Stock market narratives

The invention of narratives to explain why there are more total sellers than buyers in particular stock indices can seem to me like an act as creative and fanciful as astrology or reading meaning from sheep entrails.

Maybe “the stock market” is down because people are starting to realize the holidays will be a bummer, or the election picture feels less clear than it did a week ago, or weather has turned in gloomy ways, or the elections in Chile and Bolivia indicate the left is on the march and the right is in retreat, or it’s foggy in New York City today, or instability in general is in the air when the President storms out of his 60 Minutes interview and the other guy is hardly at the top of his game.

Or just because October is spooky, to markets and in general.

Maybe it’s down because it’s been overinflated for a long time, and it doesn’t take much to make it turn. The market is a herd. Herds can turn on a sudden startle, on almost nothing, as Larry McMurtry tells us:

Long ago, when I was a young cowboy, I witnessed a herd reaction in a real herd – about one hundred cattle that some cowboys and I were moving from one pasture to another along a small asphalt farm-to-market road.  It was mid-afternoon in mid-summer.  Men, horses, and cattle were all drowsy, the herd just barely plodding along, until one cow happened to drag her hoof on the rough asphalt, making a loud rasping sound.  In an instant that sleepy herd was in full flight, and our horses too.  A single sound on a summer afternoon produced a short but violent stampede.  The cattle and horses ran full-out for perhaps one hundred yards.  It was the only stampede I was ever in, and a dragging hoof caused it.

Maybe the vibe is just off.

I’m not saying this headline is wrong, just that it might be. Words like “on” or “amidst” can be made to do more work than they ought to. The idea stock market study or business analysis is a hard science is silly. There’s absolutely room to consider the role of unquantifiable vibes. You might as fairly say Stocks Fall On Gloomy Animal Spirits.

Further, the human need to put a story on events is unstoppable. Narrative investing is kind of becoming a thing, but I still feel there’s a flawed sense that you can make a science of it.

intense sunset I saw


Intrigued by what was on TV in 1940

From Larry McMurtry’s review of Connie Bruck’s bio of Lew Wasserman, in the newly unlocked NYRofB archives.

From those same archives, Renata Adler’s savage attack on Pauline Kael drops a parenthetical on TV:


Trader Joe

Great interview with Joe Coloumbe, Trader Joe himself, from Coriolis Research (ht somebody or another on Twitter.

They have all kinds of great reports over there by the way. Should I grow mungbeans in Northwest Queensland??


beautiful poem


The illusion of choice

Cool graphic, from “Monopolies are Distorting the Stock Market” by Kai Wu of Sparkline Capital


Founding Documents

Note to readers: from time to time we accept submissions written by correspondents about topics they’re passionate about that fit into our frame of going to the source.  Reader Billy Ouska sent us a writeup of something he’s passionate about, the founding documents of Facebook, and we’re proud to present it here.  If you’d like to write for us, send us a pitch!  – SH, editor. 

The Social Network (now available to stream on Netflix) tells the story of the creation of Facebook through portrayals of the legal battles over its ownership. In a pivotal scene, cofounder Eduardo Saverin flies out to Facebook headquarters to sign some seemingly innocuous legal documents. Of course, the cut to Mark Zuckerberg watching furtively from afar tells the viewer that something is up. We later discover that Saverin has signed off on corporate restructuring that will significantly dilute his equity in the company, leading to the lawsuit whose depositions serve as a narrative device for the film. (Moral of the story: know what you’re signing! If you don’t, hire a lawyer! If there’s a lawyer in the room, ask him, “do you represent me?” If he says no, get your own guy! If he says yes, make him put it in writing!)

We learn that Facebook was originally formed as a Florida limited liability company and that, through legal maneuvering, another Facebook entity was created in Delaware that acquired its Florida counterpart, giving it the ability to restructure ownership. I’m not here to delve into the legal tricks that were played; other corners of the internet have already done so. Instead, I’m here to talk about something even less interesting: entity formation documents!

Formation documents (what you file with a state to create a corporation or limited liability company) are almost always available to the public. If you know the state where the entity was created, you can easily find its initial records. So, after entering “Florida entity search” into your search engine of choice, you’ll get here. With some persistence, you should be able to find information on whatever company you’re looking for, like the initial Articles of Organization of thefacebook LLC:

Maybe it’s just me, but seeing a copy of these Articles feels almost historic, and maybe a bit inspirational. Facebook is now worth hundreds of billions of dollars, but only sixteen years ago it was so green that its owners listed in a public document what look like their home addresses—no, even better, their parents’ home addresses—because they didn’t yet have an office. Mark’s address even has a typo: Dobbs Ferry is in New York, not Massachusetts. (Or, was this not a typo but rather the first of many times in which Zuckerberg would intentionally flout governmental authorities?!)

Even better is that the amended Articles of Organization are also available for viewing.

I don’t want to pull you even further into the weeds of corporate law (thanks for even making it this far!), but what I find cool here is that the amended Articles include an attachment laying out the reorganization that is signed by the man himself. Another slice of history! Think of how much impact, both positive and negative, that Facebook has had on the planet: the media industry, the outcome of the elections, the way we communicate. So much of that can be traced back to this document (and a thousand others not available for public viewing). Did Zuckerberg have any idea? Did he pause and contemplate before signing this? Did he scribble his signature without reading it, like Saverin would later do? If you squint hard enough, it can be fun to imagine the answers to these questions.

It looks like the first Articles of Organization were sent to the Florida secretary of state via fax. So, after it was run through the fax machine, the original was probably put in a file cabinet by the Organizer (Business Filings Incorporated) or thrown out. I’m guessing the amended Articles of Organization were prepared by a Palo Alto law firm, signed in Palo Alto, and then faxed or emailed to a third party in Tallahassee, which filed the documents with the Florida secretary of state. I would guess that the original in Palo Alto made its way into a client file somewhere.
Even I, a noted corporate records enthusiast, don’t think that these documents need or deserve the reverence afforded to the Constitution. But I do think there is value in making them public record. Every once in a while, they give a peek behind the curtain into the workings of the corporate world, which could probably benefit from some more transparency.

(PS: every state lets you access corporate records like these from the comfort of your home, though some states will require the creation of an account and/or the payment of a nominal fee to search. Just imagine what you could find!)

 


Ray Dalio

In a “Principles” app that takes its name and lessons from a bestselling memoir by Mr. Dalio, this week’s case study on meaningful work and relationships features a video from a 2013 “Family Reunion” for employees who had been at Bridgewater for at least a decade.

“Every one of these people here is, you know, my family,” Mr. Dalio said in the video. “I’ve watched them grow up, like, coming out of college and watching them get married and have their kids. You know, I didn’t behave any different to the people I work with than with my kids.”

Some of the employees who appeared in the video were among those laid off this month, said people familiar with the matter.

from Friday’s Wall Street Journal piece, “Bridgewater Associates Lays Off Several Dozen Employees,” by Juliet Chung.

Ray Dalio is a beloved figure here at Helytimes.  If you’ve read Principles, this behavior is not inconsistent, I’m sure he told these employees that to achieve success they must first face and accept harsh realities.


The statement is not only humorous, but also it is literally true

Tired: Buffett

Wired: Sir John Templeton

(Inspired: Charlie Munger)


Yes! Same!

from the WSJ’s obituary of James Sherwood (paywall, prob’ly)

His work with cargoes in France and England exposed Mr. Sherwood to the inefficiencies of loading goods at docks with rigid union work rules. That experience made him an early convert to the use of standardized steel containers, which could be loaded elsewhere and delivered to docks by train or truck.

In 1965, he founded London-based Sea Containers to buy containers and lease them to companies moving goods. His initial investment of $25,000 gave him a 50% stake. When the company went public in the late 1960s, he was suddenly rich, “free to move my life forward any way I wanted,” as he later put it.

Though I’ve thought much and even written about containerization, I never fully considered the union busting aspect.

Containerization is incredible.  That such a simple idea – use a standardized box – took so long to come up with.  That is was willed into reality by one man.  The amount that it changed the world.  Every port city in the world was changed.  The ports became charmless factory zones.  No more On The Waterfront.  Walmart could not exist without containerization.  The relationship of the United States and China is formed by what containerization did to shipping.  We send them empty boxes, they send us full boxes.

Must relocate my copy!


What is up with the stock market?

The US unemployment rate is 14.7%, the worst since the Depression.  Here in LA County it’s 24%.  We’re not supposed to leave our houses for non-essential purposes or go to the beach.  Every bar is closed, almost every store is closed.

And yet the “stock market” is not really down that much.  Here is a one year chart of the S&P 500, which The Wall Street Journal often uses as a standard benchmark for “the stock market.”

Actually a little higher than it was same time last year.

How can this be?

There are many explanations offered by people better informed than me.  Here is Gunjan Banerji’s take in WSJ, and Joe Weisenthal in Bloomberg.

Both point out:

  • the belief in a v-shaped or “Nike swoosh”* recovery
  • the Federal Reserve keeping interest rates at close to zero
  • the Federal Reserve buying $2.4 trillion in government debt, and indicating it would buy more, making it clear that the government can inject essentially infinite money into the economy, “backstopping” everything.

As an amateur enthusiast on this topic, I’d like to offer some additional explanations.

  • The stock market is rigged to go up.  This is just a sort of understood but rarely stated fact.  The stock market is one of the few measures the President cares about.  Every tool at the disposal of the administration and at the supposedly independent Fed is used to keep the stock market up.

 

  • The stock market by definition is big, public companies.  These are the S&P 500 companiesBig companies are benefitting from the demise of their various small competitors.  Big companies can survive by taking on debt in ways small businesses can’t.  They did a great job getting a chunk of the federal money made available.  Consider if I have Steve’s Burger Stand.  I just don’t have the bureaucratic ability, relationships, time, to get a loan the way Shake Shack did.  If anything, are huge companies are seeing their small scale competitors destroyed?
    • Kind of an addendum to the last one: the federal government gave out the free money via big banks like Wells Fargo, Bank of America, BlackRock which themselves are part of the S&P 500!  Big boys feed first!

 

  • Money has nowhere else to go.  The Fed’s actions reduce the benefits of alternative investments like bonds or just putting your money in the bank.

 

  • Trading has become free! I feel crazy that this never gets mentioned.  Starting with Schwab (I think?) last fall, and then flowing on to competitors, trading stocks became free.  Instead of $8 or $4 to trade stocks, it’s free!  You might think this might’ve just created more volatility, maybe it did, but once the barrier to entry for the retail investor is zero, it’s as easy to flow your extra money into the stock market as it is into the bank.  This is, in my opinion, a dangerous or at least explosive change that hasn’t really been reckoned with.  See what Robin Hood is up to.  It might be as easy to bet your money on Tesla or Amazon as it is to tuck it away in the bank.  It’s frictionless, it can be done on your phone.  That might be dangerous!

 

  • There’s nowhere else to gamble.  Again, I feel crazy that this is never acknowledged as a factor.  Consider that Americans spend something like $100 billion on gambling a year.  At the moment, there’s nowhere to do that!  Casinos are closed.  Sports are stopped.  I do not think it’s unreasonable to imagine there are billions of dollars in gambling money going into the stock market as simply a place to gamble and trade.  See Dave Portnoy of Barstool Sports, who personally injected half a million dollars.

I’m not here to make predictions.  It’s probably a cognitive bias to believe the stock market “deserves” to go down, but that’s what I believe.  Then again, when you think about the stock market, it’s not just rich assholes, it’s like the pensions of firefighters and teachers.

Is it possible that the stock market is not calculating the biggest risk, some kind of massive social upheaval coming from disgust at this system?  The stock market is not built to calculate “what if we ruin society, make things so unequal and so unfair and grotesque that this system no longer functions?”

Maybe that’s “baked in” as they say.

So said Warren Buffett at the annual meeting.  Happened to be reading this speech by Stanley Druckenmiller from 2015 which I found on Valuewalk:

Remember your competition:

This chart is illuminating:

It’s good for me to write about the stock market, because I’m guaranteed to get an email saying something like you stupid clown you don’t understand anything.  But the more I study the stock market, the more convinced I am that sometimes the experts, overwhelmed by information, become blind to the obvious.  Consider this case reported by Bloomberg as a representative example.  Do you really need to use a machine-reading program to determine that things are looking a bit grim?

There’s the famous story about Joe Kennedy knowing it was time to sell when the shoeshine boy gave him stock tips (bullshit, he was insider trading).  What if you’re the shoeshine boy?

* I don’t understand the Nike swoosh recovery idea.  Isn’t the long part of the swoosh roughly equal to the short part?  So in a swoosh recovery, wouldn’t we just take a very long time to get back to where we were?  and that’s the optimistic take!


Buffett bits (and Munger)

Did not watch, but read a transcript of this year’s Berkshire Annual Meeting. Even though he tends to repeat himself, especially once you’ve gone over a few of his letters, there’s something comforting and eternal about going over the wisdom again, like reading The Bible.

 

Is there simpler investment advice?

I would love to talk to Ajit Jain for a few minutes:

I didn’t know about this event:

from the National Archives:

The morning after was an archivist’s nightmare, with ankle-deep water covering records in many areas. Although the basement vault was considered fireproof and watertight, water seeped through a broken wired-glass panel in the door and under the floor, damaging some earlier and later census schedules on the lower tiers. The 1890 census, however, was stacked outside the vault and was, according to one source, “first in the path of the firemen.”(11)

Could be a good clue in a National Treasure style mystery.

Speculation and rumors about the cause of the blaze ran rampant. Some newspapers claimed, and many suspected, it was caused by a cigarette or a lighted match. Employees were keenly questioned about their smoking habits. Others believed the fire started among shavings in the carpenter shop or was the result of spontaneous combustion. At least one woman from Ohio felt certain the fire was part of a conspiracy to defraud her family of their rightful estate by destroying every vestige of evidence proving heirship.(15) Most seemed to agree that the fire could not have been burning long and had made quick and intense headway; shavings and debris in the carpenter shop, wooden shelving, and the paper records would have made for a fierce blaze. After all, a watchman and engineers had been in the basement as late as 4:35 and not detected any smoke.(16) Others, however, believed the fire had been burning for hours, considering its stubbornness. Although, once the firemen were finished, it was difficult to tell if one spot in the files had burned longer than any other, the fire’s point of origin was determined to have been in the northeastern portion of the file room (also known as the storage room) under the stock and mail room.(17) Despite every investigative effort, Chief Census Clerk E. M. Libbey reported, no conclusion as to the cause was reached.

previous coverage of Buffett and Charlie Munger.

Charlie Munger unfortunately couldn’t be in Omaha, but looks like he had interesting things to say as always at the Daily Journal annual meeting in February:

Question 28: You talk frequently about having the moral imperative to be rational. And yet as humans, we’re constantly carrying this evolutionary baggage which gets in the way of us thinking rationally. Are there any tools or behaviors you embrace to facilitate your rational thinking?

Charlie: The answer is, of course. I hardly do anything else. One of my favorite tricks is the inversion process. I’ll give you an example. When I was a meteorologist in World War II. They told me how to draw weather maps and predict the weather. But what I was actually doing is clearing pilots to take flights.

I just reverse the problem. I inverted. I said, “Suppose I wanted to kill a lot of pilots, what would be the easy way to do it?” And I soon concluded that the only easy way to do it, would be to get the planes into icing the planes couldn’t handle. Or to get the pilot to a place where he’d run out of fuel before he could safely land. So I made up my mind that I was going to stay miles away from killing pilots. By either icing or getting him into (inaudible) conditions when they couldn’t land. I think that helped me be a better meteorologist in World War II. I just reversed the problem.

And if somebody hired me to fix India, I would immediately say, “What could I do if I really want to hurt India?” And I’d figure out all the things that could most easily hurt India and then I’d figure out how to avoid them. Now you’d say it’s the same thing, it’s just in reverse. But it works better to frequently invert the problem. If you’re a meteorologist, it really helps if you really know how to avoid something which is the only thing that’s going to kill your pilot. And you can help India best, if you understand what will really hurt India the easiest and worst.

Algebra works the same way. Every great algebraist inverts all the time because the problems are solved easier. Human beings should do the same thing in the ordinary walks of life. Just constantly invert. You don’t think of what you want. You think what you want to avoid. Or when you’re thinking what you want to avoid, you also think about what you want. And you just go back and forth all the time.

How about this:

Question 30: My question is about electric vehicles and BYD. Why are electric vehicles sales at BYD down 50 to 70 percent while Tesla is growing 50 percent? And what’s the future hold for BYD?

Charlie: Well, I’m not sure I’m the world’s greatest expert on the future of electric vehicles, except I think they’re coming generally and somebody’s going to make them. BYD’s vehicle sales went down because the Chinese reduce the incentives they were giving to the buyers of electric cars. And Telsa’s sales went up because Elon has convinced people that he can cure cancer. (laughter)

And then by Question 33 he really gets going.

 Lots of luck if you’re an impulsive person that has to be gratified immediately, you’re probably not going to have a very good life and we can’t fix you. (laughter)

Buffett is like beer, Munger is like whiskey.

(via latticeworkinvesting)


fast and decisive adjustments

This struck home, read it in a Sequoia Capital memo someone Twittered.

Also in the category of: clear writing from people in the world of VC/tech financing, an anecdote retold by Morgan Housel

The Battle of Stalingrad was the largest battle in history. With it came equally superlative stories of how people dealt with risk.

One came in late 1942, when a German tank unit sat in reserve on grasslands outside the city. When tanks were desperately needed on the front lines, something happened that surprised everyone: Almost none of the them worked.

Out of 104 tanks in the unit, fewer than 20 were operable. Engineers quickly found the issue, which, if I didn’t read this in a reputable history book, would defy belief. Historian William Craig writes: “During the weeks of inactivity behind the front lines, field mice had nested inside the vehicles and eaten away insulation covering the electrical systems.”

The Germans had the most sophisticated equipment in the world. Yet there they were, defeated by mice.

 


How Will You Measure Your Life?

Some books give value just with their title.  I’d say I think about the title of Clayton Christensen’s book about once every two weeks or so.  Most of what’s in the book can be found in Christensen’s 2010 speech on that theme.

This theory addresses the third question I discuss with my students—how to live a life of integrity (stay out of jail). Unconsciously, we often employ the marginal cost doctrine in our personal lives when we choose between right and wrong. A voice in our head says, “Look, I know that as a general rule, most people shouldn’t do this. But in this particular extenuating circumstance, just this once, it’s OK.” The marginal cost of doing something wrong “just this once” always seems alluringly low. It suckers you in, and you don’t ever look at where that path ultimately is headed and at the full costs that the choice entails. Justification for infidelity and dishonesty in all their manifestations lies in the marginal cost economics of “just this once.”

I also find myself often thinking of an anecdote about milkshake purchases Christensen describes in the book:

The company then enlisted the help of one of Christensen’s fellow researchers, who approached the situation by trying to deduce the “job” that customers were “hiring” a milkshake to do. First, he spent a full day in one of the chain’s restaurants, carefully documenting who was buying milkshakes, when they bought them, and whether they drank them on the premises. He discovered that 40 percent of the milkshakes were purchased first thing in the morning, by commuters who ordered them to go.

The next morning, he returned to the restaurant and interviewed customers who left with milkshake in hand, asking them what job they had hired the milkshake to do. Christensen details the findings in a recent teaching note, “Integrating Around the Job to be Done.”

“Most of them, it turned out, bought [the milkshake] to do a similar job,” he writes. “They faced a long, boring commute and needed something to keep that extra hand busy and to make the commute more interesting. They weren’t yet hungry, but knew that they’d be hungry by 10 a.m.; they wanted to consume something now that would stave off hunger until noon. And they faced constraints: They were in a hurry, they were wearing work clothes, and they had (at most) one free hand.”

The milkshake was hired in lieu of a bagel or doughnut because it was relatively tidy and appetite-quenching, and because trying to suck a thick liquid through a thin straw gave customers something to do with their boring commute.

Something illuminating about food as something to do.

Understanding the job to be done, the company could then respond by creating a morning milkshake that was even thicker (to last through a long commute) and more interesting (with chunks of fruit) than its predecessor. The chain could also respond to a separate job that customers needed milkshakes to do: serve as a special treat for young children—without making the parents wait a half hour as the children tried to work the milkshake through a straw. In that case, a different, thinner milkshake was in order.

In the book, Christensen also goes on about how parents have to say no very often, and a milkshake is a relatively easy “yes.”

Christensen died last week.

 


Rules for Investment Success by Sir John Templeton

Quality is a company strongly entrenched as the sales leader in a growing market.  Quality is a company that’s the technological leader in a field that depends on technical innovation.  Quality is a strong management team with a proven track record.  Quality is a well-capitalized company that is among the first in a new market.  Quality is a well-known trusted brand for a high-profit-margin consumer product.

The hunt for quality.  That’s what’s cool about investing.  Hidden quality.

It can’t be all Warren Buffett all the time.  Sir John Templeton has been getting my attention.

The hunt for points of maximum pessimism.  Templeton worked above a grocery store in the Bahamas.  His grand-niece keeping the flameAn interview from circa 1985.  Later in life he devoted himself to spiritual searching.

Remember, in most cases, you are buying either earnings or assets.
This is a slight book, almost like a pamphlet, containing reprints of a series of columns Templeton wrote for the Christian Science Monitor in 1993.
The only reason to sell stocks now is to buy others, more attractive stocks.  If you can’t find more attractive stocks, hold on to what you have.

Lionsgate update

This is an update to a recent post about Lionsgate: kind of stunned by the crumminess of this trailer.  Aren’t most of these worse versions of shots from Pearl Harbor (2001)?

Only instead of coming out in 2001 when people were feeling kinda patriotic, it’s coming out now.

Worried about Lionsgate.  Maybe somebody will buy them?


Bird

Look I like markets, but it’s enough to make a guy a socialist when you observe how easy and consequence-free it is for a company to leave plastic-and-electronic shits on the sidewalk all over the place.  There’s always a grotesque euphemism:

 


Beyond

Beyond Beef ($BYND) IPO’d.  Unlike Uber, it has so far been a huge success.

I will disclose bought some shares of BYND once it was launched.  (I didn’t, like, “get in” on the IPO, like early investor Bill Gates no doubt did, I bought them on day one as soon as I realized it’d happened).

This product is dynamite.  The killer element: there is no gluten, no soy, and no GMO.  Soy-based meat replacements have always seemed pretty limp to me.  Beyond Beef I believe I first tried in burger form: terrific.  The crumbles I’ve used to make very satisfying bolognese-style ragus.  Beyond Beef uses pea protein.  I love peas. Here’s Orson Welles reading an ad for peas.

“Every July, peas grow there.”  I think of that whenever I think of peas.

Tyson and some powerful competitors may get in the alt-meat game.  I’m not certain Beyond’s moat will hold, but I think it’s hard to make an acceptable beef substitute to a beef eater, and they have done so.

A perfect use for this product is in the junk beef realm, the world of frozen ground beef for fast food tacos and burgers, where the beef itself is of probably repulsive quality, raised under obscene conditions, and the taste is really coming from packets of flavor-enhancing additives.

Beyond’s ability to get in on this market impresses me.  When I saw that Del Taco was serving Beyond tacos I tried them as soon as I could.  Here was an area well within my circle of competence (fast food tacos) where I had an advantage over other investors because I live in Del Taco’s range, near their headquarters.

Del Taco originated in the Mojave Desert.  The Mojave Desert may represent a possible future for the United States, and thus be on the cutting edge of trends.  There’s something sci-fi about the landscape.   Something prophetic.  Biblical.

When pioneers reached the American desert, they remembered the desert landscapes told of in the Bible.  They marveled anew at the prophetic power of the Bible on what would be faced on the way to the Promised Land.

At the Del Taco in Ontario (CA) where we stopped to try these tacos again, I asked the kid how the Beyond tacos are selling.  He said they were selling ’em out every day.

Del Taco’s stock has the ticker symbol TACO.  Surely Matt Levine or someone has examined how gimmick tickers tend to do.

Del Taco’s stock has never been a great winner.  Last five years:

Here is the last six months:

A pretty narrow range.  The Beyond taco launched April 25.  Possible that ~$1 bump there in late April – May comes from the Beyond release.  Or just from the stock crossing and staying beyond the legendary $10 threshold.

Whether stocks under $10 really are often ignored by big institutions or not, I haven’t investigated, I’ve seen takes on both sides and can offer no informed opinion.  It does seem like, despite Malkiel, there are dumb glitches like that in markets all the time.

Is Del Taco an effective sneak way of riding the BYND wave?  I don’t know. On May 6, Del Taco posted some disappointing earnings results.

source: CNBC

CEO John Cappasola had explanations though, don’t worry:

Although our quarterly results were negatively impacted by unfavorable weather in California and throughout the West as well as the anticipated three-week shift of the Lenten season

And consider his inspiring tone as he discusses the new Beyond campaign:

Last but certainly not least, we are using menu innovation to drive traffic in incremental Del Taco occasions with the exciting recent launch of the Beyond Taco and Beyond Avocado Taco, which are now available in all restaurants. As guest demand for vegan and vegetarian options continues to grow, we took the opportunity to partner with Beyond Meat, an innovative leader in plant-based proteins, to be the first Mexican QSR chain to develop a proprietary blend seasoned 100% plant-based protein.

A key objective as we developed our Beyond Taco strategy was competitive differentiation which we attack on three fronts, flavor, variety and convenient value. The team did a great job developing a proprietary and unique flavor profile that taste incredibly similar to our current ground beef, allowing us to broaden its appeal to not only attract vegans and vegetarians, but also those looking for better for you options or to reduce red meat without sacrificing flavor.

Next is variety. Our Beyond ground protein can be substituted for any other protein or added on any menu item, including burritos, nachos, bowls or salads. This provides best-in-class variety to our guests and endless future product innovation opportunities for our culinary team.

Word about the Beyond tacos is JUST getting out.  I think it’s fair to say I’m close to the front lines when it comes to fast food taco news.  Has the full impact been felt?  Will it matter?  How much of Del Taco’s consumers are recurring customers?  Will they care about this new item?  Will new customers be drawn in by Del Taco’s enticing campaign (advertised on signs outside every location I’ve seen in SoCal?  Who is eating the Beyond taco?  Cappasola:

And as expected, we are seeing some new faces as well as a lot of trial among our existing guests. So great opportunity here from a consumer standpoint. Generally, this is the type of customer that is in QSR today and QSR just is not traditionally providing them great options and we feel like we can.

It’s fun to think of the stock market as a chance to gamble on all these variables.  It will be interesting if TACO stock falls below $10 again.

One problem, I’d say, is that a Beyond taco costs fully a dollar more than a regular taco.

The pendulum seems like it’s swung in the USA national mood from feeling pretty optimistic about the future, as I think we all did in say 2009, to feeling pretty grim.  Maybe that’s just me getting older or my narrow bubble, but it feels like there’s less talk of wonderful possibilities for the near future.  Eliminating or reducing industrial meat-farming, improving our diets, making more and better food options available even in the cheap fast food space seems to me like it could be a great development of a blossoming future.

The future’s so bright I gotta wear shades, or as John Cappasola puts it:

Our operational efforts are paying off with early guest experience measurement survey results showing a high level of guest satisfaction for Beyond Tacos, even higher than the very successful Del Taco following its launch.

For me as a consumer, I will say, when I left Del Taco after trying the Beyonds for a second time, I felt, “now here’s brand that can deliver a value-oriented QSR-Plus position.”  Which, it turns out, is just what Del Taco was aiming for!

(Disclosure: I am nothing more than an enthusiastic amateur and I do not offer investment or financial advice.  I do not own shares of TACO at this time but I’m thinkin’ bout it!

Other Helytimes posts on business


Lionsgate

Lionsgate continues to grow into a vertically integrated global content platform of increasing diversity, reach and scale. The Company’s portfolio of assets includes one of the largest independent television businesses in the world, a 17,000-title film and television library, a world-class film business and an expanding global distribution footprint.

says their investor website.   What is Lionsgate?  How do we value an entertainment company?

I’m interested in Lionsgate, because they have a majority ownership of 3 Arts

The management company where I am represented.  In a way, I work for them?

Here’s a brief history of Lionsgate – which is not very old – from this recent LA Times article by Ryan Faughnder, entitled

Founded in 1997 in Vancouver, Canada, the company became known early on for edgy indie and horror films such as “American Psycho” and “Saw.” Lionsgate grew its firepower and boosted its stock price through acquisitions, catapulting itself into the big leagues with its 2012 purchase of “Twilight Saga” studio Summit Entertainment and the release of the first “Hunger Games.” The four-movie apocalyptic “Hunger Games” series grossed $2.97 billion. It impressed investors with its tactic of offsetting the risk of producing movies by pre-selling foreign distribution rights and bringing in co-financiers.

Then they had some busts:

“Gods of Egypt,” a $140-million mythological epic released in 2016, flopped after it was slammed by critics and accused of whitewashing its cast. A reboot of billionaire Haim Saban’s “Power Rangers” franchise disappointed after Feltheimer said on an earnings call that the company could produce multiple films based on the kids series.The studio’s decision to turn the third book in the “Divergent” series into two movies backfired when “Allegiant” flopped. A planned fourth installment was never produced.

That LA Times article is entitled Lionsgate, the studio behind ‘Hunger Games’ movies, struggles in shifting Hollywood currents.  

The Wall Street Journal had a whack, too, a few days later:

Management Tension, Mounting Competition Sink Lions Gate’s Stock

As rivals grow larger, studio struggles to find box-office hits and synergies with pay-TV network

Lions Gate’s movie business has lost ground since ‘The Hunger Games’ series ended in 2015. PHOTO: LIONS GATE/EVERETT COLLECTION

Apparently they are, at the moment, attempting to salvage a huge and expensive turd:

Lions Gate faces a major challenge called “Chaos Walking.” The first of several planned adaptations of a series of young-adult science fiction novels cost around $100 million to produce but turned out so poorly it was deemed unreleasable by executives who watched initial cuts last year, according to current and former employees.

A scalding take:

I’m not sure how much Wall Street has built the disaster here into the stock’s price.

Sir John Templeton taught us to look for points of maximum pessimism.  Is Lionsgate an opportunity? How should we value an entertainment company, which is liable to have big swings and misses?

First, what does Lionsgate own?

Over the course of its life, Lionsgate scooped up a bunch of film companies, in the process acquiring a library.  They swallowed up:

  • International Media Group

don’t know what their big movies were

  • Sterling Home Entertainment
  • Trimark Holdings

Their biggest franchise might be Leprechaun

  • Modern Times Group
  • Roadside Attractions

They produced, among others, Supersize Me, Manchester By The Sea, Mystery Team, Winter’s Bone, Mud

  • Mandate Pictures

Juno, This Is The End

  • Summit Entertainment

Hurt Locker, Red, Hellboy, John Wick, American Pie, Ender’s Game

  • Artisan Entertainment

Blair Witch Project, Ninth Gate, House of the Dead, Step Into Liquid

From that library I have to imagine Lionsgate will continue to make some kind of money.  Some of these films are things people will want to see and resee or rediscover, and it’s a good business to keep selling something that’s already made.  All told, according to their 2018 investor letter, Lionsgate has something like 17,000 films in its library.

I was surprised by this fact:

In fiscal 2018, we shipped approximately 65 million DVD/Blu-ray finished units.

The Lionsgate investor page highlights some of their big ones:

MOTION PICTURE GROUP

Lionsgate’s Motion Picture Group encompasses eight film labels and more than 40 feature film releases a year, including 15-20 wide releases from the Lionsgate and Summit Entertainment mainstream commercial labels. Lionsgate’s film slate has grossed nearly $10 billion at the global box office over the past five years, and films from Lionsgate and its predecessor companies have earned 122 Academy Award® nominations and 30 Oscar® wins.

As well as some of their TV productions and co-productions:

TELEVISION GROUP

The Lionsgate’s Television Group has carved out a unique position as a leading supplier of premium scripted content to streaming platforms, cable channels and broadcast networks alike. One of the largest independent television businesses in the world with nearly 90 series on 40 different networks, Lionsgate’s premium quality programming includes the ground-breaking Orange is the New Black, fan favorite Nashville, the hit dramedy Casual, the critically-acclaimed Dear White People and the breakout success Greenleaf. The Company continues to build on its legacy of award-winning premium series that include the iconic multiple Emmy Award-winning Mad Men, one of the best reviewed series of all time, Weeds and Nurse Jackie.

The Company’s development and production slate includes a number of high-profile premium properties including The Rook (Starz), a Lionsgate/Liberty Global coproduction executive produced by Twilight creator Stephenie Meyer with acclaimed producer Stephen Garrett serving as showrunner, The Kingkiller Chronicle (Showtime)Step Up: High Water (YouTube Red)Get Christie Love! (ABC) and American Lion (HBO).

As they note:

many of the titles in our library are not presently distributed and generate substantially no revenue. Additionally, our rights to the titles in our library vary; in some cases, we have only the right to distribute titles in certain media and territories for a limited term.

Coming down the pike are some high-risk, potential high-reward titles.  From the LA Times:

Lionsgate could rebound this year with the release of movies including “Long Shot” and a third “John Wick” movie, analysts said. But otherwise, the schedule includes few obvious hits. Upcoming films include “Angel Has Fallen,” the third installment in the “Olympus Has Fallen” series, “Rambo V: Last Blood” and a Roland Emmerich remake of “Midway.”

How much do people want to see an expensive movie about the Battle of Midway, I wonder?

All told:

the Company’s consolidated revenues from its reporting segments included Motion Pictures 44.1%, Television Production 19.5% and Media Networks 37.1%

The big engine at Lionsgate in Media Networks is Starz, the premium network.

Home to Outlander, Power, Ash vs Evil Dead, a bunch of costume-y looking shows.  Starz produces a lot of the profits:

Starz has performed well financially, with revenue increasing 4% to $366.8 million and profits up nearly 10% to $134.1 million in the fiscal third quarter ended Dec. 31. It added just over one million subscribers in 2018.

There was a writeup of Lionsgate in a recent issue of Graham and Doddsville, “an investment newsletter from the students at Columbia Business School.”  You can read it free, here.  Amit Bushan, Bruce Kim, and Stephanie Moroney won 1st place at the CSIMA Stock Pick Challenge with their case.

Above-consensus subs projection results in a 12% above-consensus NTM adj. EBITDA. Given the FCF stability of the subscriptionbased business, we are applying a premium over movie studios (~10x). Note that 12x multiple is 12% lower than Starz’s recent average (13.7x).  Catalysts: 1) higherthan-consensus OTT subs growth in the next few quarters; 2) increased visibility on the impact of the international expansion; 3) M&A.

Not sure I agree with this assessment.  But there are a couple points I think are interesting about Lionsgate.

  • Starz is easy to add on to your Amazon Prime.  In addition to being its own channel, it’s like an add-on to your Amazon.  To me as a customer, that makes it very accessible.
  • 3 Arts is cool, and represents a lot of top tier talent.  It’s kind of hard to find a list of their clients if you don’t have IMDb pro, but here’s the top ranked by “Star Meter”
7
60
78
256
357
379
604
721
786
820
1,025
1,043
1,047
1,081
1,128
1,270
1,311
1,319
1,347
1,353
1,464
1,481
1,483
1,550
1,620
1,682
1,816
1,823
1,881
1,882
1,903
1,961
1,966
2,136
2,157

 

What impact that will really have on 3 Arts’ bottom line, I’m not sure.  But they do have access and potential synergies with some pretty explosive entertainers and creators.

Net Income 473,600 14,800 50,200 181,800

As always around here, we like to look at a picture of the company’s CEO:

Here is John Feltheimer.  He gets paid a lot of money.

Is this company worth $2.8 billion dollars?

I’ll be interested to hear their fourth quarter earnings report on May 23.

Thank you for joining us on a continued journey to learn about business and entertainment.

 


Jobs

from:

Kondo’ing some books.  Picking up Walter Isaacson’s bio of Steve Jobs does not spark joy, but I did take another look at several passages I’d noted.

Here’re some previous Helytimes posts related to Steve Jobs.


Marijuana and psychosis

This was in today’s Economist newsletter, and I’ve seen it elsewhere too.  Scary!  But then again, what is the definition of psychosis?

Isn’t getting your thought and emotions so impaired that you lose contact with external reality the point of high THC content marijuana?  Is this a feature not a bug?  External reality can be rough.

The study, in The Lancet, used the ICD-10 Criteria (F20-33), so schizophrenia and manic/bipolar episodes. The study compared people hospitalized for that kind of thing versus a control general population. Here’s how the study worked:

We included patients aged 18–64 years who presented to psychiatric services in 11 sites across Europe and Brazil with first-episode psychosis and recruited controls representative of the local populations.

Then this part:

We applied adjusted logistic regression models to the data to estimate which patterns of cannabis use carried the highest odds for psychotic disorder. Using Europe-wide and national data on the expected concentration of Δ9-tetrahydrocannabinol (THC) in the different types of cannabis available across the sites, we divided the types of cannabis used by participants into two categories: low potency (THC <10%) and high potency (THC ≥10%). Assuming causality, we calculated the population attributable fractions (PAFs) for the patterns of cannabis use associated with the highest odds of psychosis and the correlation between such patterns and the incidence rates for psychotic disorder across the study sites.

“expected” and “assuming” are two words that do a lot of work here, but I don’t have time to read the whole study, I have to write cartoons.

In my neighborhood the most booming new shops sell either marijuana or cold brew coffee.  Personally I wonder if drinking huge amounts of highly caffeinated cold brew might be more crazy-making than marijuana.

There is certainly ample psychosis in Los Angeles, so much so that it might be necessary to induce mild psychosis just so you can understand what’s going on with everybody.  The chicken and egg, correlation and causation on psychosis / drug use is a tough one to unravel, as the study’s authors acknowledge.  The study also notes that patients presenting with psychosis were more likely to have smoked ten or more cigarettes a day.