Archive for April, 2014

Would You Short This Company?

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1. A specialty retailer trading at 25x earnings.

2. With negative same store sales comps:

Guidance - SSS Comp

3. Expanding into new locations with lower population density and income than current stores (which implies margin pressure going forward):

Market Size per Store

Note: Distinct Market Size per Store is comprised of spending on women’s apparel and sporting goods in a 10-mile radius trade area. Source: Signal Data.

4.  With worldwide online search trends that recently turned negative (side note: if you aren’t tracking worldwide search trends, you are missing out on huge alpha opportunities in the consumer / tech space; the correlation between search to sales is not insignificant – see here):

Google Search Trends

Would you short this company?

To me, the answer is clear: the time to short LULU is now.

Rentrack (RENT) – Mark Cuban is Selling Shares Hand Over Fist. I’m Joining Him.

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Note: this write-up was sent out to my network on the morning of 9-Apr when RENT was trading at $55 / share. It has since fallen to $46.50. If you are an accredited investor / buysider and want to get on my VIP research list, email me at analyst @ this domain.

I am in the middle of diving into my 7th investment theme – a theme I call “cord shaving” (you can read about it here). Inside of this theme is an interesting little company called Rentrack.

Rentrack measures TV and movie engagement and then sells this data to movie studios, TV networks / stations and advertisers / ad agencies. RENT currently has 2 divisions, but is trying to sell the second (source):

  1. Advanced Media and Information (AMI) which is a recurring fee-based business model with 3 units:
    1. Box Office Essentials: Box office ticket sales
    2. TV Essentials: TV viewership information
    3. OnDemand Everywhere: measures performance of on demand content
  2. Home Entertainment (HE) which includes DVD distribution services and data measurement on home video rentals

The HE division has been in a structural decline for years (revs have gone from $82MM in 2009 to $45MM in 2013); it’s a rather lousy business to boot (gross margins of 28% in 2013). Given these two characteristics, I’m not certain that Rentrack will be able to find a buyer – EBIT has come down from $11.4MM in 2011 to just $7.1MM in 2013 (note: it’s unclear to me if management is properly allocating overhead to that EBIT number). If a buyer does step in, any number over $30MM would be a big surprise to me – in any event, it’s now considered a “discontinued operation” per their 20-Mar-14 press release (source).

For investor purposes, RENT is now a media information pure-play focusing on box office data, TV viewership data and on demand data.

RENT’s box office business is a decent little business. Decent is probably an understatement; it’s a monopoly (it became a monopoly after the Dec-09 acquisition of Nielsen EDI). Using a call center, RENT contacts over 85,000 movie theaters in 36 countries and reports global box office ticket sales to the seven major Hollywood studios, plus +650 theater customers. I suspect it’ll stay a monopoly as building reporting capabilities on RENT’s scale is an incredibly difficult task and it’s not a big enough market for anyone else to bother (revenues in this segment were just $18MM in 2011, $21MM in 2012 and $24MM in 2013; low teens annual growth has been driven by price increases and new clients – particularly in China).

RENT’S TV Essentials unit combines consumer viewership information with other databases (purchase behavior / customer segmentation data / marketing data / advertising data) to provide intelligence on TV viewers. This data helps TV networks optimize their ad inventory and it helps advertisers and advertising agencies make better ad purchasing decisions. TV Essentials is currently tracking the viewing patterns from more than 29MM televisions in 13MM households.

RENT’s OnDemand Everywhere reports help content providers analyze the performance of on demand content. The Company has partnered with every operator that offers VOD programming and is ingesting information from over 107MM televisions in North America.

The common thread between RENT’s TV Essentials business and their OnDemand Everywhere business is how the Company sources their information: by buying it from cable, satellite, and telco partners. You see, it isn’t RENT’s data… they have no proprietary claim to it. RENT is simply buying TV viewership data on multi-year (2 – 4 year) contracts, combining it with data they buy from marketing companies, and delivering reports to customers. Let me repeat this very important point: none of this data is proprietary to Rentrack; they simply operate as a middle-man between data warehouses and add a reporting layer on top. The company confirms this in their K under the ‘Risk Factors’ section:

Gulf Coast Ultra Deep Royalty Trust (GULTU) – A Very Special Situation

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In a recent interview (here), T. Boone Pickens was asked about Gulf Coast Ultra Deep Royalty Trust (GULTU) and he immediately changed subjects. Odd, isn’t it, that a guy who has a lot to say about everything all the sudden doesn’t want to talk?

It was his reaction that piqued my curiosity. So I dug in. And what I learned makes me believe Gulf Coast Ultra Deep Royalty Trust is a very special situation.

GULTU was created in connection with Freeport-McMoRan Copper & Gold’s acquisition of McMoRan Exploration, which was completed on June 3, 2013. Immediately prior to the merger, McMoRan created a trust and conveyed a 5% gross overriding royalty interest in the future production from 20 specified shallow water ILTC (Inboard Lower Tertiary / Cretaceous) exploration prospects located on the Shelf of the Gulf of Mexico and onshore South Louisiana.

The nature of the overriding royalty interest means that GULTU owns a share of future production yet doesn’t have to pay any of the operating expenses or development costs. So the holders in GULTU are getting a free ride on the back of McMoRan’s exploration and development efforts in the Gulf and Southern LA.

There are a few things that are notable about the Trust:

3D Printing – We’ve Seen this Before

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Twice I have expressed my opinion on the 3D printing companies. In my first note (here) I called the top for all 4 of the 3D printing stocks (DDD, SSYS, XONE, VJET). In my second note (here) I confirmed that the ridiculous January 17 “candy press release” (here) did indeed mark the top and that it was “over” for these companies (with the caveat that rallies would be forthcoming; for two of these stocks a nice rally did follow). Today I’d like to make another comment for anyone holding out hope on the long side: you are going to continue to lose a lot of money while short sellers like me make a killing. We should all know how this story ends because we’ve witnessed it before, albeit on a much larger scale. Courtesy of The Fly, here’s a reminder of what the dot com crash felt like (Nov 6th is probably the best analog of where the 3D printing stocks are today; that date is in bold below):

March 6th, 2000: $170 (looks sweet, new highs)
March 27th: $120 (buy the dip?)
April 3rd: $78.5 (got to buy it now, yes?)
April 10th: $48.94 (this is just ridiculous)
April 17th: $64.56 (that’s better)
April 24th: $78.50 (the bull is back)
May 1st: $86 (kill the bears)
May 30th: $90 (get some)
June 17th: $138 (c’mon, son)
August 14th: $167.19 (buying a new house and lambo, cuz I bought the dip)
August 30th: $142 (no biggie, a little profit taking)
Sept 11: $105 (was that a double top?)
Sept 18th: $117 (here we go again. Back to new highs?)
Sept 25th: $105 (maybe not)
Oct 2nd: $78 (that was a double top)
Oct 16th: $85 (we’re bouncing here)
Nov 6th: $59 (maybe we’ll retest the lows then bounce. Crazy tape)
Dec 4th: $64 (holding steady. I like the consolidation)
Dec 18th: $35 (taking out new lows, the bottom dropped out)
Jan 2nd, 2001: $33 (new year, fresh start)
Jan 16th: $50 (atta boy)
Jan 29th: $29 (more of the same. This market sucks)
Feb 20th: $20 (where is this thing going, zero?)
March 5th: $14 (wow, what a value!)
March 26th: $10 (I can’t believe this stock was $170 last year)
April 2nd: $7 (ruinous. That was the bubble)

Below are charts of DDD, SSYS, XONE and VJET – the numbers in the chart represent the dates I published my previous notes:

DDD Chart 7-Apr-14

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SSYS Chart 7-Apr-14

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XONE Chart 7-Apr-14

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VJET Chart 7-Apr-14

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If you are long, you still have time to get out before your loss becomes “ruinous”.

The Disruption of Cable Television Has Arrived

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We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten. Don’t let yourself be lulled into inaction.

– Bill Gates

What is the future of television? This is a question I have asked myself multiple times over the past few years – lately with increased frequency. The answer, I believe, is starting to reveal itself.

Let me begin with a basic premise: viewable content is viewable content, irrespective of the form. It doesn’t matter if you’re watching a broadcast TV show, a YouTube video, or a movie on demand – all of these are just different forms of the exact same thing.

So why then do we have to access them differently? Why do you have to toggle between different TV inputs and navigate different UIs to find something to watch? (First world problems, I realize, but the investment implications here are enormous.)

My answer is this: we are forced to toggle between multiple inputs because we’re in the midst of a transitional period where new competitors are beginning to overtake the incumbent television companies. Multiple inputs are merely a symptom of this transition.

The trend away from traditional television to internet-based content delivery has been enabled by a few key developments (hat tip: Mark Suster):