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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More Q3 Letters, A Takeout Bid and TechCrunch’s False Start

This world’s spooky. There’s lots of uncertainty in life. Yet there’s four things that remain true:

    • Death
    • Taxes
    • Bill Belichick owning rookie QBs
    • Value Hive producing killer content

Here’s what we’ve got in store this week. More of our favorite value manager Q3 letters. Tiffany receives a premium takeout offer. A 16-page article on everything Jim Chanos. TechCrunch has an ‘oopsie’ with SnapChat, and more!

Housekeeping: Some of you may have noticed we didn’t include the Idea of The Week section in last week’s letter. The reason is that we’re profiling at least 1-2 investment ideas with each quarterly letter we cover. Once the Q3 holiday season wraps up, we’ll presume with our normal content.

And if you haven’t already, make sure to subscribe to this newsletter. You’ll receive Value hive every week, completely free. Straight to your inbox.

Let’s rock and roll!

October 30, 2019

A Thief In The Night: What profession prides itself on deception, misdirection and charisma? No, I’m not talking about the CEO of Tesla Motors. I’m referring to magicians. This week’s trivia is simple. Which famous magician died on Halloween night?

You know the drill. House rules, no Google. Good luck!

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Investor Spotlight: Arquitos Capital & Massif Capital

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Last week we received two of my favorite letters: Arquitos Capital and Massif Capital. Steven Kiel (of Arquitos) and Chip Russell (of Massif) are exceptional investors. I had the pleasure of meeting Chip in Vail, CO. at the ValueX Vail conference. He’s a fantastic human and investor.

If I recall, he also beat me in corn-hole. So Chip, if you’re reading this. Yes, I am ready for a rematch.

Both letters offer thoughts on the markets and ideas on individual companies.

Let’s dig deeper.

Arquitos Capital: Staying Patient

Kiel’s fund returned -12.6% net of fees in the third quarter. YTD the fund’s returned -12.5%. Since inception (2012), Arquitos has compounded capital at an annual rate of 16.9%. That ain’t bad!

Kiel spends the letter discussing his three favorite ideas: MMAC, WED.V and SYTE. These are companies that Kiel would “own over the next decade even if there were no share price quoted.” That’s some serious conviction.

How can Kiel have that kind of conviction? Kiel believes the operations of each business provides potential exponential increases in value. He outlines this belief through his thesis on MMAC.

 

MMA Capital Management (MMAC)

MMAC is Arquito’s largest position. MMAC invests in debt associated with renewable energy infrastructure and real estate.

The company’s darn cheap.

It trades less than 4x earnings, 15% discount to book value and sports 24% ROE. Along with those figures, the company generated $22M in FCF last year. That’s good enough for a near 13% FCF yield.

What Arquitos Likes: High Returns on Capital

Kiel reveals one of the main reasons why he’s bullish on MMAC:

    • Generating high rates of return on low-interest debt

According to Kiel, MMAC recently borrowed up to $175M at sub 5% interest rates. The company will then use that debt to invest in MMAC’s solar lending portfolio. The solar portfolio has generated “better-than-mid-teens annualized returns over the past several years.”

For those following along, here’s what the equation looks like:

    1. Borrow $175M at <5% interest
    2. Invest the $175M into a portfolio generating >15% returns
    3. Print cash at ~10% return net of interest

Cherries on Top

The company halted their share buyback program to borrow the $175M. Once acquired, MMAC reinstated their buyback. If history is any predictor, MMAC could buy back 8-10% of their outstanding shares over the next year.

 

A Word on Investment Styles

Kiel ends his letter with an ode to Ben Graham. He notes that investment styles fall in-and-out of favor from time to time. Ben Graham-style value investing, unfortunately, continues to disappoint. Kiel reminds investors that, “The markets will be challenged in the future again, and these strong balance sheet types of companies will be a safe haven for stock investors.”

We just don’t know when that shift will occur.

 

Massif Capital: Gold, GrafTech and The Oil Markets

Will Thomson and Chip Russell run Massif Capital, which returned -7.47% in Q3. YTD they’ve returned -5.72%. Massif’s letter focuses on gold, a few shorts, GrafTech and an outlook on the oil industry.

The Oil Markets: Massif Sees Risk

Massif estimates that ~16M barrels of oil in the Persian Gulf are at risk due to potential conflict in the Middle East. The letter cites the troubles in Libya, Egypt and “a brewing conflagration between Syria, Russia, the Kurds, and Turkey.”

Massif notes that OPEC production is down ~4M barrels per day. US production in the lower 48 states is down. And US inventory levels are in a YoY deficit.

Yikes.

Pack a change of underwear if you’re investing in oil-related companies.

Gold as a Currency

Massif added their first gold miner stock last October. Since then, gold’s appreciated against the dollar more than any other ‘currency’.

Thinking about gold as a currency is interesting. Something I hadn’t heard of until reading this letter. Yet this rise in gold is a bit odd when compared with the other currency pairs.

Here’s Massif’s take on gold’s appreciation against other currencies (emphasis mine):

“Of the 32 currencies we track, seven have appreciated against the dollar, and gold has outperformed the others by more than 2x. This is a bit of an oddity given that the US Dollar and gold tend to move in opposite directions.”

And here’s a chart showing Gold vs. Negative Yielding Debt (via Massif Q3 letter):

You might be thinking, “that’s nice and all Brandon, but what stocks in the gold space should I look at?” Unfortunately I can’t answer that for you, and neither can Massif. But if you’re looking for a place to kickstart your research, here’s Massif’s current gold thesis holdings:

Massif sees a 38% average upside to these positions at an average gold price of ~$1,300/ounce.

Portfolio Review

Massif offers insight into part of their portfolio. I won’t provide all the details (as it would take up too much space here). But read the letter!

Here’s some of Massif’s current holdings:

Longs

    1. Diamond Offshore (DO)
      • Massif’s Take: “At today’s prices, our potential expected return has increased substantially, and we expect to average down to capture this reality … We expect to exit the position with a 10% – 15% annualized return three to four years from now.”
    2. Teekay Offshore (TOO)
      • Massif’s Take: “We wrongly viewed Brookfield’s involvement in the company, at the time of investment, as a positive. We expect to close out the position in the fourth quarter this year. We will incur a 28.9% loss in the position when we are bought out by BBU.”
    3. GrafTech (EAF)
      • Massif’s Take: “GrafTech is our largest position at the current time … At our average entry price, given the new timeline, we expect to exit the position in just shy of 2.5 years with an annualized return over the life of the position of 19%.”

Shorts: UNP, CSX, DE, NCLH

Closed Positions: Consol Coal Resources LP (CCR)

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Movers and Shakers: TechCrunch’s Whoopsie & Tiffany’s Payday

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Last week, technology website TechCrunch released Snapchat’s earnings results. This isn’t news, right?

Well, that is until you realize they released earnings AHEAD of Snapchat’s earnings call.

Pour one out for the formerly-employed TechCrunch editor. That writer would fail the delayed-gratification marshmallow test too.

This gaff brought up a lot of questions on “the twitters” as Alex likes to call it. People questioned the legality of releasing earnings figures to journalists ahead of the public.

Public companies do this all the time. Writers have articles waiting in the batter’s box. All they need is a couple bits of information so they can hit “Publish” before everyone else.

That would’ve been a hell of a short, though. Shortly after releasing earnings, SNAP’s stock fell over 18%.

Mind The Gap: Tiffany’s Gets a Bid

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Early Monday, luxury goods conglomerate LVMH threw its hat in the ring to buy-out Tiffany’s & Co. (TIF). LVMH isn’t messing around, either. Their offer? $120/share in an all-cash deal.

A successful deal would mark LVMH’s biggest takeover since buying Christian Dior for $7B. How do you top your biggest deal ever? You double it, of course.

Shares of TIF shot up on the news and currently trade at a premium to the $120/share offer. If the deal goes through, LVMH would pay close to 30x earnings, 4x sales and16x EBITDA for the company.

To all TIF pre-announcement bag-holders, I congratulate you. Cash in and buy your significant other a TIF bag with those winnings.

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Resource of The Week: Acquirer’s Multiple Podcast

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Tobias Carlisle’s podcast The Acquirer’s Podcast is quickly becoming one of the best. His most recent interview with Connor Haley is no exception.

Connor Haley manages Alta Fox Capital. The fund focuses on micro-cap and special situation-type stocks. Connor’s currently the #1 ranked contributor on MicroCapClub.com. He’s also a member of the elusive Value Investors Club website.

Also, do yourself a favor and give Tobias and Connor a follow on Twitter. They post great content.

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Bonus Round — Jim Chanos 16-page Article & Horizon Kinetics

Jim Chanos is the world’s most popular short seller. I always find myself learning something new whenever I listen to him speak.

Intelligent Investor Share Advisor released a 16-page special report on Jim Chanos. It’s a masterclass on how he started his fund, his strategy and more. It’s a gold-mine. The report was first released in 2014, yet only recently made its way across the value interwebs.

Also, Horizon Kinetics released their Q3 letter. Horizon packs their letters full of interesting macro thoughts, quantitative ways of thinking and more. This letter is no different.

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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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Investor Letters, Options Trader Wins Big and More!

This edition is LOADED with investor letters as we clear the deck for one of our favorites: Scott Miller. We’ll touch on some other things, such as a trader turning $700 into $100K+. Artko Capital continues to kill it. And Howard Marks discusses negative rates.

But we’re saving room for what matters most, fresh ideas.

Make sure to subscribe to this newsletter so you receive it every week, completely free.

Are you ready?!

October 23, 2019

Size Matters: Last week’s trivia prize was a shout-out and $1 Venmo from yours truly. We received a lot of feedback from last week’s Value Hive and the winner is … *drumroll please*

NOBODY!

That’s right. Nobody emailed the correct answer to last week’s question. That means we’re going double or nothing. Yep. Two whole dollar bills and two week’s worth of shoutouts is up for grabs. Here’s the question: What is the world record for the largest pumpkin ever grown?

House rules, no Google! Good luck!

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Investor Spotlight: Scott Miller Likes SPACs and South Africa

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Early last week, Scott Miller released his Q3 Investors Letter. Miller — who runs Greenhaven Road Capital — returned a hair below 1% for the quarter. Astute Value Hive readers know we don’t care about short-term performance.

We agree with Miller on this one. Quarterly performance is a blip on the long-term radar.

Before we dive into Miller’s new investments, let’s glance at his top four holdings (thesis descriptions are taken from letter, not my opinion):

    1. KKR & Co. (KKR)
      • Miller’s Thesis: A strong balance sheet with $17+/share in cash and investments. A sub 6x distributable earnings valuations. Conservative accounting, high insider ownership and strong secular tailwinds.
    2. Digital Turbine (APPS)
      • Miller’s Thesis: Neutral third party that works with wireless carriers to pre-install apps on new cell phones. Then sells the ‘slots’ to app-driven companies such as Uber, Amazon and Netflix.
    3. PAR Technology (PAR)
      • Miller’s Thesis: The asset Greenhaven wants to own is the restaurant POS (point of sale) system, Brink. Brink remains buried under a defense contracting business and a hardware business that is currently far bigger.
    4. BlueLinx (BXC)
      • Miller’s Thesis: The company has 9M shares, a sub-$300M market capitalization, currently running at approximately $100M in adjusted EBITDA per year. There is debt, but all the earnings improvements would accrue to the equity holders.
    5. SharpSpring (SHSP)
      • Miller’s Thesis: If the product continues to evolve and SHSP can maintain a LTV/CAC above 5, this [recent] sell-off will likely be a blip on the way to a bright future.


Miller’s Newest Holdings: SPAC and South Africa

Miller bought two holdings during the 3rd quarter:

    1. GigCapital Rights/Warrants (GIGRT/GIGWS)
    2. Undisclosed South African Stock

Let’s start with the position we actually know, GigCapital.

GigCapital went public via SPAC. If you’re not familiar with SPAC IPOs, this description (via Reddit post) should help:

“SPACs are, without question, flaming piles of garbage.”

Yet Miller finds himself hunting amongst the inflamed piles of dung.

What Miller Sees in GigCapital

In his own words, Miller’s done everything in his power to tilt the odds of success in favor of Greenhaven Road. He’s the only investor (to his knowledge) that’s traveled to visit the soon-to-be acquired company.

Further, Miller’s structured a deal with GigCapital that locks in favorable returns should shareholders approve of the acquisition.

This smells of “Heads I win, tails I don’t lose much”.

If you want to dive deeper, check out here and here.


Cliffhanger in South Africa

Miller continued purchasing a small, South African company during the quarter. In his words, the investment is a “bet that the underlying earnings power and forgiving valuation will overcome the macro headwinds that will undoubtedly rise.

While not disclosing the name of the company, Miller offered clues. Here’s what we know:

    1. The company has high insider ownership (40%)
    2. Best-in-industry operator in a cyclical industry
    3. Company is profitable and generating double-digit returns on equity
    4. Company trades at a substantial discount to book value
    5. P/E <3x

There’s a lot to like about South Africa. As Miller points out, investing in South Africa offers non-US equity exposure. Second, South African equities are dirt cheap. Many companies trade sub-5x normalized earnings.

If you can sift through the junk (like with any market), you’ll find gems.

Consider this your weekly Scavenger Hunt!

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Movers and Shakers: Artko Capital Q3 Letter & Howard Marks Memo

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Peter Rabover is having himself one hell of a 2019. Rabover runs the investment partnership, Artko Capital, LP. He focuses on micro-cap and special situation opportunities.

While known for his eccentric Twitter profile, Rabover is equally as impressive when it comes to stock-picking.

Through the first 9 months of 2019, Artko returned 36.9% net of fees. Crushing the stated benchmarks. Since inception, the Fund’s generated a 13.6% annualized return. Impressive all around.

Benefits of Being Small

Rabover starts his letter by explaining the competitive advantages of staying small. The smaller the partnership, the greater the available opportunities. Rabover mentions a study by Robert Ibbotson of Zebra Capital.

Ibbotson studied the performance of 3,500 stocks from 1971 – 2017. His results are below (from Artko’s letter):

Smaller, more illiquid names generated the highest annualized returns: 16.05%

At this point you’re thinking, “Why doesn’t everyone invest in the smallest, most illiquid assets then?”

Great question. Peter offers a reason:

“Investment management companies like to make a lot of money by growing through scale and their investors do not like to lose money or having the appearance of losing money by having it tied up in illiquid, mark-to-market securities.”

In other words, loads of career risk in micro-caps.

Artko’s Latest Portfolio Updates

Portfolio Additions

    1. Flotek (FTK)
      • Size of position: 10% Core position at average cost basis of $2.04/share
      • Artko Thesis: This past quarter’s 35% drop below levels where company’s implied market cap was almost 100% cash offers hefty margin of safety. It’s also trading at 65% of Artko’s estimated liquidation value

Portfolio Sales

    1. Leaf Group (LEAF)
      • Size of sale: Entire 8% position at average cost basis of $7.20/share (good enough for a modest profit)
      • Reason for Selling: Saw negative news on all fronts of the business, especially rapid deterioration of e-commerce business.
    2. Skyline Champion (SKY)
      • Size of sale: Entire 9% position at close to $30.00/share (hefty profit from initial purchase at $12.50)
      • Reason for Selling: The upside was no longer meeting the return hurdle to remain a large position.
    3. USA Technologies (USAT)
      • Size of sale: Remaining 4% position at around $7/share (hefty profit from <$4/share purchase price)
      • Reason for Selling: Announcement that the company would not be able to meet its NASDAQ filing deadline, which lead to delistment from stock exchange.


Howard Speaks, We Listen

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Warren Buffett reads Howard Marks’ memos. We should too. In his latest edition, Marks discusses negative interest rates.

Marks admits that he “doesn’t know anything” about negative interest rates. But that’s the point. According to Marks, nobody does (emphasis mine):

The fact that we know what they are — as we do with inflation and deflation — doesn’t alter the fact that we don’t know for sure why negative rates are prevalent today, how long they’ll continue in force, what might cause them to turn positive, what their consequences are, or whether they’ll reach the US.”

Negative Rates in a Nutshell

Marks’ first interaction with negative rates came in 2014. The dialog that follows between Marks and his lawyer (Carlos) paints the perfect picture on negative rates.

Carlos: The money has arrived. What should I do with it between now and Monday?

Marks: Put it in the bank.

Carlos: You know that means you’ll get less out on Monday than you put in today.

Marks: Okay, then don’t put it in the bank.

Carlos: You have to put it in the bank.

Marks: So put it in the bank.

If you receive less money at maturity than you put in at the start, why would anyone buy negative interest debt? Marks offers four reasons:

    1. Flight to safety as investors flock into a sure (but relatively smaller) limited loss
    2. A belief that interest rates will go more negative, thus raising the price of the bonds
    3. An expectation of deflation, causing purchase power of repaid principal to rise
    4. Speculation that currency underlying the bond will appreciate by more than negative interest rate

Would the US Go Negative?

Marks offers a couple ideas should negative interest rates find their way to the US.

First, you could store your valuables in a Swiss private bank. This will cost you, of course, but the fee would be smaller than the negative interest received at a bank.

If you don’t like that idea, Marks quips, you could try this:

Move out on the risk curve to strive for returns above those offered by safe instruments in this low-return (or negative-return) world … but do so with caution.”

What will be your strategy if we see negative interest rates?

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Resource of The Week: ValueDach’s Interview with Guy Spier

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valueDACH released their latest interview with Guy Spier. Spier runs Aquamarine Fund, an investment partnership inspired by Buffett’s old partnerships.

The interview is 30+ minutes of gold. Here’s a few quick hits on what Spier chats about:

    • Spier’s view on mistakes
    • Three lessons Spier learned from Mohnish Pabrai
    • Typical day-in-the-life of Guy SPier
    • Right incentives in life

If you haven’t already, make sure to subscribe to valueDACH’s channel. I’m not paid to endorse them, they just make great content.

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Who Won The Internet? — Options Trader Wins Big

Have you ever dreamed of turning small sums of money into larger sums of money? Of course! That’s why you’re an investor.

What if I told you that you could skip ahead? What if, through two trades, you could turn $700 into $100K+? Sound too good to be true?

Well, consider this guy lucky:

For those without calculators, that’s a 13,967% return.

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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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Shipping Stocks, Water Assets and Jeff Bezos Interviews

October’s well underway, but yesterday marked my official first day of Fall. My girlfriend convinced me to visit a pumpkin patch. We took “artsy” photos with pumpkins and tractors.

Safe to say I’m buying puts on her IG page if she posts those.

Here’s what we got in store for you this week. PG&E hides under the covers and shuts off power. Greece throws their hat into the negative-yielding debt parade. The short seller that screams loudest doesn’t always win, and more!

Make sure to subscribe to this newsletter so you receive it every week, completely free.

Onwards!

October 16, 2019

Back To The Trivia: We took a hiatus from financial trivia for a couple of weeks. Time to break that streak. This week’s trivia challenge is a good one. Are you ready?

How many times does the phrase “United States of America” appear on the $100 bill? House rules, no Google! If you know it, email me the answer and I’ll personally Venmo you $1. Oh and did I mention next week’s Value Hive will feature the winner’s name? Don’t everyone scream at once.

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Investor Spotlight: You’re Wrong, Harry

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Harry Markopolos. The man became a household name after exposing Eron for what it was. A giant fraud. After scoring big with his claim, Markopolos sought another target. General Electric (GE).

You can find his original bearish pitch deck here. But I’m warning you. It’s 175 pages long. That’s a lot of trips to the bathroom to finish a piece of that length.

While the sheer size of the piece is impressive, it turns out Markopolos might be wrong. There’s still a ton of red flags to go around surrounding GE’s future. But a high profile win in this corporate battle would go a long way.

What Did Markopolos Claim?

In short, Markopolos thinks GE’s hiding close to $40B in losses. Here’s his breakdown:

Markopolos goes on to assert that GE’s hiding another $29B in long-term care insurance liabilities. According to Markpolos, GE’s actions are worse than Enron and WorldCom.

That’s quite a claim.

Like I mentioned, GE has a lot of problems. Yet most of them stem from Jack Welch’s brain-child, GE Capital. Not current management.

Rumors then surfaced regarding the investigator’s motivation for such a release. After all, why now? Why not when Welch was at the helm? What unfolds next is something out of Billions.

Markopolos’ Dirty Laundry

Here’s where things get interesting. It doesn’t matter if Markopolos ends up correct or wrong. He gets paid either way!

How so? Markopolos gave his short thesis to an unnamed hedge fund ahead of its release. Coincidentally, the unnamed hedge fund planned to short GE before the report became public.

In exchange for the short report ahead of public release, the hedge fund agreed to share its profits from the short with Markopolos.

If this sounds a little bit like market manipulation, it’s because it is.

Like clock-work, GE’s stock fell over 10% after the report hit mainstream outlets. We don’t know the size of the hedge fund’s short position, nor Markopolos’ winnings.

What Markopolos Got Wrong

According to the article, Markopolos failed to account for the differences between STAT and GAAP accounting. To simplify, STAT is GAAP’s more conservative brother. The article notes, “Both STAT and GAAP mandate that companies hold adequate reserves, but their methods of calculating those reserves are different — with STAT requiring greater caution.”

What does this mean for GE? In short, their STAT reserve requirements are much higher than what’s reported on their GAAP statements. Markopolos’ claim is that over time, the GAAP requirements must match the STAT reserve requirements.

Insurance Accounting expert Neal Stern thinks otherwise. According to Stern, “Nothing in that FASB rule requires that STAT and GAAP be the same.” Uh oh. Could it be Markopolos misinterpreted an accounting rule? And he used that misinterpretation as the crux of his thesis?

That’s likely an oversimplification, but there’s a lesson to learn here.

People Respond to Incentives

Markopolos is a smart man. Maybe he knew the report wasn’t 100% accurate. Yet I can understand why he released it anyways. Markopolos would’ve profited regardless of if it were true or not. This type of incentive — one which rewards deception and manipulation — is cancerous. It can destroy shareholder value at the expense of fat paychecks for a few individuals.

That’s enough soap-box preaching for one week.

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Movers and Shakers: PG&E Goes Lights-out, Greece Issues Fresh Debt

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PG&E (ticker: PCG) made another splash in the news this past week. Instead of causing wildfires, the California utility company took preventative measures ahead of such natural disasters.

The company’s shut off power to most of Northern California to prevent another wildfire. Why are they doing this? According to the Washington Post, NorCal’s experienced bouts of heavy rain followed by long periods of dry weather. This combination (known as ‘Diablos’) is a breeding ground for wildfires.

You Can’t See Me!

Remember the Paradise wildfire last year? The one that killed 85 people and left 14,000 homes in ashes? You can thank PG&E for that.

PG&E declared bankruptcy shortly after the Paradise wildfire, citing billions in losses. The market shortly (and justly) took PG&E out behind the woodshed:

The most recent drama knocked PCG’s stock another 27% this week (as of 10/10).

I bet you wish you bought puts a couple weeks ago.

Between a Rock and a Hard Place

PG&E’s damned if they do, damned if they don’t. Had they chosen not to shut-off power and a wildfire ensued, their stock would probably go to zero. In hindsight, if there isn’t a wildfire, PG&E shut off power for (effectively) no good reason. Causing millions to live like communist Venezuela.

What’s to learn here? Life as a utility company in Northern California is hard.


Greece Joins The Negative-Yielding Debt Parade

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Early last week, Greece joined their European friends in the negative-yielding debt parade. This is yet another sign in the (never-ending) cycle of countries chasing returns — no matter the cost.

According to Avantika Chilkoti and Emese Bartha of the Wall Street Journal, Greece issued €487.5M ($535.31M) of three-month debt yielding -0.02%. In other words, you owe money if you invest in Grecian debt. This negative issuance comes off the heels of an eight-year economic downturn.

Greece is Still in Trouble

Although there’s buyers for their debt, Greece isn’t out of the woods. The country’s only four years removed from -2% GDP growth. Plus Europe’s economy is slowing.

(Note: I’m reaching the edge of my circle of competence with the macro stuff. If you want to dive deeper into the macro, read Alex’s work. He’s one of the best.)

Yet here we are, value investors. Shouldn’t we be greedy when others are fearful? There’s plenty of fear to go around in Greece.

Some Grecian Stock Ideas

Greece stocks usually mean shipping stocks. We’re very bullish on the shipping industry at Macro Ops (disclosure: I own shares in STNG & CPLP). Is there a way to combine our bullish industry sentiment with a fear-laden macro backdrop?

For those that want to do more research, here’s a list of all publicly traded Grecian ADRs.

We’re seeing a lot of bottoming patterns with Greece stocks. Check out some of our favorites:

1. Capital Product Partners, L.P. (CPLP)

I wrote about CPLP in my March post, Anchors Away. Here’s the quick-and-dirty thesis:

Current share prices offer a 70% discount to book value (most of which are tankers). Along with a margin of safety, you can buy their existing operations — which are profitable — for less than 4x this years EBITDA.

I am long CPLP as of 10/11/2019.

2. Euroseas, Ltd. (ESEAS)

ESEAS is a micro-cap ($12M market cap) shipping company. You can buy shares for 10x EBITDA while getting 70% discount on book value and sales. They also generated $4M in FCF last year. That’s good enough for a 44% FCF yield.

3. Diana Shipping, Inc. (DSX)

DSX was another company I wrote about in the Anchors Away piece. This was my take back in March (it hasn’t changed):

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Idea of The Week: PICO Holding, Inc. (PICO), East 72

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This week’s IOTW comes from East 72’s Q3 letter. The entire letter is worth the read, especially for those that love asset plays.

Let’s break down Andrew and Marc’s PICO thesis.

It’s About The Water

According to the letter, PICO emerged from a 2016 shareholder revolt laser-focused on monetizing their water rights. The water rights come from two sources:

    1. 51% interest in Fish Springs Ranch (which serves NV)
    2. 100% interest in storage credits which service AZ market

Andrew and Marc break down the asset value in the letter, saying:

“At prevailing prices, the lesser assets appear to have a value around $70M; the interest in Fish Springs Ranch is worth some $233M ($185M preferred + $48M of equity).”

Remember PICO’s market cap is only $210M (debt-free). According to the letter, the stock trades at a discount to its lesser valued assets, alone.

But we’re not done.

50% Discount to Asset Value

Andrew and Marc then assess the value of the long-term storage credits (emphasis mine):

“The credits can be traded. Recent market prices for the credits are around $375/credit; PICO owns just over 290,000 [credits], worth an estimated $109M.

Here’s the kicker (emphasis mine):

“Adding up these three assets alone gives a value around $412M before the value of any real estate; along with $10M of cash, the company has an equity value of some $422M before costs.

A Stock That Doesn’t Screen Well

As of writing this (10/14 AM) the stock trades around $10.30/share. Or a market cap of $203M.

What I love about this idea is that PICO doesn’t screen well for traditional value metrics. The company sports a 200x P/E and 83x EV/EBITDA.

If you’re interested, I wrote about this topic in last month’s Value Ventures newsletter.

Greenblatt likes to say, “If you do good analysis work, the market will reward you. You just don’t know when.”

PICO trades at half of its water asset value. Over time the market should reflect that divergence. It just doesn’t happen on our time frame.

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Resource of The Week: Jeff Bezos Interview Compilation

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I’m on a Jeff Bezos binge. Yes, it is better than an Office binge.

I found a compilation of interviews from Bezos on Investors Archive’s YouTube channel. The video is 47 minutes long but well worth it. I’m in my second iteration of listening and am learning new things each time.

Also, if you haven’t already, you need to read Bezos’ 1997 shareholder letter.

I tweeted my favorite sections from the letter this AM.

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Who Won Twitter? — StockCats

This week’s winner goes to StockCats. Although I’m not a fan of cats (sorry, Alex!), the tweet is money.

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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, Russian Stocks and P/E Misconceptions

There’s four major holidays we like to celebrate at Value Hive. Q1, Q2, Q3 and Q4 Investor Letters. This month we get our Q3 batch of letters. The next three Value Hive editions will be chock full of these letters. We’ll cover new positions, recently exited positions and market outlooks from our favorite value managers. 

Here’s what we got this week. Elliott Management’s back with their latest idea. Beware of Canadian bank stocks. Andrew Rangeley’s killer blog post and much more.  

Make sure to subscribe to this newsletter so you receive it every week, completely free. 

Let’s get to it!

October 09, 2019

The Month From Hell: If investors were smart, we wouldn’t look at markets for the entire month of October. Yet year after year we defy our past miseries and step up to the plate. For those getting their feet wet in the investing world, let me tell you a bit about October. October’s known for three market crashes: 1987, 2002 and 2008. 

If you want to scare your neighborhood investors, dress up as the eight month of the year.

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Investor Spotlight: It’s a Marathon, Not a Sprint 

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After recent success with AT&T, Elliott Management is back in the news. This time with their newest idea, Marathon Petroleum (MPC). 

According to their site, MPC’s engaged in refining, marketing, retail and transportation businesses. The company operates through three segments: 

    • Refining & Marketing: refines crude oil 
    • Speedway: sells transportation fuels and convenience products
    • Midstream: gathers, processes and transports natural gas, crude oil and refined products

The company’s cheap by conventional metrics. They trade around 13x earnings and 7.2x EBITDA. MPC generated $5.36/share in earnings in 2018 and $2.39B in FCF. That’s good enough for a 6% FCF yield.

What Elliott Sees

Elliott’s reason for activism is simple. According to Elliott, “Marathon Petroleum has failed to realize the potential of its three world-class businesses.”

How do they unlock that value? 

A separation of each business would unlock $22-$40B of shareholder value (61% upside). Here’s what each segment would look like if Marathon separated them out:

    • Refining Business: By itself, the refining business would be worth $29B in EV. You’d also get the best refining asset base in the United States. 
    • Midstream Business: Separating the midstream business would result in an EV of $50B. The spin-off would also free-up the midstream business to pursue growth opportunities. 
    • Retail Business: Retail business would become the largest US-listed retail operator on first day of spin-off.

Elliott and Marathon Have History

This isn’t the first time Elliott’s fired shots across the bow at Marathon. The investment firm voiced its concerns with trapped asset value in 2016. Those concerns fell on deaf ears. At that time, Elliott called for Marathon to spin-off its Speedway and MPLX businesses.

Marathon obliged and simplified their MPLX business. Yet according to Elliott, half-assed their review of the Speedway business. This didn’t look good. In Elliotts words, the actions, “eroded investor confidence that the Company would unlock the value embedded in its assets.”

The Integrated Model Isn’t Working

In 2018, Gary Heminger stated, “Our integrated business model allows for differentiated results.” The MPC CEO was true in that the results were different. He forgot to let shareholders know they’d be different in a very bad way. 

Take a look at the total shareholder return of MPC vs. its peers:

MPC’s underperformance relative to its peers grew over time. The retail assets in particular are the most shocking. MPC’s lost 245% in shareholder return versus its peers. Ouch. 

The underperformance hasn’t simply restricted shareholder value. It’s reduced asset values to the point of absurdity. Let’s take a look at what Elliott means by that.

Buying Great Assets for <1x 2020 EBITDA

One crux of Elliott’s activist case is that MPC’s current share price implies a low EBITDA valuation for its refining business. For example, at current share prices, you can buy MPC’s refining business for less than 1x 2020 EBITDA. 

How do we get to that figure? Check out Elliott’s back of the envelope valuation: 

How Much Will The Separation Cost? 

One excuse Marathon used to avoid the spin-offs in 2016 was the cost of spinning off each business. Elliott isn’t buying it. 

Further down in the slide deck, Elliott lays out the total EBITDA impact from the separations. Spoiler alert: it’s jokingly small.

In a best-case scenario, the spin-offs would accrete $60M in total EBITDA. How MPC management doesn’t acknowledge the risk/reward benefit blows my mind. 

Call To Action

Even though Elliott’s benefited from their activist stake in AT&T, the MPC idea looks to be the better bet. In order for this idea to get off the ground, MPC management must first acknowledge that the integrated model is a failed model. 

Secondly, management needs to spin-off each business. I don’t want to get too excited about the idea until I see some Form 10-12s.

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Movers and Shakers: Canadian Bank Stocks & YAVB 

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Canadian bank stocks are on the rise. Canadian Financials ETF (XFN) is up over 14% in 2019. 

After the run-up, many investors wonder if now’s the time to get into the banks up North.

Not according to this guy: Nigel D’Souza

A financial analyst from Veritas Investment Research, D’Souza mentions a few reasons to not be so bullish on Canadian banks. His main argument revolves around credit risk. He mentions three aspects of Canada’s 2019 credit risk:

    1. It’s higher than the 2015 and 2016 credit risk cycle
    2. It’s affecting not just oil and gas, but many sectors
    3. Banks expect elevated credit losses in near-term

So When Do We Buy?

I know. You want me to skip the details and get right to the meat and potatoes. D’Souza thinks investors should look North by late 2020 or early 2021. 

D’Souza explains, saying (emphasis mine):

“Keep in mind management teams at the banks themselves have said they expect credit losses to continue to normalize. So if you think credit losses will continue to go up, you want to buy bank stocks in the future, not right now.” 

Roger that, Nigel. 

For a reminder, say, “Alexa, remind me to look at Canadian bank stocks on January 1, 2021.” 

Andrew Walker and His Really Good Blog Post

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Andrew Walker releases (arguably) the best blog post every month. How does it do it with such consistency? Every month, Walker posts the titled: Some things and ideas for the specific month. 

Each post oozes with, well, things and ideas! Andrew discusses stock ideas, books he’s read and podcasts he’s listened to during the month. 

Needless to say, it’s a must read

Let’s touch on some things I thought were most intriguing. 

The Gold-Star Challenge

This is (by far) my favorite feature from Andrew’s posts. The Gold Star Challenge first appeared in his August edition

What is the Gold Star Challenge? Read at least one new 10-K a day. That’s it. It sounds simple. Yet think of the compounding nature of reading a new 10-K each day. For example, Andrew read 31 10-K’s last month. 

How many did you read? How many did I read? Not that many! 

The Value Hive needs to hop on Andrew’s Gold-Star Challenge train!

Jealousy in Investing

Charlie Munger often says (paraphrasing), jealousy is the only sin without some personal pleasure.

Andrew highlights a few key aspects of jealousy in the investing space. If left unattended, jealousy produces counterproductive habits and thoughts. Check them out:

Jealousy is a lot like Medusa (stay with me). There’s one key driver — jealousy — but expressed in various ways (or snakes). Along with arrogance and excessive risk taking there’s revenge trading/investing.

Revenge investing is the feeling that the market stole something from you. And it’s your job to get it back. What does this look like? In the value investing space this can be doubling-down on your biggest loser if your thesis failed. It can also mean placing larger-than-normal bets to “make up” for previous losses. 

Stick To The Process

How do you combat jealousy investing? Andrew makes it simple: stick to the process. 

Do yourself a favor and follow Andrew’s blog. Oh, and start reading more 10-Ks!!!

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Idea of The Week: Sberbank (SBER), Vlata Fund

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I came across this idea a couple years back in a stock screen (based on low P/E). But seeing that it was a Russian company, I passed. My reasoning? Too many headaches and geopolitical issues to worry about. 

Yet here we are two years later and I find myself interested in the Russian banking powerhouse. 

What triggered my interest this time was Vlata Fund’s Q3 letter

Daniel Gladis runs Vlata Fund and he’s one of the OG’s to invest in Sberbank. According to the letter, Gladis first invested in SBER in 1997. At the time he only managed his personal assets. 

20 years later Gladis remains invested. Why? 

SBER Generates A TON of Profit

SBER is one of the most profitable companies not just in Russia, but in the entire world. For example, Daniel notes that Sberbank’s annual profit is on the level of Deutsche Bank’s market cap. 

That’s wild to think about. 

How can they sustain such high levels of profitability? Through deep and wide moats. 

The company owns at least 25% market share in every major Russian banking category: 

All-World Finance Metrics

SBER’s not only a powerhouse within Russia. The company shines when compared with any global financial institution. 

For example, SBER generates the highest return on equity (ROE) based on the top 100 banks by market cap (excluding China). 23.1%. The company’s second in the world in return on assets with 2.9%. And they lead all banks in financial leverage ratio with 11.3%. 

Positive Dynamics in Play in Russia

SBER’s local growth remains positioned to accelerate. Russia is deleveraging, there’s wage growth of 12% and loans are more affordable than ever. The average consumer loan rate in 2014-2015 flirted with 35%. Imagine paying 35% interest on a loan. Yikes!

Four years later, the average consumer loan rate hovers around 15%. Still relatively high, but much better than 35%. 

On top of that, consumers are paying off their loans faster than ever. SBER’s repayment ratio (which measures the repayment amount as a percentage of loan) is an impressive 65%. 

In other words, the average monthly payment is 2.3x the minimum amount due. That’s a healthy loan environment. 

SBER is Cheap

Despite leading almost every world bank in profitability and return percentages, SBER trades at a discount to its peers. Here’s a breakdown of the metrics: 

    • P/B: 1.1x
    • P/E: 5x
    • Dividend Yield: 10%

Most comparables trade (at least) twice the P/E ratio as Sberbank. 

Check out their latest slide deck if you want to dive deeper. 

Disclosure: I do not own shares or derivatives of SBER stock. 

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Resource of The Week: Michael Mauboussin on P/E Ratios

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This week’s Resource of The Week is an oldie-but-a-goodie. In his 2001 whitepaper, Michael Mauboussin (along with Alfred Rappaport) breaks down the issues with earnings and P/E ratios. 

Mauboussin argues that the stock market is long-term oriented in nature. Yet the tools we use to value stocks focus on short-term results. This disconnect trickles down into management’s inability to effectively allocate capital. 

Mauboussin explains this further: 

If earnings are the wrong tool for the job (i.e., valuing a company on a long-term basis), why do so many investors still use it? 

Mauboussin’s answer is simple. Because it’s convenient. Yet this convenience comes with a price. What you gain in convenience (Mauboussin notes) you lose in accuracy and relevance. 

The entire PDF (18 pages) is pure gold. Take the time to read it. 

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Who Won Twitter? — Ramp Capital

Earlier this week, Ramp Capital took the prize for Best Twitter Thread of 2019. I know. There’s still time left in the year. But trust me. It won’t be close. 

For those that haven’t seen it, check it out here.

Here’s a teaser: It’s the story of WeWork rise and fall, told through The Office gifs. Michael Scott is Adam Neumann. 

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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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Spooky Times for WeWork, Zero Fees and More!

Happy October! This month means Pumpkin Spice Lattes, apple orchards and pumpkin carvings. Speaking of October, we’ve got some spooky news for a few companies in this week’s Value Hive! Forever 21 files for bankruptcy. WeWork halts their IPO. Brokerage companies race to zero commissions, and more!

Make sure to subscribe to this newsletter so you receive it every week, completely free.

Let’s Pumpkin-spice things up!

October 02, 2019

Where Did It All Begin? — October. The month we celebrate skeletons, dead people and grabbing candy from strangers’ homes. Is there really an age limit to Trick-or-Treating? Anyways, can you guess where Halloween officially began? House rules apply: No Google! Answer at the bottom. _____________________________________________________________________________________________

Investor Spotlight: No Mas IPO for WeWork, Bye Bye Forever 21

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Value Hive was born the first week of September. Over the last four weeks we’ve covered WeWork in some shape or form. Yet it appears this week will be our last dance with the glorified rental property company.

The NY Times reported Monday that parent company We halted its IPO plans. The article explains the sentiment around WeWork perfectly, saying:

“The move is the clearest sign yet that investors are increasingly wary of ambitious young companies that have run up huge losses and might not be profitable for years.”

We couldn’t agree more.

The fun doesn’t end for WeWork with the IPO halt. They have cash problems to worry about. The company sported around $2.5B in cash at the end of June. That cash will likely evaporate by the end of the year.

Living on a Prayer

WeWork is the epitome of a train wreck at this point. The company’s fired their CEO, halted the IPO and struggles to secure lines of credit to keep the business afloat.

We’s bonds went from 102 cents on the dollar to 85 cents. Yields skyrocketed to 11%. In other words, every sign is pointing to the same conclusion: WeWork isn’t a good business.

Yet despite the obvious warning signs, WeWork’s negotiating deals with JPMorgan Chase. This last ditch effort appears to be in restructuring their $6B loan that was originally offered.

CNBC correspondent Carl Quintanilla had this to say about the whole WeWork ordeal:

Forever 21 Files for Bankruptcy

Forever 21 is yet another example of the shift in how consumers prefer to shop, as well as the dying culture of shopping malls.

The company filed Chapter 11 bankruptcy. What is Chapter 11 bankruptcy you ask? Good question.

According to USCourts.gov, Chapter 11 bankruptcy is used to restructure the business while keeping the personal assets of the business owner safe (if the business is a corporation). In other words, Forever 21 isn’t shutting down all stores and halting production.

The company said it will close a lot of stores over the coming months. 350 closures when it’s all said and done.They want to get “back to basics” according to senior executive Linda Chang.

What’s The Plan Stan

Forever 21 got a kickstart on capital preservation in September. How? They didn’t pay their leases (don’t give Tesla any ideas!). The company’s renegotiating some of their larger leases. Along with this, the teenage-targeted merchandiser cut over 1,000 jobs.

The company is private and family owned/operated. The Changs plan to pass the business on to their two daughters — if it’s still alive by then.

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Movers and Shakers: Brokerage Houses Race To Zero

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Early last week, Interactive Brokers (IBKR) announced IBKR Lite. IBKR Lite offers unlimited commission-free trades on US equities and ETFs. Oh, and zero account minimums.

And just like that, the race to zero was on!

This isn’t necessarily a surprise to investors given the rise (and popularity) of trading app, Robinhood. Yet it wasn’t until Charles Schwab came to the party where things got interesting.

Early Monday, Schwab (SCHW) announced that its ending commissions on all U.S. stocks, ETFs and options. It takes Schwab’s commissions from $4.95 to nothing. Zip. Nada.

CEO Walt Bettinger backs up the claim, stating, “This is our price. Not a promotion. No catches. Period.”

Mr. Market’s Response

Mr. Market doesn’t seem as thrilled as Schwab clients about zero commissions. Schwab opened Monday down 8% and never fully recovered.

What is the market anticipating? The move reduces Schwab’s top-line revenue. But by how much?

The company anticipates a hit of 3-4% of total revenues. That’s not that bad. And if Schwab is right on its bet, it’ll make up that 3-4% in AUM fees.

The CNBC article notes that the last time Schwab lowered its commission fee, it grew assets from $2.92T to $3.72T. I’m assuming the same reaction will happen this time.

TD Ameritrade Isn’t a Fan

Although the race to the bottom looked inevitable, some brokerages did better than others at adapting. TD Ameritrade wasn’t one of the lucky adapters.

While Schwab and IBKR were busy adjusting their business models to survive in a $0 commission world, TD Ameritrade seemed oblivious.

TD Ameritrade’s stock AMTD took a nosedive, over 25%. Check out the gruesome chart below:

I don’t know if the race to zero is good or bad for Robinhood’s planned IPO. On one hand Robinhood got the major brokers to play on their field with their rules. On the other hand, the major brokers have the resources and market share to take down Robinhood.

Either way, the real winner here are the investors using the brokerages. We win.

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Idea of The Week: Nekkar, Inc. (NKR), Focused Compounding

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This week’s idea comes from our friends over at Focused Compounding. In their latest quarterly letter, Andrew and Geoff discuss their newest investment, Nekkar Inc (NKR).

Going Abroad for Value

NKR is a Norwegian micro-cap company that’s a combination of Syncrolift and a couple of new ventures. According to Geoff, Syncrolift is a, “ship moving technology used at shipyards as an alternative to a drydock.” The new venture includes cages for land based salmon farming.

The combined ventures will result in “the new Nekkar”. The stock trades on the Norwegian Exchange and reports in Norwegian Kroner. Adjusting for USD the company sports a $30M market cap.

What Geoff & Andrew Like About NKR

There’s a few things Geoff and Andrew like about NKR:

  1. The company has 3-4 years of backlog. Some of which is paid up-front
  2. The company is trading for less than net cash (with no further needs for capital)
  3. The business needs no additional capital as it grows

The last part seems to be the crux of Geoff’s thesis. The business needs no additional capital as it grows.

To explain this phenomenon, Geoff gives a hypothetical scenario for NKR (emphasis mine):

“This means that if Syncrolift were to grow revenue, earnings, free cash flow, etc. by about 6% a year — which is about what it probably has done over the last 25 years — it would be able to pay shareholders a dividend of literally everything it reported in earnings and that dividend would also increase 6% a year.

How Cheap Is NKR?

Given the net cash, Geoff and Andrew paid a negative EV/EBITDA for the company. Yet on a forward looking basis, Geoff believes the price paid “isn’t going to be that low.”

Geoff estimates that when it’s all said and done, they would’ve paid around 15-20 earnings for NKR.

What’s Not To Like

Nekkar is a very cyclical business. When it looks expensive that’s when it’s probably cheap. And when it looks cheap that’s probably when it’s actually expensive. There’s also currency risk involved between the Norwegian Kroner and the USD.

Focused Compounding’s Newest Fund

I can’t talk about Focused Compounding without bringing up the HUGE news. Focused Compounding, in partnership with Willow Oak Asset Management, will launch a private investment fund vehicle.

I’ve known Andrew via Twitter for quite a while now. There’s not two people more deserving in this business than Anrew and Geoff. I wish both of them the greatest of successes in their newest venture.

Hey, it gives small guys like us motivation to keep going!

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Resource of The Week: Jim Chanos Slide Deck

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When Jim Chanos speaks, I listen. He’s one of the best (if not the best) short seller of this generation. Late last week Chanos released a slide deck on GAAP Accounting fraud.

It’s loaded with gems. I found myself reading the deck on my iPhone while at a bar in Charleston at 1:00am. I don’t know if that says more about my dedication to investing, or my complete lack of social skills. I’ll let you decide.

One of the biggest takeaways from the deck was the rise of “Pro-Forma” and “Adjusted” results. Companies that direct investors’ attention away from audited financials and towards adjusted metrics should be taken with a grain of salt.

According to Chanos, earnings press releases are the “Wild West” of Wall Street. They’re lightly regulated and prepared by management, not auditors.

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Who Won Twitter? — MastersInvest.com

Source: MOI Global

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Bonus Round

It was the Celtics from Ireland that started the tradition of Halloween. How many of you thought it was a Hispanic country?

That was my first guess (curse you, Dia De Los Muertos!).

The Celts believed that on October 31st, dead relatives would visit their families.

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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Sony Says No, AT&T Listens and China Talk!

What do we got for ya this week on Value Hive? Sony and Loeb duke it out over operations. AT&T appears to have listened to Elliot management. A trader loses his shirt, and more!

Make sure to subscribe to this newsletter so you receive it every week, completely free.

Let’s get to it!

September 25, 2019

How’s Your History? — I’m in Charleston, SC this week. That means a lot of Civil War tourist sights to visit. Also, for those that haven’t ventured down to the Palmetto state, make time. The beaches are amazing.

This week’s bonus round question is either easy or impossible. What is the name of the Fort that was first fired on to mark the start of the Civil War? Don’t Google! Answer at the bottom.

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Investor Spotlight: Dan Loeb Gets Rejected, AT&T Listens to Elliot

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Last Wednesday, Sony (SNE) gave Loeb’s fund Third Point a critical stiff-arm/middle finger. If you’re new to the Loeb / Sony saga, here’s some backdrop:

    • Third Point built a $1.5B stake in SNE, which it announced back in April. That’s good enough for 6% of total shares outstanding.
    • Loeb’s fund sent a letter to SNE management suggesting various sales and spin-offs as a way to create value.
    • Shares are up 40% since April. (Loeb’s sitting on nice gains).

The decision wasn’t a close one. SNE’s board unanimously decided to keep the semiconductor business. This makes sense. SNE’s semiconductor business is a powerhouse for the company. It provides 18% of total revenue and owns over half of the image sensor market.

SNE offers other “reasons” why the company decided to keep the business:

    • SNE expects its semiconductors will play a crucial role in various growth industries. (IoT, autonomous driving, etc.)
    • SNE believes it’s too expensive to run the semiconductors business as a separate entity. Management cites higher licensing fees, tax inefficiencies, etc.

Yet I think the real reason is a bit more obvious, and a lot less academic. They don’t feel like it. The stock’s up over 60% in three years (10%+ CAGR). Things aren’t terrible at SNE. The switching costs to shake things up are too high.

What Will Loeb Do Next?

Loeb could fight this with a proxy vote to get seats on the board. And if Loeb’s past is any sign of his future, things could get nasty. Loeb’s known for fighting corporate big-wigs until he gets his way.

Once again, there’s reasons why Loeb wants this semiconductor business separated. SNE has ridiculous corporate structures (like most Asian companies). Structures which Loeb believes depress shareholder value.

Sony’s involved in gaming, music/picture and semiconductors. Those don’t quite go together.

SNE trades at a mere 11x earnings despite growing profitability every year for the last five years. So while they have appreciated over 60% since April, one could make the argument that they haven’t grown enough.

I’m with ya, Loeb. Increasing profitability five out of the last five years should command a higher multiple.


AT&T (T) Listens to Elliott Management

Elliott Management’s activist story seems to be going better than Loeb’s. AT&T’s looking to rid their stake in DirecTV, an acquisition they made only four years ago. We can assume it had something to do with Elliott’s activism.

AT&T’s Plan for DirecTV

The company’s discussed two ways to separate the business:

    1. Spin-off the business into a separate, public entity
    2. Spin-off of DirecTV with combination of Dish TV Satellite assets

Given how bad the DirecTV investment went for T shareholders, either option looks appealing.

DirecTV is a Disaster

What went wrong? Well, everything. Elliott believes T overpaid for the TV company in the first place. On top of overpaying, DirecTV’s losing customers faster than Antonio Brown’s chances of playing football.

How bad is this customer churn? Management anticipates another 1M subs gone by next quarter. In other words, DirecTV’s losing subscribers at a 1MM quarterly run-rate basis.

But it doesn’t end there.

AT&T faces a class-action lawsuit for wrongfully reporting subscriber figures to its shareholders. Not to be outdone by Wells Fargo, AT&T is also accused of creating fake DirecTV Now accounts for customers without them knowing.

Yikes.

I love spin-offs. But I don’t want to touch a DirecTV spin-off with a 10-foot pole.

One Down, One To Go

If Elliott gets their way with the spin-off, it would mark a crucial turning point for the firm’s investment. The only remaining piece of business to take care of after the spin-off? Figuring out what to do with the Time Warner stake.

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Movers and Shakers: Rogue Traders & Adam Neumann

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We’ve all had bad days in the investing world. A stock we love reports shocking negative earnings — the stock tanks — and with it, your confidence. It’s that feeling you get when a stock you love keeps diluting shareholders even though its undervalued!!!

Despite all that, nothing this week tops what one oil trader did to his firm’s money.

Who’s To Blame

Chinese trader Jack Wang of Petro-Diamond Singapore Pte had lost $320M since January. OUCH. I use the word “had” because he got canned. Not surprising.

For context, Wang’s firm expects to generate around $5.6B in trading profits for 2019. So the $320M is a drop in the bucket. Still. It begs the question.

How did he do it?

According to the report, Wang placed a plethora of “unauthorized deals disguised as hedges.”

Hedge transactions are normally created through derivative instruments such as options and futures. Gotta love that sweet, sweet leverage.

How They Found Out

Wang did what any well-respected, hard-working oil trader would do. He went to his boss, informed him of the trades and suffered the consequences.

Just kidding.

He stopped showing up at work. After a while, people became suspicious. One thing led to another. Finally, after going through Wang’s trades during the oil bust of July – August they found the unauthorized deals.

Lesson To Learn From Wang

What can we, as investors learn from Wang’s demise? Should we never engage in derivative instruments? Never flirt with futures trading? It goes beyond that. Most likely Wang tried to make up for previous losses, only to suffer more losses. Which led him to try to make up for his bigger losses, etc.

The big takeaway is to take your lumps and move on. Don’t double down if your thesis falls apart. There are plenty of opportunities in any market at any given time.


Things Aren’t Going Well For Adam Neumann

Adam Neumann reminds me of that friend your child invites out to dinner with the family. Things are great at first and your kid’s friend is respectful. But by the second time they eat out with you, they’re ordering virgin Shirley Temples and ice cream sundaes.

Masa Son Wants Neumann Out

Masa Son runs Softbank. You know, the enterprise that invested in WeWork at a $47B valuation. It’s no surprise that as of its recently quoted IPO of $27B, Son wants Neumann out of the driver’s seat.

Son wants Neumann ousted as CEO for one reason:

    1. Prevent WeWork from going public

If you’re Masa Son, this makes perfect sense. Son doesn’t want a writedown of nearly $20. Who wants to take a loss like that if they don’t have to? Maybe our oil trader friend.

I can now see why Neumann cashed out when he did. Maybe this was his plan all along?

This is What We Get

Conspiracies aside, WeWork is a great example of the type of company that bubbles to the surface during peaks in the economic cycle.

When retail and institutional investors care more about narratives than profits, you get WeWork.

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Idea of The Week: Revisiting Spotify After It’s Fall

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I’m not a shareholder of Spotify (SPOT), but a disclaimer is necessary. I freaking love the product and use it every day.

With that out of the way, let’s break down this week’s Idea of The Week. The idea comes from Matthew Griffith of DA Davidson. Matt pitched this idea at ValueX Vail 2019. For those interested, you can find the entire presentation here.

Let’s break down the highlights of the bull thesis:

    1. Spotify is a disruptor in a large and inefficient industry
    2. Spotify controls a two-sided market, creating value for listeners and music creators
    3. Spotify is the only competitor at scale
    4. Although a young, tech company, Spotify is FCF positive

It’s About The Musicians

While Spotify enjoys healthy cash flows from their growing base of listeners, that’s not their goal. The real money will come from partnering with content creators. The musicians.

Matt explains in the following chart:

Spotify’s addressable market increases considerably if their able to provide higher-value for musicians.

On top of that, the switching costs for musicians to use Spotify’s service is low. They’re already getting screwed. What’s the harm in seeing what Spotify can offer?

What The Bears Say

Many investors focus on the amount of listeners Spotify can add to their platform. But they’re missing the point. If you focus only on listeners, you overweight a critical aspect of the bear thesis: free alternatives.

These services would be stiff competition if Spotify was a one-way business.

That’s not the case.

Now there are a few major risks with Spotify, as Matt points out:

    • Inability to secure rights or control third-party content
    • Unfavorable regulation changes in music
    • Inability to grow outside core operating segment

Let’s take a look at price.

Flirting with All Time Lows

SPOT’s bouncing around its 2019 lows of ~$120. It still trades for ridiculously high multiples of earnings and EBITDA. But, if you look beyond traditional value metrics, the next five years could look better than its last five years.

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Resource of The Week: How To Invest in China

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I want to invest in China. I really do. Yet I can’t get myself to do it. Is it the shell companies, shady accounting practices or the CCP controlling most every public company? It’s a mixture.

Fortunately, ValueDach released a new video with Professor Dr. Ingo Beyer. Dr. Beyer works for Qilin Capital, focusing exclusively on Chinese equities.

The video touches on:

    • Why Chinese markets are interesting to invest in
    • Beyer’s favorite Chinese companies
    • The state of protection of shareholder’s rights in China

I want to believe. I want to have the faith of Charlie Munger in the Chinese markets. This video motivates me a little further.

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Who Won Twitter? — When In Doubt, Mention AI. 

Source: Mark McQueen Twitter

Remember where we are in the business cycle. It’s never too late to mention AI in a company’s latest earnings report.

Pro Tip: If you’re struggling with sales, mention artificial intelligence. Just say it. It’s the equivalent to saying “China” in 2017-2018.

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Bonus Round

If you guessed Fort Sumter for today’s Bonus Round question, you’d be correct. The first shots of the American Civil War fired at Fort Sumter on April 12, 1861.

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

 

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Value is Back (and some other goodies)!

Last week we remembered 9/11. We thank those brave men and women who ran into the fray that day — and every day. If you haven’t already, thank a veteran this week.

We’ve got a hard-hitting Value Hive this week. Value stocks are back, a fitness equipment company thinks its a tech business, Elliott Management’s gone activist and more!

Make sure to subscribe to this newsletter so you receive it every week, completely free.

Let’s get to it!

September 18, 2019

The More You Know — On this day in 1973, soon-to-be President Jimmy Carter filed a report with the National Investigations Committee on Aerial Phenomena (NICAP) claiming he saw a UFO in 1969. If elected President, Carter vowed to declassify all UFO material to the United States public.

He didn’t follow through with that promise. So I guess we’ll never know exactly what Carter saw that evening.

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Investor Spotlight: Elliot Management & Spruce Point Management


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“We’re not mad, we’re just disappointed.”

That sentence sums up Elliott Management’s activist letter to AT&T (T). The letter outlines poor decisions made my T’s management, as well as a path towards 65% increase in share price.

Why does Elliot have beef with AT&T?

For starters, T’s underperformed the S&P 500 for the last ten consecutive years. Ouch.

Elliot also questions T’s acquisition strategy. The firm highlights three disastrous acquisitions (or attempted acquisitions):

  1. Failed T-Mobile Merger
  2. Overpaying for DirecTV
  3. No clear strategy for Time Warner acquisition

In Elliot’s view, the failed T-Mobile merger opened the door for the (at the time) struggling 4th place contender. AT&T then paid $67B to acquire DirecTV, an asset that’s seen premium subscriber count fall faster than shareholder confidence. Finally, after paying $109B for Time Warner in 2016, AT&T has yet to solidify the purpose of such a purchase.

Light At The End of The Tunnel

All hope is not lost. Elliot sees a path towards 65% share price appreciation over the next two years.

How do they think T will get there? Through Elliot’s handy-dandy four-step program that’s how (see below):

Shareholders should win handsomely if Elliot gets their way at unlocking value.


Spruce Point is Short Church & Dwight (CHD)

Founded by Ben Axler, Spruce Point Management isn’t a name you want to hear if you’re long a stock. In fact, if Axler puts out a short thesis on one of your long ideas, it’s time to check your thesis (and your pants) again.

Here’s a quick hit-list of accolades Axler’s accumulated:

I love studying short-dominant firms. They add a level of in-depth due diligence that is often overlooked with many long ideas. This makes sense though. If you’re wrong on a short idea, the position grows as a percentage of your portfolio.

Spruce’s latest short idea is Church & Dwight (CHD). The company is a serial acquirer of personal care and consumer products. There’s a 99.99% chance you’ve used some of the company’s products before:

    • OxiClean (RIP Billy Mays)
    • Trojan Condoms
    • Orajel
    • Arm & Hammer
    • Etc, etc.

So what’s the dirt?

According to Spruce’s research report, the company’s engaged in “extreme financial engineering, aggressive accounting, and managerial self-enrichment practices.”

Spruce also believes that 6 out of 10 of CHD’s “power brands” are struggling financially. Some of them, the report claims, are complete failures.

Misleading Accounting Practices

Let’s talk about accounting methods for a second (I know, don’t everyone get excited at once!). Spruce notes that by using the equity method of accounting, the company inflates operating margins, working capital and FCF.

How do they do that? The equity method avoids adding in manufacturing aspects of CHD’s business. Adding these expenses in would reduce all the above metrics.

What’s The Downside?

Spruce sees 30-50% downside from current share prices (around $70/share).

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Movers and Shakers: Peloton’s Going Public


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Can’t get enough of your money-losing IPOs? Well you’re in luck!

Peloton (PTON) dropped their S-1 last Tuesday, telling us all about how they’re not just a fitness equipment company.

In their own words, Peloton is “an innovation company transforming the lives of people around the world through [their] ever-evolving fitness platform.” Did you catch all those buzzwords? If you didn’t here they are:

    1. Innovation
    2. Transforming
    3. Ever-evolving
    4. Platform

I can hear the cries for an 11x sales multiple as I type.

Peloton wants to be the one-stop-shop for all things fitness and healthy living. So far their strategy is working. The company has 1.4M subscribers. That’s good for the largest interactive fitness platform in the world.

The company’s growing revenues faster than their head trainer can bike. Revenues grew from $218.6M in 2017 to $915M in 2019 (over 100% 3-year CAGR). On the back of $915M in revenue, Peloton lost $71.3M in EBITDA.

Before you go running to increase margin for your next short, there’s a clear bull thesis to Peloton.


How Your Fitness-Crazed Sister Would Describe Peloton (The Bull Case)

Peloton’s bull case:

    • Peloton is a high-margin, recurring revenue generator with a fanatical customer base.
    • They’ll be able to “turn-on” profitability by reducing their investment in growth.
    • Peloton sports low churn ratios and highly-visible revenues.
    • If the company can grow, they’ll be able to spread SG&A costs over a wider array of customers (increasing margins).

They’re Just a Bike Company (The Bear Case)

The bear case:

    • Peloton sells expensive exercise bikes and is going public in the late innings of the market cycle.
    • Their niche customer base will dry up once a recession hits. People won’t pay for $2k bikes and $40/month subscriptions during a downturn.
      • This would increase churn ratio, which reduce margins.
    • The company hasn’t shown signs of profitability yet, losing $100M in 2019.

No matter which side of the fence you’re on, it’ll be interesting to see where the company starts their trading career.

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Idea Backlog: Einhorn’s Latest Long — The Chemours Company (CC)


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Chemours Company (CC) first appeared on my radar after reading David Einhorn’s 2Q 2019 letter. Einhorn hit it big with his first swing at CC — going from sub-$5/share to $57/share back in 2015-17.

CC spun-out of DuPont in 2015. As part of the spin-off arrangement, CC had to pay indemnification liabilities back to DuPont (if you’ve followed GTX you know this pattern).

Einhorn’s bull case was simple. He believed CC owed less in liabilities than the $5B claims touted by bears. He was right. DuPont and CC settled for $335M, well below the $5B claim.

Deja-vu for Greenlight

The bull case is much the same for Einhorn today as it was in 2015.

CC shares declined sharply during 2Q in response to liabilities surrounding fire-fighting foams. Bears suggest this liability will cost the company billions of dollars. Einhorn doesn’t agree.

Here’s Einhorn’s take (from the letter):

If Einhorn is right, and the company only owes millions (not billions), what is CC worth?

CC is Very Cheap

The company trades less than 5x earnings. Given the current share price (around $16), you can buy the fluoroproducts business for less than 10x EBITDA and get the rest of the company for free.

Einhorn believes the fluoroproducts business is worth more than the entire company. The segments generates half of the company’s earnings, earnings which Einhorn thinks commands a higher multiple.

Greenlight sees a path towards $10/share in earnings power by 2021. If you subscribe to his bullish narrative, you can buy the company for less than 2x 2021 earnings.

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Resource(s) of The Week: Damodaran & Clifford Sosin


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We’re spoiling you this week with two resources. The first is a video from Aswath Damodaran on WeWork’s valuation. The second is a whitepaper from investor Clifford Sosin at CAS Investment Partners.


Analyzing WeWork’s Value Destruction

The King of Valuation is back, this time with an analysis on WeWork. In the video, Damodaran goes through WeWork’s IPO and provides his own valuation of the company.

Damodaran’s valuation: $14B.

The issue is clear. Even under high growth assumptions, the company isn’t worth nearly as much as SoftBank paid.

At this point I wish the company went public at $47B so I could’ve backed up the truck on shorts. Oh well, there’s always Peloton ;).


Clifford Sosin Wants to Change Banking

When he’s not looking for great investment ideas, Clifford Sosin spends his time trying to change the banking system. In their whitepaper on bank reform, Sosin and Peter Blaustein team up to tackle one of banking’s biggest problems: procyclicality.

The paper goes deep into the weeds on banking, capitalization and regulation. We’ll try to break things down into their first-order concepts.

    • The Problem: Banking presents high procyclicality from money and finance. Crises amongst banks has a cascading effect on the economy and causes recessions.
    • The Solution: Reduce procyclicality from money and finance.
    • The Mechanism: Positive Book Equity Recourse Notes (PBERN)

At this point you’re probably asking, “what in the hell are PBERN’s?” Good question.

According to the paper, PBERNs are “10 year constant payment bonds with monthly payments, with the feature that any interest or principal payments payable would be paid in stock at a pre-specified price when (a) the stock is lower than a pre-specified price and (b) tangible equity value is negative.”

And yes, this is out of my circle of competence as well.

What would this new banking system look like during an economic crisis? Sosin and Blaustein paint us a picture (from the paper):

To conclude, Sosin and Blaustein argue that replacing equity requirements with PBERN requirements would increase the utility in elastic money supply. This would in turn reduce the severity of banking crises.

PSA: Give Cliff a follow on Twitter. His twitter account is like an undervalued, overlooked stock. He posts (and retweets) thoughtful content and is quick to respond to questions.

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Who Won Twitter? — Value is Back (Steven Wood)


Source: Steven Wood Twitter

Better to be early than never! As of last week value stocks seem to be in vogue.

Of course this is a ludicrously small sample size. But can the trend continue? Will value once again have its day in the sun?

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Bonus Round


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Like a Marvel movie, it pays to stay until after the credits here at Value Hive. I’ve got two more resources for you this week:

    1. CEO’s Guide to Capital Allocation, BehavioralValueInvestor.com
    2. What Investors Can Learn From Operators, Adventur.es

We love hearing from the Value Hive community! If you came across an interesting story, a super cheap stock or a funny history tidbit, let us know! We want to hear from you.


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Burry, Timber Stocks and a WeWork Roast

This week’s Value Hive is jam-packed with stock ideas, a public roast of WeWork (and slashing valuations!) and more Michael Burry headlines.

If you haven’t already, make sure to subscribe to this newsletter so you receive it every week, completely free.

Let’s get to it!

September 11, 2019

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!

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Investor Spotlight: Burry & TLRD are 13-D Official (and his love for Japan)


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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.

In an interview with Bloomberg, Burry revealed the eight stocks he’s long in Japan:

    • Tazmo Co (ticker: 6266)
    • Yotai Refractories Co (ticker: 5357)
    • Sansei Technologies Inc (ticker: 6307)
    • Tosei Corp (ticker: 8923)
    • Kanamoto Co (ticker: 9678)
    • Altech Corp (4641)

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.

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Movers and Shakers: The Roast (& Value Capitulation) of WeWork


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WeWork’s been in the news for all the wrong reasons. Between their Euro League soccer-looking CEO and incredulous valuation, the “tech” company can’t seem to get out of its way.

Unfortunately, things got worse. Way worse.

The week from hell began with Scott Galloway’s public roast of the company’s S-1. The week ended with a valuation slash so severe Ron Swanson would approve.

WeWork Loves Adam Neumann

Going through We’s S-1, Galloway noticed something peculiar. The document oozed with mentions of the company’s CEO Adam Neumann.

Now you might be thinking, “That makes sense, he is the founder of the company”. But things get weird when you compare the amount of founder mentions in We with other companies.

Check out Galloway’s comparison graphic below:


Source: profgalloway.com

Galloway goes so far as to equate WeWork’s culture to a cult around its founder. And who can blame him?

Could WeWork survive if Neumann got hit by a bus tomorrow? Taking the S-1 at face value the answer is most likely no.

JK We’re Actually 50% Cheaper

If SoftBank loved WeWork at $47B, shouldn’t they love them at $20B? That’s the question the investment giant faces if rumors are true about WeWork’s revised valuation.

According to Bloomberg, WeWork anticipates an IPO around $20-$30B. Many analysts are anticipate the lower bound being the more realistic scenario. So why such a valuation cut?

Wall Street still thinks We is a real estate company, not a tech/SAAS business:

The company’s created accounting metrics that have Ben Graham rolling in his grave:

    • 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?

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Idea Backlog: Timber and Burgers (New band name?)


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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:

  1. Overlooked and underfollowed (trades on the OTC market)
  2. Rather illiquid trading volume (around 8K shares per/day)
  3. 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:

    • 3M shares outstanding / 184K timberland acres = 0.14 acres per share.

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.

This could be an early sign of brand erosion.

So what makes Red Robin an interesting value investment idea? There’s two catalysts:

  1. The company is cheap
  2. 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.

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Podcast of The Week: Get Stuff Done!


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We’re big Tim Ferriss fans at Value Hive, and his latest podcast with David Allen is no exception.

David Allen is a management consultant, executive coach and author of the best-seller Getting Things Done: The Art of Stress-Free Productivity. Ferriss does an excellent job of squeezing out nuggets of gold in the 1 hour 43 minute interview.

Some high-level topics of discussion include:

    • Your mind’s made for having ideas, not for holding ideas
    • Best tips for renegotiating agreements
    • Pros and cons of keeping track of information digitally vs analog format
    • The capture list
    • The two minute rule
    • Emptying the in-basket
    • Top-down vs. bottom-up systems

Much of what Allen has to say relates to value investing and investor psychology.

We all want to be more productive at analyzing a company, reading annual reports and structuring our days.

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Who Won Twitter? — The Expert Squeeze

Acquirer’s Multiple sent out a great link on Michael Mauboussin’s The Expert Squeeze and Man Versus Machine.

What is the Expert Squeeze? According to Mauboussin, its when “people stuck in old habits of thinking fail to use new means to gain insight into the problems they face.”

Mauboussin claims that experts do well with rules-based problems with a variety of outcomes — even better than computers.

Here’s a handy breakdown of domains, rules and outcomes and which area experts shine in:

While you’re at it, give Michael Mauboussin a follow on Twitter. You’ll thank us later.

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Bonus Round

Source: fangraphs.com

If you guessed the Nats win probability to be 0.03% with one-out in the bottom of the 9th, you’d be correct.

Note how the above graph looks eerily similar to that deep value stock you forgot about diligently held on to as it got bought out.


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Welcome To The Value Hive

September 03, 2019


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 a hip 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.

If you want to do deeper work on Mario and friends, we recommend starting with @HardcoreValue’s slide deck.


Idea Backlog — A Two-Fer with Chris Mayer

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:

  1. Airport in Bangalore
  2. 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:


Video of the Week — It’s Luxury, My Boy!

We don’t consider ourselves “high fashion” here at The Value Hive, but this week’s video is all about luxury. Bernard Arnault, CEO of luxury goods conglomerate LVMD, sat down for a Q&A to discuss all things luxury.

Some high level talking points:

  • How and why Arnault entered luxury goods business
  • How Arnault defines the word, luxury
  • How Arnault enters new markets
  • Why Arnault got into the luxury goods business

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!


Bonus Round

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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