Good Industries That Are Misunderstood By Wall Street Analysts

[BG2008]

I am trying to figure out some industries that are consistently misunderstood by Wall Street.  Take a look at the WWE stock chart in the last few years.  Professional wrestling is generally considered by many to be trashy and watched by mouth breathers.  In recent years, MMA is competing product that seemingly took a lot of the Pro Wrestling fans away.  I believe that many Wall Street analysts are simply too "coastal elite" to understand the appeals of WWE for the guys with a HS education, drives a pick up truck, etc.  What was fascinating about WWE is that a lot of the appeals were non-verbal.  Here is a little back story.  Back in the early 90s, my dad and I used to watch WWE on Saturday mornings.  92 was the year when I came to the US and I didn't understand a word of English.  My dad still doesn't today.  Hence, the talk shows, the drama, and most comedies were off limit.  But we shared a bond watching wrestling on Saturday morning, even if it was like a half hour before we have to be at work.  The action, the muscle, the bravado, the booing and cheering, it was really more like Roman coliseum.  To us football was a bunch of weirdos in pads and who swings a bat at a baseball.  And there is barely any action.  Those damn stupid Americans!!! The NBA was a better product.  We understood Michael Jordan vs Karl Malone.  When I was in high school, there was an attractive girl with RBF.  She came across as quite aloof.  We somehow started talking about pro wrestling.  We talked about Lex Luger body slamming Yokozuna on the air craft carriers.  We talked about Hulk Hogan and the Ultimate Warrior.  So at some point, even little girls watched WWE and have very fond memories of the build up of the drama of Lex Luger being flown in via a helicopter and walking through the crowd and managing to body slam Lex Luger.  Then there was the attitude era with the Stone Cold Steven Austin, The Rock, Mankind, etc. When the WWE transition to an OTC product.  I actually did some previews and find the content to be quite appealing.  There were these great Pay Per View matches from the past that I never watched like Sean Michael vs Razor Ramon etc.  I have grown to appreciate that "yes wrestling is fake.  But those are amazing athletes and great actors."  The WWE library is a great collection of content.     

 

What I am trying to say is that WWE had appeals on a very primal level to a lot of people and combine that with the non-verbal acting that appeals to the entire world.  The reason why I did not invest in WWE was that I viewed MMA as a the death stab of WWE.  The UFC has recently ran into its own challenges of growing live fights.  I would say that the MMA product has been watered down recently due to too many fights.  Another issue with the WWE is that I thought PEDs lawsuit was going to be worst than concussion in the NFL.  Just google 80s and 90s wrestlers and most of them are dead or so addicted to opiate painkillers that they can barely function.  It is sad to see guys like Razor Ramon reduced to nothing and many of the wrestlers are now deceased in their 40s and 50s.  WWE has a huge PED issue.  I think that most analysts who work at billion dollar hedge funds or at Fidelity will be too embarrassed to acknowledge that they own WWE stocks.

 

Look at how the WWE has done.  I really regret not putting in more time on WWE.  This is a company where I can actually understand the product, even though I maybe too embarrassed to admit it. 

 

I can see why Credit Acceptance is a stock that kicks ass and there will constantly be skeptics.  I can see why Cimpress is a good stock despite people's view that printing is dead.  I would love to foster conversation on what else maybe misunderstood by Wall Street.  I think Cable falls into this category.  A few years ago, there was a sumzero interview where a guy published a long thesis why cord cutting and how the Cable TV bundle was about to get torn up.  He was totally right about the TV bundle, but he did not mention about the cable company's ability to raise prices on internet services and how the margins are incredible on that end.  I think there are a lot of many to be made on businesses that appear to be terminal, but really aren't.  But picking the right one is really difficult.  The mall business is one that is incredibly difficult to determine. 

[Jurgis]

I think you are conflating a bunch of unrelated things in regards to WWE. You seem to be claiming that you understand the company/industry while Wall Street doesn't. Yet your memories (understanding) are 20 years old. Lots of things have changed since then, so investing based on 20 year old memories may be dangerous. Also it seems that your more recent evaluation of the company is negative (perhaps correctly). Compare that with the fact that the stock went nowhere for years and then exploded upwards a year ago. So I'd question whether you have a better understanding of the company than Wall Street does (did).

 

What you did with WWE in your post is what most of people do: you built a story. Now, it's a nice story, but IMO that's pretty much what it is.

 

Hope you don't take above negatively.  8)

 

To generalize:

 

1. There are thousands of people evaluating various companies every day. Some of them "don't understand" the company, some of them do.

2. Genuine variant perception is extremely rare. Almost nonexistent.

3. What you are asking is not really genuine variant perception. I think what you are looking for is more of a "at this point in time company is valued differently than me and a bunch of folks on CoBF would value it (also known as "The Real Intrinsic Value" ).".

4. The point 3 approach is not a bad way to invest. However, note that I kinda added the "valued at" part (although you do imply it in some places of your post). If we change this to "at this point I and a bunch of folks think X about company, while Wall Street (who?) thinks Y" without attaching "valued at", then it's less interesting.

5. Corollary of 1,3,4: there are always people both on CoBF and Wall Street and media that think about company X and value it at $XX; there are always people on CoBF and Wall Street and media that think about the same company Y and value it at $YY.

6. It is very hard to evaluate percentages of people who think/value X/$XX vs. Y/$YY (which you need to do if you want to call it misunderstood without referring to current market price). You can compare $XX and $YY to current market price $ZZ to call it misunderstood in regards to market price. But you don't know whether market thinks X, Y or some Z.

7. The fact that you and some people think X does not necessarily mean that X is indeed what is happening/will happen.

 

tl;dr: what you are trying to do might be good, but not simple.

 

I could argue why I think CACC, CMPR, cable cos, etc. are not "misunderstood", but I doubt these arguments are interesting.

 

BTW, another wrinkle is that as Howard Marks said "More things can happen than will happen". So even post factum evaluation of whether something was/was not understood is fraught with biases.

 

Good luck, have fun  8)

[Broeb22]

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.

[SharperDingaan]

There are literally hundreds of thousands of migrant workers around the world, that are systematically exploited.

They don't look like us, talk like us, think like us, and may even 'smell' a little. They're the bottom of the social ladder, exist to be abused, and they do all the sh1t jobs that you and will not do. But they have the same needs as everyone else, and are ignored because they are too 'poor' to pay. Of course, every drug dealer, and pimp, knows this is utter bullshit - but apparently, not Wall Street. 

 

Migrants typically pay 10%+ of their weekly remittances in fees,

simply for a Wells Fargo to take their cash and wire the proceeds to their home country. Yet we can routinely do the same thing by any one of a number of smartphone apps at a fraction of the cost; we just need an account to deposit the cash into. But according to Wall Street, that isn't a threat; and we continue to systematically over-value Wells Fargo, and under-value the smart app competitors.

 

Traveling circus acts, made their money bringing 'low-brow' entertainment to the people.

It's essentially live theatre, & didn't require you to know the language, or the culture, to enjoy a good laugh amongst others in similar circumstance to you. Masked mexican wresting shows are very similar, and the characters are often hilarious, when 'collecting' from the crowd after the show. Clear value, but unless it's a 'Vegas' quality production, not worth anything.

 

Rags to rags in 3 generatiions, also applies to industry.

 

SD

 

 

 

 

[SHDL]

I think SFIX might interest you.  I’m sure you can decide for yourself whether you like it or not, but at least it does come with a nice list of characteristics that turned off most VCs in its early days and will likely keep many stock pickers away for quite some time:

 

First off, it’s a clothing retailer that mainly caters to women.  I.e., one of the worst businesses known to man.  And yes it’s an online retailer, but no you can’t search & choose what to try; instead they do the choosing for you.  In other words, this is no Amazon.  Financially, their revenue is growing fast but their margins are not.  So, no, actually this is a lot like Amazon.  Oh and by the way they never, ever, discount their merchandise, so people can forget about finding any good deals there, and on top of that their shipping is super duper slow.  So clearly Amazon is going to come and eat their lunch, and you know what, the founder/CEO is on a 16-week maternity leave in the meantime.

 

Still interested?  :)

[Jurgis]

I think SFIX might interest you.  I’m sure you can decide for yourself whether you like it or not, but at least it does come with a nice list of characteristics that turned off most VCs in its early days and will likely keep many stock pickers away for quite some time:

 

First off, it’s a clothing retailer that mainly caters to women.  I.e., one of the worst businesses known to man.  And yes it’s an online retailer, but no you can’t search & choose what to try; instead they do the choosing for you.  In other words, this is no Amazon.  Financially, their revenue is growing fast but their margins are not.  So, no, actually this is a lot like Amazon.  Oh and by the way they never, ever, discount their merchandise, so people can forget about finding any good deals there, and on top of that their shipping is super duper slow.  So clearly Amazon is going to come and eat their lunch, and you know what, the founder/CEO is on a 16-week maternity leave in the meantime.

 

Still interested?  :)

 

Yes, but is it really misunderstood?  8)

 

 

 

Just kidding.

 

Carry on.  8)

[SHDL]

That is what I think is the zillion dollar question here.  8)

[Spekulatius]

I guess there is the question about industries vs companies. While some companies may be misunderstood, it is quite rare that an industry is completely misunderstood.

 

I think one is more likely to find misunderstood industries where there is very little coverage from the investment community, which could be an overlooked sector, or a sector where the industry changes/transforms and those few analysts/investors that cover it, don’t quite grasp the change.

 

I think some recent changes that I am aware of are the subscription model for software (Adobe, Microsoft; and separation of franchising/branding from property management and ownership in the hotel sector (HLT, MAR benefited from that).

[Jurgis]

I think some recent changes that I am aware of are the subscription model for software (Adobe, Microsoft

 

Is ORCL going through this transition and is it hugely undervalued and misunderstood then?

 

 

I don't know. I've had this question pop up every time I look at ORCL, but I am not sure I can answer it.

[IanBezek]

 

Migrants typically pay 10%+ of their weekly remittances in fees,

simply for a Wells Fargo to take their cash and wire the proceeds to their home country. Yet we can routinely do the same thing by any one of a number of smartphone apps at a fraction of the cost; we just need an account to deposit the cash into. But according to Wall Street, that isn't a threat; and we continue to systematically over-value Wells Fargo, and under-value the smart app competitors.

 

 

Is this is a major source of revenues for Wells and other banks? I was under the impression that most migrants used something like Western Union or Moneygram. I will note, due to weird circumstances, I've been having to send myself money - I'm currently in South America and can't mail myself a new debit card yet - and I can send myself cash through a service like Worldremit for ~1% of my remittance (including both fee and FX charge) and pick up directly at a local bank five minutes later. That is going to put a lot of people out of business over time.

[BG2008]

I think you are conflating a bunch of unrelated things in regards to WWE. You seem to be claiming that you understand the company/industry while Wall Street doesn't. Yet your memories (understanding) are 20 years old. Lots of things have changed since then, so investing based on 20 year old memories may be dangerous. Also it seems that your more recent evaluation of the company is negative (perhaps correctly). Compare that with the fact that the stock went nowhere for years and then exploded upwards a year ago. So I'd question whether you have a better understanding of the company than Wall Street does (did).

 

What you did with WWE in your post is what most of people do: you built a story. Now, it's a nice story, but IMO that's pretty much what it is.

 

Hope you don't take above negatively.  8)

 

To generalize:

 

1. There are thousands of people evaluating various companies every day. Some of them "don't understand" the company, some of them do.

2. Genuine variant perception is extremely rare. Almost nonexistent.

3. What you are asking is not really genuine variant perception. I think what you are looking for is more of a "at this point in time company is valued differently than me and a bunch of folks on CoBF would value it (also known as "The Real Intrinsic Value" ).".

4. The point 3 approach is not a bad way to invest. However, note that I kinda added the "valued at" part (although you do imply it in some places of your post). If we change this to "at this point I and a bunch of folks think X about company, while Wall Street (who?) thinks Y" without attaching "valued at", then it's less interesting.

5. Corollary of 1,3,4: there are always people both on CoBF and Wall Street and media that think about company X and value it at $XX; there are always people on CoBF and Wall Street and media that think about the same company Y and value it at $YY.

6. It is very hard to evaluate percentages of people who think/value X/$XX vs. Y/$YY (which you need to do if you want to call it misunderstood without referring to current market price). You can compare $XX and $YY to current market price $ZZ to call it misunderstood in regards to market price. But you don't know whether market thinks X, Y or some Z.

7. The fact that you and some people think X does not necessarily mean that X is indeed what is happening/will happen.

 

tl;dr: what you are trying to do might be good, but not simple.

 

I could argue why I think CACC, CMPR, cable cos, etc. are not "misunderstood", but I doubt these arguments are interesting.

 

BTW, another wrinkle is that as Howard Marks said "More things can happen than will happen". So even post factum evaluation of whether something was/was not understood is fraught with biases.

 

Good luck, have fun  8)

 

Jurgis,

 

I waited a few hours before responding and still can't figure out your argument.  You have a way of framing your points that is frankly a bit above my pay grade.  Variant perception, what is that? In fear of getting too caught up in semantics like "what is value investing."  I'll try to boil it down to simple examples that a fifth grader can understand

 

1)  Before Buffet bought Burlington Northern Santa Fe, everyone thought that railroads were bad capital intensive businesses. After he bought them, everyone realized that there is a ton of pricing power. 

2) A few years ago, people thought all the cable companies will die and shareholders will get wiped out.  A few people realized that you will still need the connection to the home. 

3) A few years ago, there was a 400 post discussion on VIC about whether Amazon will forever be a 1% net margin crappy retailer.  I think we all know that the reality is very different from that.  Amazon was a large cap even then and there were thousands of people looking at the name. 

4) I neglected to mentioned that WWE's stock crashed because Vince tried to get a TV deal that would pay WWE live sport kind of money.  The TV people balked at them and told Vince that wrestling is scripted. So Vince said "to hell with these guys, I'm going over the top."  The strategy was risky and no one knows if they will ever go above breakeven which I believe is about 1 mm subscribers.  So there was a time when you could have followed WWE closely and see how close they were getting to break even.  The subscription at $10 or $12 was a great value for its fans.  If you bought 2 pay per views a year, that was your annual subscription.  From a content perspective, it also means that your stars can focus on the product and not try to promote the buying of pay per views which can get very tiring. 

5) Buffet denounces airlines for a long time.  Then he invested in them after they have been consolidated to four big players. 

 

Maybe we can call whatever I am trying to find something different and exotic, but the key here is to identify situations where people think

 

1) An industry is terminal, yet it has tremendous growth and pricing power, i.e. Cable companies

2) Business is capital intensive and will forever earn a bad return, in reality the industry has consolidated and has much better economics

3) Low ROIC is intentional and the company is being greedy for the long run, i.e. Amazon and a lot of the tech companies

4) Not sure how I can frame WWE into this framework, but there is some misperception in that the capital allocators don't understand the lifestyle of the poor and trashy population. 

[Spekulatius]

 

Migrants typically pay 10%+ of their weekly remittances in fees,

simply for a Wells Fargo to take their cash and wire the proceeds to their home country. Yet we can routinely do the same thing by any one of a number of smartphone apps at a fraction of the cost; we just need an account to deposit the cash into. But according to Wall Street, that isn't a threat; and we continue to systematically over-value Wells Fargo, and under-value the smart app competitors.

 

 

Is this is a major source of revenues for Wells and other banks? I was under the impression that most migrants used something like Western Union or Moneygram. I will note, due to weird circumstances, I've been having to send myself money - I'm currently in South America and can't mail myself a new debit card yet - and I can send myself cash through a service like Worldremit for ~1% of my remittance (including both fee and FX charge) and pick up directly at a local bank five minutes later. That is going to put a lot of people out of business over time.

 

Remittance is most likely a very small part of larger banks revenues. The larger banks now promote Zelle, which I think is a bank sponsored payment system and is free or very cheap (I haven’t tried it yet).

[IanBezek]

Thanks Spekulatius. My understanding is that Zelle requires the receiver of the remittance to have a debit or credit card, which makes it useless for many people in emerging markets. Banking penetration outside of the upper class remains shockingly low in Latin America where I live, though perhaps it is a little higher for Asia.

[Guest Schwab711]

I think you are conflating a bunch of unrelated things in regards to WWE. You seem to be claiming that you understand the company/industry while Wall Street doesn't. Yet your memories (understanding) are 20 years old. Lots of things have changed since then, so investing based on 20 year old memories may be dangerous. Also it seems that your more recent evaluation of the company is negative (perhaps correctly). Compare that with the fact that the stock went nowhere for years and then exploded upwards a year ago. So I'd question whether you have a better understanding of the company than Wall Street does (did).

 

What you did with WWE in your post is what most of people do: you built a story. Now, it's a nice story, but IMO that's pretty much what it is.

 

Hope you don't take above negatively.  8)

 

To generalize:

 

1. There are thousands of people evaluating various companies every day. Some of them "don't understand" the company, some of them do.

2. Genuine variant perception is extremely rare. Almost nonexistent.

3. What you are asking is not really genuine variant perception. I think what you are looking for is more of a "at this point in time company is valued differently than me and a bunch of folks on CoBF would value it (also known as "The Real Intrinsic Value" ).".

4. The point 3 approach is not a bad way to invest. However, note that I kinda added the "valued at" part (although you do imply it in some places of your post). If we change this to "at this point I and a bunch of folks think X about company, while Wall Street (who?) thinks Y" without attaching "valued at", then it's less interesting.

5. Corollary of 1,3,4: there are always people both on CoBF and Wall Street and media that think about company X and value it at $XX; there are always people on CoBF and Wall Street and media that think about the same company Y and value it at $YY.

6. It is very hard to evaluate percentages of people who think/value X/$XX vs. Y/$YY (which you need to do if you want to call it misunderstood without referring to current market price). You can compare $XX and $YY to current market price $ZZ to call it misunderstood in regards to market price. But you don't know whether market thinks X, Y or some Z.

7. The fact that you and some people think X does not necessarily mean that X is indeed what is happening/will happen.

 

tl;dr: what you are trying to do might be good, but not simple.

 

I could argue why I think CACC, CMPR, cable cos, etc. are not "misunderstood", but I doubt these arguments are interesting.

 

BTW, another wrinkle is that as Howard Marks said "More things can happen than will happen". So even post factum evaluation of whether something was/was not understood is fraught with biases.

 

Good luck, have fun  8)

 

Jurgis,

 

I waited a few hours before responding and still can't figure out your argument.  You have a way of framing your points that is frankly a bit above my pay grade.  Variant perception, what is that? In fear of getting too caught up in semantics like "what is value investing."  I'll try to boil it down to simple examples that a fifth grader can understand

 

1)  Before Buffet bought Burlington Northern Santa Fe, everyone thought that railroads were bad capital intensive businesses. After he bought them, everyone realized that there is a ton of pricing power. 

2) A few years ago, people thought all the cable companies will die and shareholders will get wiped out.  A few people realized that you will still need the connection to the home. 

3) A few years ago, there was a 400 post discussion on VIC about whether Amazon will forever be a 1% net margin crappy retailer.  I think we all know that the reality is very different from that.  Amazon was a large cap even then and there were thousands of people looking at the name. 

4) I neglected to mentioned that WWE's stock crashed because Vince tried to get a TV deal that would pay WWE live sport kind of money.  The TV people balked at them and told Vince that wrestling is scripted. So Vince said "to hell with these guys, I'm going over the top."  The strategy was risky and no one knows if they will ever go above breakeven which I believe is about 1 mm subscribers.  So there was a time when you could have followed WWE closely and see how close they were getting to break even.  The subscription at $10 or $12 was a great value for its fans.  If you bought 2 pay per views a year, that was your annual subscription.  From a content perspective, it also means that your stars can focus on the product and not try to promote the buying of pay per views which can get very tiring. 

5) Buffet denounces airlines for a long time.  Then he invested in them after they have been consolidated to four big players. 

 

Maybe we can call whatever I am trying to find something different and exotic, but the key here is to identify situations where people think

 

1) An industry is terminal, yet it has tremendous growth and pricing power, i.e. Cable companies

2) Business is capital intensive and will forever earn a bad return, in reality the industry has consolidated and has much better economics

3) Low ROIC is intentional and the company is being greedy for the long run, i.e. Amazon and a lot of the tech companies

4) Not sure how I can frame WWE into this framework, but there is some misperception in that the capital allocators don't understand the lifestyle of the poor and trashy population.

 

I think what Jurgis is implying in addition to what he actually wrote is that not only are good novel ideas (variant perception) rare, but that accurately recognizing them is also quite rare.

 

People are posting 'novel' ideas relatively frequently on cobf and elsewhere.

Folks like ajc here (or @emilio_gold on twitter) are arguing for Long SPOT, which I don't understand at all.

@emilio_gold has some novel arguements with regards to NFLX, which I also don't get.

Picasso pushed certain coal companies/ideas when the industry was all but dead. But it didn't actually die. I suppose that's close to what you are looking for. I didn't understand the idea until it worked and neither did many others. I remember at YYX that year, a few coal companies were pitched with little interest.

 

The ideas you are looking for have probably already been written up here, on twitter, on VIC, or elsewhere. They are being written by the people that sound crazy or possibly sound like they don't understand the basics of the industry or finance analysis. Most are as crazy they sound. Some, though, are exactly what you are looking for.

[Guest cherzeca]

misanalysed companies are rare and as has been noted on thread difficult to recognize.  industries more so.

 

what I do think you can do is invert and ask whether a hate/love-fest with a given company or industry is overdone.  very dangerous of course.

 

is housing a buy now? most will say no. that means it may be an opportunity to see if you can see the phoenix before mr market.

[SharperDingaan]

My bad, my reference was supposed to have been Western Union and not Wells Fargo.

 

In most places, if you don't have a bank account; you can't participate in the global 'payments' system. You got around it by using various versions of the 'Hawala' or 'Chiti' systems. Give your money to person 'X', they would arrange payment to person 'Y', in countries A, B, or C - in return for a large fee, and a reputation for honest dealing.

 

No bank account to receive money into = no credit = no cards (debit/credit) = no way to obtain cash without paying somebody a large fee to cash your (wage, social assistance, etc) cheque for you. Maybe the nearest 'branch' is too far away from you, you look/smell so much like a bum (homeless, druggies, etc.) that security/staff won't let you in to open an account, or you're just an 'undesirable' caste member - & it's outright discrimination. 2 Billion+ people around the world.

 

ApplePay, GooglePay, etc. doesn't care what you look/smell like, or where you live.

You can open an account on-line, from anywhere; easily receive money into, and pay out of that account; and at a cost that purely depends on whether the 'other side' also has an ApplePay, or GooglePay account. All you need is a basic smart-phone, a reliable way of charging it, and an internet connection. Much of which already exists in many places. So what?

 

Mega-Bank XYZ is typically 'at most' a national bank + 'a bit'. Sizeable if you're US, less so if you're Icelandic.

ApplePay, GooglePay, clients are 'everyone on the planet', they are scaleable networks, and transaction costs decline with size.

Lose the ability to curtail access to a bank account, and it's Mega-Bank that's dead in the water. 

 

All because they were too arrogant to work with the 'little people'.

Recognize the enormous opportunity in front of their noses - couldn't get past the smell.

And that this is a common experience of just about EVERY new-comer/immigrant in the world.

 

SD

 

 

[Foreign Tuffett]

misanalysed companies are rare and as has been noted on thread difficult to recognize.  industries more so.

 

what I do think you can do is invert and ask whether a hate/love-fest with a given company or industry is overdone.  very dangerous of course.

 

is housing a buy now? most will say no. that means it may be an opportunity to see if you can see the phoenix before mr market.

 

I agree that it's difficult to identify companies that the analyst community at large has misunderstood. It's easier to search for gems among companies that have minimal analyst coverage. Go where there's less competition instead of striving to be the most clever in an industry full of smart, highly motivated people.

[Jurgis]

Jurgis,

 

I waited a few hours before responding and still can't figure out your argument.  You have a way of framing your points that is frankly a bit above my pay grade.  Variant perception, what is that? In fear of getting too caught up in semantics like "what is value investing."  I'll try to boil it down to simple examples that a fifth grader can understand

 

1)  Before Buffet bought Burlington Northern Santa Fe, everyone thought that railroads were bad capital intensive businesses. After he bought them, everyone realized that there is a ton of pricing power. 

2) A few years ago, people thought all the cable companies will die and shareholders will get wiped out.  A few people realized that you will still need the connection to the home. 

3) A few years ago, there was a 400 post discussion on VIC about whether Amazon will forever be a 1% net margin crappy retailer.  I think we all know that the reality is very different from that.  Amazon was a large cap even then and there were thousands of people looking at the name. 

4) I neglected to mentioned that WWE's stock crashed because Vince tried to get a TV deal that would pay WWE live sport kind of money.  The TV people balked at them and told Vince that wrestling is scripted. So Vince said "to hell with these guys, I'm going over the top."  The strategy was risky and no one knows if they will ever go above breakeven which I believe is about 1 mm subscribers.  So there was a time when you could have followed WWE closely and see how close they were getting to break even.  The subscription at $10 or $12 was a great value for its fans.  If you bought 2 pay per views a year, that was your annual subscription.  From a content perspective, it also means that your stars can focus on the product and not try to promote the buying of pay per views which can get very tiring. 

5) Buffet denounces airlines for a long time.  Then he invested in them after they have been consolidated to four big players. 

 

Maybe we can call whatever I am trying to find something different and exotic, but the key here is to identify situations where people think

 

1) An industry is terminal, yet it has tremendous growth and pricing power, i.e. Cable companies

2) Business is capital intensive and will forever earn a bad return, in reality the industry has consolidated and has much better economics

3) Low ROIC is intentional and the company is being greedy for the long run, i.e. Amazon and a lot of the tech companies

4) Not sure how I can frame WWE into this framework, but there is some misperception in that the capital allocators don't understand the lifestyle of the poor and trashy population.

 

Fair enough. I disagree with your examples and your reasoning that they were (are) misunderstood, but I guess that's what makes the market forum.  8)

 

Good luck.

[Jurgis]

I think you are conflating a bunch of unrelated things in regards to WWE. You seem to be claiming that you understand the company/industry while Wall Street doesn't. Yet your memories (understanding) are 20 years old. Lots of things have changed since then, so investing based on 20 year old memories may be dangerous. Also it seems that your more recent evaluation of the company is negative (perhaps correctly). Compare that with the fact that the stock went nowhere for years and then exploded upwards a year ago. So I'd question whether you have a better understanding of the company than Wall Street does (did).

 

What you did with WWE in your post is what most of people do: you built a story. Now, it's a nice story, but IMO that's pretty much what it is.

 

Hope you don't take above negatively.  8)

 

To generalize:

 

1. There are thousands of people evaluating various companies every day. Some of them "don't understand" the company, some of them do.

2. Genuine variant perception is extremely rare. Almost nonexistent.

3. What you are asking is not really genuine variant perception. I think what you are looking for is more of a "at this point in time company is valued differently than me and a bunch of folks on CoBF would value it (also known as "The Real Intrinsic Value" ).".

4. The point 3 approach is not a bad way to invest. However, note that I kinda added the "valued at" part (although you do imply it in some places of your post). If we change this to "at this point I and a bunch of folks think X about company, while Wall Street (who?) thinks Y" without attaching "valued at", then it's less interesting.

5. Corollary of 1,3,4: there are always people both on CoBF and Wall Street and media that think about company X and value it at $XX; there are always people on CoBF and Wall Street and media that think about the same company Y and value it at $YY.

6. It is very hard to evaluate percentages of people who think/value X/$XX vs. Y/$YY (which you need to do if you want to call it misunderstood without referring to current market price). You can compare $XX and $YY to current market price $ZZ to call it misunderstood in regards to market price. But you don't know whether market thinks X, Y or some Z.

7. The fact that you and some people think X does not necessarily mean that X is indeed what is happening/will happen.

 

tl;dr: what you are trying to do might be good, but not simple.

 

I could argue why I think CACC, CMPR, cable cos, etc. are not "misunderstood", but I doubt these arguments are interesting.

 

BTW, another wrinkle is that as Howard Marks said "More things can happen than will happen". So even post factum evaluation of whether something was/was not understood is fraught with biases.

 

Good luck, have fun  8)

 

Jurgis,

 

I waited a few hours before responding and still can't figure out your argument.  You have a way of framing your points that is frankly a bit above my pay grade.  Variant perception, what is that? In fear of getting too caught up in semantics like "what is value investing."  I'll try to boil it down to simple examples that a fifth grader can understand

 

1)  Before Buffet bought Burlington Northern Santa Fe, everyone thought that railroads were bad capital intensive businesses. After he bought them, everyone realized that there is a ton of pricing power. 

2) A few years ago, people thought all the cable companies will die and shareholders will get wiped out.  A few people realized that you will still need the connection to the home. 

3) A few years ago, there was a 400 post discussion on VIC about whether Amazon will forever be a 1% net margin crappy retailer.  I think we all know that the reality is very different from that.  Amazon was a large cap even then and there were thousands of people looking at the name. 

4) I neglected to mentioned that WWE's stock crashed because Vince tried to get a TV deal that would pay WWE live sport kind of money.  The TV people balked at them and told Vince that wrestling is scripted. So Vince said "to hell with these guys, I'm going over the top."  The strategy was risky and no one knows if they will ever go above breakeven which I believe is about 1 mm subscribers.  So there was a time when you could have followed WWE closely and see how close they were getting to break even.  The subscription at $10 or $12 was a great value for its fans.  If you bought 2 pay per views a year, that was your annual subscription.  From a content perspective, it also means that your stars can focus on the product and not try to promote the buying of pay per views which can get very tiring. 

5) Buffet denounces airlines for a long time.  Then he invested in them after they have been consolidated to four big players. 

 

Maybe we can call whatever I am trying to find something different and exotic, but the key here is to identify situations where people think

 

1) An industry is terminal, yet it has tremendous growth and pricing power, i.e. Cable companies

2) Business is capital intensive and will forever earn a bad return, in reality the industry has consolidated and has much better economics

3) Low ROIC is intentional and the company is being greedy for the long run, i.e. Amazon and a lot of the tech companies

4) Not sure how I can frame WWE into this framework, but there is some misperception in that the capital allocators don't understand the lifestyle of the poor and trashy population.

 

I think what Jurgis is implying in addition to what he actually wrote is that not only are good novel ideas (variant perception) rare, but that accurately recognizing them is also quite rare.

 

People are posting 'novel' ideas relatively frequently on cobf and elsewhere.

Folks like ajc here (or @emilio_gold on twitter) are arguing for Long SPOT, which I don't understand at all.

@emilio_gold has some novel arguements with regards to NFLX, which I also don't get.

Picasso pushed certain coal companies/ideas when the industry was all but dead. But it didn't actually die. I suppose that's close to what you are looking for. I didn't understand the idea until it worked and neither did many others. I remember at YYX that year, a few coal companies were pitched with little interest.

 

The ideas you are looking for have probably already been written up here, on twitter, on VIC, or elsewhere. They are being written by the people that sound crazy or possibly sound like they don't understand the basics of the industry or finance analysis. Most are as crazy they sound. Some, though, are exactly what you are looking for.

 

Great elaboration and examples Schwab711!  8)

I like your examples more than BG2008's.  8)

At least partially because for some of them we don't know the outcome yet.  8)

Although I might argue that some of your examples are also not misunderstood.  8)

 

Anyway +1 on your post.  8)

[Jurgis]

I really don't want to get into a long discussion of "is it misunderstood or not", but let me cover couple BG2008 and Schwab711 examples briefly. Just to emphasize, I don't know if I'm right and I won't defend my position much. You can make up your own mind.  8)

 

Airlines - I don't care what Buffett did before/now/after. I believe airlines still have issues in terms of competition, pricing, labor, etc. So IMO even though airline stocks seem cheap, I don't think that market/analysts misunderstand them. I'd argue that they do.

 

NFLX - Yes, there is an argument that NFLX is not just lighting cash on fire on the road to hell. But NFLX valuation is huge even if the arguments about their growth-before-cash-flow approach is good and works out. Does market/analysts misunderstand NFLX? IMO no. It could be argued that market misunderstands NFLX by being too optimistic rather than being too pessimistic (bear argument). It could be argued that there is some balance of NFLX being understood/valued based on great growth vs negative cash flow.

 

Hope this helps. Have fun.  8)

 

Nobody's gonna take my ORCL challenge?  8)

[abitofvalue]

I think you also need to be careful of hindsight bias here.. most of these sutuations represent inflection points in businesses where wall street was too pessimistic on success of a change in strategy.  I really don't think there was a 'misunderstanding' of the business model or lack of understanding of industries in the sense that ppl didn't understand what was going on.

 

In a lot of cases e.g. WWE the strategy had real risk and meaningful downside or at least Wall Street wanted to see signs of success before bidding it up. Maybe your variant perception is you could have seen the signs of success earlier.. 

 

I kind of agree with your cable example. Pricing power of Internet service / threat of competition from 5g etc hasnt been as bad as feared. That said given the huge capex investment it still could be an issue.. Cable does need a period of low capex / limited price competion to work out.. 

 

There are also probably tons of examples the other way - wall street being too optimistic of a change... 

 

One thing - This notion that wall street is elitist and wouldn't own WWE isnt actually true... Look at their top 20-30 non insider holders..  taking a random quarter - Q2 2017 - based on a cursory glance - it was held by Blackrock, Eminence, clearbridge, Vanguard, Capital, State Street, Balyasny, Principal to name a few.. 

 

Another stock that you mention Credit Acceptance - is mentioned so often as misunderstood it's arguably reached the point where the fact that ppl think it is misunderstood is in itself a misunderstanding.. the stock trades at a 2x PE and 4x PB multiple premium to other auto lenders.. think investors understand the model enough to give it that valuation.

 

 

 

 

[Jurgis]

I think you also need to be careful of hindsight bias here.. most of these sutuations represent inflection points in businesses where wall street was too pessimistic on success of a change in strategy.  I really don't think there was a 'misunderstanding' of the business model or lack of understanding of industries in the sense that ppl didn't understand what was going on.

 

In a lot of cases e.g. WWE the strategy had real risk and meaningful downside or at least Wall Street wanted to see signs of success before bidding it up. Maybe your variant perception is you could have seen the signs of success earlier.. 

 

I kind of agree with your cable example. Pricing power of Internet service / threat of competition from 5g etc hasnt been as bad as feared. That said given the huge capex investment it still could be an issue.. Cable does need a period of low capex / limited price competion to work out.. 

 

There are also probably tons of examples the other way - wall street being too optimistic of a change... 

 

One thing - This notion that wall street is elitist and wouldn't own WWE isnt actually true... Look at their top 20-30 non insider holders..  taking a random quarter - Q2 2017 - based on a cursory glance - it was held by Blackrock, Eminence, clearbridge, Vanguard, Capital, State Street, Balyasny, Principal to name a few.. 

 

Another stock that you mention Credit Acceptance - is mentioned so often as misunderstood it's arguably reached the point where the fact that ppl think it is misunderstood is in itself a misunderstanding.. the stock trades at a 2x PE and 4x PB multiple premium to other auto lenders.. think investors understand the model enough to give it that valuation.

 

+1  8)

[rkbabang]

BTW, another wrinkle is that as Howard Marks said "More things can happen than will happen". So even post factum evaluation of whether something was/was not understood is fraught with biases.

 

He's not a proponent of the many worlds theory of quantum mechanics.  Maybe everything that can happen does happen.  If you want something to happen that is possible to happen you just have to hope that this version of you ends up steering into one of the reality tunnels where it does.

 

EDIT: And if it doesn't, you can take comfort in the fact that countless other versions of you are living in reality tunnels where it did.

[Read the Footnotes]

 

I think what Jurgis is implying in addition to what he actually wrote is that not only are good novel ideas (variant perception) rare, but that accurately recognizing them is also quite rare.

 

People are posting 'novel' ideas relatively frequently on cobf and elsewhere.

Folks like ajc here (or @emilio_gold on twitter) are arguing for Long SPOT, which I don't understand at all.

@emilio_gold has some novel arguements with regards to NFLX, which I also don't get.

Picasso pushed certain coal companies/ideas when the industry was all but dead. But it didn't actually die. I suppose that's close to what you are looking for. I didn't understand the idea until it worked and neither did many others. I remember at YYX that year, a few coal companies were pitched with little interest.

 

The ideas you are looking for have probably already been written up here, on twitter, on VIC, or elsewhere. They are being written by the people that sound crazy or possibly sound like they don't understand the basics of the industry or finance analysis. Most are as crazy they sound. Some, though, are exactly what you are looking for.

 

Great post, Schwab711. By my memory, I first met Schwab711 in the Spring of 2016 and he is just as insightful and incisive a thinker as you would suspect from his posts. I believe it was this same occasion that I pitched CNXC and FELP as Schwab711 references above. BG2008 was in attendance for all three of the pitches that I make reference to below, so maybe my comments will be of use to him or others.

 

In the spring of 2016, I pitched the purchase of CNXC and FELP. Picasso and I both separately and roughly simultaneously came upon coal opportunities from different backgrounds and perspectives. I certainly felt it was very contrarian to propose coal investments in 2016 when so many coal companies were going under. Traded at the right time, you could easily have made returns of several hundred percent in roughly a year on each of them, but it was difficult to generate interest from fellow investors as Schwab711 said. I think both Picasso and I saw these investments as specific securities of specific companies that could be identified as promising opportunities with a margin of safety and it was not a bet on the industry itself, although you could argue the prospects of the industry were likely better than many people believed at the time. Shortly after I pitched FELP, I discovered some crazy guy named Picasso was writing about it. So coal has given me a lot from that perspective too, it introduced me to Picasso.

 

In the spring of 2017 I pitched a group of Healthcare investments including HCA and simply buying the healthcare index. As an aside, BG2008 and I scheduled follow up conversations to discuss the opportunity in HCA, as a result of the pitch. The fear regarding regulatory changes had created a whole index that at least temporarily was undervalued. Those out of favor healthcare ideas beat the broader market with low risk.

 

In the spring of 2018, I pitched buying VRX and/or LEAPS on VRX. People laughed, and I laughed along with them, but I was confident in my belief because I had been following the company for sometime, though more for amusement, or potentially as a whistleblower or short.

 

My point is that sometimes a specific security is misunderstood (CNXC and FELP). Sometimes an entire sector is misunderstood (healthcare in 2016 and 2017). Sometimes a single company is misunderstood (VRX). Each of the examples I gave above were temporary opportunities the market presented. Many of the above buying opportunities lasted for quite a while, but I think BG2008 is looking for something that is misunderstood more consistently.

 

I think BG2008 was asking about the situation where the industry is consistently misunderstood and he is probably consistently interested in higher quality companies. To the best of my knowledge, I was unsuccessful in talking him in to HCA, even though HCA is probably a better company than a lot of what I have invested in, and HCA has almost doubled in the past two years.

 

Another point that might be worth making is that in the cases above, I was drawing on prior knowledge to identify the opportunity when it arose. I think from talking to Picasso about how he found FELP, he also relied heavily on prior accumulated knowledge. That is a little different from actively going out and seeking misunderstandings. That might work too, but it is a different process. The risk is that the further you are out of your base of knowledge the more you risk being (here I am paraphrasing Schwab711) as crazy as you might sound.

[Guest cherzeca]

"I think from talking to Picasso about how he found FELP, he also relied heavily on prior accumulated knowledge. That is a little different from actively going out and seeking misunderstandings. "

 

this is a great point.  if there is such a thing as recognizing a misunderstood company, it is far more likely it "comes to you" based upon prior experience, work and observation, rather than your seeking it out.  in dealmaking, this is the difference between letting the deal come to you and forcing the issue...former deals are better though fewer than latter