Good Industries That Are Misunderstood By Wall Street Analysts

[BG2008]

 

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.

 

This is way better than I could have summarized.  For the record, I was too dumb to recognize the wisdom of Read the Footnotes.  I need to pay attention to everyone of his healthcare ideas.  I left a lot of profits on the table.  I guess the title of this thread should be "what do you think, companies or industries, is currently misunderstood based on your accumulated knowledge."  If someone else has a more eloquent way of summarizing my questions, please feel free!   

 

In Oprah's voice, you get a Word Smithing Award, you  get a Word Smithing Award, Everyone gets a Word Smithing Award

 

Read the Footnote - Any updated thoughts on Bausch?  Thoughts on attractive entry prices?  Of course, I left money on the table on this one as well.  When will I ever learn? 

[BG2008]

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.

 

I think that if the list of owners are all top mutual funds doesn't really mean that they understand it.  I have talked to mutual funds that own 10% of a company who literally does not know that the company was going through a transformation.  Someone has to own the stock.  I find that the top 20 holders of a $200mm small cap that I own are your usual suspects, Fidelity, Vanguard etc.  But I don't think they know that is is trading at 50% of intrinsic value.     

[hyten1]

i think misunderstood is rare, however i do think there are times when wall street (humans) think something will happen a lot quicker than it actually does, some examples are:

 

- hard drives (hard drive will be obsolete next year!)

- dare i say autos (ev, uber will take over the world, no one needs autos anymore, time will tell)

- cable (cord cutting will decimate their biz)

 

 

hy

[BG2008]

i think misunderstood is rare, however i do think there are times when wall street (humans) think something will happen a lot quicker than it actually does, some examples are:

 

- hard drives (hard drive will be obsolete next year!)

- dare i say autos (ev, uber will take over the world, no one needs autos anymore, time will tell)

- cable (cord cutting will decimate their biz)

 

 

hy

 

Hyten1,

 

This is where I want to make a differentiation.  In the case of Cable, the thesis was literally, cord cutting will decimate their biz. They are going to die.  Now it is starting to emerge that the Cable companies can actually increase prices via their broadband internet.  It is very different when the market believes the rate of decrease is 10% a year and it turns out it was 3% and you can manage that down.  It is entirely different when the market or a large part of the market participant did not realize that the incumbent cable guys can actually grow because you still need the cord for the broadband access.  I don't know what the right terminology is here.  I was never good with semantics.  But some large segment of the investing world got it really really wrong.