Your 2016 best ideas

[SharperDingaan]

Re PWE. At some point there is going to be a royalty sale; clearing off some more debt & raising the % of production hedged. They are also highly likely to increase the number of farm-ins, to reduce the capex needed to hold their land positions.

 

Re o/g in general. We expect Iran to flood the market, & SA to either cut back or experience a regime change; no idea as to timing, but the clock is ticking. Confidence because it is far easier to change Emirs than depose Khomeini; been there already, tried that, and failed. 

 

SD

[undervalued]

I may sound like a broken clock on this board to many, but here are my favorite ideas in order.

 

1. BXE, GXE.TO

2. AAV, PWE, ETE, AR, PXD

3. SBRCY, DNOW

4. JD

 

Could you share in the DNOW thread on what you think will happen on the 8-K they just released back on Dec 24?

[drzola]

Their Northmart food distribution centers in Canada >120  ( and stable 4-4.5% margins )

. No competitor in most remote locations

. Population consisting of mainly Gov. assisted collectors going nowhere for a very longtime

. Unless suicide rates increase and birthrates decline indivdual consumptiion rates and customer population growth rate trends our upward 

 

 

 

[Uccmal]

"Why would you say PDH is your best 2016 idea? its a large position in my portfolio but overvalued at the current price and we need to wait for fundamentals to catch-up to the stock price - it could take years."

 

We're long time PD shareholders & are accumulating, not selling. If the dividend continues we get a very good cash yield; should it get cut we will see a buying opportunity. We are also not measuring over a 1 year timeframe, & are quite OK with a one-year 25% loss - if it results in a doubling of our share count.

 

SD

 

SD, PDH : Premier Diversified Holdings.  ; PD: Precision Drilling

 

Me: Nothing new: Good oil related cos. and PWE

 

So you are pro SD and PWE?  I own both but I have to tell you that in my opinion Saudi Arabia needs to raise prices or SD and PWE are in for a world of hurt.  Having said that I think I am going to buy some more this year in my Roth IRA.  Probably in the next month or two.

 

I guess I have to ask, why the confidence?  Should I just read the dedicated threads on the two from start to end?

 

I think he meant "SharperDingaan" and not "Sandridge Energy"

 

Yes... we got buried by acronyms. 

[dolce2think]

Resource Companies

Totally beaten down. But: China is pumping money into the economy. Charlie says "Chinese are gamblers", hence they will do

some projects with the money. The structural shift is coming, but they will need growth to do this, so the will ignite investments once more.

 

My favourites:

Freeport McMoran

Vale SA

 

Oil:

Gear Energy

Baytex Energy

 

Gas: this is not so much about china, its about the LNG terminals and a very low gas price

Southwestern Energy

Range Resources

 

 

[Guest Grey512]

Cash (50% weight)

 

Long Groupon

Long LyondellBasell

Long PayPal

Long Spirit Airlines

Long Google

 

Short healthcare / biotech ETFs

Short European banks

Short certain NASDAQ /NYSE tech companies

Short certain investment banking firms

Short certain EM currencies

 

Those are the main themes but I don't have a lot of conviction in things. Periodically do short term trades like ZINC, VRX, SUNE whenever the market pukes, basically.

 

I see a lot of complacency, over-extension and beginnings of a set-up towards liquidation, so I hope for some massive drawdowns next year to deploy some cash and close out some shorts.

 

[Guest Grey512]

Forgot to add that I am also long AAPL. But the stock has gone nowhere despite good progress at the business level. Beginning to look like dead money to me, with high opportunity cost.

[Broeb22]

Grey512,

 

Can you explain your long for Groupon?

 

They generate a lot of float in the same way Blue Chip Stamps did, and this contributes to nice FCF. Now, their new CEO has committed to spending an additional $200MM on marketing and advertising to restore growth. This is coincidentally the same amount of FCF GRPN was generating. So I don't see the go-forward FCF that I did before the new CEO was announced.

 

Net of cash and investments, Groupon's market cap is more like $1BN. The last 3 years it has averaged CFO of $258MM and CapEx of 83MM, for average FCF of 175MM. So, if the new CEO doesn't destroy Groupon's FCF in the pursuit of growth, Groupon trades at a 17.5% FCF yield.

 

FCF has been driven by changes in operating assets, essentially Groupon not paying its vendors as fast it receives the cash, so if the new CEO drives growth at Groupon then FCF could grow, but netting this potential benefit out against his certain $200MM investment in customer acquisition makes me scratch my head. 

 

Not to mention from a competitive perspective, if we're comparing GRPN to Blue Chip Stamps, Groupon has a bigger market (global) with significantly more competition while Blue Chip Stamps (from my understanding) was a monopoly in the areas of California it served.

 

Would love your thoughts on any of the points.

[Broeb22]

Looking a little closer, GRPN has also expanded its capital lease obligations notably in the last few years. These are operating assets, but are shown in the financing section.  Additionally, the $120MM of stock compensation expense should arguably not be added back. So FCF at GRPN may be closer to $70MM when accounting for these factors.

[Guest Grey512]

broeb22,

 

Thanks. Here's how I see it:

 

> In its present incarnation, Groupon is certainly not an attractive channel for every vendor. But there is no clear, consensus 'superior' alternative to Groupon out there. It's not Opentable. It's not Entertainment Book. If you talk to restaurants, they have problems will all of these platforms. Groupon is the 'broadest' and 'dumbest' of the platforms so far and 'works' only for vendors with a certain customer and margin profile. The main grief that vendors have with Groupon is the high take-rate (north of 40% in many cases) resulting in cannibalization and low/negative incremental profits; I believe the second main complaint focuses on low repeat behaviour. But so far I see little evidence that Groupon tried to be more sophisticated in how it pitches itself to justify the take rate, or how it harnesses data to provide more of a value-add to the vendor. I get the sense that better algorithms and programming can make GRPN much more valuable to vendors. Instead of selling 'dumb' pipeline, there appears to be potential to work more on customer loyalty and become more of a purveyor of general online marketing solutions. E.g. the pitch to vendors can be something like 'we'll deliver the right type of customer and work on controlling cannibalization and promoting repeat visits'.

 

> At a stock price cost basis of below $2.80, I am willing to take the relative bet that existing/new competitors will have trouble matching GRPN's ratio of customer lifetime value to all-in CAC, due to a mix of factors such as mind-share, as well as scale & scalability (due to breadth and international exposure). Local 'mini-Groupons' are springing up in certain countries and some of them are quite innovative and doing well by putting their own twist on how the basic Groupon-like model operates in their environment. Groupon can probably replicate / bolt-on the features that it has in those markets, and by leveraging on data in a better way, Groupon can compete better.

 

> Therefore: the general perception is that Groupon is a first-mover in a no-moat industry. At a price below $3, I am willing to stay open-minded to the existence of a moat and strategic value in the size and mind-share of the user-base.

 

> On cash-flows: I am not too focused on that because that's not how GRPN trades. I don't disagree with what you wrote on that topic.

 

> From a market psychology stand-point, the pattern here looks somewhat similar to what happened after Pincus came back to Zynga (20% return in a few weeks). That's partly played out, but I think psychology here can go a bit further because Groupon is a better business.

[Guest Grey512]

One last point to note:

 

Let's think about the concept of a 'customer journey'. By that I mean basically the entire process of a person deciding where/how he/she wants to eat (or get a manicure, etc), booking a table/appointment, leaving a review and then a few weeks later easily making a repeat booking (assuming that he/she liked the initial experience).

 

Google and Facebook will continue taking an ever-greater share of this process, and it is logical. From an engineering, data and marketing ROI standpoint, they can't be rivalled so vendors / advertisers will flock there. Similar thing for users. Especially as the baby-boomer generation continues to gradually die off and the share of the population who grew up with smartphones in their hands is increasing.

 

Google and FB very much do keep their eye on this "O2O" (online-to-offline) process; they want to be more than dumb machines. The steps that we see Baidu taking is just the beginning; we'll probably hear a lot more about this in the coming years. Google itself wanted to buy Groupon a few years back. If I am correct in betting that Google / FB will find it sub-optimal to grow their Groupon / 'daily deal' alternative organically, then Groupon is an eventual take-out target.

[Picasso]

You can say GRPN doesn't trade on FCF but isn't that how we want to figure out what it should be worth in different scenarios?  I can see how some good earnings release can send the stock up 30% "just because that's how it trades," but doesn't that just make this a shot in the dark against an okay backdrop of terrible sentiment and a so-so valuation?

 

I've had this one on my list of busted IPO's that have a shot at doing well for new shareholders but I can't get past the cash generation here.  These coupon stocks have a history of ripping every so often as the shorts get creamed.  That said the whole sector is busted up right now, including the likes of SALE etc.

[Guest Grey512]

I think this one is tough to model.

 

Numbers-wise, at $2.77 per share, the way I looked at this is that the average FCFF (adjusted downwards for stock-comp, ex-acquisitions) in the past few years is about $75m. That was about 15x EV of $1.1b, or a 'steady' yield of circa 6.5% if the business just maintains its current cash economics. What's been happening in the past few years is that the top-line grew but margins got worse and the float (as % of revenue) decreased; net-net, the cash flows were steady at about $75m. For a 'new economy' Internet stock with the embedded optionality of what can be done with the user base and the data, 15x is not that horrible.

 

Peeling the onion 1 layer further:

We know that Groupon wants to aggressively spend $150-200m on marketing to juice growth (this can temper the rate of stock buybacks, which were $300m in the past 12 months).  The 'best in class' e-commerce businesses tend to get a customer NPV / all-in CAC of 4x+ after 3 years, or an IRR of 50%+.

 

Therefore:

You can look at Groupon as two 'separate' investments: a $1.3b EV (i.e. my entry EV less $200m for new marketing spend) producing annual $75m of FCFF, or just a 5.5% yielding risky paper + a $200m capex investment that can some X% chance of being a 4x+, a Y% chance of producing the same unimpressive 5.5% yield, and a Z% chance of it being a zero.

 

That's one way to look at it.

 

 

[LowIQinvestor]

VIACOM - VIAB

7 PE and yielding 3.8%

Worth at least 30% more

 

and FRFHF for downside protection

[plato1976]

google 's core search business is challenged in mobile

how do you evaluate this impact?

 

Cash (50% weight)

 

Long Groupon

Long LyondellBasell

Long PayPal

Long Spirit Airlines

Long Google

 

Short healthcare / biotech ETFs

Short European banks

Short certain NASDAQ /NYSE tech companies

Short certain investment banking firms

Short certain EM currencies

 

Those are the main themes but I don't have a lot of conviction in things. Periodically do short term trades like ZINC, VRX, SUNE whenever the market pukes, basically.

 

I see a lot of complacency, over-extension and beginnings of a set-up towards liquidation, so I hope for some massive drawdowns next year to deploy some cash and close out some shorts.

[Southpaw]

Long QIS.v (see thread for more detail). Should be a 20%+ grower for the next several years and show meaningful and positive operating leverage. Currently at ~6x 2016 EBITDA.

 

Long QHR.v. QHR is the industry leader (Canadian EMR software) in an oligopoly structure whose consolidation is accelerating. They offer a mission critical product with 98% customer retention. The stock has 50% upside from where it is now even if they never get another new doctor, but both the number of doctors and ARPU could double in ~5 year and <10 years, respectively, so it has low-risk for multi-bagger potential. 

 

[Guest glavacem]

Fairfax and Concordia healthcare.

[smartone]

CHTR/LBRDA

FCAU/RACE

AAPL

[Guest Grey512]

google 's core search business is challenged in mobile

how do you evaluate this impact?

Which challenge are you referring to? Ad-blocking? Shift to apps? Something else entirely?

[bearprowler6]

Fairfax and Concordia healthcare.

 

+1

[kapilm]

Triumph Group (TGI) - new CEO, undervalued in SOTP, beneficiary of the pickup in A&D, focus on cost cutting through consolidation of facilities and product lines - a value play.

 

[KJP]

Long QIS.v (see thread for more detail). Should be a 20%+ grower for the next several years and show meaningful and positive operating leverage. Currently at ~6x 2016 EBITDA.

 

Long QHR.v. QHR is the industry leader (Canadian EMR software) in an oligopoly structure whose consolidation is accelerating. They offer a mission critical product with 98% customer retention. The stock has 50% upside from where it is now even if they never get another new doctor, but both the number of doctors and ARPU could double in ~5 year and <10 years, respectively, so it has low-risk for multi-bagger potential.

 

Southpaw:

 

I really liked your QIS writeup.  Do you have something similar for QHR.  At first glance, it appears to be a leading niche SAAS software company trading at 2x recurring revenue with room for growth, both from greenfield opportunities and other EMR software providers. 

 

One question I do have is if EMR software is very sticky, why is QHR able to obtain 1/3 of new sales are from competing EMR providers?  Do they have a superior product?  Lower cost to the user?

 

Also, do you have a sense of the returns on capital the company has been able to achieve on its acquisitions of competing EMR providers?  The recent Jonoke transaction, for example, appears to have given QHR access to $1 million in recurring revenue for almost nothing (I understand that not all of the Jonoke users will transition to QHR). 

[Southpaw]

KJP--Thanks for the reply. We have a write-up similar to the QIS one, but not quite ready to share it...have another call with the new CEO next week to continue due diligence.

 

In terms of 1/3 of new business coming from existing EMR providers, we think this business is mostly being taken from very tiny players who are struggling to achieve scale and are not able to keep up with ongoing regulatory requirements or R&D needs. For a public example, Nightingale Informatix NGH.v, is slowly bleeding out and losing revenue and doctors to QHR. The Accuro product is superior to many of the smaller players (more of a one stop shop), as well, although QHR claims to be at a premium price. I am searching around to nail down subscription price comparisons across the major players.

 

On the Jonoke acquisition, there is a potential $500,000 earn-out over a period of three years.

 

Happy to keep the discussion going, I can start a new thread and post more notes soon.

[Picasso]

I think this one is tough to model.

 

Numbers-wise, at $2.77 per share, the way I looked at this is that the average FCFF (adjusted downwards for stock-comp, ex-acquisitions) in the past few years is about $75m. That was about 15x EV of $1.1b, or a 'steady' yield of circa 6.5% if the business just maintains its current cash economics. What's been happening in the past few years is that the top-line grew but margins got worse and the float (as % of revenue) decreased; net-net, the cash flows were steady at about $75m. For a 'new economy' Internet stock with the embedded optionality of what can be done with the user base and the data, 15x is not that horrible.

 

Peeling the onion 1 layer further:

We know that Groupon wants to aggressively spend $150-200m on marketing to juice growth (this can temper the rate of stock buybacks, which were $300m in the past 12 months).  The 'best in class' e-commerce businesses tend to get a customer NPV / all-in CAC of 4x+ after 3 years, or an IRR of 50%+.

 

Therefore:

You can look at Groupon as two 'separate' investments: a $1.3b EV (i.e. my entry EV less $200m for new marketing spend) producing annual $75m of FCFF, or just a 5.5% yielding risky paper + a $200m capex investment that can some X% chance of being a 4x+, a Y% chance of producing the same unimpressive 5.5% yield, and a Z% chance of it being a zero.

 

That's one way to look at it.

 

Thanks.  I think this is one of those stocks that will start working without seeing some absurd 30% FCF yield scenario; people will just miss the move (except for you?).  Not sure how I feel about valuing this on the enterprise value though.  There are various busted 2000 era tech stocks with low to negative enterprise values and it's a drag to the equity returns because you can never get a fully geared up return to earnings on the diluted share count until they repurchase a ton of stock or pay out a special dividend.  Despite the aggressive repurchases it will take a while to get to a point where you can get an attractive FCF/share versus FCF/EV. 

 

That said it seems to imply a short-term margin of safety and you have some optionality so it looks interesting.  Funny to think how much Google wanted to pay for this business in the past.

[KJP]

 

Happy to keep the discussion going, I can start a new thread and post more notes soon.

 

Look forward to seeing it.