Netflix (NFLX)
Short Thesis. Despite a business that is used happily by millions of people, Netflix has been a hot topic among many fundamental investors.
Whitney Tilson, the famous fund manager of T2 Partners, released their short position thesis on the stock.
In sum, the business is moving away from the DVD mailing business and into streaming content. Tilson argues that this new model will have a substantial impact on the company’s margins going forward.
Meritage Hospitality Group (MHGU.PK)
Long Thesis. A three part series, this is an very thorough analysis of a small microcap stock trading on the PinkSheets.
MHGU is a real estate and restaurant company with locations under the Wendy’s (79 stores), O’Charley’s (3 stores), and Twisted Rooster (1 store) brands, along with holding a substantial amount of land in the Bahamas.
The author argues for several catalysts: a resumption in activity in the Michigan and Florida markets (where most of the company’s restaurants are located), as well as improvements in the Wendy’s franchising model.
In parts two and three, the author evaluates the company’s potential on both a sum-of-parts asset basis as well as on the earnings potential.
Discovery Communications (DISCK/DISCA)
Paired trade. In this special situations play, a paired trade is suggested for the two classes of Discovery Communications stock. At the date of the article, the K shares trade at $37.205 vs. $42.76 for the A shares.
The main difference between the two is that the K shares have lower liquidity and no voting rights. However, since company is effectively controlled by the super-class B shares, these voting rights are probably of little value.
By buying the K shares and shorting the A shares, an investor can pick up the spread if the price of the shares converge.
Dual-class stock arbitrage is a new one for me and I plan on doing additional research into these types of workouts.
Supervalu Inc (SVU)
Long Thesis. A fixture on the 52-week low list, this large grocery store chain has been hit by a string of non-cash writedowns due mainly to the recent acquisition of another large chain, Albertsons.
If the goodwill impairments are an extraordinary event and the rest of the operating metrics (margins, cash flow, debt repayment, etc) remain intact, these situations often warrant an extra look (see my posts on NOOF as another example).
After some modifications for the latest impairments, SVU appears to be trading at a TTM P/E level of 5.5 compared to a P/E of 12 for Kroger and 17 for Safeway.
As a possible catalyst, new management has concentrated on paying down debt and streamlining the operations and product offerings.
RealD Inc. (RLD)
Short Thesis. RealD licenses 3D technologies to movie theaters internationally. This investment thesis revolves around the total market opportunity compared to the growth assumptions priced into the stock price.
The stock trades at a forward 18.5x EV/EBITDA ratio, with the author arguing that an 8x multiple is more appropriate, translating into an EBITDA figure of $185m.
In the next few quarters, 3D revenues are expected to flatten. Historically, if every possible movie was made in 3D from 2006-2010, total box office receipts from 3D movies would be approx. 40% of the total gross receipts.
Assuming RLD achieves an 80%/50% market penetration (domestic vs. international), this translates into $135m EBITDA, well short of the $185m figure.
Suggestions?
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I’m always open to ideas from other investors, especially for a thoughtful and well-researched investment articles.
Disclosure
No positions.