Four Ideas from COMPOUND Catpital Management

SPECIAL VALUE INVESTING CONGRESS NOTES FOR THE IRREGULARS

Joe Altman and Chris Kyriopoiulos at COMPOUND started out their talk with a quick mention of the TARP Warrants that they think are excellent buys — we wrote about those warrants last month and did not feature their two favorites, but you can see my thoughts on the warrants in general here.

The ones they focus on are AIG and Capital One warrants, AIG-WT and COF-WT, which expire in 2021 and 2018, respectively.

Capital One — they say it’s had a good track record, playing offense while other banks have been shrinking. Credit cards may be risky, but it’s not the asset class that determines the risk … it’s the price you pay for the asset.

AIG — trades well below tangible book value, still cleaning up but should have remarkable returns from this depressed valuation.

These warrants have a reasonable chance of being tendered at a premium as people begin to think about dilution. The market pricing is not even remotely efficient, and the Treasury was a motivated seller, and it’s no coincidence that the “juice” for Berkshire in many of their recent deals has been warrants.

So that’s two — the next two ideas are hot dogs and live entertainment:

Nathan’s Famous hot dogs (NATH).

America’s top premium hot dog. $190 million enterprise value.

Not a restaurant company — this is an intellectual property company, they don’t make anything. It’s royalty streams, and they’re overcapitalized with a catalyst.

They do own the formula to the Nathan’s hot dog. Royalty for the hot dogs sold by restaurants or franchises or super markets. Nothing asset intensive like meat packing plans or restaurants.

No analyst coverage. Royalty rates went up in December for packaged hot dogs — starting next year, the royalty rate goes to about 11% with the expiration of the 4% royalty deal. That cash will flow through the financial statements.

Buffett: “If you own great brands and take care of them, they’re terrific assets”

The brand has been around for almost 100 years and has stood the test of time. It is entrenched, including with the ESPN televised hot dog eating contest on Coney Island every year. This is part of franchisees marketing spend, and ESPN actually pays to televise the event — it gets good ratings, and the value of the brand exposure isn’t on the balance sheet.

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