Altisource Asset Management (AAMC) – A $2 Billion Dollar Parasite

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Bill Erbey’s empire is a complicated web of companies with inter-related interests. The history first:

AAMC Corporate Structure

 

The Host-Parasite Relationship between RESI & AAMC

The focus here is on RESI and AAMC’s parasitic relationship – here’s how it works:

With shared upside, no bills and no downside, the question is:

Is AAMC disproportionately benefitting at the expense of RESI shareholders?

The conclusion from Glaucus Research is an emphatic YES. RESI massively overpays AAMC.


Firsthand Tech Fund (SVVC) – Realizing Value

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In Mid-March, I wrote about Firsthand Technology Value Fund (SVVC) and a guaranteed return strategy I call the Hall of Mirrors trade (note here). The only way to get this guaranteed return, however, is to either (1) have a management team that’s intelligent enough to recognize it and do something about it, or (2) get an activist involved that forces the value creation. In the case of SVVC, I noted that renowned activist Phil Goldstein would be that catalyst concluding, “It wouldn’t surprise me if one day soon the valuation gap of SVVC completely disappears.”

It looks like today SVVC is on the road to unlocking value for shareholders via the Hall of Mirrors trade:

The settlement also provides that the Fund’s Board approve a plan for the Fund to repurchase up to $10 million of common stock in open market purchases during 2014, and to conduct a self-tender offer for at least $20 million worth of common stock at 95% of net asset value to be completed no later than January 31, 2015. Further, the Fund has agreed to liquidate its Facebook and Twitter holdings no later than September 30, 2014 and October 31, 2014, respectively, and to distribute any net realized gains from those holdings to shareholders within 60 days of completing those liquidations (source).

So Phil Goldstein and his Bulldog Investors record another win and shareholders get to ride along. Well done, Phil. As for you, fellow investor, some advice: read Phil’s semiannual letters – it’s a no lose trade (find them here).


Boston Beer Company (SAM) – The Pain Is Just Beginning

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I’ve written SAM up 3 times:

My negative bias has centered around three key points:

  1. SAM is facing an all-out assault on its business – from niche local breweries to large international brewers – and consumers are getting saturated with choices. It’s this shift – from wide-open greenfield to fiercely competitive brownfield – that will cause investors to re-price this company.
  2. This competition will drive up costs and compress margins.
  3. SAM’s stock is incredibly overpriced relative to the fundamental headwinds it’s facing.

Today the market is finally waking up to the issues I’ve been highlighting for 3 months. Just take a look at what the company said on yesterday’s conference call:

[…] increased investments in advertising, promotional, and selling expenses.

During our first quarter 2014, gross margin decreased to 49%, compared to 50% in the first quarter of 2013. The margin decrease was a result of product mix effects, increases in brewery processing costs and increases in consumer, program, and incentive costs, which were only partially offset by price increases.

[…] you’re seeing a little bit of cannibalization in the portfolio.

[…] there is a lot of uncertainty as we look at what’s going on in the category, we’ve got two or three major players pushing brands into the cider category or reinvesting behind existing brands.

I think that we’re seeing continued increases in the shelf space devoted to craft beer. But we may be getting to the point where those increases are going to slow just because there is only a limited amount of space that can be taken out of the mass domestic beers before they start running into out-of-stocks or inadequate package or other SKU variety.

Let me be clear: If you think the headwinds facing SAM aren’t real, you aren’t paying attention.


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: