More new positions Dec 20, 2013

Long: LMCA

Short: JKS, CSIQ, SPWR, ZU, PCYO, EBIX (puts and common), AMT puts, TTS, YONG puts, AVID

Closed: KWG*, short NUS.TO, short BBRY, short CREE, short TLT

Liberty Media (LMCA)

The simplest and least time-consuming way to approach Liberty is to buy when Liberty is repurchasing its shares.  From Liberty Media’s 10-Q:

On October 3, 2013, the Company completed a transaction to exchange a subsidiary which held our wholly owned subsidiary Leisure Arts, approximately $417 million of cash and our rights in and to a revenue sharing agreement relating to the carriage of CNBC for 6.3 million shares of Liberty Series A common stock.

On October 3, 2013 LMCA stock closed at $147.06.  I would simplify the situation as follows: Liberty bought a large amount of its shares (6.3M, 5.2% of outstanding shares) at roughly $147.06.  I bought LMCA at prices below $147.06.  On the other hand, one could argue that Liberty got a really good deal (it traded with Comcast) and is actually only willing to buy back its shares at prices lower than $147.06.

Liberty is currently pursuing a strategy where it is selling down its stake in SIRI so that it can deploy that money into better areas.  I’m guessing that Malone will want to buy more of Charter (CHTR) in the future, help Charter consolidate the cable industry with Rutledge as CEO, somehow dispose of the Barnes and Noble (BKS) stake, and look at repurchasing more shares.

Solar – JKS, CSIQ, SPWR

I am not an expert in this industry.  I have found Gordon Johnson to be an excellent analyst when it comes to the solar sector.  Unlike other analysts he has an unusually high number of sell recommendations.  He has made a number of good calls on shorting STEC (enterprise storage) and shorting the solar industry.

Forbes blog (2 blog posts and 1 comment)
Gordon Johnson on the Future of Solar (interview)
More Clouds Gather Over Solar-Power Producers (Barrons article)

The Bronte Capital blog has several interesting posts on solar (e.g. Senseless Chinese capital expenditure: Trina Solar edition).

My analysis on these stocks is not very sophisticated.

  1. I believe that the industry will continue to have terrible economics in the future.  I am basically following Johnson’s analysis.
  2. Some solar stocks are selling at prices well above recent secondary offerings.

Zulily (ZU)

Zulily draws comparisons to Groupon because both sites offer daily deals.  However, I think that it would be more accurate to think of Zulily as a close-out retailer.  I think that their business model does make sense.  They may very well carve out a profitable niche in online commerce that won’t be crushed by Amazon.

The company is currently unprofitable and the valuation is very high (price/sales is 8.6).  I have not done much research on this stock.

Pure Cycle (PCYO)

Pure Cycle owns water rights and handles various aspects of the water business: “water production, storage, treatment, bulk transmission to retail distribution systems, wastewater collection and treatment, irrigation water treatment and transmission, construction management, billing and collection and emergency response”.

In the past decade, this water company has lost money every year and SG&A has exceeded revenue every year (see Gurufocus).  However, I doubt that it will go bankrupt anytime soon.  The company has sold stock on multiple occasions throughout its history.  Since 2000 the stock has gone up +428%; the stock price has done quite well despite the losses.

This seems like a low quality business trading at a high valuation.

Ebix (EBIX)

This is part of my ‘plagiarism in moderation’ strategy.  Gotham City Research has released multiple hit pieces on Ebix.  I would say that hit pieces should be treated with caution as the one-sidedness of the piece is a problem.  I think that there is value to doing your own research and analysis.

I may put out a post on Ebix in the future.

American Tower puts (AMT)

See Muddy Water’s research on AMT.  The puts have implied volatility in the mid to high 20s.

Tile Shop Holdings (TTS)

Gotham City Research’s hit piece on Tile Shop is actually very good.  I admire their detective work in looking at publicly-available PIERS import/export data.  They uncovered a related party transaction that was previously undisclosed.  In my opinion this is very strong evidence that would support an argument that the company is fraudulently overstating earnings.

When I started reading the company’s regulatory filings, I saw a lot of red flags:

  1. Their margins seem way too high.
  2. The amount of inventory seemed excessive.  In the Crazy Eddie fraud (as explained by Sam Antar), one of the ways that profits was inflated was by reporting fake inventory.  Insiders would “help” the auditors count the boxes of inventory.  The Bronte Capital blog basically goes through these two arguments.  To me, the business bears too many similarities to Crazy Eddie.
  3. Insiders were constantly selling stock in secondary offerings.
  4. Some stock was being held in an offshore account.  This is a minor red flag to me.  I’ve never seen a clearly legitimate stock have a major shareholder hold the stock in an offshore account.
  5. Insider compensation is very high.
  6. There are related party transactions that don’t make any sense for shareholders.  I think it’s inappropriate for insiders to sell shares to related parties as it may be unfairly diluting shareholders.  Also, it seemed like Tile Shop did not need to raise capital.  From a 424B4 filing:

    In January 2012, TS, Inc., ILTS and JWTS sold (i) an aggregate of 129,333 Common Units of The Tile Shop to Mr. Krasnow, (ii) an aggregate of 646,667 Common Units of The Tile Shop to the Peter H. Kamin Revocable Trust dated February 2003, the Peter H. Kamin Childrens Trust dated March 2007, and 3K Limited Partnership, entities of which Mr. Kamin is trustee or general partner, as applicable, (iii) an aggregate of 25,867 Common Units of The Tile Shop to Family Office Investors LLC, an entity in which Mark Riser, a member of the board of managers of The Tile Shop prior to the consummation of the Business Combination, is the sole member, and (iv) an aggregate of 19,400 Common Units of The Tile Shop to Warren Garden, in each case for $7.732 per unit. In connection with these transactions, The Tile Shop made certain representations and warranties.

Unfortunately I held off on shorting TTS as I wanted to wait until insiders sold off more of their stock in secondary offerings.  The Gotham report came out before that happened and the stock tanked.  I first found out about TTS through a VIC writeup.

I think that there is value in the underlying business.  Retail is a tough business.  These guys IPOed with a chain of retail stores.  This suggests to me that insiders are actually good at retail.  It is unlikely that unskilled operators would end up with a chain of stores because capitalism is often a game of ‘survival of the fittest’.  I wouldn’t want to bet on this stock going to zero.

Yongye puts (YONG)

Yongye has been attacked by many short sellers for being a fraud (I agree with the fraud thesis).  However, the company is currently being taken over for $6.69/share in cash.

A few weeks ago, the stock was trading at $6.30 and I was able to buy $5 strike 2016 puts for $0.05/contract.  I thought about buying the common stock and a few put options for each 100 shares of common.  Such a trade would probably make money regardless of the outcome of the buyout.  It would lose money only if the buyout failed and the stock dropped below $6.30 but stayed above ~$5 until Jan 2016.  But that is not the trade I put on.  I currently own puts and have no position in the common.  My dislike for going long silly stocks may or may not be irrational.

 Avid (AVID)

Avid’s two crown jewels are its video editing software and Pro Tools.  These should be wonderful cash cows.  However, the company had terrible management and continues to have terrible management.  It seems incredibly fishy to me that Avid can’t file its financials on time.  It doesn’t make sense.  The situation could be explained by incompetence or some form of accounting fraud that they need time to cover up, but both scenarios seem implausible to me.

I have written about Avid before:

  1. Avid (AVID): how to lose money when you’re the market leader
  2. Avoid Technology: How does a company not manage to file its financials?
  3. Film/TV production/technology stocks

Closed positions

Nautilus (NUS.TO) – I don’t like shorting this because the borrow is very expensive.  If the stock is at 23 cents and the rate is 20.875%, I believe the effective interest rate on the borrow for me is 45.38% (IB explains the calculations on their website).  I covered at a small profit.

KWG Resources – I covered almost all of my position at 4.5 cents/share.  I believe I have 1,500 shares left, which is a meaningless position for me (less than a hundred dollars).

Blackberry (BBRY) – I didn’t know what to think of Prem’s takeover offer so I covered too early (between $8 and $9).  In hindsight, it’s easy to see that Prem Watsa’s takeover offer had very little interest behind it, Watsa wasn’t putting in any money, and the break fee was unfair to Blackberry shareholders.  In any case this short position worked out very well for me.  Unfortunately I did not make back the money I lost going long Blackberry.

Long-term US treasures ETF (TLT) – I was bought in on this position.  Lost a small amount of money.

Cree (CREE) – Covered at a profit.  I don’t like shorting stocks which are constantly raising capital.  Management understands the strategy of using overpriced stock to buy real assets.

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5 thoughts on “More new positions Dec 20, 2013

  1. (not trying to be critical here) but seems like you want a lot of positions or a lot of action? I’m thinking you would be better off in less positions but positions that you have researched thoroughly and have more conviction in.

    When did CREE sell stock or buy another company for stock? I don’t know of anything recent, at least material. CREE is debt free and has a large cash balance. I own a few puts spreads in CREE, did I miss something recent? CREE is a good short candidate because I think competition kills margins.

    • By my count, they have done 2 secondary offerings since their IPO. They have also made numerous acquisitions, some of which was paid in stock. (Yes some of these events were a long time ago. The first secondary is practically ancient history.)

  2. Pingback: Closed my Tile Shop position | Glenn Chan's Random Notes on Investing

  3. Pingback: Liberty/Malone update | Glenn Chan's Random Notes on Investing

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