Archive for the 'Investment Ideas' Category

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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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Summary

 
In this episode of The Intelligent Investing Podcast, Eric Schleien and Jeremy Raper sit down to discuss everything from Jeremy's personal growth into a 'credit-based equity investor' to specific long (Shinoken, Gan) and short (Nio) ideas and how he generates ideas like these.
 

Discussion of investment philosophy

- Pursue a methodology I term 'credit-based equity investing, or 'thinking like a creditor but applied to stocks'
- It means using the skeptical, 'downside before upside' mentality of a creditor to pick stocks, rather than the typical equity mindset (which emphasises growth/blue sky/optimism)
- Method derives from time spent in Japan, where due to decades of low rates/QE the fundamental discipline of credit analysis structurally disappeared from the market
- This created an opportunity to identify investment ideas using a credit skill-set
- However, the true opportunity lay not in applying those tools to fixed income/bond markets but to equity markets, given the excess liquidity in the system provided by QE/central banks meant typical bankruptcy restructurings were not common
- Instead, the equity market was serially used to recapitalize troubled/distressed issuers
- This pattern is now being replicated, to an extent, in other markets like Europe and the US (since these markets are, from a monetary perspective, looking more and more like Japan)
 
 

Stocks we discussed

Shinoken (Tokyo listed, 8909)
 
- Small cap Japanese part real estate developer, part RE management/recurring revenue stream business unfairly sold down last year t0 <4x EPS due to temporary dislocation just in the development segment
- Business has since stabilized and RE development likely returns to growth next year; the recurring rev segments are still growing strongly
- Business has rerated to 6.5x EPS but fair value on a sum of the parts basis is closer to 11x EPS, so still a near double
- Aligned management (30% ownership), do occasional buybacks, pay a decent div
- Japanese small cap with v limited English disclosures so not for everyone!
 
 
Gan Plc (London listed, GAN)
 
- Small cap and listed on the AIM junior exchange, so caveat emptor :)
- Provider of B2B software for internet gambling providers. Historically all in Europe but major client now is Fanduel in the US and so they are plugged in to the structural multi-year growth runway in US legalized sports betting
- They get royalty fees based on users and engagement thus as ARPDAU grows, margins should scale, like a SaaS business
- revenues will double this year and no reason they won't keep growing aggressively as sports betting growth continues
- Available today at <4x FY20E revs and EBITDA positive (maybe <15x EV/EBITDA) for a business growing triple digits. Highly unusual
- Only this cheap because its not on a major exchange but this will change from next year with NASDAQ relisting
- Manager, Dermot Smurfit's family owns ~30% of the company and is highly aligned
- This is an atypical opportunity for me but highly interesting given the valuation/setup
 
 
Nio (New York listed, NIO)
- One of the most anomalous mispricings of a security Jeremy has ever seen in his career
- Chinese EV player that is likely structurally unprofitable and unable to scale, burning tons of cash, all the key executives have left, took on a ton of debt, and no update on two emergency financing transactions
- The company has essentially 'gone dark' (stopped reporting material information) - peculiarly a perk only available to Foreign Private Issuers (FPIs) despite being listed on the NYSE
- In any case they likely run out of cash in the very near term, or do an emergency financing transaction that wipes out the ADR equity
- Bonds trade at 30c on the dollar implying an EV for the whole company of <$500mm while the stock market cap ($2.3bn) implies an EV for the company >$4bn, or 9x that implied by the bonds
- Highest conviction short on his books at the moment
 
Full writeups here:

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In this episode of The Intelligent Investing Podcast, Eric Schleien sits down with Braxton Gann to discuss two shipping companies, Scorpio Tankers (STNG) and Diamond S Shipping Company (DSSI). 

Overview

A lot of managers are concerned about the "trade war" because less trade = less shipping. Braxton thinks that a trade war is a positive because the trade will be less efficient, increasing ton-miles.
 
Some investors also worry that a global recession will send these shipping companies into bankruptcy, forgetting that new supply would be cut off by a recession, and that obsolete vessels would be scrapped mercilessly.
 
There has been a lot of talk about OPEC cutting production being a negative for STNG, but STNG carries products, not crude. Saudi Arabia is adding refinery capacity, and the OPEC cuts will have to be renewed in March.
 

IMO 2020

Another puzzle is that shipping companies are downplaying the obvious effects of IMO 2020, which can easily be enforced by spot checks. Braxton thinks this is because most companies can't afford scrubbers, even though they offer payback times of 10 months or less.
 
Another factor that we didn't end up getting to on the show is that many shipyards are going bankrupt, and shippers will have to rebuild their balance sheets for a couple of quarters before ordering more product tankers, which can take a year and a half to build.
 

The Tanker Thesis

 
The main reason Braxton likes product tankers is due to the disruption that will occur from IMO 2020. Many ports don't have the low-sulfur fuels required for IMO 2020, and each low-sulfur blend must be carried in a different tank. Braxton started looking at product tankers when he realized they would be the ones carrying LSFO blends. Inventories of refined products and bunker fuels are surprisingly low, so you could get a double boost from normalizing inventories and arbitrages between ports. This could boost demand by 10% or more, excluding the effect of normal GDP growth.
 

Contact Eric Schleien

If you'd like to connect with me Eric directly, he always loves connecting with listeners of the Intelligent Investing Podcast on his personal Twitter.

You can also connect with Eric on FacebookInstagram, or through his personal website.

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Episode Summary

In this episode of The Intelligent Investing Podcast, Eric Schleien interviews DTEJD1997 to discuss an under-the-radar company called Caledonia Mining. 

 

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In this episode, Eric Schleien & Anthony Waldichuk discuss National Stockyards (NSYC). 
 
According to Oddball Stocks:
 
Here's the backstory. A long time ago in a faraway place, there was a company that owned stockyards.  A stockyard is a place where cattle are auctioned off to buyers.  Ranchers drive their cattle by horse, or train, or truck to the stockyard at pre-determined dates when auctions are held.  Cattle buyers come and purchase the ingredients for your burgers and steaks and the ranchers return home without cattle, but with pockets full of cash.

The company was established in the 1870s in Oklahoma.  The date and place invoke images of cowboys and Indians, saloons and western movies.  Those days are long gone and the company now consists of three things, their Oklahoma stockyard that's still transacting cattle, a plot of empty land near St. Louis, and an ownership interest in a golf course.

 

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Following Anthony on Twitter  

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In this episode, Eric Schleien & Anthony Waldichuk discuss Scope Industries (SCPJ). Company is super under the radar. The CEO has been at the helm for 6 decades and has built a pretty good long-term track record as a value investor. Was amazed that I had never heard of him before this episode. Totally interesting stuff! Anthorny refers to the CEO as the Poor Man's Warren Buffett.

 

Hope you enjoy!

 

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In this episode, Eric Schleien & Anthony Waldichuk discuss Southern Reality (SRLY) which is an oil & gas royalty business with a stock and bond portfolio attached.

 

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SA Article: https://seekingalpha.com/article/4235934-southern-realty-podcast

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#45: Avoca, LLC (AVOA)

Avoca, LLC (AVOA) is a publicly traded, non-reporting limited partnership that owns a 16,000-acre island off the coast of New Orleans. They have a few side businesses, some potential use for the land, and have a stock and bond portfolio worth the market cap. These dark companies are fun!

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A writeup of this podcast was also published on Seeking Alpha which you can find here: https://seekingalpha.com/article/4236410-want-buy-island-avoca-llc-podcast

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In this episode, Eric Schleien & Anthony Waldichuk discuss Ojai Oil Company (OJOC). 

Anthony started out as a trader for what is now TD Ameritrade Institutional’s trading desk, moved onto LPL Financial where he traded equities, then moved over to trade fixed income instruments.

Then moved to the buy-side as a portfolio manager for Neosho Capital LLC, where he focused on international and emerging market equities. 

Retired in 2016 to oversee his real estate portfolio, but still dabbles in the stock market occasionally, mostly in the inefficient micro-cap space.

He can be followed on Twitter at @darkfirecapital 

Follow Eric on Seeking AlphaTwitterFacebookLinkedIn, and GSCM.

 A writeup of this podcast was also published on Seeking Alpha which you can find here: https://seekingalpha.com/article/4235632-ojai-oil-company-podcast

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