Archive for the 'Investment Ideas' Category

This is Part 8 of a special Coronavirus Investing Series. If you have not listened to Part 1, please click here to get the overall context/market overview during this unprecedented time.

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In this episode of The Intelligent Investing Podcast, I sit down with Jeremy Raper to chat about a potential opportunity in Japanese Mall REIT's which have been hit pretty hard during this coronavirus pandemic. 

 

Overview

If you are willing to look through whatever happens in 2020 and assume we go back to a normalized environment in 2021, then you should be looking at some of the most beaten-down sectors.

You have to ask yourself a few questions when valuing names in the most beaten-down sectors of the economy:

 

  1. Is the equity going to survive?
  2. What losses are they taking along the way?
  3. What does that post-corona-world look like?

 

Japanese REITs

Japanese Mall REITs fall within the broader subsector of Japanese REITs. REITs are real estate investment trusts. Furthermore, REITs must pay 90% of their income as dividends. 

 

Japanese Hotels

Why Japan hotels in particular? Japan has been under-hoteled for a long time. There has been a shortage of hotels and that had been rectified somewhat on the runup to the Olympics. 

However, the hotel fleet is still pretty tight. 

 

Two Cheap Japanese Hotel REITs

On this episode, we discuss two Japanese Hotel REITs

 

Both REITs trade at fractions of NAV and high normalized cap rates.

 

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Staying In Touch With Jeremy Raper

 

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This is Part 6 of a special Coronavirus Investing Series. If you have not listened to Part 1, please click here to get the overall context/market overview during this unprecedented time.

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In this episode of The Intelligent Investing Podcast, Eric Schleien & Jeremy Raper discuss opportunities in the Gold Sector.

Macro View

The macro view is that due to the massive debasement of currency during this coronavirus pandemic, that will be bullish for gold prices. In addition, gold companies such as Kinross Gold are shutting down production due to coronavirus outbreak which ends up being a net-positive for the commodity. Unlike commodities such as copper, gold demand is not impacted by economic activity due to less actual functional utility. 

 

Gold Mining Stocks

 

However, Jeremy prefers Gold Minding stocks to owning actual physical gold outright. The reason for this is that if you can buy a gold miner that has been dumped during this coronavirus crisis, and you can find one where their revenue is in US Dollars but their costs are in their local non-US currency, you can also benefit from margin expansion. The margin expansion comes from cheaper labor costs, a lower price of oil, and a debasement of non-US currencies which have been destroyed in relationship to the US Dollar.

 

Polyus Gold

Polyus PJSC (Russian: ПАО "Полюс") is a Russian gold mining company. It is the largest gold producer in Russia and one of the top 10 gold mining companies globally by output (2.84 million ounces of gold production in 2019). It is headquartered in Moscow and is listed on both the Moscow and London Stock Exchanges.Polyus’ main assets are located in Eastern Siberia and the Russian Far East - in the regions of Krasnoyarsk Krai, Irkutsk Oblast, Magadan Oblast and the Republic of Sakha.

The company is controlled by Said Kerimov, son of Russian billionaire and politician, Suleyman Kerimov.

Due to the majority share ownership of Polyus by Said Kerimov, the company is not a buyout candidate. However, the company will benefit from margin expansion and Jeremy believes the company is trading at low-mid single digits of earnings based on $1,500 gold price. That equates to a 7.5% dividend yield on a conservative basis and probably higher with margin expansion.

If you want to listen to the episode of Jeremy discussing Polyus Gold, you can listen here. You can also listen to the commentary on Polyus on YouTube.

 

DRD Gold

 

Another gold mining stock that Jeremy likes is DRD Gold based out of South Africa. Like Polyus, they will benefit from a depreciation in their local currency (Rand), and benefit from higher gold prices. Unlike, Polyus, the company is a takeout candidate as their parent company has moved up its ownership stake in DRD from 40% to over 50%. DRD has a boatload of cash and no debt. The company currently trades at a very low P/E bases off $1,500 gold and their parent may very likely buyout shareholders in order to take advantage of the low stock price. Furthermore, the parent will probably want access to a large amount of cash being that the parent is somewhat levered. It's interesting to note that DRD pays an unusually low dividend which Jeremy suspects are due to marching orders from the parent company.

 

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Staying In Touch With Jeremy Raper

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This is Part 5 of a special Coronavirus Investing Series. If you have not listened to Part 1, please click here to get the overall context/market overview during this unprecedented time.

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OVERVIEW

In this episode of The Intelligent Investing Podcast, Eric Schleien sits down with Jeremy Raper to discuss some merger arbitrage and special situation investment opportunities in this coronavirus market environment.

 

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This is Part 4 of a special Coronavirus Investing Series. If you have not listened to Part 1, please click here to get the overall context/market overview during this unprecedented time.

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Overview

After a decade of bankruptcies, shipping investors are fed up. The shipping ETF was shuttered a month ago, and the carnage prompted Morgan Stanley and JP Morgan to drop coverage of the entire sector. Investors fear that Covid-19 will crush oil demand, and plummeting oil prices will result in tanker demand evaporating - potentially resulting in bankruptcies. However, tanker companies have used windfall profits to pay down debt, and some are now on solid footing.

 

Halts In Air Travel

As lockdowns spread and air travel grinds to a halt, oil consumption is collapsing, but Braxton says that's good for tankers because what oil isn't getting burned is going into storage on tankers, which were already in short supply.

 

Scorpio Tankers

Braxton discusses Scorpio Tankers, which trades at 35 cents on the dollar of liquidation value. Scorpio owns the youngest product tanker fleet of any public company. The product tankers built during the last boom are starting to turn 15 years and older, either trading in a second-tier market or moving into dirty trades. At the same time, new environmental regulations significantly boost the demand for product tankers to carry MGO and other compliant fuels.

 

Other Tankers

Braxton mentions several other tanker companies he owns, including Euronav, a prominent owner of crude tankers. Despite the strongest balance sheet in the industry and a policy of paying out 80% of net income as dividends, Euronav trades at two-thirds of liquidation value.

 

IMO 2030 & The Shipbuilding Industry

In the show, Braxton explains why he finds the shipbuilding industry unattractive, and how IMO 2030 may put a damper on new ordering.

 

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This is Part 3 of a special Coronavirus Investing Series. If you have not listened to Part 1, please click here to get the overall context/market overview during this unprecedented time.

Part 2 of the series, can be found here.

 

OVERVIEW

In this episode of The Intelligent Investing Podcast, Eric Schleien sits down with Jeremy Raper to discuss Qantas Airways, an airliner who has seen it's stock plunge during this coronavirus pandemic. Qantas is part of the Australian air travel market which Jeremy believes to have superior dynamics to most parts of the world. Jeremy believes there is triple-digit upside potential in the name with a low probability the stock goes to 0. We go into detail in the show.

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This is Part 2 of a special Coronavirus Investing Series. If you have not listened to Part 1, please click here to get the overall context/market overview during this unprecedented time.

Overview

In this episode of The Intelligent Investing Podcast, Eric Schleien sits down with Jeremy Raper to discuss AerCap (AER), a bombed-out stock during this coronavirus pandemic. AerCap is the world's largest independent aircraft leasing company. Jeremy believes there is triple-digit upside potential in the name with a low probability the stock goes to 0. We go into detail in the show.

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Show Notes 

In this episode, Eric sits down with Julian Lin to discuss the mall real estate industry.

Julian is a contributor on Seeking Alpha with over 13,000 followers. Julian runs a stock investment newsletter named Best of Breed which invests in high-quality companies with “moaty” business models, conservative balance sheets, and best in class management teams. You can find out more about the newsletter here - there is a 2 week free trial available.

Stocks of mall real estate investment trusts (‘Mall REITs’) have been crushed over the past several years, with some names having dividend yields up to 30%. While retail bankruptcies and store closures have indeed pressured the sector, there are many misconceptions.

For one, vacant Sears and JCPenney stores do not signal the “death of malls” but instead present opportunity. Mall landlords are replacing these stores with restaurants, fitness centers, movie theaters, all while earning an 8% cash return on investment.

Further, not all malls are created equal. Many low-quality malls may eventually need to be completely repurposed away, but high-quality malls, known as “Class A malls,” continue to thrive and should have relevance for decades to come. Class A malls continue to raise rents and grow cash flows.

The elevated amount of store closures and retail bankruptcies has depressed occupancy rates and cash flows in the near term, but Class A malls should be able to backfill vacancies and return to strong cash flow growth in short order.

Julian reveals the two names that he is most optimistic about in the sector, one with an A credit balance sheet and another with a nearly 13% dividend yield.

You can find more high-quality growth and value picks from his newsletter Best of Breed here - there is a 2 week free trial available.

 

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Hi Guys, it's Eric Schleien back again bringing you Episode #75! Thank you everyone for supporting the show 75 episodes later! You guys rock! This episode was recorded right before Christmas, however, a month later not much has changed. I sit down with Igor Ciric who is an individual investor who applies engineering frameworks to invest in publicly traded technology and technology-related companies.

Check-Cap Ltd. (CHEK)

One of the Igor's holdings is in a company called Check-Cap Ltd. (CHEK). Check-Cap is a clinical-stage medical diagnostics company developing C-Scan®, the first capsule-based system for preparation-free, colorectal cancer screening. Utilizing innovative ultra-low dose X-ray and wireless communication technologies, their capsule generate information on the contours of the inside of the colon as it passes naturally. This information is used to create a 3D map of the colon, which allows physicians to look for polyps and other abnormalities. Designed to improve the patient experience and increase the willingness of individuals to participate in recommended colorectal cancer screening, C-Scan removes many frequently-cited barriers, such as laxative bowel preparation, invasiveness and sedation.

Investment Overview

Check cap was selling $70 a share back in 2015. Today it’s an illiquid stock selling
for around $1.6 a share and the market cap is a bit over 13M.

Articles For Context:

C-scan price of $600 vs. $500 for Pillcam and $1000 for colonoscopies (US).

  • Colon cancer screening multi billion market.
  • Medtronic has $3 bil in annual net income and $123 bil market cap. 1 month of
    income -> $28 a share. (17x current share price)
  • Given Imaging had losses and no revenue for the six months in 2001. In 2002 the company grew revenues $29 million. In 2014, Covidien acquired Given Imaging for $860 million net of cash, 4.78X the $160 - $200 million in annual sales Covidien expected to gain from the acquisition. (When the company had grown) -> $100 a. share (60x current share price)
  • Exact Sciences Corporation multiple of x22.5 would generate $150 a share (92x current share price)

Risks

  • Funding 
  • Going Commerical (GE - Assembly, packaging, and shipping)
  • Warrants & Further Dilution

Recent Study Results

To see the most recent news, click here

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Watch The Video!

It's been a while since we've talked about Cambria Automobiles on the Intelligent Investing Podcast. You can hear the original episode we did on Cambria, here.

Update

Cambria Automobiles came out with earnings around the end of November. The stock was up ~15% on that news. The company increased earnings by ~25% over the previous year whereas the rest of the car dealership industry was down because of poor new car sales in the UK.

Cambria is up mostly because of new dealerships and startup losses are not turning into profits.

There are three categories of profits for car dealerships:

  1. New Car Sales (NCS)
  2. Used Car Sales (UCS)-used car
  3. After Sales (Parts & Service)

All three categories for Cambria were up which is an amazing accomplishment. It's even more incredible for NCS because that's the number one driver for the industry being down this year.

Why Is Cambria Different?

Because the company started fibve luxury dealerships around 18-24 months ago. Luxury dealerships have more profit contribution when they mature than non-luxury which is what most of the industry is.

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Today I had the pleasure of having on Brian Dress who is an investment analyst at Left Brain Investment Research. We discuss 3 equity ideas and 3 bond ideas. We also delve into a bit about his firm's process as well.

  • Click here for more information on Left Brain Investment Research
  • Click here for more information on Left Brain Wealth Management

 History/Background of Left Brain

Left Brain opened the wealth management business in 2014, hedge fund in 2016, and investment research platform in 2019. A differentiating characteristic of Left Brain's investing platform is an emphasis on selecting individual securities, particularly individual bonds in the high yield space. Brian genuinely enjoys and gets excited to share his investment philosophy with both individual investors and advisors.  The company has slowly built up their investment staff in order to cover a large universe of high yield bonds (about 900) and about 200 stocks.  What they've come to realize is that many advisors lack the resources to replicate this type of research apparatus, so they decided to create a product to provide this research to advisors so that they can select stocks and especially high yield bonds that will help clients achieve income goals in a compressed interest rate environment.

Data-Driven Bottom-Up Approach

Left Brain has a data-driven, bottom-up approach that incorporates technology to rank securities on the basis of a number of quantitative and qualitative factors, including revenue growth, gross margins, competitive dynamics, and accelerating results. The company portfolios are concentrated, as they view this as an allocation model with the best chance to deliver superior results and excess returns; usually no more than 20-25 stocks at any given time, particularly in the hedge fund.

Characteristics Left Brain Looks For In Analyzing Securities

Management

Company management is paramount in both equities and credit.  Left Brain wants to see a history of success for the CEO, a strong capital allocation strategy, and an alignment of interests with investors (“skin in the game”); also for equities and bonds, they want to see strong fundamentals in the underlying business, no matter what the valuation or possible yield compensation

Equities

The company looks for strong (and accelerating) revenue growth, high (and expanding) gross margins, favorable competitive dynamics

Distressed Bonds

For distressed bonds: Left Brain looks for deleveraging (either through improved EBITDA or retiring debt through asset sales), improving trends in operating metrics (revenue, EBITDA, total debt), high yield compensation per unit of leverage (Debt/EBITDA), and most importantly, a strong Free Cash Flow (FCF) profile

 

Equities Discussed On The Intelligent Investing Podcast

 

Splunk (SPLK)

One of the strongest companies in Silicon Valley working in the data analytics space could be considered Splunk. Splunk’s platform allows non-technical workers to query company data using natural language (“Google for your data”) to gain insights both about customers and operations. Left Brain is attracted to Splunk’s 30% annual revenue growth and 53% growth in recurring revenue, which are both quite high for a company trading at 9x forward revenue; as an $18 billion market cap company, still plenty of room for Splunk to grow before maturing as a business.

Changing Business Model

Splunk is changing business models to discontinue all perpetual licensing: recurring revenue model leads to higher gross margins. Splunk has gained penetration in the enterprise, winning several 8-figure deals in the last quarter, including a major partnership with Domino’s

Talend (TLND)

Talend is a small French cloud computing company (mkt cap ~$1B) that does data integrations that help companies gain valuable insights using data. The company trades in the US as an ADR. Despite a small size, Talend has over 3500 customers including HP, Citigroup, GE, Astra Zeneca, and Lenovo.

Financials & Valuation

Talend has Annual Recurring Revenue is up 27% YoY. However, what Left Brain really likes is that cloud revenue has grown more than 100% annually for the last 13 straight quarters. Talend, despite the strong growth, trades at a very low multiple relative to peers at less than 4x forward revenues.

Roku (ROKU)

This is Left Brain’s Stock of the Year for 2020. Left Brain has rotated some of thier long-held Netflix (NFLX) positioning for ROKU, who they think has less business risk as ROKU is not a content creator. Streaming is one of the market’s strongest trends: ROKU offers an operating system that integrates all streaming platforms (built into 1/3 of TVs shipping today). ROKU offers a non-intrusive advertising platform that we think the company can monetize as advertisers seek any platform to advertise that is not Facebook or Google. In addition, Revenue growth is strong at 52%. Today, the stock trades at a 12x forward revenue multiple. Brian is confident that ROKU can keep growing at a pace that justifies the multiple.

 

Bonds Discussed On The Intelligent Investing Podcast

YPF 8.5% 2025 bonds

The YPF 8.5% 2025 bonds currently yield in excess of 12%. YPF is an Argentina-based integrated oil play that has been in existence since 1922, surviving through many difficult economic times in Argentina’s history. The company has a strong credit profile relative to Argentina sovereign bonds. The downgrade in Argentina sovereigns dragged down YPF bonds, making them attractive for Left Brain.

In addition, the company has no currency exposure to the Argentine Peso, as debt and revenue are both denominated in dollars (oil market revenue always remits in USD). The company has flattish revenue growth; cutting CapEx aggressively by pursuing Joint Venture (JV) partners to save on CapEx.

The company's leverage of under 3x (Debt/EBITDA) is very low relative to other energy exploration companies.

Transocean (RIG) 7.5% 2031 bonds

Transocean 7.5% 2031 bonds currently yield 12.6%. Transocean is a best of breed company. In addition, the company has by far the best rig fleet of any oil service provider (31 of the 100 best offshore rigs worldwide).

RIG management says offshore drilling activity is picking up as oil prices begin to stabilize.  RIG’s high-spec rig fleet positions the company well to take advantage of any improvement in the oil market.

RIG Leverage is currently high, but should drop dramatically if rig utilization improves and raises EBITDA (increased earnings is RIG’s best path to deleveraging). In addition, RIG has five straight years of positive Free Cash Flow, despite a difficult oil industry environment.

Furthermore, RIG has $12 billion in backlog business, $2.5 billion in cash on the balance sheet, and $4 billion in total liquidity.

L Brands (LB) 6.95% 2033 bonds

L Brands 6.95% 2033 bonds have a current yield near 9.5%.

10% revenue growth at Bath and Body Works (40% of the business) and flattish growth at Victoria’s Secret (the other 60%).

Victoria’s Secret recently hired a new CEO from successful women’s brand Tory Burch, giving us hope that LB can turn around the VS business.

Company leverage is under 3x, making the 9.5% yield very generous for a company that appears to be quite safe according to Brian.

LB has 23 consecutive years of positive Free Cash Flow, making their ability to service their debt very robust. Their store closure strategy has helped bring down leverage slightly over the past few quarters.

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