Behind The Idea

We're getting back on the boat this week. Last week's episode about Royal Caribbean and the viability of cruising hit a nerve, and we wanted to explore further. Paul Brady of Conde Nast Traveler joins us to talk about the benefits of the new Silverseas deal and the surge in cruise popularity, and William Mack, CFA, of Spring Mill Research explains why the deal concerns him, and why he likes cruise lines as well even this late in the cycle. A double interview episode! Topics covered - Paul Brady from 1:15-43:15, Spring Mill Research from 45:00-end The excitement around Silverseas – ports, destinations, different clientele - 1:45 The question about who is cruising for, and how long should you visit Montenegro – 10:15 Royal Caribbean and Silverseas and the fit in the industry – 16:30 Has the population changed? Has travel changed? So long to The Beach – 21:30 The flood of information vs. the ease of the cruise – 26:20 Who is taking cruises? – 31:00 We have to ask about the cycle – 34:45 The underlying import, or maybe Wall-E is the better parallel? – 39:25 Section w/William Mack, CFA of Spring Mill Research Reviewing the challenges with the Silverseas acquisition – 46:00 Again with the cycle – 49:30 Does acquiring Silverseas shorten the cycle risk? – 52:00 What could go right for RCL? – 56:00 Is this still a golden age for cruises? – 59:00 Why Carnival and Norwegian? – 1:00:30

Royal Caribbean (RCL) was sailing along smoothly until it decided to make an expensive purchase. Are rougher waters ahead, or will this pass quickly? We look at the nature of the deal, of cruises, and of consumerism in the 21st century, based on an article by Spring Mill Research. Topics covered: 3:30 minute mark – snapshot of the Spring Mill Research thesis, or how RCL isn’t learning their lesson 6:30– What is there to say about this deal? 15:00 – The prospects for the cruise business in general, including Carnival Cruise Line (CCL) 19:20 – The triumph of capitalism, or goodbye to the 90s 23:20 – Taking the bearish view to cruise story 28:20 – Is this just a value trap? 32:45 – Taking a closer look at the deal and its timing

So much in life is about timing. The same goes for short ideas. We review a recent pitch by Berna Barshay of Viola Capital Management, LLC that argues that Ralph Lauren's chic look is passé with younger shoppers, and that the stock's recent rise is unearned. Is it a question of the right fashion or the right timing? We discuss. Topics covered: 2:55 minute mark - Recapping the short thesis - sales in the off-price channel and loss of millennial foothold. 6:30 - Looking closer at the generational issue for Ralph Lauren 10:20 - The mismatch between male investors and female shoppers - potential edge? 17:00 - What is the right timeframe to consider Ralph Lauren - the next year, the next five years, or the longer term? 23:00 - Short ideas as an activist blueprint for management 26:50 - Questions of faith, or when is it right to stick to your position? 33:00 - Inverting to get to the long idea and checking the valuation 36:15 - Shorts that aren't broken axles, and again the question of timing (and torturing the voting machine vs. weighing machine metaphor)

Shopify - the next major web platform or an overhyped tech company? We review a couple recent articles - both bull and bear - and see where the different sides get it right or wrong. Topics Covered Quick recap of Shopify - 2:00 minute mark Mike's experience with Shopify as a potential competitor - 4:00 Is Shopify making a land grab, and how does the multi-sided platform compare to a network effect - 9:00  The side hustle secular trend (or is it?) - 13:45 The bear case - competition, reliance on Facebook, and click fraud issues? - 24:00 Looking at the valuation - 34:45 The need for growth investing - 39:45 Conclusions on the short case and on Shopify overall - 43:45

Kerrisdale Capital joins us on Behind the Idea to go over some of their recent short ideas and the current state of the market, as a follow-up to our review of their Proteostasis idea (episode #9). Sahm Adrangi and co make their case and explain why shorts can also get it wrong. Topics covered - Proteostasis (3:00 minute mark), St. Joe's (17:50), QuinStreet and the adtech problem (29:00), the state of activist shorting and the hedge fund business (34:30).

Disney is the king of story telling, but the market hasn't been buying what the company is selling. Brian Langis recently told a story - https://seekingalpha.com/article/4172855-future-disney-espn - for how Disney will not only survive cord-cutting but thrive. Is a happy ending coming for shareholders? We discuss. Topics covered: 2:00 minute mark - What do we know about Disney already?  7:50 - The strategic outlook for Disney, and the opportunity Brian Langis sees 14:15 - Everybody's worried about cannibalization. How does that play out? 19:00 - What won't change in our viewing habits? And which is better, content or distribution? 28:00 - Break up Disney? Or let the behemoth rumble? 34:20 - The fundamentals, and what kind of stock is Disney? 42:05 - A last plot twist - Mike throws out the risks

Conde Nast Traveler Articles Editor Paul Brady joins Behind The Idea this week to follow up on our Delta discussion (episode #15). We discuss the state of the industry and the limits on capacity, and how Delta is trying to gain distance from its competitors. Topics covered: 2:00 minute mark - Delta’s focus cities and offering full scheduling options 5:25 - Capacity constraints and where that leaves fliers and airlines 9:25 - What are the risks and drawbacks to being at full capacity? 14:25 - What is Delta doing to differentiate themselves, and how good a job are they doing? 21:25 - What is driving growth, is it cyclical, and what's the deal with bleisure? 28:25 - Given the rosy outlook, why is there no pricing power for airlines?

Does anyone eat cereal anymore? And what can Kellogg do about it? That's the topic of this week's Behind the Idea, as we take Prescience Point's short idea - https://www.presciencepoint.com/wp-content/uploads/2018/04/Prescience-Point_Kellogg-Company__K_.pdf - and see what really matters for Kellogg going forward. Topics covered: 2:00 – Setting the table for the consumer packaged good industry and the general Prescience Point thesis  4:50 – Assessing the decline of cereal, and Mike puts on his Peter Lynch hat 10:45 – What's going on with the accounting pt. 1 - looking at factoring 17:15 – What's going on with the accounting pt. 2 - the issue of incentives 24:30 – What's going on with the accounting pt. 3 - the reverse factoring issue and are we double-counting? 30:30 – Management’s role in the decline, and the future of the food industry 38:10 – What is the quality of the short thesis? What matters here? 46:30 – Looking back at a past Prescience Point short call for perspective

Professor Aswath Damodaran joins Behind the Idea this week to discuss Facebook as a follow-up to our episode reviewing his article (BTI #12). He also sheds light on his investing philosophy, why he dislikes the Dean of Valuation moniker, and the importance of faith and testing your faith in investing. Topics covered: Why the 'Dean of Valuation' is a terrifying title - 1:10 minute mark Recapping Damodaran's Facebook (FB) thesis - 2:00 How do you deal with the risk to Facebook's dominance? - 3:45 The piece WhatsApp plays in the puzzle - 9:20 About the data issue... - 11:20 What to do when a stock's fair value is reached? - 15:30 What's wrong with a margin of safety? - 20:00 Separating price vs. value in equity research - 26:30 The two words you need to avoid using in investing, and the problem with true believers - 28:30 The philosophy of teaching and the importance of faith in investing - 33:30 The difference between losing faith and getting the story wrong - 38:15 Getting the life/portfolio mix right - 41:00 Portfolio construction, or how do you sleep at night owning 53 stocks? - 43:45

The airline industry has changed. How do the remaining big players separate themselves from one another? Tim Dunn detailed Delta's focus city strategy in a recent article - https://seekingalpha.com/article/4167776-deltas-focus-city-strategy-delivers-revenue-advantages - which shows one approach. We look at whether management's story checks out and what it means for investors to consider an oligopoly. Topics covered:  What’s going on in this thesis and with the focus city model? (1:30 minute mark) Deconstructing the spoke & hub model (4:30) Management’s flexibility in an oligopolistic market, and the risks of this approach (7:30) What are the competitive dynamics in the airline industry? (12:10) Recalling regional airlines (16:50) Management’s strategy and the impact on investors (18:45) What to do with the airline industry? Regulate, invest, or compile the hate index? (24:20)

Landmark's model came under scrutiny in an article by new SA contributor Alacran Investments (https://seekingalpha.com/article/4164640-beware-landmark-infrastructure-partners-lp). A lot of high-yield models may come up for scrutiny as the interest rate cycle turns. What does that mean for income investors? We look at how to avoid the high yield trap this week. Topics covered: What is Landmark's model, exactly? (1:45 minute mark) Definition of terms - MLPs vs. REITs vs. triple-net-leases (4:10) Mike explains how yield companies are like a box, and what that means for investors (9:25) How does the yield-co model work generally? Where does it go wrong? (11:55) Talking about dropdowns and wondering why MLPs exist (19:25) Assessing Alacran's thesis and the power of explaining (24:25) Getting inside the box to further understand these companies (31:10) So what are ways to beat the high yield trap? (39:50)

Barnes & Noble: Value trap or value play? We take a research report from Westpeak Research Association - https://seekingalpha.com/article/4163135-barnes-and-noble-new-page-evolving-history - as a launchpad to consider the bookseller's future and what that means for investors. Topics covered: Looking at Westpeak's Research (1:45 minute mark) The tradeoffs between a research report and an actionable long/short idea (5:00) Inverting this article to find the short case (12:20) But look at that value! (19:00) The merits of BKS Chairman Leonard Riggio rejecting the buyout offer (21:30) Can Barnes & Noble become the new community center? Or is it stuck in the middle? (26:15) But about the dividend... (34:00) And landing on what the long case looks like and what the value of a research report is. (38:00)

When the facts change on a stock that 'everybody knows', how do you change your mind? Professor Aswath Damodaran wrote an article about why Facebook is worth considering - https://seekingalpha.com/article/4162285-facebook-feeding-frenzy-time-pause - and provided a framework for how someone could update their views on a company. We take a look at that framework to see how it can be an example for investors, and where it might fall short. Topics covered: A summary of the professor's thesis and our three topics - the framework, the quantification, and margin of safety (1:30) Looking at Damodaran's framework and how it can be updated, along with a look at Mike's 'sold too early' story (3:20) How this framework can apply to story companies (10:15) The art of combining story with numbers (12:00) The limits to the deeply quantified approach, the presence of 'priors', and the annoying kid in your MBA program (18:30) Network effects, rotary telephones, and Facebook's vulnerability (24:45) Why doesn't Facebook have good stock market talk? And so what? (28:30) Damodaran doesn't use margin of safety. Good or bad idea? (31:00) The time value of investment research (35:50)  The uncertainty in investing and my 'stock I missed' story for Facebook (39:45) The mutability of projections, and one last visit from the annoying kid (42:15)

Google is a great company. Is it a good investment? How much should you pay up for quality? That's the topic of this week's Behind The Idea, as we look at David Trainer's argument - https://seekingalpha.com/article/4160296-nows-time-buy-discounted-tech-giant - that the recent dip is a buying opportunity. Topics covered include: The ups and downs of the buy the dips strategy (1:20) The quality of Google as a company (8:15) Potential threats to Google's moat (13:00) Risks David Trainer brings up and whether anything can really breach that moat (21:00) What is Google worth? (30:30) The potential of Google's other bets and the risks of podcast listening habits (38:00) The socially responsible angle vis a vis Google, hedging out Gmail risk, and the potential of...blockchain (45:00)

General Electric has fallen on hard times, to the point where the mere rumor that Warren Buffett could get involved has perked up the stock. What happened, and what happens next? Mike and Daniel take an article by WG Investment Research on the good, the bad, and the ugly with GE and see whether there's anything redeeming in the company's prospects or shares. Topics discussed on this episode: The backdrop of GE's situation (1:55 minute mark) Buffett's interest and the principle of coattail riding (3:00) Covering the "good" in GE's story (8:15) Onto the bad, with a focus on GE Power (15:00) Just how bad is it, anyway? To the 10-K (23:45) Onto the ugly, or what is GE Capital for? (27:40) But is there any value here? (35:50) And what about that other conglomerate, Berkshire? (39:25)