Kameleon007
Editor’s Note: This article is meant to introduce Michigan Value Investor’s Marketplace service, Concentrated Value With MVI
I’m excited to launch Concentrated Value With MVI, a new Seeking Alpha marketplace service covering value and deep value stock ideas. This service will provide readers with actionable research and in-depth analysis, a full portfolio, regular updates, and all questions answered. Long time readers know me as MVI in the extensive comments sections of my free articles. You guys already know what to expect.
But for everyone else, I want you to understand what you’d be getting here, and the answer is going to require us to spend some time with each other. So read on, and find out!
Anatomy of a 25 Bagger
I’m not going to bury the lede. I’ve had some big winners over the past 10 years, including two that are up ~25x for me. It’s amazing the impact even one 25 bagger can have on a concentrated portfolio – usually I hold 6 to 10 stocks – and my prediction is I will have 2 more within the next 5 years. So this could be pretty relevant going forward, too. The one I want to talk about here is a broadcast company called Nexstar (NXST). Here’s how I found it.
In 2012 a friend of mine who runs a large fund told me I should be interested in broadcast companies and pointed me at NXST. I knew NOTHING about broadcast companies at the time, but was able to attend an investing conference which gave me a chance to meet CEO and CFO level executives across the space, including Nexstar’s CEO, Perry Sook. It turned out that everyone in the room thought of Perry as the best executive in the industry, a real star. I met him and thought he was both brilliant and completely obsessed with his work. Someone to take very seriously, no doubt about it.
NXST was selling at 6x fully taxed free cash flow. That low multiple was largely due to a narrative about people increasingly skipping commercials with their DVR. There was some truth to this, but there was also an emerging source of non ad-based revenue called “retrans”. This is revenue that a cable or satellite provider has to pay the broadcaster for the right to carry the TV channel, and it was growing really fast. And while general ad spending was in some trouble, political ad sending was ramping way up. Probably that last bit is not surprising to any of us!
Anyway, despite the very real concerns over the future of TV ad spending, the fact was that FCF wasn’t shrinking at NXST, it was growing. Fast. If the trend continued, and there were some pretty good reasons to think it probably would, then FCF would be growing for many years to come. I was pretty intrigued by this, but it’s what came next that really blew me away.
Because Perry made it clear in various public forums that NXST could make acquisitions that were instantly highly accretive by acquiring smaller broadcast stations. The reason was that every large broadcaster gets better terms from networks and cable/satellite companies (the so called “rate book”) but, as far as I could tell, NXST was the only company that had the contractual right to *immediately* reset the rates at any acquired companies. Other acquirers had to wait for the old contract to expire before resetting the rates.
Since each acquisition was instantly accretive the day it closed, Nexstar could just roll up station after station without issuing any equity. There was never a need to pause to de-lever in order to load up and do it again, because the acquisitions were instantly de-levering with the reset of the rate book at the target companies. They could just make deal after deal as fast as Perry could put them together.
Within weeks of my first hearing about the company, they executed on an acquisition and guided to doubling FCF as a result. The stock price didn’t budge because no one was paying attention, and for two weeks NXST stock could be bought for $6 and change on what was now fully taxed FCF guidance of ~$2. What’s more, there was ample reason to think this FCF would grow rapidly, both organically and through more acquisitions.
FCF/share at NXST rose to $5 in 2014 and $11 in 2019, and FCF guidance today, 10 years later, is ~$35 a share. The narrative about declining earnings at broadcasters was dead wrong, and the ability of NXST to grow inorganically turned out to be exactly as Perry had promised, and the stock is up ~25x.
This is how value investing really works, at least for me. I find myself just digging in and being patient for opportunities, and every once in a while something screams at me. Every great investing idea I’ve ever had looks at least something like NXST. In order to do really well, other than through pure luck, you have to have figured out something that the market hasn’t figured out yet. And you have to be patient enough to wait for the right opportunities.
What you get
- My portfolio of top ideas, weighted to make it obvious which have the best risk/reward profile
- Detailed write-ups of new and existing ideas
- Extensive commentary as ideas evolve and new information comes to light
- A chatroom where you can get your questions answered, by me or like-minded investors
- One on one communication with MVI
Value Investing
Value investing in all cases means carefully considering the intrinsic value of a security that you understand well, and then buying at a discount to that value. Intrinsic value is the discounted value of the cash that can be taken out of a business during its remaining life. From there one has to understand the security well, by which I mean one’s estimate of intrinsic value is probably right. That’s Circle of Competence. And buying only at a large discount is known as a Margin of Safety, both concepts originally coined (as far as I know) by the legendary Ben Graham, and likely familiar to many readers.
Opportunity Cost
And then, since I always have more ideas than I can use, I decide between them using the principle of Opportunity Cost – another value investing staple – to sell something I own in order to buy something else that’s even better. Mr. Buffett once described his experience in 1974 as selling at a P/E of 5 in order to buy something else at a P/E of 3. There is no set buy or sell price. The key is to always be invested in the best ideas you have, which can include cash if one thinks cash is better than the alternatives.
A Completely Frictionless Mind
Emotion has no place in intelligent investing, and every investor should be nimble and flexible when the facts change, and not wedded to a thesis. I have heard John Malone described as having a “completely frictionless mind”, and I strive to emulate that.
My process to help achieve that is to wake up every morning and imagine what stocks I would own if I were constructing a brand new portfolio. Then, if my holdings are different from that, I adjust accordingly. I find that many people become emotionally invested in a stock that they already own, in a way that they never would if they were considering it fresh. This process removes all of that legacy emotion.
A trusted source of investing ideas
Has this happened to you? Sometimes when I “look under the hood” and follow up on a given idea, there are important facts that are omitted, which almost invariably work against the thesis. An investor who experiences that might, understandably, put the person who supplied the idea into the “not credible” category, and then never be interested in their investing advice again.
I think a lot of investors face that problem. Investors need ideas from someone they can trust to get the story right. You can decide for yourself whether you agree with it or not, but either way the thesis needs to be succinct, fact based, and well reasoned.
And I do that. That’s the problem I solve for readers, the need for a trusted source of ideas that you can then make up your mind about.
My Background
I have a PhD in theoretical physics from UC Berkeley and worked briefly in the field before switching my interests to investing. I worked as an analyst at a billion dollar fund for several years, and started my own very small fund in 2009. During this time I have developed a group of stocks that I understand well, and I have excellent relations with management in many cases. This longstanding familiarity with a select group of companies means I have a pool of investable ideas available.
I’m always looking to expand the number of companies I understand. I know a number of professional investors, many of whom have brought good ideas to me in the past. We trade ideas, and I hear lots of stock pitches. When I hear something potentially actionable I dig in and try to understand it.
Why Now
I mentioned earlier that being in cash is always an option. In fact, I almost always have at least some of my portfolio in cash, to serve as a kind of “dry powder” just in case there are some great opportunities that come along. But every once in a while it makes sense to be 100% long. At the lows of the pandemic, and the lows of the Great Financial Crisis, for example, I was 100% long back then. And I am again today, too. The reason is that select stocks are truly exceptional values right now, especially among small caps, where the forward PE is as low as any time since, you guessed it, the lows of the pandemic and the GFC.
The best opportunity is when the other folks are panicking, but you keep your head. That time is right now.
How to get started
For the first two weeks, subscribers will get a great deal for life at $499 for an annual subscription. After that the price will go up to $599, so you save $100 a year for life.
Interested, but want more information? I totally get it. Putting your trust in someone to help with your investments is a big decision, and you understandably want to be sure. Message me with questions on SA and I will answer you.
And remember there’s a two-week free trial. You can try out Concentrated Value with MVI and see if it’s really worth it. If it’s not a good fit, no harm done, and thanks for taking the time to have a look. And if it does work out for you, all the better!
If you’re reading this via Seeking Alpha’s mobile app, to try this service right now go to seekingalpha.com and enter Concentrated Value With MVI in the site search to visit my Marketplace Service checkout page.
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