Scott Miller’s Greenhaven Investors Q3 excerpts – see full letter below

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NEW INVESTMENTS This past quarter we made two new investments, both of which can be classified as “invisible” with interesting set-ups. There is a long, detailed write-up at the end of the letter, but given the following fact pattern, I think we can all agree Gaia (GAIA) is largely invisible. GAIA is covered by just one sell side analyst who did not published for several months. The company has changed its name and its sub-$150M market capitalization makes it largely not investable for large funds. This year, Gaia sold its two largest divisions, changed CEOs, bought back 40% of the shares in a tender offer, and until last month had a PDF with the words “place holder” come up when you clicked on their investor presentation. There are plenty of invisible companies, so why Gaia? What is the set-up? As outlined in the write-up below, 75% of Gaia’s market capitalization is covered by cash and real estate, the company could be profitable today if it chose to grow more slowly, and it is acquiring customers at one-third of their lifetime value in a large and growing market. Gaia is 38% owned by its CEO, who previously built a Fortune 500 company. It can grow 50%+ per year, has a fully funded business model, and generates 80%+ gross margins. This has not been a profitable investment to date, but based on the growth opportunity ahead combined with the “downside protection” that the balance sheet provides, I like the set-up and think significant appreciation is possible. The second “invisible” opportunity we pursued was to be both long VMware and short VMware. Generally speaking, being long and short the same company would only make the broker a handsome return. How and why did the fund do this? Context is helpful. Dell is a private company, and they are in the process of buying EMC, a public company that owns 80% of VMware, another public company. To finance the transaction, Dell could not pay EMC shareholders 100% in cash, so they gave EMC shareholders $24.05 per share in cash and .11 DVMT shares per EMC share. DVMT is a newly created tracking stock meant to track the performance of EMC/Dell’s ownership of VMware. Dell effectively had to let EMC shareholders retain some of their VMware ownership through the tracking stock. The main difference between the publicly listed VMware and DVMT is that if Dell faces bankruptcy, DVMT will be impaired, so there is Dell credit risk associated with DVMT and not with VMware. But Dell’s earnings and bond prices indicate that bankruptcy is not a near- or medium-term concern. We bought the DVMT shares when they were trading on the pink sheets as “when issued” shares – meaning that they would eventually turn into DVMT shares on a given date – and also shorted a proportional amount of DMVT shares. At the time we made this investment, the difference in price between our “invisible”-when-issued DVMT shares and the economically equivalent VMware shares was approximately 40%. One reason the discount may be so large is that Dell carved out the ability to buy back tracking stock shares over time, so they had no incentive to “talk up” the shares or opportunity.
[drizzle]
This investment is referred to as a “pair trade” and we are effectively not exposed to the VMware business and are indifferent to its price (we are also short VMware). Rather, we will benefit if the “tracking stock” discount gets smaller, which implies a convergence in the price of VMware and DVMT. It is not clear there is an “appropriate” tracking stock discount overall, but the Liberty tracking stocks and others typically have a 15-25% discount. So yes, this stock was largely invisible (pink sheet, when issued, tracking stock) but it was also a 40% discount to the publicly traded, visible comparable. This investment is not directly correlated to the overall market and does not rely on earnings growth or multiple expansion to be profitable. I prefer it to cash. I like the set-up here as well, and time will tell if we are rewarded. …………… SHORT POSITIONS We continue to have a very small number of short positions. Given current nosebleed valuations and lack of growth prospects on many consumer goods companies, it is possible we will increase the number of shorts as the year progresses. The two primary short positions the fund currently holds are Tesla (TSLA) and Lands’ End (LE), for similar reasons. Tesla is a cult stock that needs continuous access to the public markets to finance a broken business model. The unit economics are broken, and Tesla loses money on each car sold. The likelihood of delivering the Model 3 on time with 20% margins as advertised is very, very, very low. The competitive landscape is intensifying with the Chevy Bolt and a slew of other electric cars entering the market. I have yet to hear a justification for the Solar City acquisition that makes any sense for Tesla shareholders (other than Elon Musk, who is also a Solar City shareholder). Elon Musk has some incredible accomplishments, but at current valuations, Tesla is a stock built on what I would argue is a vulnerable myth of his unquestioned genius. To date, the short is moderately profitable, but we have tried to short the stock before with little success – so time will tell. The markets will fund Elon’s broken model… until they won’t. Lands’ End has a leadership problem like Tesla, just a different kind of leadership problem. Lands’ End is a spinoff from Sears, which has a hedge fund manager as a CEO; this seems to work as well as a retail manager running a hedge fund. In the case of Lands’ End, there is $280M of net debt for a company that generated less than $10M in adjusted EBITDA (down 75%) in the first six months of the year (before the quarter the CEO stepped down). More importantly, when we initiated the short position, they had a CEO who hailed from Ferrari and Dolce & Gabbana, living in New York City and commuting to Wisconsin. Aside from the likely “fit” issues of the Italian CEO commuting to Wisconsin, she was trying to dramatically increase the fashion profile of the dowdy Lands’ End (I can say that because I am dowdy myself). The company was launching new lines emphasizing slimmer clothes and stiletto heels, having expensive fashion shoots, and establishing a Fashion Week presence – a long distance from the canvas boat bags and Midwestern flair the company is known for. This strategy seemed highly unlikely to succeed, and is perhaps best described as a head scratcher. As of now we don’t know the final results, but at the end of September, the CEO resigned and now the company is being led on an interim basis by co-CEOs, another set-up that rarely succeeds. The shares have sold off, but we remain short Lands’ End. The fund

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