The Week at Sea 1/5/20
The Week’s Waves
Trump sent a shot across the bow escalating conflict with Iran. In his friend John McCain’s words: Bomb Bomb Bomb-Iran
Iran’s response will likely focus on economic assets, bases in Iraq, US allies in the Middle East, and the straight of Hormuz
Expect similar path to other conflicts: Chinese Trade War, US MCA, etc.,
Stoking a conflict showing a tough, hardline stance followed by “wins” along the way to “closing a deal”
Eyes turned to China—one of Iran’s closest allies and a key partner in China’s Belt & Road Initiative’s reach into the Middle East—who called for calm
This aged nicely.
Portfolio Update: Part 1
These are my larger core “highest conviction” holdings
Game Stop (GME): 2020 Best Idea Write-Up Here
Last quarter the firm bought back 1/3 the shares and did so most recently at an average price of $5.37. Friday’s risk-off move gave us an opportunity to add to the position below $6 again. I added to my position knowing the firm’s most recent average repurchase price was just 8% below the purchase price
The biggest risk I have in GME is that management decides to make an acquisition or plows growth capex back into the business
Micron (MU)
Micron operates in an industry with inelastic supply that requires significant capex where demand goes through boom and bust cycles (original thesis was that card demand would continue to increase rapidly but…)
The recent WSJ report on Chinese hacking renewed my concerns about the industry
I made this a large position in early October but have started to scale out of this as I’ve found more compelling, inflecting opportunities elsewhere (GME, Shipping)
DRAM pricing continues to decline and the concerns about a 4th market entrant would ruin market economics
I’ll continue to hold some of weighting in the name, and when prices recover I’ll be quick to scale back up
Shipping (STNG, DHT, TNK, EURN, DSSI, NAT, DSSI, FRO, CPLP, CMRE)
I’m not the expert on these names, and you’re better asking others about the space, but the economics are simple. The industry hasn’t been profitable for an incredibly long time and has been starved for capital. Supply is inelastic and shrinking as tankers need to be refit with scrubbers to comply with IMO2020 or purchase low sulfer fuel
The escalation of conflict in Iran is very bullish the space; disrupting normal trade routes creates more demand for boats because fewer are available
The Straight of Hormuz sits directly south of Iran and I think will be the center of Iranian response; very bullish
And yet, many stocks were hardly higher. I think most investors that have paid attention to the space are at full capacity given how bullish sentiment is
When earnings raise eyebrows across the investment community capital should flow rabidly to the sector
Denbury (DNR)
Added to this name Friday since the move Friday wasn’t nearly enough in my opinion. Iran knows Trump wants low oil and higher oil would be beneficial to Iran. One of the most levered oil names and a breakeven around ~58 so any spike in Oil would be a nice Bounty
Intelsat (I)
I own 3-6 month options given the bimodal nature of legislation. I think an amicable resolution with congress is most likely because anything other than that and Intelsat would drag the process out in the court system
The tail risk is Trump declaring 5G a national emergency and “seizing” the spectrum leaving Intelsat with nothing
An analyst report out Thursday caused Intelsat to rally; saw a merger as unlikely
Like any auction, increased market participants increases demand
Portfolio Update: Part 2
These are “odds and ends” that I have “tracker positions” or spec positions in
AMC Theaters (AMC)
Like the name, solid cashflow, waiting for capex to tick down (management has guided this; waiting for execution)
Wanda overhang continues to weigh on the name like a cloud
Waiting for this and management to execute on guidance before I do more work on the name; until then it remains a starter position)
Town Sports International (CLUB)
Two bits of news here.
First HG Vora is out and sold their stock to Patrick Walsh at $1.50; must be nice (stock closed at 1.78 Friday). And I was wondering why it was up 30% after hours and…
The purchase of Flywheel the luxury spinning studio (here). Kennedy Lewis purchased 75% of Flywheel during bankruptcy. The at home spinning business embroiled in litigation with Peloton (PTON) will remain outside the deal
The stock trades at option value right now. Kennedy Lewis has taken a 15% stake in the stock. They’re said to help with financing in the future (200 mm of debt due next year)
Without seeing the deal terms I’m inclined to believe the stock should rally materially Monday. I’ll be adding to this one since an RX seems much less likely if it’s flat (should have paid attention to the Term Loan B as it’s been rallying while the stock has been flat), but will still be measured since I don’t know deal terms
Lionsgate (LGF)
This was a widow maker last year. At current valuations you’re creating everything ex-Starz for for 500 mm EV (CBS was willing to pay 5 Bn. for Staz and LGF has a 5 Bn. EV)
Ex-Starz generated 200 mm of EBITDA; this is volatile EBITDA (movie theater production requiring capex so it shouldn’t be a high multiple but 2.5x seems too low for me
Double Eagle Acquisition Corp (DEAC | SPAC)
The warrants were a decent position for me because of how successful management has been in SPAC-land
Based on where the stock is trading, the warrants look cheap. But… The deal terms are pretty poor and I expect the stock to sell off so I’ll be selling my warrants down this week
An illustrative path, and that’s just what it is! Notice how 3.7 Bn. of revenue achieved—2028 projections with 25% market shares and a 65% penetration. Then discounted back. You can find the presentation here. The 10x multiple that is being marketed you’ll find on page 22. More gems in the footnotes.
Mosaic Acquisition Corp (MOSC | SPAC)
It concerns me that the stock is trading at liquidation value despite the re-cut terms. The new EBITDA multiple of 6.75x is a slight premium to their competitor ADT (6x)
I think this is justified given Vivent is a growth business
Vivent needs to get this deal done to paydown debt because of how much financial duress they are under
The bonds responded already—moving 3 pts higher
I’ll be adding to my warrant position this week
Speculative Trades
After seeing the Chinese response and the market weakness I bought FXI Calls (Jan 17 45.5). It’s clear they are feeling the economic pain from the trade war and this put the nail in the coffin for me. They need to get a deal done and this is a simple expression of that
Book Rec of The Week
This one doesn’t make most of your common lists, but it’s one of my favorite books of all time (here). The lessons stand the test of time and the writing style is incredibly elegant. After reading you’ll be lending out the copy to anyone that will listen…
Safe Sailing and feel free to reach out via email (DeepWaterValue@gmail.com) on Twitter (@deepwatervalue). Always love suggestions for new companies to research. You’re Welcome to share with anyone and have a great week!