Career Risk, Sports Stocks, Li Lu and What Makes Stocks Go Up

Hope your week is off to a great start! We’ve got a lot to cover this week. But before we do, I want to briefly discuss the Macro Ops Collective.

The Collective is our premium service offering. It’s unlike any other investing resource on the market. We’re a group of people dedicated to the craft of investing, trading and getting smarter every day. As iron sharpens iron, so one investor sharpens another.

As a Collective member, you’ll gain access to this growing group of traders via a private Slack channel, as well as institutional-quality investment research.

You’ll receive real-time trade alerts, weekly stock ideas from the most under-followed corners of the market and invaluable briefs on market trends.

If any of this sounds interesting to you, click here to learn more.

Our Latest Podcast Episodes:

Here’s what we cover this week:

    • Genetic Defects in Active Investors
    • Sports Investing in a Post-COVID World
    • The Anatomy of Stocks That Go Up
    • Li Lu Speech at Columbia University

I love curating this content for you guys. Let’s dive in!

July 1st, 2020

Chart Of The Week: After taking 2/3rds profit on our PTON position (see last week’s Value Hive), we’re back this week with a new short trade. This chart was featured in a previous premium Breakout Alerts report.

I got short around $100.52. I’m expecting a pullback towards the 200MA before another leg down (or if I’m wrong, a reversal above the 200MA).

I’m seeing a lot more short set-ups. You can find one of them here.


Investor Spotlight: Do Active Managers Have A Genetic Defect?

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Institutional Investor published an article on a “genetic defect” found amongst active fund managers. This defect wasn’t underperformance, nor was it some sector-specific bias.

It was over-diversification.

The article begins by saying (emphasis mine), “Research has shown that active managers produce persistent excess returns on their best ideas — but they squander these returns by relying on overly diversified portfolios.

This isn’t breaking news by any stretch of the imagination. So why is it in the news now?

Finance veteran Tim Mullaney developed a new RIA designed to eliminate this defect.

Killing “Beta Anchors”

Mullaney’s project (Melius) isn’t groundbreaking. Take only the best ideas from multiple portfolio managers and remove each manager’s diversification efforts. The logic being each manager’s combined best ideas provides enough diversification while removing the beta anchors, or stocks added to reduce risk (but also reduce return).

Melius relies on ensemble methods to capture this alpha. Ensemble methods take in multiple predictive models which (hopefully) spit out a more predictive model. We see this idea in Michael Mauboussin’s Wisdom of Crowds paper.

The Real Reason: Career Risk

Managers over-diversify to protect themselves from career risk (getting fired). This makes sense. The incentive structure of most money managers isn’t to out-perform an index. It’s to keep their job.

Inevitably this leads to closet-indexing, or managers constructing portfolios similar to the S&P 500. The article explains the phenomenon well (emphasis mine):

“Take the Janus 20 fund,” he said. “It did well for a while, but when that manager’s approach goes out of style, even if short term, what happens? The investors gets hurt, the consultant gets embarrassed, and the manager gets fired. So that’s why you don’t see highly concentrated portfolios.”

Have Your Cake & Eat It Too

Mullaney wants to have his cake and eat it too. Combining the top ideas from multiple managers has worked in the short-term (as the article notes). But what about long-term performance? This story reminds me of the Charlie Munger anecdote on the “best ideas portfolio”. Here’s Warren’s partner on the endeavor (emphasis mine):

“We’ll get the best ideas from our best people and we’ll make a portfolio just of our best ideas from our best people. Nothing could be more plausible. They’ve done it three times and it’s failed every time. Now, how would you predict that?

Well I can predict it because I know psychology. When you pound out an idea as a good idea, you’re pounding it in. So by asking people for their best ideas they were getting the stuff that people had most pounded in, so they believed. So of course it didn’t work. And they stopped doing it because it didn’t work. They didn’t know why it didn’t work because they hadn’t read the psychology books, but they knew it didn’t work so they stopped. And it’s so plausible.”


Movers & Shakers: The Shake-up In The Sports World (An Investor’s Guide)

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Andrew Walker is back with Part 6 (six!!) of his Yet Another guide to media stocks. This week he focuses on team sports investing and the changing landscape post-COVID.

If you’re looking for Andrew’s favorite two sports team stocks, look no further than:

    • Madison Square Garden Sport (MSGS): Owns the Knicks & Rangers and trades for <$4B EV.
    • Liberty Media Corporation (BATRA): Owns the Atlanta Braves + some real estate and trades for roughly $1B EV.

According to Andrew, the above valuations are massive discounts to what a private buyer should pay (emphasis mine):

Those are mammoth discounts to the private market value of the sports teams underlying those assets; the Knicks alone would likely go for ~$5B if they were put for sale (or more than MSGS’s entire enterprise value, implying you get the Rangers thrown in for more than free!), and I would guess the Braves would be close to $2B in a sale (implying you get the very valuable real estate around the Braves’ stadium plus a few other goodies for more than free).”

COVID Clouds on The Horizon

Today’s market prices are cheap. But how cheap are they in a post-COVID world? Andrew does a great job answering this question (emphasis mine):

“The impacts of Covid on sports teams are going to be felt for decades to come, and I would not be at all surprised if Covid creates some permanent impairment in sports team values. Probably not enough impairment to justify close to today’s discount, but if you asked me if you offered me the exact same sports team at $2B pre-Covid or $1.5B post-Covid, I would almost certainly prefer to invest at the higher price in the pre-Covid world.

What are these long-term effects Andrew’s referencing? He mentions a few:

1. Acceleration of Cord-Cutting

Andrew’s Take: “So when Corona shut down every sports league, it created a really weird cable TV offering: cable TV was effectively an overpriced sports bundle that no longer had sports. The results were pretty predictable: cord cutting accelerated.”

2. Increased RSN Blackouts

Andrew’s Take: “If I was a cable company, I would absolutely be looking to blackout the RSN. Why am I going to be given them $5/sub/month when they aren’t providing a product? Sure, the RSN could offer to take no or seriously reduced fees until baseball returns…. but, again, if I’m a cable distributor, I’m looking to tighten the screws on the RSN right now. If I blackout an RSN during a lockout, basically no one will care. But the RSN will suffer enormously.”

3. Decrease in Revenues, Salaries & Salary Caps

Andrew’s Take: “Lebron James is already making more per year in endorsements than he is in NBA salary; if the league tries to cut salaries 20% across the board, could James and a few other super stars band up and create their own league (Kyrie Irving already floated the idea, though Irving can be a little wacky….)? In normal times, I’d consider that laughable. But with the whole world on pause, a fresh league could have some advantages: there are plenty of suboptimal things about the NBA that could be improved with fresh thinking, and obviously the players could cut out the owners (who don’t really provide much) and keep the equity capital for themselves.”

The Rise of eSports

Andrew must’ve read last month’s Macro Ops Consilience Report. We dove deep into the rise of eSports and its long-term runway.

He mentions an interesting point about the second-order effects of COVID in sports: generational fans. In short, Andrew argues that kids (the next generation of potential fans) will opt for other forms of sport and entertainment (primarily esports). Why? Here’s Andrew’s answer (emphasis mine):

A big part of being a fan as a kid is going to a stadium and experiencing a game. Kids aren’t going to get that for the next few years. Sure, they can watch the game on TV…. but they could also just go play fortnite. I would bet a significant number of kids chose fortnite over watching games on TV, and that can break the lifelong fandom bond.”


Newsletter Of The Week: The Anatomy of Stocks Going Up

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Dave Portnoy taught us stocks only go up. Fair enough. But why do they go up? It’s a trivial question at face value. But think about it. What really makes a stock price rise? Is it macro liquidity? What about margin expansion?

According to Dubra Stocks research findings, only two things mattered:

    1. Revenue growth
    2. Earnings growth

That’s it. While helpful, those two things aren’t useful to us as investors. We already know that.

Dubra dove deeper into these Stocks That Go Up (STGU) to determine what made them rise in addition to revenue and earnings growth.

Five Groups of Stocks That Go Up

Dubra broke these STGU into five groups:

1. The Early Innovators: “Exceptionally high revenue growth companies that generally run at lower margin. These companies are growing at all costs.”

My take: Early stage companies at the beginning of their growth curve. They have no earnings, generate massive losses. They only care about growth.

2. Maturing Innovators: “Very high margin businesses that grow somewhat slower than The Early Stage Innovators.”

My take: Companies continue to grow rapidly but are starting to lose less money, potentially making minimal earnings.

3. Mature High Moat: “Moderate revenue growth and strong margins. Far higher margins than The Early Stage Innovators but lower margin than the Maturing Innovators.”

My take: Companies now make consistently high profits and are reinvesting less of their cash-flow back into the business (R&D, etc.) and using it to pay dividends, raise cash balances or buyback stock.

4. Defensible & Predictable: “Stocks with relatively low revenue growth and margins, but have strong moats and competitive advantages (regulated oligopolies, etc).”

My take: This is your run-of-the-Dempster-mill Buffett company. Massive, strong moat and durable earnings power.

5. The Survivors: “This is a group that is otherwise unremarkable in terms of revenue growth and margins whose returns are predominantly the result of surviving major periods of uncertainty in the markets.”

My take: Lackluster group with no real place in the study. Goodwill, in other words.

Invert, Always Invert

We’re closer to a working formula for finding STGU. One last step, invert.

Dubra inverts his question and asks, “What are characteristics of stocks that go down (STGD)?”

He outlined another five groups (from the newsletter):

These five groups combine to make one terrible stock (unless it’s 2020 — then that’s to the moon). Dubra notes the common traits of STGD (emphasis mine):

“What we find is that STGD generally suffer from combinations of financial leverage (too much debt), operational leverage (too much overhead) and cyclicality (not enough revenue when they need it). These characteristics amplify negative developments and create scenarios of irrecoverable loss for investors.”

Bringing It All Together

Dubra gives us a TL;DR of his research. And yes, it is as simple as you think.

Stocks That Go Up: “generally coincide with high revenue growth and the ability to grow at high rates over long periods of time. Better said, STGU tend to benefit from open-ended growth opportunity that enables both high growth and high durability of that growth.”

Stocks That Go Down: “exhibit characteristics of financial leverage, operational leverage and cyclicality. Those things are to be avoided in a thoughtful way.”


Lecture Of The Week: Li Lu at Columbia University, 2006

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Li Lu is one of my investing heroes (behind Burry). Lu’s approach to investment is logical, straightforward and produces incredible results. He’s one of the few (if only) man Charlie Munger trusts with his capital.

Check out this lecture Lu gave at Columbia University in 2006. Lu’s words of wisdom penetrate time, creating evergreen content.

It’s an hour and 46 minutes and worth every second.


That’s all I got for this week. Shoot me an email if you come across something interesting this week at

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Activism, Financials and Why IPOs Suck

We hope you had a better weather weekend than we did in MD. Rain, rain and more rain. I can’t complain, though. I finished one of my newest favorite books: Amarillo Slim in a World Full of Fat People.

If you haven’t read it, buy a copy. Brad Hathaway (you can find his podcast here) turned me on to the book. He even bought me a copy. Great dude — can’t thank him enough.

Next on my to-read list is Creating Shareholder Value and The Bond Book. What’s on your reading list?

Our Latest Podcast Episodes:

Here’s what we cover this week:

    • A Framework For Understanding Financial Companies
    • Investing in Cloud Computing
    • Alta Fox’s Latest Activist Position
    • Why IPOs are Rip-offs

Ooo I’m excited for this one! Let’s get after it.

June 25th, 2020

Chart Of The Week: This week’s chart was featured in a prior Breakout Alerts report. So far it’s working in our favor (I have a position). Profit target is around $59-$60/share. Here’s what I like about it:

    1. Breakout from horizontal boundaries
    2. Established uptrend
    3. Continuation pattern from bullish inverse H&S breakout


Investor Spotlight: Alta Fox Raises Voice in Activist Campaign

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Alta Fox Capital went activist last Friday. Connor Haley, managing partner of Alta Fox, disclosed an activist position in Collector’s Universe (CLCT). You can read the letter here.

Connor is one of the sharpest investors in the game. I read his letters like religion. This public activist stance got FinTwit’s attention real quick.

Before diving into the letter, let’s take a look at CLCT.

CLCT By The Numbers

    • Market Cap: $305M
    • Enterprise Value: $296M
    • Gross Margins: 60%
    • Unlevered FCF Margin: 19%

We can see why Connor would like CLCT. A durable, high FCF generating business with a strong competitive moat.

Armed with our figures, let’s breakdown Connor’s letter.

Not Your Typical Activist Stake

Alta Fox didn’t initiate its CLCT investment with the intention of going activist. The fund bought shares because CLCT displayed common characteristics found in many Alta Fox investments (from the letter):

    • Strong competitive advantages
    • Long runway for growth
    • Attractive reinvestment opportunities
    • Low investor awareness

But after talking with past executives, employees, customers, etc. Alta Fox smelled an untapped value creation opportunity.

The activist campaign centered on one company problem (from the letter, emphasis mine):

“In our opinion, CLCT’s lack of innovation and margin improvement is primarily attributable to a complacent and disengaged Board that has not demonstrated or executed on a thoughtful capital allocation plan.”

Not The Best Board

Reading further, we see why Alta Fox wants to change CLCT’s board. Take a look at the current board’s rap sheet (from the letter):

That’s a recipe for complacency and lackluster capital allocation. And when Alta says the board’s equity ownership is minimal — they mean it. The board owns (a collective) 1.5% of common stock.

Three Ways Out

Alta Fox sees three paths for CLCT’s future (from the letter):

    1. Bring in a new and rejuvenated Board to work with current management in improving the core business (Alta Fox’s preferred plan)
    2. Slash public company costs and go private
    3. Maintain the status quo (which the board has elected to do)

Alta’s Final Thoughts

Alta Fox sums up its thesis in the following paragraph (emphasis mine):

“With reasonable growth and margin expansion assumptions, CLCT’s base grading business is severely undervalued by the market today. Furthermore, the market today is assigning CLCT no credit for any digital efforts. Our nominees would work tirelessly with management to fix the bottlenecks in the core grading business, introduce valuable new digital services, and bring increased transparency to both investors and customers …

We believe our nominees have the experience and track record to work collaboratively with management to deliver $100/share in value to CLCT’s shareholders within the next 3 years ($50/share in core business + $50/share in new digital initiatives).


Movers & Shakers: Frameworks For Financials

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I struggle analyzing financial companies. In fact, I have yet to invest a dollar into financials or insurance businesses. Not because I don’t think they’re good businesses. But because I don’t understand them. I want to change that. That’s why we’re covering Marc Rubinstein’s newsletter post, Front Book, Back Book: A Framework for Understanding Financial Companies.

The Benefits of A Large Back Book

Banks and insurance companies have “old” assets on the balance sheet. Each year, those assets grow because you can’t replace the duration of those assets today, with the returns you’ve generated from the old asset until now.

In short, a long-tail premium written decades in the past has had time to accumulate decades of premiums. That’s not the case for newer premiums.

Here’s Marc’s take on the benefits of a large back book (emphasis mine):

“A financial company doesn’t have to start all over again on 1 January each year. Before it even opens its doors it can bank on a stream of income coming in (although a stream of charge offs or claims could very well go the other way). Unlike other businesses a back book makes money during the night and over the weekend. It’s a melting ice cube of course, the asset won’t stick around forever, but as long as it was priced correctly, the back book can provide a stable stream of earnings to finance new business growth.

Did you catch that last part? “As long as it was priced correctly …”

That’s critical. Marc explains why (emphasis mine):

“Just as no-one priced in the possibility of large-scale terrorism losses in 2001, no-one priced in the possibility of pandemic losses in 2020. Lloyd’s of London estimates that insurance industry losses will exceed US$100 billion this year. That’s around twice what 9/11 cost (US$40 billion or US$55 billion in today’s money).”

What does this mean for financial companies’ business models? They become quite capital intensive enterprises.

That makes sense. The back book of business took a lot of expense to win upfront. But after that, it’s an annuity stream until losses and claims come in. It’s at this point we find the distinction between front and back books.

Front vs. Back Books

I love the way Marc bifurcates financial companies’ two main business segments (from the article):

This creates a problem for newer financial companies, like insurance. Take Lemonade, Inc. for instance. We covered them in last week’s Value Hive. Marc notes an important distinction in their business model that allows Lemonade to eliminate the need for a back book (emphasis mine):

“Lemonade details in its S-1 prospectus how beginning 1 July it will cede 75% of its business to reinsurers. Like most fintechs it does not have the capital to cultivate a back book.”

Again, this makes sense. The back book is a highly capital intensive operation (but with high margins). What new company wants to go through the trouble of developing a back book of business when they can offload it to reinsurance companies?

A major problem with doing that is lack of skin in the game. Marc explains (emphasis mine):

“The problem of course is that it removes skin in the game. If you’re not going to retain some interest in the long-term performance of the book, there is little incentive to underwrite it properly at the outset.”

Benefits of Having Two Books

The newsletter ends with a defense for two books of business (emphasis mine):

“When capital is abundant, pricing goes down. At times like those, a well-underwritten back book can sustain the business until the cycle turns. If the entire business is built around flow it’s harder to withstand competitive forces … But when capital is depleted, like it is after large losses and pricing goes up — that’s really the time to dance.

Marc observes two ways to make money with both books:

    1. Front book: follow the pricing higher (works best in a consolidated industry
    2. Back book: Value the book higher than the market


IPO Of The Week: IPOs are (actually) Rip-offs

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Last week we covered Lemonade, Inc. LMND wants to go public via IPO. Bill Gurley thinks that’s a terrible idea. And we should listen to him. Gurley’s a GOAT in the venture capital space. He’s invested (via Benchmark) in companies like Uber, Zillow and Stitch Fix (to name a few).

What makes IPOs such a rip-off? Simple: it’s all about the underwriters making money. Gurley elaborates with a story on Elastic’s public offering (emphasis mine):

“We suddenly realized that the investment banks were way underpricing the shares, and that the market cap would jump by $70 [million] to $80 million the first day.”

When investment banks underprice a company’s shares, there’s usually one direction the stock trades post IPO. Up. Gurley noted that in Elastic’s case, the underwriters took home a cool $200M in gains from the share price increase. None of that went to original investors (like Benchmark) nor the company’s bank accounts.

A 2019 CNBC article revealed the largest underpricers in the underwriting game (Hint: it’s who you think it is).

What’s the solution? Gurley suggests direct listing.

Benefits (and Drawdowns) of Direct Listing

The main benefit of a direct listing is insiders and employees retain most of the equity ownership in the company. There’s less dilution and you remove the underpricing with investment banks.

It’s also never been easier to directly list on a stock exchange. The article notes, “There’s no technical reason why companies can’t list themselves. The technology already exists. Companies can essentially plug right into the stock exchanges, and the share price gets determined by a standard market-matching process.”

There are clear drawdowns with direct listings. IPOs are an easy way to raise cash for a business. Direct listings don’t have a clear way to raise capital (if companies need it). Another common drawdown people mention about direct listings is there’s little/no momentum going into the listing.

I don’t see that as a big issue with social media and digitization of road shows.

If you’re interested in learning more about direct listing vs. IPOs, Patrick O’Shaughnessy did a great podcast with Gurley. You can find that here.


Whitepaper Of The Week: Investing in Cloud Computing in 2020

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JPM released a 106-page CIO survey on IT investment spend. It’s a great primer for understanding where chief allocators put their money in that space.

Here’s the TL;DR if you’re pressed for time:

    • IT budgets remain cloudy (see what I did there) amidst COVID-19 uncertainties
    • Microsoft dominates the cloud game (commands 3x mindshare as #2 opponent)
    • Spending on cloud computing remains robust
    • Top five companies include: Microsoft, Amazon (w/ AWS), Google, salesforce, and ServiceNow.

Spending Plans For CIO’s in 2020

One of the coolest parts about the survey was seeing how CIO’s planned to spend their IT budget. And more importantly, which product companies CIO’s plan to invest in. Check out the graph below:

There’s a few things to notice from this graph:

    1. Microsoft only has 0.8% of the market left to conquer
    2. CIOs plan to maintain investment in Adobe
    3. Almost 50% of CIOs plan to invest more in Microsoft products

Also not a huge fan of Slack’s numbers in this report. Looks like deterioration of the bull thesis.

Let’s take a look at another graph (warning to shareholders):

Almost 50% of CIOs expect to increase their spending in Microsoft products/services. On the other hand, CIOs plan to spend 10% less on and 4.6% less on Dropbox. But don’t tell that to DBX and BOX shares. Both companies’ stock prices are hitting new highs.

Next is one of my favorite charts in the survey. If you’re looking for actionable investment ideas this is your chart:

Take a look at the top left of the chart. It shows companies which CIOs spending intentions are high and company market penetration remains low. In other words, there’s a lot of demand for these products with long runways for growth.

That’s not a bad combination.

If you don’t want to squint your eyes, here’s the list:

    • Elastic (ESTC)
    • Pure Storage (PSTG)
    • CrowdStrike (CRWD)
    • Coupa (COUP)

Find a hour to read the entire report. You’ll get smarter and learn about a few businesses you might not otherwise.


That’s all I got for this week. Shoot me an email if you come across something interesting this week at

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Ackman’s SPAC, Intangible Assets, Insurance IPOs and Mauboussin’s Whitepaper

Hope you had a great weekend and a good start to your week. Isn’t it funny how a ~8% drop in the S&P feels like nothing after March? Just another day in the markets.

There’s people saying we’re in a recession/depression. There’s people saying we’re in the early stages of a bull market. Whichever side you’re on — it doesn’t matter. All that matters is finding great companies that trade at crazy discounts to intrinsic valuation, ripe for a breakout.

Speaking of new ideas … our latest podcast is loaded with em’!

Our Latest Podcast Episodes:

Here’s what we cover this week:

    • Bill Ackman Writes Blank Check
    • The Math of Value & Growth
    • Lemonade S-1 Analysis
    • Accounting For Intangible Assets

This newsletter has a mix of in-depth analysis, company research and investor news. Let’s get after it.

June 17th, 2020

Chart Of The Week: I’m featuring the chart below in this week’s Premium Breakout Alerts Report. I’ll give you a few hints:

    • Well-known company
    • Robinhood favorite
    • Technology-based

I really narrowed down the list, didn’t I? Anyways, it’s a beautiful cup-and-handle pattern.


Investor Spotlight: Bill Ackman Cashes In (Again)

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Bill Ackman officially signed a lease in the pages of this newsletter. We can’t get rid of him! This week he wants to issue a Special Purpose Acquisition Company (SPAC). A big one: $1B.

There’s a lot we don’t know about the Ackman SPAC. But for those unfamiliar with SPACs, check out this slide deck here.

In short, a SPAC is a holding company that has a certain amount of money to acquire an existing business to take public. The SPAC has ~2 years to find a candidate. Often, early SPAC investors have no idea what business the company will buy.

SPACs also come with warrants or rights. Think of these as call options on the future of the SPAC and the acquired company.

SPACs in Vogue

The article also mentions the popularity of SPACs in 2020. Here’s some stats:

    • SPACs have raised $9.8 billion through U.S. IPOs so far in 2020
    • SPACs have been behind some of the most high-profile public listings of the last 12 months, with the likes of space tourism company Virgin Galactic Holdings, sports betting platform DraftKings Inc and electric truck maker Nikola Corp
    • Social Capital CEO Chamath Palihapitiya and Starwood Capital Group CEO Barry Sternlicht each raising hundreds of millions of dollars for them this year.

Flaming Dumpster Fires

As one Reddit user once said (and I’m paraphrasing), “SPACs are large dumpster fires full of s**t.” And they’re not entirely wrong. We don’t have a large database of SPAC return research. But what we do have isn’t good.

Anytime you find a place people call “dumpster fires”, stop. Remember the words of prophet Michael Burry: “If my initial reaction to a stock is ‘ick’, I dive deeper.”

Here’s two great resources for further SPAC Research (not sponsored):

    1. SPAC Alpha
    2. SPAC Research


Movers & Shakers: Accounting For Intangible Assets

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Last week we reviewed stock-based compensation and its effect on underlying profitability. This week we’re staying in the weeds with intangible assets. Let’s dive into FootNotesAnalyst’s review of intangible assets and their effect on traditional value metrics.

Value Factors: Assets-in-place vs. Cheapness

The article argues that there’s two ways to measure the value characteristic of a stock (from the article):

    1. Assets-in-place: “The value of a company can be thought of as the sum of the value derived from business activities already in place and the current value of expected future investment and growth opportunities. Furthermore, the value of existing business activities can itself be thought of as the current balance sheet value of (net) assets plus the added value derived from the way those assets are utilised i.e. their profitability.”
    2. Cheapness: To further confuse matters value can also be regarded as the characteristic of cheapness based upon one or more valuation metrics. This obviously overlaps with the idea of assets-in-place but the emphasis is on selecting stocks with low multiples rather than necessarily high assets-in-place.”

Indices and algos use book-to-price as the standard value “cheapness” factor. But there’s three issues with that approach (from the article):

    1. Measurement: “Financial reporting uses a mixed measurement model with some assets reported at cost and others at current value. In addition, measurement choices available to companies mean that comparability within asset classes may be affected.”
    2. Goodwill:While goodwill is regarded as an asset for financial reporting purposes, the question for investors seeking to identify ‘value’ stocks is whether it is an asset-in-place and, if so, whether balance sheet values are relevant.”
    3. Intangible assets:As we explain above, the recognition of intangibles is generally limited and often inconsistent, primarily due to the very different treatment of those assets that are purchased and internally generated.”

Why You Can’t Trust Stated Book Value

Intangible assets highlight another important aspect of value investing: you can’t trust book value. There’s two instances where book value matters: asset-heavy firms and financial institutions. After that, you shouldn’t use it.

The article offers a perfect explanation why (emphasis mine):

“The problem is that, in effect, a cash rather than an accrual basis is used to account for them. Investment in intangibles produces an expense in the current period but the benefit may predominantly impact profit in future periods. Equally, past investment in unrecognised intangibles that was expensed in prior periods may now be contributing to higher profits, but there is no amortisation charge to reflect the ‘consumption’ of the asset.”

A great way to think about this is through software-based businesses and customer acquisition cost. Businesses expense the acquisition cost of a customer upfront. But recognize revenue and profits in the future. This dichotomy between expense and revenue timing creates opportunity for individuals. Devastations for quants and algos (emphasis mine):

“However, if your approach to investment and portfolio construction is based on ‘factors’, ‘styles’ and data-driven analysis then intangible asset accounting may be much more of a problem, particularly if you favour (or wish to avoid) ‘value’ stocks.”

Hidden Value Stocks

Inverting the intangibles problem we can ask ourselves, “how much are quants and indices under-reporting stated book equity for companies?” Remember, the lower the stated book value, the higher the P/B ratio. Which leads to fewer value stocks and more growth stocks.

Scientific Beta tried to solve this problem by adjusting for intangible assets and removing goodwill. Here’s their results:

The study normalized standard book equity at 1. As the graph shows, adding omitted intangibles significantly increases the company’s book equity.

Note goodwill’s impact on book equity, too. Removing goodwill almost balances the gains from intangibles by 2017.

How To Use This Information

We threw a lot at you. The next logical question is, “great, how do I use this to get better?” There’s a few ways:

    1. (Unless analyzing asset-heavy/financial businesses) Don’t pay attention to book value and ROE
    2. Remove P/B from your stock screens
    3. Screen for companies with high P/B as a way to find hidden value stocks


IPO Of The Week: Lemonade’s S-1 Analysis

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I like combing through new and upcoming IPOs. Not because I think there’s tons of bargains in the mix. But because I learn about new businesses and new revenue models. It’s also one of the few places you can gain an information edge in markets.

One such potential IPO is Lemonade, Inc (ticker to come LMND). I found the idea from Byrne Hobart’s Substack newsletter. Byrne does a great job analyzing the bull case and risks as Lemonade hits public markets. You can also read the entire S-1 filing here.

What is Lemonade, Inc.?

LMND is a fully-digital renters and homeowners insurance company. Their mission is to quote, “Harness technology and social impact to be the world’s most loved insurance company.” How Silicon Valley of them.

The company’s goal is also simple: capture early/first-time insurance users at the beginning of their life-time spending cycle. Hold on as they earn more money and buy bigger houses. Add high-margin insurance products like pet and life as their customer matures.

Insurance is a great business. That’s why I’m interested in Lemonade. Let’s see what Byrne has to say.

A Bundle of Bets

Byrne claims Lemonade is a bundle of three bets:

    1. The theory is that small insurance claims are a market for lemons.
    2. The big tailwind is that reinsurers are overcapitalized.
    3. Lemonade thinks the industry doesn’t acquire enough customers online, and that this locks them out of low-premium policies.

Entry Market & Risk Mitigation

Byrne reaffirms Lemonade’s go-to-market strategy saying, “Lemonade’s entry point into the market is renter’s insurance.” He then describes how customers enact with the business (emphasis mine):

“[Lemonade] underwrite[s] through a chatbot, accept[s] claims through another chatbot, and offload[s] the vast majority of their risk to reinsurers through one- to three-year contracts.”

Everything’s done through an AI-powered chatbot. Straightforward enough.

How To Measure User Behavior

Byrne later explains how Lemonade wants to analyze their customers’ behaviors at three separate time periods:

    1. When they get a customer, to know how much to charge them
    2. When they get a claim, to know whether or not it’s legitimate.
    3. When Lemonade upsells or cross-sells.

That third period, “when Lemonade upsells or cross-sells” is vital to the bull case, as Byrne notes (emphasis mine):

Their renter’s insurance product is incrementally cost-competitive only because overhead dominates their competitors’ costs, and Lemonade’s cost structure is more fixed. But in 2019 they spent $175m in operating expenses to produce $13.1m in gross profit, which is not a sustainable model. At their current operating cost run-rate, they’d break even on renter’s insurance if they had 8.6 million customers, or 20% of all households that rent.”

Why Now?

Lemonade burns through cash and reports negative net losses. Today’s market loves that kinda stuff! In seriousness, Byrne thinks the IPO is more a marketing strategy than anything else:

My suspicion is that this is yet another marketing channel. Lemonade doesn’t need cash, but they do need attention. IPOs tend to increase name recognition, and the daytrader market is in the middle of a bubble.”

Regardless, I’m going to read the entire S-1 and learn all I can about their new-wave insurance model. Who knows, maybe they’ll crash post-IPO and present an opportunity!


Whitepaper Of The Week: The Math of Value & Growth

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Michael Mauboussin’s latest work, The Math of Value and Growth made it into this week’s letter. As always, read the whole piece. It’s short (13 pages) and full of knowledge bombs. Here’s a few of my favorite snippets (emphasis mine):

    • “But in recent decades investments have shifted in form to intangible assets, which are expensed on the income statement and are typically absent on the balance sheet (except for when one company acquires another). This is important because companies that invest heavily in intangible assets and have high returns on those investments often produce poor profits, or may even lose money. As an investor, you want that kind of company to invest as much as it can. The income statement looks bad, the balance sheet looks better, and the value creation looks great.”
    • “The fundamental principle is that growth only adds value when the company earns a return on its investment that is above its cost of capital. The higher the return, the more sensitive the business is to growth. Growth is of no economic significance if a company’s returns are equivalent to the firm’s cost of capital. As a consequence, companies should focus not on growth per se but on value-creating growth.
    • “Investors often calculate the P/E multiple using the current price and next year’s earnings. As a result, they sometimes believe that the market overreacts to what appear to be modest changes in the near-term earnings. But if expectations for the trajectory of growth really do shift down, the large apparent drop in the P/E multiple is completely justified”
    • “Here, next year’s earnings are revised down by just 2.6 percent, but the warranted P/E multiple is 25.3 percent lower. When ROIIC’s are well above the cost of capital, the value of the business is highly sensitive to changes in the growth rate of NOPAT.”


That’s all I got for this week. Shoot me an email if you come across something interesting this week at

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Emerging Markets, Stock Based Compensation & DIY S&P Valuation

Markets don’t make sense. The Druck is as confused as the rest of us. Nobody knows why companies with $0 in revenue trade at $20B valuations. And like that, the S&P is back to where it was before the COVID-19 sell-off.

Just as everyone predicted.

If there’s anything we know about markets it’s that we can’t predict. We shouldn’t spend time thinking about predicting them. Nor should we banter over Twitter about where the S&P will trade by the end of the year.

Nobody cares and it doesn’t help us make money on individual stock selection / investment.

Anyways, off my soapbox and on with the regularly scheduled programming.

Our Latest Podcast Episodes:

Here’s what we cover this week:

    • Stock-Based Compensation in Tech Companies
    • A DIY S&P 500 Valuation
    • GMO Q1 2020 Letter

We get technical in this issue so both hands inside the cart at all times!

June 10th, 2020

Winner Of The Week: Some of you know I run a premium Breakout Alerts service. Each week we send 6-7 potential breakout trades for the week(s) ahead. We recently closed on our largest winner yet: Credit Acceptance Corp (CACC).

Here’s the chart. Those that took this trade rode it for a near 5R (5% return on risk capital):

I’m sure Robert Vinall of RV Capital is thrilled with how CACC’s played out.


Investor Spotlight: GMO Q1 2020 Letter

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GMO Capital released their Q1 2020 letter and it’s a doozy. I love their Focused Equity portfolio and their thoughts on global valuations. Here’s the link to read the entire report.

Ben Inker, head of Asset Allocation at GMO starts the letter saying (emphasis mine):

“Our job is to try to understand the impacts of those scenarios on the assets we forecast and put together a portfolio that gives an attractive outcome in as many scenarios as we can manage.

I can’t stress enough how important it is to ponder alternative realities to the ones we’re currently facing. From there, we can probabilistically weigh those alternative realities and determine how to profit.

Inker then reveals GMO’s equity forecast from March 23, 2020:

There’s a few things to note:

    • Emerging stocks look like they’re about to crush it
    • S&P 500’s returns going forward look abysmal
    • Value-based stocks in all categories should do better than their counterparties

But then the rally came. This recent rally pulled equity returns forward. In some cases almost a decade forward. Inker explains in more detail (emphasis mine):

“To put the rally in perspective, the group that went up the least, International Value stocks, earned the equivalent of 4.4 years of an “equity-like” return for a fair-valued group of stocks. U.S. large and small cap stocks rose the equivalent of 6 years of “equity-like” returns.”

The GMO re-ran the equity projections after the run-up. Check out the difference:

Now we see a few things:

    1. S&P 500 forward returns are negative
    2. US stocks projected to significantly underperform their global counterparts
    3. Value stocks should provide decent returns across US, international and emerging markets

Here’s Inker’s thoughts on this (emphasis mine):

“But while the ability of some of these economies to handle the crisis well is helpful, the primary reason we believe emerging stocks should give a higher return is simply that they are trading at much lower valuations, which leaves significant room for normalized earnings to fall while still providing a good return to shareholders. Emerging market value stocks are far cheaper still, and today seem priced to offer a double-digit expected return in a GFCx2.”

Finally, Inker highlights the massive disconnect between value-based valuations and other indicators:

The above chart shows value stocks at their largest discount relative to the overall market since the 1999-2000 dot-com bubble.

How To Play This:

    • Look overseas (Italy, Portugal, France, Spain, Poland, etc.)
    • Look for value stocks (beaten down YTD returns, cyclicals, left-for-dead)
    • Have the stomach to buy them


Movers & Shakers: Accounting For Stock-Based Compensation

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I stumbled upon Tanay Jaipuria’s Substack this week and I’m glad I did. His newsletter focuses primarily on tech and business/investing. If you’re going to read Tanay’s newsletter, start with his post on stock-based compensation.

Tanay’s Claim: Stock-Based Compensation Hides Unprofitability

For starters, stock-based compensation is simply compensation in the form of options on company stock or restricted stock units (RSU’s). These compensation packages are contingent on certain internal factors like revenue growth, customer growth, etc.

Tanay describes three main benefits of stock-based compensation:

    1. Offer employees and management skin in the game
    2. Help retain employees since most SBC vests in four years
    3. Allow cash-poor companies to preserve cash while offering compensation to key employees

To Expense or Not To Expense

It wasn’t until 2004 that GAAP required expensing stock-based compensation. Here’s how the expense works (from the article): Value stock options based on their fair value and record them as an expense on their grant date.

Easy enough. Yet most high-flying tech companies choose to report non-GAAP financials which remove stock-based compensation from the income statement.

Does It Even Matter?

A natural question follows: “Does SBC even matter to overall profitability?” In the case of popular tech-stocks the answer is yes!

Check out the graph below where Tanay shows the SBC as a % of revenues for various tech companies:

Workday (WDAY), Okta (OKTA), Splunk (SPLK) and Coupa (COUP) all have SBC that’s over 20% of their revenues.

For these companies, SBC inclusion/exclusion is the difference between profitable and not-profitable (from the newsletter):

What Should We Do?

Faced with a value-investing conundrum, I ask myself WWWD? What Would Warren Do? Expense it of course (emphasis mine):

“If options aren’t a form of compensation, what are they? If compensation isn’t an expense, what is it? And, if expenses shouldn’t go into the calculation of earnings, where in the world should they go?”

Tanay includes excerpts from companies like Facebook (FB) and Alphabet (GOOGL) that encourage the use of SBC in their profitability reports.

When in doubt — include the SBC expense. Even if the company doesn’t have to pay the employees options today or issue them restricted stock today, they will at some point. So you might as well start modeling for it.


The Weekly Dam: A DIY Valuation of S&P 500

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Our valuation OG is back with another great blog post! This week Aswath Damodaran breaks down a do-it-yourself valuation of the S&P 500.

Step 1: Start with earnings

Damodaran starts with the earnings estimates for the S&P over the next two years (see below):

No surprise in 2020’s drop.

Step 2: Focus on Cash Returns

Let’s go back to the blog post (emphasis mine): “As with earnings, this crisis will result in cash flow shocks, and dividends and buybacks will drop this year. Given that dividends tend to be stickier than buybacks, the drop will be lower from the former than the latter. Analysts vary on how much, though, with a range of a drop of 30-70% in buybacks and 10-30% in dividends.

Step 3: Estimate Risk Premium

Check out this graph for risk premium dating back to February 2020 (the beginning of the crisis):

According to Damodaran’s estimates, the equity risk premium is down to 5.81%.

Putting It All Together

The final step is to put numbers behind each part of our story. Damodaran does this for us:

The result: “With these assumptions, I can value the index and I capture the valuation in the picture below. My estimated value for the index is about 2926, which would lead to a judgment that the index was over valued by about 6% (based upon the level on June 1, 2020).”

An overvaluation of ~6% isn’t much. But that was as of June 1st. The market’s risen almost 6% since then. All things equal we’re looking at ~12% overvalued now.


That’s all I got for this week. Shoot me an email if you come across something interesting this week at

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New Ideas From Telecom, Healthcare and Salmon Farming

Seemed like May flew by (along with the rest of 2020!) didn’t it?

The markets continue to confuse professional managers. Robinhood investors are minting money. Riots in the streets, S&P futures up pre-market. Nothing really makes sense.

If there’s one shred of consistency in your life, it’s a fresh new copy of Value Hive in your inbox every Wednesday.

Our Latest Podcast Episodes:

Here’s what we cover this week:

    • Massif Capital Long Thesis on Bakkafrost (BAKKA)
    • Bonhoeffer Capital Q1 Letter
    • Interview with RA Capital on Healthcare Companies
    • Bill Ackman Sells Berkshire

Let’s dive in!

June 3rd, 2020

Meme Of The Week: 


Investor Spotlight: Bonhoeffer Capital & Maran Capital

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This week’s Investor Spotlight features Bonhoeffer Capital Q1 Letter and Massif Capital’s latest long idea: Bakkafrost (BAKKA).

Bonhoeffer Capital (-33.7% in Q1)

Keith Smith of Bonhoeffer Capital returned -33.7% in Q1. It was a rough quarter for value investors. I love reading Keith’s letters because his fund is so different. As of the letter, his top countries (by allocation) are:

    • South Korea
    • Italy
    • South Africa
    • Hong Kong
    • United Kingdom
    • Philippines

Don’t see the US on that list do ya? That’s because Keith fishes where the fish are!

Keith spends most of the letter discussing Strategic Framework Investing.

What is Strategic Framework Investing?

Here’s Keith’s take: “Valuation models have evolved over time from valuation multiples—which work well with mature companies (Graham)—to discounted cash flow models—which work better for growth companies (Buffett)—to distress-weighted models for declining businesses (Damodaran), and finally to strategy/business models—which focus on market size, growth (including network effects), customer lock-in, economies of scale, and probability of survival for young growth companies (venture capitalists).”

Valuation changes over time. So, the framework through which we view our valuations should change with it.

It doesn’t make sense to value a money-losing start-up company based on P/E ratios. An investor that only uses one valuation method is the same as a man wielding only a hammer. To him, every company looks like a nail.

Why does it matter that we adjust and adapt to the constantly changing business environment? Let’s tap-in Keith for this one:

“With the introduction of disruptive internet capital-light models by young growth companies, current profitability (under the assumption of the presence of either large unreproducible investment or network effects) has been less important than future profitability supported by a business model that can generate strong customer growth, recurring revenue with small amounts of customer attrition due to customer lock-in and/or creating network effects.”

Issues With New Business Models

Keith reeles off a few issues with these new network-effect businesses:

    • LTV, CAC and Churn are hard to estimate
    • Some of the business models are dependent upon outside financing when they are in the growth phase of development

The letter shifts focus to discuss the multiple (P/E, EV/EBITDA) valuation method and mean-regression. I encourage you to read the whole thing — it’s great.

But we’ll end with two ideas from the letter: Telecom Italia (TIT.IT) and KT Corporation (KT.US).

Telecom Italia (TIT.IT)

Business Description: Telecom Italia S.p.A., together with its subsidiaries, provides fixed and mobile telecommunications services in Italy and internationally. The company operates through Domestic, Brazil, and Other Operations segments. –

What’s To Like:

    • 54% Gross Margins
    • Long history of profitability
    • ~$2B 3YR FCF average
    • Trades <6x EBITDA
    • Owns most extensive telecom network in Italy

What’s Not To Like:

    • Low normalized net income margin
    • Net Debt/EBITDA is 3.69x
    • France’s Illiad may cause price war

What’s It Worth:

Let’s assume the company grows to $17.2B euros by 2024. Using historical EBITDA margins (40%) we get almost $7B euros in EBITDA, 2.5B euros in FCF and $37B in Enterprise Value.

Subtract net-debt and you’re left with around $12.7B in market cap (0.60 euros/share). That’s assuming a 9% discount rate and 3% perpetuity growth. If you take a multiple approach (EBITDA or FCF) you’d realize a higher per-share value.

Chart Analysis:

TIT’s showing sideways consolidation below the 50MA. Our price-action base case is a breakdown below support and further price decline. But we’re looking for a reversal given the fundamental background.

KT Corporation (KT)

Business Description: KT Corporation provides telecommunications services in Korea and internationally. The company offers local, domestic long-distance, and international long-distance fixed-line and voice over Internet protocol fixed-line telephone services, as well as interconnection services; broadband Internet access service and other Internet-related services; and data communication services, such as leased line and broadband Internet connection services. –

What’s To Like:

    • Strong FCF generation
    • 40%+ Gross Margins
    • Declining SG&A % of Revenue
    • Improving Current Ratio
    • Net Debt/EBITDA: 1.18x
    • Largest amount of 5G Infrastructure in South Korea

What’s Not To Like:

    • Legacy business still dominates revenues
    • Tensions with North Korea
    • Declining real estate values in KT’s portfolio
    • Failure to spin-off non-core (non-teleco) businesses

What’s It Worth:

KT is a sum-of-the-parts (SOTP) story. They have a hodgepodge of businesses, each with varying degrees of value.

Keith summarized his view on KT’s value in a 2018 post with MOI Global (emphasis mine):

“The shares recently traded at a “look-through” FCF multiple of 5.8x, and look-through EV/EBITDA of 1.5x …  If the shares traded at 6x EBITDA with a holding company discount, the stock would be more than a triple, not including dividends, buybacks or cash flow gains from a growing telecom business.”

Someone call Dave Waters, he loves this stuff.

Chart Analysis:

There’s nothing we can glean from this chart right now. Look for the 50MA to act as resistance over the next few weeks.

Massif Capital: Bakkafrost (BAKKA) Long Thesis

Massif Capital’s back with their latest long thesis: Bakkafrost (BAKKA). You can read their entire report here.

Let’s dive in.

Business Description: P/F Bakkafrost, together with its subsidiaries, produces and sells salmon products under the Bakkafrost and Havsbrún brands in the United States, Europe, China, and internationally. The company operates through four segments: Fish Farming FO; Fish Farming SCT; Value Added Products; and Fishmeal, Fish Oil, and Fish Feed. –

What Massif Likes:

    • Family owned and operated with 19% ownership
    • Consistent 70% Gross Margins
    • Ideal location for growing salmon
    • Commands 15% pricing premium against global competitors
    • 20%+ Operating Margins


    • Long-term erosion of salmon prices
    • New diseases / pandemics affecting salmon health
    • Consumer taste changes

What Massif Thinks It’s Worth: BAKKA’s balance sheet has a long-term interest-bearing debt of 𝑘r2.3 billion vs. a cash balance of ~𝑘r1.3 billion. Gross margins are remarkably steady at around 70%. A discounted cash flow analysis, assuming a 10% discount rate, results in a valuation of ~𝑘r741 NOK per share, producing an expected return of 32% at current prices.

Chart Analysis:

BAKKA broke out of its ascending right triangle last week. A brief pullback has us up against the new-found support line. Price remains above the 50MA and 200MA, a bullish sign. __________________________________________________________________________

Movers & Shakers: Bill Ackman Sells Berkshire!

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Bill Ackman isn’t afraid of the spotlight. We’ve heard his name referenced numerous times during this COVID crisis. Who could forget his live-action sob story on CNBC?

This time, he’s in the news for selling Berkshire Hathaway (among other investments).

My reaction: Who cares? There’s tons of ideas out there that are better than the BRK thesis.

Ackman brought up some good points during the interview (emphasis mine):

The one advantage we have versus Berkshire is relative scale. Berkshire has the problem, if you will, of deploying $130 billion worth of capital … Pershing Square, on the other hand, has about $10 billion of capital to invest and therefore can be more nimble … We should take advantage of that nimbleness, preserve some extra liquidity, in the event that prices get more attractive again.”

And that’s my biggest issue with the BRK bull thesis. Buffett is so capital constrained it makes it damn near impossible to find deals. Meanwhile, there’s plenty of opportunities for less capital constrained investors/funds. Look at Poland, Egypt or Italy (to name a few).


Interview of The Week: Healthcare Investing with RA Capital’s Peter Kolchinsky

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Evercore describes RA Capital as, “ one of the leading dedicated healthcare investment funds and has been built over nearly two decades with a unique approach to analyzing therapeutic categories.”

My circle of competence in the healthcare space is pitifully small. This interview helped expand it a bit.

Let’s dive into the meat of the interview (emphasis mine on the responses).

Q: How have your private company investments changed your view of the field?

RA Capital: “The public markets don’t get to see how the sausage 4 is made, which is just as well because it can be harrowing. But we have come to appreciate the way driven, talented people can work through most any challenge to keep programs going. That makes us more patient public investors.”

I loved this quote. We’ve heard similar things from Scott Miller in some of his past interviews. Working in the belly of a company makes you a better investor. Period.

Q: How do you choose which companies or fields to drill into?

RA Capital: “We’re always mindful of the risk that we might overlook a great investment and are constantly refining our methodology to minimize that risk. For example, because we have someone tracking everything that’s going on in lupus, we know which companies in that landscape are working on something potentially compelling. Either we’ll reach out to those companies about financing them, even if they aren’t talking to investors yet, or, when they reach out, we’ll know to assemble a team of people, including senior members of our investment team, to get a deep update and make a rapid decision.”

Q: What do you see as the biggest risks/opportunities for the sector?

RA Capital: “I think that the risks of drug development are shifting from probability of technical or clinical success, which quantify the risks of – for example – a clinical trial failing, to those of strategic complexity. Historically, the chessboards have been so empty that making any drug that works has been considered a win. However, with more and more drugs coming to market, it’s no longer enough to make a drug that simply works.

If this interview made me realize anything, it’s that I will always be the patsy at the poker table in that space.


That’s all I got for this week. Shoot me an email if you come across something interesting this week at

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Four New Ideas, Gavin Baker & Howard Marks

We hope you enjoyed your extended weekend! As the weather warms up it remains harder to stay indoors. In light of that, you know how easy it is to practice social distancing in a boat? Pretty easy. Just boat six feet away from everyone else!

Before diving in, I want to take time to thank all our servicemen/women for their valiant efforts. It’s what they do overseas (and at home) that enable the rest of us to live free, full lives. We sleep easy at night knowing America’s finest are on the clock 24/7 keeping us safe. We will never be able to thank you enough.

In honor of Memorial Day, my brother and I are attempting “Murph”. For those that don’t know, it’s a workout from hell. Here’s the layout:

    • 1 mile run
    • 100 pull-ups
    • 200 push-ups
    • 300 air squats
    • 1 mile run

Try it out this week! If you do it, email us your time! Fastest times will get a shout-out in next week’s email.

Our Latest Podcast Episodes:

Here’s what we cover this week:

    • Greenhaven Road Partners Q1 Letter
    • Gavin Baker’s Latest Talk at Columbia
    • Howards Marks on Knowing What You Don’t Know

Let’s get it!

May 27th, 2020

Tweet of The Week: 


Investor Spotlight: Greenhaven Road Partners

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This week’s Investor Spotlight features Greenhaven Road Partners Fund. We hope you find one (or a few) that reach your short-list.

Greenhaven Road Partners Fund: -23.5% Q1

Greenhaven Road Partners (GRP) returned -23.5% in Q1. GRP is a unique fund-of-funds. It invests in small, one-man-shop firms that meet specific characteristics. These firms have concentrated portfolios, invest in off-the-beaten-path ideas and allocate a large portion of their personal net worth into their funds.

The letter highlights some of the funds investments (you’ve heard quite a few of these names):

    • Laughing Water Capital
    • ADW Capital
    • Desert Lion
    • Maran Capital
    • Tollymore
    • Long Cast Advisers
    • Arquitos Capital
    • Far View Capital

We’ve already highlighted the letters of most of these funds,so we’ll cover the ideas we haven’t heard yet.

API Group (API), ADW Capital

Business Description: APi Group Corporation provides commercial life safety solutions and industrial specialty services. The company offers specialty contracting services and solutions to the energy industry focused on transmission and distribution in the United States and Canada; and industrial services, including the retrofit and upgrading of existing pipeline facilities. –

You can read their S-4 filing here.

What’s To Like:

    • Stable end-markets
    • Trades at 5x free cash flow
    • Essential service
    • Boring business
    • Forced buyers from NASDAQ listing

What’s Not To Like:

    • 44% Unionized workforce
    • Serve energy exploration end-clients (cyclical)
    • $1.2B in total debt

What It’s Worth (from the letter):

    • “Given that we believe API’s business is superior to most of its public comparables, has a proven capital allocator/owner at the helm, and has an established framework to expand EBITDA margins over the next few years, we believe the APG stock should trade at a premium to its larger peers. At only 16x 2019 EPS, APG shares would trade at almost $20/share or about a +110% return from today’s prices.”

Chart Analysis

The stock remains above the 50MA but I wouldn’t put too much emphasis on this chart. There’s not much history here.

Gym Group PLC (GYM.L): Tollymore

Business Description: The Gym Group plc operates health and fitness facilities in the United Kingdom. It operates 175 gyms. The company was founded in 2007 and is based in Croydon, the United Kingdom. –

What’s To Like:

    • 20%+ 5YR Revenue CAGR
    • 99% Gross Margins
    • Expanding Operating Margins (18%)
    • Low-cost gym offering

What’s Not To Like:

    • Large cash inflow from “other operations” last two years
    • $430M in net debt ($211M from capital leases)
    • Gyms in serious question post-COVID

What It’s Worth:

Let’s assume $216M in revenue and $108M in EBITDA by 2024. Let’s also assume cap-ex hovers around 25% of revenues (historical average) over the next five years.

That leaves us with $46M in FCF by 2024, $63M in PV of cash flows and $390M in terminal value. That’s roughly $453M in Enterprise Value. Add cash ($3M) and subtract debt ($327) and you’re left with $128M in shareholders equity ($0.77/share).

This assumes GYM doesn’t reduce its debt over the next five years, when in fact the opposite is plausible.

Chart Analysis

GYM remains below its 50MA (bearish) in a solid downtrend. I’d like to see a strong move above the 50MA and a breakout above the 165 level.

Cross Country Healthcare (CCRN): Long Cast Advisers

Business Description: Cross Country Healthcare, Inc. provides healthcare staffing, recruiting, and workforce solutions in the United States. The company operates in three segments: Nurse and Allied Staffing, Physician Staffing, and Other Human Capital Management Services. –

What’s To Like:

    • 25% Gross Margins
    • Reduced Total Debt/Equity
    • Trades for 0.38x Revenues
    • Co-founder returning to company

What’s Not To Like:

    • Consistent laggard
    • Currently money-losing
    • Cash flow from ops is positive due to “other operating activities” not core biz
    • SG&A margin increased while EBITDA margin decreased

Avi’s Take:

    • “The business has some temporary COVID-related tailwinds, but also headwinds due to declines in non-COVID related emergency room visits, operations, other deferred elective procedures, and school closures. Looking through this, I observe an inexpensive yet durable, cash-flow generating founder/operator company doing the right things to weigh the odds more favorably towards profitable growth.” – com

Chart Analysis

This is a turnaround story led by a returning co-founder hoping to revitalize a lagging, money-losing business. If he’s successful, we should see a reversal in share price and a breakout above the resistance line.

Wouldn’t surprise me to see an inverse H&S form on this chart, further bolstering the bullish case and the completion of the turnaround project.

Naked Wines PLC (WINE.L): Far View Capital

Business Description: Naked Wines plc, together with its subsidiaries, engages in the retailing of wines, beers, and spirits in the United Kingdom, the United States, Australia, and France. It operates through four segments: Retail, Commercial, Lay & Wheeler, and Naked Wines. –

What’s To Like:

    • High 20’s Gross Margin
    • Total Debt/Equity of 0.31x
    • 15x EBITDA
    • Shift to DTC wine sales

What’s Not To Like:

    • Money-losing in 2019
    • EBIT/Interest Payments less than 2x
    • Significant share price increase YTD
    • Increase in cash conversion cycle from 35 to 75

Far View’s Take: “As we have seen in other industries, once consumers experience the benefits of an online model, they are unlikely to return to their prior purchasing patterns. As the leader in U.S. direct-to-consumer wine, Naked has the potential for a significant inflection in its business trajectory on a more permanent basis.”

Chart Analysis

WINE broke out of its descending wedge with a strong weekly close above the chart pattern and 50MA. The stock’s up nearly 45% since that weekly breakout. The next real resistance lies around $480 as WINE tests previous highs.


Movers & Shakers: Gavin Baker & Howard Marks

GIFs by tenor

Man do we have two great resources for you this week! Howard Marks discusses Knowing What You Don’t Know. Gavin Baker chats video games, venture capital, doing what’s obvious and technology.

Howard Marks: Knowing What You Don’t Know

Marks is a distressed investing OG and viral book seller. His most recent discussion on investment philosophy, contrarianism and framing is worth the read.

Marks notes six insights that guided his investment philosophy to what it is today:

1. View Market Movements Constructively

Marks’ Take: “I tend to think of them, more productively, as excesses and corrections.”

2. Know What You Don’t Know

Marks’ Take: ““It’s so silly for an investor to build his investment conclusions around his view of what the disease holds when he knows nothing about it … You shouldn’t make it up on your own, you should look to the experts.”

3. Insist on a Margin of Safety

Marks’ Take: ““The expert calibrates the expression of his opinion based on how firm the evidence is … The investor should calibrate his confidence in his investment based on how much margin of safety there is.”

4. Know When To Get Aggressive

Marks’ Take: ““I think that toggling between aggressive and defensive is the greatest single thing that an investor can do, if they can do it appropriately.”

5. Be Different, But Be Correct

Marks’ Take: ““If you think and behave different from other people — and you’re more right than they are, that’s a necessary ingredient — then you can have superior performance”

6. Get Comfortable with Discomfort

Marks’ Take: ““Every great investment begins in discomfort. If everyone else didn’t hate the investments, they wouldn’t be cheap.”

Gavin Baker: Venture Capital, Tech, Video Games & Doing What’s Obvious

Gavin Baker sat down with the Columbia Student Investment Management Association for a 90 minute knowledge bomb session.

Here’s my time-stamp for the video. It’s 90 minutes long. Pro-tip: watch at 1.75x speed. It sounds normal and reduces the listening time from 90 minutes to 52 minutes.

Check out the video here. If that link doesn’t work, check out Gavin’s YT channel. The video is the latest one on his page.

    • 12:00 – Roadmaps and Loosely-held opinions
    • 23:00 – Technology
    • 28:25 – Video games
    • 38:00 – Winners of the video game industry
    • 49:00 – TikTok
    • 58:00 – Making Difficult Decisions
    • 63:00 – Competition Demystified
    • 68:00 – Freemium Model
    • 76:00 – Venture Capital Models


Article of The Week: When Safety Proves Dangerous

Farnam’s latest piece, When Safety Proves Dangerous, stabs at the heart of the COVID-19 issue. It’s a five minute read and worth every second.

There’s two ideas that resonate throughout the article:

1. Risk Compensation

Farnam’s Take: “Risk compensation means that efforts to protect ourselves can end up having a smaller effect than expected, no effect at all, or even a negative effect. Sometimes the danger is transferred to a different group of people, or a behavior modification creates new risks.”

2. Risk Homeostasis

Farnam’s Take: “enforcing measures to make people safer will inevitably lead to changes in behavior that maintain the amount of risk we’d like to experience, like driving faster while wearing a seatbelt. A feedback loop communicating our perceived risk helps us keep things as dangerous as we wish them to be. We calibrate our actions to how safe we’d like to be, making adjustments if it swings too far in one direction or the other.”

What does this mean for investors? Let’s use the two frameworks in an example.

You’re up big on the year. You’ll more than likely take bigger swings (i.e., risks) knowing you have the cushion of strong profits. That’s Risk Compensation. Don’t get me wrong. I don’t think this necessarily a bad thing. The Druck uses a similar strategy. If he’s up big he bets big.

Risk Homeostasis is a bit trickier. Let’s say we have a newly defined trading rule (i.e., seatbelt in car) of 1% risk per trade. There’s no denying the 1% risk rule is good for a trader. But what are the second-order consequences of this risk mitigation strategy? Over-trading.

Since you’re only risking 1% of your capital per trade, it could cause you to place too made trades. Even trades of the same correlation.


That’s all I got for this week. Shoot me an email if you come across something interesting this week at

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Crisis Investing, Value vs. Growth, and Chapter 11 Bankruptcies

As always, hope you had a great week. I got to spend the weekend at Hilton Head Island, SC. Beaches weren’t crowded so social distancing was a breeze. In true deep value fashion, we snagged our Airbnb at a 75% discount rate to its historical rental price. I told you we eat, sleep and breathe this stuff!

Anyways, enough about my travels. More stocks.

Our Latest Podcast Episodes:

Here’s what we cover this week:

    • Investing in Chapter 11 Stocks
    • An Aswath Damodaran Update
    • Bill Nygren on Investing in Crisis
    • Mittleman Global Value Equity Q1 Update

Let’s get it!

May 20th, 2020

Tweet of The Week:


Investor Spotlight: Mittleman Global Equity Value

GIFs by tenor

Mittleman Global Value Equity: -33.4% in Q1 2020

Mittleman Global Value equity lost over 30% in Q1. The investment company takes a global approach to investing in small/micro-cap companies.

Here’s their portfolio stats as of April 1:

The portfolio’s cheap … real cheap. 33% of their holdings are in the US, 18% in Canada and 21% in Hong Kong.

Let’s take a look at their top three holdings:

    • Clear Media (100.HK)
    • Aimia, Inc. (AIM.CA)
    • Revlon (REV)

Clear Media (100.HK)

Business Description: Operates as an outdoor advertising company in the People’s Republic of China. It provides bus shelter advertising solutions. The company serves e-commerce, IT digital product, entertainment, beverage, food, realty, business/consumer service, realty, telecommunication, and education industries. As of December 31, 2018, it operated a bus shelter advertising network of approximately 54,000 panels covering 24 cities in Mainland China. –

What’s To Like:

    • Durable business with NIMBYism qualities
    • Strong insider ownership
    • 30% Gross Profit margins
    • 15% FCF Yield

What’s Not To Like:

    • Going through low-ball takeover offer
    • Chinese company
    • Low-ball offer, if accepted, represents significant value destruction

Mittleman’s Take: “The overleveraged status of CCO, into the maelstrom of the COVID-19 crisis, apparently led them to accept a very low valuation, which puts minority shareholders at risk should enough take up the offer. MIM is optimistic that enough shareholders will reject the low-ball offer. MIM has taken advantage of the price appreciation however and sold a significant portion of the position to buy a couple of new positions and add to select existing holdings”

Chart Analysis

The sudden jump in stock price reflects the low-ball take-out bid. Should shareholders reject the offer we could see it trade back down on the news.

Aimia, Inc. (AIM.CA)

Business Description: Aimia Inc., together with its subsidiaries, engages in loyalty solution business in Canada, the United Kingdom, the United Arab Emirates, the United States, Australia, and others.It invests in Club Premier, a Mexican coalition loyalty program; and BIG Loyalty, AirAsia’s loyalty program. The company offers loyalty strategy, program design, implementation, campaign, analytics, and rewards fulfillment; and the Middle East loyalty solutions business, which includes the Air Miles Middle East coalition program, as well as Intelligent Shopper Solutions (ISS), Aimia’s international data analytics and insights services. –

What’s To Like:

    • Crazy cheap based on NAV and net cash
    • Decent business providing a needed service to airlines and customers
    • Positive changes on the board

What’s Not To Like:

    • Cash burn creates melting ice cube
    • Long-standing distrust in management’s ability to unlock value

Mittleman’s Take: “Aimia also has C$700M in tax assets that MIM does not include in its NAV estimate of C$8.00 / US$5.75 per share, which is 3.8x the quarter-end price. Alas, the perverse illogic of market pricing at times, and yet what wondrous opportunities are produced by such sentimental extremes.”

AIM jumped almost 13% on April 29. The stock now sits at $2.77. This is still well beneath MIM’s estimate of fair value.

Chart Analysis

I missed this move when it broke out of its symmetrical triangle. Now I’m hoping for some sideways consolidation for another optimal reward/risk set-up.

Revlon, Inc. (REV)

Business Description: Revlon, Inc., through its subsidiaries, develops, manufactures, markets, distributes, and sells beauty and personal care products worldwide. The company’s Relvon segment offers color cosmetics and beauty tools under the Revlon brand; and hair color under the Revlon ColorSilk and Revlon Professional brands. Its Elizabeth Arden segment markets, distributes and sells skin care products under the Elizabeth Arden Ceramide, Prevage, Eight Hour, SUPERSTART, Visible Difference, and Skin Illuminating brands; and fragrances under the Elizabeth Arden White Tea, Elizabeth Arden Red Door, Elizabeth Arden 5th Avenue, and Elizabeth Arden Green Tea brands. –

What’s To Like:

    • 50% Gross Profit Margins
    • 87% Insider Ownership
    • Large Insider w/ Cash To Help Sustain Burn from COVID
    • Improved terms on short-term debt

What’s Not To Like:

    • Overleveraged at 16x Net Debt/EBITDA
    • Growing Long-term net debt
    • 20% Sales Hit due to COVID

Mittleman’s Take: “Revlon’s mass market positioning (except for the 20% of sales from prestige brand Elizabeth Arden) should play to the trade-down effect that tends to support mass market brands much better than prestige brands during recessions. Revlon will likely sell its hair colour business (#1 market share in mass market), its fragrance business or Elizabeth Arden for valuations high enough to facilitate substantial deleveraging of its balance sheet.”

Chart Analysis

REV’s range-bound between $16 and $9.50.


Movers & Shakers: Bill Nygren & Aswath Damodaran

Bill Nygren and Aswath Damodaran are two heavy-hitters in the value investing world. This week we look at two of their latest publications. Let’s start with Bill.

Investing in Crisis with Bill Nygren

Value Investor Insight released their interview with Nygren on April 30. There’s a ton of knowledge bombs, so I encourage you to read the entire transcript.

Here’s some of my favorite snippets from the interview …

“Our early focus was to sort through all the companies whose share prices had fallen significantly to identify those that fell less on an enterprise-value basis and that were more in the eye of the storm.”

This is an interesting concept, and Nygren explains why they focus on enterprise value in the following paragraph:

“When share prices are indiscriminately cut in half, the company with net cash really has been much more heavily hit.”

Bill uses an example to illustrate this concept …

“A simple example: Say two stocks fall 50%, from $20 to $10. Let’s say one has $3 per share in net cash, so its EV has fallen from $17 per share to $7, meaning the market is valuing the business at 60% less than it did when the stock was at $20. The cash presumably was worth $3 before and still is, so the business is worth incrementally less than the fall in the stock price.”

The discussion then pivots towards their latest investment in Pinterest (PINS). I know, not the type of stock you’d expect in a traditional “value” portfolio.

But that’s why I love the guy.

Here’s his basic thesis on PINS:

“The company isn’t yet making money because it has incremental costs in preparing to be a much larger-scale enterprise than it currently is, and also because it is still in the early days of monetizing its platform. The priority to grow users – which now number more than 300 million on average each month, growing 15% a year – is higher than the priority to maximize advertising per user.”

This isn’t the first time we’ve seen PINS dropped in a value portfolio. Scott Miller’s Greenhaven Road initiated a position this past quarter.

Nygren finished the interview with a comment on lasting lessons from the COVID-19 equity collapse:

“We’re pretty good at looking past current events and what companies could be worth on a long-term basis. That doesn’t mean we’re better than anyone else at guessing how the virus evolves or when the economy returns to normal. We need to make sure our portfolios don’t depend on us being experts in areas where we are not.”

Aswath Damodaran: Re-examining The Value vs. Growth Debate

Damodaran’s latest Musings on Markets is loaded with discussions on global equities, valuations, gold, copper, etc. You name it, he’s covered it.

What we care about is his section on Value vs. Growth. I know, you can’t get enough of that debate.

Here’s my favorite bits …

    • “Value investors believe that it is assets in place that markets get wrong, and that their best opportunities for finding “under valued” stocks is in mature companies with mispriced assets in place. Growth investors, on the other hand, assert that they are more likely to find mispricing in high growth companies, where the market is either missing or misestimating key elements of growth.”
    • “It is quite clear that 2010-2019 looks very different from prior decades, as high PE and high PBV stocks outperformed low PE and low PBV stocks by substantial margins. The under performance of value has played out not only in the mutual fund business, with value funds lagging growth funds, but has also brought many legendary value investors down to earth.”

One major realization from this article was that low P/E stocks don’t always offer protection in downturns.

Check this out:

    • “Note that it is the lowest PE stocks that have lost the most market capitalization (almost 25%) between February 14 and May 1, whereas the highest PE stocks have lost only 8.62%, and to add insult to injury, even money losing companies have done better than the lowest PE stocks.”

That’s nuts! Damodaran caps this argument perfectly, saying (emphasis mine), “If I had followed old-time value investing rules and had bought stocks with low PE ratios and high dividends in pre-COVID times, I would have lost far more than if I bought high PE stocks or stocks that trade at high multiples of book value, paying little or no dividends. The only fundamental that has worked in favor of value investors is avoiding companies with high leverage.”


Whitepaper of The Week: Investing in Chapter 11 Situations

In honor of JC Penny (pour one out!) I found an interesting whitepaper on Chapter 11 investment situations. You can read the entire paper here. The authors (Yuanzhi Li and Zhaodong Zhong) review the trading, value and performance of Chapter 11 investments.

Let’s dive in.

Setting The Stage

The authors looked at 602 total cases of Chapter 11 bankruptcy. Here’s the distribution of cases:

Here’s what the characteristics (metrics) of those 602 companies look like:

The average company in this study had $150M in net assets, lost around $9.5M in net income and generated -2% ROA.

What surprised me was the leverage ratio (total liabilities/total assets). It’s below 1.

Trading Post-Chapter 11

Chapter 11 stocks resume trading activity after a brief decrease post-filing. The paper shows this in the graph below:

This begs the question — who’s doing the trading in these post-Chapter 11 situations? The answer: not institutions

Here’s the graph:

The Performance of Chapter 11 Stocks

Let’s get to what really matters … return statistics. The paper defines performance by Holding Period Return (HPR). The holding period = number of days from the first trading day after filing to the resolution date, or the first trading day after the resolution date if there is no trading on the resolution date.

MHPR = monthly holding period return.

Here’s the breakdown:

MHPR = -16%


Concluding Thoughts

What should you take away from this study? Investing in post-Chapter 11 stocks are hard and (on average) lead to negative returns.

But I view post-Chapter 11 through the SPAC lens. Sure things are garbage on a median basis — but that shouldn’t stop you from digging through the dumpster. You never know what you might find! __________________________________________________________________________

That’s all I got for this week. Shoot me an email if you come across something interesting this week at

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Carvana, Peloton & A Cheap Portuguese Company

Hope you had a great week and weekend. Golf courses in MD finally opened up. When you haven’t hit a golf ball in 3 months, you don’t keep score. You see how many balls you lose. I only lost one ball. It was a good round.

Anyways, we’ve got three great letters for you this week from three of my favorite investment thinkers. But before we get there, I want to give a huge shout-out to Harris Kupperman of Praetorian Capital.

Kuppy came on the podcast last week and set a major record. We passed 1,000 listens in less than a day. And within three days, Kuppy’s episode has over 2K listens. I know, it’s peanuts compared to other larger podcasts. But we’re just getting started.

Thank you to every guest and listener — you make the show.

Our Latest Podcast Episodes:

Here’s what we cover this week:

    • Tao Value Q1 Letter
    • GreenWood Investors Q1 Letter
    • Hayden Capital Q1 Letter


May 13, 2020

Valuing Young Growth Companies: One of my favorite hobbies is reading Aswath Damodaran’s valuation white-papers. I know, exciting life I lead, right? My favorite Aswath paper (so far) is Valuing Young, Start-up and Growth Companies: Estimation Issues and Valuation Challenges.

I’m in the process of creating a long Twitter thread of my favorite bits of information from the paper. If you don’t have time to read all 67 pages, give me a follow on Twitter and I’ll give you the run-down!

Speaking of Twitter, I recently compiled all my favorite Mohnish Pabrai YouTube videos in one thread:


Investor Spotlight: Emerging Markets & Emerging Managers

GIFs by tenor

Tao Value: -12.96% Q1 2020

Tao’s letters are great because they open me to a new world of equities: China. I’m like a kid that doesn’t want to learn to swim when looking at China. I see the other kids have fun, splashing around. But as soon as I dip my toes in, the pool turns to shark Luckin-infested waters.

Tao mentions numerous stocks, but we’re focusing on the following:

    • China Meidong Auto (1268.HK)
    • Atlassian (TEAM)
    • Bilibili (BILI)

China Meidong Auto (1268.HK)

Business Description: The company is involved in the sale of new passenger cars and spare parts; and the provision of service and survey. It also provides after-sales services, such as auto registration, insurance, auto financing mortgage, auto parts, repair and replacement, sales and maintenance of automotive supplies, etc. In addition, the company engages in the trading of used vehicle and finance leasing activities. Its dealership stores cover various automobile brands comprising BMW, Lexus, Toyota, Hyundai, and Porsche. –

What’s To Like:

    • 30%+ 5YR Revenue CAGR
    • 76% 5YR EPS CAGR
    • Strong balance sheet
    • Reducing Inventory Churn/Payables Outstanding

What’s Not To Like:

    • Chinese auto-dealership
    • Specializes in luxury cars
    • Increase in debt/liabilities as % of assets
    • Approaching Tao’s estimate of fair value (21x normalized earnings)

What’s It Worth (Assuming 10% Discount Rate):

At the current price, Mr. Market expects 33B CNY in 2024 revenue, 1.99B CNY in EBITDA (6% margin) and a 10x EBITDA exit multiple.

Here’s what Tao has to say about valuation (emphasis mine): “On valuation though, I see the price approaching fully valued. It now trades at 25 X trailing EPS, and around 17x forward earning per share.”

That said, Meidong is growing over 30% p.a in top-line revenue while trading at 21x normalized earnings. It may not be cheap, but it doesn’t sound expensive at that growth rate.

Also, a 10x exit EBITDA multiple is quite the compression from its current 16x valuation. If multiples don’t shrink, and Meidong exits at its current multiple, shareholder equity increases to 22B CNY (21.54 HKD/share).

Stock Chart

Atlassian (TEAM)

Business Description: It provides project tracking, content creation and sharing, and service management products. The company’s products include JIRA, a workflow management system that enables teams to plan, organize, track, and manage their work and projects; Confluence, a content collaboration platform that is used to create, share, organize, and discuss projects; and Trello, a collaboration and organization product, which captures and adds structure to fluid fast-forming work for teams. –

What’s To Like:

    • 40%+ 5YR Revenue CAGR
    • Net cash on balance sheet ($859M)
    • 83% Gross Margins
    • FCF Positive
    • Negative Working Capital

What’s Not To Like:

    • Optically Expensive
    • Trading Near All-Time Highs
    • High stock-based compensation
    • Increase in Days Sales Outstanding from 10 days to 21 days

What’s It Worth:

The company’s estimated 27% EBITDA margins by the end of this year. If we assume their 30% revenue growth is correct, that gives us $434M in EBITDA by 2020, $660+ in Cash from Ops and $600M in free cash flow.

That’s great. Unfortunately Mr. Market’s priced that already. At the current price, Mr. Market’s expecting $3.3B in 2024 revenues and over $1B in EBITDA on 30% margins. Is that possible? Of course. But TEAM’s trading at 28x revenues. I would need a serious drop in price to get interested in this name. And I hope it does drop.

It’s a great business that generates loads of free cash flow.

Chart Analysis

Bilibili (BILI)

Business Description: Bilibili Inc. provides online entertainment services for the young generations in the People’s Republic of China. It offers a platform that covers a range of genres and media formats, including videos, live broadcasting, and mobile games. –

Tao’s Take: “I believe BILI has built a moat around its mid-form PUGC platform. It now has 130 million engaging monthly active users, and wide range type of content. The network effect of attracting highquality content creators is evident, as it organically expands user base to older millennials (in their 30s) who has no ACG-related hobby.”

What’s It Worth (emphasis mine): “I estimated BILI’s game business could be worth about $3b on a 15x forward earning, which, at our cost basis, implies $2.8b for the rest operating businesses, or $22 market cap for each MAU. This is very cheap considering such a business should be able to easily monetize at $10/user (using either opportunity-cost-based survey or Chinese video/streaming/social media peers) from current 5 mere $3.7/user when they see appropriate. A reference point is that YouTube currently monetizes at $8/user globally, which is also under-done in my opinion. So, we paid 2.2X “fair” revenue for a YouTube of China, where I think a fair multiple should be between 5 to 10 times (depending how much growth you believe is still left).”

Chart Analysis: Potential Inverse Head & Shoulders


GreenWood Investors: -22% to -25% Q1 2020

Steven Wood is one of my favorite investors in the game. I love the way he thinks about ideas, situations and portfolio construction. Steven, if you’re out there — I’d love to have you on the podcast! Let’s make it happen!

Wood returned -25.60% during Q1. You can read his letter here.

Let’s review some of the stocks Steven mentioned:

    • Correios de Portugal (CTT)
    • Peloton (PTON)

Correios de Portugal (CTT)

Business Description: Correios De Portugal, S.A., together with its subsidiaries, provides postal and financial services worldwide. The company operates through Mail, Express & Parcels, Financial Services, and Banco CTT segments. It offers addressed mail, transactional mail, international inbound and outbound mail, and advertising mail distribution related services; CTT Logística, a platform for the creation of product catalogue, storage, order preparation, and distribution to the final consumer which allows customers to focus on the development and sale of their products; banking services; courier; transport solutions; payment network management services through Payshop; and documental services. –

Steven’s Take: “The company’s ubiquitous network that touches nearly every house and business almost every day is a fantastic delivery mechanism for the clear bull market in parcels, particularly e-commerce-driven parcels. Express networks are not properly set up for the last mile outside of highly urban areas. That’s why postal companies largely win the last mile of e-commerce. It’s a business that’s somewhat similar to a cement company, local market share matters heavily. As we all learned in geometry, when a truck’s delivery radius shrinks by half, as its market share doubles, the total area driven is reduced by ~75%.”

“Just a few years ago the company launched its own bank, which we estimate has taken almost half of all new accounts in the country since being opened. It has the highest customer satisfaction, and with a labor and physical footprint around one tenth of its competitors, it will have a permanent cost advantage versus peers.”

What’s It Worth:

Steven’s Take: “combined with the bank, and even if we take a major haircut to the bank’s GreenWood Investors LLC 5 value, the stock with just over a €300 million market cap today and a €32 million net cash position, means the company’s current enterprise value is deeply negative. So investors today are getting paid to take a core business which before the coronavirus, was on track to hit over €90 million in EBITDA in 2020, even after the new lease expenses and banking income are removed.”

We can cross-reference Steven’s valuation with our own, simple 5YR DCF model. Let’s make the following assumptions:

We’re also assuming a 10% discount rate and 0% perpetuity growth.

That gets us around $436M in EV ($197M from PV cash flows + $240M in terminal value). Add back our cash + investments and subtracting debt gets us another $540M in equity value for a total shareholder value of $976M ($6.50/share).

Chart Analysis

CTT remains in a clear downtrend and is forming a large symmetrical triangle. Look for a breakout above the 50MA and the upper resistance level to confirm the trend reversal.

Peloton (PTON)

Business Description: Peloton Interactive, Inc. provides interactive fitness products in North America. It offers connected fitness products, such as the Peloton Bike and the Peloton Tread, which include touchscreen that streams live and on-demand classes. The company also provides connected fitness subscriptions for multiple household users, and access to all live and on-demand classes, as well as Peloton Digital app for connected fitness subscribers to provide access to its classes. –

Steven’s Take: “It sells its stationary bikes and treadmills for about 10x the cheapest competitive offerings, yet it still manages to save its 2.6 million subscribers significant sums of cash every month. Because the value of Peloton lies in the millions of hours of content, as well as live exercise classes, the monthly subscription fee of $39 is dwarfed by the monthly bills of boutique fitness studio goers, which number over 30 million in the United States, and who pay over $30 per class for their endorphin rush.”

What’s It Worth:

Honestly, I don’t know what this thing could be worth in five years. We can use a revenue multiple since they don’t generate earnings. But attaching a 4x sales multiple on 2024 estimated revenue of $5.5B gets us a 30x exit EBITDA multiple.

Maybe PTON is worth 30x EBITDA in five years. But they face stiff competition from Apple’s fitness app and Soul Cycle’s new bike.

Chart Analysis: Inverse Head & Shoulders Breakout


Hayden Capital: +4.10% Q1 2020

Fred Liu, CFA runs Hayden Capital. He invests primarily in Asia/North America. As of Q1 end, he had 56% of his fund in Asian equities.

Liu mentions two stocks in his portfolio update:

    • Interactive Brokers (IBKR) — sold
    • Carvana (CVNA) — owns

Interactive Brokers (IBKR)

Why Liu Sold: In the last year, Interactive has faced several industry-wide headwinds that hindered some of these positive developments.”

What were these developments? Two things:

1. Low net interest margins

Fred’s Take: “For example, net interest margins have declined 15% from a peak of ~1.7% a year ago, to most recently ~1.45%. This means even as accounts have grown, Interactive will make a less money per account, going forward.”

2. Zero commissions

Fred’s Take: “Industry-wide commissions have also been under pressure, as many retail-focused competitors started offering $0 trading commissions last fall. Interactive was one of the original low-price leaders, and was also one of the first to initiate the $0 commission price war via its new IBKR Lite platform, once it was clear the industry would inevitably move in this direction.”

Will the company do well over the next five-to-ten years? Yes. As a user of their product, I hope so!

But they trade around 28x normalized earnings in a low net interest margin world and zero commissions. Like Liu, I believe most of the marginal retail accounts will flow to other shops like Charles Schwab (SCHW). The UI is a bit better and the customer service is top notch.

Plus, the stock remains in a well-defined downtrend.

Chart Analysis

Carvana, Co. (CVNA)

Business Description: CVNA operates an e-commerce platform for buying and selling used cars in the United States. Its platform allows customers to research and identify a vehicle; inspect it using the company’s proprietary 360-degree vehicle imaging technology; obtain financing and warranty coverage; purchase the vehicle; and schedule delivery or pick-up from their desktop or mobile devices. –

Fred’s Take: “Carvana seems to be following a similar playbook. Similar to how Amazon educated the consumer and changed online shopping habits with its own 1P business and Amazon Prime, Carvana is doing the same with its marketing and hassle-free experience. Once they proved the market with their own inventory and built the trust, traffic, and infrastructure, Amazon eventually opened up the platform to 3rd Party sellers and provided them with the tools to succeed.”

What’s It Worth:

CVNA currently trades at 1.5x EV/Sales. This seems cheap given their 100%+ 5YR Revenue CAGR. The company also sees a path towards EBITDA positive by 2023. Let’s use the following assumptions:

Even at modest revenue growth, CVNA reaches over $13B in revenue by 2024. If we keep our 2x sales multiple we get $26B in EV (vs. $8.1B today). That’s over 100% upside assuming no revenue multiple expansion and roughly 30% 5YR revenue growth from here.

Chart Analysis

The stock remains firmly in an uptrend (above 50MA and 200MA).


That’s all I got for this week. Shoot me an email if you come across something interesting this week at

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More Letters From Your Favorite Investors

If you’re like me, you missed Berkshire Hathaway’s annual shareholders cult-gathering meeting. The weather was too nice and I’ve been cooped up inside my house too damn long not to enjoy the day. Instead of watching 3rd-grade level slide-shows, I played corn-hole.

My buddy beat me 21-0 in the third game. I know, I need to step my game up.

Anyways, before we dive into this week’s letters, check out our newest podcast episodes below.

Our Latest Podcast Episodes:

Here’s what we cover this week:

    • Laughing Water Capital
    • Alluvial Capital
    • Alta Fox Capital

Let’s get to it!

May 06, 2020

Books on Credit / Bond Investing: Last week I linked to an Elliott Management report about Perspectives. In it, Elliott noted vast opportunities in the credit space. This prompted me to think about various credit/bond books that might be useful to investors new to the credit side (myself included).

Here’s a list of books I found via Amazon. Note this isn’t an exhaustive list. It’s merely my own meandering through the loins of Amazon’s recommendations:

If you know of any more please shoot them my way. Trying to add to this list if I can.

Alright, let’s get to the letters.


Investor Spotlight: Three More Bangers

GIFs by tenor

Laughing Water Capital: -26.77% Q1 2020

Matt Sweeney runs Laughing Water Capital (LWC). His fund lost 26.77% during Q1. Matt’s one of my favorite investors to follow. I always get amped when I see a new quarterly letter.

He starts with two questions that every investor should ask right now:

    1. If a company is essentially a box of cash, plus a ~50% ownership stake in a business where cash inflows typically don’t slow all that much during downturns, but cash outflows typically slow dramatically, why should the stock trade at a market cap that is a fraction of the company’s cash?
    2. If a company is in the business of selling a recession proof essential service online, and their main competitors rely on personal interaction, why should the stock of the online business get cut in half at a time when face to face interaction has all but stopped?
    3. If a company is in the business of manufacturing recession proof goods from domestic locations, and pundits are calling for the re-shoring of similar goods due to potential shortages during a pandemic, why should the stock of the domestic businesses get cut in half?

From a rational perspective, the answer is easy: no these businesses shouldn’t be cut in half. But Mr. Market doesn’t care in the short-term.

Sweeney didn’t mention any specific investments, but he provided a three-pronged framework for thinking about markets in the current state.

Framework #1: Balance Sheets > Income Statements

Balance sheets should always matter. But sometimes, they matter more than nearly everything else in a company’s financials. Now is that time. Sweeney expands on this idea, saying (emphasis mine):

“While I always focus on owning businesses that can survive or even thrive during a weak economy and thus generally eschew leverage, I admit I had not considered the possibility of revenues at any of our businesses temporarily going to zero. The market has been swift to punish companies with leverage, but it is also a fact that the more predictable a business is, the better it is, and the more debt it can handle.

Read that last sentence again. Leverage in-and-of itself isn’t evil. Instead, one should think about the dangers of leverage as a function of the durability of the model and the allocation skill of management.

How do you manage leverage and cyclical businesses? Mid-cycle earnings. Mid-cycle earnings paint a picture of what a leveraged / cyclical earns on a “normalized” basis. Like any cyclical, there will be times of plenty and times of famine.

Not doing this brings in the risk of buying a company at peak earnings — or buying right at their cyclical top.

Remember: cyclical stocks are cheap when they look expensive, and expensive when they look cheap.

Framework #2: Pick Businesses That Improve Themselves in Downturns

This framework is one of the most powerful tools at an investors disposal. Strong businesses that survive economic downturns usually clean house when the recovery rolls around. Why is that? Let’s look at Sweeney’s explanation (emphasis mine):

“Almost all businesses are feeling pain in the current environment, but by focusing on strong balance sheets, strong competitive positions, and properly incentivized management teams, we are focusing on businesses that are likely feeling less pain than their competitors, meaning that our businesses can take market share or otherwise improve their position vis a vis their competitors during this downturn.”

If you’re buying a great, competitively advantaged business, downturns are exciting. Your business has a chance to scoop up over-leveraged competition and expand market share.

That said, notice how Sweeney didn’t say “strong stocks.” He said strong businesses. Stocks of great businesses get hammered just as hard (and in some cases, harder) as stocks of bad businesses.

Mr. Market’s a voting machine in the short run, after all. Yet over time, as the economy comes back, the market will realize the company’s dominant share and value it appropriately.

Framework #3: Getting To “Enough” on Future Potential Returns

Humans are hard-wired to focus on the short-term. As Sweeney explains, “If our paleolithic ancestors did not place more weight on meeting their immediate needs such as food, water, and shelter, then any long-term plans would be completely useless.

But how cheap is cheap enough? Can we pick the bottom-tick in the markets? Nope. And if we happen to, credit it to luck — not skill.

Let’s revert to Sweeney’s example of buying a company at 3x mid-cycle earnings. If that company goes from 3x to 2x earnings, how bad do we feel? We thought it was cheap at 3x. Seeing it at 2x makes us nervous — and that short-term mindset takes over.

The point is you can’t pick bottoms and you can’t wait until the dust settles. Take credit card stocks during 2009 as an example (from the letter, emphasis mine):

“For example, during the financial crisis, credit card delinquencies did not peak until 6-8 months after the March 2009 low. By the time the worst of the data presented itself, credit card stocks had rallied 300-400%.

Here’s a recap:

    1. Focus on balance sheet strength over income statement profits
    2. Pick businesses that improve (survive) during economic downturns
    3. Don’t try and pick bottoms


Alluvial Capital: -17.70% Q1 2020

Dave Waters runs Alluvial Capital. His letters are frequent guests during our quarterly letter review. And for good reason. Dave hunts for stocks in places few fund managers venture. His letters bring to light stocks living in the dark corners of the market.

If you haven’t had a chance, check out my podcast with Dave here.

One thing I like about Dave’s letters is the amount of actual stock/business discussion. I don’t know if it’s COVID-19, but I’ve read a ton of letters with pages on herd immunity rates and nothing on stocks.

Dave features myriad stocks in his letter, so we’ll focus on the following:

    • Tower Properties Corp (TPRP)
    • Crawford United (CRAWA)
    • Intred S.p.A. (ITD)

Let’s roll!

Tower Properties Corp (TPRP)

Business Description: Tower Properties Company engages in owning, developing, leasing, and managing real property. It owns office buildings, apartment complexes, a warehouse/office facility, and land held for future sale or development. –

What’s To Like:

    • Well-run business
    • Produces normalized funds from operations of $3,400 per share, fully taxed (5x FCF)
    • Highly illiquid

What’s Not To Like:

    • Highly illiquid
    • Low share count
    • High share price ($17K/share)

Here’s the chart …

Look at that illiquidity. As a proxy, one share traded yesterday. One. Do you notice that huge tail on the end of March 27th’s candle? Here’s Dave’s commentary (emphasis mine):

“On some of the worst market days in March, the fund was able to acquire shares of Tower at prices ranging from $12,500 to $13,500.”

It pays to have limit orders in, folks! I bet Dave had a limit order of around $13K and never dreamed he would get filled at that price again. But markets are strange things!

Crawford United (CRAWA)

Business Description: Crawford United Corporation, together with its subsidiaries, engages in aerospace components, commercial air handling, and industrial hose businesses in the United States. The Aerospace Components segment manufactures precision components primarily for customers in the aerospace industry. This segment provides complete end-to-end engineering, machining, grinding, welding, brazing, heat treat, and assembly solutions. The Commercial Air Handling segment designs, manufactures, and installs large-scale commercial, institutional, and industrial custom air handling solutions.

What’s To Like:

    • Insider Ownership (Skin in the game)
    • Down 30%+ from Feb. highs
    • Great business model with long runway
    • Highly illiquid
    • High ROE

What’s Not To Like:

    • Cyclical business
    • High deferment rate with products/services in downturn
    • Steady gross profit margin decline

I chose as part of the list because it’s such an interesting company. In short, CRAWA buys small, niche players in the HVAC industry, rolls them up, and uses the cash to buy more of those businesses.

Here’s Dave’s take (emphasis mine): “With the application of a judicious amount of debt financing, the returns on equity can be impressive and value compounds quickly. There are thousands of these acquisition candidates, many of them run by founders approaching retirement age and looking for an exit.”

Here’s the chart …

At $13.30 you can buy CRAWA for 9x 10YR normalized earnings. That includes a few years of negative earnings as well. If you zoom in, say the last five years, you’re looking at roughly 4x normalized earnings.

Given their “buy and build” strategy, it’s important to look at debt and balance sheet health. CRAWA has $14M in long-term debt and another $4M in current short-term borrowings. They have over $16M in receivables against that debt, and another $2M in cash.

The company generates enough EBIT to cover interest expense 9x over.

Intred S.p.A (ITD)

Business Description: Intred S.p.A. provides various telecommunication services in Italy. The company offers broadband connectivity services, including ADSL and HDSL connections; ultra-broadband connectivity services, such as fiber to the home and fiber to the cabinet connections; and RDSL connectivity services. It also provides landline telephone services; cloud services comprising hosting, such as domain registration, email, Web, etc., as well as data center and virtual services; and ancillary services consisting of rental services for line termination equipment, technical support, ancillary charges, etc.

What’s To Like:

    • 20%+ 5YR Revenue CAGR
    • 70% Gross Margins
    • 27% Operating Margins
    • $9M Net Cash

What’s Not To Like:

    • Low float
    • 78% owned by insiders/company

Let’s take a look at the chart …

ITD did an IPO in Italy at 6x EBITDA with net cash on the balance sheet and 20%+ top-line revenue growth. That’s the power of venturing outside the US. You’re not going to find many IPOs with those metrics here. Heck, if an IPO is profitable it’s a reason to celebrate — let alone cheap.


Alta Fox Capital: -26.77% Q1 2020

Connor Haley runs Alta Fox Capital. Since inception, he’s generated 7.98% annual returns. This compares favorably to the S&P and Russell indices.

Haley’s fund lost nearly 27% in Q1. You can read his letter here.

Connor covers three names in his letter:

    • Mamamancinis Holdings (MMMB)
    • Gan, Plc. (GAN)
    • Evolution Gaming (EVO SS)

Let’s dive in.

Mamamancinis Holdings (MMMB)

Connor’s Take: “They provide meatballs and other pasta/Italian products to grocery stores. It is a boring and non-sexy business. It is also an “essential service” and sells items that can be stored in freezers around the country as people hunker down in their homes. We bought it at 6x our estimate of forward earnings despite revenue growing 30%+ organically. The stock is already up 60% from our publish date, but we believe there remains potential for 100%+ upside over the next three years in an eventual sale of the company.”

What’s To Like:

    • Insider ownership (skin in the game)
    • 20%+ top-line revenue growth
    • 30% EBITDA growth
    • Leveraging fixed costs to improve operating margins
    • CEO has successful history of operating businesses

What’s Not To Like:

    • Current high customer concentration
    • Promises of high growth & failed in past
    • Key man risk (CEO)

Here’s the monthly chart …

What’s It Worth: Here’s Connor’s estimate of future value:

At current prices ($1.02) we have the business trading at 6.1x our FY2021 EPS (calendar year 2020) which we believe is far too cheap for a business showing this type of growth and margin expansion. Note that the business has ~$9.7m in NOLs, which we expect them to fully utilize by 2023.

Gan Plc. (GAN)

Business Description: GAN plc provides enterprise online gaming software, operational support services, and online game content development services to the casino industry. The company operates through Real Money Gaming Operations (RMG), and Simulated Gaming Operations (SIMGAM) segments. It licenses GameSTACK, an Internet gaming system to online and land-based gaming operators for regulated real-money and simulated gaming

Connor’s Take: “GAN grew revenue 114% in 2019 yet traded at a high single digit FY20E EBITDA multiple when we entered our position. We then increased our position significantly when the stock sold off sharply amidst the cancellation of sports and broader COVID-19 induced panic selling. While sports betting is roughly 10% of GAN’s revenues and its cancellation would be a headwind, the market was reacting as if all of GAN’s revenues were at risk.”

What’s It Worth (from the letter): “GAN recently issued market guidance of $100M in sales in three years with EBITDA margins of 30%+. Their sales in 2019 were ~$30M and EBITDA was ~$8.4M. Today investors can buy GAN prior to listing on the Nasdaq at <10x our estimate of FY22E EBITDA. This seems very cheap given their strong growth, scalable model, and the valuation of other US internet gambling focused peers”

Here’s the chart:

Evolution Gaming (EVO SS)

Business Description: “Evolution Gaming Group AB (publ) develops, produces, markets, and licenses live casino solutions to gaming operators primarily in Europe and the United States. The company runs the game from a casino table, which is streamed in real time and end users make betting decisions on their devices, such as desktops, smartphones, tablets, etc. It also runs on-premise studios at land-based casinos in Belgium, Romania, the United Kingdom, and Spain.” –

Connor’s Take: “This is a phenomenal business with 50%+ EBITDA margins and 35%+ organic revenue growth in each of the last three years. It is also very under the radar for a ~$7B EUR market cap, likely due to the lack of any U.S. research coverage. EVO is a B2B provider of live casino games. They work with land-based and online casino operators to enable casino games played with a live dealer that are streamed from one of EVO’s many global studios.”

What’s It Worth: “We were able to purchase EVO at 9x FY22E EBITDA. With increased investor awareness and given EVO’s competitive advantages, attractive unit economics, and high growth, the business could easily trade at double the valuation today (12x FY22E EBITDA), even after the recent rally.”

Here’s the chart …


That’s all I got for this week. Shoot me an email if you come across something interesting this week at

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More Letters From Your Favorite Investors

We hope you and your family are safe and healthy during this COVID-19 season. Many states are opening up their economies, neighborhoods and beaches in the coming weeks. Stay healthy, remain cautious and keep your head on a swivel.

The markets etched higher since last week and the Russell 2000 broke out of a symmetrical triangle on the daily chart (see below):

There’s the argument that this is merely a bear market rally — and a face-ripping sell-off is around the corner. Continue to invest and trade with caution.

In times like these, it’s survival that matters.

Our Latest Podcast Episodes:

Here’s what we cover this week:

    • Greenhaven Road Capital Q1 Letter
    • Maran Capital Q1 Letter
    • RF Capital Q1 Letter

Let’s get to it!

April 29, 2020

Perspectives & Opportunities: If you haven’t already, give Elliott Management’s Perspectives piece a read. It’s 14 pages of gold. Where does Elliott see the most opportunity right now? Credit. Here’s a snippet from the letter (emphasis mine):

The potential opportunity set is primarily in credit. Of course,equities that have fallen 20%, 30%or50% in a very short time can provide substantial upside, but in periods like this one, we prefer the additional downside protection of carefully researched debt. The Holy Grail (which presented itself in size in 2008 )is to have credit positions in which we have so much confidence and which have  so  much convexity (asymmetric  return  profiles;  much  more  upside  than  downside) that hedges  are  either  not  needed  or  can  be  relatively  small.

I’m itching to learn more about the credit space. If anyone has book recommendations on credit/bond investing, please email me or shoot me a Twitter DM.


Investor Spotlight: Keep On Rolling With Q1 Letters

GIFs by tenor

Greenhaven Road Capital: -32% Q1 2020

Scott Miller is one of my favorite investors, and yes, I get excited when he releases his quarterly letter. The reason is simple. Scott is a dynamic value investor. He doesn’t confine himself to the traditional value box. He’s not afraid to invest in companies that don’t screen well, nor garner much credibility with a Graham & Dodd disciple.

And his Q1 letter showed that.

Before diving into the names mentioned, I want to highlight this portion from Miller’s letter (emphasis mine):

“There is a greater focus on balance sheets because the duration of the pandemic and timing to recovery could be quite extended. Therefore, to own a company today, we have to believe they will very likely ride this out and make it to the other side. Sufficient company cash and liquid assets provide invaluable insurance.”

Alright, onto the names.

SharpSpring, Inc. (SHSP)

Miller’s Take: “SharpSpring sells software that enables marketing automation, primarily to digital marketing agencies for small and medium-sized businesses. Fortunately, SharpSpring does not have large exposure to travel, retail, or restaurants. However, if a business stops all marketing or ceases to operate, they will cancel their SharpSpring contract. Marketing budgets are some of the first to be cut during difficult times. On the more positive side, SharpSpring pricing compares very favorably to competitors, so they may be more likely to win new business for those seeking a high-quality, lower-cost marketing automation solution.”

What’s It Worth: “SHSP shares ended the quarter trading at an EV/Sales of less than 2. Absent a multi-year depression, the opportunity exists to see very substantial returns from here.”

SHSP is losing money on a GAAP basis. This makes sense though as they’re aggressively spending to grow their market and reach new customers. At some point, the profit nozzle should turn on. Until then, the company needs to finance operations externally — namely via share issuances.

The company issued $16M worth of shares last year.

Let’s take a look at the chart …

SHSP looks like it wants to break out above $7.20. You might get away with calling this an inverse head and shoulders as well. Regardless, it’s a bottoming pattern.

Digital Turbine (APPS)

Miller’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. In the long term, Digital Turbine’s success will be driven by the number of Android phones it controls (carrier/manufacturer partnerships) and the revenue per device it receives.”

What It’s Worth: “APPS ended the quarter with a market capitalization of approximately $400M, which is less than 2X estimates for FY2021 revenue and 6X adjusted EBITDA. Thanks to the Mobile Posse acquisition (done without issuing shares) and gains in the core business, revenue will likely grow at a rate of 35% or higher.”

Sub-2x revenues for a company growing its top-line 35% doesn’t sound like a bad deal. But Miller notes a few issues with APPS path forward, such as:

    • Recession extends upgrade cycles
    • People locked in their houses are unlikely to activate new phones.
    • Lower sales volumes

Here’s the chart …

PAR Technology (PAR)

Miller’s Take: “They own a defense contracting business, not impacted by Covid-19, which is worth approximately $100M and will likely be sold in the next year. The company also has a hardware business that sells $100M+ of equipment to large chains like McDonalds and Taco Bell, plus the Brink software business. Brink should end the year with 12,000 locations paying in excess of $2,000 per year”

What’s It Worth: “PAR may well see a share price significantly below $13, but in the long term, people will return to fast food restaurants for eat in, take out, drive thru, and delivery, and a share of PAR will no longer be available for the price of a couple of happy meals.”

The bet here appears to be that PAR’s Brink technology is vital to a QSR (quick-service-restaurant) daily operations. If these restaurants remain open (in any capacity), PAR gets paid. The shorter the shutdown lasts, the quicker PAR gets back on the growth path.

Delayed revenue, not lost revenue is the hope.

KKR & Co., Inc. (KKR)

Miller’s Take: “KKR is well positioned to benefit from the pandemic in the longer term. The firm has in excess of $160B of fee-paying capital that is “locked up” and will continue to pay fees through the slow down. KKR can also call an additional $60B of capital (dry powder) from LPs to further increase management fee income, and the pandemic will likely improve the returns for capital deployed during this period.”

What’s To Like:

    • Strong balance sheet
    • High insider ownership
    • 40-year track record
    • Investing mountains of capital at distressed prices

KKR’s Drivers of Growth:

    • Balance sheet investments
    • Management fees
    • Incentive fees
    • Capital market fees

Here’s the chart …

If we get a breakout above the horizontal boundary we could see prices retest the February highs.

Rope Out: Optiva, Inc. (OPT)

Miller’s Take: “Optiva is investing in building the next generation of cloud-hosted billing solutions for telecom companies. The cost savings for the telecom companies can be significant because they do not have to build data centers for maximum capacity as public cloud allows for dialing capacity up and down. Optiva estimates their customers will receive an 80% cost savings and a 10X improvement in performance.”

What’s It Worth: “In the last 12 months, they generated USD $14.5M in EBITDA while investing USD $11M in their cloud product, implying a valuation of a little more than 1X revenue, 9X EBITDA or 5X EBITDA ex cloud investment.”

OPT is a highly illiquid business. Miller notes that shares often go hours without exchanging hands — even post-earnings announcements. Alex and I worked on this name a couple years ago. It’s about time to dust off the old research deck and look with fresh eyes.

Here’s the chart …

Miller’s New Basket: Roku, Pinterest & Carvana

Here’s why I love Miller’s investment style. He added Roku (ROKU), Pinterest (PINS) and Carvana (CVNA) to his portfolio. These are not traditional value investments. But that’s the beauty of value investing. It’s not low P/E or low P/B. It’s buying something today whose cash flows are worth more in the future discounted back at an appropriate rate.


Maran Capital: -17.50% Q1 2020

Dan Roller is the portfolio manager of Maran Capital. He’s wicked smart and remains (brutally) underfollowed on Twitter. The fund returned -17.50% during Q1. Dan starts the letter by reminding readers what really matters (emphasis mine):

“I am sticking to our fundamental guiding principles: margin of safety, conservative underwriting, alignment of interests, a long time horizon, and investment as ownership in a piece of a business.

This is a value investor’s “true north”. Stick to those above principles and you should do okay.

Roller mentions three of his top-five portfolio companies:

    • Clarus Corporation (CLAR)
    • Scott’s Liquid Gold (SLGD)
    • Standard Diversified (SDI)

Let’s take a look.

Clarus Corporation (CLAR)

Business Description: Clarus Corporation focuses on the outdoor and consumer industries in the United States, Canada, Europe, the Middle East, Asia, Australia, New Zealand, Africa, and South America. The company develops, manufactures, and distributes outdoor equipment and lifestyle products focusing on the climb, ski, mountain, sport, and skincare markets. –

What’s To Like:

    • Growing top-line revenue 10%+ on average last three years
    • P/E shrunk from 164x to 15x in three years on increased earnings
    • Cash from operations grew from $3.7M in 2015 to $9.5M in 2019
    • Market cap only $60M higher than 2015 despite massive earnings growth

What’s Not To Like:

    • It’s a retailer
    • Increased debt while reducing cash (Quick ratio from 5x in 2015 to 1.8x in 2019)
    • Increase in Average Cash Conversion Cycle (173x in 2015 vs. 198x in 2019)
    • Isn’t crazy cheap

Here’s the chart …

That’s a beautiful breakout from a tight consolidation range. If the stock holds the breakout price it would signal a close above the 50MA, another bullish indicator.

Scott’s Liquid Gold (SLGD)

Business Description: Scott’s Liquid Gold-Inc. and its subsidiaries develop, market, and sell household and personal care products in the United States and internationally. The company operates in two segments, Household Products and Personal Care Products. –

What’s To Like:

    • High insider ownership (CEO owns 24% of the company)
    • Trading at 0.53x EV/Sales
    • Zero long-term debt and $24M in Net Asset Value ($20M market cap)
    • Highly illiquid

What’s Not To Like:

    • Consistent revenue and margin decline
    • Negative cash flow from operations over last two years
    • Increase in Average Cash Conversion Cycle from 75 in 2015 to 161 in 2019
    • Increase in Days Sales Outstanding from 12.85 in 2015 to 36.83 in 2019

SLGD’s negative cash from operations looks bad at first glance. Looking deeper, it appears transitory. The company increased inventory each of the last two years, potentially in anticipation of higher product sales. Interested investors should watch that closely.

Here’s the weekly chart …

Standard Diversified (SDI)

Business Description: Standard Diversified Inc., a diversified holding company, through its subsidiaries, engages in the other tobacco products and outdoor advertising activities in the United States. Its Smokeless Products segment manufactures and markets moist snuff and contracts for and markets chewing tobacco products. –

What’s To Like:

    • Holding company whose primary asset is Turning Points Brand (TPB)
    • Insiders own 90% of the company
    • Compound mis-pricing
    • Smart and talented management
    • Consistent cash-flow from operations

What’s Not To Like:

    • Increase debt burden by $100M (from $202M – $334M)
    • Bet on tobacco industry staying solvent
    • Recent decline in revenues, margins and earnings

What’s It Worth:

Here’s a screenshot from Dan’s 2018 presentation on TPB and SDI outlining the value proposition:

For what it’s worth, SDI still trades around $13/share today. TPB, however, trades near $24/share.


RF Capital: -27.13% Q1 2020

Roger Fan runs RF Capital. I’ll leave it to you to figure out the inspiration behind the Fund’s naming. Roger returned -27.13% during Q1. Here’s his Q1 letter.

Roger disclosed his top holdings as of the end of Q1:

    • GrafTech International (EAF)
    • Aimia, Inc, (AIM.TO)
    • Foot Locker (FL)

Let’s break down Roger’s views on each position.

GrafTech International (EAF)

Roger’s Take: “[W]e believe Graftech is well-positioned to handle this difficult environment. Not only is Graftech the only company in the industry that employs LTAs, but they also produce ~70% of the required needle coke through Seadrift, their subsidiary. Graftech’s competitors have to buy all of their needle coke on the spot market, thus creating greater variability in input costs. Given its vertical integration with needle coke, Graftech provides more earnings visibility and stability than its competitors.”

What’s To Like:

    • Long-term take-or-pay contracts
    • Vertical integration with needle coke supply
    • Locked in contracts at high spot and market prices
    • Clear path towards substantial cash flow generation

What’s Not To Like:

    • Commodity-dependent company
    • Performance linked to steel industry
    • Renegotiation (or default) of long-term contracts with customers

Here’s the chart …

Aimia, Inc, (AIM.TO)

Business Description: Aimia Inc., together with its subsidiaries, engages in loyalty solution business in Canada, the United Kingdom, the United Arab Emirates, the United States, Australia, and others. –

Roger’s Take: “Although the cash burn continues, management expects positive adjusted EBITDA and breakeven FCF in 2020. If the company achieves those targets, it would certainly help move the stock price. However, the value in Aimia continues to be its cash and assets. The company still trades at a large discount to NAV.”

What’s To Like:

    • Crazy cheap based on NAV and net cash
    • Decent business providing a needed service to airlines and customers
    • Positive changes on the board

What’s Not To Like:

    • Cash burn creates melting ice cube
    • Long-standing distrust in management’s ability to unlock value

AIM is basically a box of cash with the potential to have a decent, cash-flowing operating business attached. Shareholders of AIM don’t need the company to generate a ton of free cash to win. They can simply see their shares trade on par with net cash in the bank.

Here’s the chart …

Foot Locker, Inc. (FL)

Business Description: “Foot Locker, Inc., through its subsidiaries, operates as an athletic shoes and apparel retailer. The company operates in two segments, North America and International.” –

Roger’s Take: “Fortunately for the company, they have a strong balance sheet and are in a better position than most other retailers to weather the storm. The company ended 2019 with $907 million in cash versus $122 million of debt on the balance sheet. When stores reopen for business, the share price is likely to recover.”

FL churns out roughly $480M in annual free cash flow. The company sports a strong balance sheet and generates enough EBIT to cover interest expense 71x over.

FL’s also reduced its Average Cash Conversion cycle from 87 days to 75 days — almost two full weeks of improved cash conversion.

Here’s the chart …


That’s all I got for this week. Shoot me an email if you come across something interesting this week at

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