What are you buying today?

[Gregmal]

COMP and FRG

[cubsfan]

^  Hmmm... a software company selling at 1X sales?

 

That sounds promising.

 

I think I need to check this out.

[fareastwarriors]

3 hours ago, Gregmal said:

COMP and FRG

 

What's the theme here for COMP and Z? Continued strong demand for housing?

[Spekulatius]

20 minutes ago, cubsfan said:

^  Hmmm... a software company selling at 1X sales?

 

That sounds promising.

 

I think I need to check this out.

P/S=1 is a b it misleading, because a lot of revenues are essentially a pass through expense. You should look at a gross margin multiple when comparing this with high margin (~80%) software business. COMP margins are more in the 20% ballpark.

 

If interested, The MF Industryfocus podcast has discussed COMP in a very recent episode.

 

[Gregmal]

12 minutes ago, fareastwarriors said:

 

What's the theme here for COMP and Z? Continued strong demand for housing?

There's some winner take all dynamic as well. Few industries are more ripe for disruption than RE brokerage. Z owns the internet(which the internet is a pretty important theme over the past couple decades). 1 in 40 is the number you need to know there. Thats how many people transact in RE without ever using Z in the process. Or in other words, its virtually impossible to avoid them. From there its just about the ecosystem, engagement, and automation of the process. Ibuying is just a call option, but could be significant as well. Having done dozens of transactions over the years, its a pain in the ass. Z is the only real player who can seize this opportunity IMO.

 

COMP has the funding to do some damage as well. But I view them more as just a tiger running wild in the old ecosystem, which if you're willing to spend, is pretty easy to conquer. Poach agents or buyout smaller shops, undercut listings. Utilize some automation and advertising. Softbank knows a thing of two about throwing money at ideas....COMP is a smaller position but worth keeping an eye on well below its IPO price. 

Edited September 22, 2021 by Gregmal

[cubsfan]

^ Thanks to both of you for the great comments.

[Gregmal]

Yea commission are generally reported on a gross basis which is misleading because they are typically paid out on a % basis with the smallest end going to the firm. So a listing that does $30k gross best case has a dual representation, 60-70% can be paid out to the agents meaning for the reported figure only $10k or so is true revenue. Had a ton of people bring me small boutique financial/stock brokerage firms and be like "1x sales"...but if you're paying branch offices 90% of revenue its really more like 10x. The good thing though about this model is the overhead is typically lower as the higher the agent payout the more of the cost burden they typically bear. 

[Spekulatius]

I am it doubting the need for disruption, but COMP is pretty much supporting  a plain vanilla agent model, as well as Z actually when you take out the I-buying part. the only disruption here is RDFN.

 

Both RDFN and Z are now betting the farm on ibuying, which to me seems like poor low ROE business model. make a little money when the market is strong, lose a lot when the market turns sour. Another my cup of tea.

 

I also think that once those guys really get big in ibuying, there is going to be a lot of scrutiny on cornering the markets, but I doubt we ever get that far in the near term future.

[Gregmal]

Initially that was probably were I stood on the ibuying. But if you can leverage your size and issue at will with notes, shares, or cheap debt, thats fairly big. So whats the risk if you're raising lets say $500M and then buying 1,000 SFH with solid fundamental data supporting it at a 10-20% discount to market? This is effectively what theyre doing once you remove all the sales speak around "adjustments". And further, if you're buying these in cash or fixed debt, and the markets not "on fire", is the risk really that big? How do they lose a lot? How many times has the overall housing market gone down 25%+? Maybe a handful of times over like the last 50 years? Its not like theyre owning these at 5% down. Cash or largely funded by long term fixed rate debt. Carry cost for a home is maybe 5% a year tops assuming its vacant? So whats the ballpark on what losing a lot" actually means? Well, not really a lot. 

 

Frankly, this model, as well as similar ones from guys like Blackrock, make it far easier to dominate the market over time, especially if there's pullbacks. Of course you cant do this if you're small, but Z is the biggest fish and once you really start seeing the access to capital relative to what buying slugs of well located homes costs, it gets wild. Think about what would happen to home prices if BRK or AMZN decided to issue 5-10% of its market cap in shares to go on a SFH buying spree? You can literally buy entire towns in some of the best located neighborhoods in NY/NJ for a few billion. 

[Gregmal]

The simplified bull thesis on Z is basically theyre going to turn the long, arduous home buying/selling process into something that resembles buying/selling on eBay. One stop shop. THEY will become the real Home Depot. Where you can transact like you trade stocks. They will eat the middle stuff which if largely automated or outsourced can be hugely lucrative. Anyone who's done a deal can tell you all the absolute bullshit fees and costs the title companies take down and then of course the agent commissions. So on one end they'll have a huge inventory of homes purchased with 2% debt, notes, stock issuance. You can rent or buy from inventory through the click of a button. And all the money thats made through the transactions, which is tons! goes to the bottom line because they can offer it cheaper than anyone else, while providing the buyer and seller unmatched convenience. 

[KPO]

2 hours ago, Spekulatius said:

I am it doubting the need for disruption, but COMP is pretty much supporting  a plain vanilla agent model, as well as Z actually when you take out the I-buying part. the only disruption here is RDFN.

 

Both RDFN and Z are now betting the farm on ibuying, which to me seems like poor low ROE business model. make a little money when the market is strong, lose a lot when the market turns sour. Another my cup of tea.

 

I also think that once those guys really get big in ibuying, there is going to be a lot of scrutiny on cornering the markets, but I doubt we ever get that far in the near term future.

This is kind of my thinking as well, which is why I owned Redfin for a period of time. As I watched SoftBank Vision fund plow money into Opendoor, which now has a ~$12B valuation, then Compass ($5.5B), and read about EXP ($7B) and now several other venture stage companies I put it in the too hard pile. Definitely a great opportunity for disruption, but it seems like that’s well known, and can all these valuations be justified? Is it a winner takes all business or does it just become a more fragmented industry with slightly lower aggregate commissions?  If the game is a race to the bottom on commissions, I don’t get the current valuations. I also don’t see Warren & the incumbents going down without a fight. 

 

BTW, on ibuying, this hasn’t worked well in autos yet, but I do appreciate Vroom buying a sports car from me after driving it for 14 months during the pandemic at almost 20% above what I paid for it. 

[Gregmal]

12 minutes ago, KPO said:

This is kind of my thinking as well, which is why I owned Redfin for a period of time. As I watched SoftBank Vision fund plow money into Opendoor, which now has a ~$12B valuation, then Compass ($5.5B), and read about EXP ($7B) and now several other venture stage companies I put it in the too hard pile. Definitely a great opportunity for disruption, but it seems like that’s well known, and can all these valuations be justified? Is it a winner takes all business or does it just become a more fragmented industry with slightly lower aggregate commissions?  If the game is a race to the bottom on commissions, I don’t get the current valuations. I also don’t see Warren & the incumbents going down without a fight. 

 

BTW, on ibuying, this hasn’t worked well in autos yet, but I do appreciate Vroom buying a sports car from me after driving it for 14 months during the pandemic at almost 20% above what I paid for it. 

Covid distortion aside, theres an obvious different between buying a home and a car. And outside of the obvious one with regard to the long term desirability of the asset, I'd say the buying/selling process is much simpler for a car. I dont think cracking the home buying process will be easy, but you have the ingredients already. Again 39/40 doing a transaction go to Zillow at some point in the process. Thats all you need in terms of moat to kind of tinker with different stuff until you get it right. Imagine a world were you spot the home you want, apply through Zillow for financing, setup via the site a walkthrough tour either virtually on the spot or in version next day...where doors can be unlocked through the cloud, and then after exiting the property can submit a bid or buy it now? You wouldnt even need to charge a commission if you can automate all the bullshit title stuff. Almost all of it is nonsense that is hugely marked up. I'm doing a refi right now and these things are like 2% of the home price by themselves. Maybe charge a 2% total commission or 1% to each side. Then because you originated the mortgage yourself you get that $ too? Its a massive opportunity. I dont see anyone else having anything close to the footprint to do it. 

 

Also, on I-buying, look into it. Theyre not buying anything, theyre buying what the data is telling them is the best markets. And they offer like 10-20% below market in many case. Big difference from buying a used car 20% above MSRP. 

[Spekulatius]

The margins on ibuying aren’t that high, certainly they are never going to be 25%, most likely they are single digits. They have been able to securitize some debt, but then again, what happens if RE makers turn sour and the homes cannot be sold, except at steep discounts.

I can see a scenario where these securitization aren’t possible which means that either  pillow has to put in way more equity or exit this business for some time.

 

They see themselves as market maker and apparently  pay more commission to RE agents to show these homes than regular ones. I see this consuming tons of capital, having the potential to cause huge losses in a downturn and very little durable moat even at scale.

Edited September 23, 2021 by Spekulatius

[Gregmal]

So that's ibuying...OK, but thats just a small part of what I view the whole thing. For instance, the smallest ticket on my current refi, or on my purchase last month, was the appraisal. Appraisers need to be satisfactory to a lender. The average appraisal is about $500. Ive paid anywhere from $375 to $650 for one. 6.5 million homes sold last year and about 5 million used financing that required an appraisal. Given their algos already in place it wouldnt take much to move into this market and become the lowest cost provider at a relatively high margin. If that occurs, do you think any lender is ever going to waste time doing anything but clicking a button to order up an appraisal that can be generated in 15 minutes vs the current process which take 3-5 days and is likely to cost way more? Theres so many call options here its insane. Just need to be patient with an accumulation because depending upon how you choose to look at this its still arguably quite overvalued on some metrics. However I'd prefer not to be the value investor that gets in at 3000+ on AMZN or $250 on CRM, etc(just examples) because I didnt understand the early story and the valuation didnt make sense to me so instead of doing something I wallowed about it being overvalued. I'd rather lose a few % wading into a mid single digit position over time than leaving it on the table hoping to eventually get into the story once its cleared and pray to eke out 10-15% annual returns. 

[KPO]

1 hour ago, Gregmal said:

Covid distortion aside, theres an obvious different between buying a home and a car. And outside of the obvious one with regard to the long term desirability of the asset, I'd say the buying/selling process is much simpler for a car. I dont think cracking the home buying process will be easy, but you have the ingredients already. Again 39/40 doing a transaction go to Zillow at some point in the process. Thats all you need in terms of moat to kind of tinker with different stuff until you get it right. Imagine a world were you spot the home you want, apply through Zillow for financing, setup via the site a walkthrough tour either virtually on the spot or in version next day...where doors can be unlocked through the cloud, and then after exiting the property can submit a bid or buy it now? You wouldnt even need to charge a commission if you can automate all the bullshit title stuff. Almost all of it is nonsense that is hugely marked up. I'm doing a refi right now and these things are like 2% of the home price by themselves. Maybe charge a 2% total commission or 1% to each side. Then because you originated the mortgage yourself you get that $ too? Its a massive opportunity. I dont see anyone else having anything close to the footprint to do it. 

 

Also, on I-buying, look into it. Theyre not buying anything, theyre buying what the data is telling them is the best markets. And they offer like 10-20% below market in many case. Big difference from buying a used car 20% above MSRP. 

Fair enough on the depreciating asset point (autos) vs appreciating (SFH), and this was a point I nearly called out because it’s an easy issue to raise, but my bigger issue is the brokerage business. I don’t see a path to a winner takes all consolidation of the business unless it occurs through M&A, at which point I suspect it looks a lot like the investment brokerage business. Of course this ended in zero commissions and left remaining participants scrambling for other profit centers (pay for order flow). Believe me in that I totally was where you are in terms of seeing it as a big opportunity, but I’ve more recently cashed out of this theme for much more boring ideas given the overall market frothiness (T < $27, BAYRY < $13.50). 
 

That said, I want to very much thank you for your fantastic ideas and write-ups on APTS & FRPH, which have done well and continue to be interesting opportunities. 

[WFF]

Added to 1658.HK.  

[Spekulatius]

@Gregmal I disagree that Ibuying is a small part of the story for RDFN and Z. When you read the CC transcripts as well as some bullish writeups that where management believe the puck is going and they are betting on this big time, perhaps even their companies.

 

This better works out or there is going to be hell to pay for the bulls.

Edited September 23, 2021 by Spekulatius

[Gregmal]

Good stuff for sure guys and I appreciate the pushback. I dont think its anything that plays out overnight and as I mentioned, the accumulation part needs to be mindful of that along with the inherent volatility. Its not a big position for me and never will be. COMP I just started with at sub 1% and Z is ~3%. I'll take Z to maybe 5 or so if it gets into the 40-50 ish target range where even I can justify a lot of the valuation however from experience, these sort of things rarely get to price targets appealing to the stingier of investors and when they do you may not want to own them. The real push for me here was earlier, again having dejavu, where the evolution of the company was apparently and the long time bears who had regularly mouthed off since 2015 or so had all but disappeared. Its a pattern Ive seen all too often with certain types of special or disruptive companies and considered it a tipping point to stop being a pussy after stalking it(on the hunch of "potential" that we'd discussed above) for almost a decade.

 

At ~30B its not small, but I recall vividly enough people whining about how egregiously overvalued and risky it was at $6B. Perhaps the iBuying is the significantly part of the story now(it is) but again, to have the optionality on the rest is what I think the real opportunity is. If it doesnt work out thats fine, not all do and as always you can only lose 100% of what you put in vs make many times that if you're right. The comp to financial brokerage biz is reasonable, although from personal experience I'd point out that folks have been trying to disrupt that for 3 decades and even in its current form there is still TONS of money to be made there. Everyone looks at the ticket charge(or for RE agent commissions) but if you've worked closely there you'll know that those are just a fraction of the equation. I mean eBay is as mature and "disrupted" as you can get from 20% years ago and they still take 12% of everything sold. So who knows. A lot of times you have to just settle for knowing you'll never have the exact roadmap for how things will evolve, so Ive found it more practical to simply look for companies that are best positioned to evolve and innovate rather than figure out how they'll do it. 

[Gregmal]

50 more CLPR March 5s. 50 still on the bid at 3.35

[Gregmal]

On 9/21/2021 at 12:11 PM, Gregmal said:

Shorted some CLF 9/24 $19 puts for 40c

 

Fish in a barrel, the easiest repeated trade running for the better part of 6 months now. 

 

[CharlesMunger]

On 9/10/2021 at 11:57 PM, fareastwarriors said:

 
the @Gregmal etf ?  

 

Added to the basket quite substantially last couple of days

[Libs]

IPCO.TO 

Oil only needs to stay here* for them to keep printing money. Ridiculously cheap. Good management. 

 

* And I think the climate cult could drive oil MUCH higher.

[fareastwarriors]

7 hours ago, CharlesMunger said:

 

Added to the basket quite substantially last couple of days

Same here! Nothing yesterday or today though. 

[valueventures]

CWH. Surprised more aren't talking about this one. Marcus Lemonis led (with significant skin in the game), P/E of 7, dividend yield of 5% (just doubled), and growing optionality. Long-term, I think the perceived cyclicality of RVs is an overblown concern.

[Lance]

BABA

 

Thanks

Lance