Whitney Tilson’s email to investors discussing how millennial investors lost millions on Bill Ackman’s SPAC; avoid AMC Entertainment Holdings Inc (NYSE:AMC); tight market for apartments in New York City.
Q2 2021 hedge fund letters, conferences and more
How Millennial Investors Lost Millions on Bill Ackman's SPAC
1) Kudos to Michelle Celarier of Institutional Investor for a good piece of investigative journalism – an in-depth dive into how 17 investors lost their shirts investing in Pershing Square Tontine Holdings (NYSE:PSTH): How Millennial Investors Lost Millions on Bill Ackman's SPAC. It shows how many young, inexperienced investors are incinerating themselves with reckless speculation. Excerpt:
In January, members of a Reddit forum called WallStreetBets gained notoriety when they almost took down prominent hedge fund Melvin Capital Management after glomming onto GameStop (GME), which they knew Melvin was short. The Reddit insurgency was billed as class war against the elites, and those who bet on so-called meme stocks in a torrid, topsy-turvy market became big news.
But there are plenty of little guys who aren't winning – and scant attention has been paid to them.
Most are too humiliated by their losses to speak on the record, saying they are worried about the impact public disclosure would have on their careers. Those contacted by II provided their real names and life stories with the understanding that their names would not be published.
The irony here is that these investors didn't get destroyed, as so many of their peers were, by getting sucked into a fraud or an absurdly overvalued stock like movie-theater operator AMC Entertainment (AMC), discussed below. In fact, they invested in the best SPAC out there, in my opinion, with a proven sponsor and a shareholder-friendly structure, which is likely to do well over time.
While PSTH shares briefly ran up to more than $30 earlier this year and have since traded down to Friday's closing price of $20.30, a decline like this happens all the time in the stock market. It shouldn't have wiped out these investors...
So why did it?
These folks wildly oversized their positions (in some cases, 100% of their portfolios) and/or used options, a form of leverage. They got excited about the possibility of making a quick fortune and threw caution to the wind. As one investor admitted:
The gambler's fallacy is always the high end. You think you're invincible until you're not, and that's generally what happened to me.
II reported on another:
The Maine investor is also a recovering alcoholic and drug addict – and he found the addictions eerily alike.
"I'm kind of your standard alcoholic. One is too many, and there's never enough," he says. He became similarly obsessive about trading. "Trading options was addictive, like cocaine. It was instant gratification," he says.
"I was doing 30-day expiries. I would know whether I was going to make a 100% gain in 30 days. I would watch it, watch it, watch it. And if it went up to 100% after three days, I would sell it. But you have to be on top of it, and there's a lot of adrenaline that is kicked in. And that's very addictive."
A third cited the "mob mentality":
It's how you can get caught up in something and not be able to separate yourself and think, "Is this actually the right thing, or am I making the right decision?" Because you're just so caught up in it.
Lastly...
Bassel Ahmad, a 27-year-old graduate student at John Jay College of Criminal Justice in New York City – and the only person II interviewed who agreed to use his real name – is nursing his losses while spending the summer with family near Ramallah in the West Bank.
"People like me who are young and like the gambling aspect of it still buy the options. I mean, I personally love playing lottery cards," he says. "Lottery cards and casinos, I had to stop. It was a crazy addiction."
Avoid AMC Entertainment
2) AMC Entertainment continues to be my No. 1 stock to avoid. A friend of mine pitched it as a short on ValueInvestorsClub, so it's only available to members for the first 45 days... but here's the introduction:
We think movie theaters and particularly AMC are in for a far more challenging environment than the market is pricing in. Our research suggests that 70% of movie theaters' ("MT") revenue is from exclusive content. We believe movie windows for exclusivity are in process of declining by -60 to -70% or more from 2017-2019 levels. Moreover, many movie studios are going to a ZERO exclusivity and Day 1 releases both in theater and on their streaming platforms.
It appears to us, that U.S. movie ticket sales will struggle to hit 300 million this year. AMC has roughly 33% market share in the U.S. and 20% in markets outside the U.S. For perspective, in the U.S. we are up to a whopping 173 million tickets sold YTD vs. 1.2 billion in 2019 (we will reference 2019, as that is what analysts believe MTs can grind back up to over the next few years). We believe that AMC will need to sell around 260 million movie tickets a year to reach free cash flow breakeven, or roughly 90% of this U.S. domestic movie sales while holding 33% market share.
In addition, we think streaming/vertical integration math vs. MT is nearly 20x more attractive (e.g., streaming gets a 10x revenue multiple in the public market without a 40-50% revenue share with MTs: effectively $11 in value vs. 50-60 cents).
Furthermore, we think the following are additional headwinds:
a) Streaming is easier, as good, and far cheaper than an MT (with $29.99 you can have 4-10 people watch, without $5 in popcorn and drinks).
b) Day 1 simultaneous release for streaming and MT appear to be accelerating (again exclusivity is very important for MT).
c) What is the future of MT monetization when Netflix (NFLX) generates in just 21-30 days what 100% of U.S. MTs generate over an entire year?
d) AMC already owes $475 million in rent deferrals that are coming due over the next couple of years, plus it has $3.4 bn in net debt and $5.5 billion in lease obligations
e) EPR Properties (EPR), AMC's landlord, has 6x Debt/EBITDA [earnings before interest, taxes, depreciation, and amortization] with 20% of their business from AMC.
f) For every $1 in ticket sales, AMC generates 50 cents in 80% gross margin food/beverage sales.
g) AMC has very high fixed costs and is largely dependent on the exclusivity of content, which is declining at a rapid pace.
h) The business cannot be disaggregated whereby AMC would start selling popcorn, candy, soda at 5x convenience store prices without the movie content, so if ticket sales go, so does the business unless they can convince patrons to dine in the dark.
In summary, we believe the exclusivity moat is draining very rapidly and it's unlikely that AMC will generate FCF [free cash flow] in its current form, so at 5x sales and 50x EBITDA, we think the stock has huge downside.
Here's a summary of AMC's second-quarter results. Note that with free cash flow of negative $252 million and ticket sales of $22.1 million, AMC lost $11.40 in free cash flow per ticket sold!
Tight Market For Apartments In New York City
3) Over the weekend, I talked to three recent college graduates who recently rented apartments in New York City.
They all told me that it's an extremely tight market, so to find one they had to constantly scan listing sites like StreetEasy and Zillow (especially early in the morning), immediately go see the apartment (or not see it at all – just watch the video), and then make a bid right away.
It's incredible how quickly the market has shifted!
Best regards,
Whitney
P.S. I welcome your feedback at [email protected].
