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O'Keefe Stevens Advisory Q4 2022 Update

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Lessons From 2022

The marketplace and our portfolios had a challenging twelvemonth arsenic liking rates rose, and deteriorating fundamentals trim our largest position, NVDA, successful half. Since our first acquisition successful 2013, NVDA has seen its banal diminution 50% 1 different time, backmost successful 2018. The best-performing businesses and stocks do not spell up and to nan right. Mr. Market gets moody, and moreover 1 of nan highest value companies successful nan world is not immune. Drawdowns of this magnitude are challenging to stomach, moreover though nan banal is up 50x successful little than 10 years. While we see ourselves aged schoolhouse worth investors, we proceed to clasp this awesome institution moreover though, optically, it does not look cheap. Our assurance successful Jensen remains, and while gaming is nary longer successful hyper-growth mode, nan Data Center conception continues to grow. AI, Automotive, and different mini but quickly increasing industries are nan adjacent limb of nan story. Chris Mayer discusses nan position successful greater item pinch commentary from our CIO, Peter O'Keefe.

One of nan cardinal tenants astatine O'Keefe Stevens is investing alongside clients. We do not clasp extracurricular brokerage aliases individual trading accounts. We ain what clients own. During nan speculative mania of 2020-2022, receiving calls from clients astir Bitcoin, TSLA, and SPACs that were going up seemingly each day, questioning why we are not involved. We pridefulness ourselves connected avoiding speculation and remaining existent to our bottom-up, basal business proprietor principles. Looking foolish astatine times is portion of nan job. Those looking to beryllium correct each infinitesimal ought to find different careers. As worth investors, nan past 5+ years person been challenging, though fixed nan position of nan worth community, we are grateful to still beryllium successful nan game. Companies funded during nan zero liking complaint environment, pinch business models requiring entree to capital, quickly recognize really captious costs management, rate flow, and equilibrium sheets are to beryllium successful passim an economical cycle. Our holdings should not require entree to superior successful nan adjacent word to money business operations. We ain a concentrated portfolio of high-quality, low-valuation businesses that person been near for dead. As excess's travel out, we expect our companies and stocks to beryllium beneficiaries. We are excited astir 2023.

Several positions wrong nan portfolio merit immoderate reflection; however, nan 1 deserving nan astir attraction is WBD. Not surprisingly, it was 1 of nan worst-performing stocks successful our portfolio complete nan past year.

Warner Brothers Discovery (WBD) – One conception learned from Jeremy Raper astatine Raper Capital (@Puppyeh1 connected Twitter) is "when there's a monolithic pivot successful biz exemplary and under-delivery vs. clear IPO targets, it's mostly a large reddish flag." While WBD is not a caller IPO, it went done a melodramatic business exemplary change. I callback 2 examples of companies that pivoted strategies.

Angus "Gus" Kelly, CEO of Aercap (AER), preached really nan accelerated depreciation schedule of planes caused accounting net to understate economical profits and nan equilibrium expanse understated nan adjacent worth of assets. AER's assets, caller tech, and constrictive assemblage were immoderate of nan astir desirable successful nan industry. When Aercap acquired GECAS successful 2021, Gus discusses nan BV and accounting reasons down nan transactions and really they were acquiring these planes astatine little than BV, moreover though they could person repurchased shares astatine a discount to BV. They besides acquired 300 helicopters, historically a business statement nan institution did not find favorable. When AER acquired these assets, it was nary longer evident that nan company's accelerated depreciation schedule was unsocial and gave them an edge. Nor was nan institution acquiring assets that were successful statement pinch nan antecedently discussed business model. This alteration successful strategy should origin 1 to reassess nan thesis.

The 2nd was GAN's acquisition of Coolbet, a B2C Sportsbook. Previously, a high-margin, increasing SaaS B2B institution shifted into nan competitory user sports betting world. This pivot degraded nan business exemplary and early profitability. The go-forward business economics were apt overmuch worse than nan erstwhile standalone business.

Since nan sportsbook acquisition, GAN is down 93%. While I fishy nan B2B capacity has underperformed expectations, this business exemplary pivot played a role. AER has fared better, down only 8% since nan GECAS transaction closed. It's my correction to person not utilized nan lessons to tie parallels to a portfolio holding WBD.

WBD vanished a sadistic 2022, down 62%. In April 2021, Discovery announced nan acquisition of Warner Media for ~$100B. Today, nan EV of nan mixed entity stands astatine $83B. It's evident listening to David Zaslov talk nan challenges pinch nan merger, implying Discovery overpaid for nan assets. Discovery had erstwhile occurrence pinch nan Scripts merger. Our first guidance was to deliberation a akin consequence would occur. However, it should person been evident nan quality betwixt them.

Zaslov, connected nan Q4 2019 net call, 3 months earlier nan Warner Media / Discovery deal, said, " …the economics of our model. Our contented is simply a mini fraction of what's taking spot connected nan different broadside of nan ledger. The overbid, competitive, spiraling out-of-control costs for scripted, caller and repeats is astounding. That is not who we are. We aren't paying hundreds of millions of dollars for content, original aliases repeats, that we can't moreover own." Discovery would win successful nan streaming wars owed to unscripted content's costs advantage. Three months later, they acquired an almost exclusively scripted business, weighted complete 2x bequest Discovery, becoming what Zaslov said it would not.

Maybe hindsight is 20/20, and nan only logic to constitute astir this is really overmuch nan banal is down. A business strategy translator that opposed caller commentary should person raised much reddish flags than it did. Additionally, we were alert but did not recognize really important an effect nan bequest AT&T shareholder's waste down of WBD shares would be, creating a sizable headwind.

We proceed to ain and judge nan early of Warner Brothers Discovery is bright. The institution issued semipermanent fixed-rate indebtedness astatine absurdly low-interest rates, which is simply a redeeming grace. The banal is incredibly cheap, nan institution tin repurchase indebtedness astatine a discount to wherever they issued it conscionable a twelvemonth ago, and nan business should commencement gushing rate flows successful nan coming quarters. In a fewer years, I dream to constitute really ill-timed and successful this finance was.

Predictions For 2023

  1. One of our apical 25 holdings gets acquired
    1. A benign M&A situation complete nan past respective quarters owed to accrued uncertainty, and rising liking rates, returns. A halfway holding is acquired. Placing bets connected which one((s)) this happens to, DFIN, OTCPK:CSCCF, and OTCPK:ICLTF apical nan list. A acheronian equine prime and 1 that mightiness request to hap depending connected nan authorities of nan Real Estate marketplace is FPH. Five Point has indebtedness maturing successful 2025. Should guidance get nan opportunity to waste a ample crippled of onshore to salary disconnected this debt, bankruptcy consequence disappears, and nan worth of nan onshore is worthy multiples of nan existent stock. The mobility is not whether nan business is cheap; instead, do existing shareholders person nan opportunity to recognize nan worth of nan land?
  2. TSLA is simply a sub $200B marketplace headdress by nan extremity of 2023
    1. One poster kid of nan speculative situation is TSLA. Led by visionary Elon Musk, is not a exertion institution but an car manufacturer. A capital-intensive, debased ROIC business that should waste and acquisition astatine a aggregate acold little than nan market. The first-mover advantage gave Tesla a ascendant marketplace stock successful nan EV abstraction declines arsenic competitors return stock and wounded TSLA margins and profitability. From questionable accounting practices to a afloat self-driving scam to a declining competitory advantage. A banal down 71% by itself does not make it cheap.
  3. Crypto, nan last blow
    1. Tether, 1 of nan past remaining stablecoins, breaks its peg and is nan nail successful nan coffin of nan crypto landscape. We've seen it before, a tally connected deposits, nan chartless assets backing deposits, and a deficiency of equilibrium expanse transparency. We are happy to ne'er put a dime of customer money successful this narrative-driven speculative rat poison. (Thanks, Charlie)

Goals For nan Year

Chat much pinch management. Some investors awkward distant from talking pinch guidance teams. For others, it's an integral portion of their process. We clasp positions for respective years. We should get acquainted pinch those that we are partnering with. The item of 2022 was spending a nighttime pinch nan Greenfirst Forest Products guidance team. I cognize much astir Canadian lumber than I ever imagined. These meetings springiness america added condemnation successful nan position.

Discuss positions pinch different investors. One of nan champion decisions I made was penning publically astir ideas. Sure, it's embarrassing pitching a banal that subsequently declines 40%; however, nan added feedback is invaluable and adds a level of accountability to consistently update nan position and thesis. I constitute connected Sumzero and Seeking Alpha. Multiple investors reached retired to talk write-ups. I thoroughly enjoyed each speech and dream to person much successful 2023.

Along a akin line, engaging pinch different members of FinTwit. Searching $XYZ and uncovering immoderate commentary astir nan banal aliases news is helpful. Some of nan brightest investors are connected Twitter, can't wounded to spot what they deliberation astir ideas; successful different cases, I dream to supply adjuvant information. Our Twitter grip is @OSA_Rochester

Portfolio Top 5 Holdings

At nan extremity of nan year, our apical 5 holdings represented ~37% of assets, pinch NVDA representing almost 13% of nan portfolio. The remaining 4 see OTCPK:BKRIF, QCOM, AMGN, and GLW. Bank of Ireland was 1 of nan champion performers successful nan portfolio, up 60% connected nan twelvemonth moreover though it was level done nan extremity of August. The Irish authorities exited its liking successful nan Bank successful September, ending 13 years of authorities involvement. The afloat return to backstage ownership and consequent banal capacity is not coincidental. A akin arena could hap erstwhile AT&T (T) shareholders complete nan trading of WBD.

Regards,

Dominick D'Angelo, CFA


Disclaimer

This archive is for informational purposes only. O'Keefe Stevens Advisory is not providing immoderate finance recommendations pinch nan publishing of this document, and nary patient capacity information is included successful this document.


Original Post

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

Editor's Note: This article discusses 1 aliases much securities that do not waste and acquisition connected a awesome U.S. exchange. Please beryllium alert of nan risks associated pinch these stocks.

This article was written by

Dominick D'Angelo floor plan picture

Research Analyst astatine O'Keefe Stevens Advisory. Over 5 years of experience, including 2 years arsenic a investigation expert connected a $3B money astatine 1 of nan largest pension costs successful nan US. I emotion to talk thing successful nan investing abstraction and admit immoderate feedback. Email - dominick@okeefestevens.com

Editor: Naga



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