Seeing through the stock-based compensation ruse

A large and perennial frustration I have when researching companies in the US is the propensity of many companies to add back stock-based compensation to headline 'adjusted earnings'/'adjusted EBITDA', coupled with the propensity of many analysts and investors to take those adjustments at face value. In many cases, I believe the practice to be contributing to material overvaluation, as headline PE and EV/EBITDA multiples are often meaningfully understated.

Why I think digital currencies will go to zero

In 2011, my girlfriend at the time, who knew next to nothing about finance and investments, asked me out of the blue if she should buy some gold. She produced a bouchure she had procured from somewhere offering for sale small ounce-sized gold bricks. I was already bearishly inclined towards the metal at the time, but that comment cemented my bearishness. It called immediately to mind the depression-era saying that "when the shoeshine boys start telling you what stocks to buy, it's time to sell" (paraphrased). Sure enough, gold, which was at about US$1,800/oz at the time, was within a hare's breath of peaking. Gold now trades at closer to US$1,200/oz - a 33% loss over a 6yr period where the S&P500 has continued to surge to record highs.

The 'ick factor', and Ambac as an interesting long

I have found that a fruitful place to look for good investment ideas is amongst stocks that suffer from what might best be described as the 'ick factor' - i.e. it feels too icky to touch. And I have found that the more immediate and visceral the revulsion to the very idea of looking at a particular stock/industry/country, the better. The ideal reaction you want when you float an idea to most people is immediate disgust/dismissal. If you get that you're quite often on to something.

This is so for many reasons. For a start, it goes without saying that growth & fashion-chasing investors are unlikely to be interested in picking over dead carcasses, but the ick factor also means that a lot of otherwise intelligent and contrarian value investors, who generally act as the buyers of last resort in out of favor industries/stocks/countries, are also unlikely to even bother looking at it. This can result in larger-than-average degrees of undervaluation.

Time to take a punt on Nagacorp?

Nagacorp (3918 HK) is a company I have followed for a while. The company owns a first-class asset - an exclusive monopoly license to operate a hotel-casino in Cambodia's capital city Phnom Phen out until 2035 (which is built out and operational). The company has been growing like a weed, benefitting from growing tourism flows into Cambodia, and rising regional and (in particular) Chinese wealth (a key source of inbound tourism and gaming dollars).

The company took the significant downturn in Chinese VIP gambling activity in 2015-16 in its stride (which followed a Chinese corruption crack-down which hit Macau pretty hard), with the downturn barely registering in Nagacorp's financials. This reflected the property's mass-market appeal (about 50% of gross profit), coupled with its VIP positioning as something of a 'poor man's Macau' (although it has also been speculated that company has benefitted from Cambodia's somewhat more 'off the radar' location and lax oversight). The casino also benefits from gambling tourism from Vietnam, where until recently gambling was outlawed (a modest relaxation of these restrictions is currently being discussed/trialled).

Unicorn bubbles, Clutter, and the value of time

In recent years, Silicon Valley has witnessed something of a technology bubble Mark II, although this time the excesses have been concentrated in the private VC start-up funding market, rather than the public markets (large-cap FANG tech valuations are high, but I do not believe them to be bubblish as yet). The poster children have been the so-called 'Unicorns' - private VC-funded start-ups sporting valuations in excess of US$1bn, which are long on hopes/dreams/aspirations and rapid user growth, but short on profits (in fact large and growing losses are the norm).

Many of these Unicorns are marketing a number of cool new O2O services, and are growing active users and (sometimes) revenues very rapidly. The narrative is that everyone else - including incumbent players in adjacent old-world industries - have been too dumb to recognize the opportunity to provide such services on new-technology platforms, and that only tech-savvy 20-somethings have been smart enough to figure out both the business opportunity and how to bring such products & services to market. Mobile apps now mean every industry is ripe for 'disruption'.