(LMCA) Investment Company Act

I did not understand the Investment Company Act before.  This set of regulations would be extremely onerous for Liberty Media if it were deemed to be an “investment company”.  In particular, Liberty would likely run into problems with the following:

Be careful of VIC writeups

On ValueInvestorsClub.com, there is a writeup on AVID which argues that 4K will drive the adoption of Avid products.  4K basically refers to film and/or video formats that have four times the pixels than HD formats.  However, the reality is that Avid products cannot output at 4K resolution.  Currently, a subset of Avid users are forced to use another product for their 4K conform/online editing/finishing needs (e.g. Resolve, Autodesk Smoke, etc.).  If the project must be delivered in 4K, current Avid products cannot do the job.

Spotting inflated oil and gas reserves

There are two main approaches:

1. Look at management’s integrity.
2. Look at the technical data and/or perform proper due diligence.

Anybody who believes this slide deserves to lose money in junior mining

Here’s the slide:

BBA did technical report work for Bloom Lake.  Note the big discrepancy between Bloom Lake’s current operating costs and what the technical reports estimated.

BBA did technical report for Kami.  Hmm I guess Alderon’s management failed to mention this in their presentation.  Other slides in the presentation also fail to mention the sulfur and manganese levels in the Kami deposit.

*Disclosure:  No position in Alderon or Altius Minerals (key Altius employees sit on Alderon’s board of directors).  There may be some value in Kami.  However, I think that projections about Kami’s economics are “overly optimistic”.

Short selling update May 2014

Lately, I’ve been organizing all my current and potential short positions into a table (see below).  The short positions I am most excited about go into Tier 1.

Microcap stocks and G&A

Thankfully, it seems like many people (including even some institutional investors) don’t get it.  With microcap stocks, it’s very important to examine the company’s general and administrative spending.  The companies with excessive G&A spending are typically doing one or all of the following:

1. Lining insiders’ pockets or supporting their lavish lifestyles (e.g. private jets, unusually expensive meals, etc.).
2. Paying for stock promotion.
3. Operating inefficiently.

All of these behaviours are bad for shareholders.  Excessive G&A is a sign that at least one of these value-destroying activities is happening.  Examining G&A will help you avoid stock promotions and really awful management teams.

Hollysys: Office Space

(This blog post only explains very minor red flags.  I think I see much bigger red flags with Hollysys but I will not explain them.  This will be a lower quality post compared to other posts on this blog.)

According to HOLI’s SEC filings, it owns Bond M&E and CE Concord.  Hollysys decided to buy one of these companies and then the other.  Here’s Google street view showing their neighboring offices:

Restoration Hardware versus West Elm

Restoration Hardware competes against a company called West Elm, which is owned by the publicly-traded Williams Sonoma (WSM).  SEC 10-K filings disclose metrics for both companies.  Restoration Hardware’s metrics are far superior:

• Higher “comparable brand revenue growth” overall
• Roughly three times higher sales per leased square footage (by my calculation)

Yet there are some curious things about Restoration Hardware:

• According to Google Trends data, West Elm has been trending stronger than the supposedly faster-growing Restoration Hardware.
• I’ve never seen a hot retailer shrink its store count.  Hot retailers look like West Elm.  They open stores because the rate of return on new stores is likely very high.

(Malone) Tracking stocks versus spinoffs

Advantages of spinoffs

Spinoffs can hurt bondholders if the debt covenants are weak and allow the company to spin off significant assets backing the debt.  This benefits the equity as the spin-off that is unencumbered with debt can issue debt at lower rates.

Spinoffs make a company easier to understand and allow more institutional investors to own the stock (e.g. sector/industry-specific funds).  This may increase the share price.  This can generate value if the stock is used as acquisition currency in rolling up poorly-managed companies (e.g. LBYTA).

Advantages of tracking stocks

LMCA update May 2014

Previously, I predicted that Liberty would repurchase its shares.  I was dead wrong.  Instead of buying back shares, Liberty decided to buy $124.5M in Charter shares at around $138.8 per share (press release).

I believe that Malone wants to play defensively by gaining more voting control over Charter and ensuring that Tom Rutledge can run the business without interference from other Charter shareholders.  (I honestly can’t think of any other reason why LMCA would buy CHTR shares instead of LMCA.  In the past, Liberty has bought back shares in the $110-$130+ range.  Its stocks have gone up since then so Liberty’s intrinsic value is higher now than in the past.)