johnhuber

Some thoughts.... Zillow isn't a good business in my opinion. The business of flipping homes loses money on a gross margin basis even before accounting for all of the company's operating expenses. e.g. they lose money on each house before paying their internal employees and all their other operating costs. There just isn't enough spread between the price they buy the home and what they sell it for to pay two sides of closing costs, including attorneys, appraisers, inspections, carrying costs such as taxes and insurance, cleaning fees, painting, maintenance and repairs, etc... Scale isn't always a good thing. If the price of your product isn't high enough to cover your variable costs, then you're just going to lose more money as you "scale". So scale is like leverage: it can work in your favor but it can also work against you. It's not automatically beneficial. I know the real estate business fairly well, and I'm pretty convinced there is no way for Zillow to profit from the flipping business. The other issue they have: scale actually works against them because the only way to really make money flipping homes is to cherry pick great deals. You can do this as a small operator by being nimble and patient, but if your goal is to have 5% of the "TAM", then you lose the ability to get below market pricing in aggregate. Housing is a commodity and Zillow's ibuying service is a commodity, which means they'll pay market pricing on the way in and the way out. And the worst part is that they are taking on massive amounts of debt to finance these money losing transactions because there core business isn't profitable either so they will continually need fresh cash to grow. My hunch is that they saw the writing on the wall with their core business (which also has issues), and they are making a Hail Mary attempt to find something new. But the something new isn't profitable. One thing I've thought about lately is the simple idea of profitability as a checklist item. If the business is public (and thus is relatively established) and is not profitable, then you have to ask why not? If Zillow has all this valuable data, why isn't it using it to make money now? If flipping homes is a profitable business, why are they losing money on each of the thousands of transactions? I think this general concept applies to a lot of businesses. Amazon is the one giant exception to the rule; but the rule might be: if the company isn't making money now, it's highly unlikely that it ever will be a very profitable business.

The other thing to consider about Renaissance is the massive tax bill that LP's paid each year. I know much of their investor base became institutions that in some cases don't pay tax, but if you are a tax paying investor, your results were still incredible, but much, much closer to owning BRK. In fact, if you were a high net worth individual living in NYC, I would bet that your after tax returns would have been higher just owning BRK during its prime three decades than owning Renaissance during their run.

I really think that the vast majority of investors (including Charlie Munger) are too focused on gaining an informational advantage. This makes sense because if you've spent a formidable portion of your career utilizing and capitalizing on an info edge, and that edge has gone away, then it's understandable to lament the disappearance of this edge. But this misses a glaring edge that can still be exploited by mere mortals (i.e. those of us who are far less talented investors than the All-time First Team NBA types such as Munger and Buffett). And that glaring edge is what Roark mentions... the fact that the largest publicly traded company in the world can go up and down by $200 billion or more in market value in a matter of weeks. Basically, this edge is just capitalizing on the fact that stocks fluctuate more than values do. No, there is nothing I know more than the market does about Apple. Yet the stock traded for $90 a share not that long ago and has compounded at close to 30% annually for three years. How is that possible? Either the business value appreciated that much (which it did not), or the market wrongly discounted recent trends (possible), or simply that the market overreacted to near term noise. I think it's a combination of 2 and 3. This happens all the time in the stock market, and it happens now more than it did in the 50's and 60's when Buffett and Munger dominated. This is because the reasons for why the info edge is gone (access to information, the speed of news, noise, etc...) is actually the reason why stocks fluctuate probably even more than they once did. Humans overreact. I think this game is now one of capitalizing on time arbitrage and assuming that you don't have any info edge. Because even with small caps where you think you have an edge, it's very likely that you don't. I think large caps and small caps can get mispriced obviously, and small caps get more mispriced than large caps, but it's far, far more likely to be because of sentiment and emotional swings than because of information that can be obtained. I think it's useful to keep this in mind when looking at ideas, because if you assume that the market already knows everything you're uncovering as you evaluate an idea, you'll look at it differently, and maybe (hopefully) avoid a few mistakes.

That was the previous management's guidance. The new management team campaigned on assertions of much higher NAV. That said, I don't think the previous management's range was unrealistic, and given the state of NYC real estate, this isn't that surprising. The cap rates they used in their activist letters seemed pretty aggressive. The Winthrop guy has a history of being slightly conservative, so maybe this new estimate is on the lower end, but his previous liquidations all came during times of falling cap rates. I bet this estimate is pretty close to being accurate. Probably not a lot of downside (unless Cravath, the big tenant in their main asset, leaves). But not much upside either.

Google finance is saying there are 126M shares outstanding and this includes institutional investors and company insiders. That's not accurate. A GOOG miscue. There are 423m shares outstanding (81% held by Dell, 19% publicly traded).

One question regarding VMW, currently the Market cap of VMW is 31B with 423m outstanding shares, this includes Denali's 81%, right? So if I have enough money to purchase all available VMW stocks, I can only buy a total of 80m shares? And of that 80m, looking at Google Finance, Inst. own is 76%. This means 60.8m are owned by institutional investors and I can only purchase 19.2m? Did I interpret this information right? Yep, roughly 80m shares in float (I don't know how much institutional investors own offhand). But there are about 423m shares outstanding in total. The public owns around 80m, and Dell owns the other 343m. There are 223m Dell Class V shares now trading under DVMT (which is the Dell-issued tracking stock that tracks Dell's stake in 223m of the 343m VMware shares that Dell holds).

It is confusing, but not misleading. And it is Dell common stock. (Just a quick joke from Seinfeld: Kramer: "So you're saying she's deaf?" Jerry: "I'm not saying she's deaf. She's deaf".) So it is Dell Class V common stock. This Class V common stock tracks 65% of Dell's stake in VMW. I'm not sure it would be worthless if Dell filed for bankruptcy, but pretty sure. I am 100% sure it sits behind a mountain of debt in Denali's capital structure. Hope that helps.

Yes, it's Dell common stock (meaning, that Dell issues the stock). The Class V common stock (aka the tracking stock) will track 65% of Dell's (formerly EMC's) stake in VMW. So yes, it tracks VMW (one share of tracker tracks one share of VMW), and yes, it's technically Dell common stock. Confusing, I know...

I didn't see a thread on this, so I thought I'd start one. I'd be interested if anyone has looked at the VMW tracking stock, which will be issued to EMC shareholders by Dell. Quick background: Dell is buying EMC for $24.05 per share in cash and .111 share of a tracking stock. The tracking stock is issued by Dell (the company is now called Denali, but I'll refer to it as Dell). So the tracker is Class V common stock of Dell. Each Class V share tracks one Class A share of VMware common (the publicly traded VMW). The deal closes tomorrow. The tracking stock will have a ticker DVMT, but has been trading in the when-issued market under DVMTV. Dell's use of the tracking stock allows it to avoid a big tax bill that would come from the sale of a portion of the VMW stake (EMC paid $630m for a stake in VMW that is now worth around $23 billion). The tracking stock helped Dell get the deal done without having to come up with more cash. The tracking stock (at around $44) currently trades at around a 40% discount to VMW (at around $73 per share). A discount is certainly warranted, in part for the following reasons: 1. The tracker is Dell common stock, which means it sits behind a mountain of debt. Should Dell/EMC go bankrupt, the tracker is worthless. 2. Dell has said its top priority is to pay down debt and achieve investment grade ratings, so the tracker is currently on Dell's back burner. 3. Dell will take over EMC's 81% stake in VMW, but for tax reasons, it is unlikely that Dell will spin/sell VMW (which also means it won't collapse the tracker back into the common) for five years. So I think part of the discount is due to the fact that there is no near-term path to closing that spread I think those are the three main reasons for the discount. There could also be a larger than expected spread because of fears that Michael Dell might act in his best interests at the expense of VMW shareholders (or Class V tracker holders). One argument is that he lets VMW struggle in order to buy the rest of it cheaper (I find this argument ridiculous though). But nevertheless, he got criticized for "taking under" Dell back in 2013, and that could have something to do with the discount. So those are a few main reasons why I think the tracker trades at a discount (in addition to other reasons why trackers always trade at slight discounts: no voting rights, no legal claim to assets, etc...). Again, there deserves to be a discount. 40% discount just seems to be too much. There are a few reasons why I think the discount could close: 1. Dell's debt facilities will allow the company to buy back up to $3 billion worth of tracking shares, which at today's price, is equal to around 30% of the 223 million tracking shares outstanding 2. VMW has a $1.2 billion buyback authorization for its Class A shares, which they intend to complete by the end of the year. This is equal to around 20% of the float (there are about 423 million VMW shares; 343m are owned by EMC, 80m are owned by public shareholders) 3. The tracking stock becomes listed on the NYSE (I'm unsure how much appetite/ability institutions have to own tracking shares, but for an investor interested in VMW at a sizable discount, this would be one way to own it). I haven't bought the tracker because I'm still considering my thoughts on VMW. VMW provides software that allows for more efficient use of data centers. This process is referred to as server virtualization, and VMW has a large market share. Basically, an administrator can use VMW software to divide a physical server into separate “virtual servers”, which allows a company to be more efficient with the IT infrastructure that it currently operates. VMW makes money by licensing its software, and it also collects revenue from software maintenance and related services. VMW has a nice competitive position in its market because companies don’t want to switch software providers due to the significant inconvenience associated with learning a new system as well as the downtime associated with switching. It's also a cash cow. It will do over $2 billion in operating cash flow this year, and has around $12 per share in net cash (net of taxes). So this makes the $43 tracking price attractive. But the industry is obviously going through major changes. Two risks to the company: 1. A shift from on-premises data centers to the cloud. VMW could lose current customers as more and more companies shift their data centers to the public cloud, and thereby eliminating the need for VMW’s product. 2. Competition for smaller, new customers. Although VMW has an entrenched market position providing software for physical servers, Microsoft has a competitive product that is gaining traction with smaller companies, especially those who might also use Azure, Microsoft’s cloud storage offering. There have been a number of potential VMware "killers" that haven't materialized for one reason or another. VMwares prices are very high, and there are open source server virtualization products available for free, but surprisingly, VMware continues to dominate. Part of it is the support, but there are support options out there for 10% of the cost that VMware charges. I don't know the industry that well. Are there reasons why IT departments stick with VMware over what appears (to me at least) to be numerous other (much cheaper) alternatives? This isn't a comprehensive view of VMW (because I don't really have one), but just some thoughts I've cobbled together from reading about it. I think Dell is an interesting guy, and I think the situation is interesting. The bears liken this Dell/EMC deal to the famous analogy of two garbage trucks colliding (which is how people referred to the HP/Compaq merger in 2001). I think Dell (the guy) is much smarter than HP/Compaq mgmt teams though. He also has a lot riding on this. I'm open to thoughts on Dell/EMC business as well as the VMW business (and future prospects). Anyone have thoughts on the businesses (or the tracker)?

A lot of good stuff to chew on. A couple of comments. Agreed that the level of dealer growth isn't sustainable over a long period of time, and that they need some help from the competitive environment for total long term growth. Management (who I think you must have confidence in to own the stock) seems to think a good runway remains though, and has provided data on the point. I think at these levels we're paying for some growth, though not historical growth levels. When comparing valuation, in addition to the items you noted, I think CACC's earnings stream is higher quality because of how they structure their portfolio program (most of their business). By that I mean the dealers have skin in the game, so (a) incentives are more aligned, and (b) CACC is in a more senior position compared to those using a direct discount purchase model. Regarding (b), up to CACC's advance, the dealer is in the first loss position and beyond that, 80% of the losses (variance below forecasted collections) are born by the dealer through reduced dealer holdback. So their earnings should be less risky and volatile on the downside, and so deserving a higher multiple (though clearly their earnings are quite cyclical and credit risky). Also, you're right that it's a tough business. It's not one of Buffett's businesses that is "so good an idiot could run." But I think if it were easy it would be a very bad business - totally comoditized. And they strike as having the philosophy, management, and discipline to do well. Not dissimilar to an investment business, insurance company, or bank, which are also not easy, but can be quite good if run in a rational and disciplined manner. A bit of a leap of faith with management is required. The other thing that makes me nervous about these subprime companies is that its very difficult to get a good feel for the true performance of these loans. CACC discloses the "spread" all through their filings: i.e. the amount of the total loan value (p&i) that they collect compared to the amount that they advance to the dealers up front. This spread has always been positive, and as you pointed out, this creates in effect a seniority position in the loan. That said, when only 65-70% of the loan value is getting collected, the default rates are very high. Somewhere around 50% of the loans are getting repaid in full. This isn't surprising, as other subprime lenders have very high default rates as well. But CACC's disclosure is much more complicated than the other subprime lenders that basically just state their credit metrics in more traditional form. For CACC, it seems the only way that this model has been so successful is that the dealers are jacking up the price of the car above the fair market value so that a) it can get an advance from CACC (combined with the downpayment from the car buyer) that is close to what the dealer would get from a cash buyer or traditional subprime lender and b) CACC gets enough interest to recoup its advance and make a profit before the buyer quits paying. It's like a race against the clock. CRMT is in a similar position, where it needs around 10 or 11 months of payments to breakeven, and soon after the buyer typically quits paying. NICK and CACC need more time since their loan terms are longer, but same concept. The difference is NICK and CRMT (and others) are currently provisioning more than 25% of their revenue for credit losses, and CACC is in the single digits. I know this is due to the differences in their model, but I fear that dealers have more of an incentive to artificially inflate the cost of the car on a CACC loan since they don't get as much up front as they do from another subprime lender that does a more traditional loan purchase. Thoughts?

I have never looked at this company but just read the annual report today. Some quick random comments I'll make: I think it's a well-run business, but they have some tough headwinds currently. This is widely acknowledged, but competition is brutal currently. I've looked at CRMT and NICK (much smaller players in subprime auto finance) and loose terms and excess inflows of capital to this business is really affecting their profitability. I've talked to CRMT management, and you almost feel bad for them. They feel like there are new competitors entering their turf on an almost weekly basis, and you get the feeling that they aren't in control of their own destiny at all. It's much easier for people who used to be great CRMT/CACC/NICK customers (subprime, but at the top of the subprime "tranche") to now go to one of the OEM finance arms and get a 72 or even 84 month loan, which allows them to buy a nicer car that's twice as expensive for the same bi-weekly payment But what has impressed me on CACC is their ability to offset declines in volume per dealer (due to heavy competition) with consistent growth in the dealerships that they do business with. They've roughly doubled their dealer count since 2011, which has more than offset around 26% declines in per-dealer volume. Despite losing market share on a per-dealer basis, they've added dealers and improved overall share and volumes, and earning power has doubled. That said, they've gone from 900 dealers in 2003 (the beginning of the previous cycle) to around 9,000 now. And volume per dealer has gone from around 62 loans to 32 loans. So it took a monumental increase (10x) in dealers to offset 50% productivity declines at the dealership level. To sum it up: They've done an impressive job of growing through the cycle by willingly ceding market share to preserve profits at the dealership level during competitive markets and offsetting this with new dealers. Now that they have 9k dealers, it's impossible to achieve the same level of growth going forward, and so the high returns on equity will be much more dependent on level of profitability they can get with each loan, which will likely require some help from the competitive landscape (CACC likely does fine going forward by the way, it's just they won't see anywhere near the rate of compounding I don't think). Just as aside, it's interesting how much higher CACC is valued than smaller (weaker) competitors like NICK. For $4b (equity value of CACC), you get around $3.3b in receivables and $1b of equity. NICK is roughly 10% of that size ($311m receivables and $102m equity), but cost only ~$80m. In other words, NICK is 0.8 P/B and CACC is 4.0, or five times as expensive. Both have similar debt levels relative to equity, but obviously CACC gets much better returns on its equity than NICK, and so its valuation relative to earning power is only twice that of NICK's (14 P/E at CACC vs 7 P/E at NICK) I wonder how much of that is warranted. CACC is obviously a much better business, and I think probably much better positioned to do well if/when the downturn next comes. It has a ton of dry powder via its credit facility and some cash, whereas NICK is mostly tapped out. So CACC will be able to capitalize by writing loans at attractive terms if capital begins to leave the industry. I'm not sure I really like either business. Subprime auto lending is so tough, and likely to get tougher. And short of another credit crisis, I'm not sure capital leaves as quickly as it did the last downturn. Open to comments on the industry or any one of these firms specifically...

+1. I don`t know if it was Buffet who said that, but the best investment is one that grows without reinvestment of capital like See`s Candy and throws of a lot of free cash on its way. This whole compounder stuff is way overrated since ROIC is mean reverting. Number one determinant of future rate of return is price paid, every backtest that i have seen confirms that. ROIC doesn`t even have an impact on returns, this was highlighted in "Deep Value". Good points. I think there is so much interest around the compounders because we've gone through a multi-decade bull market and everyone sees a TDG, POOL, BRK, etc, and they think how much better it must be to buy something to compounds tax deferred forever. Well yeah, of course that's better. But actually investing the bulk of your portfolio in a compounder at the end of a 25 year bull market in both stocks and bonds is not an easy task. I know it's in bad form to take someone from this forum as an example, but take a look at gio. He's posted like 6000 times so it's a decent sample size. He's picked out all these "compounders" in the past, and almost every one mean reverted. He bought into Apple, and now it looks like he bought right as iPhone sales peaked. He bought into Oaktree, then realized it wasn't that great. He bought into Nomad, then realized it wasn't great. Bought into Valeant, and then realized it wasn't great. Now he's buying into Google, Nike, Amazon, etc. In the search of finding compounders I don't think he's stuck with a single one? That just defeats the purpose of investing in compounders. You might as well have found a crapload of cigar butts over that time frame. Now it just looks like he's long the S&P 500 at peak everything. Buffett probably identified less than 20 "compounders" over his entire lifetime that he was able to buy at the right price. But he did it during one of the biggest economic bull markets in history. That's a hell of a tailwind to be long a compounder. And he's probably 50x better than most of us at finding something that can keep compounding. How long will you wait to invest your portfolio in these compounders and be willing to sit through nasty bear markets, changes in the economy, changes in competitive advantages, you name it. It's incredibly hard. Look at something like Walmart today. It looked like a great compounder back in 1995 and now no one wants to own it. Anything that looks like a good compounder today is incredibly expensive. 30x, 50x, or 1000x for AMZN. It would be nice to find the next WBA, BDX, CHD, XOM or MO but it's nearly impossible to do in practice. But if you guys come across any cool compounding machines that isn't Amazon, let me know. Out of the thousands of threads on this board, I'm not aware of any others that look like real high ROIIC compounders. These are some great points Picasso. Finding the truly great compounders is extremely tough. You only need a few of them to make a career, but there is no guarantee even of that. I've spent a lot of time thinking about two "buckets" of investment opportunities. I prefer limiting my investments to good business (with the occasional exception when it comes to some sort of oddball situation or bargain security). But almost always, I feel more comfortable with the businesses whose intrinsic values will be higher 5 years from now. But within this category of "good businesses", I think there are many opportunities to buy them during times of general pessimism and sell them when the market values them more fairly. The so-called "time arbitrage" where you buy these companies when they represent a decent discount to steadily rising fair values, and then sell them when the market eventually corrects itself. It seems that once or twice a year, Mr. Market offers this up due to some macro event or just general market pessimism, and occasionally there is an opportunity to buy into a company-specific short-term problem. I think there are many more opportunities to engage in these types of investments than there are trying to locate the next 10 bagger. If you are willing to wait 2 or 3 years for your result (often, the result happens sooner than that, but having that kind of time horizon is usually necessary to capture the opportunity), I think you could simply build a list of these so-called compounders, and just wait. If you have a list of 50 of them, there are probably opportunities on 2 or 3 of them at any given time. I think a guy like Allan Mecham has built his successful track record on this type of general concept. He has fairly low turnover, but he seems to find these (often large) good companies at a decent discount, and then patiently holds them for a year or two, and then sells them later once the market values it more fairly. A friend and I call this "cigar butt investing 2.0". Basically, instead of cigar butts, they are good businesses. Both approaches require maintenance and a fairly steady flow of new ideas, but it seems a practical solution to the ever present problem of locating the next CMG, HD, or AMZN. In the meantime, you can always keep hunting for the next 10-bagger. Just some random thoughts. John