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Some things and ideas: April 2021
Some random thoughts on articles that caught my attention in the last month. Note that I try to write notes on articles immediately after reading them, so there can be a little overlap in themes if an article grabs my attention early in the month and is similar to an article that I like later in the month.
My monthly overview
I'm going to start putting this piece in at the start of every month. I just want to highlight two things
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Reopening plays remain befuddling
I continue to be confused by the valuation on recovery plays. So many of them are trading at EVs higher than they were trading before the pandemic started. That just doesn't make any sense to me; in order to survive the pandemic, many of the recovery plays have locked in very expensive long term financing they'll be paying off for years. And, while it seems like we have clear line of sight to a post pandemic world, it's still going to take a while to get there, and these companies will continue to burn cash or earn very subpar returns on capital while we wait to get there.
Consider, for example, Dave and Buster's (PLAY). Their current stock price is ~20% above where it was prepandemic, and their EV is ~50% higher given all the shares they issued during the crisis. I don't get it; the company will be ~breakeven in the near to medium term while we wait for reopening, and even once they reopen this is a business that the market was looking at pre-pandemic and saying "bleh." Why should that change going forward?
Some investors might point to the nascent sports betting opportunity for PLAY as a reason to be bullish. I think there's some opportunity there, but I'm not sure why PLAY would be the company to capture it. Think of their business: PLAY rents a ton of space and puts adult arcade games on ~half of it. That seems inefficient for sports betting; people playing video games aren't actively sports betting, and you're paying for a ton of space (and thus, higher overhead) that isn't actively contributing to your sports betting play. Wouldn't a restaurant dedicated to food and sports (like your local sports bar or Buffalo Wild Wings) be a much better sports betting play?
I get the bull case for recovery plays; people are desperate to go out, and combine that desperation with a competitive landscape that looks decimated post COVID and a ton of COVID cost cuts and we're going to see some absolutely fire comps and operating leverage in the short to medium term. But it still strikes me as strange. In the medium term, the competitive situation will normalize, and I'm curious how many of those COVID cost cuts prove permanent.
Consider someone like SEAS. They're arguing that if/when attendance gets back to 2019 levels, EBITDA will be ~50% higher than it was pre-COVID thanks to some pricing improvements and cost cuts. That sounds great! But it does beg a lot of questions. Why did it take COVID for them to figure out this could be a mid-40s EBITDA business, not a low 30s? Why did it take COVID to figure out they had pricing power or that more than 10% of their cost base was unnecessary?
PS the market appears to have fully bought into the SEAS argument. Pre-COVID, SEAS was trading at ~$32/share and had an ~$4B EV. That came out to a ~8.6x EBITDA multiple and a ~16x P/FCF multiple. As I write this April 6th, SEAS is trading at ~$52/share with an almost $6B EV. That works out to a ~8.5x EBITDA multiple and ~13-14x P/FCF on their targeted "2019 attendance w/ post COVID cost cuts" numbers.
Note: SEAS is one of the few hospitality businesses that didn't have to do a ton of dilution to make it through the crisis, though they did issue some expensive debt, so SEAS is one of the few businesses where comparing the stock price today versus 2019 can be kind of instructive.
Getting better follow up
A follow up to my piece on "getting better" in last month's links I got a ton of suggestions. I think the most common were recommendations to get a coach and improve your mental state / thinking clarity.
One reader recommended studying investors who make different investments than yours to see what they are doing and try to pick up new skills / style / just stay fresh. This is not "I generally buy large cap GARP stocks and my friend tends to buy microcap growth stocks" but more "I am a value investor; let's go study someone whose style is diametrically opposed to me but who makes it work (maybe an aggressive trader or a macro specialist)." I thought that was interesting.
On coaching and mental state: I liked both of hose answers but I wonder a little bit about how to implement them.
On coaching: has anyone tried an investing coach? I'm not sure what that would look like. I love coaching; I rowed in college and I loved having a coach hand me a workout every day, comment on improvements or areas to work on, and actively correct my form when necessary. But how does that work with investing? Who serves as your coach? Is it another investor you respect? And what do they do? I know surgeons will comment on other surgeon's surgeries in a coaching method, but what does an investing coach do? Do you just hand them your ideas? Do you send them your notes on research one day and they provide comments? Do they track your work stream one day and give comments on areas for improvement (try to check email less? spend less time going back and forth between the 10-k and model)?
I get those questions sound basic and maybe a little sarcastic, but I swear I'm being earnest. I'm really wondering about coaching and how I could incorporate into my practice!
On mental state: I don't think anyone comes out and says, "I am actively trying to get into a worse mental state / think less clearly." So what can you do to actively improve mental state? I've taken up doing a lot of Yoga, generally a 10 minute class to start the day and another 10 minute class to end the day. I've found that practice has helped me get a little calmer (and my body feels better too); it's almost like a form of meditation for me. Maybe I should just cave and get back into meditation!
Liberty mentioned shiny new object syndrome. That's something I've been thinking a lot about recently; does always looking for the next one tend to hurt your ability to think about and hold on to your current stocks (i.e. your mental state is cluttered with a bunch of different ideas, so you can't focus)? I tend to be an absolute manic researcher (that probably shows in how much I write / podcast / how many different stocks I cover), but I worry that hurts my returns because I'm not diving as deeply into ideas or holding on to them long enough for my ideas to play out, and my portfolio can get unwieldy / too diversified. I'm trying to actively force myself to focus a little more
One way to improve calm and emotional control might mean holding more cash. That sounds silly, but I promise you can look at a market crash or a big draw down a lot more level headed if you have cash to deploy versus if you are fully invested. So maybe holding cash and waiting for a panic in some ways improves your mental state.
Somewhat related to the "holding cash" comment above: one thing I've been thinking about is that market can be connected in really weird ways, and it's tough to know those connections in advance. In January, every stock with any type of short interest went parabolic because of Gamestop; I doubt many people though FIZZ and GME would have connections before then. In March, Archegos showed a weird connection between legacy media and Chinese growth/tech. One thing I've been wondering is how to take advantage of those weird connections; the best answer I've come up with is being prepared and having cash. Having cash is obvious; you need something to buy that opportunity. Being prepared is a little different; it means doing work on companies and having a watch list of companies so that if they do dislocate you're ready to take advantage. Again, I know that sounds basic, but I know I personally can fall into the trap of only researching companies that I think are "active" ideas (meaning companies that I would be likely to buy now after doing some research). Being prepared might mean researching more "passive" ideas; stocks and companies that you know you probably won't be buying right now (most likely because they're too expensive, but there are plenty of other reasons!) and just following them and being ready to take advantage if they do get to a place where you can take advantage!
Speaking of Archegos....
I'm still confused by everything about Archegos. What the heck was their exit plan after buying up >10% of every company and squeezing their stock prices to triple. How did they think that turned out well?
Maybe the real answer is they had none. They were greedy and riding a wave. Or maybe they just really wanted a Peppa Pig / Jersey Shore crossover?
One last thing: I am struck by how even the companies involved didn't know what was happening. Go back and read Viacom and Discovery transcripts from late February or early March; they were giddy that the market was finally waking up to their inherent value. Competitors seemed to begrudgingly acknowledge that the market was recognizing value there too, though some competitors did suggest that the market might be getting ahead of itself on valuation. It's just another reminder that the market can work in strange ways, and even the company itself is sometimes mystified by what the market is doing to their stock.
DD on companies you're not the target market for
I was spending some time looking at Farfetch (FTCH) last month, and I just couldn't believe how far from the target market I was. That brought to mind two thoughts:
Researching a product/company that isn't meant for you is really hard; is there a way to improve there?
"Buying a stock/company that wall street isn't the target audience for can create alpha"- that's a very popular though / phrase in the value investing community, but is that real?
On the former: you can obviously research/invest in companies that you aren't the target market for. Plenty of portfolio managers buy Lockheed Martin, and I doubt any of them have flown a fight jet. But I just find it's easier to buy and get comfortable with a stock if you can use and enjoy the product; how do you do that if you're not the target market? Maybe primary interviews are best (John Hempton's work on Herbalife stands out), but I still find the gap between talking to someone who is passionate about something and actually being passionate about it is pretty large.
Funny thing: while being passionate about a product can help you see an opportunity everyone is missing, using and enjoying a product can be a death knell for an investor because you can see an opportunity that isn't actually there, or the thesis can get broken and you just keep holding on because you love the product. Plenty of people got rich buying and holding Tesla because they love the product, but traditionally one of the best ways to grow broke was to buy a company you loved and then hold on too long as the company eroded because you still loved them even though no one else really did.
On the later: a common refrain for investors is that an opportunity exists because the traditional Wall Street analyst doesn't use the product. A simple example is Qurate (QRTEA); their target audience is middle age suburban housewives. For years, people (including the company!) have said Wall Street doesn't understand the opportunity because Wall Street isn't the target market. What I'm wondering: is there actual proof (a backtest or study or something) that companies that target a non-Wall Street audience are systematically undervalued / create alpha? My guess would be "no"; saying a company is undervalued because Wall Street isn't their target audience is a nice story but there's no real basis for alpha there.
Also, if products that don't target Wall Street are traditionally undervalued, does that mean products that do target Wall Street are traditionally overvalued? Could you make systematic alpha by shorting vest companies, caviar manufacturing, and prestige television against a long book of cargo shorts manufacturers, store brand ketchup, and "trashy" reality television? Again, my guess is no; in fact, my guess is that the former outperform the later. But it's an interesting thought.
What company creates the most customer value?
Amazon's 2020 shareholder letter was a great read. Bezos is a very clear thinker and communicator. He's one of the greatest entrepreneurs in history, so I don't think I'm setting any worlds on fire saying that!
Of course, Amazon is so big now that a large part of the letter is focused on public relations and government affairs, which dilutes the letter a little bit.
One piece of the letter jumped out at me. Bezos calculates that Amazon created $301B in value for all of their different stakeholders. There's some very liberal math in there (for example, I don't think the alternative to buying something on Amazon is going to a physical store; it's probably ordering on a different website like Walmart.com or something. Given how awful my historical experience with Walmart's website has been, you could probably have a debate about if Amazon creates more value by comparing themselves to a physical store or a Walmart store, but you get the idea!), but directionally it's interesting.
Here's my question: what company currently creates the most "stakeholder" value versus their own bottom line? I'd be interested in the answer on both an overall basis and a market cap adjusted basis. Here were some of my initial takes:
The first answer that jumped out at me was all of the "free" social services. Twitter, YouTube, etc. The reasons there are pretty obvious; they provide hours and hours of entertainment, their cost to consumers is basically nothing, and it's undeniable that they have massive reach and impact into the real world.
An interesting case could be made for Netflix. Their average user watches multiple hours per day; let's just say the average user watches 40 hours per month and pays $20/month to make the math really easy. That's $0.50/month/hour of entertainment. If you went to the movies, it would cost you ~$10/hour of entertainment (using a $20 ticket price and a two hour movie), and that ignores the time cost of travelling to and from the movie, so Netflix's is providing huge consumer surplus versus some of the alternatives.
But Netflix's case is probably dwarfed by free to play games like Roblox or Fortnite or League of Legends. People spend hundreds of millions of hours/month in those games, and they can do so for no cost if they chose not to buy skins and other microtransactions. What's the value creation from those free games?
The right answer is probably Pfizer and Moderna. Their vaccines are going to create literally trillions in value for the global economy by ending the pandemic early, and I don't think either company will make much from the vax (particularly versus how much value the vaxs are creating).
But what's powering Pfizer and Moderna? They couldn't do anything without an internet connection and power to run their computers, right? So could you argue that utilities and internet companies (like Charter or Comcast) actually provide the most surplus (h/t to the person who first mentioned utilities)? Both of those are really interesting; you couldn't play Fortnite for free without power to your computer and an internet connection. This is actually one of the reasons I've long loved internet/broadband businesses; most people pay $50-70/month for their internet, but it literally powers the rest of their lives. The consumer surplus is absolutely enormous, and I think that gives them huge pricing power over time (though regulatory and political forces will ensure they don't take too much advantage of their pricing power!).
Anyway, those were my initial takes; I came up with them in ~30 minutes after reading the letter, so I'm not married to those takes or anything. Still, I'd be very interested if anyone has some particularly unique or edgy cases of value creation for a stakeholder group that isn't getting captured!
ARKK strikes again
Last month I mentioned ARKK's modelling and how I couldn't tell if their models were incompetence or trolling.
This month, they were part of a white paper, "Bitcoin is Key to an Abundant, Clean Energy Future." and it's maybe the most insane thing I've ever read. Gas lighting at its finest.
I don't have much else to add here; I just cannot believe that a firm that is publishing papers and models this silly / this far from reality is running this much money (and performing this well). Just astonishing.
Speaking of ARKK......
Capital returns and fraud
I tweeted this out, but I was thinking about frauds and capital returns this week. A lot (maybe all) frauds will announce a share repurchase towards the end when things are starting to unravel; many even buyback shares aggressively with whatever funds they have remaining. It's a simple calculus for them: investor confidence is shook, and often shorts are swarming. The companies hope a share repurchase will reestablish confidence in the company and drive a short squeeze, and the resulting higher price can be used to keep the fraud going.
So that's pretty table stakes for frauds towards the end of their fraud'ing. But my question is how many frauds execute consistent capital returns programs? A consistent capital return program would be something like buying back 3-5% of your shares outstanding every year, plus maybe paying a dividend. I'm sure there are examples, but offhand I can't think of any. It seems like a pretty rare move for a fraud: most frauds aren't actually taking in / making the money they claim they are, so they don't have the money around to return to shareholders. In fact, they generally need shareholders to give them money to keep the fraud going.
I got several responses on twitte; all of them were interesting but I don't think any of them quite hit what I was looking for
The spec pharma companies like Valeant and Endo in the middle of the decade were popular answers, but I don't believe they ever really did aggressive buybacks. Perhaps I'm misremembering, but I think they are actually perfect examples of what I'm talking about. They had no capital return to shareholders, and the only time they really tried was when the fraud was just unravelling. I just flipped through their 10-K, and Valeant only bought a token amount of stock back in 2015; aside from that, they had no real capital return program during their big run up (they did buy back stock pretty aggressively in 2012/2013, but that was before everything got crazy and they were probably cheap then!). In fact, when the spec pharma cos were running up, they were huge capital consumers, either through direct equity issuance or through using their stock to buy assets (a very common fraud move; use your worthless but highly priced stock to buy real assets!).
IBM and GE were thrown out a good deal. I can see kernels of this here, but in general I think of those as poorly run companies that tried to use financial engineering to get out of real headwinds to their legacy businesses. Was their accounting aggressive? Absolutely (particularly GE!).... but I don't think what happened at GE is anywhere close to Enron or any of the other major frauds, which is more the light I was going for.
Another interesting one thrown out was MLPs during the MLP boom. For those who don't remember, at the height of the MLP boom MLPs were getting valued basically for dividend growth, so they had this weird perpetual motion machine: they had super high multiples because of their dividend growth, so they could issue equity to buy assets at low multiples and increase their dividend, which got them an even higher multiple, which they could then use to buy more assets, etc. Interesting case there.... but those were real businesses; investors were just going through a mania and valuing them on dividend growth. I'm not sure; this just seems like good capital allocation to be honest. Investors gave these companies unreasonable multiples and told them "grow. grow the dividend. that's all we want," and the companies responded to those incentives. Overvalued? Absolutely. But the assets existed and the numbers were real!
Anyway, work in progress. I'm still interested in finding frauds with consistent capital return programs!
I launched the Yet Another Value Podcast in August 2020 and provided a longer piece on my vision for the podcast at the start of 2021 . They've been a blast so far. You can follow on Spotify, iTunes, or YouTube (and please be sure to subscribe and rate them if you enjoy them!). This month's pods:
Look, I'll be honest: I went a little podcast crazy this month! But I've really been enjoying them, I think the listeners and guests are enjoying them / getting something out of them, and the way I've looked at it is I have a smart guest who has an idea they actually have put capital behind. Instead of researching whatever I was going to research that day, I just research what they are invested in and then ask them all the questions I was going to ask / developed. It works for me and I'm enjoying them; I hope you are too!
SPACs SPACs SPACs
Want to know what the SPAC market looks like today? Look no further than GMII's deal for Sonder; they lead the deck not with their prior deal returns or how attractive this deal is, but with the fact that past Gores deals have had super low redemption rates!
PS Sonder seems super interesting. I'm going to spend some time on it; if you have experience with them from the property owner side, I'd love to hear about it!
In my "April Fools' for post SPAC investors" post, I asked for any other examples of SPAC shenanigans. Here's some that I saw
EV Companies went public with big plans. They're quickly hitting snags (WSJ article, covers a lot of the same companies I hit on)
Wonder if the SEC has been reading my blog (or at least the WSJ!); SEC statement on SPACs, IPOS, and liability risk under securities law. I wonder if this chills the SPAC market.
Very related to the "April Fools' for post SPAC investors" are the shenanigans that Nikola and Triteras are pulling right now.
Nikola chose to host their Q1'21 earnings on a Friday afternoon after market close; they eventually changed it to before market open (likely because so many people told them how dumb a Friday after market close call is). I can't imagine how Nikola wants to avoid talking about their results to even contemplate putting earnings after market close on a Friday!
TRIT put out a PR noting they were expanding their board of directors; buried in the 6-K filing for that PR was that two of their directors had resigned. One of the director's resignation letter is very much worth reading, as he resigned because "it is clear that the Chairman and the company’s interim general counsel’s office have very different views to my own as to the optimal path forward for the company at this extremely challenging time." WOOF
Let me get weird for a second
I mentioned last month I thought there was a non-zero chance Twitter is larger than Facebook in 10 years. I just see so many avenues for monetization, but I do worry that some of those could make Twitter (and maybe the world?) a much scarier place.
For example, let's say Twitter enabled tipping. I would bet breaking news reporters could make a pretty nice amount of money in their tweets. I think this would lead to some positive engagement effects. For example, I tweeted one out about Woj (the NBA breaking news reporter) tweeting out a trade sending Lebron to the Knicks. How many Knicks fans would tip Woj $1 for that tweet? Would some super fan tweet him $1k? And, with all those tips flowing, wouldn't you see a huge increase in engagement (both from reporters trying to gin up tips, and from people engaging with those tweets)?
But there would be tons of negatives too. What happens if reporters are making more money off tips than they are off their jobs? Do they start tweeting salacious things not up to journalistic standards to gin up more tips and engagement? You could see how this could quickly turn Twitter into a cesspool of misinformation. Imagine the election last November; I could see the first reporter to break the outcome from a hotly contested race would get tons of tips from people happy about the race's outcome. But that could lead to a whole wave of issues. Reporters could start calling states too early in the rush to be first and get that sweet, sweet tip money. And reporters could start tweeting disinformation in order to get tips from disgruntled losers (i.e. if one news service calls a swing state for a candidate, an unethical reporter could quote tweet it saying "my sources inside the campaign say this is wrong and their opponent will be declared the winner shortly" and likely get a pretty nice influx of tips).
Not sure. Seems like a mammoth opportunity for Twitter, but I can also see some downsides!
UPDATE: after reading Facebook and Twitter's earnings reports, I feel like a fool for even suggesting that Twitter could be bigger..... but I still kind of think it's nonzero chances!
PS: One bonus thing while I'm here. Everyone hates on Twitter because Jack is a "part-time" CEO. I get it; I think Twitter's opportunity is big enough that they deserve someone fully focused on just the core business. And I think a part time CEO is really, really bad culturally for a bunch of reasons. But all of these tech companies are enormous; Facebook has Oculus, Facebook, Instagram, WhatsApp, and a bunch of other things inside of it. Aside from Instagram and Facebook, those are all very different companies. Is the fact they are all inside one company that much different / better than Jack running two different companies separately? Could you argue it's better to have the different companies separate so that they can have different boards oversee them and make sure they're working (i.e. one board oversees all of Facebook's bets, so they're spread thinner, while two boards oversee Square / Twitter)? What about for employee motivation; isn't it better if you're joining a company whose mission or product you believe in that you get equity that goes up and down based only on the results of that company? If you join Square, your options go up because Square's stock goes up. If you really believe in Oculus and join them, your work on Oculus doesn't really have any impact on how your stock options perform; it's just too small versus Facebook / Insta. You could apply similar logic to basically every tech company (I mean, think of all of the bets inside Google!). Not saying I necessarily agree with this or think it's perfect; just a thought!
Other things I liked
This greatly upsets me. I read her other series (Six of Crows) and loved it, so I was really excited to read Shadow and Bone. I just found the series dull; the characters were pretty simple and the plot was way too predictable. So it upsets me that the show is good because I'll probably have to watch it.
Two good write ups from a good new substack, Adu's Newsletter