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Eric Schleien discusses value investing, rational investment analysis, and vital mental models.
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Thursday Dec 19, 2019
Thursday Dec 19, 2019
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.
Wednesday Dec 11, 2019
Wednesday Dec 11, 2019
Summary
Discussion of investment philosophy
Stocks we discussed
Wednesday Oct 30, 2019
Wednesday Oct 30, 2019
Show Summary
Happy day before Halloween! This is a very special episode of The Intelligent Investing Podcast. I bring Brian Langis back on the show to discuss Brookfield Asset Management which we have discussed before. We go into some of the slides from Brookfield Investor Day 2019 on both Brookfield Asset Management and also some of their subs such as Brookfield Business Partners. We discuss larger trends, low and negative interest rates, valuations, and culture.
Cultural Activism
We spend quite a while on the cultural activism going on at Brookfield Business Partners led by their COO, Denis Turcotte. I had the pleasure of meeting him at the Brookfield Investor Day and noticed he wasn't just giving lip service to culture but actually doing it and knew he didn't learn this from business school. Many of you don't know this but I have a 10 year background in transformational coaching and a 7 year background specifically on organizational culture- not just understanding it but actually empowering organizations to elevate it. Brookfield Business Partners is actually working with businesses to elevate culture not just talk about it and no surprise, profits go up!
Better Culture Equals Greater Profits
One of the things I have discussed with my colleagues John King and Scott Forgey is that greater culture equates to greater profits. John King is the inventor of Tribal Leadership which is the most cutting edge and leading cultural transformation technology on the planet. Scott Forgey is working with me on empowering organizations to elevate their culture, except we are focusing on public companies. When an organization goes from what is known as Stage 2 to Stage 4, profits go up by an average of 300% - 500%.
Relevant Links For This Episode
- Eric Schleien interviews John King on Tribal Leadership | Thrive Global
- Cultural Activism: A New Model For Activism | The Intelligent Investing Podcast
- Netflix, Sears, Tribal Leadership | The Intelligent Investing Podcast
- How To Keep Large Companies Innovative | The Intelligent Investing Podcast
- The Oaktree / Brookfield Transaction | The Intelligent Investing Podcast
- 2019 Brookfield Investor Day Slides | Brookfield Asset Management Investor Relations
- Getting Into The Weeds: Recap on Brookfield Asset Management | The Intelligent Investing Podcast
Connect With Eric Schleien
- Visit Eric Schleien’s Podcast
- Visit Eric Schleien’s Twitter
- Visit The Intelligent Investing Podcast’s Twitter
- Like The Intelligent Investing Podcast on Facebook
- Follow Eric Schleien on Facebook
- Visit Granite State Capital Management’s Website
- Follow Eric Schleien on Instagram
Connect With Brian Langis
- Visit Brian Langis' BLOG
- Visit Brian Langis' SEEKING ALPHA
- Visit Brian Langis' LINKEDIN
- Visit Brian Langis's FACEBOOK
- Visit Brian Langis' TWITTER
Friday Oct 25, 2019
Friday Oct 25, 2019
In this episode of The Intelligent Investing Podcast, Eric Schleien and Glenn Surowiec discuss the Index Investing Bubble as well as discuss General Electric (GE) which has been going through a massive restructuring.
Glenn manages SMA's through GDS Investments which he founded in 2012. From 2001 to 2012, he worked for Alsin Capital Management, Inc. as an equity research analyst (2001-2003), co-portfolio manager (2003-2008), and portfolio manager (2008-2012). Before joining ACM, Glenn worked for Enron Corp. as a derivatives structuring manager, and for Commerce Bancorp (now TD Bank) as a real estate credit analyst.
He currently serves as an advisory board member of Value Conferences, an online-only conference featuring some of the most prestigious value investors across the globe.
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 Facebook, Instagram, or through his personal website. To follow The Intelligent Investing Podcast, click here.
Disclosure: Eric's firm Granite State Capital Management manages SMA's. None of his clients own GE stock. That could always change in the future without notice.
Contact Glenn Surowiec
Glenn can be reached by email: glenn@gdsinvestments.com OR he can be reached via his website.
You can read Glenn's most recent letter to his investors, here.
Tuesday Sep 17, 2019
Tuesday Sep 17, 2019
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
IMO 2020
The Tanker Thesis
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 Facebook, Instagram, or through his personal website.
To follow The Intelligent Investing Podcast, click here.
Monday Sep 09, 2019
Monday Sep 09, 2019
In this episode of the Intelligent Investing Podcast, Eric Schleien discusses Trupanion (TRUP).
OVERVIEW
The price of Trupanion (TRUP) stock has recently declined from the mid 30’s/share to the low 20’s/share. Trupanion has high short interest due to claims of overvaluation on a price to book level and due to claims that the business model is flawed and unsustainable. Even some longs are selling the stock. For example, Todd Wenning of Ensemble Capital shared in a recent blog post from his online publication Intrinsic Investing that he has grown concerned with Trupanion’s ability to communicate their value proposition to pet owners and that Trupanion has trailed the industry growth rate as defined by the North American Pet Health Insurance Association (NAPHIA), after years of outperformance.
CONCERNS RAISED BY ENSEMBLE CAPITAL
In addition, Todd shares a few concerns on his blog:
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Todd assumes that when there are industry tailwinds, most companies with what he refers to as “emerging moats” should be able to continue to gain market share and recently this hasn’t happened with Trupanion. He cites this as a red flag.
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Todd also explains that Trupanion is often the first brand that vet customers hear from their vets yet Trupanion has a slowing growth rate and is not outpacing the industry recently
There have also been concerns raised on Seeking Alpha that California raised their prices by 150% in California since 2015 with an additional 20% price-hike this year. He has concerns that this will lead to adverse selection which is a worst nightmare scenario for any insurer: healthy pets leaving due to higher prices while the sick pets stay leading to unsustainable losses.
FAULTY ASSUMPTIONS
However, there are some faulty assumptions here.
Yes, it’s true that Trupanion subscription growth only grew a bit over 15% compared to the industry’s 17% growth rate, but looking at this alone doesn’t tell the entire story. In reality, Trupanion is growing faster than the industry when you compare similar products in the marketplace. For example, there are lots of cheap products in the pet insurance marketplace that really aren’t comparable. In addition, some companies are underpricing during a period where the pet insurance category is gaining more awareness. We have seen this before.
COMPETITORS UNDERPRICING POLICIES
Trupanion competitors from time to time will grow faster than the category due to mis-priced policies. For example, Nationwide grew pretty quickly and grabbed market share two years ago. However, they had to pull back after a year because they couldn’t price their product properly Another example is Healthy Paws. If we look at Healthy Paws, they have grown pretty quickly. However, if you look at their pricing, they’re able to get away with it because they keep switching underwriters and they keep rolling over new pets to new books of business. Healthy Paws recently had to change their product by introducing caps, changing their deductible structure to longer having zero deductibles. In addition, we see pricing increases of 30% on top of natural age based pricing factors. The fact that they are mis-priced has now become a problem for Healthy Paws. In Washington, they can’t even underwrite policies anymore.
THE CALIFORNIA FALLACY
California is getting a lot of attention for Trupanion. However, this concern is also totally unwarranted and blown completely out of proportion. Just like Trupanion, Healthy Paws also files in California and 34% of pets need more than a 50% pricing increase. That’s base rate increases + 15% = 65%. California, however, is capped at 50%.
The way you win your insurance category long-term is to price more accurately than your competition. Short-term this means you won’t always be growing faster due to the ebbing and flowing of the many other pet insurance competitors that underprice their policies. This has never been shown to be sustainable (obviously) and economic reality always settles in within a few years time. Trupanion is by far the best in the business when it comes to pricing policies accurately to get their 70% target as quickly as they can.
California is no different than what Trupanion has disclosed on their main book of business. Nothing would suggest that churn is different in California despite the massive pricing increases in recent years. One-third of Trupanion customers interact with the product in the first year. The company is processing 80,000 claims/month and the average claim is only a few hundred dollars. When rates increase, there is an increased churn of 20% across their entire book, California is no different. One of the biggest opportunities for Trupanion currently is their first year churn rate.
The reality in California is that the greatest usage amongst Trupanion customers are specialty and referral hospitals (cancer centers, cardiologists, urologists, etc). This leads to greater Trupanion customer population density. The California market has seen large increases in these types of hospitals and the Trupanion customers are seeing value in them as can be seen through claims passing through those hospitals.
BUSINESS AS USUAL
The business model is not broken. None of this should be news. The panic ensues by those who can’t see the context behind the numbers. However, I’m happy to have the shorts keep shorting. Recently, the borrow rate on shares has climbed to nearly 10% meaning that through Interactive Brokers, myself and my investors through Granite State Capital Management are getting ~5% interest on our shares.
Disclosure: Granite State Capital Management manages SMA’s with positions Trupanion (TRUP). However, this could change at anytime without prior notice. This is not a buy or sell recommendation. I wrote this article myself, and I am expressing my own opinions. I am not receiving compensation for this post.
SHOW LINKS
- Why We Sold Trupanion (Intrinsic Investing Blog)
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Trupanion: $8 Price Target, Adverse Selection Exposed In Filings (Seeking Alpha)
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Trupanion: Downgrading To $1 As Rate Spiral Takes Hold (Seeking Alpha)
- TRUPANION: SLOWING GROWTH; ISSUES IN CALIFORNIA (Granite State Capital Management | Blog)
CONTACT ERIC SCHLEIEN
If you'd like to connect with me directly, I always love connecting with listeners of the Intelligent Investing Podcast on my personal Twitter.
You can also connect with me on Facebook, Instagram, or through my personal website.
To follow The Intelligent Investing Podcast, click here.
Monday Aug 26, 2019
Monday Aug 26, 2019
Eric Schleien sits down with Gobinath Balasubramanian. We discuss an interesting mistake Gobinath made buying a Russian Media company as well as one of his largest holdings, Grupo Televisa.
The Russian company was CTC Media and is one of the largest broadcasting companies in Russia. At the time, the company looked cheap. The business had no debt and was spitting out lots of free cash flow. This was during the time of the most recent Russian Oil Embargo when pretty much all Russian stocks plummeted.
So here you have a strong business, a beaten down stock, returns on capital of ~50%, and a valuation of under 10x FCF. So what could go wrong? Well, it's Russian equity markets....so lots! Russia proposed a rule saying that non-Russian owners could not own Russian media companies anymore. Therefore, poor Gobinath was forced to sell the stock 6 months later (tear-jerk).
Eric and Gobinath also discuss one of the largest media companies in Mexico, Grupo Televisa (TV). This is one of Gobinath's largest positions making up about 8% of his fund. At the time of this recording you could make the argument that each division could potentially be worth the current market cap.
Grupo Televisa Divisions
- Content Division: 700m EBITDA
- Broadband Division: 850m EBITDA
- Other Businesses: 400m EBITDA
- Univision Royalty Stream of 16.5% of Total Sales. Total sales of Univision: $3B USD. Royalty = 450m (straight to the bottom line).
Total Market Cap of Grupo Televisa: ~5B USD
Furthermore, the Gobinath likes the fact that management is buying back stock and that the companies founder's son owns 16%. In addition, the Bill & Melinda Gates Foundation own shares as well as Oakmark. Also, the company will make likely make back its market cap in cash within 5 years.
Gobinath Balasubramanian is the Chief Investment Officer of GB Investments LLC, which he founded in 2016.
Gobinath is a graduate from The University of Tampa – Sykes School of Business in Tampa, FL where he earned his Masters Degree in Finance. He performed his undergraduate studies at St. Peters Engineering college, in Chennai, India, earning a Bachelor of Engineering degree in Electronics and Communication. He holds the Series 65 license.
You can reach Gobinath on his LinkedIn or through his website for GB Investments.
You can also see Gobinath's first podcast on The Intelligent Investing Podcast, here.
Contact Eric Schleien
Of course, if you'd like to connect with me directly, I always love connecting with listeners of the Intelligent Investing Podcast on my personal Twitter.
You can also connect with me on Facebook, Instagram, or through my personal website.
To follow The Intelligent Investing Podcast, click here.
Sunday Aug 18, 2019
Sunday Aug 18, 2019
In this episode, Eric Schleien & Anthony Waldichuk discuss Tower Properties (TPRP).
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, Anthony 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.
Connect With Eric Schleien
Thursday Aug 01, 2019
Thursday Aug 01, 2019
In this episode of The Intelligent Investing Podcast, Eric Schleien sits down with David J Flood. David is a private value investor based in the UK. His investing approach is grounded in the fundamental precepts of value investing based upon Ben Graham’s core concepts of ‘Intrinsic Value’ and ‘Margin of Safety’. His investment strategy involves looking at both ‘Deep Value and ‘Franchise Value’ situations and using the value investing framework to analyze the financial and corporate facets of a given prospective investment.
In this episode, we discuss Equitech International Corp (EQTL) which is a nanocap dark company. David wrote a blog post about the company not too long ago. If you enjoy reading about obscure companies on blogs such as NoNameStocks or OTC Adventures, then you’ll also enjoy David’s blog.
Monday Jul 15, 2019
Monday Jul 15, 2019
In this episode, Eric Schleien sits down with Jan Svenda to discuss Millennium Investment & Acquisition Company (MILC).
Jan is a “deep value” investor/analyst mainly focused on the US small-cap and micro-cap universe. He started out with a long-only bias (stocks trading close to NCAV etc.) which led to his interest in the OTC world.
Jan now covers this space through his exclusive newsletter service where he shares his latest long ideas and a watchlist of OTC stocks which should help subscribers generate material returns and allow them to “monitor” the OTC space more efficiently.
The service also acts a community of engaged members who share the same focus. On top of this, he is interested in short-focused research especially in thesis revolving around accountancy or earnings manipulation.
From time to time he also contributes to Safety in Value’s marketplace ‘Microcap Review’.
CONNECT WITH JAN SVENDA
To learn more about Jan and his manual of OTC stocks, you can visit his website.
He can also be reached via LinkedIn.
CONNECT WITH ERIC SCHLEIEN:
Visit Eric Schleien’s Podcast
Visit Eric Schleien’s Twitter:
Visit The Intelligent Investing Podcast’s Twitter
Like The Intelligent Investing Podcast on Facebook
Follow Eric Schleien on Facebook
Visit Granite State Capital Management’s Website
Follow Eric Schleien on Instagram