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):

Gaiam (GAIA) – The Genius of Jirka

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As a follow-up to my last note on Gaiam, I wanted to share a few additional details on the Company post the release of their 10-K:

Proprietary Products and the Genius of Jirka

Gaiam’s proprietary products fall under 2 brands: Gaiam and SPRI. These 2 brands represent 93% of the revenues in their branded products division in 2013. That is interesting as it’s up significantly from the 70% they mentioned last year. What’s more interesting is Gaiam’s strategy for testing products and then pushing them through their retail channel. Per the 10K:

We sell our branded products across various sales channels. Non-proprietary products are only available through our e-commerce and catalog channels. We use our e-commerce and catalog channels to test products before we develop them under our brand and distribute them through our other sales channels. Because we use a multi-channel approach to our business, we are able to leverage our media and product development costs across all channels of our business.

In other words, Gaiam will put non-proprietary products on their website and test the response from customers. If they meet the Company’s target, Gaiam will remake / redistribute the product under their Gaiam or SPRI brands and then push the product through their 38,000 store retail channel. This is absolutely genius as it reduces the investment / performance risk to the Company and its shareholders.

Jirka Rysavy’s Compensation & Background

Jirka might be one of the most shareholder-friendly managers I have ever come across. From the K:

The board approved annual base salary for Mr. Rysavy was $412,000, in 2013 and 2012 respectively. However, he voluntarily requested that his salary rate be reduced to reflect the decrease in his time devoted to our business during 2012 and 2011. As a result, Mr. Rysavy received an aggregate salary of $47,585 during 2011 and $60,000 during 2012. Mr. Rysavy served as our Chief Executive Officer until March 2009. He continues to serves as our Chairman and is our largest shareholder. Prior to 2013, at Mr. Rysavy’s request, he has not been given any bonuses or awarded any stock options in the last ten years. Our compensation committee and our board of directors strongly believe that Mr. Rysavy’s salary and overall compensation level are modest given the importance of Mr. Rysavy to our future, his previous experience and business accomplishments and the market value of his skill set as an executive.

In 1995, a man named Stephen Solomon wrote an article in Inc Magazine about Jirka providing some fascinating color into his life. See it here. Really. If you want insight into Jirka’s approach, read it.

So this week a buyside friend of mine decided to write Stephen Solomon and get his thoughts 20 years later (note that Stephen Solomon went on to win multiple industry awards and then founded the master’s program for economic journalism at NYU, so he’s an accomplished individual). His response is so very interesting:

GAIA - Stephen Solomon on Jirka

Jirka is 100% authentic – just the type of leader you would want if you were trying to build an authentic yoga apparel brand to compete against LULU.

Value and Valuation

Here’s what you’re getting for the price you pay today (click to get the xls file / notes):


So for $2.28 (the difference between today’s price and the asset value per share), you are getting:

What a deal.

Gaiam (GAIA) – A Value Investor’s Dream and a LULU Shareholder’s Nightmare

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Jirka Rysavy, the founder of Gaiam, is a rather remarkable guy. He came to the US in 1984 from Czechoslovakia with no money, spoke very little English and proceeded to roll up the office supply market into Corporate Express which Staples bought in 2008 for $2.65BN. He also started Gaiam in 1988. Sometime in-between then and now, he bought an 80-acre forested tract in mountains above Boulder, complete with a cabin, no running water and an outhouse so he could live sustainably and meditate. Which brings me back to Gaiam – a company that makes products and media for sustainable living. Gaiam is Jirka’s baby. Up until very recently, Gaiam was a mish-mash of unrelated business units, making it difficult for investors to understand what exactly they were investing in. To give you a sense, since Gaiam began they: