Scientific Games

Scientific Games (SGMS) reported earnings & the market reaction was beautiful with a powerful short squeeze causing the stock to jump 15%. I figured they were going to have a positive reaction to their earnings announcement, if for no other reason the ability to shift narrative.

  • they had just recently spun out their SciPlay mobile gaming subsidiary (SCPL) via an IPO, raising $301 million for a 17.4% stake. Funds were used to lower leverage on the parent corporation by paying down debt
  • as of this morning, SciPlay is valued at $1.86 billion
  • they still own most of that mobile subsidiary (much like IAC’s stake in Match)
  • outside of their 82.6% equity stake in SciPlay (valued at $1.54 billion), the remaining core business is highly debt leveraged but has limited enterprise value beyond the heavy debt load
  • many spin outs (or new line reporting) have led to a revaluation upward of the core remaining business
  • they would not have had strong incentive to spin out the other company while retaining the majority of its equity unless they felt the parent company was healthy enough to continue servicing the debt
  • Zynga’s stock (ZNGA) has been on fire this past year as mobile gaming keeps growing

Scientific Games has been beaten down for the past year & I figured even if they bombed the numbers the narrative shift would carry the day.

Last week I put most of my liquid savings in a low-yield Vanguard bond fund so I would sort of ignore the stock market & focus on other stuff, so I only put a tiny position on just before close yesterday using a bit of money that was in my IRA to quick flip Scientific Games around the quarterly results.

The short squeeze is still going with the stock up over 19% now, so I certainly sold too soon, but it will likely trend down later in the day as shorts finish covering & new shorts re-engage.

Trading the Trade War

The trade war ending has already been priced into the market, which is part of why the market has tanked for the last couple days after another round of Trillion dollar Tweets.

When the market sold off Monday I sold off the VIRT position I had recently established.

By close of Monday the stock market made up most of its losses & then today was once again down.

There are lots of obvious first-order impacts of the trade war. A slowing Baidu (BIDU) now trades for about a 15x P/E on fears of slowing down of the Chinese economy & potential capital flight from foreign investors if the trade war accelerates & supply chains move.

Today US federal government bonds & muni bonds are up. However most of the market is down.

There are also defensive sectors which can turn very much non-defensive if market behavior shifts enough. For example, if a market sell off continues it could not only project a recession, but it could cause one. That, in turn, would likely lead to an electoral landslide for the Democrats. That, in turn, would lead to some defensive sectors like healthcare getting dramatically repriced as some portions of the value chain are grown while others are gutted.

My view on the trade war stuff has been to fade consensus. When everything being perfect is priced in, expect turbulence. Whenever it seems all hope is lost with negative headlines everywhere, become a buyer. If the market is down again tomorrow it might be a decent day to nibble.

CMGI Sighting: Taking a Break from Trading

I’ll still read about the capital markets daily, but I have found trading quite distractive when considering my daily workflow. I’ve sold most my positions other than WBA, CVS, a REIT & a somewhat negatively correlated stock that tends to outperform when the market craps the bed. In the current market where a flood of IPOS are coming online, I’d hate to be in anything other than low beta stuff unless I was obsessively watching it.

I guess that near constant distraction would be worth it if my investing returns drastically outperformed what I was doing elsewhere, but the capital markets are far more competitive than most other markets. As a newbie it is better to wade into such waters when the central banks are pumping liquidity into the market after a pull back than to either buy beaten down value plays that keep getting more beaten down or diving into some beyond meat IPO pump-n-dump styled elevator price action.

I am the only person in America to have not filed an S-1 to go public this year. I love seeing endless IPO’s, but I know that with IPO’s comes supply and with endless supply comes lower prices (at least generally).

I also have some 1999 Déjà Vu going on.

SoftBank Group Corp. is considering audacious fundraising plans, including a public offering of its $100 billion investment fund and the launch of a second fund of at least that size, as it looks to seize on an exploding startup scene, people familiar with the matter said. … Highlighting the need for new funds: Mr. Son recently returned from China, where he negotiated informal deals worth several billion dollars that the Vision Fund doesn’t yet have, one of the people said.

If he & money from Saudi Arabia are existing, who is the next marginal buyer left in the market? I can’t believe the Wall Street Journal published an article with this analogy:

A Vision Fund IPO is the most ambitious of the plans under consideration and would take place after the fund is fully invested, likely by this fall, according to people familiar with the matter. The hope is to create a smaller version of Warren Buffett’s Berkshire Hathaway Inc. —only loaded with young technology companies, many of which have yet to turn a profit, instead of a stable of well-established utilities, insurers and energy companies.

Like Buffett, except the opposite.

  • Not value-based investments
  • Not profitable
  • No large insurance premium float to fuel other investments, but rather a bunch of marked up money-losing companies where the exit is done in part to raise funds to create another pro-cyclical investment vehicle which will likely invest in companies that also compete against the last batch of startups before they get profitable

Blue Apron is now profitable after a couple years as a public company & a 90% slide in their stock price.

Anyone remember CMGI? The Vision Fund feels like a high-stakes liar’s poker version of that. A loose collection of money losing somethings fueled by unrelenting optimism … sold to you.

Sounds like a press release to me

This sumptuous show last fall at the Hammerstein Ballroom in Manhattan represented the avant-garde not of theater but of Internet hype. It introduced a new home page and ad campaign by AltaVista, the search engine, to about 100 journalists and Wall Street analysts, and laid the groundwork for an initial public offering. AltaVista — prompted by its new owner, CMGI, one of the most successful incubators of Internet companies — promised to take on Yahoo with ”a portal as powerful and immediate as life itself.”

To do so, it would spend $120 million on a new slogan, ”Smart is beautiful.” These days, that strategy does not look very smart, and the prospects for the CMGI empire are not very beautiful.

CMGI’s shares are off 91 percent this year, to a value of about $3.8 billion, closing on Friday at $11.94.

And I wasn’t the only one who saw the CMGI parallel

If you lose 50% of your capital base, you have to double your base just to get back to even. If you ride a CMGI down 90% you’ll need a 10-bagger to get to par, excluding the impacts of inflation.

Maybe the market heads higher from here on a China trade deal & the Federal Reserve lowering rates once more to throw fuel on the fire, but I suspect the Fed will first have to see a catalyst to justify throwing more fuel on the fire & at the very least I’d rather wait for such a catalyst before putting much capital at risk.

CVS Panning 2018 Q4 Was…

… a great buying opportunity.

Which is part of why insiders were buying. CVS is up around 5% in premarket trading today. They beat earnings & revenues, raised full year guidance, outperformed in their retail business & outperformed in their health-care benefits segment.

A month ago they were under $52 a share & a week ago they were still just $52.50 a share. So shares currently trading at $57 have seen a big move & the bottom is almost certainly in.

Provided Bernie Sanders is not elected president (socialized medicine that nixes private insurance also guts the value of CVS’s Aetna) the current share price is still cheap. In Q1 CVS insiders invested hundreds of thousands of dollars buying shares at above $58 a share, so if you buy at open you’d be paying a price insiders felt was a good deal.

Here is a list of some of the recent insider buying

Date Director Shares Share Price Investment
3/11/2019 C. David Brown 10,000 $53.18 $531,800
3/11/2019 Fernando G. Aguirre 1,900 $53.59 $101,821
3/8/2019 David Wyatt Dorman 9,600 $52.71 $506,016
3/8/2019 Edward J. Ludwig 2,000 $52.8 $105,600
3/1/2019 Edward J. Ludwig 4,000 $58.27 $233,080
3/1/2019 Fernando G. Aguirre 3,410 $58.29 $198,768

And they also issued a bunch of options at $54.19 a share.

Date Director Shares Award or Strike Price Value
4/1/2019 Larry J. Merlo 20,858 $54.19 $1,130,295
4/1/2019 Thomas M. Moriarty 4,837 $54.19 $262,117
4/1/2019 Troyen A. Brennan 3,606 $54.19 $195,409
4/1/2019 Lisa G. Bisaccia 2,411 $54.19 $130,652
4/1/2019 Eva C. Boratto 1,336 $54.19 $72,397
4/1/2019 Alan M. Lotvin 863 $54.19 $46,765
4/1/2019 Joshua M. Flum 742 $54.19 $40,208
4/1/2019 James D. Clark 253 $54.19 $13,710
4/1/2019 Kevin Hourican 1,109 $54.19 $60,096
4/1/2019 James D. Clark 5,536 $54.19 $299,995

Disclosure: the author owns CVS shares.

Google Guts Stock Market

When I saw they were down almost $100 a share in after hours trading yesterday I knew today was going to be a down day for the market. You’d just about need a signed deal ending the trade war with China (allegedly resolved one way or the other within weeks) to get markets back up to par after such a key component nose dives.

  • Google is weighted heavily in key indexes & many tech ETFs
  • Google is seen as a bellwether. If they can’t get the numbers to work out as well as it looked like they would, then many money losing tech startups that are soon coming to market will have people question how they’re going to get their numbers to work.

Google rarely misses, but they stunk up the joint in Q1 by showing a rapidly decelerating ad growth rate, with the YoY rate decelerating from 26% to 17% in the quarter & operating margins falling from 25% to 18%. Google claimed a big part of the shift was due to changes at YouTube:

“While YouTube clicks continue to grow at a substantial pace in the first quarter, the rate of YouTube click growth rate decelerated versus a strong Q1 last year, reflecting changes that we made in early 2018, which we believe are overall additive to the user and advertiser experience,” Porat said on the company’s earnings call Monday.

If YouTube was the main driver of the miss you would expect to see rapidly slowing click growth & increased cost per click. What we saw in the quarter for Google properties was:

  • paid clicks (also includes video ad views): up 39% YoY, down 9% QoQ
  • cost-per-click: down 19% YoY, up 5% QoQ

Ads on search clicks are worth far more than video ad views because there is a lot more expressed intent in searching for a specific keyword than there is in watching a random(ish) YouTube video.

Over the prior 4 quarters Google grew their owned & operated ad clicks about 60% YoY while driving down CPC about 24% YoY. The rapidly decelerating click growth & CPC falling less than it had been would indicate YouTube is perhaps getting closer to ad saturation.

Historically a rising click count at above a 50% rate means massive YouTube ad view expansion, which normally correlates with blended click price being off around 20%. That Google rose their cost per click in the first quarter from the seasonally strong 4th quarter does indicate they’ve slowed down ad growth on YouTube compared against prior quarters.

When the first month of a quarter has an announcement that Google is culling a large partner from their ad network that can be seen as more than a hunch they had a soft quarter & are doing clawbacks.

Prior to the app removals, DO Global had roughly 100 apps in the Play store with over 600 million installs. Their removal from the Play store marks one of the biggest bans, if not the biggest, Google has ever instituted against an app developer. 

Though it also remains to be seen how or why Google needs BuzzFeed News to ensure click quality!

DO Global is a Chinese app developer that claims more than 800 million monthly active users on its platforms, and was spun off from Baidu, one of China’s largest tech companies, last year. At least six of DO Global’s apps, which together have more than 90 million downloads from the Google Play store, have been fraudulently clicking on ads to generate revenue, and at least two of them contain code that could be used to engage in a different form of ad fraud, according to findings from security and ad fraud researchers Check Point and Method Media Intelligence.

Google sending out questionnaires to small businesses about monetizing the hell out of local search is another clue the quarter was going to stink.

The weakness Google showed in the most recent quarter likely has to do with ad load saturation. They could add another ad unit on desktop search results, but key categories like hotels & e-commerce already stack ads via showing multiple different formats. They have also ramped up YouTube ad load a lot over the past year.

Google’s push of programmatic advertising has led to a greater share of their non owned and operated inventory being low quality garbage clicks like the stuff DO Global was offering.

Leading publishers have reoriented their focus to place more emphasis on subscription revenues & less on advertising. And some of the leading destination sites are not only ad buyers but are also becoming ad sellers.

Amazon.com now carries a heavy ad load. They are piggybacking on the install base of Google’s DFP to launch the Amazon Unified Ad Marketplace across the broader web. And then Jeff Bezos also has a sneaky secondary play to further peal off premium publishers from Google. Washington Post’s ARC Publishing has partnerships with the sort of premium publishers Google has perhaps taken for granted:

The software-as-a-service platform may grow into a $100 million business that would bolster the company’s bottom line.

Shailesh Prakash, head of product and information technology at the company, said Arc has expanded its clientele beyond WaPo to include almost every major advertising market in the United States. Its technology powers the Chicago TribuneLos Angeles TimesNew York Daily NewsThe Boston Globe, The Dallas Morning News and The Philadelphia Inquirer.

That gives Washington Post great benchmarking data on their competitors. But it (combined with Amazon’s first party data) also puts them in an enviable spot to launch a premium ad network. I could see them offering the technology free (or rebated to make it free) in exchange for using their ad server. At that point Google gets to have an ad netwrork consisiting of fat thumb misclicks on mobile games while premium advertisers & premium publishers are drawn in closer to Amazon’s orbit.

Look what Amazon recently did in the freight market. Offer a service at no margin to destroy the capacity utilization & economics of an incumbent, and then only after shifting the economics consider making a profit. The ad network equivalent of that is peal off many of the premium publishers while leaving the existing ad network with backfill dreck.

Walmart & Target are following Amazon in ramping up their ad load. eBay is also growing an ad business which will include a CPC aspect. Facebook’s Instagram now has a checkout feature.

With so much selling off it could be the beginning of a bear market, so no harm staying heavily in cash. That said, here are some stock ideas I am looking at…

  • PETS – earlier today Petmed Express was off over 3% in part on general market downdraft, fall of internet related stocks & an ultra bearish analyst call on PetIQ that pulled PETQ down about 15%. As of typing this PETS is down almost 3%. Chewy.com also filed for IPO, so that could have a big impact (hype around IPO could drive PETS higher until some analyst makes a call that Chewy.com will eat everything & downgrades PETS). Petmed Express reports earnings on the 6th.
  • VIRT – if volatility picks up this stock often has a negative correlation to many others, as they are an HFT shop that can scrape more meat off the bones when others are forced to liquidate positions. They were off about 2.5% earlier today & are still down about 1.5%.
  • MMYT – they made a strategic majority investment in corporate travel firm Quest2Travel & were downgraded by Bank of America in the wake of Google crapping the bed – a proper triple lindy. Last week did Ctrip increase their holdings in the company to 49%. They’re off over 10% today, putting their stock right where it was before the Ctrip announcement was made. This stock has low liquidity & sometimes spreads can be a bit wide on it, so it is worth considering a longer term position, particularly if you think the domestic India internet will parallel the development of the Chinese & US internet ecosystems.
  • I don’t follow commodities heavily, but African swine flu is causing big problems in China. Some of the related protein stocks have been strong & are up even on a day like today. Tyson (TSN), Seaboard Corp (SEB), Pilgrims Pride (PPC) & the JBS ADR (JBSAY) might be worth a look & a small exploratory position. Many of them are up about 50% off the bottom from late last year.
  • EIGI – probably has another day or two of decline, but Endurance International Group bombed earnings and lowered guidance. They’re now at fresh 52-week lows & are down over 10% today, so who knows when the bottom will be in. At some point they will be a P/E buyout target as they are trading at well under 1 times sales. Anyone who can come up with any sort of upsells on hosting that they are not doing could drastically expand their margins as they have about 4.8 million active subscribers. Hard to believe they were founded in 1997, have negative growth YoY & are still losing money.
  • Health insurers – if you don’t have any exposure to healthcare yet, these are quite beaten up & the current Congressional hearings are about as rough as it will get provided Bernie Sanders is not elected and/or the Senate does not flip in 2020

Amazon One-day Shipping

Amazon has had a history of making announcements that decimate adjacent markets. They’ve acquired Whole Foods & crashed Kroger, they’ve acquired PillPack & crashed CVS + Walgreens, and they’ve had other retail announcements in the past which have clobbered other retailers.

In most cases, each of the “oh shit, Amazon …” stories has been a decent entry point for at least a short term trade.

On the most recent conference call Amazon announced they were going to cut delivery times for Prime subscribers from 2 days to 1 day.

“We’re currently working on evolving our Prime free two-day shipping program to be a free one-day shipping program,” Olsavsky said, adding that Amazon expects to spend $800 million this quarter to make the change.

Amazon offers one-day delivery on some products now, and even same-day delivery for some purchases. But Olsavsky suggested that the company now expects that the standard free two-day shipping that is the biggest selling point for the Prime subscription plan will be improved to a one-day schedule globally.

The faster shipping time increases the range of impulse purchases consumers may conduct on Amazon. Amazon still has gaps in their catalog in terms of competitive pricing & the more they move to speed up advertising the more they’ll need to either cross-subsidize from AWS or squeeze merchants on their platform with more junk fees to make up for the cost difference.

Some parts of the market are logical & some are utterly illogical. For instance, after there was news that Nancy Pelosi’s team was guaranteeing health insurers they wouldn’t eat any cramdowns anytime soon & Trump suggested it made sense to wait until after the 2020 election to reform healthcare one could presume that would be an “all clear” to dip into the health market.

Markets not only tend to be forward looking, but they also tend to be more headline & emotionally driven than most would give them credit for being. So when the Democratic presidential candidates started taking hard left planks to try to differentiate themselves from the field, the concept of socialized medicine / Bernie Sander’s Medicare-for-all absolutely clobbered health stocks.

The current Democratic leaders in Congress — Senator Chuck Schumer of New York, the minority leader, and Nancy Pelosi of California, the House speaker — have not supported it. President Trump and Republican leaders in Congress have been demanding a smaller government role in health care, not a larger one. And the giant health care companies, which have enormous wealth and influence, are, for the most part, committed to blocking the idea. …

Data from Bespoke Investment Group shows that the damage to health care stocks became much more acute on Tuesday and Wednesday. On those days, according to Bespoke, the health care sector, dominated by UnitedHealth, underperformed the S&P 500 by its widest margin since April 2009.

Joe Biden throwing his hat in the ring has the healthcare industry hopeful, but I can’t see him winning the election.

The health care industry — doctors, hospitals, insurers, pharmaceuticals — has united in the Partnership for America’s Health Care Future, a lobbying coalition, to stop Medicare-for-all. That organization aggressively denounces single-payer at every opportunity, and has condemned proposals like a public option or letting people 55 and older buy into Medicare.

The Democrats would need to take the Presidential election, the House of Representatives & the Senate in order to pass a Medicare-for-all bill. And they would need to have a strong enough majority to override moderate grifter types like Nancy Pelosi. In short, “The selloff is based on legislation that has almost no chance of passing,” said Raymond James analyst John Ransom.

If that tail risk doesn’t come true then many stocks in that sector are a steal. And if at any point during the election cycle it looks like Donald Trump is going to get re-elected or a more moderate Democrat is likely to get the nomination healthcare stocks will pop.

After the steep declines health industry stocks today are almost like buying a call option on Bernie Sanders losing the election or a put option on him winning.

The Amazon shipping announcement took about 6% off Target, 4% of Kroger & 2% of Walmart. Those are substantial moves for staid retailers.

The flip side to the announcement is this: Amazon’s move to one-day shipping shows the competition is catching up

“[I]t would be a mistake to sell large retailers on this announcement as they have anticipated this for some time and are already rolling-out corresponding services,” Zolidis said in a statement. “Further, we believe that a total offer that gives consumers the option to get product when and where they want it, either at home or in the store, is superior to a delivery-only option.”

I just bought a bit of KR & TGT. They could still fall further, but unless the entire market craters they are reasonably priced.

And any logic which concludes offline retail is going to get wiped out by Amazon becoming more efficient is also logic which might conclude that Amazon is likely to get broke up after the election. President Trump already hates Jeff Bezos (for owning the Washington Post) & some of the Democrat presidential candidates like Elisabeth Warren have spoke mad hate about Amazon.

To be clear, I don’t think Amazon gets broken up anytime in the next 5 or 6 years. But I also don’t think changing shipping from 2 days to 1 day is a huge deal changer for most people.

A smarter approach IMHO would be one where Amazon gave buyers a sliding scale for shipping rebates for either buying more merchandise at once and/or selecting slower shipping dates for credits to apply to future purchases. Amazon already does the second a bit, but I think they could have their shipping features more than pay for themselves by allowing customers to not only enjoy free shipping widely but also get paid to wait.

A couple years ago IHL Group highlighted how the “retail is dead” meme was sort of garbage & how a lot of the company closures were from debt-levered LBOs by private equity firms. That business model is a “no lose” as even when they go under they still get to loot the value of the underlying real estate & pension plans while layering on dividend recapitalization after dividend recapitalization until they create a debt mountain so large the firm implodes.

To this day IHL Group is still debunking new rounds of retail doom.

Many retail names today are still dirt cheap.

Either they are pricing in a recession or they are pricing in asset price inflation where tech companies will keep appreciating much faster than value companies.

“Growth shares have surged to the highest levels versus cheap equities since the dot-com bubble, underscoring fierce demand for companies less exposed to the gyrations of the economic cycle. Stocks posting a strong return on equity are near their most expensive since 1990, according to Sanford C. Bernstein & Co. To cap it all, tech multiples have jumped toward 2009 highs relative to the broader gauge. It all suggests an “extreme” valuation gap is setting the stock market up for a rotation away from winners in favor of the losers, according to Morgan Stanley, echoing a growing number of Wall Street strategists. … the most-loved equities look decidedly expensive in this melt-up. And all bets are off on how they will fare in any correction, with the projected earnings expansion for growth stocks this year not much stronger than peers”

In other news, Naspers exchanged their MakeMyTrip shares for new shares in Ctrip, giving the leading Chinese online travel agency a 49% stake in the leading Indian online travel agency. MMYT was up over 6% on the news. Ctrip is unlikely to increase their MMYT holdings any further given the local “national champion” policies India is following in an attempt to create home grown tech platforms the way that China has Alibaba, Baidu & Tencent. Skift explicitly stated the 49% stake was capped to limit regulator scrutiny:

Naspers offered Ctrip even more shares, which would have given it control of MakeMyTrip, noted analysts at Goldman Sachs, but Ctrip opted for a minority position to avoid regulatory scrutiny. Ctrip’s concerns centered around a foreign company taking over a brand in India. Naspers will own about 6 percent of the Chinese travel agency’s outstanding ordinary shares after the maneuver. In 2016, Shanghai-based Ctrip had invested about $180 million in MakeMyTrip, gaining it one board seat. With this deal, it will get Naspers four board seats. It now has five of the 10 board seats.

Fads, Trends & Timelines

ROKU was on fire yesterday as the market turned up. It is already up over 90% so far this year, in part due to a particularly weak performance as the stock market cratered in Q4 last year.

A few weeks ago analyst after analyst downgraded Roku, but on Monday Susquehanna analyst Shyam Patil upgraded it on the thesis that cord cutting is a trend which will continue for a long time to come.

“The connected TV advertising market is inflecting as engagement continues to shift from linear to digital. ROKU is one of the few scaled plays on this trend,” he wrote.

Young people view Netflix as the most important video brand by a wide margin. People under the age of 35 also put Hulu & Amazon Prime Video in their top 5.

AT&T just shed another half-million TV subscribers in the most recent quarter.

AT&T lost a net 544,000 premium TV subscribers, a category that includes DirecTV satellite and U-verse television customers. Analysts had expected a loss of 385,000 customers across DirecTV and U-verse, according to research firm FactSet.

Their stock is off almost 5% today ($1.57 or 4.9%). With a quarterly dividend of 51 cents that is over 3/4 a year that just went poof. Anyone who sells now instead of yesterday is undoing most of a year’s worth of income from the stock. And if that income was taxed at 23.8% the day’s slide is a whole year’s worth of income.

Add up a few nasty quarters like that & it really ads up.

Since July 29, 2016 the stock slid from $43.29 to $30.59 (as of typing this). That is a $12.60 slide per share. As July 29 was past the July 9 ex-div date that means shareholders who bought that top did not get the next quarterly dividend payment that August. So they’ve earned $5.46 in dividends over nearly 3 years, amounting to half of the stock’s decline & then that income was also taxed.

Ex/Eff Date Dividend Declared Recorded Paid
4/9/2019 0.51 3/29/2019 4/10/2019 5/1/2019
1/9/2019 0.51 1/10/2019 2/1/2019
10/9/2018 0.5 9/28/2018 10/10/2018 11/1/2018
7/9/2018 0.5 6/29/2018 7/10/2018 8/1/2018
4/9/2018 0.5 3/30/2018 4/10/2018 5/1/2018
1/9/2018 0.5 12/15/2017 1/10/2018 2/1/2018
10/6/2017 0.49 9/29/2017 10/10/2017 11/1/2017
7/6/2017 0.49 6/30/2017 7/10/2017 8/1/2017
4/6/2017 0.49 3/31/2017 4/10/2017 5/1/2017
1/6/2017 0.49 10/24/2016 1/10/2017 2/1/2017
10/5/2016 0.48 9/30/2016 10/10/2016 11/1/2016

That AT&T performance looks absolutely fantastic when compared against a bombed out Tupperware (TUP) which raised its dividend yield about 10% today by having the stock slide over 9% on negative sales growth. In the age of Instagram who goes to Tupperware parties?

Anyone who bought yesterday might offset that decline in a couple years provided the dividend is not cut.

Painful.

It is very easy to see new verticals & market shifts as fads early on in the shift, but if you compound a decade or two of strong growth it adds up.

Two decades ago the Internet was a fad & a bubble.

A decade ago mobile was a fad. Today if you interact with the public regularly in an urban area it is hard to go a whole day without being pissed off by some unaware cell phone user cutting you off or running into you.

People have become embedded apps in their cell phones. Thus mobile constitutes the majority of online ad spend – over 70% of the total online ad spend.

We forecast digital ad spending will rise 17.1% to $327.28 billion in 2019 … Mobile represents a significant portion of total media ad spending as well, and we forecast it will get $232.34 billion in 2019.

eMarketer

Who really cares if something is a fad if it goes up 60,000%? A fad that doesn’t end & enjoys growth long enough can no longer be described accurately as a fad, even if it is terrible.

The California-based company’s unparalleled stock rally reflects its steady growth. It has boosted revenues by at least 9% every year since 2001

And would plants crave it if it wasn’t good?

JUUL was a fad. Ignoring it proved costly:

“Youth use of e-cigarettes jumped 78% between 2017 and 2018—to one out of every five high-school students—thanks largely to the popularity of Juul. … Altria first tried to buy the entire company in late 2017 or early 2018 with an informal offer of as much as $8 billion, according to people familiar with the matter. That approach, previously unreported, was rebuffed. Mr. Willard eventually sweetened the offer and settled for a minority stake. He also agreed to put Juul coupons on packs of Marlboros, giving his own consumers an incentive to try Juul.”

This, incidentally, is also why value investing can be so painful.

While “the future” can be priced at infinite through rose colored glasses driven by compound growth & the imagination of what is possible, existing players who are getting disrupted need to spend aggressively while their growth falls to nothing or even turns negative.

Also from the above linked WSJ article:

It’s the dilemma facing many established companies in mature markets. How should one respond to new entrants that are disrupting the status quo, when the classic strategy—buy the disrupter—could potentially speed the decline of the legacy business? PepsiCo Inc. and Coca-Cola Co. have shifted away from sugary sodas by scooping up coconut water, coffee and kombucha. Big media companies such as Walt Disney Co. and AT&T Inc. are launching their own streaming services as they chase consumers who are cutting the cord. Walmart Inc. has invested billions in e-commerce sites such as Jet.com and India’s Flipkart as the retail giant works to fend off Amazon.com Inc

A 4%, 5%, 6% or 7% dividend can sound quite appealing at first glance. But that income is instantly realized & taxed. If the company has a crappy quarter the stock can lose a half-year or multiple years worth of coupon in a day. So you pay income tax on the dividend that does not even compensate for the capital decline.

If that dividend payment gets cut pain compounds on top of pain as many dividend investors consider a declining dividend to be a sell signal, locking in further losses for existing debt holders. What’s more, many value stocks carry a high debt load from acquisitions and/or buying back their own stock. So you end up hoping either the debt can be paid down or a new growth channel emerges before the profit pool goes away. Each quarter the dividend payments must be made while debts are serviced & rolled over.

As rates go up, bonds become relatively more attractive than equities (particularly equities that have a bunch of debt associated with them & a dividend that might get cut as debt service costs rise).

The future is anything but certain.

But the emotional pain is real.

And you must be willing to eat that pain long enough for either the company to fight through market changes, or for analysts to believe in a different narrative of the company. And while you do so, you are underperforming the index almost every day until the bull market ends.

“Growth shares have surged to the highest levels versus cheap equities since the dot-com bubble, underscoring fierce demand for companies less exposed to the gyrations of the economic cycle. Stocks posting a strong return on equity are near their most expensive since 1990, according to Sanford C. Bernstein & Co. To cap it all, tech multiples have jumped toward 2009 highs relative to the broader gauge. It all suggests an “extreme” valuation gap is setting the stock market up for a rotation away from winners in favor of the losers, according to Morgan Stanley, echoing a growing number of Wall Street strategists. … the most-loved equities look decidedly expensive in this melt-up. And all bets are off on how they will fare in any correction, with the projected earnings expansion for growth stocks this year not much stronger than peers”

And even outperformance in a crash could mean still losing, but losing slightly less than the index.

To some degree, this is why momentum investing can be more rewarding than value investing. The shifts come quickly & you often know if you are right or wrong in short order. Whereas with a value play you can eat pain for months or years before it finally turns around – or not.

This is part of why it can help to have multiple brokerage accounts. One for active management where you regularly take score, buy good set ups & regularly enter & exit positions. Then the other account where the value investments are segregated into something you rarely look at & the daily noise of the market doesn’t have any impact on.

Health Sector Not So Healthy

The health sector cratered yesterday on fear of ‘Medicare for All’ gutting the sector.

The stock is down 13.3% so far in April, on track for its biggest one-month decline since February 2009 when it fell 30.64%. UnitedHealth shares initially rose Tuesday after it reported first-quarter earnings and revenue that beat Wall Street’s expectations. But the stock quickly gave up those gains on jitters from investors over drug pricing reform and “Medicare for All” proposals from Democratic lawmakers.

Insurers were not the only companies that cratered. Pharmaceutical companies like AbbVie fell around 3%. More volatile drugmaker stocks like CRSP fell much more – closer to 8%. Hospitals fell. Drug suppliers fell. CVS took another dump.

Last night Guggenheim initiated coverage on CVS at buy with a $63 price target, while this morning they downgraded Walgreens Boots Alliance to neutral from buy.

There have been a couple wild health-related stories recently. Scientists restored brain some function after the death of a farm animal & in Israel they’re 3D printing organs using a patient’s cells.

FNKO fell as low as $18.68 a share from a daily high of $20.06, due in large part to announcing their CFO Russell Nickel intends to step down by the end of this year. They closed at $19.09 a share – off 5.21%. They’re announcing earnings after market close May on 2.

Reporting the News vs Creating the News Cycle

CVS was downgraded today by Oppenheimer analyst Michael Wiederhorn to market perform. The value of such a downgrade AFTER the stock slid from over $112 a share in July of 2015 to under $53 a share recently is a bit suspect.

That said, a downgrade would normally cause a stock price to slide at least a bit, though CVS was up 2.67% today in spite of the downgrade.

Barron’s Jack Hough published an article stating CVS is a buy, causing the stock to jump. Barron’s then published a follow up article reporting on CVS stock rising because Barron’s called the stock a buy earlier the same day.

Added: Barron’s keeps doing more CVS articles & video interviews to compliment their CVS feature.

And there is a not-so-subtle reason CVS may have pushed hard to couch expectations earlier this year.

Expert Analyst Calls by Goldman Sachs 

One of my favorite articles of all time about analyst picks was published by Jeff Matthews back in 2010, Goldman 8, Public Zero…The Teachable Moment of Bare Escentuals

Another class of losers, however, would be pretty much anybody who took Goldman Sachs’ advice to sell their BARE stock just six weeks ago. Indeed, more than 5 million shares changed hands in the two days following Goldman’s early December move from the always-meaningless “Neutral” rating to the rare “Sell” rating, and the stock traded down $2, wiping out $200 million of the company’s valuation.

Now, you might think such a ridiculous price would have merited an upgrade: that $2.45 per-share valuation amounted to only 3-times EBITDA, a steel-company multiple for a non-steel-company-like 70% gross margin, 28% operating margin business.

Besides, if you liked it a $36.50, shouldn’t you love it at $2.45?

You might think that, but you’d be wrong. In fact, Goldman kept its “Neutral” rating and thus missed a 425% rally in shares of BARE until the stock hit $13.00 a share—where Goldman’s Finest deemed the shares an outright “Sell” just over a month ago.


the financial advisor to Bare Escentuals in its acquisition by Shiseido is none other than…

Yes, you got it.
Goldman


Long ROKU

I just bought a bit of ROKU today after multiple downgrades knocked the stock from above $70 to under $57 over the past couple weeks.

Roku opened up yesterday with the broader market, but as Netflix fell on news of a low priced competitor from Disney competitor to launch in November it pulled Roku down with it.

Roku is of course a smaller stock than Netflix, so the industry leader sliding would make some correlation trade algorithms push down Roku hard. That said, I think the “online video stocks” correlation pulling down Roku from a fall in Netflix makes no sense in the context of the news which drove the market today.

In markets dominated by a single player, you can’t really negotiate with them, you have to accept whatever their terms are. Netflix is powerful enough they could push around Apple to skip their app store skim. A market which is rich & diverse in competitors has many more potential partners hungry for buiness, many more businesses spending on growth & many more business opportunities for Roku.

A few other reasons to like ROKU…

Massive Market Size

The OTT market is absolutely massive – estimated at $4 billion a year & growing 25% YoY into next year:

“OTT (over-the-top) video ad spending is expanding at the fastest rate of any major medium and will approach $4 billion this year and $5 billion next year, according to a revised advertising forecast from IPG Mediabrands Magna Intelligence unit.”

Video is the Future of the Internet

As Josh Herman wrote in 2015 The Next Internet Is TV.

In this future, what publications will have done individually is adapt to survive; what they will have helped do together is take the grand weird promises of writing and reporting and film and art on the internet and consolidated them into a set of business interests that most closely resemble the TV industry. Which sounds extremely lucrative! TV makes a lot of money, and there’s a lot of excellent TV. But TV is also a byzantine nightmare of conflict and compromise and trash and waste and legacy. The prospect of Facebook, for example, as a primary host for news organizations, not just an outsized source of traffic, is depressing even if you like Facebook. A new generation of artists and creative people ceding the still-fresh dream of direct compensation and independence to mediated advertising arrangements with accidentally enormous middlemen apps that have no special interest in publishing beyond value extraction through advertising is the early internet utopian’s worst-case scenario.

Google certainly believed that vision when they acquired YouTube for $1.65 billion on October 9, 2006.

Google made one simple calculation when it purchased YouTube: in the broadband era, video was likely to become as ubiquitous on the web as text and pictures had always been. YouTube was already, in essence, the world’s largest search engine for video. In fact, it would eventually become the second-most-used search engine, period.

How The Internet Happened: From Netscape to the iPhone

YouTube as a stand alone entity would probably be worth about 30X to 40X what Verizon paid for Yahoo before writing it down massively. That valuation gap is because

  • one platform is the present & future, growing like a weed
  • one platform is the past, increasingly irrelevant by the day as it is displaced by niche publishers with higher quality content

According to SEMrush traffic analytics YouTube gets more visits than Facebook, particularly on desktop.

Video sites dominate the web

Broad-based Strategic Investment By Tech Companies

General Lay of the Land

Every one of the big tech plays is investing billions of dollars in video. Apple announced their new streaming service recently, Google has YouTube, Amazon has Prime Video & IMdB Free Dive & Twitch, then of course there is Netflix.

Facebook is Desperate for Video

Mark Zuckerberg made it abundantly clear he sees video as the future:

You can just see this trajectory from early internet, when the technology and connections were slow, most of the internet was text. Text is great, but it can be sometimes hard to capture what’s going on. Then, we all got phones with cameras on them and the internet got good enough to be primarily images. Now the networks are getting good enough that it’s primarily video. At each step along the way, we’re able to capture the human experience with greater fidelity and richness, and I think that that’s great.

Facebook has Watch, but their past greed with low revenue sharing (their Audience Network is a joke for publishers – backfilling low CPM stuff instead of the premium tier ads on Facebook proper) has meant they have failed to get many great partners offering first-rate video content to date & Facebook Watch has not caught on widely.

Facebook obtaining a music license with all the major labels could help close the gap with YouTube some, but the labels are perhaps in no rush to further commoditize music through ad-driven partnerships with big tech players given that YouTube Red has been a flop & both Spotify & Apple Music are providing vital subscription revenues that are changing their fortunes.

Facebook still does not have a device like Chromecast, Apple TV, or the Amazon Fire Stick to jump into the OTT market. Better than a device, Roku’s software is being baked into many TVs, making it easier for them to align their business model with Facebook’s (ad sales vs hardware, with addressable targeted ads). And Roku is unlikely to do anything belligerent like Google in terms of forcing a row of crappy ads on a multi thousand Dollar TV. Roku would be a great acquisition for Facebook if they wanted to play catch up on OTT distribution. Plus with all the controversy around the Facebook brand on the privacy front, having a separate application would be a wise business decision.

Facebook would be a natural buyer for Roku, as would Walmart or Disney.

Infighting

Tech companies have had rounds of infighting where Amazon for a period of time refused to sell Chromecast or Apple TV. That sales policy reversed after Amazon’s Echo stopped getting access to YouTube. Netflix recently stopped supporting Apple’s Airplay.

Crappy Bundling

Almost every week there is a new article in the mainstream press about privacy issues. Crazy ad targeting features on Facebook that allowed redlining. Facebook allowing third party apps access to excessive amounts of user data. Facebook requesting third party email passwords to log into the user’s email & harvest their contacts. Facebook leaving hundreds of millions of user passwords accessible in plain text. Google Android is spying on user location data even if they have location services turned off or the SIM card removed from a cell phone. Ring video data streaming online unencrypted. Amazon workers listening to what you tell Alexa. etc etc etc

Founders of the tech companies spend 10s of millions of dollars per year on personal security while people are being killed & third world villages are razed due to conflicts started by fake news shared on their social media platforms.

In addition to the above sorts of issues, Google & Amazon have done a 1-2 punch to gut new tech start ups by copying their products and selling below cost.

“According to confidential documents viewed by Mashable, Amazon acquired Eero for $97 million. Eero executives brought home multi-million dollar bonuses and eight-figure salary increases. Everyone else, however, didn’t fare quite so well. Investors took major hits, and the Amazon acquisition rendered Eero stock worthless: $0.03 per share, down from a common stock high of $3.54 in July 2017. It typically would have cost around $3 for employees to exercise their stock, meaning they would actually lose money if they tried to cash out.”

There might be a few companies that will hang their hat on selling an Google or Amazon powered TV, but that is a path to doom ultimately.

“Rivals Amazon.com Inc. and Best Buy Co. are joining forces to sell television sets powered by Amazon’s Fire TV operating system. … The companies will sell 11 models, starting this summer with TVs by Toshiba and Best Buy house brand Insignia. Best Buy will feature the Amazon-powered TVs in its stores and on its website, and also become a merchant on Amazon’s website, where it will sell these TV sets exclusively. … The partnership means that Best Buy’s house brand Insignia will no longer produce sets powered by Roku Inc.’s operating system.”

These low-margin device makers know they need a diverse & competitive ecosystem to earn incremental revenues. They have already seen Google eat most of the profits on the mobile web. Samsung is the only Android hardware player outside of China with actual profits.

They have seen Google buy & gut Motorola, have seen Google buy HTC, have seen Android go from open to closed, have seen Google security “researchers” conducting opposition research styled zero day disclosures on Galaxy phones when Google was concerned about Samsung becoming too powerful of a partner.

They have also seen past resignations over TV OS fails. The big, ugly ads showing up on the operating system on a multi-thousand dollar TVs are anything but appealing.

In this sort of environment, being partnered with a player exclusively devoted to your category is a better & more sustainable strategy than being tied to a large company’s side-side-side business:

“In the tech business, superior technology often wins and tech companies basically compete on how smart their employees are and the quality of their products. … when new computing platforms emerge, an operating system or a platform built specifically and optimized for that platform wins. … When you’re trying to get 50 cents off your bill of materials so you can win a Black Friday special at Walmart, the amount of money you save by cutting your RAM in half and your CPU in half by running Roku software — which actually has great performance and more content — is huge. It’s the difference between getting distribution and not getting distribution in Walmart.”

Roku CEO Anthony Wood

Other Big Media Companies

In addition to all the tech companies, Walmart has Vudu, Disney will launch Disney+ this year, Disney also has ESPN+ & Hulu, AT&T has WarnerMedia launching a service soon, CBS has all access, Comcast acquired Sky, etc.

Amazon has already moved away from supporting the longtail toward focusing on the big players like HBO & Showtime. That in spite of getting a 30% to 50% rake from channels on a fast-growing, high-margin revenue stream of $1.7 billion per year. Roku has an incentive to differentiate by not only partnering with the likes of Epix, but also partnering with many longtail streaming services. Roku hasn’t engaged in any of the anticompetitive infighting the other tech companies have done. They support Google Play and many other services.

Viacom paid $340 million to acquire Pluto TV. They also approached Tubi TV.

Walmart owns video site Vudu & there are many other players between streaming services focused on niche categories like anime or British comedies or Korean dramas & regional players like Hotstar in India, Bilibili & Youku & iQiyi & Tencent Video in China, & iFlix in other emerging Asian markets.

While the sector is largely dominated by Netflix, Amazon, and Hulu – PwC said SVOD revenue accounted for 79.6% of OTT revenue in 2017 – niche players are increasingly making a dent in the overall business. PwC noted that anime and manga service Crunchyroll reached 1 million subscribers in 2017, streaming more than 1.5 billion minutes of content per month, while U.K.-centric BritBox reached 500,000 customers.

Likely Industry Trends

Throwing Good Money After Bad

All the capital allocation being pushed into securing exclusive content rights & creating video subscription services will eventually create subscription fatigue, which in turn will drive consumption back toward free services.

But there will be HEAVY marketing spend before that subscription fatigue sets in. Those who have already dumped 10s of billions of dollars are going to dump millions more into marketing.

Could you imagine the investor response to a quarterly result where a management team states they are going slow & conservative & are not worried about low growth at their big new category they’ve dumped 30% or 50% of their market cap into?

Inconceivable.

Paying for Live Web TV vs Movie Streaming Services

YouTube and Hulu have been growing their streaming TV offerings while Sling & DirecTV haven’t really been growing recently. Frequently YouTube has a popover offering an ad free experience & they even sometimes do nasty stuff like unskippable midroll ads in the middle of songs! That horrible user experience probably ends up being a subsidy to Spotify, YouTube downloader services & anything Napster-like still on the market. Those streaming TV growth rates are likely to slow further as lower cost competitive movie streaming services launch & early price subsidies for skinny bundles of live web TV services go away.

Google has cut back on YouTube TV subsidies, recently raising prices to $50 per month. The skinny bundles are ultimately a bad deal for those who get news free from online channels. Other than sports, there isn’t much reason to pay 3x Netflix price or 8x Disney Plus price when the other services offer an essentially limitless pool of content to consume.

AT&T’s acquisition of DirecTV was a disaster:

“DirecTV has lost 1.4 million satellite customers since its peak of 21 million-plus about two years ago. Analysts expect news of roughly 300,000 more defections when AT&T reports quarterly results on Wednesday. AT&T is bracing for cancellations this year that would cut into its 2019 operating profits by $1 billion. The company has told investors it plans to make up for much of the money lost to defections by charging more to customers with discounts who stay. Meanwhile, some former call-center workers say AT&T has incentivized such employees to make it as difficult as possible for customers to cancel, a claim the company disputes.”

And their replacement OTT service has already begun shrinking!

“The company reported a net loss of 403,000 DirecTV satellite subscribers as well a decline in its online streaming service DirecTV Now, which shed 267,000 customers including free trial accounts. AT&T reported a net customer gain of 12,000 at its U-verse home video service.”

If their Time Warner / WarnerMedia acquisition is viewed as disastrously as the DirecTV acquisition was they are screwed. AT&T absolutely can not afford to launch a streaming service that fails to take off or they’ll likely create a cycle of doom that could impact their mountain of BBB rated debt. If the rating falls their will be forced sellers of their debt, spiking yield on any debts they roll over. That increased debt service cost could in turn make many investors think their dividend is in jeopardy & that doesn’t work when the stock has been sliding for years.

Roku is Switzerland

Being a neutral party not tied to a mammoth monopolistic tech play, Roku is likely to be seen as a low-risk distribution point in the same way that Apple was to music labels with the original iTunes store when Apple was a niche computer & computer accessories maker near bankruptcy.

Further, the companies launching video subscription services have spent 10s of billions of Dollars on acquisitions while also nixing some of the licensing revenues they may have obtained from third party services if they didn’t keep key content as differentiated exclusive content on their site. the narrative of growth (at any cost!) will be vital for these firms, so they will spend a lot to advertise on Roku & offer Roku competitive deals for sharing revenue on streaming partnerships.

Video subscription services will be forced to lose money buying growth, which will make the ad rates on Roku’s interface jump. The new video streaming services will be desperate to sell the growth story at any cost, because they’ve already spent 11 figures (or 12 collectively) on their plays in the market.

This is similar to the VC fueled bubble currently going on in online mattress sales, or the VC fueled bubble between daily deal sites like Groupon & LivingSocial about a decade ago.

The massive marketing push we will soon see will be funded by rolling over debts & using cashflow from adjacent telecom & cable markets rather than venture capital, but a lot of that money will still spill onto Roku just the same.

When subscription mania washes out, there will be more ad-supported video available to stream on Roku. And with YouTube keeping 45% of ad revenues, it won’t be hard for content creators to prefer Roku.

Update: Indeed the Disney+ announcement is good for ROKU

Disney said it has reached a deal to give Disney+ prominent display with Roku users. Laura Martin of Needham & Co., in a research note Tuesday, said that Roku will get a share of the revenue generated by people signing up for the new service.

That revenue share plus an increase in advertising could be worth $200 million a year and could boost the market value of Roku by 15% or $1 billion, according to Martin.

Broadcasting & Cable