Broeb22

CVET

Based on my analysis, which I am quite certain you won't rely on, CVET offers a superior value proposition to its customers, vets. It does so by offering lower inventory carrying costs and bringing the vet practice incremental sales they otherwise would not earn. Vets currently charge exorbitant prices for their prescriptions because much of the inventory moves slow at the individual practice level, but a company like CVET can aggregate the demand of its vets, generate better inventory turns at lower gross margins, and still earn a respectable ROE. The lower gross margin CVET can charge relative to the individual practice is what drives the sales boost for the vet practice. The prescription mgmt. side of CVET is more than anything a means to drive higher sales from the distribution business. The existing distribution business and its sales reps should also drive the adoption of CVET's prescription mgmt. business internationally, which the company is building its capabilities for right now. Yes, the debt is very high. That is an admitted risk for a small position, and one I offset at the portfolio level with a decent amount of cash. I guess when you boil it down, I believe CVET will earn above-market growth due to the better value prop outlined above, will get some additional gravy from their software-type business, and they operate in a market that grows above inflation with a multi-decade record of doing so.

Another “crappola” spin-off. What is the thesis now, since the initial thesis of a software subscription business seems to busted? Or is this thesis still intact in your opinion? Was the thesis ever that this was a software subscription business? Maybe your opinion of CVET is shared by others, which makes my thesis more plausible that the business fundamentals will be strong for a long time while being hard to understand in the present, and potentially a source of excess returns. But that's what makes a market.

CVET

Bought FTV after earnings and FRFHF.

While not for start-ups there is a community kind of similar for search funds. Searchfunder.com

If you think about how easy it is to communicate changes in your life to your friends through Facebook, it adds a lot of value. What is the alternative? Sending pics and messages in a group text to all 200+ of your closest friends and acquaintances? Friends of mine are traveling in Europe and now they can easily share with all of their friends the things they are seeing and doing, and as someone who hasn't seen them in probably 6 months, it helps keep me connected and it reduces my "cost" of staying connected via phone calls, texts, in-person get togethers. That coin has two sides though. Now we see what everyone else is doing, and how cool the most photograph-worthy moments of their lives are, and it makes some (most?) people sad. I don't think Facebook is any different than the way humans have always communicated and experienced the envy by seeing/hearing about what others are doing. It amplifies that FOMO experience, but unfortunately I believe that is part of the human experience. While I don't that Facebook specifically will always be around, it is hard to imagine a world where everyone has internet access that does not include some kind of utility that humans use to communicate their thoughts and experiences to others.

Sold UA and sold YELP. UA appreciated significantly and the business has not turned around much if at all over a couple years. Meanwhile the stock is up 75-80%. YELP I bought into based on someone else's research without doing adequate research of my own. I am not comfortable with the direction of the business and this is a good reminder to always do my own work, even if piggybacking on successful investors.

I think the CIA uses something like that as part of its enhanced interrogation techniques.

Communication seems like a pretty essential part of human life to me. There is unrest all over the world, and as far as I am aware Facebook has not called out war in Syria or drug wars in much of Central America as a reason for slower growth or lower engagement. Additionally, cable subscriptions did not decline very much at all during 2008. Why would you expect people to give up a free utility like Facebook just because a war is occurring? Would their Ad monetization decline in a war? Almost certainly, every advertising medium probably would see the same impacts. Using history as an example, Sears grew right through the Great Depression and while its growth did slow during WWII, its growth resumed after WWII's conclusion. So, I am less concerned about Amazon enduring business quality, even during something terrible like a war or economic recession. Now, valuation with AMZN is another matter, but you're suggesting these companies' businesses will not perform well, which I disagree with. https://www.smithsonianmag.com/history/rise-and-fall-sears-180964181/ "By 1929, on the eve of the Great Depression, it operated more than 300 department stores. Growth continued even during the economic downturn, because Sears wisely championed an aesthetic of thrift. The chain made its name selling dependable staples such as socks and underwear and sheets and towels, rather than fashion items like those found in traditional department stores such as Marshall Field’s in Chicago or John Wanamaker’s in Philadelphia or New York. Sears outlets were spare, catering to customers who were interested in finding good value, to meet practical needs. By the end of the Depression decade, the number of stores had almost doubled. " http://www.searsarchives.com/history/history1925.htm In 1931 Sears retail sales topped mail-order sales for the first time. Stores accounted for 53.4 percent of total sales of more than $180 million. Despite the Depression, Sears continued to open stores during the 1930s. When war broke out in 1941, more than 600 stores were operating. World War II called a halt to Sears retail expansion and even forced several stores to close. After the war, however, Wood resumed his expansion program.

What is most frustrating is the fact that politicians continue to completely ignore the poor design of the original policies, and are attempting to paper over the federal government-fueled student loan debt by forgiving all of it instead of redesigning the system? It's like taking a leaky gas tank and just adding gasoline. Sure the car will run, but not nearly as quickly or efficiently as it could. How in the world do we have tens of thousands of open high-wage positions in this country and not nearly enough people to fill them? If the government wants to incentivize education, which helps the US with its competitiveness globally, the government should be incentivizing the types of education that make us more competitive, i.e. STEM careers, not psychology, English, and other liberal arts-type degrees (speaking as a liberal arts major). It's just beyond insanity to address the problem in the way Democrats are proposing. But hey Modern Monetary Theory will take care of all this anyways, so no need to worry about the quality of our politicians' decision-making.

That's an interesting way to think of IPO's as special situations.

I always tune in to POST conference calls. While not as entertaining as the other excerpts in this thread, they tend to get more strategic questions from analysts than what happened this past quarter. Usually very interesting.

This is a goal I've had for some time as well. I'm still pretty far away, but a couple mid-teens years plus my normal savings rate would have me within spitting distance. Honestly, the best "investment" I've ever made was purchasing two vacant residential lots in an area near an upcoming public transit system in a growing Southern city. The leverage from increasing house prices without having to take on debt myself has been pretty crazy. My personal view is land offers many of the benefits of homeownership or even owning a rental property without many of the negatives. In reality, the physical structure of a home is a depreciating asset, while the land underneath is what actually appreciates. So on a $100,000 home, when home prices increase 3%, the physical structure did not really increase in value (depreciation offset by replacement cost inflation approximately net out). The land, which may be roughly 20% of the total value, actually increased in value by 15%. Anyways, my market investments have been only so-so because I've held a very large amount of cash. I think I'm still working on the psychological scars from a prior employer who insisted on holding 40% in cash for at least the last 6 years.

TwoCities, Fairfax's investment leverage appears to be approx. 2.78x if you back out the 4.25 billion of assets and the 4.25 billion of non-controlling interests. I get to 37.4 billion - 4.25 billion divided by 11.78 billion. Is that not the right way to think about their investment leverage? If not, how do you figure the investment leverage? If that is the right number, then an after-tax investment return just north of 5% would achieve a 15% book value growth, assuming investment leverage stayed relatively stable. Is this way off-base?

If Fairfax can return to compounding at 15%, which should be easier when you’re not betting the world will end with expensive puts, the stock could be a 2x from revaluation alone starting at approximately 1x book value, and 5 years of 15% growth on top of the re-rating gets you to a 4x. The classic Davis double.

Zoom set to trade for at least 30x 2019 revenue. Wow. With very aggressive assumptions around growth (35%) and high profitability (30%), investors are paying 40x earnings 5 years from now.

When it comes to seeing this company could be a real business, i.e. generate free cash, they have shown some operating leverage in their business over the last few years. The losses have more or less stayed flat as the revenue rose. Dara already reined in G&A expenses in 2018 somewhat (they actually declined 10%), so its clear 1) that the company was spending like a drunken sailor prior to his arrival, and 2) he understands G&A can't be 25% of sales in a 50% + GM business. I still have a very hard time justifying a $100+ billion valuation, but I can get to $2 billion in operating profit in about 4 years assuming most expenses as a % of sales continue their decline. For perspective, over 2016-2018 Ops and Support fell from 23% to 13% of sales, Sales and Marketing fell from 41.5% to 28%, R&D fell from 23% to 13%, and G&A fell from 26% to 19%. So it is pretty reasonable to expect that trend to continue. Additionally, I don't have all the details on their equity stakes in other companies, notably Didi Chuxing, but they made a sell their China operations in exchange for an 18% stake in Didi, which according to some sources was valued at $65 billion in 2018 ($11.7 billion attributable to Uber). At a 50% haircut to get closer to a reasonable valuation, that stake alone is worth $6 billion. I'm no bull on Uber, but it's a real enough business to analyze, and it certainly doesn't lose money on every ride as some have suggested.

Lyft and Uber could frankly be priced at parity with taxis and I would still go with them every time. They offer a better service, so even at pricing parity I'm getting a better value.

By no means am I saying UBER is attractive as a stock, but I have been guilty of dismissing too many companies out of hand because the FCF yield wasn’t at least high single digits. We have seen many companies at this point create massive equity value while generating relatively minimal cumulative cash flow. CRM, AMZN, NFLX come to mind but there are certainly others. The companies going public these days are not fly by night companies of the late 90’s but real businesses with millions of paying customers. Essentially, all I’m saying is I am trying to be open-minded about these companies and being aware of my (our?)bias for a preference for assets cash flowing now vs. assets cash flowing in the future (but creating massive value along the way). Regarding the minimal switching costs and competitive dynamics driving down profits, sure there are minimal switching costs, but you still have only two real options. What happens if you try Uber, are dissatisfied, try Lyft, are dissatisfied? Are you really going to call a taxi service or use whatever taxi app there is and wait 30 minutes for your ride? The end state for this market is still a duopoly (or maybe even monopoly), a market structure that usually generates rational pricing over time. Given the scale at stake and the benefits to scale/density in tech/route-based businesses, it wouldn’t be surprising for Uber and Lyft to duke it out for market share. Eventually, which is what’s important if we’re truly thinking long-term, rational pricing will probably prevail. How many duopolies don’t end up with rational pricing? I’m far more concerned that someone would get to self-driving cars before Uber and Lyft can, and push them out of the market by offering a superior product (autonomous driving) at lower cost (no labor, better safety). I worry these companies are kind of a stepping stone to something even better.

I would think after seeing so many tech-focused companies generate tremendous returns that were or perhaps still are money-losing, there would be fewer snide remarks about businesses that have clearly changed how a vast amount of people move, buy, sell, work, etc. Whether valuation makes sense or competitive position is strong is always a worthy topic of discussion, but there are a lot of people on this board who have totally missed the boat (myself included) on how software business models generate losses up front but can become very profitable very fast when growth slows and maturity is more within sight. In a world where "getting to scale" is realistic globally and the winner of that race earns the vast majority of the profits in an industry, it makes sense to spend aggressively to be that ultimate winner. We have a lot of Malone fanboys on this board, myself included. What do you think he was doing when he wasn't generating any profit for decades but he guided investors towards EBITDA? He was saying "when I stop spending so much on cable and set-top boxes, we're going to have a business that gushes cash". The tech companies are essentially saying the same thing, except now their sales, marketing, and R&D expenses are high relative to long-term plans. Please help me and others understand these companies that are changing all of our lives better so we can properly value them before they are large mature companies. saasbusinessmodel3-150508030541-lva1-app6892.pdf

http://finra-markets.morningstar.com/BondCenter/Default.jsp Not saying this is great, but its the best I know of.

Spek, What's your thesis on Rezideo? I looked at both HON spins and couldn't get comfortable enough to take a chance. Any thoughts on how they are competing against upstarts in the smart home market?

I believe that terrestrial radio is a medium that is probably misunderstood. Sure, do I prefer Spotify, Pandora, and YouTube over radio in my car, absolutely, but radio works well when I'm in the car. Radio will get crowded out some when more cars incorporate more modern infotainment systems, but there is certain talk radio, i.e. exclusive content, that radio has that Spotify currently does not. The other point I would make is that whereas traditional cable TV is more expensive than internet + Netflix + Amazon, etc. making cable the high-cost option, terrestrial radio has always been ad-supported and thus is the low-cost option. There will always be people, particularly when the middle class is being squeezed like it has been the last 30-40 years, that simply cannot or will not pay for subscription music services. So I think radio has a much longer life than some are willing to give it, and assets in the area are priced like they are in imminent terminal decline.

ESI and DAVA