revenue Models and a Net-Cash Idea

From all us at Value Hive we wish you and your family a terrific Christmas Holiday!

Crazy to think that this newsletter is four months old. We’ve grown up so fast!

If you’ve got a long car ride to the in-laws, consider listening to our latest podcast episodes:

But it’s Christmas and we’re in the season of giving. Here’s what we got in store this week:

    • Stan The Man’s Economic Predictions
    • A Bottom’s Up Approach to Forecasting Revenues
    • Buying Stocks For A Fraction
    • David Flood’s latest illiquid idea

Onward!

December 25, 2019

Rally With Santa: If you’re a Value Hive reader, odds are you’ve heard the phrase “Santa Claus Rally”. That time of year when Santa makes it rain on your 401(k). We know its Wall Street jargon. But is there any actual evidence to back this up? Turns out, yes.

According to FINRA.org, “Since 1950, the index has delivered an average return of 1.4% in the last five trading days in December and the first two in January.”

If you’re interested in hearing more about the Santa Claus rally, the guys at Macro Ops and I did a video on it. You can find that here.

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Investor Spotlight: When The GOAT Speaks, We Listen

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Stanley Druckenmiller is one of the greatest investors of all time. During his run at Duquesne Capital, The Druck generated over 30% annualized returns. That’s not a typo. The man is one of a kind. Druckenmiller sat down with Bloomberg’s Eric Schatzker to discuss monetary policy, 2020 outlook and his portfolio.

I listened to the entire interview and took notes so you don’t have to. In all seriousness, watch it.

You Get Liquidity, You Get Liquidity!

Druckenmiller points out that things are looking good in the United States. According to Druck, the economy’s fine and breadth indicators look solid. He also mentions improved global trade. On the China-US trade war, Druck said, “Everything isn’t peaches and roses, but things are de-escalating.”

Venturing beyond the US, Druck made the following observations:

    • There’s fiscal stimulus in Japan and Britain
    • There’s green stimulus in Europe
    • There’s negative real rates everywhere and negative nominal rates in [many] countries

The former Duquesne manager believes we’re in a period, “of unprecedented monetary stimulus given the circumstances [around the world].

This begs the question: Where does Druck have his money? I’m glad you asked.

A Look Into Stan The Man’s Portfolio

George’s former trading partner didn’t dive into company-specific names when asked about his holdings. But he gave us asset classes. Hints at where he’s parking his capital. On an absolute basis, Druckenmiller’s current portfolio is set for, “a benign economic outlook, and a benign market outlook.

He stresses that his view could change tomorrow. And that’s what I love about the guy. He holds convictions but isn’t afraid to abandon them if he’s wrong. As of now, here’s what his book looks like:

Long Equities

    • Increased exposure to stocks that will do well in a high-growth environment. Without naming companies, he mentioned Japanese equities (where have we seen that before?) and financials / banks.
    • Druck’s words: “It looks more like a normal mix than a year ago.

Long Commodities

    • He’s long copper.
      • Druck’s words: “I’m long copper because global economies will be better than IMF thinks. There’s also a kicker to copper. EV (Electric Vehicles) add around 0.50% a year to demand.
    • He thinks he should be long energy.
      • Druck’s words: “I don’t own energy, but I probably should. I just think there’s a real demand challenge.”
      • He’s also on the board for Green Energy Defense.

Currencies

    • Long Canadian dollar, Australian dollar, NZD and MXN
      • Druck’s words: “I’ve got some [short] pesos lying around somewhere.”
    • Long British Pound heading into the election
      • Druck’s words: “I had enough of a position to smile when I heard the news [of the election].”

Short Fixed Income

    • Short longer-end of the yield curve and treasury market.

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Movers and Shakers: Customer-Based Revenue Models & Fractional Shares

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Daniel McCarthy & Peter Fader’s piece on forecasting revenues was one of the best things I read all week. But then again, you can’t go wrong with Harvard Business Review’s material. The piece dives into a new way to forecast revenues via Customer-Based models. Let’s dive in.

Switching The Game

Customer-Based Corporate Valuation (CBCV) is better than other models. At least that’s the claim. The authors describe the model as, “a meaningful shift away from the common dangerous mindset of ‘growth at all costs’ toward revenue durability and unit economics.”

How does the model do that? By exploiting basic accounting principles, a CBCV valuation makes projections from the bottom-up. Not top-down.

But we need a few models to help us navigate the new method:

    1. The Customer Acquisition Model: Forecasts the inflow of new customers
    2. The Customer Retention Model: Forecasts how long customers will remain active
    3. The Purchase Model: Forecasts how frequently customers will transact with a firm
    4. The Basket-Size Model: Forecasts how much customers spend per purchase

These models help us understand the real drivers of businesses. This in turn allows us to project revenues with greater accuracy. While at the same time providing in-depth knowledge about the unit economics of any business.

That’s the key. The model works for all types of businesses. The article does note that CBCV method is easier with subscription-based models.

Let’s see it in action!

The Two-Step Model For CBCV Revenue Projections

There’s three steps to this method:

    1. Figure out total revenues from your retained customers
    2. Forecast amount of total revenue from new customers
    3. Add the two together

But we need to calculate steps one and two.

The formula for step 1 is simple:

    • Multiply the current customer base by your historical retention rates
    • Then, multiply that number by the historical average revenue per customer (ARPU)

Formula 2 follows a similar pattern:

    • Multiply acquisition trend average by ARPU

Further Research Ideas

A customer-based method of valuation paints a clearer picture into two things:

    1. Drivers of revenue
    2. Unit economics.

The HBR article is the tip of the iceberg. The two men teamed up to write two academic papers, which you can find below:

I’ll dive into those this week.

Fractional Shares Hit Mainstream Brokers

Robinhood now offers fractional share purchases, joining Schwab and Square in the fun. There’s both good and bad consequences of fractional share ownership. As value investors, can we take advantage of this added wrinkle?

The Good: Spreading the Opportunity

Fractional shares is the latest effort to make stock ownership more universal. Jack Dorsey, CEO of Square notes that fractional shares, “make building wealth accessible to more people.” And that’s true.

Now, people that want to buy Amazon (AMZN) stock can. Even if they lack the thousands of dollars. There’s no doubt this move will send a wave of retail money into the markets. But at what cost?

We can apply similar logic to fractional shares as we did zero-commissions. On one hand, it’s great for retail traders. But on the other hand, does it encourage “dumb” money to enter the markets? And if so, is that a net positive to value investors?

The Bad: Dumb Money Climbs Higher

Fractional shares will increase the amount of “dumb” money  markets. There’s also the argument that if someone can’t afford the average stock price ($67 – based on 2013 data), they shouldn’t be in the markets. Instead, they should park that money in a savings account.

While I’m not a financial advisor or financial planner (and I don’t play one on TV), there’s weight to that argument.

The Reality: It Doesn’t Affect Our Stocks

Yet at the end of the day, this is a net positive for the investment community. It opens doors to people that wouldn’t otherwise learn about financial markets. Most of all, this doesn’t affect the stocks that we look at. Small, illiquid, micro-cap names have no need for fractional share ownership.

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Resource of The Week: An Interview w/ Bruce Greenwald

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Bruce Greenwald is a value investing legend. He’s author of Value Investing: From Graham to Buffett and Beyond. He also teaches at Columbia University.

Greenwald sat down with Tano Santos to chat all things value investing. Here’s a break-down of my favorite topics (from show-notes):

    • The value investing oral tradition (10:30)
    • Applying a value orientation to your investment search strategy (12:11)
    • Why you need to be a specialist (13:24)
    • What you can learn from Warren Buffett about specialization (14:56)
    • Paul Hilal’s approach to investing by first spending the time to learn (16:28)
    • How to approach the valuation of a moat business (24:11)
    • The factors to consider when calculating your return (26:51)
    • Why you have to pay attention to management behavior (30:48)
    • The importance of active research for value investors (34:14)

It’s a tremendous interview.

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Idea of The Week: David Flood’s Latest Net-Net Idea

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David Flood is a private value investor based in the UK. If you haven’t heard (or read) his material, check out these resources:

I’m working with David to get him on our podcast. Details to follow!

NOL Stub Below Net-Cash

David’s latest write-up covered Origen Financial (ORGN). The company is small, $2M market cap. What’s interesting about it, you ask? According to David, the stock trades for a mere 0.75x net cash.

ORGN also has another thing going for it: NOLs. NOLs (or Net-Operating-Losses), shield any future income from taxes. You can also monetize them.

David estimates the company has around $15.6M in NOL on the balance sheet. Whether they monetize them or not is up for debate. What’s not up for debate is the discount to cash, and the reduced cash burn to $20K per-quarter.

The stock trades around $0.09/share with little volume. Oh, and 30% bid/ask spreads.

I’ll leave you with this quote from David (emphasis mine):

On a per share basis if we include the marked down value of the NOL’s and the Net Cash I get a rough value of around $0.277 per share. Assuming we apportion no value to the NOL’ s then I get a rough value of $0.123 per share.”

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Tweet of The Week: Tiho Brkan on Wall Street Analysts

 

That’s all I got for this week. Shoot me an email if you come across something interesting this week at brandon@macro-ops.com. Have a great Christmas holiday.


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Sports Rights, Optimal Teams and The Death of Value

We’ve got an early Christmas gift for our swarm of Hive readers this week. Wait for it …

We have a podcast! The Value Hive Podcast!

Click here to listen to the podcast. It’s also available on Spotify and Apple Podcasts.

Stoked doesn’t begin to describe how we feel! We’ve got a killer lineup and a (growing) backlog of terrific content.

We’re talking with value managers, entrepreneurs, psychologists, doctors, you name it. If we think it can help you become a better investor, we’ll release it.

Make sure you click on the link above to listen to our first episode with Richard Howe of StockSpinoffinvesting.com.

With that out of the way, here’s what we got in store this week:

    • Andrew Walker’s Media Guide Part 3
    • Ideal Team Sizes for Research Firms
    • The Value Premium is (*gulp*) …. Over?
    • Chris Mayer’s Ideas for 2020

Let’s get to it!

December 18, 2019

(White) Elephant In The Room: Wondering what to get for your White Elephant office party? Well look no further. White Elephant Rules’ website offers tons of ideas. And for us value investors, each one is under $20! Not bad! You can find all the ideas here.

Here’s my favorites from the list:

    • Toilet Bowl Mug
    • Social Shower Curtain
    • Beard Hat (I might buy this)

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Investor Spotlight: Everything Sports Rights

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We’re in Part 3 of this (so far) three-part series on Media Investments. Andrew’s done a tremendous job with this project, and we couldn’t thank him enough. Part 3 covers all things sports rights. Oh, and here’s a tickler … we’re releasing our podcast with Andrew on this exact topic next week.

Stay tuned!

Sports Rights & Where To Play The Game

Sports faces a problem. They deliver more value to the TV bundle than they receive in compensation. But as Andrew explains, they’re never going to realize that value arbitrage as long as they’re tied to the bundle. Here’s the issue. If sports gets their way and realizes larger profits, every other content producer will do the same.

Andrew lays out four takeaways from the above logic:

    1. Sports delivers a lot more value than the price they get
    2. Sports channels are incentivized to increase their price
    3. Increasing price will eventually cause the collapse of the bundle
    4. There’s no way for sports to monetize better than its current form

How To Bet on Sports Rights Future

There’s bullish tailwinds for the sports rights industry. So what are some ways to play that theme? Andrew offers four flavors:

    • Buy a publicly traded team
    • Buy a publicly traded sport
    • Buy an RSN
    • Buy the networks

What’s Andrew’s take? He’s bullish sports rights and bearish sports rights holders. Here’s his thesis:

__________

“Sports is going to do gangbusters as they get more and more consumer data. My guess is that the sports leagues all eventually take their sports rights back and launch direct to consumer apps that they can monetize through hyper targeted advertising and merchandise sales.”

__________

The Dangers of Blackouts

Blackouts are bad. But I didn’t realize how bad until reading Andrew’s article. Check out this section (emphasis mine):

__________

“A long term blackout is really, really bad for an RSN. An RSN’s leverage is pretty simple: if you drop us, all of our passionate fans are going to leave you for someone who carries us. That’s a really powerful stick; however, once the RSN has been dropped, the stick isn’t there any more: after a few weeks, all of the people who cared enough about the team to switch providers have largely done so.”

__________

Here’s the rub. If a sports rights company prices themselves too high, they’re at risk of blackout. And good luck getting back in once you’re out. Fans would have nowhere to turn to for their local team.

Blackouts also affect the individual sports teams. Andrew notes that these teams rely on viewership for:

    • Driving fan engagement
    • Merchandise sales
    • Popularity
    • Season ticket sales

And more.

As always, the entire piece is a great read.

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Movers and Shakers: Optimal Teams & Value Premiums

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Ever wondered what the optimal size for an investment team? Concerned that the long-standing value premium is dead? This is your section. First we’ll dive into Michael Mauboussin’s research on the ideal size of an investment team. Then, we’ll check out some charts to show the value premium is, in fact, dead.

Mauboussin’s Findings

The suspense is killing you.

According to the CNBC article, Mauboussin’s research reveals the optimal number. Three.

He also notes a couple of interesting facts:

    1. Funds managed by three-person teams outperform solo-run funds by 58bps a year
    2. 75% of all actively managed funds are team managed, leaving only 25% run by one-man shops

Three makes logical sense. Not too big where bureaucratic practices take over and ideas can’t pass. Yet not small enough to fall victim to one person’s biases or intellectual errors. Further, Mauboussin explains that, “Smaller is better than bigger. Three would be preferable than seven.”

Mauboussin notes that diversity amongst an investment group is critical to its success. He’s not referring to social diversity (such as race, gender, etc.), but also cognitive diversity. Cognitive diversity includes differences in education, training, experience and personality.

The End of The Value Premium

I hate to get all gloom-and-doom on you. But this whitepaper from StarCapital Research is full of insights on the value premium decline.

The main thesis (emphasis mine): “Any consistently successful strategy would attract so much capital over time that it would rob itself of its own basis for success. Cycles are the price of outperformance. Nevertheless, after more than ten years of disappointment, the question arises whether we are experiencing a normal weakness or whether structural changes mark an end to the Value effect.

Some Nice Lookin’ Charts

Here’s a couple charts that highlight the scale of this value effect decline:

As you can see in the above chart, we haven’t experienced growth outperformance like this since the dot-com bubble and the Great Depression.

The most recent five-year value underperformance is in the top 1% of worst performances in statistical history. Ouch!

But why? StarCapital offers a few reasons:

    • Increased use of smart beta products
    • Growth stocks able to maintain above-average growth rates and profitability
    • Convergence of technology, media and communications sectors
    • Simultaneous integration of new technologies and lack of regulation on new business models

But the real problem here is lack of mean reversion …

But not all hope is lost. Inverting the question, we realize value stocks are cheaper than they’ve ever been in history. Check out the chart below:

Since this is a value investing newsletter, we’re hoping the tide shifts. Remember, value investing works because it doesn’t work all the time.

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Resource of The Week: Adventur.es 2019 Annual Letter

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New Fund, New Partners, Same Old Strategy

That’s the title of Brent Beshore’s 2019 Annual letter. The letter is full of gems so I encourage you to read the whole thing. Here are Brent’s cliff-notes from his Twitter post:

I’d say that’s being a bit productive! Brent and company buck the trend of traditional private equity. Don’t believe me? Check out this paragraph (emphasis mine):

__________

We take no fees on the capital we raise and cover all our own costs, including travel, dead deal-related expenses, and all overhead. We buy with no intention of selling, typically use no debt, and like to keep leadership teams intact post-close. If you’re familiar with private equity, that makes no sense.

__________

I love that. Not only is it a great framework for future private equity funds, but also for investment partnerships. It echoes Buffett’s early partnership days.

Career Risk Changes Everything (But The Culture of PE)

Brent nails it when he asks the question, “if the traditional PE model is broken, why don’t people change?” Here’s his response (emphasis mine):

__________

The short answer is career risk. No one wants to break wind in the crowded elevator. To quote the great philosopher Austin Powers when asked how dare he, “I didn’t know it was your turn, baby.”

__________

I’ve chatted about career risk for investment managers in the past. But back to Brent’s letter. He listed a collection of quotes from his road-show to various LP candidates. Here’s a couple of personal favorites:

    • “If I’m committing to 27 years, I need to see your entire medical history, including blood work and your doctor’s charts.”
    • “There’s no way you’ll build a team in Columbia, MO. I mean, come on, who’d want to live there?”

I can smell the LP ignorance through the quotations.

If you haven’t already (and why haven’t you already), give Brent a follow on Twitter. He posts tremendous content that is worth every second.

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Idea of The Week: A Dark Stock from Dave Waters

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Dave Waters released his latest idea on OTCAdventures.com. The stock of note? Monarch Cement (MCEM).

What does Dave like about it? Here’s a few hints (from the write-up):

    • Cement is low-value, but heavy and bulky. This makes shipping it beyond certain distances from the plant uneconomical
    • Element of NIMBYism (Not-In-My-Back-Yard). Cement production plants are loud and dusty. Securing one provides geographical moat
    • Operated for 110 consecutive years. That’s saying something

The company trades around 4.4x EBITDA. Realizing that arbitrage between cheap and fair value will take time.

Dave reminds readers that shareholders of dark, illiquid stocks must remain patient. He says, “As with any company like Monarch, shareholders must be prepared to wait a long, long time for an eventual catalyst.

Dave’s fund, Alluvial Capital, owns shares of MCEM.

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Tweet of The Week: Chris Mayer’s Ideas For 2020

Chris Mayer wrote a great piece on his ideas for 2020. I recommend reading the entire thing. But if you’re in a jiffy — here’s the cliff notes version:

    1. Buy something in energy
    2. Buy something in the UK
    3. Buy something in India

That’s all I got for this week. Shoot me an email if you come across something interesting this week at brandon@macro-ops.com. Have a great Christmas holiday.


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Media Investment Guides, MSG Spin-off and Yacktman’s Focused Fund

We’re two weeks away from Christmas. Wow.

If you’re struggling to think of what to get your significant other for Christmas — get them a stock! Unlike flowers, a stock will (hopefully) last decades. Churning out fat dividends. Then, use those dividends for dinner dates.

You can thank me later.

Anyways, here’s what we got in store this week:

    1. Andrew Walker’s Part 1 & 2 of Media Investment Guide
    2. Interactive Brokers Allows Russian Stocks
    3. Madison Square Garden Spin-off
    4. Tobias Carlisle’s Interview with Bluegrass Capital

And more!

December 11, 2019

Christmas Trivia: This week’s trivia has a double meaning. The answer to the Christmas question also answers the question of where I’m finding a lot of deep value stock ideas. Are you ready? House rules, no Google!

In which modern-day country was St. Nicholas born?

First person to email me the correct answer gets $5 cash.

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Investor Spotlight: Local Broadcasters, Media Case Studies

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Last week we said we’d cover every Andrew Walker post on media investments. And did we (Andrew) deliver. We’ve got Part 1 & 2 of Andrew’s media investment guide.

Andrew covers local broadcasters in part 1. Part 2 highlights a couple media investments / case studies.

Local Broadcasters: Retransmission Fees On The Rise

Andrew explains that broadcasters make their money two ways: retransmission and advertising fees. Cable companies pay local broadcasters retransmission fees to air certain content (think sports, etc.). Andrew uses this example:

“for every one person who subscribes to the cable bundle, the cable company will pay the broadcaster fee (around $1.50-2/month)”

The advertising fees are self-explanatory. But let’s circle back to retransmission fees. These fees are growing, fast. Andrew mentions that Tegna’s (TGNA) retransmission fees now account for 33% of TV revenue mix. This is up from 4% in 2009.

That’s not all. There’s evidence to suggest retransmission fees will continue to rise. The American Cable Associated (ACA) expects retrans fees to rise 88% in 2020. The survey involved members of the ACA, which averaged $11/month per subscriber in retrans fees. That same sample now anticipates paying $19/month per subscriber.

Three Concerns with Local Broadcasters

Andrew lists three concerns with the local broadcaster industry:

    1. Unclear fit within media ecosystem in the future
    2. Cord-cutting (obviously) a major issue
    3. Unsustainable advertising revenue

Despite these three concerns, Andrew remains interested in broadcasters? Why? Because they’re so darn cheap! Andrew mentions two reasons why broadcasters are attractive investment ideas:

    1. They generate massive amounts of levered free cash flow
    2. Most broadcasters are buying back their stock with the free cash flow

That’s a very accretive situation for shareholders. And if you can buy that stock for <10x earnings, even better.

Let’s move onto Part 2 …

Part 2: CBS and FOX

Andrew dives into FOX and CBS in Part 2 of his media investments guide.

Disclosure: I am currently long FOX.

The Bull & Bear Thesis For Networks

The Bull Thesis: Networks get paid less on a ‘per-eyeball’ basis than anyone else. If that gap narrows over time, networks should make a killing.

The Bear Thesis: Escalation of sports rights fees.

The Case for CBS

Andrew’s bullish on CBS. Check out his simple valuation model for the company:

He argues that even a SOTP (sum-of-the-parts) valuation reveals a cheap company. Although the shares are cheap, Andrew notes three potential issues with the figures:

    1. 2018 revenues capture tail-end political spend. Andrew suggests looking at local and entertainment earnings over the last two years to get a more realistic earnings picture.
    2. CBS is plowing money into content production for their direct to consumer (D2C) business. This will distort short-term cash flows.
    3. CBS will merge with Viacom — so the current business won’t look the same going forward.

A Word on Fox

I’ve previously written about the FOX bull thesis, which you can find here. Andrew isn’t as bullish on Fox for two reasons:

    1. Trump could start his own network
    2. The next president might not generate enough “buzz” to keep viewers entertained
    3. Reliance on live events and lack of direct to consumer offering

Before we go, here’s a shot of both companies’ charts. Oh and give Andrew a follow on Twitter.

CBS:

FOX:

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Movers and Shakers: MSG Makes It Official

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Madison Square Garden (MSG) is finally spinning-off it’s sports and entertainment businesses. The company filed its Form 10 last week. There’s a lot to unpack, so let’s break down the two segments.

The Sports Segment

The MSG sports segment (SportsCo.) will include:

    • The New York Knicks NBA franchise and development team (Westchester Knicks)
    • The New York Rangers NHL franchise and its development team (Hartford Wolf Pack)
    • The New York Liberty WNBA franchise (company wants to sell)
    • Knicks Gaming, which includes NBA 2K esports franchise of NY Knicks, a majority interest in Counter Logic Gaming
    • Team Training Center in Greenburgh, NY

The Entertainment Segment

The Entertainment segment (EntertainCo.) offers a boatload of assets:

    • Venues: Madison Square Garden, The Hulu Theater, Radio City Music Hall, Beacon Theatre and the Wang Theatre
    • Bookings Business: Fills MSG venues with entertainment as well as booking live sporting events (NBA, NCAA, boxing, etc.)
    • Productions: Radio City Rockettes and the Christmas Spectacular
    • Majority Interests: TAO Group, Boston Calling Events
    • Joint Ventures: Azoff-MSG Entertainment, Tribeca Enterprises
    • 1/3rd economic interest in SportsCo.
    • $1B in cash

The company expects the spin-off to complete during the first half of 2020. We’ll make sure to track it once it hits the markets — we love that forced selling potential!

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Resource of The Week: Acquirer’s Podcast with Bluegrass Capital

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Crash Course on Unit Economics

The man behind the Twitter account Bluegrass Capital joined Tobias Carlisle on the Acquirer’s Podcast. The hour-long interview is pure gold. BluegrassCap dove deep into unit economics evaluation, capital intensive businesses and more.

Before we continue, make sure to follow Bluegrass Capital on Twitter (link above). He posts excellent content.

Bluegrass shared his strategy for finding new investment ideas: 13-F filings. Here’s who he follows:

    • Berkshire
    • Merkel
    • Tom Gaynor
    • FundSmith
    • SPO Advisor
    • Sequoia
    • Rain Cuniff

One of my favorite parts of the interview revolves around the question: does this business need to exist? Here’s Bluegrass’ take (emphasis mine):

____________

Do people want it? I mean, do people need this service or product? And a lot of companies you can just look at and it’s like, no, or there’s 100 competitors and … or you can do it yourself, there’s no reason to pay somebody else to do it. So it just fundamentally before you even get to the, does this business make money at the unit economics level? Just think to yourself, do I need this? Do I want this? Is this valuable to anybody? If this business just fell off the face of the earth, would anybody care?

____________

Such a great question to add to your investment checklist (if it’s not there already).

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Idea of The Week: Yacktman’s Latest Buys

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Donald Yacktman is one of the greatest value investors of all time. Yacktman’s Focused Fund has outperformed the market since inception in 1997.

$10,000 invested in the Focused Fund in 1997 grew to $80,000 as of Nov. 2019. That same amount invested in the S&P during that time? $60,240.

Yacktman’s latest 13F filing reveals two new names: News Corp (NWSA) and Rinnai Corp (RINIF/TSE:5947). Let’s check ‘em out.

News Corp (NWSA)

NWSA is a media and information services company. They produce content like The Wall Street Journal, Barron’s, The Daily Telegraph and MarketWatch … to name a few. The company also publishes fiction/non-fiction books, children’s entertainment and sports.

NWSA stumbled into a rough patch over the last two years. Revenues declined, operating margins shrunk and earnings turned negative.

But that’s reversed this year. Over the last year, the company grew revenues 10%, expanded operating margins over 400bps and generated positive EPS of $0.26. The company also generated $126M in FCF.

In light of Andrew’s media investment guide, NWSA fits the bill of another cheap news company. Here’s a few metrics:

    • 8x P/B
    • 7x P/S
    • 7x EV/EBITDA
    • 19x EV/FCF

Rinnai Corp (RINIF/TSE: 5947)

Rinnai Corp is a Japanese company that produces and sells heating appliances and components. It’s a boring business that trades roughly 1.45x NCAV. The company generated $3.13B in sales last year, and they’re tracking for $3.3B this year.

From that $3.13B in 2019 revenue, RINIF generated $278M in operating income (~10% margins). This year, the company anticipates around $300M in operating income. RINIF has no debt, 30%+ gross margins and trades for roughly 12x next years operating income.

Yacktman made it his smallest position (0.80% of portfolio). But it reveals that more investors are venturing into Japanese markets.

If I had to bet, I’d bet I’ll write about a Japanese stock in this month’s Value Ventures.

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Tweet of The Week:

Insider purchasing is a great signal. But it’s only as good as those that are allocating the capital. Macy’s (M) is a perfect example. Management bought at the top. Every. Single. Time.

Then again, it’s also a retailer.

I found this tweet via Chris Mayer’s account. Make sure to give him a follow.

That’s all I got for this week. Shoot me an email if you come across something interesting this week at brandon@macro-ops.com. Have a great Christmas holiday.


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Media Investing, African Equities and Japanese Ideas

Can you believe we’re in the last month of 2019? Seems like yesterday Value Hive was born. Oh how time flies …

Anyways, we’re deep in the throes of Holiday season. Lights are up, stockings hung. Here’s what’s in store this week:

    • Media investment guides
    • Thoughts on South African investing
    • Warnings from Brookfield
    • White-paper on Margin of Safety

and more!

Pause that Christmas classic, Diehard, and dive in.

December 4, 2019

It’s Beginning To Look A Lot Like Spending: Black Friday shoppers spent a record $7.4B in the second-largest online sales day ever. The spending fell a close second to 2018’s Cyber Monday sales. Also, ‘Small Business Saturday’ onlines sales jumped 18% this year.

Here’s the funny part. Shoppers didn’t start spending on Friday. They were busy hitting ‘Buy Now’ while at the Thanksgiving dinner table. Thanksgiving day sales reached $4.2B.

I guess we are a consumer-driven society.

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Investor Spotlight: Everything Has a Price … A Media Guide

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Andrew Walker’s at it again. In a pre-honeymoon effort, Walker penned his thoughts on all things media investments. As someone whose long a media investment (FOX), I found this post very valuable. Also, congrats to Andrew on getting married!

I’ll cover the highlights, but I encourage you to read the entire piece. This is only the intro post. Andrew’s whipping out a “Part 1” … and I assume at least a Part 2. We’ll make sure to cover those here as they’re released.

Cord-Cutting: The Negative Flywheel Effect

Before diving into specific companies, Andrew discusses cord-cutting. His reason is simple. Many non-media “experts” don’t understand the concept. Here’s Andrew’s first principles definition of cord-cutting:

____________

Cord cutting is, at its most basic, pretty simple: households who used to subscribe to the legacy cable video bundle are increasingly dropping that package and choosing to just buy broadband from their cable provider. For video, they’re choosing some combination of Netflix, free youtube videos, or maybe some other DTC products (like Disney+, HBO Go, etc.).

____________

Andrew created a simple model to explain the negative flywheel effect. He created a world with three channels (sports, news and entertainment). Each channel cost $10/month to subscribe.

Here’s where things get interesting. Different channels have different values, depending on the subscriber. Andrew fleshes this idea out, saying:

____________

So customer 1 values sports at $50/month, news at $12/month, and entertainment at $11/month. In total, the value is worth $73/month to him, yet he only pays $30/month, so he gets $43/month of value from the bundle. In contrast, customer 2 doesn’t care about sports, but he really likes news and entertainment ($26/month).

____________

Using this logic, if the price of the bundle costs more than its value to the customer, they’ll unbundle.

Another Problem: Value & Price Gap

That’s not the only problem. As Andrew shows in his example, subscribers (on average) value sports at $18/month. Yet the sports media charges $10/month. There’s a value gap and sports media will push for increased prices.

This is where the negative flywheel comes in. After raising the prices for sports media, the total package (bundle) now costs more. This leads to more people dropping off as the value is less than the cost.

Andrew says it perfectly: “However, the value delivered to customers of the bundle never changes, so as the overall bundle’s pricing increases it continues to price out marginal subs. Each channel is stuck raising prices just to try to maintain a flat revenue base, which causes the price of the bundle to rise even further and pushes even more people out.”

Some Stocks Mentioned (They’re Cheap!)

Andrew mentioned a few, cheap media stocks: CBS, FOX and LGF.

CBS trades at 5x earnings …

FOX at 14x earnings …

And LGF at 2.5x EBITDA …

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Movers and Shakers: Tread With Caution (Brookfield & South African Equities)

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This past week we read two reports issuing caution. First, Brookfield Asset Management says their more cautious than they were in 2009. Then, Ashmore Investment Management released a brake-pumping report on South Africa.

But we’re value investors. We’re greedy when others are fearful. We’re not scared! But should we be?

Brookfield Ain’t All Roses and Dandelions

Brookfield CEO, Bruce Flatt made a bold claim this week. He said (emphasis mine), “it’s inevitable there will be a recession in developed markets at some point in time.”

Flatt really went out on a limb with that prediction, didn’t he.

Brookfield’s positioning themselves in reaction to Flatt’s stance. The company’s holding more “dry powder” on their balance sheets than 2009. Remember, Brookfield has $500B in AUM. That’s a lot of dry powder.

Protection with Diversification

Flatt’s a big proponent of diversified assets. He went so far to say that Brookfield’s success, “hinged on being highly diversified”. They’re industry agnostic, not favoring any particular asset class. Flatt notes that if one asset class gets crowded, they can go elsewhere:

____________

“If many people are bidding up infrastructure in a certain country, we just don’t participate. We have 29 other countries we can go to, we have three other businesses. So we can ebb and flow our capital and therefore we’re not forced.”

____________

That’s not the only word of caution we saw this week.

Ashmore: Beware of African Equities

We like to go where others won’t in search of value. One of those places is South Africa. We’ve highlighted Rudi Van Niekark’s South African fund here before. Like Rudi, we’re finding a ton of cheap SA equities.

But should we tread with more caution? Ashmore Investment Management thinks so.

Quick Overview

South African markets are cheap, but well behind the rest of the world (ROW). Check out the below figure:

As you can see, African equity markets make up 1% of the global market cap. Yet they account for 14% of the world’s population and 5% of global GDP.

On average, African equities generate 22% ROE, sport 5% dividend yields and trade at 9.1x P/E ratio. Ashmore also dives into the unique youthfulness of the country, using it as a bright spot for future investment. Here’s three consequences of African’s younger markets:

    1. African stock and bond markets are almost identical in size. This is much different than other, more developed economies where bond markets trounce equities.
    2. Eurobonds make up larger share of total bonds (23%). This compares to the average emerging market (EM) country’s percentage (18%).
    3. Corporate bonds make up 30% of total Eurobond market in Africa. This compares to EM average of 72%. Quite the difference.

Holding all else equal, Ashmore thinks investors can expect:

    • Faster relative growth in fixed income compared to stock market
    • Faster relative growth in local fixed income compared to Eurobonds
    • More rapid growth in corporate debt markets than sovereign debt

The Seven Horsemen of African Markets

But there’s a price to pay for this expected faster growth. Ashmore highlights seven issues in African public markets. I call them the Seven Horsemen. Here’s the list:

    1. Sovereign governance and transparency
    2. Politics upheavals
    3. Pension systems
    4. Macroeconomic management
    5. Information asymmetries and the illiquidity premium
    6. Leapfrogging
    7. Institutional Quality and Market Depth

We’re not going to parse through all seven — that’s why you should read the report! But we’ll highlight one: Information asymmetries and the illiquidity premium.

Misconception About Governance

Many investors are quick to judge African equities. Claim they’re risky ventures where management pays little/no attention to corporate governance.

It’s a popular opinion. But according to Ashmore, it’s wrong. Ashmore flips the script, claiming that South African companies offer better governance than other EM companies (emphasis mine):

____________

“There is a perception that African companies have poor corporate governance and abuse minority shareholders. This is a misconception. The level of corporate disclosure and governance in South Africa is one of the best in the context of emerging markets.”

____________

Ashmore argues that the relative cheapness in African equities (9.1x P/E) isn’t due to governance. It’s the illiquidity and information asymmetry. Here’s their reasoning:

    1. Liquidity tends to be lower in African stocks
    2. African companies are generally not as good at keeping their investors information compared to other EM companies

There’s weight to this argument. The lower valuations in Africa aren’t reflected in higher default / corporate bankruptcies, either.

So, African companies reap better ROE and dividend yields for a lower (relative) price:

In other words, it’s akin to the illiquidity premium from Roger Ibbotson’s white-paper. The only difference appears to be a larger effect on price and returns in Africa than US markets.

Further Research

For those interested in learning more about African equities, here’s an idea. Print out the list of all JSE stocks and go through them one-by-one. It’s tedious, yes. Time consuming, of course. But you’ll get a great feel for the type of valuations in South Africa. And maybe even find a great idea or two along the way.

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Resource of The Week: Margin of Safety White-Paper

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Redefining Margin of Safety

NZS Capital released their white-paper on margin of safety. The paper dives into “how the nature of growth and adaptability informs investing”.

In short, NZS turned the idea of margin of safety on its head. They don’t think of margin of safety as the cheapest price paid for an asset. Rather they look at margin of safety as ranges of possible outcomes. They explain their stance:

____________

“If the valuation is expensive, then we have to make more narrow (i.e., highly precise) predictions. If the valuation is cheap, then we have a bit more leeway and can make broader (i.e., less precise) predictions about the future.”

____________

At the end of the day, that’s all we as investors can do. Make predictions — poor ones at that — about the future.

Defining Value Traps

NZS Capital argues the rise of ‘value traps’ is due to the failure of old-age businesses to adapt to the Information Age. Relying on mean reversion and intrinsic value is misleading, they claim. NZS shows the four quadrants of companies along the Disruption and Predictions spectrum:

NZS illustrates the cycle most companies fall into in the middle. Companies start off as gambles. Then they gain market share, grow and create asymmetry. After taking more market share the company is now resilient to competitors. Yet, like most things, these businesses deteriorate into value traps. The company then resorts back to gamble-like status at their death.

What’s The Secret Sauce?

According to NZS, there’s three characteristics of investments that maximize margin of safety:

    1. Slow-growth
    2. Long-Duration
    3. Adaptable Management Teams

NZS suggests looking for companies that are mission critical to their customers, delivers more value to their customers than they do themselves, and have a flexible management team. These types of companies, “allows for timely innovation, decelerating the game clock so managers can make smart decisions and maintain their lead through adaptation.”

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Idea of The Week: Sanken Electric: 6707 (Oasis Management)

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We saw earlier a market ripe with opportunity: South Africa. There’s another market as attractive, Japan. This week’s IOTW comes from Oasis Management. Check out their entire bull thesis on Sanken Electric (6707) here.

Business Overview

Sanken Electric operates two business segments:

    • Semiconductor Devices (85% of revenue)
      • Allegro (US Subsidiary): 46%
      • Other: 39%
    • Power Systems (15% of revenue)

The company does around 175bn yen in annual sales, generates 10.5bn yen in operating profits and trades at 6x EBITDA.

The company’s semiconductor business is a much better business than power systems. The semiconductor business generates 96% of the company’s operating income at an 8.5% average margin. Meanwhile, the Power Systems business accounts for 4% of operating income with a meager 2% operating margin.

The Big Takeaway

One large crux of the bull thesis is that Sanken’s holding in Allegro (the US subsidiary) is worth 41% more than the entire market cap of Sanken:

The path to value creation is simple in theory. Oasis argues that Sanken should rid itself of the low-margin, cost-heavy Power Systems business and focus on their semiconductors segment.

So far, Oasis’ plans are working. Here’s what Sanken’s initiated since the Oasis report went public:

Will be interesting to follow along in their progress. I’m finding a lot of interesting Japanese bargains right now. Heck, even Burry likes Japan!

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That’s all I got for this week. Shoot me an email if you come across something interesting this week at brandon@macro-ops.com. Have a great Thanksgiving holiday.

Your Value Operator,

Brandon


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Hedge Funds Closing, Schwab Buying and Mexican Stocks

Before we dive into this week’s content, I want to let everyone know that this Friday, Nov. 29th MO is having a special Black Friday surprise for all Value Hive readers. I don’t want to spoil anything, but I will say that if you like to trade equity earnings announcements, you won’t want to miss this offer… So keep an eye on your inbox the day after Turkey day!

With that, let’s feast!

November 27, 2019

Turkey Trivia: We’re back with more festive trivia! This week’s question is all about Thanksgiving. You know the rules. No Google. First one to email the correct answer receives $5 Venmo from yours truly.

Are you ready?

Here it is: Which President made Thanksgiving an official, annual holiday?

Clock starts now!

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Investor Spotlight: Big Names Stepping Down From Funds

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Many investors are struggling to match the S&P’s torrid 24% YTD rise. In fact, numerous funds are shutting their doors and returning capital to outside investors. This week we take a look at a hedge fund giant closing shop, as well as the overall trend towards hedge fund liquidations.

No More Bacon: Louis Steps Down at Moore Capital

The investment world lost access to one of the greatest global macro investors of all time this week. Louis Bacon of Moore Capital Management, closed the doors to outside investors.

Bacon consolidated the company into one investment vehicle, returned capital to outsiders and stepped away from day-to-day operations.

According to the Barron’s article, Bacon’s going back to his roots. His pre-hedge fund days. He explains the decisions, saying (emphasis mine):

“For me this new arrangement is in some ways a return to my market origins in that my original pre-hedge fund track record was generated off of my own proprietary capital while overseeing a financial business devoted to commissions. And now I am once again concentrating on my personal investment account while overseeing a large multi-asset alternatives platform.”

Enviable Track Record

Bacon’s track record was impressive to say the least. He revealed some of those figures in his closing letter to investors. Here’s a quick run-down:

    • Net annualized return of 17.6%
    • Cumulative return of over 21,000% since inception of flagship Remington funds
    • 15% annualized return for Moore Global Investments
    • Cumulative return of 61x original investors capital.
    • 11% return for Moore Macro Advisors (newest fund)

Bacon turned every $1 of outside investor capital into $61 by the end of his run. That’s incredible. But were his returns due to broad market forecasts and large global bets? Or were they a product of a longer-term trend following system?

Global Macro = Trend Following?

The Barron’s article features Avi Tiomkin, an adviser to global macro hedge funds. According to Tiomkin, these impressive returns were due to trend following / momentum strategies. Not pitch-perfect correct global macro hypotheses.

He says, “Many legendary macro hedge funds managers were really momentum players following trends.”

Regardless, Bacon’s achievements in the markets are historical. He created vast wealth for his investors.

The Liquidation Trend: Bacon’s Not Alone

Reading the piece on Bacon made me think about the broader hedge fund industry. What were the trends like at a 30,000ft view? With the S&P up near 25% YTD, there’s bound to be managers closing shop.

And there were. A quick Google search led me to this article by Pensions & Investments. The article notes that hedge fund liquidations have outpaced hedge fund openings for four straight quarters. Granted this report was from September 2019. But recent enough to remain valid.

The Struggle is Real

There’s reason to worry for the hedge fund industry. Investors aren’t willing to accept the 2/20 fee structure. And why should they when they can buy the S&P index ETF for 0.09% expense ratio?

It’s harder to raise money in today’s hedge fund industry. Don’t believe me? Ask Peter Lynch’s replacement, Jeffrey Vinik. Before starting his own fund, Vinik oversaw Lynch’s pride and joy; the Magellan Fund.

Vinik had no problems raising money for his first fund, which he launched in 1996. According to this Reuters article, Vinik raised $800M on launch day. Not bad!

Yet this time around, in his quest for $3B in assets, Vinik fell short. Way short. All he had to do, Vinik thought, was to meet with 30-40 pension funds and wealthy individuals and he’d have his $3B. He got a paltry $456M instead.

Hedge Funds to Family Offices

The new fad for hedge funds is to close shop and run internal / founder money. There’s no benchmarks to hit, no outside investors to worry about. Just an internal team running a single pool of concentrated wealth.

Some recent examples of this shift include Highfields Capital Management and Omega Advisors.

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Movers and Shakers: Schwab 1, TD Ameritrade 0

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It’s happening. As of 3:00AM PST, Charles Schwab announced its acquisition of TD Ameritrade. The price tag? A cool $26B. The move marks one of the largest consolidation efforts in the history of the discounted brokerage industry. Here’s a quick snapshot of the new combined company:

    • 24 million brokerage accounts
    • More than $5 trillion (with a t) in client assets
    • $17B in combined annualized revenues
    • $8B in combined annualized pre-tax profits

That’s a lot of fun coupons!

So far both companies seem to enjoy the new living arrangements.

Schwab’s (SCHW) chart shows a breakout above the 50MA, 200MA and downward trending channel:

TD Ameritrade’s (AMTD) chart shows strength since rumors surfaced in late October. It’s stock price blew through the 200MA and the 50MA:

Let’s get back to the press release for more details on the transaction.

The merger is expected to be an all-stock deal. If the deal works, AMTD shareholders will receive 1.0837 Schwab shares for each AMTD share. This represents a 17% premium over 30-day average price.

Synergies, Synergies, Synergies

According to the press release, the deal should be 10 – 15% accretive to SCHW earnings and 15 – 20% accretive to SCHW operating cash flow after three years.

On top of accretive top-line synergies, SCHW anticipates 18 – 20% reduction in expenses. This would result in $2B in savings.

A Better User Experience

The SCHW & AMTD merger creates one of the best brokerage experiences in the industry. Both firms are notorious for their client offerings and support services. For example:

    • SCHW ranked #1 in Customer Satisfaction by J.D. Power and ranked #1 Broker Overall in 2019 Investor’s Business Daily survey
    • AMTD ranked #1 for Best Online Broker in 2018 and ranked #1 in Overall Broker in Stockbrokers.com 2019 Online Broker Review.

Both SCWH and AMTD users should welcomet the merger with open arms.

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Resources of The Week: John Malone & Meir Statman

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We’re in the season of giving. You think we’d let you go Thanksgiving week without giving you two investing resources? How else will you drown out the political banter at the dinner table this week? We’ve got an interview with media legend John Malone and a podcast with Meir Statman.

Malone on Markets

David Faber of CNBC sat down with John Malone to discuss the media investments, streaming wars, cable cutting and more. For what it’s worth, I think it’s CNBC’s best interview that I’ve seen. Faber is an excellent host who knows how to ask great questions and then get out of the way.

Malone’s one of the greatest allocators and investors of all time. The interview is an hour long, but well worth the time. I’m on my second trip through.

Stocks, Watches and Roses

Equity Mates Investing Podcast released their latest interview with Meir Statman. Statman’s an expert in behavioral finance and author of the book Finance for Normal People.

Here’s the run-down on what Meir discusses (via EMIP website):

    • The difference between a rose, a watch and a stock
    • The major cognitive bias that investors fall victim to, and how to avoid them to improve your investing
    • How to make sure you’re not eaten by the lions of the market
    • What the ‘greater fool’ means, and how you can take advantage in your investing

There’s a chance I pick up Statman’s book over the next few weeks. If so, I’ll make sure to leave a review in a future Value Hive.

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Idea of The Week: More Value South of The Border

I’ve been on a Mexican-equity tilt over the last month. I don’t know if it’s because I spent last month’s Value Ventures uncovering two value plays in Mexico, or recency bias.

Nevertheless, this week’s IOTW comes from Mittleman Brothers Investment Management (MIM). I like reading their Global Value Equity Report each quarter. This quarter’s letter mentioned the Mexican company TV Azteca (AZTECA/CPO).

Mexican Broadcasting

TV Azteca provides Spanish-language television programming. Like most Spanish TV broadcasters, AZTECA’s share price hasn’t done well. The stock’s down 86% over the trailing 5 years. Grupo Telvisa is down 57%, Atresmedia, 60% and Viacom 64%.

Despite sector weakness, MIM remains a believer in linear over-the-air (OTA) TV. Yet even if they’re wrong, AZTECA’s taking steps to diversify its assets. Here’s a few examples from the MIM letter:

    • Mexican Liga MX football team Atlas of Guadalajara, bought for $50M in Nov. 2013, est. worth $60M today.
    • Mexican Liga MX football team Monarcas Morelia, bought in 1996 est. worth $70M.
    • 40% stake in Azteca Comunicaciones Colombia est. worth $40M.
    • 100% ownership of a new fiber optic network in Peru called Azteca Communicaciones Peru est. worth $60M.

For those doing the math at home, that’s an asset value around $230M, or $0.08/share. That’s double the current share price.

Mittleman’s Past Success in Mexico

Mittleman Brothers is comfortable investing in Mexico. The firm’s generated healthy returns from Mexican companies like Telmex, Grupo Radio Centro and Cemex.

MIM still thinks the AZTECA thesis is in tact. With the stock trading at 50% to its asset value, might be an interesting idea.

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That’s all I got for this week. Shoot me an email if you come across something interesting this week at brandon@macro-ops.com. Have a great Thanksgiving holiday.


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Pubs vs. Tourists, Spin-offs and Interviews

Thanksgiving’s right around the corner. Can you believe it? Turkey, mashed potatoes, gravy, and TSLAQ arguments. What else am I missing?

Anyways, there’s a ton of content for y’all this week. We’ve got a few more Q3 letters to share. A new spin-off from a major outdoor brand. valueDACH’s two-part interview with Guy Spier, and more!

Before we jump in, make sure to subscribe to this newsletter. You’ll receive Value Hive every week, completely free. Straight to your inbox.

Let’s feast!

November 20, 2019

Taleb’s Turkey: For the most part, turkeys live good lives. That is until that day comes. After reading Nassem Taleb’s book Black Swan, I can’t help but think of this chart while feasting on Thanksgiving dinner:

A turkey’s life isn’t robust. Just like LTCM’s historic collapse, some things look like sure bets (like a turkey living past Thanksgiving) until they aren’t.

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Investor Spotlight: GreenWood Investors & Hayden Capital

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This week we’ve got two killer letters from Greenwood Investors and Hayden Capital. Each letter offers investment ideas, psychology lessons and even a book recommendation.

Let’s dive in!

GreenWood Investors: Pent-up Alpha

GreenWood Investors, managed by Steven Wood & Chris Torino, is up 2.30% YTD (as of 10-31). In their Q3 letter, Torino discusses long-term thinking, a couple European stocks and Boeing. After recent underperformance, GreenWood remains optimistic.

Torino believes GreenWood, “holds the future in their hands.” And the future looks bright.

The Corner of Dead Money & Unpredictability

Dead-money. The term often used to describe an investment which goes nowhere over long periods of time. The investment is ‘dead’ because it’s not earning anything in capital appreciation. Plus, that money could be invested elsewhere in a more, non-dead, investment.

Torino expresses the idea of dead-money through GreenWood’s Exor (EXOR) investment. He says Exor is, “a prime candidate of a company that can at times go for long stretches where it may seem like nothing is happening from a fundamental perspective;”

So how do you combat dead-money? Invest in exceptional allocators. Builders (emphasis mine)

“However, it is a refreshing reminder that putting capital in the hands of managers whom we trust, and have significant skin in the game, will compound the underlying value of the businesses when the market is least expecting it.”

Exor still trades at a 28% discount to NAV.

The Pub vs. Tourist Approach

We’re huge fans of Rory Sutherland at Macro Ops. Sutherland’s book, Alchemy, didn’t have cash flow equations. It didn’t mention LTV/CAC ratios. Yet it was one of the best investing books I read in 2019.

How so? Via the pub vs. tourist example.

Torino discusses this framework of customer acquisition and retention in the letter. It’s a great mental model for thinking of the business/customer relationship.

The Pub Approach: “The business makes less money from people on each visit but likely generates significant trust and more profits in the long-term.”

The Tourist Approach: “The company attempts to gouge the customer on a single visit or short-term contract, and is thus less trustworthy.”

Torino notes of a simple, yet powerful investment strategy. Long the pubs, short the tourists.

Long Leonardo, Short Boeing

Torino gives readers an example of the long/short pub vs. tourist strategy in the letter. GreenWood is long Leonardo and short Boeing. Let’s find out why.

Short the Tourist: Boeing (BA)

GreenWood went short BA in late September when, “it became clear Boeing would not meet its early Q4 target for FAA approval of the 737 MAX and refused to admit the MAX had a hardware problem, not just a software problem.”

Boeing failed to think about the long-term prospects of their business. They chased short-term earnings beats. Their time-frame resulted in wonky airplanes, shoddy software, and untrained pilots.

Torino offers a great example at BA’s tourist thought process (emphasis mine) :

“At the end of the day, BA’s core-competency should be to build safe and reliable aircraft. It has failed to do so in the case of the MAX and it continues to insist of a reckless approval pathway that ignores the need to retrain pilots in a simulator, because it would impact operating earnings ~5%.

Long the Pub: Leonardo (LDO)

GreenWood’s thesis is simple. LDO’s recent heavy investment should grow its backlog and improve their cash conversion profile. Second, the company won “very demanding” contracts with US DoD. Third, Leonardo is nearing certification for “the first civil tiltrotor in history”.

In GreenWood’s eyes, the company’s “taking substantial market share and is moving into a period of harvesting its major investments made a few years ago.”

All this coming “when investors are not paying attention.”

If you haven’t already, give Steven a follow on Twitter.

Hayden Capital: Insight Arbitrage

Fred Liu runs Hayden Capital. The fund returned -6.02% for the quarter. YTD the fund is up 20.75%. Liu spent most of the letter discussing social commerce, how companies use it, and the US’s slow adoption.

Let’s dive in.

The Dollar Auction: Investing in Money-Losers

The Dollar Auction is an economics game in which people bid on a $1 bill. The winner is the highest bidder. Yet there’s a catch. In this game, the second-highest bidder loses the amount that they bid.

Now one would think … “If they’re bidding on a $1 bill, wouldn’t the winner just bid $1?”

Not so fast. Liu explains that, “almost always, the end result is that the winning bid will surpass $1.

But why?

According to Liu, it happens “as the bids rise and the bidders’ incentives shift from trying to make a profit to minimizing their losses by not being in second place.

Liu argues that this game is going on in the private capital markets. “Private markets”, Liu asserts, “have been willing to fund these companies [questionable models, winner-take-all], providing the capital to make these even-higher bids.”

What will happen when the tide goes out and investors are caught plowing capital into money-losing enterprises?

The game might be up for those investors. The ones chasing unicorns without a care in the world of eventual profitability.

Social Commerce: Capturing Monetization

People like shopping. But people love shopping with their friends.

Companies such as Poshmark are taking advantage of this social commerce phenomenon.

Liu notes that companies (and apps) like Poshmark are in the business of user engagement. They want your eyes glued on their app all-day. Poshmark’s average engagement per-user is 23-27 minutes/day. That rivals Facebook and Snapchat’s 27 minutes.

Yet user engagement is meaningless without user retention (i.e., stickiness).

Liu makes this point, saying, “By keeping users engaged, it improves the user retention rates, and more importantly drives monetization.”

Gamifying Discounts

Liu’s commentary on the gamification of company apps was my favorite section of the letter. Gamifying apps increase user engagement and retention. And according to Liu, many companies use this as a cheap customer acquisition tactic.

The letter provides examples from companies such as Pinduoduo, Taobao, Lazada and Shopee. Check out the Lazada example:

Users literally swipe their screen to ‘slash’ the product. If they get enough of their friends to slash the same product, the price could drop to zero. It’s an ingenious way to grow your brand’s audience. What’s one free protein powder compared to 31 new slashes (users on the app)?

Stocks Mentioned

Hayden sold out of their Credit Acceptance Corp (CACC) position in Q3. The stock generated a 26% annualized return since initial purchase. Not bad!

Why are they selling? Here’s Liu’s own words:

“The remaining pool of potential customers are going to be a tougher sell (there’s a reason they haven’t already joined the program), implying at most 60% upside in its dealer relationships. Volumes per dealer may increase … but this is likely to be short-lived and will return to structural norms afterwards.”

Finally, Hayden Capital is looking for two interns for the Spring semester. If you or someone you know would be a great candidate, shoot Fred an email. While you’re at it, give Liu a follow on Twitter.

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Movers and Shakers: Icahn’s Plan & Sam Zell’s Purchases

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Carl Icahn and Sam Zell are two investing legends. Both investors are in the spotlight this week. Icahn’s trying to negotiate a mega-deal between two well-known companies. Zell’s buying dirt-cheap oil assets for pennies on the dollar.

Icahn’s Proposed Marriage

Icahn wants to combine HP and Xerox. To accomplish his mission, he’s bought 10% of Xerox and nearly 5% of HP (ticker: HPQ). If anyone can get the deal done, it’s Icahn.

Here’s what we know so far:

    • Xerox offered $33B in a cash + stock offer for HP
    • HP confirmed the bid, but did not disclose the offer price

HP is more than 3x the size of Xerox. But according to Icahn, the deal is a “no brainer” for Xerox.

What Icahn Sees

Icahn thinks a merger between HPQ & XRX is “in the best interests of both sets of shareholders.” He notes the merger would:

    1. Give the potential for cost savings
    2. Market a more balanced portfolio of printer offerings

The old-school corporate raider’s done a deal like this before. Last June, Icahn gained a seta on Caesars’ (CZR) board. He then initiated a $17.3B merger between CZR and smaller-sized peer, Eldorado Resorts.

First Glance at Both Companies

HPQ is a great company trading at an attractive price. You can buy the business for 7x earnings and 6x EBITDA. That’s not bad considering HPQ generates around $3B in FCF annually (10% FCF yield).

XRX isn’t as cheap as HPQ on paper. The printing company trades for 14x earnings and 8x EBITDA. They generate close to $1B in FCF (11% FCF yield).

Sam Zell: Fishing Where They Ain’t

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Sam Zell is a magnate in the distressed investing space. A multi-billionaire, Zell made his fortunes buying assets when nobody else wanted them. This Forbes article outlines his investing strategy:

    1. Look for bargains: assets that are out of favor or in bankruptcy
    2. Ensure that those assets are of high intrinsic quality
    3. Structure the deal so that you pay as little in taxes as legally possible

So where’s he looking now? The US Oil sector.

In a recent Bloomberg interview, Zell revealed he’s buying assets in California, Colorado and Texas. His reasoning? Capital’s drying up and assets are cheap:

“The amount of capital available in the oil patch is disappearing.”

Zell’s providing capital to companies that are expecting problems. In other words, these are proactive capital infusions, not reactionary investments. Zell likens the current oil and gas downturn to the real estate market in the 1990s.  Zell said, “you had empty buildings all over the place, nobody had cash.”

Distressed Ideas in O&G

There’s plenty of distressed companies to go around in the O&G market. Let’s dive through a few names and their valuations.

But I’ll warn you. O&G companies, especially in downturns, take on a biotech stock role. They burn through cash, leaving nothing for their shareholders.

1. Sandridge Mississippian Trust (SDT)

SDT trades at 1x earnings and 0.39x EBITDA. The company has no debt, nearly $3M in net cash and a whopping 70% dividend yield. It’s also trading at an 85% discount to book value.

2. Rosehill Resources (ROSE)

ROSE is a *gulp* former SPAC. It trades for 0.42x earnings and 3x EBITDA. They have $360M in net debt, 68% pre-tax margins and a 15% discount to book value.

3. TransGlobal Energy Corp. (TGA)

TGA trades for 2.5x earnings, 2x working capital, and around 1x EBITDA. They have $19M in net debt and generated $0.13/share in cash flow last quarter. Given their low debt-to-EBITDA ratio (0.19), the company intends to leverage strategically to acquire and grow their business.

Dumpster Diving

Zell made billions dumpster diving. But that’s what it is — a large dumpster. There’s loads of garbage to sort through. But if you’re prudent, you can find diamonds in the rough oil.

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Resource of The Week: valueDACH & Guy Spier

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valueDACH’s content gets better and better. This week they’re back with part deux of their interview with Guy Spier. Spier covers a variety of topics, including:

    • Allocating time to think alone
    • How many companies he researches per year
    • Factors that make him dive deeper into a company
    • Limits to number of holdings
    • When and why he sells a company

This is an interview you’ll want to watch again. There’s that much wisdom in it.

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Idea of The Week: An Explosive Spin-off

Last week, American Outdoor Brands (AOBC) announced its intentions to spin-off the ammunition manufacturer, Smith & Wesson. The spin-off leaves AOBC with their outdoor products and accessories business.

The majority of AOBC’s revenues come from their ammunition sales. In fact, AOBC’s original name was Smith & Wesson. Yet the recent surge in gun control laws (and overall sentiment around guns) prompted the company to change their name. And subsequently their business strategy.

As a standalone products and accessories business, AOBC should generate around $160M in annual revenue. This is in stark contrast to Smith & Wesson. AOBC’s expecting $600M in revenue and $90 – $105M in EBITDA within the first 12 months post-spin:

Important Dates for Spin-off

    • Date of Form 10 Filing: 1H 2020
    • Finalized Spin-off Date: 2H 2020

Here’s AOBC’s slide deck if you want more information.

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That’s all I got for this week. Shoot me an email if you come across something interesting this week at brandon@macro-ops.com.


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Q3 Letters A Plenty, LEGOs as Investments and More!

Value Hive took it’s bye week last week. Now we’re back, healthy and ready for the second half of the season.

We’ve got a ton of content for y’all this week. More investor letters. SoftBank’s hilarious corporate presentation. Interviews with value managers, and more!

Before we jump in, make sure to subscribe to this newsletter. You’ll receive Value hive every week, completely free. Straight to your inbox.

Omaha-set-hut!

November 13, 2019

Incredibly Pessimistic Opportunities (IPOs): Well it’s official. The Uber lock-up period is over. Insiders are free to dump their shares of the money-losing enterprise. This got me thinking, “How would investors fare if they bought every IPO and held it for five years?”

Luckily, Dan Rasmussen of Verdad Capital figured that out. And the results aren’t good. In fact, you’re better off investing in 5x leveraged companies on the verge of bankruptcy. Think about that. It’s no wonder more companies decide to stay private.

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Investor Spotlight: Two Big-Name Activists

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Two big-hitting activist investors shared their quarterly letters last week. Third Point Capital and Greenlight Capital. David Einhorn runs Greenlight. Dan Loeb, Third Point. . Their activist strategy is unique in today’s passive, quant-driven world.

Let’s dive in!

Third Point Capital: Generating Alpha in a Passive World

Loeb’s fund lost 0.2% in Q3. For the year the fund remains positive, up 12.7%. Loeb attributes much of his yearly returns to his positions in Baxter, Nestle, Sony, Campbell’s, Southeby’s and United Technologies Corp.

Activism in Loeb’s Words

Most of the letter revolves around Loeb defining his activist strategy. He initially outlines the purpose of activism in markets (emphasis mine):

“Activism allows us to create our own catalyst in concentrated positions where, by definition, we have a differentiated view of a company’s potential value based on our intervention.”

Activism in a Passive World

Loeb believes this shift towards passive investing presents more opportunity for activist investors. Loeb remarks that quants are, “making it more difficult to generate equity alpha as their algorithms evolve.” This viewpoint isn’t discouraging Loeb — it’s invigorating him.

Third Point has the highest percentage of assets in activist holdings since inception. Greater than 40%. Behind this increased exposure is Loeb’s reliance on Third Point’s six strengths:

    1. Successful track record and reputation for change
    2. Wide range of engagement techniques with companies
    3. Ability to invest globally
    4. Deep sector expertise
    5. Sophisticated hedging strategies
    6. Large capital base with a substantial portion of long duration capital

The strategy’s worked so far. Third Point’s top five profit generators are all activist positions.

Specific Stock Ideas

Loeb discussed three of his stocks in the letter: Sotheby’s (BID), EssilorLuxottica (EL) and Sony (SNE).

    • Sotheby’s (BID): Sale

Loeb sold the final stake of BID during the quarter. The sale marked a six-year investment in the company. Loeb helped transform the company from “an old master painting desperately in need of a restoration” to a 61% return for his fund.

    • EssilorLuxottica (EL): Long

Loeb’s Thesis (from the letter): Compelling end-market growth in a defensive category. Strong market share. High returns on invested capital. Potential for incremental capital deployment and competitive moats created by brands and technology.

Loeb thinks EL can earn over 8 euros-per-share in 2023, which would double its 2019 figure.

    • Sony, Inc. (SNE): Long

We’ve highlighted Loeb’s position in SNE in past Value Hives. Unfortunately for Third Point, Loeb’s recommendations fell on deaf ears. After undergoing a strategic review with Goldman Sachs, SNE came back with nothing to change.


Greenlight Capital: Early, Not Wrong on NFLX

David Einhorn is one of my favorite investors. Not because he plays poker. Not because he’s written great books. And not because he shorts TSLA. Einhorn is one of the smartest investors in the game.

Safe to say I’m rooting for his continued success.

Greenlight returned 5.6% in Q3 bringing YTD returns to 24%. Most of Einhorn’s gains came from the long-side of his book. Now he’s back in the green with his NFLX short.

From Shares to Puts: A NFLX Short Story

Einhorn’s history with NFLX is extensive and well documented. For a while Greenlight had little to show for their short position. That is until recently. NFLX fell from $367.32 to $267.62 during Q3, marking healthy gains for Greenlight’s fund.

Einhorn expressed his short via selling shares outright. But, NFLX’s meteoric run in 2018 forced the fund to convert to put options. This move ensured a positive-ske asymmetric return profile for Einhorn’s position. While he didn’t say in the letter, we’re assuming these are DOTM, long-term puts.

Accounting for Terrible Shows

Einhorn went beyond the cash-burn, deeper in the rabbit-hole. The rate at which NFLX amortized their content differed from its length in relevance. Here’s Einhorn’s take (emphasis mine):

“NFLX structures its site to emphasize new releases and popular licensed content while library content requires an effort to watch. And yet, NFLX amortizes its content over up to 10 years, inflating GAAP margins by deferring expense recognition.

In other words, NFLX amortizes their content longer than the show remains relevant (let alone popular).

Einhorn goes further, saying (emphasis mine), “While we enjoyed Aziz Ansari’s Right Now, we suspect 80% or more of its lifetime view has already happened. How and why does something like that deserve a multiple-year accounting life?

So you can’t trust NFLX’s GAAP accounting figures. The $3B/year cash burn is a more realistic temperature of the company’s financial health.

When It Pays To Forget

My favorite part of Einhorn’s letter was the story of his 2008 subordinated debt investment. Greenlight bought subordinated debt in Guaranty Bank in 2008. Soon after, Guaranty Bank made a large investment in “AAA-rated tranches of Alt-A mortgage pools”. I know. Great timing, right?

After the s*** hit the fan, the FDIC went around seizing banks that held such tranches. Guaranty Bank was no exception.

Fast forward a decade. Einhorn gets a call that the FDIC wants to send him a check for the liquidated subordinated debt.

I’ll let Einhorn take us home … “In September, the FDIC contacted us and more or less asked where to send the money. It was so odd that the running joke in the office was that it was a scam. But ultimately we received the funds … and so far there have been no follow-up requests fro a ‘foreign dignitary’ with further instructions.”

The ol’ set-it-and-forget-it approach strikes again!

Musk-Watch Twitter Drama

Elon Musk and Einhorn exchanged virtual twitter-jabs late last week. You can find the exchange here. In short, Musk read Einhorn’s Q3 letter (which discussed their short on TSLA) and responded to Einhorn via open letter.

Einhorn read and responded with hilarious questions and comments. Here’s a couple of my favorite:

    • “I think facility visits would be fun (can we start in Buffalo?). I might learn the difference between your alien dreadnought factory and cars made by hand in a tent.”
    • “In September 2018, you said the receivables doubled up because the quarter ended on a Sunday. That answer wasn’t very satisfying at the time. This year, the quarter ended on a weekday. Sales are lower than they were a year ago and yet, the receivables stayed high. We are curious.”

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Movers and Shakers: A Surprising Alternative Asset Class & SoftBank’s Defiance

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We’re familiar with alternative asset classes. The fancy cars, antique paintings, gold watches. We know those. But there’s another, more attractive alternative asset class out there. And it’s hiding in your attic (or children’s closet).

LEGOs. Yep, the instruments of death that spike you at midnight actually serve a purpose.

LEGO – The Toy of Smart Investors reveals that LEGO collectibles outperforms:

    • Large-cap stocks
    • Bonds
    • Gold
    • And other alternative asset classes

Better still, LEGOs aren’t exposed to market, value, momentum, or volatility risk. It’s a true uncorrelated asset class.

According to the report, LEGOs return an average 11% per-year with positive skew of 0.7.

Yet the report concludes that outperformance isn’t statistically significant against equity markets. But LEGOs are in fact a better asset class than automobiles, wine, and art.

LEGOs also perform more like small, illiquid stocks than anything else. This suggests that a liquidity / size return premium remains true across asset classes.


SoftBank’s Rough Quarter: Getting to Breakeven

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SoftBank had a rough third quarter. It’s no surprise for those that have followed the WeWork drama. Yet despite SoftBanks shoddy WeWork underwriting, the firm doubled down on its stance.

Masayoshi Son misjudged Adam Neumann, saying, “I overestimated Adam’s good side. His negative side, in many cases, I turned a blind eye, especially when it comes to governance.

Willful blindness if I’ve ever seen it. Son looked past Neumann’s red flags, and instead, focused only on the positives. That’s a recipe for disaster.

This isn’t stopping Son from fundraising for another fund. Yep, as if the WeWork debacle wasn’t enough of a tailwind for capital raising. The NY Times article notes that SoftBank wants to raise $100B for its next fund. This new fund will focus on artificial intelligence. Son says he’ll also invest heavily in AAPL, MSFT and similar Japanese companies.

The ‘Getting Back To Breakeven’ Fallacy

What scared me most from this interview was Son’s philosophy on ‘getting back to breakeven’. He mentioned this idea in regards to his WeWork investment, saying (emphasis mine):

“We may not be able to make a big gain, but at least we may be able to get back our investment.

This is good old-fashioned revenge investing. Instead of admitting a valuation mistake, taking the loss and moving on, Son wants to get even. He plowed another $9B into WeWork. The farther the company’s value drops, the more hell-bent Son will be on getting back to even.

Par for the Venture Capital Course

Son’s made one great investment, Alibaba. That one investment generated $100B for SoftBank. Since then, not much progress. While Son faces scrutiny over his recent hitless streak, it’s important to realize the dynamics of venture capital. This is par for the course. You make one great investment. That investment makes up for all the losers and then some.

It’s unfair to judge Son based on every single investment he makes. He’s investing in dreams at the edge of innovation. Most will fail.

Fun With Slides

SoftBank is a $100B investment fund. You’d think at that asset level, their slide deck would look somewhat professional / put together. Well, I hate to disappoint. Check out this beauty …

Amount and time. That’s all the investor needs. We don’t need numbers or specific dates. All we need to know is that over time WeWork’s profit amount will grow. Simple as that.

And my other favorite …

Thank goodness the “future” period starts at the exact bottom of WeWork’s EBITDA. Unlike the first graph, we don’t get a time frame, nor do we get dollar amounts. Just an x-axis with zero in the middle. Turnaround time? Pssshhh, why get specific when you can be opaque?

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Resource of The Week: Dave Waters Alluvial Fund Presentation

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Dave Waters of Alluvial Capital, LP released his Q3 letter. In it, he included a video presentation during his time at Willow Oak.

You can read the letter here.

The video explains Waters’ fund, his unique approach to investing and where he likes to find value. Waters starts speaking around the 3-minute mark.

In his spare time, Dave runs the website OTCAdventures.com. He posts unique, off-the-beaten-path ideas. Most are micro-to-nano cap stocks with low liquidity. My favorite!

Also, give Dave a follow on Twitter. He posts great content. You won’t regret it.

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Bonus Round: More Letters!

Thought we’d take a week off and only give you two investors letters? Get outta here! Here’s a list of some of our favorite letters over the last couple weeks.

Quote I Liked: “I’m not looking for hundred-baggers; that’s a bad base rate. I’m looking for two-baggers over three year horizons. The watchlist is designed to consistently surface those opportunities.”

Stocks Mentioned: INS, CTEK, QRHC, TBTC, SIFY, PSSR and SCND

Quote I Liked: “Evidence and reason both suggest that investing in small individual companies with discrete opportunity pathways that can be researched, analyzed, tested and observed, and whose shares can be acquired at discounts to their future cash flows, offers a better and safer alternative to compound capital faster than the rate of inflation, after tax, than the mass index fund approach.”

Stocks Mentioned: TOO, GTN, CAMB

Quote I Liked: “Given its importance in valuation, growth should be a key metric that value investors use to estimate the value of securities. The first question that should come to mind when analyzing a cheap stock is, ‘What is the potential growth rate of cash flows?’”

Stocks Mentioned: IAC, YELP, AER

Quote I Liked: “Amidst this negative backdrop, what do I want to own? Since we started the fund, our portfolio companies have ranged somewhere between undervalued to extremely undervalued. They are generally recession resistant businesses with consistent cash flows and solid balance sheets.”

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That’s all I got for this week. Shoot me an email if you come across something interesting this week at brandon@macro-ops.com.


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