Sunday, January 20, 2019 2 comments ++[ CLICK TO COMMENT ]++

Sold: Nevsun (NSU) -- takeover completed

Haven't had time to spend too much time on investing but I do keep up with news and research things here and there.

With the American market selloff in Q4 2018, I have been investigating several stocks. As usual in these corrections, the lower quality stocks have sold off more. I notice that leveraged businesses are somewhat cheap right now. As an example, a lot of John Malone's companies have sold off quite a bit (some of it due to company/industry  specific issues but market selloff amplified it). For example, Liberty Global (LBTYA, LBTYK) and Liberty Latin America (LILA, LILAK) have fallen a bit. They have lots of debt and the is concern over the future of the cable industry but they are getting cheap.

In the meantime, in early January, the Nevsun (NSU) takover was completed (on Jan 4). Took a bit longer than forecast bute overall, satisfied with how things turned out.

Price Sold: $6.00
Total Return: 4.88% (annualized (estimate): 23%--not meaningful)

With a small portfolio these small returns would not be worth it but with a moderate portfolio, it can be ok.

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Monday, November 19, 2018 7 comments ++[ CLICK TO COMMENT ]++

Real Vision's Stanley Druckenmiller interview (2018)

Thanks to Liberty for pointing me to this excellent interview with hedge fund superinvestor Stanley Druckenmiller, conducted by Real Vision. Druckenmiller is a macro investor so anyone who is macro- oriented should definitely check it out.

As he makes clear in the interview, he made most of his money in interest rates and currencies and doesn't do much equity investing, so small investors like me who are focused on stocks won't find much practical insights. Nevertheless, you can glean some thoughts about global macro issues. Of note, the interview covers loose money policy over the last decade and potential trade war with China. In my opinion, these two are the most important issues, not just in the immediate future but also over the next 25 years.

Druckenmiller also gives the most important investing lesson he learned: one should always know whether they are on a hot streak (doing well) or if they are on a cold streak (bad). You should realize what streak you are on and act appropriately. Don't be like a gambler who, on a losing streak, bets everything in order to make it back.

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Tuesday, October 23, 2018 9 comments ++[ CLICK TO COMMENT ]++

Purchase: WesternOne (TSX: WEQ)

WesternOne (TSX: WEQ) is being liquidated and it seems like an attractive investment so I took a position in it. I came across the idea from Sculpin at Corner of Berkshire and Fairfax (thanks).

You can read the official press release but basically they are winding up operations and expect to pay out $2.20 to $2.43. It will be adjusted up or down by working capital but hopefully no negative surprises emerge. Initial distribution in Q1 2019 with another one upon liquidation.

A shareholder vote is required but about 38% is held by insiders who approve the deal. So I think risk is low.

The return is going to be driven by how much is paid out early. I'm hoping most of it will be paid out by end of Q1 2019.

Purchase price (TSX: WEQ): $2.10

Return Expectation

Liquidation price (conservative, low): $2.20
Return: 4.8%

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Friday, October 19, 2018 6 comments ++[ CLICK TO COMMENT ]++

Purchase: Nevsun (NSU)

I took a position in Nevsun (TSX: NSU) which is being bought out by Zijin Mining, which is one of the largest gold mining companies in the world. zijin is a chinese company that trades in Hong kong and there should be no risk with financing and the like. I owned Nevsun about 10 years ago and this buyout would bring closure to one of my earliest stocks.

Since the spread is so small, this deal is not worth it for you if your holdings are in a different currency and you don't hedge; or have a US$-denominated account. C$ currency fluctuations can wipe out any gains.

NSU also trades in USA but company is Canadian and all my dealings are in C$ and on TSX.

Purchase price (TSX: NSU): $5.72

Return Expectation

Takeover price: $6
Purchase price: $5.72

Probability of success (my estimate): 99%
Return on success: 5%
Probability of failure (my estimate): 1%
Return on failure (my estimate): -56% (assume it drops to $2.50, the multi-year low from early 2018 (it has traded between $3 and $4 over the last few years) (however, the price before another hostile offer (from Lundin mining) was $3.82 and Lundin hostile offer was for $4.75)
Expected Return: 4.3%

Buffett's Four Key Questions

(1) How likely is it that the promised event will indeed occur? 

No buyout condition and Zijin Mining is listed in Hong Kong and is a large company so low financing risk. Unlikely to be blocked by China or Canada (asset is in Africa so Canada should not have any concern and Canada does not generally block mining takeovers--it will hurt the mining industry and future foreign investments).
(2) How long will your money be tied up?
 Companies expect deal to close by end of 2018

(3) What chance is there that something still better will transpire - a competing takeover bid, for example? 
None -- already went through prior hostile offer from Lundin at a lower price of $4.75.
(4) What will happen if the event does not take place because of anti-trust action, financing glitches, etc.? 
Although not ideal, wouldn't mind owning business if deal fails. Gold exposure is likely attractive given rising trade wars and geopolitical risk (from a fairly peaceful era).
Owned Nevsun about 10 years ago so somewhat familiar with it.  midstage junior operating in very risky African country.

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Saturday, July 14, 2018 9 comments ++[ CLICK TO COMMENT ]++

Sold: Monsanto (merger completed)

Have been busy, and probably not efficient with my free time, so haven't blogged much... Need to get into a rythm and dedicate more time to investing. I think I'm going to give myself to post once a week and maybe just do a roundup of things I did that week, articles I read,etc.

Anyway, the Monsanto buyout by Bayer successfully closed a month ago and I just got around to reviewing it. As with most mergers, it took a bit longer than initially forecast--this is why if you are into risk arbitrage, you should always factor in a longer closeout process which lowers your annualized return. As I remarked a while ago, m&a is getting riskier with potential USA trade war with China, and likely followed by escalating trade war with Europe, so deal breaks are likely to become more common. Already several Chinese and high technology deals ran into issues.

Overall return wasn't that spectacular but I was satisfied with it. Dividends added about 1.8% which is always a positive with delayed deals (not all deals pay dividends when deal agreed).

Price Sold: $128
Total Return: 11.5% (annualized (estimate): 11.8%)
Total Return (C$): 12.34% (annualized (estimate): 12.5%)

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Saturday, November 11, 2017 24 comments ++[ CLICK TO COMMENT ]++

A Look at Tripadvisor (TRIP) and its Two Problems

It's hard to find anything that seems cheap in the current bull market but as in any market, some stocks do sell off for various reasons. One of the ones that attracts me is Tripadvisor (TRIP*). As the chart below illustrates, the stock is trading near a 5-year low and is down about 70% from its 2014 peak (share count hasn't changed much and no major return of capital to shareholders).

(* You can also own TripAdvisor indirectly through John Malone's holding company, Liberty TripAdvisor, with ticker symbols LTRPA/LTRPB. You should evaluate this option as well. Sometimes holding companies, especially if it is well run like most Malone companies have historically been, are better; sometimes they are not (there may be additional overhead/fees for the holding company, may have worse shareholder rights (doesn't favour minority shareholders) and market generally places a holding company discount on such shares and they may be illiquid))

I remember looking briefly at TripAdvisor several years ago when it was spun out of Expedia (I was evaluating Expedia at that time--too bad I didn't buy that) and it seemed very expensive at its IPO. I think its P/E at IPO was 50+ and Price/Revenue was 10+. The market was definitely pricing TripAdvisor with expectation of very high growth rates.

Now that the stock has sold off quite a bit, is it cheap?

Well, the revenue has doubled since 2012 from $700M (roughly) to $1.5B now. But its profit has fallen from a peak $226M in 2014 to $120M last year and about $96M TTM. Profit may be temporarily depressed (depends on how you view their current problems).

TripAdvisor is attractive for a few reasons:
  • Massive moat: TripAdvisor has 390+ million unique monthly visitors. This is a massive number and very few internet companies in any industry can reach such numbers. As a customer of TripAdvisor and someone who uses the site quite often for travel, I think the switching costs are very high and I doubt too many other companies can replicate its content for travel planning.
  • Low capex, high ROE: When the company was doing well a few years ago, it had 20%+ ROE. Now it has dropped below 10% but it depends on if you think current profitability is temporary or not. The company has low capex requirement and product/service doesn't become obsolete easily.
  • Good (low to moderate) growth potential: The online travel industry is likely to become more popular over time. Although TripAdvisor may have captured most of the obvious customers, it will still grow, at a minimum I think it will grow at inflation + population growth.

Having said all that, there are two big problems with TripAdvisor...

Strong Moat, Low Profits?

First of all, I have been thinking hard about this company and researching it quite a bit and... is this one of those companies that has a strong moat but low ability to profit from it? Is it another Yelp (YELP)--a dominant restaurant/event/shop review site that has been unable to make much money. TripAdvisor has a lot of online visitors and has tried all sorts of things over the years but hasn't really made much money. As a user of TripAdvisor, I don't think they can easily increase profitability (other than go into adjacent verticals or something).

TripAdvisor vs Priceline/Expedia

Secondly, TripAdvisor appears to have little bargaining power and seems to depend heavily on two companies for almost half of its revenue. From the 2016 10K,
"We derive a substantial portion of our revenue from a relatively small number of advertising partners and rely significantly on our relationships. For example, for the year ended December 31, 2016, our two most significant advertising partners, Expedia and Priceline (and their subsidiaries), accounted for a combined 46% of total revenue."
This is actually listed under the risk factors at the front so it shouldn't be a surprise to most but it still makes me nervous. Basically, online travel agents, Expedia and Priceline, contribute almost half (46%) of their revenue.

To make matters worse, those two are sometimes direct competitors, especially in some recent direct booking services being pursued by TripAdvisor. They are probably best considered frenemies. Apparently TripAdvisor is rolling back those services (probably after Priceline and Expedia started a battle and decimated TripAdvisor).

Furthermore, if I'm not mistaken, TripAdvisor generates less than 5% of Priceline's revenue (probably the same for Expedia). This basically means that Priceline doesn't care if it loses the TripAdvisor revenue; in contrast, TripAdvisor cares very much about Priceline's payments to TripAdvisor.

If you ever studied corporate strategy or Porter's Five Forces or anything like that, you will see that TripAdvisor is in a bad competitive situation here. You just don't want to be in a situation where two entities, who are sometimes your competitors, are responsible for 46% of revenue, while they get less than 5% of their total revenue from you!

Worth Waiting and Seeing

Although the competitive/supplier/customer industry dynamic looks bad for TripAdvisor, it is still worth investigating because some of its advantages are pretty big. I really can't see too many companies (except possibly something like Facebook) being able to capture almost 400 million global travelers who use the site on a regular basis. Even companies like Amazon likely can't (Amazon doesn't have strong brand outside a few regions like North America/India/etc, or outside tech circles). I'm just not sure how well TripAdvisor can monetize its users.

TripAdvisor's heavy reliance on Expedia and Priceline is also largely due to the hotel segment. If TripAdvisor can generate revenue from other travel-related segments (attractions, airlines, train bookings, global/foreign events, etc), it can lessen its dependence. Remains to be seen what the company does.

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