We’re Not Done Yet: More Q4 Investor Letters

We hope you enjoyed your extended weekend with friends and family. You might be thinking, “does Value Hive take a day off?” The answer is no! In fact, we’re writing this intro on Monday morning.

We don’t snooze so you can stay up-to-date on all things value investing.

This week we’re diving into two of my favorite fund manager letters. But before we do that, check out our two most-recent podcasts:

Also, if you have the time, please subscribe and leave a rating/review of the podcast on Apple Podcasts. It goes a long way in spreading the word about the show.

This week’s letters:

    • Laughing Water Capital
    • Greenhaven Road Capital
    • Hayden Capital

We’ve also got a video from Charlie Munger’s Daily Journal meeting.

Let’s get after it!

February 19, 2020

Presidential Fun Facts: It’s President’s Day, so why not some fun trivia? You know the rules. No Googling. First person to email the correct answer will get $5 cash and bragging rights for an entire week. Are you ready? Here it is:

George Washington had a set of false teeth. They weren’t made from wood. What were they made from?

Good luck!


Investor Spotlight: Off-The-Beaten-Path Letters

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I’m excited to dive into these letters. Each manager has their unique spin on markets, investing and the concept of value investing. There’s a lot to learn from reading their thoughts.

Matt Sweeney kicks us off.

Laughing Water Capital: +20.9% in 2019

Matthew Sweeney’s Fund, Laughing Water Capital (‘LWC’), returned 20.9% in 2019. Since inception, the Fund’s returned 93.6% net of fees. This equates to an 18.4% compound rate of return. That’s darn impressive.

As Matt notes, the Fund’s underperformance shouldn’t be shocking. He says, “In a year when greater than 90% of SP500 returns came from multiple expansion, our relative underperformance should not be a surprise.”

Laughing Water sticks to simple, timeless investing principles. According to the letter, the Fund buys shares of good businesses that are, “led by incentivized management teams while they are dealing with some sort of optical, operational, or structural problem that we deem to be temporary.”

Let’s review three of LWC’s holdings:

    • Aimia, Inc. (AIM)
    • Avid Bioservices (CDMO)
    • Hill International (HIL)

Aimia, Inc. (AIM.TO/GAPFF)

Aimia Inc., operates as a data-driven marketing and loyalty analytics company worldwide. It operates in two segments, Coalitions, and Insights & Loyalty Solutions. – TIKR.com

Here’s LWC’s reasoning for their initial investment:

“Our investment was based on the value of these assets, as well as the belief that an underperforming and improperly incentivized board of directors would be replaced in the near future.”

New management will take the helm in March. So what’s to like about the current price?

For one, you’re getting the loyalty business for next to nothing. The company has a $235M market cap with $203M in cash and no debt. Granted, the company’s lost money each of the last three years. But remember, you’re not paying much for that operating business.

Here’s the chart …

Avid Bioservices (CDMO)

Avid Bioservices, Inc., a contract development and manufacturing organization, provides process development and Current Good Manufacturing Practices (CGMP) commercial manufacturing services focused on biopharmaceutical products derived from mammalian cell culture for biotechnology and pharmaceutical companies. – TIKR.com

LWC lists reasons why CDMO is a great business (from letter):

    • Recession proof business
    • Powerful industry tailwinds
    • Growing client list
    • Significant competitive advantage

What more could you want?

Here’s what LWC sees over the long-term with CDMO (emphasis mine):

“Quarter to quarter and even year to year shares are likely to remain volatile as the business matures, but zooming out it is not difficult to imagine situations where a few years from now the company’s cash flow matches today’s revenue level. That might be 3 years from now or it might be 7 years from now, but given Avid’s existing pipeline, extremely high switching costs, and impossible to duplicate regulatory track record, this outcome appears likely.”

Let’s take a look at the chart …

Hill International (HIL)

Hill International, Inc. provides project and construction management, and other consulting services primarily for the buildings, transportation, environmental, energy, and industrial markets. – TIKR.com

There’s a few reasons LWC remains optimistic about HIL:

    1. Recent improvements in backlog
    2. Potential listing on Russell 2000 index
    3. Improved balance sheet and operating structure

It feels like a special situation given the Russell 2000 catalyst. Here’s LWC’s take:

“Given that being added to the index means forced buying without regard to price, and given that operationally the business is performing very well means there are unlikely to be many sellers, shares could re-rate considerably higher in the not too distant future.”

Think of it like the opposite of traditional spin-off/SPAC dynamics.

Here’s the chart …

Honorable Mentions

The letter details four other investments. But to spare the length, we won’t dive into those here. Check out the letter for more details:

    • Iteris (ITI)
    • Recro Pharma (REPH)
    • Par Technologies (PAR)
    • Clear Media (100:HK)


Greenhaven Road Capital: +15.5% in 2019

Scott Miller’s fund, Greenhaven Road Capital, returned ~2% in Q4 and 15.5% for the year.

Miller spent the first part of his letter discussing what the fund doesn’t own. There’s a few commonalities, such as:

    • Not owning a stock in the S&P 500
    • Not owning a stock that’s bid up due to bond-like dividends

As Miller notes, “Ultimately, fundamentals do matter and trees do not grow to the sky.”

Here’s what Miller does own in the partnership (top 5 holdings):

    1. KKR & Co. (KKR)
    2. Par Technology (PAR)
    3. SharpSpring (SHSP)
    4. Digital Turbine (APPS)
    5. Kaleyra, Inc. (KLR)

We’ll pull Miller’s thesis for each stock along with the price charts.

KKR & Co. (KKR)

Greenhaven’s Take: “Rather, we own shares of the entity that benefits from management fees and incentive fees for all of the KKR funds in the market. While the absolute returns of the underlying funds may suffer as assets grow, management fees are guaranteed, and KKR manages 30+ strategies. Some portion of the various strategies will almost definitely generate incentive fees as well. We can argue about how many of the funds and how much per fund, but even if lower returns do happen, owning the corporate entity/general partner still makes sense.”

Here’s the chart …

Par Technology (PAR)

Greenhaven’s Take: “PAR is a business in transition, actively investing in and growing its “good” business, a restaurant point of sale (POS) system. The POS system serves as the spine of a restaurant, and PAR is actively adding functionality and revenue streams from areas such as payments, inventory management, data analytics, and mobile order management (integrating with UberEats, etc.). PAR should aggressively grow the number of locations using the software and the revenue per location over the next three years. “

Here’s the chart …

SharpSpring (SHSP) *Board Member — Little Details*

SharpSpring, Inc. operates as a cloud-based marketing technology company worldwide. The company offers SharpSpring, a marketing automation solution for small and mid-size businesses. It markets and sells its products and services through sales teams and third party resellers. – TIKR.com

Here’s the chart …

Digital Turbine (APPS)

Greenhaven’s Take: “Digital Turbine serves as a neutral third party that works with wireless carriers to preinstall apps on new cell phones, then sells the slots to app-driven companies like Uber, Amazon, and Netflix. The company saw 30% revenue growth in the core U.S. market where they work with four major carriers including Verizon and AT&T. Their growth is even faster in international markets. This past quarter, APPS announced a Telefonica partnership that will launch in the next six months.”

Greenhaven’ Largest Concern: Large companies going directly to phone carriers, circumventing APPS.

Here’s the chart …

Kaleyra, Inc (LKR)

Greenhaven’s Take: “The real question for our investment at this point is: Can shares appreciate above $11.70? The current share price is $8.40, which implies a valuation of 1.5X revenue. This is a significant discount to its peers (Twillio is at 9X revenues and Sinch, a more relevant comparable, is just under 3X). The investment bank Cowen has an $18 price target on KLR shares and Northland has a target of $17. We are effectively getting paid to look at the next three earnings releases while not assuming the risk of a price decline. Kaleyra is profitable, and grew revenues in excess of 40% last quarter. A share price in the teens does not appear wildly implausible with a modicum of positive news.”

Here’s the chart …

Honorable Mentions

Miller disclosed two new investments:

    • Balwin Properties (BWN.JO)
    • Elastic Software (ESTC)

Check out his letter for his deep dive into those names.


Hayden Capital: +41.06% in 2019

Fred Liu returned a whopping 16.8% in Q4 and 41.06% in 2019. Those are fine numbers!

Where did Fred’s returns come from? According to the letter: Asia. Liu explains:

“As of today, ~55% of our investments are headquartered in Asia, ~38% in the US, and the rest split between Europe and Cash. Even with that, most of our American companies derive a significant portion of their earnings from abroad, while our Asian and European companies are predominantly domestic.”

Liu didn’t spend much time discussing his seven holdings. He mentioned two names:

    • Sea Limited (SE)
    • Carvana (CVNA)

Yet what the letter lacked in idea specifics, it made up with knowledge bombs.

Here’s a list of my favorite quotes from the letter:

    • “Sometimes I describe businesses like these, who are in an earlier-stage of their business lifecycle, like “children”. Even from a young age, you can usually tell when an exceptional child has qualities that set them apart from their peers (KPIs, usage metrics, etc.).”
    • “For example, you can see below that out of the 29 investments we’ve made since Hayden’s inception, the top 20% of positions (6 investments) accounted for over 100% of our gains (108% to be exact)5 . We’re wrong often, and that’s okay.”
    • “Studying investors such as Charlie Munger, Hillhouse, Himalaya, Nomad Investment Partnership, Prescott General, among others sparked the realization that it’s a handful of investments that really drive the long-term outperformance of these funds.”

The letter is well worth the read. Also, if anyone knows Fred, I’d love to get him on the podcast.


Resource of The Week: Long Live Charlie Munger

GIFs by tenor

Pull up a chair, grab some popcorn, it’s Munger time!

CNBC aired a two-hour long live-stream of Munger’s Daily Journal meeting. You can watch the replay here.

It’s a great way to spend an afternoon or evening.


Tweet of The Week: That Bat Flip Though …

Warren Buffett tells us to invest in our sweet spot. This is what it feels like when you wait for that perfect pitch:


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

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Ackman Nets 50%, More Investor Letters & Housel’s Latest Long-Form

Hope you’ve had a great week so far! Lots going on in the value corners of the markets. As always, we’ve got a bunch of Q4 Letters to roll through.

But before we do that, check out my latest podcast with Cliff Sosin of CAS Investment Partners. I had a blast listening to Cliff spout off knowledge bombs. It’s over 2 hours, so strap in and brace yourself.

    • Episode 11: Clifford Sosin, CAS Investment Partners

Episode 11 is fast becoming one of the all-time most listened episodes. Granted, we have a whopping eleven. But hey, we’re growing! I’m excited to bring you this week’s episode. We’ve got a great guest!

Also, if you have the time, please subscribe and leave a rating/review of the podcast on Apple Podcasts. It goes a long way in spreading the word about the show. The larger the audience, the better the guests, the better the content. Help spur that flywheel!

With that out of the way, here’s the letters we’re dissecting this week:

    • Maran Capital
    • Pershing Square (Presentation)
    • Laughing Water Capital

We also have Morgan Housel’s latest long-form piece.

This should be a doozy!

February 12, 2020

Richest Man Despite a Divorce: Not sure what I did in a past life, but I found myself watching the Oscar’s last night. I know, I feel ashamed. I watched long enough to hear a tremendous Jeff Bezos roast from Chris Rock. Rock spotted Bezos in the crowd and said, “Jeff Bezos is so rich, he got divorced and he’s still the richest man in the world. He saw ‘Marriage Story’ and thought it was a comedy.”

I couldn’t tell you who won what, but I laughed at that.


Investor Spotlight: Keep Them Letters Coming!

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We’ve got three great letters to dive into. The process stays the same. We’ll review the high-level theme of the letter, and then discuss each investment mentioned.

Dan Roller, you’re up!

Maran Capital Management: +24.8% in 2019

Dan Roller’s Fund returned 9.5% in Q4 and 24.8% in 2019. The Fund is unconventional, as Dan wrote in the first paragraph, saying (emphasis mine):

“Maran Capital Management is an unconventional investment manager. I feel that it needs to be, as it is aiming for unconventional — that is, superior — results.”

WIthin this unconventional structure, Dan sees four distinct competitive advantages:

    1. Structural (i.e., small size)
    2. Behavioral (i.e., disciplined & patient)
    3. Informational (i.e., intensive, fundamental research)
    4. Analytical (i.e., sound, systematic process)

Here’s the infographic of each advantage:

Dan mentions four companies from his top five holdings:

    • Clarus Corp (CLAR)
    • Ranger Energy Services (RNGR)
    • RCM Technologies (RCMT)
    • Scott’s Liquid Gold (SLGD)

Let’s figure out why he likes them …

Clarus Corp (CLAR)

Dan thinks CLAR has the potential to be a multi-bagger. Here’s his take (emphasis mine):

“The balance sheet is clean, and the aligned management team is comprised of great operators and skilled capital allocators.  I believe fair value today is in the high teens; my five-year base-case valuation is $35/sh, and my five-year upside case is $45/sh.

Let’s check out the chart …

Catalysts for future growth (per letter):

    • Black Diamond Equipment improving margins and revenues
    • Potential growth in apparel and footwear segment
    • Sierra Bullets segment

Ranger Energy Services (RNGR)

Here’s what Dan likes about RNGR:

“Ranger is an off the beaten path domestic energy services company trading at a very cheap price. It is illiquid, small cap, and a ‘broken’ IPO, yet has high insider ownership (60%+), is well run, taking share, gushing cash and buying back stock.”

It’s hard to disagree with Dan’s thesis when the company’s doing numbers like these:

    • Run-rating ~$50M of EBITDA ~$30M FCF
    • Currently trades ~3x EBITDA and 30% FCF yield to equity
    • Trades at ~0.5x tangible book

Maran believes RNGR has around 100% – 300% upside under various scenarios. Let’s go to the charts …

Scott’s Liquid Gold (SLGD)

Maran holds over 5% position in SLGD. The letter doesn’t dive into specifics on SLGD, but here’s some quick highlights:

    • Market Cap: $28M
    • EV: $23M
    • EV/EBITDA: 7.8x
    • Gross Margins: 35%

Here’s the chart …


Pershing Square Capital: +51.2% in 2019

Bill Ackman killed it in 2019. Pershing increased NAV 58% and returned 51.2% for shareholders. Not bad. On the heels of such increases, Pershing initiated a 2% dividend yield, similar to the S&P 500.

The Fund (PSH) also bought back $224M in shares between June 2019 and Feb 4, 2020.

PSH beat the S&P by 2,660bps. And it was the fifth time PSH generated net returns of 39% or higher:

So which companies contributed to PSH’s returns?

All of them.

Yep. And to make sure that you know, PSH put a slide in their deck that reads:

“We did not have any detractors in 2019. Every portfolio company generated positive returns.”

Flaunt it when ya got it, I guess? Either way, here’s the return breakdown for Ackman’s holdings:

Let’s take a look at Ackman’s latest investment, Agilent (A).

Agilent (A)

Agilent is a leading analytical measurement company. They sell instruments, consumables and services to identify, quantify and analyze molecular properties of substances / products.

Here’s the quick-hit financials:

    • Market Cap: $26.2B
    • Enterprise Value: $27B
    • EV/EBITDA: 20x
    • Gross Margin: 54%
    • EBIT Margin: 20%

Ackman believes shares are undervalued for two main reasons:

    1. Margins can expand
    2. Underlevered relative to peers

Agilent sports 25% EBITDA margins, which is good. But not as good as their peer Waters (WAT) which does 35%.

Also, the company’s Net Debt / LTM EBITDA rests at 0.8x. Yet its peers have an average of 3x leverage.

Here’s the chart …

Congrats to Ackman’s stellar 2019. Hopefully he continues his success in the years to come.


1 Main Capital: +25.2% in 2019

Yaron Naymark runs 1 Main Capital Management. If you haven’t already, follow him on Twitter. He adds tremendous value to your timeline. Anyways, back to the letter.

1 Main Capital returned 12.4% in Q4 and 25.2% for the year. Since inception, the Fund’s returned 10.7% compared to 19% for the S&P 500 and 8.5% for the Russell 2000.

Top contributors to the Fund’s performance included:

    • Alphabet (GOOG)
    • Altigen (ATGN)
    • Hemacare Corp (HEMA) — Exited in Q4
    • KKR & Co. (KKR)
    • Mastech Digital (MHH) — Exited in Q4
    • Sanofi Contingent Value Right (GCVRZ) — Exited in Q4
    • Total Site Solutions (TSSI)

At the end of the year the Fund’s top five positions were:

    • Issuer Direct (ISDR)
    • KKR & Co. (KKR)
    • MasterCraft Boat Holdings (MCFT)
    • RCI Hospitality (RICK)
    • Total Site Solutions (TSSI)

The top five positions accounted for ~45% of the Fund’s assets.

Let’s break each down.

Issuer Direct (ISDR)

ISDR is a communications and compliance firm that helps corporate issuer clients disseminate information. Why is ISDR interesting? They’re switching from a project-based revenue model, to more of an annual platform style. Here’s Yaron’s take (emphasis mine):

“Over the last few years, the company has been in the process of transitioning its business model away from project-based engagements to annual platform subscriptions, which has in turn increased the predictability of the business but has also temporarily suppressed revenue growth. Additionally, in the last year, the company was impacted by the rapid decline of its investor commentary business.”

On top of that, the company’s core business (ACCESWIRE) grew 70% in Q3 and 40% YTD.

Before we get to the charts, here’s the quick-hit financials:

    • Market Cap: $44M
    • Enterprise Value: $29M
    • EV/EBITDA: 20x
    • Gross Margin: 70%

RCI Hospitality (RICK)

RICK is the Fund’s largest position going into 2020. According to the letter, it’s been a drag on performance since inception. There’s reasons for the performance drag, as Yaron explains:

“As we sit here today, RICK is late to file its annual 10-K with the SEC for the third time in as many years, had its auditor resign late last year and is under formal investigation by the SEC regarding a series of negative articles published about the company by an anonymous short seller. “

Ouch. So why did 1 Main add to this investment? Here’s 1 Main’s take:

“To summarize, based on the company’s valuable assets, capable management team and strong cash flow, I have a tough time seeing how we lose much and can easily see us making multiples of our capital in this investment in the coming years.”

The company has around $200M in owned real estate and trades at 5x FCF. The little debt they have is covered by that significant cash flow generation. Will it be enough to overcome the accounting speed-bumps and short seller reports? Time will tell.

Here’s the chart …

Total Site Solutions (TSSI)

TSSI provides services for the planning, design, deployment, maintenance, and refurbishment of mission-critical facilities in the United States. It operates in two segments, Facilities and Systems Integration.

Here’s why 1 Main Fund likes the company:

“Today, the company is focused entirely on the modular data center market. Modular data centers allow its users to scale their capacity over time on an as-needed basis, compared to traditional data centers which require much more capital investment for greater upfront capacity than is needed today. This allows for a steadier pipeline of service work for clients, who require ongoing planning, configuration, rack construction, server integration, deployment and maintenance.”

Check out the quick-hit financials:

    • Market Cap: $24M
    • Enterprise Value: $22M
    • Forward EV/EBITDA: 2.8x
    • Gross Margins: 36.5%

Here’s the chart …


Resource of The Week: Nothing is Inevitable

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Sorry, Thanos. According to Morgan Housel, you’re not. In fact, nothing is. And that’s the point. Housel’s latest piece, History Is Only Interesting Because Nothing Is Inevitable, sheds light into this phenomenon.

Housel uses history to paint a picture of the laughable arrogance of humanity’s hindsight bias. Take this quote for example (emphasis mine):

“That stuck with me. Here we are, bloated with hindsight, knowing the crash after the roaring 1920s was obvious and inevitable. But for those who lived through it – people for whom the 1930s was a yet-to-be-discovered future – it was anything but.

Going further, Housel notes that in the heat of the moment, people weren’t worried about a Depression. They celebrated in the prosperities of America:

“When we look back at the late 1920s we think about crazy stock market valuations and shoe-shine boys giving stock tips. But that’s not what people paid attention to at the time. The newspapers are filled with charts like these: rational, level-headed, and fuel for optimism.”

The entire paper’s worth the read.  


Tweet of The Week: Less Instagram, More Reading. More Writing.


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

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More Ideas From Your Favorite Value Investor Letters

After a brief stint of daily content, I’m back with your weekly favorites. From here on out, expect your normal Wednesday morning Value Hive in your inbox. We’re back in the saddle.

If you haven’t had a chance to check out my latest podcast episodes, you can find them here:

So far Dave’s podcast has the most listens of any podcast I’ve done. Congrats Dave! I’m excited to release this week’s podcast.

Anyways, we’re deep in the heart of investor letter season. Here’s what we got this week:

    • White Crane Capital
    • Wolf Hill Capital
    • Alluvial Capital

We also have a resource from expectations investing OG Michael Maubouisson.

Let’s dive in!

February 05, 2020

It Pays To Take The Under: First, a big congrats to the Chiefs for pulling off a Super Bowl win. I know Brent Beshore is ecstatic, and I couldn’t be happier for the state of Kansas ;). Before kick-off, bettors who took the UNDER on Demi Lovato’s National Anthem song duration of 2 minutes made some cash. The line? +180. Not bad.


Investor Spotlight: Letters and More Letters

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I’m excited to dive into these letters. Each one presents ideas on the markets and new positions. Make sure to read these in their entirety. I don’t know if its selection bias, but most of these managers are damn good writers.

Let’s start with White Crane.

White Crane Capital: +10.4% in 2019

White Crane Capital returned 1.8% in Q4 and 10.4% in 2019. For those unfamiliar with White Crane’s strategy (like I was before writing this), here it is:

“The White Crane Multi-Strategy Feeder Fund Ltd. seeks to identify securities across the capital structure that trade at a discount to our estimate of intrinsic value (valuation discrepancy), with corresponding company specific events to cause the price to converge to intrinsic value (catalyst). A multi-strategy approach is used to generate an uncorrelated return to broader equity and fixed income markets throughout the market cycle”

I like White Crane because it exposes me to an area of competence I lack: bonds. I want to learn more about investing across the capital structure. And I find White Crane’s letters a great resource.

As of December 31, the Fund was 55% long and 44% short for 11% net exposure. But what I’m interested in is their position in Yellow Pages (YLO).

White Crane bought YLO’s senior secured bonds in January 2018. Their thesis at that time included the following (from the letter, non-exhaustive):

    • Leverage at the senior secured level was approximately 1.7x. The business had transitioned such that, by our estimate, approximately 50% of the Company’s EBITDA was derived from its digital assets. Applying conservative multiples of 3.0x EBITDA for the print business and 6.0x EBITDA for the digital business resulted in asset coverage of approximately 3.0x.
    • The indenture had bondholder friendly (i.e. tight) covenants including sweeps on free cash flow generation and asset sales.
    • Despite experiencing revenue declines, YLO continued to generate substantial free cash flow.

YLO redeemed its senior secured notes in full in the fourth quarter 2019. White Crane accrued a 10% yield over the life of their investment at, “what we believe [to be] very low credit risk.”

Why did they think YLO’s bonds offered low credit risk? They focused on cash flow. They ignored perceptions (emphasis mine):

“We believe our approach of focusing on YLO’s cash flow generation allowed us to understand the reality of this strong credit, rather than focusing on the perception. In the current markets, it sometimes seems that investors perceive profitability and cash flow generation as being afterthoughts, while we take a more traditional view in believing they form the bedrock of security valuation.

Cash flow forms the bedrock of security valuation. Love that quote.


Wolf Hill Capital: +32.3% in 2019

Gary Lehrman’s Fund returned 7.47% in Q4 2019 and 32.3% for the year. Since inception (Feb. 2019) the Fund’s returned 115.98% for partners. Not bad Gary!

One thing to note about Wolf Hill’s returns: they generated positive alpha from their short positions. To generate 4.6% from shorts in a “rip-roaring” market is worthy of a hat tip.

Let’s dive into Wolf Hill’s newest ideas:

    • Cornerstone Building Brands (CNR) – Long
    • Renewable Energy Group Inc (REGI) – Long
    • Westshore Terminals (WTE.CN) – Short

All information about the ideas come straight from the letter.

Cornerstone Building Brands (CNR) – Long

CNR is the largest North American manufacturer of outdoor building products. They serve both commercial and residential construction end-markets.

Wolf Hill claims CNR is another “classic public market LBO.” Here’s their logic:

“… The  market  cap  represents  a  small  portion  (20%) of the company’s total enterprise value and the majority of the outstanding stock is in fact held by private equity firms CD&R  and  Golden  Gate  Capital.  The combination of CNR’s robust  free  cash  flow  generation and our anticipation of improving earnings creates what we believe will be a powerful recipe for  shareholder returns as deleveraging and multiple expansion take hold.”

Where will the value unlock come from? Wolf Hill has a few ideas:

    • Cyclical tailwinds from robust residential construction trends
    • Consolidating manufacturing facilities
    • Investing in high ROI automation equipment

Let’s take a look at the charts …

As you can see, CNR’s about broke even since 2019. We’ll leave this idea with Wolf Hill’s closing remarks:

“We believe CNR will have the wind at its back as dovish Fed policy will keep mortgage rates persistently low, allowing new home and commercial construction projects to maintain their healthy growth trajectory. At today’s valuation, CNR offers exceptional upside potential, driven by healthy end-market demand and company specific initiatives which should drive earnings growth and balance sheet de-leveraging.”

Renewable Energy Group, Inc. (REGI) – Long

REGI is the largest producer of biodiesel and second largest producer of renewable diesel in the US. Wolf Hill built a “meaningful position” in REGI during Q4 2019 around the “call-option like” event: Blenders Tax Credit.

Wolf Hill explains the BTC, saying, “The BTC was a piece of legislation first implemented in 2005 that provides a $1/gallon tax credit for biodiesel producers. Since 2005 Congress has often allowed the BTC to expire, only to reinstate it retroactively”

Congress reinstanted the BTC in December on a retroactive basis. This also provided an extension of the BTC through 2022. What does this mean for REGI? One monster tax-free windfall: $500M in cash ($13/share).

Let’s go to the charts …

The stock’s flirting with all-time highs. Wolf Hill remains bullish after the stock’s run-up. Here’s why (from the letter):

“In Summary, if we conservatively value REGI’s renewable diesel facility at $1b, the market is assigning a negative $300mm valuation to the rest of REGI’s portfolio! No, that was not a typo. We believe that REGI represents a +$3b collection of assets – in fact we cannot fathom a scenario where REGI is worth materially less than today’s valuation over any extended time frame. We anticipate the next leg higher in REGI’s valuation to occur in conjunction with the upcoming earnings announcement where management is likely to announce an aggressive share repurchase authorization and to quantify the compelling economics of deploying capital into an expansion of the company’s renewable diesel portfolio.”

This idea might be worth looking into (I don’t own a position).

Westshore Terminals (WTE.CN) – Short

Westshore operates the largest coal export facility on the American West Coast from a port in Vancouver. Wolf Hill believes the short is now more compelling at lower prices ($18 compared to initial short at $20). Here’s why:

“In addition, Westshore’s second largest customer, Cloud Peak, was on the verge of bankruptcy and would ultimately be forced to idle mines that were shipping through Westshore as Cloud Peak export economics no longer made sense.”

Let’s go to the charts …

The stock’s down around 15% since Wolf Hill’s letter release.

At year-end 2019, Wolf Hill had 12 longs and 11 shorts.

Alluvial Capital: +18.5% in 2019

Dave Waters returned 5.8% in Q4 and 18.5% in 2019. Since starting Alluvial Capital, Dave’s returned 39.8% to LPs, or 11.8% annualized. Dave’s a great guy and awesome investor. Check out my podcast with him above if you haven’t had the chance.

Also, go follow Dave on Twitter @alluvialcapital. Anyways, back to the letter.

There’s five areas Dave believes his Fund has succeeded:

    • Undiscovered Markets
    • Corporate Events
    • Obscured Value
    • The Truly, Truly Illiquid
    • Special Situations

Of course, my favorite of these is the Truly, Truly Illiquid. Yet Undiscovered Markets offer tremendous opportunities for the patient (or stubborn) investor willing to look. Dave explains these Undiscovered Markets (emphasis mine):

“Searching for value in little-known market segments with barriers to investment has been a profitable enterprise for Alluvial Fund. The Borsa Italiana AIM segment, for instance, goes unexplored by most funds because of the tiny size and limited trading liquidity of its constituents. We are already looking for the next treasure trove!”

Fish where the fish are and the fishermen aren’t.

Let’s take a look at Alluvial’s newest holding: Butler National Corp. (BUKS). For full disclosure, I am a shareholder in BUKS. Here’s Dave’s take on the company:

“Butler is an odd little company with operations in two industries. The first is aerospace: the firm performs aircraft upgrades, modifications, and testing. The second is casino management: Butler has a majority stake in the entity that manages the Boot Hill Casino in Dodge City, Kansas. These lines of business have nothing to do with each other and there are no possible synergies gained from operating both. Thankfully, the company is aware of this and is exploring a disposition of the smaller, less profitable casino management business by way of a sale or spin-off. “

Of course, I agree with Dave’s thesis. Also, if you want to check out my thesis on BUKS, click here.

Per Dave’s letter, “Butler trades at a price-to-earnings multiple of just 6 and has substantial excess cash on its balance sheet. Currently trading around 70 cents, I believe shares are worth well over $1 today and potentially far more in coming years.”

As a fellow shareholder, I hope we’re right Dave!


Resource of The Week: Managing The Man Overboard Moment

GIFs by tenor

Shout-out to Ensemble Capital’s twitter account for this resource. If you haven’t, go follow them. They produce great content and will add to your Timeline quality.

This week’s resource is Michael Mauboussin’s white-paper, Managing the Man Overboard Moment.

Mauboussin addresses the dreaded topic: when one of your stocks drops 10%+ in one day. At this moment, it’s important to keep your compass pointing North. Mauboussin looks at the data, 5,400 events in the past quarter century.

Through his analysis, he develops a checklist for investors. The checklist helps decide whether to buy, hold or sell the free-falling stock. Here’s the checklist:

The entire paper is worth the read, as is anything Mauboussin writes.


Tweet of The Week: Tiho Brkan on Wall Street Analysts


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

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Sneak Peak at Second Deep Value Polish Play

Yesterday we discussed the first of two Polish stocks I’m covering in February’s Value Ventures. In today’s email I’m going to give a rough overview of the second company. The idea is equally exciting and also has a good looking stock chart.

Like yesterday, I can’t give away the name of the company because I’m writing about it in my Value Ventures report. But after reading this you find yourself interested, check out this page to learn more. We’re keeping access open until Sunday at midnight EST. There’s also a 60-day money-back guarantee, so there’s no risk to try it out.


An Over-Optimistic IPO Leads To Bargain Prices

The second company is a product of a failed IPO. They went public at high valuations based on glossy, pie-in-the-sky projections. Those projections weren’t met, and the share price took a major hit. Over the next two years, the stock fell from 55 zloty to 15 zloty (>70% decline).

We think 15 zloty represents significantly low expectations for the future of this company. Speaking of, here’s what I love about the business:

    1. Trades <3x EBITDA and sports 36% FCF yield
    2. Growing Market Share in Core Product
    3. 30%+ gross margins and 11% pre-tax margins
    4. Founder-run with 60% insider ownership

There’s a lot not to like about the company:

    • Single-digit revenue growth
    • Declining gross profits & EBITDA
    • Partial Share Dilution
    • Investments in Non-Core, Unproven Businesses

Yet, we think some of these issues are transitory given management’s reinvestment cycle. In essence, the company’s plowing capital into sales and marketing to expand their presence beyond Poland. Here’s a quote from their CEO on this topic:

“Higher operating costs are primarily a consequence of high advertising and marketing expenditure aimed at increasing market share. These activities already have effects in the form of growing sales, especially in the markets of Western Europe and Scandinavia, where we have recorded over 50% increases.”

If those operating expenses lead to higher sales and greater reach, the company should return to its normal EBITDA margin of around 12%. But even if they don’t the current stock price is low enough to offer a margin of safety. We’ll hit on that later.


The company is run by two brothers. They own over 60% of the company between the two of them. They have over 17 years experience in telephone manufacturing, and were one of the first people to break into the senior citizen cell phone market in Poland. The brothers appear smart and capable in expanding the company’s sales into North & South America.

Alright, let’s talk about valuation …

Potential Downside

The company has a strong balance sheet which provides adequate downside protection. As of last quarter, they sported 72M zloty in current assets against 11.8M zloty in total liabilities. If we take these figures at face value, the company trades at a 46% discount to NCAV.

But we can’t take these figures at face value because most of their assets are in inventory. Let’s apply a 50% discount to inventory. A 50% discount in inventory gets us around the current share price.

That’s not bad.

Potential Upside

Our conservative assumptions on growth and EBITDA expansion put this company’s shares well over 100% of current market prices. In fact, we don’t need to see margins expand in order to realize higher intrinsic business value. We would need the business to not collapse in the next five years. That’s all.

There’s also a scenario where upside potential reaches above 200%. But we’re not assigning a high probability to that outcome.

Wrapping It Up

Here’s a business that trades at roughly NCAV if you discount their inventories by 50%. On top of that, you’ve got a profitable core business that’s growing in market share targeting a niche, boring industry. The company’s run by founders with tremendous skin in the game. Finally, a broken IPO has led to severely discounted share prices.

Oh, and check out the charts … We’ve got support at the current price level.

Once again, if you’re interested in knowing exactly what companies these are, check out this page. We’re only keeping enrollment open till Sunday at midnight EST. After that we’ll be closing the service. There’s also a 60-day money-back guarantee. So you can try out our value research service for a few months and if it’s not for you, we’ll give you your money back. No problem.

I’ll see you tomorrow!

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

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Sneak Peak at First Deep Value Polish Play

We’ve spent the last two days discussing where we’re looking for deep value plays and what type of company we want to buy when we get there. With both factors in place, it’s time to chat about my first Polish idea.

I can’t give away the name of the company because I’m writing about it in my Value Ventures report. But after reading this you find yourself interested, check out this page to learn more. We’re keeping access open until Sunday at midnight EST. There’s also a 60-day money-back guarantee, so there’s no risk to try it out.

Alright, let’s dive in!

Boring Business On Sale With 22% Free Cash Flow Yield

This first company is a very boring business. They make iron castings for various end-markets. The company specializes in painting, thermal processing, assembly and distribution of their castings. They sell to seven different markets, all which are boring on their own.

So, this is a boring business that no 18-25 year old wants to do. In other words, it passes that initial screen with flying colors.

There’s a few things I like about the business:

    1. Super cheap (2x EBITDA with 22% FCF yield)
    2. Monopoly on Cheapest & Strongest Product
    3. Growing Margins & Revenues
    4. High insider ownership

Not only do you have a cheap price, but you get growth with it.

The company’s averaged 20% revenue growth over the last ten years. During that time, they’ve nearly doubled EBITDA margins (7.5% to 13.7%). They’re able to increase margins and revenues because of two things:

    1. Monopoly on cheapest & strongest iron casting product
    2. Internal R&D department providing new efficiencies

Both these things translate into lower costs of production, which they can pass on to their customers in the form of lower prices. And to their shareholders in the form of higher profits, margins and dividends.

Speaking of dividends, let’s talk about capital allocation.

Skin In The Game & Capital Allocation

Management’s putting their money where their mouths are. The directors own roughly 11% and through various buybacks / tenders, the company itself owns 28% of common stock. Along with opportunistic buybacks, the company pays a healthy 6.50% dividend.

In other words, you can receive about the average market return in dividends from holding this stock, with all the potential upside from its discount.

Potential Downside

I always start my analysis with how much I could lose. If I know that, the upside should take care of itself. In this case, the company trades at around 20% premium to its net asset value. So our downside should be around 20% or so from current prices. Maybe a bit more if you discount some of their balance sheet items (like inventory and PP&E).

Potential Upside

Here’s where things get interesting. The current price indicates low expectations for the future. Mr. Market’s pricing in zero top-line revenue growth and no margin expansion. On top of that, Mr. Market’s assuming a continued rise in cap-ex as a percentage of revenues beyond their five-year historical average.

We don’t think the future will look like that for this company. And if we’re right, we should win big.

Remember, the company’s averaged 20% annual growth over the last ten years. If we assume a fraction of that growth and a slow EBITDA expansion (given monopoly on that product), we’d get 150% increase in shareholder value.

And those are conservative assumptions!

If we projected double-digit revenue growth over the next five years, the discount becomes downright silly.

Wrapping It Up

Tomorrow we’ll chat about another Polish company that caught my eye. In similar fashion, tomorrow’s company offers low expectations for the future. It’s a boring business led by its founders who have massive skin in the game.

Once again, if you’re interested in knowing exactly what companies these are, check out this page. We’re only keeping enrollment open till Sunday at midnight EST. After that we’ll be closing the service. There’s also a 60-day money-back guarantee. So you can try out our value research service for a few months and if it’s not for you, we’ll give you your money back. No problem.

I’ll see you tomorrow!

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

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Boring Businesses In Overlooked Areas: The Holy Grail of Deep Value Investing

Yesterday we discussed where we’re looking for deep value investments: Poland. Today, we’re fleshing out the types of companies we’re looking for. These companies are homogenous in style across the globe. Durability doesn’t change regardless of where we are in the world. And that’s a good thing.

In short, we’re looking for three things:

    1. Boring businesses uninterrupted by technology changes
    2. Easy-to-understand business models
    3. High insider ownership

Now of course these companies have to be cheap — otherwise we wouldn’t bother looking at them. But besides your standard discount to future cash flows, the above three criteria help us find great businesses at those cheap prices.

But why these three? Let’s dive in.

Boring is Beautiful

Boring businesses are beautiful. They go about their day-to-day operations with efficiency and robotic automation. They’re not susceptible to headline risk (i.e., negative news), and all around unassuming to most investors.

Here’s a great way to filter the boring companies from the more “exciting” ones. Ask yourself one question: “Are there any 18-25 year olds dying to get into this business?” If the answer is “no”, you’re in the right place.

Boring businesses are great investments because a) nobody wants to invest in these companies and b) most boring businesses perform some vital task. What do I mean by vital? Sewage, plumbing, HVAC, pool installation, road maintenance, etc. These businesses make civilized life possible. It’s the things we take for granted all the time, then complain when they’re not working.

But there’s the second part to this equation: uninterrupted by technology changes. This is important for two reasons. First, technology changes every day, sometimes faster than we can comprehend. Second, investing is a game of probabilities and expectations. Guessing those two things (probabilities and expectations) in an ever-changing industry is darn-near impossible.

As you’ll see in the next email, both companies in the February Value Ventures are very boring businesses.

This leads us to our second criteria: easy-to-understand business models

Simplicity Rules, Especially In Business Models

Another great consequence of boring businesses is their tendency for simple, easy-to-understand business models. A road maintenance company isn’t too hard to understand. A pool installation company isn’t offering rapidly changing technology packages.

Simple business models increase your chances of accurately projecting the future set of probabilities for that company. That’s not to say you’ll be right every time. But you’ll have a clearer picture on what the future could look like due to the lack of industry/company change.

We’re making it plenty tough going outside the US into countries where we don’t know the language. Adding a complex business model on top of that is downright foolish.

Adding another layer of comfort and alignment is our third criteria: high insider ownership

Eat Your Own Cooking

We want to invest in companies whose owners have skin in the game. It doesn’t matter if its a Polish company or a US listing. Insider ownership aligns management’s interests with those of its shareholders.

This doesn’t guarantee that management will act in the best interest of shareholders. In fact, too much insider ownership isn’t great either. A family business where insiders control 90% of the company doesn’t bode well for shareholders.

One of the companies we profile has 60% founder-led insider ownership. Interests are well aligned in this situation, and even better, the founders still run the company.

A Look Ahead

In our next email, we’ll review the high-level theses of our two Polish ideas. Both companies share a few key qualities:

    • Very cheap
    • Low expectation stock price
    • Strong balance sheet
    • Boring business
    • Healthy cash flow generation

If we’re right (or not too wrong), we should be handsomely rewarded for holding such names.

If you’re interested in our Value Ventures research service, then make sure you check out this page to learn more about it.

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

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Charlie Munger’s ‘Fish Where The Fish Are’ Applied To Poland Equity Research

It’s been a couple rough trading days for US equities. But fear not, there’s other places to invest and other holes to fish. Yesterday we previewed one country that meets both our standards for cheapness AND quality. A country that’s pro-business, geopolitically stable and sports a cheap equities market (12x P/E).

The country is Poland.

Poland is the second-best place to do business in the world (as of Feb. 2019).

Poland’s GDP grew during the 2009 Economic Recession while the rest of Europe crumbled.

In fact, Poland experienced >4% GDP growth each of the last two years (4.8% and 5.1%).

So we’ve got this macro backdrop that looks really good. What does the equity picture look like? Pretty darn cheap.

According to StarCapital research, Poland trades at 12.5x earnings, 1.1x book and 0.7x sales. The country also sports a 3% average dividend yield. Not bad, and much cheaper than the United States equity markets.

Fish Where There’s No Fishermen

An important part of our deep value approach is fishing where others aren’t. Like Munger said, if we can fish where the fish are and fish where there’s no fishermen, we’re in a good spot. In Poland’s case, the fish are there, but the fishermen aren’t. Here’s what I mean …

Europe’s stock market ended 2019 up 23%. Meanwhile, Poland’s equity market lost 6.4% in 2019. Talk about not jumping on for the ride. But here’s the interesting part, Poland’s economy is growing and conditions for investment are better than most of Europe.

What’s with the divergence? According to a December 2019 Bloomberg article, it could be slowing expectations of GDP growth in Poland. The country’s expected to clock in 3.4% growth in 2020. This would mark the slowest growth in five years. In other words, investors expect the fish to dry up.

Kamil Stolarski, analyst at Santander Bank, said in the Bloomberg piece:

“Already low valuations of Polish stocks won’t be enough bait for investors in the coming months.”

It sounds like a challenge. It sounds like a perfect place to fish.

What Makes Poland A Fertile Value Space

Poland is a rich, fertile place to find deep value stocks. Turn over enough rocks and you’ll find P/Es of 2 and monopoly businesses trading like cigar-butts. I want to reiterate why this opportunity exists:

    1. Poland is the second-best place to do business
    2. Poland’s economy is growing >3% per-year
    3. Poland’s markets haven’t benefited from 2019’s major equity run up

I’m spending a lot of time in Poland trying to find great businesses at ridiculously cheap prices. I’ve found a few and I’m sharing two of them with Value Ventures subscribers next week.

These are great businesses at crazy cheap prices. Prices that could 2-3x in 3-5 years if we’re conservatively right.

Also, if you’re interested in our Value Ventures research service, then make sure you check out this page to learn more about it.

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

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How Warren Buffett Made 50% Returns During His Partnership Days | Warren Buffett’s Investment Strategy Explained

We’re a few weeks away from releasing the February Value Ventures research report. If you’re not familiar, Value Ventures is our premium value investing research service. We cover deeply undervalued, off-the-beaten-path stocks that nobody’s talking about. In fact, in most cases, we’re the only ones researching these stocks. I’m talking about zero sell-side analyst coverage. 

I’m not trying to sound like a salesman when I say that you won’t find the stocks we cover at Value Ventures anywhere else. We designed it for that reason. 

Anyways, this month I’m featuring two of my most interesting ideas from one of the cheapest parts of the world. In order for us to generate superior returns, we need to do two things: 

  1. Look where nobody else is looking
  2. Fish where the fish are

Let’s flesh these ideas out. 

“It’s a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.”…would you say the same thing today?” – Warren Buffett

Look Where Nobody Else Is Looking

Buffett spent most of his early Partnership days buying and selling undervalued micro-cap stocks. Most times, these stocks had little liquidity and a nonexistent following. These weren’t the kind of companies you’d hear at cocktail parties. 

Yet it was this strategy, looking in the forgotten corners, that helped Buffett generate 50% annualized returns. Read the above Buffett quote again. Why is he so confident he could generate 50% returns with smaller pools of capital? Here’s his answer (emphasis mine): 

“You have to turn over a lot of rocks to find those little anomalies. You have to find the companies that are off the map – way off the map. You may find local companies that have nothing wrong with them at all. A company that I found, Western Insurance Securities, was trading for $3/share when it was earning $20/share! I tried to buy up as much of it as possible. No one will tell you about these businesses. You have to find them.

That’s what Value Ventures is all about. Turning over a lot of rocks to find little anomalies. We’ve taken Buffett’s approach above and applied to the global investing landscape. There’s over 20,000 international stocks, most of them small-micro caps. It’s in these corners where we find ridiculous ideas. Ideas like the two we’re profiling next month. 

If everyone’s looking in the US, head elsewhere. Venture outside your own borders. There’s no excuse to not look at other countries’ companies. Tools such as onlinedoctranslator make it easier than ever to read foreign languages. When Buffett invested in South Korean stocks, all he had were the financials. He didn’t read management’s reports. Now you have that power. 

This idea, looking where nobody else is, lead us at Value Ventures to a country with one of the lowest P/Es on the globe. A country ripe with industrialization, prime investment opportunities and solid political leadership. 

Fish Where The Fish Are

“Now there are various ways to look for value investments, just as there are various places to fish. And the first rule of fishing is to fish where the fish are […] The first rule of value investing is to find some place to fish for value investments where there are a lot of them.“ – Charlie Munger

I like to fish. A few years ago my friend and I found a quiet, secluded section of a river behind his house. We spent the next three summers reeling in bass after bass. We couldn’t buy enough bait! Yet over time, word spread about the success we were having at our watering hole. It was only a matter of time before the spot dried up and our streak ran out. 

Replace “fish” with “cheap stocks” and you’ve described how most value investors feel about US markets. This is lazy thinking. I know. That sounds harsh, but it’s true. Here’s why. 

Like a fisherman can move down (or up) stream to find more fish, so too can a value investor move to different markets. Heck, you don’t even have to leave the US to find good ideas. Stop searching in the most liquid and most followed spaces of the US markets. A simple climb down the liquidity or market cap ladder reveals dozens (if not hundreds) of companies trading at substantial discounts to intrinsic value. 

At Value Ventures, we fish where the fish are. We never leave the smallest, darkest, most illiquid spaces because we know that’s where the opportunity is. We know these spots won’t fall victim to over-fishing. We stay small, we stay nimble. 

A Preview of Our Next Fishing Hole

We’re excited about the current opportunity set in this cheap, under-the-radar fishing hole. And tomorrow, we’re letting you know exactly where that is. In the mean-time, I’ll whet your palate with a few statistics that should get you excited. 

  • This country ranks as the 2nd best place to invest (as of Feb. 2019)
  • This country has a pro-business government and incentives are aligned for business growth
  • This country’s GDP grew during 2009 while the rest of Europe crumbled
  • This country has an average P/E of 12x

Keep your eyes open for tomorrow’s email!

Also, if you’re interested in our Value Ventures research service, then make sure you check out this page to learn more about it. 

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

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Insights From O’Shaughnessy Asset Management’s Q4 2019 Letter

I want to dive into O’Shaughnessy Asset Management’s Q4 2019 Investor Letter. It’s one of my favorites so far this quarter, and you’ll see why.

If you’re pressed for time, here’s the cliff-notes:

    • Growth beat value, again
    • Growth generated returns via multiple expansion
    • Value generated returns via good business results or return of capital to shareholders
    • Growth vs. Value Expectations Gap Widest Since Dot-Com Bubble
    • How We Can Leverage Expectations

Let’s get to the charts …

Multiple Expansion Leads The Way

The above chart show’s OAM’s breakdown of style performance for the Russell-segmented stocks. What’s important to note about this graph is the returns from multiple expansion. Russell value stocks returned -1.22% via fundamental business growth and 3.58% via buybacks and dividends.

But the greatest return factor from all Russell segments? Multiple expansion.

And multiple expansion, my friends, is the reason value underperformed growth in 2019. OSAM notes that, “Multiple expansion added 43.7% to Growth index returns, but only 24% to Value.”

That’s why growth won. But it’s more than that. As we look towards 2020 one thing remains clear: embedded expectations for growth stocks are at their highest peak.

The Expectations Game

Take a look at the chart below from the letter. What do you notice?

According to OSAM research, the current long-term earnings growth expectations between value and growth is at its largest divergence since the 1999 dot-com bubble.

Embedded expectations is the key to understanding stock price movements. As the chart shows, expectations are now high for growth stocks and low for value stocks. In other words, growth stocks have high hurdle rates to clear over the next year. Value stocks? They’ll soar if they make it through the year.

But I hate this “value vs. growth” debate. Both are necessary for long-term absolute returns. In fact, if we look at stocks through the lens of expectations, we don’t need to segregate into “growth” or “value”.

Learning From The Best: Michael Mauboussin

Michael Mauboussin wrote the book on Expectations Investing. You can grab a copy here. I finished it in a couple of days. Here’s the big picture with expectations investing (from Mauboussin, emphasis mine):

“Expectations investing represents a fundamental shift from the way professional money managers and individual investors select stocks today. It recognizes that the key to achieving superior investment results is to begin by estimating the performance expectations embedded in the current stock price and then to correctly anticipate revisions in those expectations.”

Mauboussin doesn’t mention the words “growth” or “value”. And there’s a reason for that. Behind every stock price is an expectation of the future. That expectation is binary. It’s either better or worse than the company’s past performance. According to Mauboussin, if we want to generate outsized returns, we need to be on the right side of expectations.

How To Profit from Embedded Expectations

Now that we know the expectations gap, we can develop a simple, robust investment strategy. All we do is look in the low expectations pool. Find the lowest decile of expectation stocks, and project what Mr. Market thinks will happen over the next five years (or so).

This is easier said than done, of course. But it’s the mindset that matters. Changing your perception of stock prices from random gyrations to embedded expectations gives you a leg up on almost everyone.

Once you find a low-expectations stock, use a DCF to figure out what Mr. Market’s expecting the company to do over the next few years. Do those assumptions seem unreasonably pessimistic? How low is the company’s hurdle to beat Mr. Market’s expectations?

The lower the expected performance, the higher the expected return if we’re right.

Concluding Thoughts

O’Shaughnessy’s Q4 letter gave us the map to find low expectation stocks. They’re hiding in the value corners. Mauboussin on the other hand, gave us the tools to take advantage of O’Shaughnessy’s research insights (i.e., expectations investing).

This is our playbook for 2020, are you ready?

Have a great weekend!

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

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Let The Investor Letters Roll In

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

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

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

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

Let’s get to it!

January 15, 2020

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

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


Investor Spotlight: Letters Galore!

GIFs by tenor

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

Woodlock House Capital: +12.43% 2019

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

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

Cheap (Undervalued)

Owner-operator (skin in the game)

Disclosures (easy to follow)

Excellent financial condition

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

Portfolio Overview

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

The Old Names:

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

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

The New Names:

InterContinental Hotel Group (IHG.LSE)

JD Weatherspoon (JDW:LSE)

Next, Plc. (NXT:LSE)

Texas Pacific Land Trust (TPL)

AO. Smith (AOS)

Vlata Fund: +25.40% in 2019

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

Real-Time Intrinsic Value Estimation

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

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

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

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

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

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

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

Portfolio Overview

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

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

East72 Capital: -6.15% Q4 2019

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

Deep Dive Into Exor NV

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

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

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

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

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

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

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

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

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

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

RV Capital: +31.20% 2019

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

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

Diversification with Charlie Munger

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

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

Pessimism in South Africa

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

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

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

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

Discovery (DSY): Health & Life Insurance

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

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

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

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

Here’s what the charts look like …

RV’s Newest Investment: Wix.com (WIX)

Robert runs WIX through his list of investment questions:

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

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

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

Here’s the chart …


Resources of The Week: Table Stakes & Expectations Investing

GIFs by tenor

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

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

Expectations Investing Tutorial

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


Tweet of The Week: All The Accounting You Need


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

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