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This week on the Intelligent Investing Podcast, I sat down with Jeremy Raper. One of companies we discussed was his largest holding, AerCap (AER).
Essentially, the company is run by a brilliant CEO who continues to buy back the stock below book value while the airplane fleet is understated on the books. Jeremy believes the company will eventually be sold at a premium.
You can listen to the full The Intelligent Investing Podcast episode, here.
This week on the Intelligent Investing Podcast, I sat down with Jeremy Raper. One of major themes we discussed was what Jeremy calls ‘Credit Based Equity Investing.’
Essentially, you’re buying thinking like a creditor yet buying equities. In this clip, Jeremy goes through his process of how he sources these ideas and what he looks for in an investment.
You can listen to the full The Intelligent Investing Podcast episode, here.
This week on the Intelligent Investing Podcast, I sat down with Jeremy Raper. One of the stock ideas we discussed was shorting the company, Nio.
You can listen to the full The Intelligent Investing Podcast episode, here.
Jeremy believes that Nio is one of the most anomalous mispricings of a security he has ever seen in his career. Nio is a Chinese EV player that is likely structurally unprofitable and unable to scale, burning tons of cash. Furthermore, all the key executives have left, the company has taken on a ton of debt, and there’s 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, the company has likely run out of cash in the very near term, or will have to do an emergency financing transaction that wipes out the ADR equity.
The 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.
This week on the Intelligent Investing Podcast, I sat down with Jeremy Raper. One of the themes we discussed was low interest rates in the USA and how they compare to the prolonged low interest rate environment in Japan.
You can listen to the full The Intelligent Investing Podcast episode, here.
This week on the Intelligent Investing Podcast, I sat down with Jeremy Raper. One of the companies we discussed was a company called Polyus Gold.
The company trades at 7x sustainable FCF at today’s gold prices. It’s the cheapest large cap gold company in the world. They also have the best assets in the world. They have a nice growth runway as the company could add 50% to their production profile within the next five to six years. If the price of gold goes up to around 2,000, this investment could be an absolute home run. However, if it doesn’t, shareholders get paid a 7% dividend. Possible to make a respectable high single digit/low double digit even if the price of gold doesn’t go up.
You can listen to the full The Intelligent Investing Podcast episode, here.
This week on the Intelligent Investing Podcast, I sat down with Jeremy Raper. One of the companies we discussed was a company called Shinoken. The company is a small cap Japanese part real estate developer, part RE management/recurring revenue stream business unfairly sold down last year to <4x EPS due to temporary dislocation just in the development segment. The business has since stabilized and RE development is likely to returns to growth next year; the recurring rev segments are still growing strongly
The 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.
The company has aligned management (30% ownership), they do occasional buybacks, and they pay a decent dividend.
You can listen to the full The Intelligent Investing Podcast episode, here.
You can read Jeremy’s full writeup on the company here.
Ferrari is like the inverse of some scammy MLM business or a tarot card reader or a self-proclaimed “life coach” that does motivation and gives people advice.
On one hand you have a business that caters to the ultra-wealthy, has a wait list, will kick you off it for life if you come to the front of the line and don’t buy, and needs you to prove brand loyalty to have the right to buy exclusive products.
Then there’s those people who are always busy and hustling running their scammy little business at worst or just doing some hobby business with no sound revenue model at best who is constantly chasing around for clients and working with pretty poor low value creating people which tends to correlate with having shittier integrity and character.
Then, you have no pricing power, your clients can barely afford to pay you, you are still dirt poor, and you’re running around like a crazy person hustling while still struggling to get by.
Inversion is such a great principle. Just avoid all of that. All of that.
I’ve turned down nearly 2 million dollars over the past few years. But I only work with really smart and wonderful people that I highly respect and admire who also are a pleasure to partner up with.
Avoiding and saying no to everything that doesn’t work while being clear what you need to do to deserve the results you get in life is so key.
It’s one of the reasons I love and admire the Ferrari model. In an industry that’s cyclical and tends to have pretty horrible returns over time (automobiles) — they totally stand out from the crowd and avoid all the dumb stuff. Avoid, avoid, avoid.
Or as Charlie Munger would say, “invert, always invert”
Cheers!
Made this video this morning on the Uber/WeWork debacle. The CEO has said he now regrets his investment decisions. Expect more write-downs to come. I also don’t think Uber has a sustainable model, even WITH driverless technology.
GameStop is a global, multichannel video game and licensed consumer products retailer, operating over 5,800 stores across 14 countries.
The business is in decline.
The CEO has no credible plan and should buyback stock.
GameStop is a global, multichannel video game and licensed consumer products retailer, operating over 5,800 stores across 14 countries.
The company’s success is dependent on a handful of suppliers. The company’s largest vendors are Nintendo, Sony, Microsoft, Take-Two Interactive and Activision Blizzard, which accounted for 23%, 22%, 10%, 6%, and 4%, respectively, of products carried by Gamestop.
In the current business climate, video game hardware sales are declining and consoles are declining significantly at a rapid speed. One of the major reasons for the decline is that the Playstation 4 (PS4) and Xbox One are approaching the end of their life cycles.
In the Q4 fiscal year result, Microsoft reported a decline of 48% in Xbox hardware revenue primarily due to a decrease in volume of consoles sold. Earlier this year, Sony reported a decline in PS4 console-sales volume which declined by 1.2 million units in 2018 compared to 2017.
According to The NPD Group, a firm which tracks hardware sales, hardware spending in June 2019 dropped 33 percent when compared to a year ago. Moreover, year-to-date hardware spending has declined 20 percent versus a year ago.
GameStop’s “New video game hardware” segment’s revenue declined by a whopping 35% in the recent 1st quarter of 2019. Moreover, given the fact that Sony’s next generation of PS and Sony’s ambitious Xbox Project Scarlett are rumored to be launched by Christmas of 2020, it is clear that the company’s new video game hardware is not going to improve in the near-term.
Pre-owned and value video is declining drastically and pre-owned video, which accounts for 28% of revenue, is the most profitable business segment which accounted for roughly 46.3% of gross profit.
This cash cow segment’s sales are rapidly declining since 2016. In the last four quarters, the segment’s sales are declining at double-digit rates. Furthermore, in the most recent quarter, the segment revenue declined by 20%. Also, the gross margin declined from 46.3% in FY 2016 to 43.4% in FY 2018.
Digital games, which are downloaded directly through the online store, are slowly replacing physical discs. Also, the lack of blockbuster games is affecting the used-video game market.
In last year earnings call, Robert Alan Lloyd, CFO told analysts that: “It does have to do with how customers can get some of those older titles, the very inexpensive titles that you can get through either subscription memberships or online in a pretty heavily discounted mode.”
Microsoft’s disc-less move is a long term threat for the companyRoughly four months ago, Microsoft announced a new model of its Xbox One console, a digital-only version that will not be able to play discs and costs $50 less. Moreover, Microsoft has partnered with Sony to help power PlayStation's streaming efforts.
The company’s digital store is unlikely to become a major hubSubscription services, including services such as PlayStation Plus and Xbox Live, that offer video game downloads each month, are a long-term threat to the company.
Now, starting April 1st, 2019, Sony prevents retailers like GameStop from selling digital download codes for PlayStation 4 games.
In the most recent quarter, the company’s Digital sales declined 11% and in the last 3 out of 5 quarters, digital sales declined.
The future is bleak but business is not going away soon. After the sale of its Spring Mobile business, GameStop is currently focusing only on the video game industry. The company is now a pure-play gaming business.
Even though the long-term outlook is negative and business is shrinking, Microsoft and Sony are making new game consoles that come with games disc. This makes it clear to me that the company still has life.
The crux of the question is – what are they going to do with the cash?
Given the massive problem faced the company in every nook and corner of the business, the new CEO is not addressing the core problem.
First of all, the company’s newly appointed CEO outlined his goal of improving the operating profit by over $100 million. If revenue continues to decline, the cost-cutting and profit improvement plan will not matter. For example, if the pre-owned video segment (which accounted for 22% of 2018 revenue) continues to decline at 20%, it will shave off roughly $125mm to $150 million in gross profit in a year. This is significantly more than the expected improvement in operating profit.
Secondly, in July 2019, the company, under the guidance of the new CEO, hired a global design firm R/GA to develop new and streamlined physical store concepts, introducing new ways for gamers to try new titles before they buy them, and giving stores a unique layout and purpose that appeal to gamers.
This proves that the CEO has not realized the fundamental problem of the company. The core problem is not that customers are walking into competitor’s retail shop for their fancy store concept – the fundamental problem is vendors like Sony are shifting to digital and there is no reason for the gamers to visit a physical store.
Third, in the recent conference call, the CEO talked about “new revenue stream” nearly 5 times, but the fact is that he is yet to “figure out” how.
"We’re evaluating new revenue streams and how we can and should participate in the digital economy, particularly given the significant number of loyal customers we bring the publishers and console makers. This will take time but is a necessity to enable us to continue maintaining our position as the leader in the video game space."
- George Sherman, CEO, Q1 2019 earnings call
Overall, it is clear that the company’s new CEO is clueless and is squandering the company’s cash.
Michael Burry, the founder of Scion Asset Management, was among the few who predicted the 2008 subprime mortgage crisis and was featured in The Big Short, a Michael Lewis bestselling book. He is now long on GameStop.
In his recent letter to the management, he urged the company to fully execute the $237.6 million remaining on its current $300 million share-buyback authorization. He has argued that it was the right time for the company to buy back its shares and expressed his belief that both Sony and Microsoft would keep physical optical disk drives.
Given the market capitalization of GameStop at ~$400 million at the close on September 23rd, completing the authorization would retire over 80% of GameStop’s outstanding shares. Depending on the timing and quality of execution, such a repurchase would increase earnings per share dramatically – far more than any other possible action on a per-share basis. On the most recent earnings call, the CEO appeared to say that he was considering using the company's cash on acquisitions. Shareholders that want no cash used for acquisitions and all cash used for share buybacks may have no choice but to run a proxy contest to get a new board of directors in place.
