What Are The Odds?! — Late Tuesday night/early Wednesday morning, the Washington Nationals defeated the New York Mets 11-10 via a walk-off homer. Walk-off home runs happen all the time. But can you guess the Nats win probability entering the 9th inning with one man out? Answer down at the bottom!
Investor Spotlight: Burry & TLRD are 13-D Official (and his love for Japan)
GIFs by tenor
Last week we highlighted Michael Burry’s public complaint over TLRD’s lack of value creation. Burry demanded a $50M buyback, continued reduction in debt and elimination of the dividend (costing $36M per annum).
This week he put (more) money where his mouth is.
Burry filed a 13D with TLRD raising his ownership take to 2.6M shares (5% outstanding).
Can Burry squeeze out returns from this melting ice cube before time runs out? He’s certainly hoping so.
Burry Loves Japanese Stocks
Making sure he stays in the news, Burry revealed another tidbit. This time, he tells us where he sees value outside the United States. The answer: Japan.
What does Burry see in Japan? Alex released his Friday Musings with some data to backup Burry’s bullish tilt.
Alex noted that Japan’s forward P/E ratio is one of the cheapest in the world (12.3). On top of that, Japan is one of only two major economies (Canada being the other) seeing positive economic surprises.
Alex also explains that Japanese earnings expectations are fully reset — which he argues is a great thing for forward equity returns.
While we’re at it, give Alex a follow on Twitter. He posts (in his words) mindless drivel about markets and other things.
Community Adjusted EBITDA: Standard EBITDA at first glance, but the company adds “building and community level expenses”. This is (of course) the company’s largest expense and includes tenancy expenses, utilities, internet, salaries and cost of building amenities.
Adjusted EBITDA before Growth Investments: Standard EBITDA with a bonus exclusion of growth expenses such as SG&A, market development and pre-opening community expenses.
In other words, WeWork looks great if you remove all their operating expenses and costs of doing business. Who else is backing up the truck with me?
This week we profile two ideas: Keweenaw Land Association (KEWL) and Red Robin Gourmet Burgers (RRGB). One unique asset trading at a discount to land value and the other a turnaround project.
“They Aren’t Making More Land!”
We originally stumbled upon KEWL in a Focused Compounding write-up. The idea later resurrected on Neto’s Notes. After seeing the idea twice, we knew we had to do some digging. So what’s to love about KEWL?
For starters, it fits the bill for a great value investor’s stock:
Overlooked and underfollowed (trades on the OTC market)
Rather illiquid trading volume (around 8K shares per/day)
Discount to asset value (discussed below)
Valuing a Timber Company
Neto takes a differentiated approach to intrinsic value, opting for an acre-per-share metric. The math is simple:
Think of this as our “multiple” for share price valuation. Luckily for us, KEWL appraises their land every three years, with the most recent appraisal conducted in 2018.
The 2018 appraisal valued the land at $160M (or $870/acre). Using Neto’s acre-per-share multiple we can easily figure out an intrinsic value of the land:
$870/acre x 0.14 (acres-per-share) = $112/per share of timber.
Long Term Drivers
Timber is a unique asset that’s found in many Ivy League endowment funds. The asset class offers uncorrelated compared to other investment options and sports long-term tailwinds for appreciation.
Neto agrees. Check out his take on timber as an asset:
The only thing standing in KEWL’s way of realizing intrinsic value is their debt. Neto argues that the debt is more than manageable. Assuming $870/acre value of timber, the principal balance is less than 10% of the value of the timber.
A Turnaround at Red Robin (RRGB)
Red Robin makes a great burger, but as an investment, not so much. Shares are down 35% since Jan 2018. The driver of underperformance is simple: people aren’t going to their stores.
RRGB’s experienced declining same-store sales three out of the last four years (2017 being the exception). On top of that, as the CorpGov article notes, same-store guest counts dropped 6.4% over the last few quarters.
So what makes Red Robin an interesting value investment idea? There’s two catalysts:
The company is cheap
The new CEO knows what he’s doing
Red Robin is Cheap
The company trades around 5x 2020 EBITDA and less than 1x sales. There is an argument to be made that its cheap for a reason — and we don’t disagree.
Restaurants don’t make the best investments. Maybe they deserve to trade at such a low multiple?
Given the poor performance and deteriorating brand, it doesn’t make sense to compare RRGB to other fast/casual dining competitors (SHAK, MCD, SBUX, etc.). They’re not on that level.
Paul J.B. Murphy III is a Stud
The data suggests it’ll take quite the effort to turnaround RRGB. Picking Paul Murphy III is a good start.
Murphy’s held two leadership roles in the past, both generating positive returns for shareholders:
CEO of Del Taco Restaurants, Inc. (TACO)
Executive Chairman of Noodles & Company (NDLS)
Murphy led TACO through a SPAC IPO in 2015 through 2017. During that time, Murphy helped the taco joint deliver 11 quarters of sames-store sales growth, generating over 30% returns for shareholders (15% CAGR).
After positive results at TACO, Murphy lept to NDLS in June 2017. He led the company to four straight quarters of positive same-store sales. Share prices rose over 50% while Murphy was at the helm (over 20% CAGR).
Can Murphy repeat his past success with RRGB? Time will tell. But if you’re a believer in his past success, 5x 2020 EBITDA smells like a cheap call option on his operational success.
This Day in History — On this day in 1789, the United States Congress established the US Treasury Department. Bonus points if you can guess who was the first to lead the department (answer at the end).
Investor Spotlight— Michael Burry Goes Activist
The man who sent The Short Heard ‘Round The World is at it again, this time with his keyboard. Dr. Michael Burry, manager of Scion Asset Management, penned two activist letters last week. The recipients of such an honor? Gamestop (GME) and Tailored Brands (TLRD).
Burry has reason to publicize his frustrations with each business. GME and TLRD share similar characteristics in that:
Both companies are bouncing around all-time lows.
Both companies have high cash balances.
Many investors consider both companies a value trap.
So what exactly is Burry demanding of management?
Burry’s Beef with TLRD
The famous hedge fund manager isn’t thrilled with TLRD’s capital allocation decisions, and believes capital should be spent buying back stock. TLRD’s retired over $400M in debt with cash from operations, which Burry applauds, but doesn’t think its enough.
Burry wants management to institute a $50M buyback while continuing to pay down debt.
He also wants the company to stop their dividend — a commitment that’s cost the company nearly $36M per year.
If It Looks Like a Duck …
Burry seeks a more aggressive buyback from GME’s management team — to the tune of $238M. If Burry gets his way, management would retire close to 80% of GME’s outstanding stock. Management’s already said they’d purchase stock up to $6/share, so current prices of $4 still appear cheap.
Yet, even if Burry fails to get his way, GME’s released ahip new website! This will surely increased shareholder value, right?
Movers and Shakers — EEI Shareholders Get Paid & Hedgies Pile Into NTDOY
Shareholders of Ecology & Environmental, Inc. (EEI) ended Wednesday with a nice little gift: a buyout agreement.
The company reached an agreement with Candian-based WSP Global, Inc., a private engineering firm. The deal still needs approval from EEI shareholders, but we think they’ll like the price.
If the deal goes through, WSP will acquire all outstanding shares of EEI for $15 a piece — a nice 50% premium from Tuesday’s close.
Hats off to Peter Rabover of Artko Capital LP for winning big on his long thesis.
For a rear-view look into EEI, check out Adam Wilk’s thesis on the company (self-claimed cloner of Rabover on this idea). While you’re at it, give him a follow on Twitter. He posts great content.
Value Investing’s Newest Hotel
Similar in hype to the Madden cover athlete reveal, 2019’s Value Investing Hedge Fund Hotel goes to … wait for it … Nintendo (NTDOY)!
Since we live in the small, Harry Potter-style room that is value investing, it only takes a handful of funds to invest in the same stock to catch my eye. Remember when I said Adam Wilk sends money tweets? I didn’t lie:
One such Fund that’s long NTDOY is Scott Miller’s Greenhaven Road Capital. You can check out his thesis at the end of his latest quarterly letter.
What’s The Big Deal?
NTDOY is generating a lot of interest from value investors because, well, it’s a great business at a cheap price. The company sports industry-leading IP, zero debt on the balance sheet and management effectively allocating capital.
Along with the above features, NTDOY aims at capturing the smartphone market, a move that (if successful) will greatly increase the TAM to sell games, IP. etc.
I’m a simple man. Whenever I see a new blog post from Chris Mayer, I read it. In his latest post, Mayer offers two of his latest ideas: InterActive Brokers (IBKR) and Fairfax India (FIH-U:TSX).
What Mayer Sees in Fairfax
FIH-U is a holding company of a hodge-podge of businesses — some private, some public. According to Mayer, the “crown jewels” in FIH-U’s bag are:
Airport in Bangalore
IIFL, a financial company that’s had triplets.
Mayer concludes that since only one of the three pieces of IIFL trade on public markets, its difficult to get a sense of what the underlying value is of the whole. He also likes the management team and is a proponent of exposure to Indian equities.
Understanding Broker-Cash = Understanding IBKR
It’s been a rough go of late for IBKR. But hey, misery loves company, right? Mayer suggests lower interest rates have something to do with the decline in nearly all brokers (Schwab, TD, E*Trade, etc.). In fact, Mayer notes that all major broker stocks hit 52-week lows in August.
To get a closer glimpse into broker-cash and its relation with net-interest margin, Mayer turned to IBKR’s IR team. Here’s their breakdown from the last earnings call (from Mayer’s post):
Mayer believes IBKR has levers to pull to counteract various interest rate environments — and for that, he’s not selling:
The interview just shy of an hour long. Don’t be a millenial, watch the whole damn thing. Also, subscribe to Investor’s Archive’s YouTube channel. This isn’t a sponsorship — they just release fantastic content.
Who Won Twitter? — TA Predicts Hurricane Patterns
For all the Floridians reading, stay safe!
If you answered “Alexander Hamilton” to the This Day In History question, you are correct!
That’s all I got for this week’s Value Hive.
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