Archive for July, 2014


Rayonier Advanced Materials (RYAM) – The Miss That Should Surprise No One

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Rayonier Advanced Materials (RYAM) is a fantastic business. I first wrote it up here just prior to its spinoff from RYN. But I also laid out the case that 2014 was going to turn into a disappointment for RYAM. To quote myself:

I think RYAM will miss on production volumes in 2014 and end the year at 500k tons of specialty and 125k tons of commodity cellulose.

I believe that investors expecting 2014 to be on par with management’s guidance are going to be disappointed.

Turns out I wasn’t far off. On this morning’s call, Management confirmed that full year volumes should come in near my estimates (625k tons total; 25% of that would be commodity, 75% specialty) and EBITDA should be closer to $265MM (from their initial guidance just north of $300MM).

This was a miss. But it was a miss that should’ve surprised no one.

But the market is full of crazy people and it’s fully of lazy people, and the stock sold off rather dramatically after the news hit (down over 10% today).

To those investors that are neither crazy nor lazy, this dislocation may turn into a fantastic buying opportunity. To quote myself once again:

But where others see disappointment, I see opportunity. To understand why, you have to look through the next 12 – 24 months. You see, RYAM has already executed their large capital program. They already spent $385MM to transition their remaining commodity cellulose capacity to specialty; those costs are sunk. And when the market soaks up the existing excess capacity, RYAM shareholders will be the biggest beneficiaries of future specialty cellulose inflation. RYAM’s position reminds me of a quote from Warren Buffett:

In an inflationary world, a toll bridge would be a great thing to own because you’ve laid out the capital costs. You built it in old dollars, and you don’t have to keep replacing it.

If RYAM gets into the mid-20s, you will have the rare opportunity of owning a truly great business at 5x core future EBITDA earnings power.

Even the crazy and lazy should find that compelling.


Demand Media (DMD) – The Times They are a Changin’

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“This is the most important and exciting change in the internet in a long, long time. Maybe since the beginning of the modern internet.”

– Ben Fried, Google’s Chief Information Officer (source)

Investors should take note every time a Google exec goes on record saying they are “incredibly excited” about something because most of the time, there’s a good reason for it. Which is why when I heard the above quote at Google’s I/O, I decided to dig in. And what I found was a truly great business being ignored by the market with a value creation catalyst just a few trading days away.

Let’s start at the bottom by walking through the modern domain registry business. There are 4 main constituents in the domain registry value chain:

Here’s a view of the marketplace:

Domain Registry Process

In terms of who gets what, the economic breakdown of every .com sold looks like this (average sales price is about $10 today):

As you can see, the closer you are to ICANN, the more value you capture. The registry operator is clearly king, keeping 78% of the economics from every .com sold.


Boston Beer (SAM) – Facing Annihilation?

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“Let’s take the criticism, that the scale brewers have been slow to innovate and to bring exciting, fresh and new brews. That’s probably correct. The reality, though, is we’ve recognized that and we’re moving very quickly.”

– Alan Clark, CEO of SABMiller, the world’s second largest brewer (source)

When I think about the competitive forces moving against SAM, I can’t help but consider the parallels to the samurai just before the Battle of Shiroyama (here).

Far outnumbered in size and might, SAM’s business today appears just as vulnerable as Saigō’s head in 1877.

I’ve spent many hours racking my brain and the only conclusion I can come to is this one: this will not end well for SAM shareholders.

But like all humans, I am fallible. So I am writing to seek out different opinions on SAM. Please tell me where I’m wrong (previous notes here).


Lightstream (LTS) – 3x. Eventually.

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Say you own a house. And your neighbor across the street owns a similar house. Heck, let’s just say the entire neighborhood is made up of similar homes.

Last weekend, the neighbor across the street sells her home for $150k. Zillow’s Zestimate also values everyone’s house at $150k – everyone, that is, except yours. Your home, although nearly identical, is inexplicably valued on Zillow for $50k. You’re confused, but it doesn’t really matter because you’re never going to sell it for $50k. When you go to sell, you’re going to get what every comparable home in your neighborhood gets. That’s how the real estate market works.

That’s how every (mostly) efficient market works. Eventually.

But in-between today and “eventually”, anomalies can pop up. And these anomalies create fantastic investment opportunities.

Case in point: Lightstream (LTS; previous note here).


Accretive Health (ACHI) – A Transformational Hire

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A week ago, I sent out a note to my network highlighting Accretive Health as a special situation (posted yesterday here). In fact, I called it “the definition of special” because of all the issues the Company has endured over the past three years. In spite of those issues, I concluded that the Company still had a pretty darn good business. And the negativity surrounding the stock would erode as the investing community became confident that the problems were getting fixed.

So imagine my surprise yesterday – a mere seven days later – to learn that ACHI was able to land one of the most respected, influential people in healthcare as their new CEO (here). I was so surprised, in fact, that I almost spit my coffee onto my keyboard. Emad Rizk is so credible and so respected that I’m going on record stating: The hire of Emad Rizk is a transformational event for this Company. 

Here’s just a few of Emad Rizk’s accomplishments over the past 25 years:

In my mind, the hire of Emad Rizk completely blows up the bear case. Any bear case. And investors that continue to regard Accretive Health as untouchable are going to be proven very, very wrong.