Value Investing Letter Recaps: Q3 2022

“When we find our treasure, we forget where we put our picks and shovels.” – Bert McCoy

Our Value Investing Letter Recaps keep things simple. 

Each email focuses on three value investing hedge fund letters, three ideas, all digestible in three minutes

Within each idea we answer four main questions: 

  • What does the business do? 
  • Why is it a good bet? 
  • Why does the opportunity exist? 
  • What is the prize if you’re right?

Quick housekeeping note that nothing you read is investment advice and please do your own due diligence before investing. Also, I do not own any of the below-mentioned securities as of this writing. 

Finally, we get each investment letter from r/SecurityAnalysis, which you can find here

This week we analyze Six Flags (SIX), Charles Schwab (SCHW), and Constellation Software (CSU). 

Let’s get after it. 

Top 3 Value Investing Letters You Need To Know About


1. Merion Road Capital: Six Flags (SIX)

Merion Road Capital is a new addition to our Value Letter Recap series. Aaron Sallen runs Merion Road Capital, a value-oriented investment vehicle based in Miami, FL. The company has two strategies: Long Only and Long/Short Small Caps. 

You can read more about Merion Road Capital and their latest Q3 Letter here and here, respectively.

Let’s dive into one of Aaron’s latest longs, Six Flags.  

What does SIX do? 

Via Six Flags Entertainment Corporation owns and operates regional theme and waterparks under the Six Flags name. Its parks offer various thrill rides, water attractions, themed areas, concerts and shows, restaurants, game venues, and retail outlets. The company also sells food, beverages, merchandise, and other products and services within its parks.

Why is it a good bet? 

“SIX is another turnaround situation. [The company] is backed by hard assets and has a history of stable earnings.”

Why does the opportunity exist? 

“New management is looking to grow EBITDA to $700mm vs. the $525mm range over the past several years, covid aside. Their strategy is to effectively reduce traffic and increase price, while prioritizing capital spend on high return projects. Results have admittingly been mixed so far.

What is the prize if you’re right? 

“Even assuming no benefit from the new initiatives, the company is trading at a reasonable valuation of 11x EBIT.”

Further Research Material

2. Ensemble Capital: Charles Schwab, Inc. (SCHW)

Ensemble Capital is one of my favorite Twitter follows. They run under the username @IntrinsicInv. Give them a follow. 

Anyways, Ensemble discusses two of their long ideas in its Q3 Letter: NVR, Inc. (NVR) and Charles Schwab (SCHW). You can read the letter here

What does SCHW do?

“Schwab’s core value proposition is about helping its customers, both individual investors and independent registered investment advisors like Ensemble, intelligently and efficiently invest in capital markets”

Why is it a good bet? 

“Schwab grew its scope of services and revenue to new more profitable levels built off its ability to drive operating costs lower with scale thereby offering excellent value and service to millions of customers relative to competitors. 

This has powered its growth and profit flywheel that relies on scale and efficiency to drive costs lower, allowing it to reduce prices that attract more customers and assets even as it invests to add higher value services to cross sell, which further increases scale and efficiency opportunity. As a result, assets held at Schwab now stand at over $7 trillion from about $1 trillion in 2005 … 

Today, Schwab stands in front of a large revenue opportunity not seen since before the great financial crisis, with interest rates higher than they’ve been in a decade. As mentioned earlier, Schwab’s largest revenue source is now net interest revenue, and it’s a highly profitable source too. ”

Why does the opportunity exist? 

Schwab’s business model has changed over the years as its offerings and capabilities evolved, initially being driven by trading commissions, then distribution fees on third party mutual funds, and later asset-based fees on its own proprietary mutual funds and ETFs, and more recently net interest revenue that is derived from its customers’ cash holdings sitting on Schwab’s balance sheet.” 

What’s the prize if you’re right? 

“Earnings grew dramatically last time this cycle played out and with an even higher base of interest earning assets today, we expect the eventual higher NIM will power much higher earnings again. 

One other thing to note is that despite near record low NIM recently, Schwab was already reporting record high adjusted operating margins in 2021. Adding billions of dollars in additional interest revenue at little incremental cost over the next couple of years should drive those margins higher.”

Further Research Material 

3. Right Tail Capital: Constellation Software (CSU)

Jeremy Kokemor is back this week with his latest Q3 Letter idea: Constellation Software (CSU). Jeremy recently joined the Value Hive Podcast to dive deep into his Q2 idea, Ferguson PLC (FERG). 

You can listen to that episode here and read his latest letter here

Let’s dive into CSU!

What does CSU do? 

“Constellation Software buys and builds niche software businesses which provide mission-critical solutions. Current President Mark Leonard founded the company in 1995. He has produced a track record of incredible growth and returns on capital. Constellation is headquartered in Toronto and has an enterprise value of ~$34B.”

Why is it a good bet? 

“Constellation does many little things well, which is a great source of competitive advantage. They buy and grow many “little” businesses. They remain fastidious on price, usually only relying on their own cash flow to buy businesses. They balance growth and profitability rather than solely focusing on growth at any cost like many companies over the past several years. As a result, Constellation’s return on invested capital is exceptional.” 

Why does the opportunity exist? 

“The risks here are organic growth declines, poor capital allocation, and a headline valuation (~4-5% earnings yield) that does not scream cheap. Organic growth declines in the more important maintenance and recurring items would be a red flag. This seems unlikely given the company’s long history of organic growth and focus on mission critical software …

Growing revenues at a 20% CAGR and free cash flow at a 25% CAGR over the past 10 years while maintaining a flat share count are exceptional results. As the business gets bigger, these growth rates will likely decelerate” 

What is the prize if you’re right? 

“At recent prices, I believe Constellation Software can generate a 15-25% IRR for several years (vs ~30% IRR over the past decade) even with a slower rate of growth. At a 20% IRR, Constellation Software has the potential to double in share price in the next ~4 years.”

Further Research Material

Wrapping Up This Week’s Value Investing Letters: What To Read Next

Thanks for reading, and I hope you learned something. If you enjoy this series, let me know by shooting an email or retweeting on Twitter. 

Also, please let me know if there’s an investor letter I should read that I didn’t cover here.

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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.