Liberty Global (LBTYA/B/K): Cable on a global scale + yet another Malone tracking stock

There are parts of the cable industry where scale is a massive advantage.

  1. On the content side, a broadcast network or cable channel with scale is incredibly profitable and is very difficult to compete against.  Scale allows dominant companies to outspend their competitors on content because their per-viewer costs are lower.  Because they have better content, they retain their dominant market share.  Historically, it has been extremely difficult for competitors to compete against superior scale.
  2. On the infrastructure side, a lot of equipment and software costs come from the fixed cost of R&D.  Scale allows a cable company to purchase in bulk and to get reduced pricing on set-top boxes, cable modems, and other equipment.

While Liberty Global largely owns cable systems (with a mishmash of other assets from its various acquisitions), it is also looking to use its subscriber base to get into the content game.

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(OCN/ASPS) Benjamin Lawsky’s fishing expedition

Benjamin Lawsky has gone after Ocwen looking for wrongdoing.  So far it seems that he has found very little.  Here are some of the claims that he has made:

  • Ocwen’s rapid growth has hurt its ability to maintain the same servicing quality.  A press release on the NY DFS’s website (May 20, 2014) essentially makes these claims about Ocwen without naming the company specifically.  (But it’s pretty obvious that he is implying Ocwen with the reference to 70% lower costs.)
  • Ocwen is potentially harming homeowners or MBS investors due to the conflicts of interest between Bill Erbey’s publicly traded companies.  See the February 26, 2014 letter (this Housingwire article provides some background).
  • Ocwen may be harming homeowners (and MBS investors) by taking kickbacks on force-placed insurance.  Housingwire has an Aug 2014 article that provides some context.
  • Ocwen has “backdated” some of the letters it has sent homeowners, potentially hurting their ability to stay in their home with a loan modification.  Here is a copy of their letter dated October 21, 2014: 243853685-Lawsky-Ocwen-Letter

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Sino Grandness (SGX:T4B)

Sino Grandness trades on the Singapore Exchange under the symbol T4B.  VIC has a pretty good writeup on the stock:  (You’ll need to sign up for a guest account to read it.)  While one-sided hit pieces should be read with some skepticism, the writeup raises a lot of red flags and provides some evidence that revenues are massively overstated.

If I could short Singaporean stocks I’d probably be shorting Sino Grandness.

*Disclosure:  No position because I can’t short it.

AAMC: A wonderful asset management company

AAMC is the asset manager that controls the operations of RESI.  Asset management is a business with potentially wonderful economics because the returns on capital can be absurdly high.

Suppose that AAMC generates returns on equity of 16%.  After taking its fees, the owners of the ‘closed-end fund’ (RESI shareholders) would receive a 10% dividend yield on their REIT.  In the current environment of low interest rates and yield hungry investors, it is likely that such a REIT will trade at a premium to book value.  AAMC can then sell shares in secondary offerings to further grow their assets under management.  High management fees combined with a rapidly growing AUM base can translate into very high returns for AAMC shareholders.  The economics are somewhat similar to midstream GPs such as Kinder Morgan.

*Disclosure:  No position.

The market cap is around $1.49B.  The shares are quite illiquid.

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The situation in Egypt

TransGlobe Energy (TGL.TO, TGA) and Centamin PLC (CEY.L, CEE.TO) are two publicly-traded companies that have not been able to get their profits out of Egypt.  The end game may be awful for shareholders if they cannot get any profits out of the country ever.  While I am interested in shorting companies with Egyptian assets, the obvious danger is if the Egyptian government begins to respect foreign capital.

*Disclosure:  No position in either TransGlobe or Centamin.

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Ruger’s upcoming quarters

This is a speculation on my part, but I think that Q3 and/or Q4 will be good quarters for Ruger.

  1. Adjusted NICS data is recovering and catching up to the very high levels of 2013.
  2. Ruger has introduced many products in Q3, the most notable one being an entry-level AR-15 rifle.  2014 Q1 introduced 1 new model, Q2 introduced 3 new models, while Q3 introduced 7 new models.

While I don’t like short-term trades, this may be a compelling short-term trade because the next two quarterly earnings releases may serve as a catalyst.  The April 2015 call options may be a way to play this because the implied volatility is very low (below 30).  There are a few long-shot scenarios that could cause the options to go up several times in value.  If Ruger demonstrates earnings growth, the stock’s multiple could go from 9.5 to a growth stock multiple like 15-20+.  Or, there could be a short squeeze because the short interest in Ruger is extremely high (those who own call options could randomly get lucky).

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Energy stock rankings (Oct 2014)

I find that ranking stocks is a useful analytical tool.  Ranking stocks against each other helps me be more realistic about how good or how bad a stock is.

I have some extreme and unconventional viewpoints.  Many “value investors” would have a list that would be the opposite of mine.  Many of the stocks I have shorted have been mentioned on as longs or potential longs.  Many of these people are quite intelligent and eloquent.  In my opinion, the longs do not understand how they are being bamboozled and misled by stock promoters.  I’ve written about this many times on this blog (e.g. “How would a sociopath fleece investors in oil and gas?” and “Beating Wall Street in oil and gas“).

While the independent E&P sector has seen a meltdown in share prices, I don’t see undervaluation.  The problem is that many of the companies continue to be run by stock promoters and charlatans (more so in the small caps than the large caps).  Until the management teams get better, I don’t think that the independent E&P space will be a good place to look for longs.  My prediction is that there will be more pain to come when NGL prices collapse.

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Notes on cable – Part 2 – The future

I think that it’s likely the following trends will play out in the future:

  • On-demand television will become widespread because it is the most compelling delivery mechanism.
  • Technologies incapable of on-demand viewing (terrestrial broadcasting, satellite) will become less profitable.
  • High-speed Internet providers (cable and telcos) will be able to exercise increasing pricing power over their customers.

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