Portfolio updates (September 2021)

It has been a while since I updated you as the day job has been crazy recently. My portfolio has stayed mostly the same and I’ve continued to add to positions I think trade well below intrinsic value (notably TRTN, MSOS and NCMI). On August 1st I wrote the following, and I think this still describes my thinking around my portfolio well:

I do subscribe to the theory that history rhymes, and as a result I’m not factoring in Delta variant to any buy / sell decisions I’m making. In fact, I’m not letting macro guide any buy / sell decisions I’m making. In theory (and I’m the first to acknowledge I don’t always do this in practice), all that matters to me is that I can buy under intrinsic value (the discounted value of future cash flows) and have some visibility on how a business could play out in the next 3-5 years.

It’s so easy to get caught up on YTD returns and thinking about short term stuff like optimizing for 2021 taxes. I still dumbly check the market most days despite knowing how pointless this is long term. Everyone is probably tired of me echoing Buffett and saying “Watch the business, not the stock” but I think these words have never rang truer. Many of the companies in my portfolio are saying things in earnings, presentations, 8-Ks and other communication materials that run directly contrary to gloom and doom financial media predictions on COVID and stocks being expensive. If I can dedicate an hour of time to reading actual company comms for every one minute of FT/WSJ/CNBC article, I’m doing something well and I aspire to get closer to that ratio over time.

As a related aside, I highly recommend downloading the app Quartr, favoriting the companies you follow and listening to the calls and maybe skipping Invest Like the Best or whatever your favorite podcast is. It’s amazing how much I learn in 30 minutes on 1.1x speed listening to companies I’m interested in but haven’t bought yet like Abercrombie and Fitch (credit to Value Investors Club member MOscowMule for the original idea). Did you know ANF beat Q2 sales from 2019 by 3%, repurchased ~5% of the float in Q2 (about $100mm), and is driving Hollister sales through record TikTok engagement with stars Dixie and Charli D’Amelio who have 270mm followers? Me neither. But these are the things in my opinion you pick up when you go company calls over podcasts and news.

In summary, over the last month I’ve been trying to stay in touch with what companies are saying and doing versus monitoring any developments around the virus or inflation or macro themes. I think the market has some amazing discounts in plain sight, and patience will be rewarded for the investor who takes a five year review or longer. Let’s get into a couple quick updates on names:

 TRTN – Triton continues to be a short term “heads I win, tails I win” name that long term has replaced its lease portfolio with higher per diem container leases that go out 12 or more years into the future. If supply chains keep being held up and material prices stay high, they benefit from higher lease rates and container prices. If supply chain problems are solved and container prices return to normal, their customers will likely lease more containers. To quote the great Diligent Dollar , this is a “Secret SaaS” business that if you replaced the container terminology with “cloud” and “Customer Lifetime Value (CLV)” and “increasing Average Contract Value (ACV)” would trade a few multiples higher at least. The fact of the matter is TRTN is the market leader in the container leasing space and is seeing CLV and ACV equivalents increase. As everyone has read about at this point, supply chains are massively disrupted right now and companies are struggling to ship and receive things on time. SpinMaster (toys manufacturer) and Abercrombie talked about this on their last call and every retailer, auto OEM and company that handles physical things has complained about it. TRTN will benefit from the short term disrupted supply chain environment and in normal times can return a ton of capital if it sees opportunities to do so. At <7x forward earnings and ~1.4x book with 25% regular ROE, I can’t help but think in a few years Triton will produce cash equal to its current market cap and trade below book if the stock stays flat.
– MSOS – The Multi State Operator Cannabis ETF has gotten whacked in the last few months and is in the middle of a 25%+ drawdown. The operators themselves posted solid Q2s and cannabis sales continue to grow at cloud computing like rates. The legal environment remains friendly and Curaleaf’s chairman Boris Jordan expects draconian tax regulations in the sector to be legislated away in the next year. Ayr Wellness announced they’re buying back the maximum 5% of the float their exchange allows (good use of capital? Who knows but at least this is moderately shareholder friendly). I don’t see any reason for the drawdown and everything I wrote in my post on MSOS remains true. If / when cannabis is legalized or even if / when the SAFE banking act is passed, this sector will get its day in the sun and I think catch a bid. It’s apples to oranges, but I’d call out some of the rich multiple companies of today used to trade like dogs – take a look at SHOP (5x sales back in the day) and DPZ (single digit P/E in late 00s). The passing of time can lead to a rerating and as long as your thesis holds true I would not be scared off by a cheap multiple and declining stock price.
– NCMI – it wouldn’t be a Stock Talking post without me making a continued buy reco on NCMI and that’s exactly what I’m doing. Yep, this thing has been sliced in half over the last quarter on what I can only assume is Delta variant fears. Yet, we just saw:

– the second biggest pandemic era film weekend opening in Shang-Chi, which by the way has a 45 day exclusive theatrical window. Additionally, this was after Free Guy posted a better than expected weekend, meaning two films with no franchise history have done extremely well at the box office during the height of Delta variant
– the biggest ever Labor Day weekend movie opening. Yep, including pre-pandemic. Shang Chi did $75mm on a 3 day and $95mm over the four day holiday weekend. This is excellent for any movie, pre or post pandemic
– Disney announce a number of movies in 2021 will have a theatrical exclusive window. One of them is Eternals which is a Marvel movie. Watch the trailer. This is after the bears all said Disney was moving to eliminating the window. I can’t reiterate the importance of this announcement in that it was done during Delta variant and signals that 2022 could be free of same day streaming releases
– Almost forgot – Sony moved UP the release of Venom two weeks after seeing the success of Shang Chi. That is not a typo. Moved up.
– IMAX CEO announced on CNBC he thinks box office attendance is hitting an inflection point

So, NCMI was sliced in half and the box office environment in my opinion has improved over that time despite the worst wave of COVID on a case basis we have seen since the pandemic started. There are calls out there among those more knowledgeable than me that this is the final wave of COVID.  So, if the value of an asset is the discounted value of the future cash flows, isn’t it high time the market started valuing NCMI, IMAX, CNK and others on 2022+ free cash flow streams? I believe advertisers will commit to NCMI in force as it becomes obvious consistent box office attendance and consistent high quality movie releases (Matrix 4 anyone?) are here to stay.

See through the Matrix and realize the market is heavily discounting movie theater cash flows

That’s all for now folks. I’m hoping to write a longer post on ANF in the future as I’m excited about an Abercrombie resurgence with its new clothing brands and TikTok presence as well as the company’s balance sheet and commitment to returning capital to shareholders. Expect a post on that from new in the next few weeks.

Happy trading,