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.

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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!


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.


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?


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.


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.


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.


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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