Treacherous Markets | The Acquirer's Multiple®

During their recent episode of the VALUE: After Hours Podcast, Taylor, Brewster, and Carlisle discussed Treacherous Markets. Here’s an excerpt from the episode:

Tobias: So, I just been really enjoying watching Davey Day Trader on the Twitter machine and everything else. Clearly, there are lots of folks following him and I’ve been looking at– you can pull up Robinhood. There’s a robinhoodtracker.net. Basically, there’s a little URL you can tag on to the end of that and the ending of it is, whatever ticker you want to look at, you can pull it up and you can see how many Robinhood holders in each of these individual names. So, I’ve been kind of just amusing myself going through them and seeing what’s getting a bid, what’s not getting a bid. It’s striking– and I’ve said this before, Robinhood buyers are definitely dip buyers and that either makes them value investors or bag holders and we don’t know yet which one it is. But I think you gotta give them credit. They have aggressively bought stuff that’s fallen.

There are places where you don’t gotta give them credit, is things like Hertz and Chesapeake because they’ve aggressively bought into bankruptcies there. And they’ve done the billion-dollar capital raise in Hertz where the debt’s trading at 67 cents on the dollar. That means equity collects nothing. That means that debt takes a 93 or 94 cent haircut, which is a lot. And then—

Bill: Is that a big down? I’m not sure.

Tobias: That’s a lot.

Bill: It’s hard to come back.

Jake: Is that bad?

Tobias: And then the billion that they’ve raised, that goes to the debt holders. That’s not gonna clear the debt because they’ve got to do another one. But while the market’s gonna take that stuff, they’re gonna feed it to it. Now, legally, it’s okay to do it. Whether you like that ethically or not, that’s a question– I think it’s pretty– I wouldn’t be doing it, I wouldn’t do it because I wanna have a good reputation and survive for a long time in this industry. So, I wouldn’t necessarily go ahead and do it, but it is legal to do and it’s all disclosed. They’re telling you right in the document that you’re not gonna collect unless something really drastic happens and they don’t anticipate that happening. They couldn’t be clearer.

So, there’s a lot of guys out there I think who are– it’s very, very easy to trade this stuff. And sometimes the fact that it’s easy to do it sort of masks how much work you really should be doing before you put these on. I got a background as a mergers and acquisitions, [unintelligible [00:29:51] diligence for a decade worked in a public company and I’ve worked in public equities since then reading filings. I’ve read a lot of filings. I’ve done a lot of reps. So I think that for a lot of things, I look at them pretty quickly and decide, when Moderna had its little pump and dump, the moment that I read that I was pretty confident that was gonna be a pump and dump. That’s what they look like. When Hertz was doing its–

Bill: So, you’re saying that 30 seconds of due diligence isn’t sufficient?

Tobias: It’s sufficient to pass.

Bill: Okay. There you go, there you go.

The First Thing To Check In A 10K/Q

Tobias: It’s not sufficient to buy. I think to buy, you wanna be doing a lot more work. So, I’ve built out systems and things. It gives me a– I’m able to cut pretty quickly to the part that I want to look at, and I’m sure that you’re the same. It is hard reading 10 Qs and Ks but if you read a lot of them, you know where you wanna go pretty quickly to see what’s happening. What’s the first thing you check in a 10K or Q? Just interested to know what’s the first thing you look at?

Bill: I like to look at the cash flow statement.

Tobias: There you go. What do you look at, JT? He’s gone to the Jaketrix. How convenient.

Bill: [crosstalk] Yeah, that is convenient. I like to read the IR presentation. [laughs]

Tobias: I just think that when the market looks as easy as this, often that might be disguising the fact that it is a lot harder than it looks. And I think we’re gonna– Jake’s back. You were in the Jaketrix very briefly there, mate. Did you hear the question? Where do you look in the 10Qs and Ks?

Jake: Yeah, I heard everything. I will typically look at a long sweep of the numbers, of the actual financials first, and then from there, I will dig in more to a little more of the qualitative things. I don’t know if you guys know, Buffett, he has a disqualifying checklist. And there are three things that he asks himself before he’ll do any more research on a company. And if any of those three things are a pass, then there’s no balance of any other good things about it that he could learn that will put it back into his funnel.

Tobias: What are they?

Jake: So, I think that’s a pretty good way. I knew you’re gonna ask me that, of course. Let’s see. I think one of them is, does he like the CEO? Another one is, does it have reasonable margins? And then I think the third one is tail risk.

Tobias: Yeah, that makes sense. I always look at the balance sheet. I go to the junkiest, the bottom part of the asset list, and I’ll just look at what they’re including in the assets. And I go to the bottom part of the liabilities list and just look at the stuff there, like the last three entries that you don’t know what they are, that’s always the first place to look because I’m trying to work out what they’re hiding in those parts. Because everything else, like everyone knows what cash is, payables and receivables, inventories. Everybody knows what those things are. It’s the stuff that’s hidden underneath that, that’s some weird thing, that’s where they’re hiding all of the good stuff. I think it’s the same thing on the income statement, what stuff are they hiding down here in costs and at the bottom that nobody’s reading. “Ah, we disclosed it. We just knew that you weren’t gonna read it.”

Bill: I think a lot of the pros that I really respect,they say, I read the audit, and then, I move on from there. Those are the guys that start– that’s the closest thing to the source documents. And even in the 10K, you get to MD&A and you start to get the corporate spin and you start to do the language. I enjoy that stuff. I think if people can communicate what’s going on in the business and a clear manner, it helps me get a sense of who they are. But the audits were the real hard– I don’t know, rubber meets the road, so to speak.

Tobias: Yeah. You wanna be careful of those qualified opinions given how loose they are, I think in most things. I’m amazed that Tesla keeps getting a clean bill of health from PwC. PwC has got a little tail risk there.

Jake: Yeah. Is everyone worried about the AR? Is that what Einhorn has been harping on?

Tobias: You need an accounting PhD to understand that stuff, and even then.

Jake: It’s all too much flexibility right now maybe.

Bill: Stonks go up.

Tobias: But stonks do go up. It does seem that way. I get increasingly uneasy when the market is like this. I don’t wanna be labeled as a permabear. I want the market to go down a lot so I can buy some more and be a permabull again. But the market to me, it just looks, there’s a lot of guys in here who are– If you look at those Robinhood holders, the number of holders in those accounts, they have hockey-sticked up in some of these names that have gone down. And that just means there’s a lot of people with exposure to them and that must be creating buying this, selling that order floater to other folks is my understanding. So there are other folks front-running it [crosstalk]

Bill: It’s in their documents.

Tobias: Yeah, well it’s disclosed. Can’t complain.

Bill: All you have to do is click the user agreement and scroll to page 5 and everybody does that, right?

Jake: Yeah. Page 500.

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