Some things and ideas: February 2021 - Yet Another Value Blog
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Some things and ideas:
February 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
1. I do four things publicly: this blog, my podcast
(Spotify, iTunes, or YouTube), my premium site, and my
twitter account. You can see my vision for the podcast
here, and my vision for the blog and premium site here.
If you like the blog / free site, I'd encourage you to
check out the pod, follow me on twitter, and maybe even
subscribe to the premium site!
2. I try to be as helpful as humanly possible to anyone
whose research / writing I enjoy. In almost every post I
do, you'll notice I link to other subscription services
or investors who I like. I don't get referral fees or
anything for that; these are almost always organic links
and highlight that I do not because I was asked to but
because one of my goals with the (very small) platform I
have is to shine light on other people who are doing
good work.If you're launching a subscription service, or a
new blog, or you're an investor who has done some
really good research and wants to let the world
know, please send me a line and let me know. If
the quality is there, I would love to link to your
blog post or subscription service or research (and
if the quality isn't there, I'm happy to provide
feedback!), and I'd love to have you on the
podcast to talk about all of it. I can't promise
anything, but most podcast guests / people I've
linked to have been very happy about the reception
/ feedback they've gotten (I've even been called
the king of the sub bumps, and I've generally
heard from investors with LPs who come on the
podcast that they're delighted by the response).
My DMs are always open, so feel free to slide into
them if I can be helpful!
Virtu (VIRT) investment thesis
My "state of the markets" heading into 2021 was
speculative excess and opportunity everywhere. The
overarching theme was pretty simple; there are multiple
bubbles / manias going on, but if you're willing to look
at the edges of those bubbles, you can find a lot of
opportunity. For example, I think there's a SPAC bubble
going on currently, but that bubble created the
opportunity to buy Worthington at a huge discount last
year, trade around PSTH while they're still looking for
a deal, and buy the "picks and shovels" to the SPAC
bubble at a large discount (note: that's my premium idea
for February, so unfortunately it is behind a paywall
for non-subs).
The headliner bubble this year (and likely for the next
several years) was Gamestop. And while that mania wasabsolutely crazy, I think even that bubble presented opportunity. One play was to sell deep, deep out of the money puts on Gamestop (I highlighted this in my post on short squeezes, though as always I'll remind you that options are risky and nothing on this site is investing advice). The other interesting play Gamestop related play that seems to be still ongoing? Virtu (VIRT; I tweeted out a summary thesis earlier this month). VIRT is an electronic trading firm. Basically, VIRT (and firms like them) are the reason Robinhood can offer free trades. Robinhood routes all of their orders through the electronic trading firms, the electronic trading firms match all of the buys and sells against them and keep a small spread (with part of that spread going to Robinhood as a reward for giving them the trades; this is known as Payment for Order Flow (PFOF)), and retail traders get better prices than they otherwise would (plus free commission). Viewed from one lens, it's a win/win/win. There are... less generous views that the business model is actually taking advantage of retail traders. I tend to lean more towards the former than the later, but I'm perhaps biased and will also admit I'm not an expert. This piece from Matt Levine did a nice job of covering PFOF in more detail. So what's the opportunity? Again, Virtu handles orders for retail trading platforms. More volume = more money.... and volume exploded with Gamestop mania. VIRT is trading for
2020 was a onetime thing, but the trends in 2021 seem to be in their favor. Even if not, VIRT is trading at a reasonable multiple to what they say their "normalized" earnings are ($2/share, so
those problems putting out a press release that
says, "we're investing $500m to building an
internalizer so we can make sure the Wall Street
fat cats don't get rich at the expense of our
clients?" Would that PR make any sense if you
actually understood what was happening? Not
really! But it would be great PR, and since very
few people seem to be taking the time to
understand what is happening I think it would
instantly solve a lot of Robinhood's problems.
Of course, that's a big investment for something
that's probably not as good as the existing
solution. Maybe the PR is worth it, but that's
expensive PR! There does seem to be a moat here;
perhaps there's a reason the majority of HFT firms
launched decades ago.
Anyway, I'm not an expert here. There are a variety of
other risks that I've glossed over (a pretty obvious
one: VIRT says normalized earnings are $2/share, but
what assumptions go into that?), and there are open
questions on how sustainable this business is in the
long term. But the set up appears really interesting:
very cheap on trailing numbers, tons of near term
tailwinds, aggressive capital returns, and even if all
that fails it seems reasonably priced on management's
"normalized" earnings numbers.
Note: I wrote this Feb. 12, the same day I tweeted
my one tweet investment thesis of VIRT. If there's
any huge changes between now and month end, I'll
try to come back and edit this section, but if
shares have changed by a dollar or three between
now and month end, I'm not going to update and
will just live with slightly stale numbers.
This article reminded me: even as GME dies down,
it does seem like retail driven trading flows are
here to stay, and VIRT will benefit.Free money for growth tech
A wave of growthy companies are raising money by issuing
convertible senior notes at 0% interest rates. Pelton,
Spotify, and Dropbox are good examples, but I think I've
seen a few more and I bet the trend accelerates if
markets remain open to them.
I understand that this isn't technically "free" money
and all the option math behind the converts.... but it
is still crazy. These are multi-billion dollar
companies, and the volatility on them is so high that
they can raise 0% debt just by offering investors the
option to buy their stock 30% higher a few years out?
Wild wild wild. Dropbox has said that their FCF is
inflecting upwards and committed to an aggressive share
repurchase program, so they're effectively raising money
to leverage up and buyback their stock.... which, if
successful, these convert investors will then be
converting into at prices significantly higher than
today's! Quite the arb.
The dropbox case is funny just because they've
been so clear that about repurchases are going to
be a serious part of their capital allocation
program. I think the free money is almost more
interesting for something like Peloton. When you
combine a founder / CEO with an incredible brand
and effectively free growth capital, what's the
limits to what they can do?
Venmo Credit Card
Venmo launched a credit card, and it made me think of
two things:
First, just continues to drive home the optionality fromowning the customer relationship / an app that people
use frequently. I'm sure when venmo was launching they
didn't have "build a venmo branded credit card" in their
business plan, but the fact so many people use them
frequently for payments made that an easy brand
extension that I would guess has a good chance of making
a decent amount of money.
Second, it makes me worry about the legacy banks. I
mean, how much does capital one spend to get new
customers signing up for credit cards? I would guess a
good amount; Venmo got me to sign up for a new credit
card with a nice rewards program, an email, and
integration to my venmo account. That's a huge customer
acquisition cost advantage. I get this is n=1, but there
are a lot of fintechs backed by a lot of money coming
for banking products. For years, one of the best /
safest investments to make has been buying small cap
banks when they trade below tangible book value and
waiting for them to get bought out. If you did a basket
of those, you would have made good money over time. I
wonder if eventually those small banks will be destroyed
by a nuclear arms race of tech, regulatory spend, and
customer service (big banks spend tons of tech and
regulatory that they can spread over a very large asset
base, so small banks can't match them there, while small
banks also can't match the customer service / speed of
fintech start ups, so small banks lose on all sides).
Maybe I've simplified too much here. The history
of betting against small banks when purchased at
reasonably cheap levels is pretty poor (they
generally consolidate and buying a basket cheaply
does well). The scariest words in finance are
"this time is different...." but the actual
scariest thing in finance is betting that this
time isn't different and being proven wrong. I'm
worried that's what could happen here.Psychology / Ego
This article (on how Bruce Berkowitz stumbled) is really
excellent. So much rang out to me; I don't agree with
everything, but everything in there is well thought out
and on the whole the article is great / I agree with
most.
One line in particular really stood out to me:
"I recently had a great discussion with a close
friend who said to me that one of the sharpest
people he knew seemed to be getting less
thoughtful. Probably because a certain amount of
fame was getting to his head and starting to
impact his judgement. I feel that the amount of
signal a person generates right after they nail a
big win is actually lower than it was before,
though most people tend to increase their
confidence in that person’s takes and analysis."
As someone who can have..... a little bit of an
ego, there's a lot of wisdom in that to me. When I
look back, most of the failures in my career have
been on the heels of big wins. Wins create
arrogance, which maybe leads to less rational
thinking or less thoughtful investing, which leads
to big losses.
Buffett said, "you never know who is swimming
naked until the tide goes out." And we all know
the simplistic meaning of it (a bull market makes
a genius of everyone). But I think there's a
deeper level to it too. A little success can make
you feel like a good swimmer. Maybe a better
swimmer than you are. Maybe it encourages you to
swim in the deep end, or try to swim races or
distances you wouldn't have swum before. Maybe all
of your success was buying growthy microcaps, but
that success makes you think you're a genius andencourages you to swim in the leveraged turnaround
water, or in the macro waters.... and eventually,
you'll discover that you were swimming in much
deeper waters than you can handle.
Anyway, I know a lot of people think it's weird
for someone who is on the "professional" buyside
to write publicly as much as I do. But I enjoy it,
and I find it comes with tons of benefits. One of
the key benefits is that writing publicly helps
keep my ego in check. Every now and then I'll
write something and look at it and think, "ok,
you're being an asshole, time to check yourself."
Or I'll post a super detailed thing that took me a
week of writing and research, and someone will
come and blow the whole thing up in two sentences
by pointing out something obvious I missed. Very
humbling, and certainly helps keep the ego in
check!
Podcasts
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:
Al Grujic on Robinhood's issues and stonk squeezes
Shehryar Khursheed from Return on Capital on RH
Joe Boskovich on WildBrain $WLDBF
SPACs SPACs SPACsBlank-check companies sets eyes on corporate spinouts or
vice-verse
I've been saying this for a while, but the boom in
SPACs eventually has to bleed into general
valuations. All of these SPACs need to get deals
done or else their founders lose millions in
promote; they will find companies to take public,
and there are only so many EV companies to go
around. Eventually, the SPACs will need to turn
their eyes to unloved segments within
conglomerates or lifting PE portfolio companies.
RSVA PIPE at a premium (CCIV / Lucid did a premium pipe
later that afternoon)
I'm highlighting for two reasons
First, I haven't seen a PIPE at a premium to trust
before, so highlighting a new trend.
Second, I just find these weird. Consider CCIV /
Lucid: their stock was a $60 when they announced
the deal. They had PIPE investors willing to
invest $2.5B at $15/share. CCIV's trust was
$10/share.... why would Lucid agree to merge with
CCIV at $10/share? Why not demand the $15 that the
PIPE investors were putting in at, or simply go
raise money with them directly?
I also wonder if we start seeing sponsors whose
SPACs trade at premiums to trust monetize their
forward commitments. I mentioned this in my PSTH
write up, but PSH has committed to invest at least
$1b at trust value in PSTH when PSTH announces a
deal. With PSTH trading at a ~50% premium to
trust, PSH is already $500m in the money on that
commitment. Why not sell half of that at a premium
(i.e. sell the $500m commitment for $750m and
split the value difference with the buyer)?
Beachbody going public through a SPAC
Beachbody comps are legit hilarious. I love Shaun
T (I did Insanity 5x/week at the height of thepandemic / before my beloved Peloton came in), but
the valuation comparison is insane.
Hat tip to the beachbody team; they've evolved
with the times and negotiated a deal that gives
them top dollar. But this business has been around
for a really long time; they got a nice bump from
the pandemic but even on those bumped up numbers
this seems to be a pretty rich price....
Also, very interesting for a company that sells
meal plans to comp themselves to Chewy.... (hat
tip here)
CLOV response to short seller
I mentioned it in my notes from Bill Brewster's
podcast, but I honestly cannot believe the company
went public / deSPACd without disclosing a
freaking DOJ investigation.
Chamath interview on CLOV on CNBC (ignore the
click-bait title on the YouTube video); I think
the discussion on his promote was very
disingenuous on his end (he appears to completely
ignore the value of the ~11m private placements
warrants he got as a sponsor), and it spoke to a
lot of the criticism that many people (including
myself!) have made of him.
The story gets even better! Billionaire Clover
Health CEO Expletive-Ridden Tirade.
Endless boom in blank check companies is wearing out
insurers
Two things on this
First, there are lots of questions of how the SPAC
bubble ends. It won't end until you see a wave of
SPAC deals fail. When SPAC deals fail, sponsors /
founders lose all of their risk capital. This
increase in insurance rates will bring that end on
a little sooner; higher insurance costs (and other
costs attached to a SPAC) means that founders need
to put up more risk capital.Second, this is going to create a little bit of a
moat for repeat sponsors and/or sponsors with very
good track records. If D&O insurance is more
expensive for fly by night SPAC sponsors than
repeat sponsors, over time you'll see fly by night
sponsors priced out.
Investors in SPACs need to know the real deal
The SPAC boom, visualized
Gamestop Day Traders Are moving into SPACs
NEBC / Rover's clever presentation
SPAC dream (rap video).
WSJ article on SPAC rap
Nevin's Thoughts on Investing: Issue 4 (SPAC mania)
SPAC boom drives gains at CS investment bank
From butter deal to lucid: inside citi's 15-year-old
SPAC desk
A-rod joins blank-check derby to build the Yankees of
SPACs
New breed of firms vies for stakes in NBA teeams
Typos on CCIV / Lucid merger deck
Look, I get those are small. But the merger deck
is the most important marketing for a SPAC. This
is a $16B deal. Reams of bankers and consultants
are pouring over everything they are publishing.
For two typos to escape on one slide is absolutely
bonkers.
You hear tons of rumors that SPAC sponsors are
doing.... very light due diligence in a rush to
get deals done before the SPAC bubble collapses.
Things like that slide do absolutely nothing to
dispel those notions!
One more CCIV shenanigans slide while we're here
WSJ: nothing Lucid about a $57B valuation for an
electric-vehicle start up
Ok, last thing on CCIV / Lucid. I mentioned this
in my post on PSTH, but bubbles can pop for really
weird reasons, and the fact that Lucid (thebiggest / most buzzy SPAC) dropped ~50% on deal
announcement seems as good a reason as any for a
bubble to pop. Markets have been reasonably weak
since that deal, and it's still early / only one
deal..... but I certainly feel like some of the
air has come out of SPACs since that announcement,
and pre-deal SPACs have traded down notably since
then (though many are still trading at big
premiums!).
Tweet thread on coming era of SPAC shorts
I tend to agree. I also think there will be a
really interesting opportunity set from SPAC
"babies tossed out with the bath water."
Speaking of getting tossed out, interesting idea
but I'd be shocked if this wasn't tossed out. SPAC
Flop is test case for disgruntled investor
lawsuits.
Let me get weird for a second
Three random and weird thoughts. I figure if you've read
this far, this is a safe space to throw some out there
thoughts at you!
First, I absolutely love fantasy novels. I read
Warbreaker this month (one of the few Sanderson novels I
hadn't read); it started slow but by the end it was just
dropping bombs left and right. Reading Warbreaker
reminded got me thinking: Brandon Sanderson is operating
on a different plane of existence than other mere mortal
fantasy writers. The only other author who I'd even put
in his class is Patrick Rothfuss (of Name of the Wind /
Kingkiller fame), but I don't think that's fair once you
consider output: Sanderson is out here writing like 1.5
books a year, while Rothfuss is barely writing one a
decade and hasn't even finished a series.Why do I mention this? First, because Warbreaker
was so good I had to share it somewhere. Second,
because I wanted to think about people who are
performing at levels just leaps and bounds above
their fields. What other examples of there are
people who are operating at just a different level
than the rest of their industry? There aren't
many. For example, LeBron James might be the best
basketball player ever, but the difference between
his performance and, say, Kevin Durant isn't
"other plane of existance higher."
With investing, I think there are three historical
examples of people operating on a different plane
than there competitors:
Ben Graham inventing fundamental analysis
and then just going and buying good
busiensses for less than the cash in their
bank
Ed Thorp (of "A man for all markets" fame)
figuring out put/call parity and making a
fortune before Black-Scholes existed.
Joel Greenblatt (of "You Can Be a Stock
Market Genius" fame) figuring out spinoffs
can hide riches before anyone else caught on
(but this is probably a looser example!).
Second, while I'm on books, another weird thought: I
feel like most of my friends who are value investors /
more real estate focused investors enjoy fantasy, while
I feel like my more growthy or VC driven friends enjoy
sci-fi more. Is that just a broad generalization, my
imagination, or is there something to those two
different mindsets leading people to like different
types of writing?
Honestly, as I write this I get it soudns silly. I
guess the thought here would be "growthy investors
are more interested in speculating in the future
and how tech evolves, while value investors aremore interested in the past (where most fantasy is
based)." Probably silly, but feels sort of right
based on my understanding.
Another related but probably equally silly theory:
investors who focus on very hard assets (investing
in stocks for less than net asset value, investing
in banks and insurance companies) are much more
into non-fiction / history books than most other
investors (who like nonfiction books, but read
more broadly).
Third weird thought: obviously I need to mention my
current obsession, Peloton. I recently discovered
Peloton and ESPN hosted an all star ride at the depths
of the pandemic. Three things on that:
1. My god, you want to talk about brand strength? I
know ESPN was desperate for content during all of
the stay at home orders, but for ESPN to host
essentially a 60 minute infomercial for Peloton
where a bunch of elite athletes came on and
effectively said "I love Peloton; it's what I use
to train at home" Wow!
2. I just love what these results reveal about the
underlying athleticism of these people. At his
weight, Rory's results are equivalent to a low
level professional cyclist (or at leash that's
what a locked account on twitter told me; I
believe them!). This is one of the best golfers in
the world, and on the side he's casually putting
out the results for elite cyclists. That's
incredibly impressive.... but I don't even know
how to speak to how unbelievable Colleen Quigley's
results are. She almost freaking beat Rory, who I
was just raving about for putting up a borderline
professional power output! The difference between
her and second place in the women's was almost
double the difference between second and last
place! A "Brandon Sanderson writing fantasy" levelof dominance from her.
3. I did my first FTP test a few weeks before seeing
that ride; I'm planning on doing one every six
weeks or so. My first test was fine, but I went
into the test blind in terms of how I should pace
myself and what cadence I should use. Super
excited to take my next one with better pacing /
cadence / form; looking forward to catching Rory
at some point (don't worry, my body weight is much
higher than Rory so I'm not planning on putting up
professional cycling levels anytime soon!). If you
have tips for training or pacing an FTP test, I'm
all ears!
A quick cable follow up
I posted: Big Three Cable; still too cheap early this
month. A quick follow up.
Charter raised ~$3b of debt this month. Look at the
rates they're raising at! 30 + 40 year paper atadjusted returns on those buybacks are outstanding.
Other things I liked
Stop everything you are doing and read this legendary
exchange between Dan Loeb and Aaron Edelheit
The article it is from (on missing Disney) is well
worth the read too!
The diff on short selling
Fully agree, and while on the subject: I consider
the Diff the work of a mad genius. I cannot
believe how many topics he covers, and how well he
covers them, on a daily basis. Highly, highly
recommend.
What does stripe do?
Why Fubo is a divisive media stock but not Gamestop
Basketball fans are investing in NBA highlights for some
reason
What is Top Shot
Silver Lake outmaneuvers rivals to win big AMC bet
Why did I leave Google, or why did I stay so long?
WWE: getting paid to give leagues championship belts
How Covid upended WWE
Disney takes 80% of streaming revenue by calling it home
video
Why Ted Lasso became the hit that put AppleTV on the map
Padres own Fernando Tatis $240m. He owes an Investment
Fund Millions from his payday'
Music Mogul buys Beach Boys Songs, calling band
underappreciated
Who really wrote your favorite song? It's complicated
Achilles Tear is basketball's worst injury. Except for
Kevin Durant
The progress in medicine continues to be
unbelievable. Decades ago a torn ACL was the endof a career. Now you're back full strength within
a year. Achilles injuries seem to be trending the
same way.
Activism at Kohls
Death, taxes, and activists tilting at windmills
to revitalize old department stores. Maybe this
time will be different....
Investors changing, golf, and Sarah Tavel
EA removes multiplayer mode from dragon age game in big
pivot
How NBCU missed out on billions in Peloton and SNAP
Enjoyed it but suspect it was written by a certain
faux account.....
SNL skits: SNL is just spot on with the best growth /
momentum stocks this month
Introducing Pelotaunt
SNL on ZillowYou can also read
