Author: the_red_deer

Categories
Uncategorized

Lemonade from Lemons

As I continue to buy more shares in RILY and FRG, I continue to examine over and over how they have behaved during the difficult times in the economy. In examining what RILY’s CEO said immediately post COVID (Q1-2020 earnings), a number of positive themes emerge in my own opinion:

Over the course of our 23-year history, we have successfully managed through prior periods of extreme marketdislocation. While this is obviously unique from previous downturns, we feel our business is well positioned to come out stronger on the other side. We have learned from experience and have intentionally built our platform to withstand severe market shocks through the diversity of our businesses. 

We call ourselves a platform because we view the company in 2 parts: with the operating side of our business, which performs services for our clients and generates cash flow for the company; and then we have our proprietary investments, where — which are investment ideas and opportunities sourced from our platform.

In spite of current volatility in our investments, these are all business opportunities which have contributed significant revenue for our platform. Revenues generated from these investments in prior quarters partially offset the unrealized loss, and importantly, there is no margin balance in any of these positions. This affords us the opportunity to make prudent investment decisions and not face pressure to sell in market values as well. In fact,the only meaningful realized trade during the quarter was the unwinding of a market hedge that we’ve put ontowards the end of last year that resulted in a $17 million gain.

As we look ahead, we have a balance of assets that continue to generate strong cash flow for B. Riley. In fact, a number of our businesses stand a benefit during countercyclical markets. This includes our B. Riley FBR corporate restructuring team, our GlassRatner bankruptcy and litigation advisory group, and our Great AmericanGroup retail liquidation division. We also believe and have begun to see a need for companies to raise capital through debt and/or equity and expect our capital markets group to be a beneficiary of this need for capital. In recent weeks, we have won a number of significant restructuring assignments and retail liquidation projects, and our pipeline for new opportunities is robust.

A key measure of our success will always be our ability to deliver shareholder value. During the quarter, inaddition to paying our quarterly dividend, we repurchased over 1 million shares, including a large block of sharestotaling 880,000 from an existing shareholder prior to the COVID-19 downturn. We also bought back some of our bonds, and our Board and management also continued to make open market purchases, which demonstrates continued confidence in the company. As we look ahead, we will continue to maintain tight discipline with our balance sheet, however, we will continue to be aggressive. Over our history, we have found that marketdisruption creates opportunities, and we intend to continue to be aggressive in pursuing these opportunities.With over $124 million of cash and over $775 million in cash and investments, strong operational cash flow andno significant principal payments due until mid-2023, we believe that we will have ample liquidity to support thebusiness through this uncertain time, and we will continue to leverage our balance sheet and to create moreopportunities, which not only benefit us, but also support our partners and our clients.

Categories
Uncategorized

Wading In

Beautiful weather down here in Sarasota versus back home in Seattle. Amazing to have happy hour outside with the kids.

While happy hour was happening certain stocks kept drawing down (while others were up bigly). Vaporware stocks got absolutely smoked and seemed to bust down through 52-week lows. I wish them the best.

In the meanwhile, I picked up starter positions in Franchise Resource Group and B.Riley Financial (on my cell no less, what a world).

Without getting in to deep details here, FRG is run by a proven company builder and capital allocator, has guided towards ~$5 / share in ’22 earnings, has a fairly resilient and predictable revenue profile, and trades for ~$48 / share right now. It has had a big run over the past ~2 years, but well deserved, as the company’s per-share earnings KPIs have bloomed thanks to shrewd M&A. It pays a well-covered ~$2.50 / yr dividend.

B.Riley is a weird company and doesn’t fit into any clean bucket. The CEO admits this contributes to his perceived undervaluation of the stock. It’s an investment bank to small / medium sized companies, has a retail liquidation arm, owns a few rusty old no-growth principal investments that generate cash, and a smattering of apparel brands. Super odd. That said, it will likely print ~$15-20 / share in earnings this year on a ~$56 stock. While ’21 was an outlier, its normalized earnings may be in the range of ~$7-10 / share, with trough earnings around ~$3-5 / share. It pays a $4 / yr dividend, which is likely breakeven in an economic downturn, and obviously very well covered in a boom year.

There’s nothing crazy complicated or asymmetric about these. Just decent businesses at reasonable prices that pay their owners.

Categories
Uncategorized

Sold! Goodbye SF.

We sold our condo in San Francisco this week. It’s a huge emotional burden that was lifted and I couldn’t be happier to be out from under it.

We bought it when we though we would likely be working in SF for 5+ more years, would have kids in the city, etc. Alas, our preferences and life situation changed. Unfortunately, the change happened just a few months before the pandemic hit – and our plans to sell our place were put on ice. We stayed in the unit until the summer and had to move elsewhere, thus kicking off a process to rent the unit.

After renting it out for a year, which surprisingly worked out well despite the terrible leasing environment in summer 2020, the market improved such that we decided to put it on the market. Mind you, the condo market is / was nothing like the market for single family homes (to the moon!). We were resigned to taking a loss on it if necessary for multiple reasons.

We clearly don’t feel good about the deteriorating social / safety situation in the city. We didn’t feel good about rates staying as low as they have been forever. And the price per square foot of our unit was so incredibly high, we knew we wouldn’t forgive ourselves if that piece of the market deflated on the back of remote work + dispersion of talent from SF to other parts of the US / world.

At the end of the day, we got a price much higher than we expected upon making the decision to sell and asking our great tenants to vacate, so sometimes it all works out. Thanks world – we owe you one.

HD wallpaper: women, Golden Gate Bridge, peace sign, San Francisco, mist | Wallpaper Flare
Categories
Uncategorized

Helios Looking at Fintech

Helios Investment Partners, an Africa focused PE firm that has a publicly listed affiliated entity (Helios Fairfax Partners), is out in the press detailing interest in carveouts of fintech groups from legacy Telcos and Banks.

The publicly traded entity trades at a fraction of its book value, made up of liquid and illiquid investments, cash, and the intangible value of a portion of the GP.

I hold a small amount of shares in this entity, but am interested to see if there’s a turn in the GP trajectory. If the GP can raise equal or larger successor funds despite the horrid Africa capital environment – I think the narrative on this company can turn. If the GP starts new product lines such as RE or bolsters credit, that could further accelerate trajectory of the valuation.

In the meantime, the company has guided to substantial dividends in the form of management fees and carry over the next year. We’ll see what they deliver, I don’t have strong confidence in the outcome, and as such this is a very small holding.

Categories
Uncategorized

Chris Douvos on Focus

Chris Douvos was interviewed on Capital Allocators last week. For the most part – I found the interview to be fairly standard stuff. However I did enjoy hearing about the change in Silicon Valley from ~20 years ago to today, specifically with respect to focus.

Chris mentioned that in the past, one could essentially boil the ocean as a VC and meet with everyone around, whether other VCs or potential investments. Today, with so much more deal flow and market participants, one can’t boil the ocean and take all meetings.

Chris mitigates it with having thematic focus and certain constraints on potential investments. That allows him to just say no to certain meetings and not feel FOMO when they turn out to be marquee opportunities.

I relate to this – as the stock market serves up way too many opportunities than any investor has time for. Moreover, it serves up way too many opportunities that may seem enticing but are too complicated for me. Thus having a focus on yield securities (whether high or low yield, public or private) helps narrow the field dramatically. I also try to avoid business models that are single product / business focused – and look for diversified entities. Without this simple focus I’d be wholly overwhelmed and playing a game that others can do 1000x better than me.

Categories
Uncategorized

Oppy on APO

Oppenheimer updated their views slightly on Apollo’s ’22E / ’23E numbers recently:

I don’t have a whole lot to say other than (1) the estimates are in line with the base case for APO, which I think is more a downside case barring an economic recession. And (2) I think that the 2023E numbers are light, as the reason I own this stock among others is I believe they will be growing DE faster than 15%.

Categories
Uncategorized

Crypto Washout

Cryptocurrency Prices, Charts And Market Capitalizations CoinMarketCap.jpeg

I snapped this screenshot yesterday (Saturday, Jan 22, 2022). It appeared at that time that most of the popular crypto tokens had gone “no bid.”

One person put their less optimistic view on display:

Another put forth his bullish view on the drawdown:

While it’s fun to watch both the action and the reactions, crypto is largely out of my wheelhouse both from a knowledge and functional perspective, at least today…

Categories
Uncategorized

Commentary on Brazil

Ted Seides had a podcast with a supposed main actor of Brazilian equities management, Constellation Asset Management.

Broadly speaking, the podcast repeated cliche Warren Buffet-isms but the speaker did say a few things that I found to be interest, albeit slightly obvious in retrospect.

First, Brazil is a relatively large population base in the 200Ms. Second, the population base is young and very tech forward. Third, and perhaps most interesting, Brazil has substantial import/export restrictions.

What the third point results in is local company dominance vs international companies expanding successfully into Brazil. He had one example where there is only one international bank that has penetrated the Brazilian market whereas local incumbents regularly run 20%+ ROEs.

The second point made that I found to be very interesting was that indices don’t do a good job of capturing the best companies in the economy because a select few very large commodity companies dwarf the rest of the pack – so active management or custom indexing is key (with the note that many of the market leaders are private).

I enjoyed these select takeaways amid the muck of run of the mill investment jargon in the interview – as I own full non-core positions in two Brazilian alternative asset managers, and it helps me understand in some small sense how they may drive alpha in this market.

Categories
Uncategorized

Thoughts on Downdraft

It’s clear there is a massive drawdown in high multiple names in progress right now. There’s a bit of chatter on good “values” to be had in the washout.

For the most part, I’m sitting out of the fray. Most of my holdings are dividend paying businesses at reasonable going in yields and don’t have earnings issues, yet. The question is should I invest in acquiring knowledge that allows me to pick up some bargains.

In this case – I think the answer is the distance that technology and other high multiple names reside from what I know is far, and can’t be learned quickly enough to have strong conviction.

Categories
Uncategorized

Coventure on How to Break from the Pack in VC

I enjoyed reading Ali Hamed’s thoughts on what he envisioned his career in VC would look like, or his firm in particular, versus what he realized at this point in his life.

Point he made broadly speaking, at least what I took away, was that looking back at prior success stories (people, companies, playbooks) is all well and good, but to truly succeed you need to invent your own path because how it happened prior isn’t how it will happen the next time.

He had a number of tangible “what am I going to do about that” actions upon realizing he needs to be aggressive about doing his own thing. I specifically liked his push on FinTech:

Check out his letter titled “Venture Investing in 2022” here.