Old ideas, new year
More symbols than analysis/stocks that might be trading for less than they're worth
Since the last post in late November, pickings have been slim for new ideas. Suffice it to say that my portfolio has turned over significantly— the only symbols that I’ve mentioned that I still like are PetroChina and Activision. I swapped EQH for JXN (which I like) but both are fairly similar in terms of product profile and valuation as L&R businesses. So there are probably three names I feel comfortable owning at these prices.
Most of the cheap names that I traffic in have rallied substantially year-to-date; nevertheless I continue to hunt. Incidentally, it might be the best time in the history for the over-the-counter stock investor. I try to not mention the over-the-counter names that I traffic in for fear of being accused of pumping-of-dumping (I would never, this is not investment advice, it is commentary). Dave Waters at Alluvial Capital regularly talks about this and remains fearless in this pursuit. But it’s an arena where people are more concerned with making money than sounding smart. So it’s rarefied air. And the good people don’t talk about it because the opportunities don’t scale. And the opportunity set has never been better:
Public company costs have never been higher in absolute terms and continue to go higher (alongside the expensive IPO process), so plenty of incentive for cost-conscious companies to remain over-the-counter
In terms of history, and I have no actual way of proving this, the most overlooked the market has been. More talent at multi-manager shops that feeds off liquidity and regular trading. More talent looking at overseas liquid names than domestic illiquid names. All these claims might be specious.
“Risk Management” desks basically ignore these names, too hard to trade and too tough to model/hedge against. Why would a market making operation risk this? Makes no sense for the business model.
Not scalable! Fixed costs for hedge funds are high! Can’t do this repeatedly. Not enough brainpower pricing these opportunities.
All that being said I don’t know how much I can or will write about OTC names. Profits from these names are slim and I am not a rich man (yet). Below are a few exchange traded ideas I’m most interested in:
CNNE- Cannae Holdings, part of the Bill Foley empire. $40~ NAV and trading at $25 as of this writing. Not the biggest holding of Foley’s but still significant. Really like two of the listed stocks in the CNNE portfolio: CDAY and DNB. Both seem reasonably valued.
SRG- like this one a little less because of the expressed desperation of the company and Lampert as well. Share sales at recent prices have been disheartening, and contacts in the CRE world have mentioned that the impending maturity on their books is going to hurt their asset proceeds. Still could hit the $18.50 low end of the range that Barclays initially guided to by the end of summer; most likely in a sale of the remaining assets at some point. Maturity of the BRK term loan is 7/31/2023
LSXMK- Timely, as the stock is cratering today on bad guidance. Had mentioned this asset briefly in newsletters past as a Liberty special. Perpetually trading below NAV and an over-leveraged fixed asset business with obsolescence risk. Except it’s not that at all (in my opinion)! Maffei has made overtures to crush the NAV discount. Pandora acquisition seems to have been a disaster. Company has decelerating churn with 34 million customers, still below their pre-pandemic numbers. So the business is decent and you’re getting it at 35%~ off through the tracking stock nonsense.
Office REIT basket: ONL, HPP, SLG, BDN- Basket trades at double-digit cap rates, and if you believe REIS, the assets are probably worth 7 caps. Not much more logic than that.
Refiners- US refining capacity hasn’t recovered to 2019 levels, while 3-2-1 NYMEX crack spreads have remained in the ~$30 range since Feb of 2022. More profits here for longer might be a good way to squeeze the last ounce out of this cycle. Smarter people than I know the arithmetic better than I do, but it does seem to me that you could convince a generalist that the oligopoly has rationalized pricing and margins.
I’ll pick a few of these opportunistically to write about in the coming months as best risk and rewards candidates. I mentioned ATVI, 857 HK, JXN as three attractive risk/reward opportunities with liquidity, but that’s about it. As a brilliant man once said, “time will tell.”