Archive for the ‘Investment Themes’ category


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).


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:


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.


The Demise of the Set-Top Box Makers

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 How does change happen? Slowly, then all at once.

I recently wrote about the disruption of cable TV (note here). As I dive further into the Cord Shaving theme, I find myself struck by the unnecessary complexity of the set-top box industry. And I can’t help but consider the parallels between today’s set-top box makers and Nokia, which went from a dominant handset maker to irrelevant in just a few short years (background here).

Instead of reviewing the maze of middleware, software and protocols that defines the set-top box market, I think it is more helpful to abstract the complexity away and start with a very simple question:

What is a set-top box?

To me, it’s just a technical layer that translates input to output.

Once you understand that part, you get to the question that really matters:

What’s proprietary about this “technical layer”?

And the answer to that question may surprise investors: Nothing.


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: