Q2 Letters, Jim Chanos and An Undervalued Student Loan Play

Hope all our American Hive members had a great Fourth of July weekend. I spent mine driving to Hilton Head, SC. Which reminds me. If anyone’s in this gorgeous part of the country, let me know! Would love to meet up for some coffee to talk stocks, investing and why I haven’t moved down here permanently!

We’re on HOLIDAY mode at Value Hive!

Q2 Letters poppin’ off left and right. We’ll dive into each of your favorite manager’s letters over the next few weeks. You’ll receive loads of new investment ideas.

Grab a coffee, get a pen and paper. It’s time to learn!

Our Latest Podcast Episodes:

Here’s what we cover this week:

    • Andaz Private Investments Q2 Letter
    • Tollymore Investment Partners Q2 Letter
    • Buffett Buys Dominion Energy
    • NelNet (NNI) Write-Up

Let’s get it!

July 08th, 2020

Chart Of The Week: This week we’re featuring a recent inverse head & shoulders breakout in Finland. We featured this company in a recent Breakout Alerts Report. The Finnish company makes beers, ciders, snacks and energy drinks. They trade around 20x earnings and have $100M in net cash on the balance sheet.


Investor Spotlight: Q2 Letters Galore!

GIFs by tenor

This week we’re analyzing two Q2 letters: Andaz Private Investments and Tollymore Investment Partners. As always, we’ll discuss each idea in the letter along with the manager’s individual commentary.

Andaz Private Investments: +14.3% YTD

Andaz is a performance-oriented specialist investment manager. They focus on one strategy. And it’s worked well. Andaz sports a 31.9% compound annual return since inception (2018). I know, it’s a small sample size. But they’re killing it.

Another has an 81% win-rate on the long-side. 73% win-rate on the short side.

You can read their Q2 letter here.

Lots of Q2 Action: Buys, Sells and Exits

I was surprised to see so much turnover in the Andaz portfolio. Here’s a brief outline of their activity (from the letter):

    • We entered into Bank of America (BAC) in increments at $21.95, $21.75 and $19.83on March 10,14, and respectively. We purchased a meaningful amount in one transaction at $18.95 on March 24.  We exited at $23.53 and $24.65 on April 9 and April 13 respectively.
    • We re-entered Bank of America at $22.66 on May 20 and again exited eight days later at $26.11.
    • We entered into Twitter (TWTR) at $26.15 on March 25 and added at $25.25 on March 31. We trimmed the position at $29.77 on May 11 and exited completely at $31.95 on May 22.

This style of trading/investing clearly works for Andaz — as shown in the results.

Let’s review three of their unique holdings during the quarter:

Zscaler (ZS)

    • Business Description: Zscaler, Inc. operates as a cloud security company worldwide. The company offers Zscaler Internet Access solution that connect users to externally managed applications, including software-as-a-service applications and Internet destinations; and Zscaler Private Access solution, which is designed to provide access to internally managed applications, either hosted internally in data centers, and private or public clouds. – com
    • What’s To Like:
      • Net Cash on balance sheet
      • >50% 5YR Revenue CAGR
      • 80% Gross Margins
      • Declining Days Sales Outstanding
    • What’s Not To Like:
      • Negative FCF
      • Loads of Stock-Based Compensation
      • Trades at 27x Revenues

Qantas (QAN)

    • Business Description: Qantas Airways Limited provides passenger and freight air transportation services in Australia and internationally. The company also offers air cargo and express freight services; and customer loyalty programs. – com
    • What’s To Like:
      • Durable 30% Gross Margins
      • Consistent Share Buybacks
      • 14% 5YR Avg. ROC
      • Conservatively Leveraged (Net Debt/EBITDA: 1.13x)
    • What’s Not To Like:
      • Low Operating Margins (recently growing)
      • Little insider ownership

Zillow Group (ZG)

    • Business Description: Zillow Group, Inc. operates real estate brands on mobile and the web in the United States. It operates through three segments: Homes; Internet, Media & Technology; and Mortgages. The company’s platform offers buying, selling, renting, and financing services for residential real estate. – com
    • What’s To Like:
      • 50%+ 5YR Rev. CAGR (100% growth in 2019)
      • Historically high Gross Margins (one-off 50% GM in 2019)
      • Minimal debt on the balance sheet
      • Dominant market position in niche category
      • Trades at 3x revenues
    • What’s Not To Like:
      • Lost $1.5B in operating income on $2.74B in revenue
      • Increasing share count
      • Not yet close to FCF positive
      • Hefty Stock-Based Compensation

Tollymore Investment Partners: +18.9% YTD

Tollymore’s Q2 letter didn’t discuss individual investment ideas. And usually I don’t include letters without ideas in these weekly newsletters. But what they lacked in investment ideas they made up in wisdom.

Mark highlighted four unconventional truths about investing. Let’s break each down.

1. Holding Cash is Imprudent

Mark’s Take: “Yet misdirected intellectual energy in the form of market commentary tends to accelerate in periods of market dislocation. The inability to act decisively in these periods, due to capital redemptions, inappropriate capacity constraints, committee-led decision making models, lack of conviction or other source of self-doubt is a barrier to value creation and one of the great shames of our industry.”

2. Dispassionately cutting unprofitable investments is consistent with long term ownership

Mark’s Take: “In the absence of clear and substantial overvaluation, selling due to valuation implies an ability to predict near term price movements.In addition, selling a familiar business making positive fundamental strides for an unfamiliar one creates reinvestment risk. We are not playing for 20% upside; we will continue to own businesses which we believe will be worth a lot more in five to ten years. We expect Tollymore Aggregate Long-term results to be determined by a small number of outsized winners and a strong tail of (many) below opportunity cost mistakes.”

3. ESG ≠ sustainable investing

Mark’s Take:Investors last year ploughed a record $21bn into ‘socially-responsible’ investment funds in theUS, almost quadrupling the rate of inflows in 2018. The surge in popularity of companies with the best social,environmental,and governance scores in recent times has resulted in a crop ofESG funds, eager to attract some of the cyclical capital flows to this bucket.Attempts to quantify art through an obsession with measurement create bubbles, dis incentivise first principles thinking, and make capital allocation and manager selection processes less efficient by making them more data driven. But data can be falsely empowering, unaccompanied by thoughtful qualitative review of a manager’s capacity and incentives to do a good job”

4. Successful investing requires intuition

Mark’s Take:We believe a behavioural advantage is possible by coordinating the disposition of the firm’s principals, the mentality of its investment partners, physical working environment, methods of internal communication, the time horizon of the strategy, and the implementation of the programme.We spend time thinking about the complementary nature of these aspects of the ecosystem. We spend less time thinking about the individual merits of concentrated vs.diversified portfolios, noisy vs. quiet offices,or short vs. long term decision making.”


Movers & Shakers: Buffett Buys Dominion Energy

GIFs by tenor

Buffett finally woke up from his nap to spend some money. CNBC announced yesterday that Buffett’s conglomerate, Berkshire Energy, purchased Dominion Energy. The price tag? $10B ($4B + debt assumption).

The move comes after months of questioning if Buffett would ever make another transaction.

But this isn’t a cannonball into the markets. Berkshire spent $4B of its $137B cash pile. That’s a 3% position. Yet the significance of the move isn’t in the dollar amount. Rather the percentage of the energy market Berkshire now owns.

Here’s what the deal means for Berkshire Energy (from the article, emphasis mine):

    • “For Berkshire, the move greatly increases its footprint in the natural gas business. With the purchase, Berkshire Hathaway Energy will carry 18% of all interstate natural gas transmission in the United States, up from 8% currently.

It’s a big splash in the energy space for a small $4B investment. Honestly, I’m not shocked Berkshire dove into the energy space. Everything’s bombed out. And if you can find a utility-like play that’s conservatively leveraged, that’s interesting.

Here’s what Buffett gets with his Dominion purchase (emphasis mine):

    • “Under the deal, Berkshire Hathaway Energy will acquire 100% of Dominion Energy Transmission, Questar Pipeline and Carolina Gas Transmission and 50% of Iroquois Gas Transmission System. Berkshire will also acquire 25% of Cove Point LNG, an export-import and storage facility for liquefied natural gas, one of just six in the U.S.”


Write-Up of The Week: Nelnet, Inc. (NNI)

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Mindset Capital published a long thesis on Nelnet, Inc. (NNI). We’re always looking for new ideas to share with our readers. NNI grabbed our attention for a few reasons:

    1. Durable business with large market share
    2. Cheap purchase price
    3. Boring business

Here’s Mindset’s take on the company (emphasis mine):

“With its stock stuck in the mud, virtually no analyst coverage and a quiet management team, few have heard of Nelnet and even fewer understand that Nelnet’s run-off student loan portfolio is winding down and is poised to deliver over $10 per share in cash over the next seven quarters, or close to a quarter of the current market cap and will enable Nelnet’s true technology colors to emerge.”

Messy Student Loan Business Masks Hidden Gems

The main driver behind Mindset’s thesis is NNI’s hidden assets. There’s three of focus:

    • NelNet Business Service (NBS): Tuition payment plans, online payment processing and information systems for school administrative functions

Mindset’s Take: “As a standalone company, NBS could be worth anywhere from $39 per share to $58 per share. Imagine what this company could IPO for in today’s market. Investors currently get it for free.”

    • Allo: End-to-end fiber optic network for businesses and residences in Nebraska and expanding into Colorado with a specific focus on under-served markets

Mindset’s Take: “A publicly traded small cap comp to Allo would be Tucows (NYSE: TCX), which is only growing at about 6% a year, but trades at 14 times EBITDA. Cable One (NASDAQ: CABO) is another rural cable play and trades at 20 times EBITDA! Even using a conservative traditional cable multiple of 8- 10 times off the drastically higher EBITDA in 2-3 years, it’s very easy to see how much more valuable this business will be in the future.”

    • Hudl: Provides digital tools to coaches and athletes to review play, scout talent and analyze competition across professional, college and youth sports.

Mindset’s Take: “Nelnet started Hudl a few years ago with a $100K investment. Along the way they only brought in three external investors, Accel Partners, Bain Capital, and Jeff Raikes (one of Bill Gates closest business lieutenants). Hudl currently has 2,300 employees in twenty countries, is making several acquisitions, especially internationally, and is growing very fast.”

Student Loan Portfolio Beneficiary of Low Interest Rates

NNI’s main business, student loans, benefits from low interest rates. Mindset explains how (emphasis mine):

“Nelnet is a prime beneficiary of the Federal Reserve holding interest rates at zero until 2022, as the underlying students continue to pay fixed rates while Nelnet pays the interest on their securitizations based on LIBOR.”

In other words, as long as interest rates stay low, NNI pays almost nothing.

Low rates propelled the company’s expected FCF figures over the next few quarters. To the tune of $2.18/share per quarter. The company’s expecting over $300M in FCF by YE2021.

What’s It Worth: $90-$114/share

Mindset walks readers through his valuation method (see below):

It’s an interesting Sum of The Parts (SOTP) story with loads of long-term tailwinds. The company has a portfolio of 35 “Hudl-like” venture investments. The current valuation allows investors to buy both the venture portfolio and the loan servicing business for free.


Slide Deck of The Week: Jim Chanos — Hiding in Plain Sight

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I’m a big Jim Chanos fan. When people think of short sellers, he’s the first name that comes to mind. His podcasts, YouTube videos and lectures are a masters class in financial accounting shenanigans.

One of my favorite Chanos slide decks is Hiding in Plain Sight: PRO FORMA FINANCIAL METRICS IN THE POST-TRUTH AGE.

The 17-page slide deck covers a range of topics, including:

    • Where to look for true financial data
    • The dangers of adding-back “one-time” expenses
    • Stock-Based Compensation
    • Executive Compensation
    • Insider Selling

And more.

Take a half hour and read the deck. Your portfolio will thank you.


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

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Brandon Beylo

Value Investor

Brandon has been a professional investor focusing on value for over 13 years, spending his time in small to micro-cap companies, spin-offs, SPACs, and deep value liquidation situations. Over time, he’s developed a deeper understanding for what deep-value investing actually means, and refined his philosophy to include any business trading at a wild discount to what he thinks its worth in 3-5 years.

Brandon has a tenacious passion for investing, broad-based learning, and business. He previously worked for several leading investment firms before joining the team at Macro Ops. He lives by the famous Munger mantra of trying to get a little smarter each day.


Investing & Personal Finance

AK is the founder of Macro Ops and the host of Fallible.

He started out in corporate economics for a Fortune 50 company before moving to a long/short equity investment firm.

With Macro Ops focused primarily on institutional clients, AK moved to servicing new investors just starting their journey. He takes the professional research and education produced at Macro Ops and breaks it down for beginners. The goal is to help clients find the best solution for their investing needs through effective education.

Tyler Kling

Volatility & Options Trader

Former trade desk manager at $100+ million family office where he oversaw multiple traders and helped develop cutting edge quantitative strategies in the derivatives market.

He worked as a consultant to the family office’s in-house fund of funds in the areas of portfolio manager evaluation and capital allocation.

Certified in Quantitative Finance from the Fitch Learning Center in London, England where he studied under famous quants such as Paul Wilmott.

Alex Barrow

Macro Trader

Founder and head macro trader at Macro Ops. Alex joined the US Marine Corps on his 18th birthday just one month after the 9/11 terrorist attacks. He subsequently spent a decade in the military. Serving in various capacities from scout sniper to interrogator and counterintelligence specialist. Following his military service, he worked as a contract intelligence professional for a number of US agencies (from the DIA to FBI) with a focus on counterintelligence and terrorist financing. He also spent time consulting for a tech company that specialized in building analytic software for finance and intelligence analysis.

After leaving the field of intelligence he went to work at a global macro hedge fund. He’s been professionally involved in markets since 2005, has consulted with a number of the leading names in the hedge fund space, and now manages his own family office while running Macro Ops. He’s published over 300 white papers on complex financial and macroeconomic topics, writes regularly about investment/market trends, and frequently speaks at conferences on trading and investing.

Macro Ops is a market research firm geared toward professional and experienced retail traders and investors. Macro Ops’ research has been featured in Forbes, Marketwatch, Business Insider, and Real Vision as well as a number of other leading publications.

You can find out more about Alex on his LinkedIn account here and also find him on Twitter where he frequently shares his market research.