Archive for June, 2014


Lightstream (LTS) – A Multi-Bagger in the Making

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Note: This is the final piece of my 3 part Unconventional Oil theme. In Part 1 (here), I described why $90 is the new “floor” for WTI. In Part 2 (here), I explained why I believe North American unconventional oil companies are the perfect conduit to implement a bullish oil view. And in this note, I cover a specific idea within this theme that I suspect will make investors a lot of money over the coming years.

I am bullish oil. It’s my highest conviction trade (you can read why here). But implementing a bullish oil view isn’t easy; the options are many. What part of the capital structure do you invest in? Is it through equity in oil services companies? Debt in pipelines? Companies focused on deepwater drilling? Deepwater exploration? The ultradeep? Oil sands? Conventional producers? Where? In Brazil? Poland? Russia? What about monocrystalline sand producers? Chemicals suppliers? The list goes on.

For the reasons outlined in Part 2 (here), I believe implementing a bullish oil view via equity in North American unconventional oil producers is the best place to deploy capital. My plan is simple: get exposure to as many barrels of oil in the ground as possible and ride the dual tailwinds of (1) higher future oil prices, and (2) improved extraction technologies. Both of these trends will dramatically increase profit per barrel and firm cash flow.

But investing isn’t blind; success is determined by the price you pay. For North American unconventional oil producers, the key is to find a company trading at a reasonable valuation based on current production and reserves and get cheap / free optionality on the undeveloped land. If you find a company with those characteristics, you should pull the trigger. Immediately.

And with that backdrop, I present my highest conviction trade in my highest conviction theme:

Meet Lightstream Resources (LTS).


Altisource Asset Management (AAMC) – How Will it End?

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On May 6, I wrote a note calling Altisource Asset Management (AAMC) a 2 billion dollar parasite (here). My conclusion was that RESI (the host REIT) and AAMC (the parasitic management company) were both set to tumble. Judging by the performance of each versus the market, I was dead on:

AAMC down 14%
RESI down 6%
S&P up 4%

The question that stands before us today is: what’s next? For that, I’ll rehash what I wrote on May 6:

Well, absent the market miraculously waking up from its stupidity-induced coma, there’s one other catalyst on the horizon: June 24th. You see, Glaucus has written letters to independent RESI board members attempting to get the current Asset Management Agreement replaced with an at-market rate (thereby eliminating the massive value transfer from RESI to AAMC) and June 24th is the last date the independent directors must give notice to terminate or replace the contract.

Tomorrow is D-Day for AAMC. Either the independent directors do the right thing and replace / terminate the asset management contract, or they do nothing and AAMC will continue to siphon money from RESI at the expense of RESI shareholders.

Here’s the thing: I fully expect the Board to do nothing. Because of Bill Erbey and Luxor Capital, AAMC is likely to continue to gorge itself on RESI’s cash distributions. Which means short-sellers today are going to be disappointed tomorrow.

But this is a sideshow from the real story. The real story is what’s going on in RESI’s core business.


The Upside in Unconventional Oil

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Note: This is Part 2 of my 3 part Unconventional Oil theme write-up. In Part 1 (here), I describe why $90 is the new “floor” for WTI. In Part 3 (update: published here), I’ll write-up a particularly compelling idea inside of this theme. But for now, onto Part 2: why North American unconventional oil demands my investment capital.

As explained in “The Era of Cheap Oil is Over” (here), I’m bullish oil over any time frame: short, medium and long-term. It is unquestionably my highest conviction idea. But having conviction and making money are two very different things; a massive gap lies between being right and making money. What bridges that gap is implementation. In investing, implementation is everything.

So the real question is: what’s the best way to implement a bullish oil view?

To me, the answer is via equity in North American unconventional oil producers. The reasons I believe this to be true are worth sharing:

I believe North American oil companies are the perfect conduit to access oil producing assets because they have: (1) no exploration risk, (2) no foreign government risk, and (3) minimal infrastructure / development risk. I’m not aware of any other region on the planet that shares all three of these characteristics.

As to why I have chosen to express a bullish oil view via unconventional producers, those reasons are also instructive:


Lululemon (LULU) – The Downward Dog

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On April 15, I sent out a note (here) asking, “Would you short this company?”

My conclusion was simple: it was time to short LULU.

That was at $52.50. Here’s what’s happened since:

LULU Performance

Yesterday, with the stock down 16% I found myself tempted to cover. But then I began reading the rather sharp words Chip Wilson had for the Board (here):

I am concerned that the board is not aligned with the core values of product and innovation on which lululemon was founded and on which the company thrived.

I have found a palpable imbalance in board representation, which is heavily weighted towards short-term results at the expense of product, culture and brand and longer-term corporate goals. I believe this is impacting the company’s prospects. My vote today sends a signal to the financial community that the company must address this imbalance if lululemon is to fully recover.

And I tried to rationalize why the Company would publish such an apathetic response (here):


The Era of Cheap Oil is Over

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I’ve heard some very smart people speculate that oil prices will decline as new supply comes online – mainly related to shale oil. This just isn’t the case.

– Harris Kupperman, Adventures in Capitalism

 

Harris is 100% right. And I’m going to prove it to you.

Side note: This is Part 1 of my 3 part Unconventional Oil theme (you can read more about my themes here and my investment approach here). Over the coming weeks I’ll publish Part 2 (a playbook of how to evaluate unconventional oil opportunities; update: published here) and Part 3 (a specific idea within this theme that I suspect will make investors a lot of money over the coming years; update: published here). To get these notes the second they are published, enter your email here:



But now onto Part 1 – understanding the forces driving a sustainable bull market in oil.

Let’s start high-level. There are 3 factors that influence the price of oil:

  1. Demand – driven by per capita consumption and population growth
  2. Supply – driven by new discoveries and spare capacity
  3. Inventories

Diving into each and doing simple math will lead you to the same indisputable conclusion I have come to: the era of cheap oil is over.