(LMCA/LBTYA) Malone’s cable strategy

Here’s how I see it.

Some people are superstars at operating a cable company while the majority of people are bad at it.  One way to figure out who the superstars are is to figure out how much money is made per home passed.  Liberty’s investor day presentation uses adjusted EBITDA per home passed, which is a rough proxy for this.  (I would prefer to subtract maintenance capex from adjusted EBITDA.)  Each home passed represents a potential customer.  Good operators will turn a high percentage of its homes passed into customers and sell them as many services as possible (television, premium channels, Internet, voice, video-on-demand, etc.).

Liberty’s investor day presentation (PDF) compares various cable companies:

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Coach: Victor Luis could be the next Ron Johnson

I have a few speculative out-of-the-money puts on COH.  The thesis is simple.  Coach’s same store sales dropped 21% in North America (press release).  This is an outlier.  It is highly unusual for same store sales to drop so fast.  It is a sign that the CEO will eventually destroy the company if left unchecked.

Closed my ESRX position

1. My thesis was that ESRX would grow its profits.  In the last quarter it did not.  Something is wrong and I don’t understand what it is.
2. I goofed because I don’t understand the implications of Obamacare as well as I should.  I can’t figure out where the macro environment for Express Scripts is headed.
3. I don’t like how Express Scripts’ integration costs have supposedly gone up.  It seems like they may be trying to manipulate their adjusted earnings.  I really dislike that type of behaviour.  Honest managers tend to be better at running businesses.  Managers may fail to correct mistakes if they do not want to recognize that they made them in the first place.

In general, I know I’ve been much better at identifying bad stocks than good stocks.  I definitely have room for improvement on the long side.

*Disclosure: I sold all of my ESRX calls.

When I wrote about ESRX on August 1, 2013 the stock closed at $65.56.  It is currently trading at around $67.32 (+2.7%), underperforming the NASDAQ, S&P 500, and other indices.  I happen to have made an overall profit on my calls because I sold ESRX shares in January when my Jan 2014 calls expired.

Altius Minerals announces secondary offering / Altius post mortem

Here’s the press release. I am very surprised that Altius chose to do a secondary offering of shares.  Management initially said that they would sell convertible debt.

In general, secondary offerings scare me.  Selling shares is an extremely expensive way of raising capital:

• Share dilution from issuing shares at a discount.
• Altius’ underwriters will collect a 5% fee and a call option.
• Various professional fees in handling the paperwork.  I believe this usually costs hundreds of thousands of dollars.

Secondary offerings are generally a sign that management (A) is stupid or (B) believes that the stock is overvalued.  Brian Dalton has a track record of selling high and buying low so it is almost certainly the latter.  Perhaps I should have noticed the overvaluation earlier; my process may have been flawed.

(KMI) Mispriced long-term options

Here’s the idea:

1. Find options or warrants where the implied volatility (according to the Black-Scholes model) is very low.  I consider implied volatilities slightly above the IV of the S&P 500 index to be low.  Anything under 30 is low.
2. Among that universe of long-term options, find the ones with underlying businesses that are able to compound their intrinsic value at very high rates.

Compounding is very powerful over long periods of time.  Options are generally a leveraged way of playing a stock.  If a stock is mispriced, the options may be even more mispriced.

Closed my Altius Minerals position

1. The share price has gone up a lot.
2. Altius is no longer buying back shares due to #1.
3. A lot of Altius’ intrinsic value is tied to Alderon and whether or not its flagship Kami mine is financed.  I absolutely do not trust Alderon’s management or the engineering firm (BBA) which prepared their feasibility study.  I previously estimated that Kami’s all-in costs would be $120/ton.  I believe iron ore spot prices are currently slightly less than that, so by my estimate a Kami mine doesn’t make sense right now.  I recognize that my estimate is not very good and that it is virtually impossible for me to perform due diligence on the Kami project.  I lack the engineering expertise and do not have access to technical data.
4. No news is bad news.  If Kami were economic (and my estimate overly pessimistic), some sort of financing deal might be in place by now (e.g. a takeover by a larger mining company).

How the SEC should reform market structure

1. Stop giving broker-dealers (and by extension, market makers) special trading advantages over institutional and retail investors.  There is no reason why broker-dealers should be able to price in sub-penny increments while investors cannot.  It’s bullshit.
2. Tighten spreads.  Historically, this has been the biggest reason why trading costs have gone down for investors.  However, the SEC should be careful not to make spreads too narrow to preempt the “shaving” trading strategy.  Shaving is basically a strategy where you bid one penny more (on 100 shares) to stand in front of the line.  It currently exists as market makers can jump in front of any order by bidding an additional penny on 100 shares (e.g. sub-penny front running).
3. Ban retail brokerages from taking kickbacks via payment for order flow.  Doing this would force retail brokerages to raise their rates to compensate for lost revenue from selling out their customers.  It may put an end to the “free” trades offered by some brokers.  This move might have bad optics politically but it would be the right thing to do.  This move would devastate the order internalization industry, which would have no reason to exist.
4. Ban exchanges from giving special trading advantages to market makers.  (This stuff gets really complicated because there are so many trading advantages and because many of them are subtle.)  Of course the market makers would claim that they provide “liquidity” and are performing a valuable service for the markets.  They will claim that they need incentives to provide liquidity.

While the steps above won’t get rid of all the market abuses, they would dramatically reduce trading costs for investors.

The chance of this happening is almost zero.  The SEC gave special trading advantages to broker-dealers.  It played a role in creating the sub-penny front running game.  Currently, the SEC seems like it wants to confuse and mislead the investing public.  You can read their Twitter feed and the articles on their website (e.g. “research” that totally misses the point and this speech where a staff member pretends that complexity is a good thing).

In the past, I would blindly assume that regulators are the “good guys”.  Nowadays, I am disappointed in myself for being naive.  The reality is that the human beings who work at the SEC sometimes do the right thing and sometimes do not.